UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 FORM
10−Q
 (Mark
One)
  x
              QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 For the
quarterly period ended: December 31, 2010
   ̈
              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
theSecuritiesExchange Actof 1934during the preceding12 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. YesxNo ̈
 
 Indicate bycheckmark 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 companyx
 
 Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).  Yes ̈Nox
 
 The
number of shares outstanding of each of the issuer’s classes of common stock, as
of February 10, 2011 is as follows:
 
 ClassofSecurities
                
                SharesOutstandingCommon
      Stock, $0.001 par value
                
                46,562,955
  
  
  CHINA
PRECISION STEEL, INC.
  Quarterly
Report on Form 10-Q
 Three
and Six Months Ended December 31, 2010
 
  TABLE
OF CONTENTS
 
 PART
I
 FINANCIAL
INFORMATION
  Item
      1.
                        
                        Financial
      Statements
                        
                        1Item
      2.
                        
                        Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                        
                        18Item
      3.
                        
                        Quantitative
      and Qualitative Disclosures About Market Risk
                        
                        34Item
      4.
                        
                        Controls
      and Procedures
                        
                        34PART
      IIOTHER
      INFORMATIONItem
      1.
                        
                        Legal
      Proceedings
                        
                        34Item 1A.
                        
                        Risk
      Factors
                        
                        34Item
      2.
                        
                        Unregistered
      Sales of Equity Securities and Use of Proceeds
                        
                        34Item
      3.
                        
                        Defaults
      Upon Senior Securities
                        
                        35Item
      4.
                        
                        (Removed
      and Reserved)
                        
                        35Item
      5.
                        
                        Other
      Information
                        
                        35Item
      6.
                        
                        Exhibits
                        
                        35
  i
  PART
I
 FINANCIAL
INFORMATION
  ITEM
      1.
              FINANCIAL
      STATEMENTS.
  CHINA
PRECISION STEEL, INC.
 CONSOLIDATED FINANCIAL
STATEMENTS
 FOR
THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2010 AND 2009
 
 INDEX
TO FINANCIAL STATEMENTS
 
 Page(s)Financial
      StatementsConsolidated
      Balance Sheets (unaudited)
                  
                  2Consolidated
      Statements of Operations and Comprehensive Income
    (unaudited)
                  
                  3Consolidated
      Statements of Changes in Stockholders’ Equity (unaudited)
                  
                  4Consolidated
      Statements of Cash Flows (unaudited)
                  
                  5Notes
      to Consolidated Financial Statements (unaudited)
                  
                  6
  1
  China
Precision Steel, Inc. and Subsidiaries
 Consolidated
Balance Sheets
 
 December 31,
                        
                        
                        June 30,Notes
                        
                        
                        2010
                        
                        
                        2010(Unaudited)AssetsCurrent
      assetsCash
      and cash equivalents
                        
                        
                        
                        
                        $
                        14,227,074
                        
                        
                        $
                        29,036,706Accounts
      receivableTrade,
      net of allowances of $1,041,244 and $1,013,744 at December 31, 2010 and
      June 30, 2010, respectively
                        
                        5
                        
                        
                        
                        26,903,637
                        
                        
                        
                        39,598,845Bills
      receivable
                        
                        
                        
                        
                        
                        8,652,060
                        
                        
                        
                        4,760,816Other
                        
                        
                        
                        
                        
                        638,134
                        
                        
                        
                        1,369,219Inventories
                        
                        6
                        
                        
                        
                        32,098,452
                        
                        
                        
                        28,522,198Prepaid
      expenses
                        
                        
                        
                        
                        
                        487,070
                        
                        
                        
                        534,882Advances
      to suppliers, net of allowance of $1,687,999 and $1,643,419 at December
      31, 2010 and June 30, 2010, respectively
                        
                        7
                        
                        
                        
                        30,211,920
                        
                        
                        
                        13,959,206Total
      current assets
                        
                        
                        
                        
                        
                        113,218,347
                        
                        
                        
                        117,781,872Property,
      plant and equipmentProperty,
      plant and equipment, net
                        
                        8
                        
                        
                        
                        74,762,761
                        
                        
                        
                        69,907,194Construction-in-progress
                        
                        9
                        
                        
                        
                        3,669,447
                        
                        
                        
                        3,983,45078,432,208
                        
                        
                        
                        73,890,644Intangible
      assets, net
                        
                        10
                        
                        
                        
                        1,873,792
                        
                        
                        
                        1,844,995Goodwill
                        
                        
                        
                        
                        
                        99,999
                        
                        
                        
                        99,999Total
      assets
                        
                        
                        
                        
                        $
                        193,624,346
                        
                        
                        $
                        193,617,510Liabilities
      and Stockholders' EquityCurrent
      liabilitiesShort-term
      loans
                        
                        11
                        
                        
                        $
                        26,617,609
                        
                        
                        $
                        25,965,421Accounts
      payable and accrued liabilities
                        
                        
                        
                        
                        
                        4,389,205
                        
                        
                        
                        9,952,109Advances
      from customers
                        
                        
                        
                        
                        
                        2,223,022
                        
                        
                        
                        3,266,377Other
      taxes payable
                        
                        
                        
                        
                        
                        4,622,729
                        
                        
                        
                        3,868,220Current
      income taxes payable
                        
                        
                        
                        
                        
                        5,794,856
                        
                        
                        
                        5,393,000Total
      current liabilities
                        
                        
                        
                        
                        
                        43,647,421
                        
                        
                        
                        48,445,127Long-term
      loan
                        
                        12
                        
                        
                        
                        18,566,257
                        
                        
                        
                        18,075,914Stockholders'
      equity:Preferred
      stock: $0.001 per value, 8,000,000 shares authorized, no shares
      outstanding at December 31, 2010 and  June 30, 2010,
      respectively
                        
                        13Common
      stock: $0.001 par value, 62,000,000 shares authorized, 46,562,955 issued
      and outstanding at December 31, 2010 and June 30, 2010,
      respectively
                        
                        13
                        
                        
                        
                        46,563
                        
                        
                        
                        46,563Additional
      paid-in capital
                        
                        13
                        
                        
                        
                        75,642,383
                        
                        
                        
                        75,642,383Accumulated
      other comprehensive income
                        
                        
                        
                        
                        
                        14,098,882
                        
                        
                        
                        10,630,975Retained
      earnings
                        
                        
                        
                        
                        
                        41,622,840
                        
                        
                        
                        40,776,548Total
      stockholders' equity
                        
                        
                        
                        
                        
                        131,410,668
                        
                        
                        
                        127,096,469Total
      liabilities and stockholders' equity
                        
                        
                        
                        
                        $
                        193,624,346
                        
                        
                        $
                        193,617,510
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  2
  China
Precision Steel, Inc. and Subsidiaries
 Consolidated
Statements of Operations
 For
the Three and Six Months Ended December 31, 2010 and 2009
 (Unaudited)
 
 Three Months Ended
                    
                    
                    Six Months EndedDecember 31,
                    
                    
                    December 31,
                    
                    
                    December 31,
                    
                    
                    December 31,Notes
                    
                    
                    2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009Sales
      revenues
                    
                    
                    
                    
                    $
                    39,768,528
                    
                    
                    $
                    27,013,838
                    
                    
                    $
                    73,664,983
                    
                    
                    $
                    44,055,827Cost
      of goods sold
                    
                    
                    
                    
                    
                    37,859,665
                    
                    
                    
                    23,377,883
                    
                    
                    
                    69,372,035
                    
                    
                    
                    39,716,513Gross
      profit
                    
                    
                    
                    
                    
                    1,908,863
                    
                    
                    
                    3,635,955
                    
                    
                    
                    4,292,948
                    
                    
                    
                    4,339,314Operating
      expensesSelling
      expenses
                    
                    
                    
                    
                    
                    (1,823
                    )
                    
                    
                    70,605
                    
                    
                    
                    108,382
                    
                    
                    
                    102,414Administrative
      expenses
                    
                    
                    
                    
                    
                    725,650
                    
                    
                    
                    654,041
                    
                    
                    
                    1,597,120
                    
                    
                    
                    1,232,739Allowance
      for bad and doubtful debts
                    
                    
                    
                    
                    
                    19,697
                    
                    
                    
                    101,067
                    
                    
                    
                    19,697
                    
                    
                    
                    218,184Depreciation
      and amortization expense
                    
                    
                    
                    
                    
                    49,551
                    
                    
                    
                    36,755
                    
                    
                    
                    93,711
                    
                    
                    
                    80,493Total
      operating expenses
                    
                    
                    
                    
                    
                    793,075
                    
                    
                    
                    862,468
                    
                    
                    
                    1,818,910
                    
                    
                    
                    1,633,830Income
      from operations
                    
                    
                    
                    
                    
                    1,115,788
                    
                    
                    
                    2,773,487
                    
                    
                    
                    2,474,038
                    
                    
                    
                    2,705,484Other
      income/(expense)Other
      revenues
                    
                    
                    
                    
                    
                    1,094
                    
                    
                    
                    91,041
                    
                    
                    
                    2,612
                    
                    
                    
                    110,963Interest
      and finance costs
                    
                    
                    
                    
                    
                    (852,738
                    )
                    
                    
                    (275,091
                    )
                    
                    
                    (1,317,851
                    )
                    
                    
                    (503,434
                    )Total
      other (expense)
                    
                    
                    
                    
                    
                    (851,644
                    )
                    
                    
                    (184,050
                    )
                    
                    
                    (1,315,239
                    )
                    
                    
                    (392,471
                    )Income
      from operations  before income tax
                    
                    
                    
                    
                    
                    264,144
                    
                    
                    
                    2,589,437
                    
                    
                    
                    1,158,799
                    
                    
                    
                    2,313,013Provision
      for income tax
                    
                    14Current
                    
                    
                    
                    
                    
                    62,363
                    
                    
                    
                    -
                    
                    
                    
                    312,507
                    
                    
                    
                    (1,233
                    )Total
      income tax expense
                    
                    
                    
                    
                    
                    62,363
                    
                    
                    
                    -
                    
                    
                    
                    312,507
                    
                    
                    
                    (1,233
                    )Net
      income
                    
                    
                    
                    
                    $
                    201,781
                    
                    
                    $
                    2,589,437
                    
                    
                    $
                    846,292
                    
                    
                    $
                    2,314,246Basic
      earnings per share
                    
                    15
                    
                    
                    $
                    0.00
                    
                    
                    $
                    0.06
                    
                    
                    $
                    0.02
                    
                    
                    $
                    0.05Basic
      weighted average shares outstanding
                    
                    
                    
                    
                    
                    46,562,955
                    
                    
                    
                    46,562,955
                    
                    
                    
                    46,562,955
                    
                    
                    
                    46,562,955Diluted
      earnings per share
                    
                    15
                    
                    
                    $
                    0.00
                    
                    
                    $
                    0.06
                    
                    
                    $
                    0.02
                    
                    
                    $
                    0.05Diluted
      weighted average shares outstanding
                    
                    
                    
                    
                    
                    46,562,955
                    
                    
                    
                    46,562,955
                    
                    
                    
                    46,562,955
                    
                    
                    
                    46,562,955Components
      of comprehensive income:Net
      income
                    
                    
                    
                    
                    $
                    201,781
                    
                    
                    $
                    2,589,437
                    
                    
                    $
                    846,292
                    
                    
                    $
                    2,314,246Foreign
      currency translation adjustment
                    
                    
                    
                    
                    
                    1,770,168
                    
                    
                    
                    677,905
                    
                    
                    
                    3,467,907
                    
                    
                    
                    64,106Comprehensive
      income
                    
                    
                    
                    
                    $
                    1,971,949
                    
                    
                    $
                    3,267,342
                    
                    
                    $
                    4,314,199
                    
                    
                    $
                    2,378,352
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  3
  China
Precision Steel, Inc. and Subsidiaries
 Consolidated
Statements of Changes in Stockholders' Equity
 For
the Six Months Ended December 31, 2010
 
 AccumulatedAdditional
                  
                  
                  Other
                  
                  
                  
                  
                  
                  TotalOrdinary Shares
                  
                  
                  Paid-in
                  
                  
                  Comprehensive
                  
                  
                  Retained
                  
                  
                  Stockholders'Share
                  
                  
                  Amount
                  
                  
                  Capital
                  
                  
                  Income
                  
                  
                  Earnings
                  
                  
                  EquityBalance
      at June 30, 2010
                  
                  
                  45,562,955
                  
                  
                  
                  46,563
                  
                  
                  
                  75,642,383
                  
                  
                  
                  10,630,975
                  
                  
                  
                  40,776,548
                  
                  
                  
                  127,096,469Foreign
      currency translation adjustment
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3,467,907
                  
                  
                  
                  -
                  
                  
                  
                  3,467,907Net
      income
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  846,292
                  
                  
                  
                  846,292Balance
      at December 31, 2010 (Unaudited)
                  
                  
                  45,562,955
                  
                  
                  $
                  46,563
                  
                  
                  $
                  75,642,383
                  
                  
                  $
                  14,098,882
                  
                  
                  $
                  41,622,840
                  
                  
                  $
                  131,410,668
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  4
  China Precision Steel, Inc. and Subsidiaries
 Consolidated
Statements of Cash Flows
 For
the Six Months Ended December 31, 2010 and 2009
 (Unaudited)
 
 2010
                  
                  
                  2009Cash
      flows from operating activitiesNet
      income
                  
                  $
                  846,292
                  
                  
                  $
                  2,314,246Adjustments
      to reconcile net income to net cash provided by operating
      activitiesDepreciation
      and amortization
                  
                  
                  5,891,211
                  
                  
                  
                  2,181,380Allowance
      for bad and doubtful debts
                  
                  
                  19,697
                  
                  
                  
                  218,184Inventory
      provision
                  
                  
                  -
                  
                  
                  
                  42,534Net
      changes in assets and liabilities:Accounts
      receivable, net
                  
                  
                  10,755,506
                  
                  
                  
                  7,189,783Inventories
                  
                  
                  (2,802,535
                  )
                  
                  
                  (8,908,192
                  )Prepaid
      expenses
                  
                  
                  93,809
                  
                  
                  
                  (85,504
                  )Advances
      to suppliers
                  
                  
                  (15,873,801
                  )
                  
                  
                  (601,926
                  )Accounts
      payable and accrued expenses
                  
                  
                  (5,820,915
                  )
                  
                  
                  (801,406
                  )Advances
      from customers
                  
                  
                  (1,131,961
                  )
                  
                  
                  1,042,492Other
      taxes payable
                  
                  
                  649,577
                  
                  
                  
                  (2,236,478
                  )Income
      taxes payable
                  
                  
                  255,560
                  
                  
                  
                  197,520Net
      cash (used in)/provided by operating activities
                  
                  
                  (7,117,560
                  )
                  
                  
                  552,633Cash
      flows from investing activitiesPurchase
      of property, plant and equipment, including construction in
      progress
                  
                  
                  (8,365,838
                  )
                  
                  
                  (4,746,139
                  )Net
      cash (used in) investing activities
                  
                  
                  (8,365,838
                  )
                  
                  
                  (4,746,139
                  )Cash
      flows from financing activitiesLoan
      proceeds
                  
                  
                  -
                  
                  
                  
                  3,735,169Repayments
      of short-term loans
                  
                  
                  (52,173
                  )
                  
                  
                  (444,400
                  )Net
      cash (used in)/provided by financing activities
                  
                  
                  (52,173
                  )
                  
                  
                  3,290,769Effect
      of exchange rate
                  
                  
                  725,939
                  
                  
                  
                  5,438Net
      (decrease) in cash
                  
                  
                  (14,809,632
                  )
                  
                  
                  (897,299
                  )Cash
      and cash equivalents, beginning of period
                  
                  
                  29,036,706
                  
                  
                  
                  13,649,587Cash
      and cash equivalents, end of period
                  
                  $
                  14,227,074
                  
                  
                  $
                  12,752,288
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  5
  China
Precision Steel, Inc.
 Notes to the Consolidated Financial Statements
 (Unaudited)
 
 1.
              Description
      of Business
 
 China
Precision Steel, Inc. (the “Company”, “CPSL” or “we”) is a niche and high
value-added steel processing company principally engaged in the manufacture
and sale of cold-rolled precision steel products for downstream applications
including automobile components and spare parts, kitchen tools, electrical
appliances, roofing and food packaging materials. Raw materials, hot-rolled
steel coils, will go through certain reduction, heating and
cutting processing procedures to give steel coils or plates different
thickness and specifications for deliveries in accordance with customers’
requirements. 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.
 
 We have
five wholly-owned subsidiaries, Partner Success Holdings Limited (“PSHL”),
Blessford International Limited (“Blessford International”), Shanghai Chengtong
Precision Strip Company Limited (“Chengtong”), Shanghai Blessford Alloy
Company Limited (“Shanghai Blessford”) and Shanghai Tuorong Precision Strip
Company Limited (“Tuorong”). The Company’s principal activities are conducted
through our two operating subsidiaries, Shanghai Chengtong and Shanghai
Blessford with manufacturing facilities located in Shanghai, the People’s
Republic of China (the “PRC”). The sole activity of Tuorong is the
ownership of land use rights with respect to facilities utilized by Chengtong
and Shanghai Blessford. PSHL and Blessford International are both British
Virgin Islands companies with the sole purpose of investment
holding.
  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 (see Note 3 “Foreign Currencies”
below).
 
 The
accompanying unaudited consolidated financial statements as of December 31 and
June 30, 2010 and for the periods ended December 31, 2010 and 2009 have been
prepared in accordance with US GAAP and with the instructions to Form 10-Q and
Regulation S-X applicable to smaller reporting companies. In the opinion of
management, these unaudited consolidated financial statements include all
adjustments considered necessary to make the financial statements not
misleading. The results of operations for the six months ended December 31, 2010
are not necessarily indicative of the results to be expected for the full year
ending June 30, 2011.
 
 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 the accompanying
financial statements. 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 longer credit terms to
long-standing recurring customers with good payment histories and sizable
operations.  Accounts receivable are recorded at the time revenue is
recognized and are stated net of allowance for doubtful
accounts.
  6
  Allowance for Doubtful Accounts
-The Company maintains an allowance for doubtful accounts based on
its assessment of the collectability of the accounts receivable. Management
determines the collectability of outstanding accounts by maintaining regular
communication with such customers and obtaining confirmation of their intent to
fulfill their obligations to the Company. Management also considers past
collection experience, our relationship with customers and the impact of current
economic conditions on our industry and market. However, we note that the
continuation or intensification of the current global economic crisis may have
negative consequences on the business operations of our customers and adversely
impact their ability to meet their financial obligations.  To reserve
for potentially uncollectible accounts receivable, management has made a 50%
provision for all accounts receivable that are over 180 days past due and full
provision for all accounts receivable over 1 year past due.  From time
to time, we will review these credit periods, along with our collection
experience and the other factors discussed above, to evaluate the adequacy of
our allowance for doubtful accounts, and to make changes to the allowance, if
necessary.  If our actual collection experience or other conditions
change, revisions to our allowances may be required, including a further
provision which could adversely affect our operating income, or write back of
provision when estimated uncollectible accounts are actually
collected.  At December 31, 2010 and June 30, 2010, the Company had
$1,041,244 and $1,013,744 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 six months ended December 31, 2010 and 2009 were
$19,697  and $218,184, respectively. The current period charge
reflects a provision for doubtful accounts based on our policy described above.
Our management is continually working to ensure that any known uncollectible
amounts are immediately written off as bad debt against outstanding
balances.
  Inventories -Inventories
are stated at the lower of cost or market. Cost is determined using the weighted
average method. Market value represents the estimated selling price in the
ordinary course of business less the estimated costs necessary to complete the
sale.
 
 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 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.
 
 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 do not provide allowances against advances paid to
those PRC state-owned companies as there is minimal risk of default. Our
allowances for advances to suppliers are subjective critical estimates that have
a direct impact on reported net earnings, and are reviewed quarterly at a
minimum to reflect changes from our historic raw materials receipt experience
and to ensure the appropriateness of the allowance in light of the circumstances
present at the time of the review. It is reasonably possible that the Company’s
estimate of the allowance will change, such as in the case when the Company
becomes aware of a supplier’s inability to deliver the contracted raw materials
or meet its financial obligations. As of December 31, 2010 and June 30, 2010,
the Company had allowances of advances to suppliers of $1,687,999 and
$1,643,419, respectively.
 
 Allowances
for advances to suppliers are written off when all efforts to collect the
materials or recover the cash advances have been unsuccessful, or when it has
become known to the management that there is no intention by the suppliers to
deliver the contracted raw materials or refund the cash advances. To date, we
have not written off any advances to suppliers.
  7
  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:
 
 Plant
      and machinery
                
                10 yearsBuildings
                
                10 yearsMotor
      vehicles
                
                5 yearsOffice
      equipment
                
                5 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 indicates the carrying value of the asset may not be
recoverable. An impairment loss is recognized when the carrying amount of a
long-lived asset or asset group is not recoverable (when carrying amount exceeds
the gross, undiscounted cash flows from use and disposition) and is measured as
the excess of the carrying amount over the asset’s (or asset group’s) fair
value.
 
 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 three months ended December 31, 2010 and 2009,
the Company capitalized $nil and $137,140, respectively, of interest to
construction-in-progress.
 
 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 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 - Advances from customers
represent advance cash receipts from customers and for which goods have not been
delivered or services have not been rendered at each balance sheet date.
Advances from customers for goods to be delivered or services to be rendered in
the 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.
  8
  Functional Currency and Translating
Financial Statements– The Company’s
principal country of operations is the PRC. Our functional currency is Chinese
Renminbi; however, the accompanying consolidated financial statements have been
expressed in United States Dollars (“USD”). The consolidated balance sheets have
been translated into USD at the exchange rates prevailing at each balance sheet
date. The consolidated statements of operations and cash flows have been
translated using the weighted-average exchange rates prevailing during the
periods of each statement. The registered equity capital denominated in the
functional currency is translated at the historical rate of exchange at the time
of capital contribution. All translation adjustments resulting from the
translation of the financial statements into the reporting currency are dealt
with as other comprehensive income in stockholders’ equity.
 
 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 profits has
been calculated on the estimated assessable profits for the period 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 income taxes in the United States has been made as
China Precision Steel, Inc. had no taxable income in the 2010 and 2009
periods.
 
 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 an Old FIE, Chengtong’s tax holiday
of a 50% reduction in the 25% statutory rates expired on December 31, 2008 and
it is currently subject to the 25% statutory rates since January 1, 2009;
Shanghai Blessford’s full tax exemption from the enterprise income tax expired
on December 31, 2009, and it is subject 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 China.
 
 Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statements 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.
  9
  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 statements 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 statements 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 in the PRC.
However, the Company cannot reasonably quantify political risk factors and thus
must depend on guidance issued by current officials in the PRC.
 
 Based on
all known facts and circumstances and current tax law, the Company believes that
the total amount of unrecognized tax benefits as of December 31, 2010 is not
material to its results of operations, financial condition or cash flows. The
Company also believes that the total amount of unrecognized tax benefits as of
December 31, 2010, 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 regulations on pension, Chengtong and
Shanghai Blessford contribute to a defined contribution retirement scheme
organized by municipal government in the province in which Chengtong and
Shanghai Blessford were registered and all qualified employees are eligible to
participate in the scheme. Contributions to the scheme are calculated at 23.5%
of the employees’ salaries above a fixed threshold amount and the employees
contribute 2% to 8%, while Chengtong and Shanghai Blessford contribute the
balance contribution of 15.5% to 21.5%. The Group has no other material
obligation for the payment of retirement benefits beyond the annual
contributions under this scheme.
 
 For the
six months ended December 31, 2010 and 2009, the Company’s pension cost charged
to the statements of operations under the plan amounted to $121,058 and $80,263,
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, short-term loans, accounts payable, accrued
expenses, and other payables approximate their fair values as at December 31,
2010 and June 30, 2010 because of the relatively short-term maturity of these
instruments. The Company considers the carrying amount of long-term loans
to approximate their fair values based on the interest rates of the instruments
and the current market rate of interest.
  10
  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 six months ended December 31, 2010 and 2009 is as
follows:
  a.     Customers
                    
                    2010
                    
                    
                    % to
                      sales
                    
                    
                    2009
                    
                    
                    % to
                      salesShanghai
      Shengdejia Metal Co. Ltd
                    
                    
                    18,683,105
                    
                    
                    
                    25
                    
                    
                    
                    9,097,037
                    
                    
                    
                    27Shanghai
      Changshuo Steel Company, Ltd
                    
                    
                    1,991,623
                    
                    
                    
                    16
                    
                    
                    
                    5,825,690
                    
                    
                    
                    17
 
 The
Company’s list of suppliers whose sales to us exceeded 10% of our total
purchases during six months ended December 31, 2010 and 2009 is as
follows:
 
 b.      Suppliers
                  
                  2010
                  
                  
                  % to
                    consumption
                  
                  
                  2009
                  
                  
                  % to
                    consumptionDachang
      Huizu Baosheng Steel Products Co., Ltd.
                  
                  
                  18,482,732
                  
                  
                  
                  24
                  
                  
                  
                  8,767,582
                  
                  
                  
                  24Zhejinag
      Wuchan Metal Group Co., Ltd.
                  
                  
                  14,403,294
                  
                  
                  
                  18
                  
                  
                  
                  8,209,383
                  
                  
                  
                  22Wuxi
      Hangda Trading Co., Ltd.
                  
                  
                  9,018,547
                  
                  
                  
                  12
                  
                  
                  
                  -*
                  
                  
                  
                  -*Hangzhou
      Steel Materials Co., Ltd.
                  
                  
                  7,640,373
                  
                  
                  
                  10
                  
                  
                  
                  7,576,264
                  
                  
                  
                  21
 
 *
Not 10% suppliers for the relevant period
 
 Our
management continues to take appropriate actions to perform ongoing business and
credit reviews of our customers to reduce our exposure to new and recurring
customers who have been deemed to pose a high credit risk to our business based
on their commercial credit reports, our collection history, and our perception
of the risk posed by their geographic location. We have halted all of our direct
sales to customers located in the Philippines since the year ended June 30, 2009
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
$26,903,637 and $39,598,845 as of December 31, 2010 and June 30, 2010,
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 have been relatively accurate in the past and currently there is 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 our inventories to
their net realizable values (average selling prices less reasonable costs to
convert the inventories into completed form) in the amount of $42,816 for the
year ended June 30, 2010.
  11
  As of
December 31, 2010 and June 30, 2010, inventories consisted of the
following:
 
 At cost:
                      
                      December 31,
                        2010
                      
                      
                      June 30,
                        2010Raw materials
                      
                      $
                      9,259,714
                      
                      
                      $
                      5,551,003Work
      in progress
                      
                      
                      9,852,815
                      
                      
                      
                      15,443,410Finished
      goods
                      
                      
                      9,879,191
                      
                      
                      
                      4,291,384Consumable
      items
                      
                      
                      3,106,732
                      
                      
                      
                      3,279,21732,098,452
                      
                      
                      
                      28,565,014Less:
      provision
                      
                      
                      -
                      
                      
                      
                      (42,816
                      )$
                      32,098,452
                      
                      
                      $
                      28,522,198
 
 Costs of
finished goods include direct labor, direct materials, and production overhead
before the goods are ready for sale.
 
 Consumable
items represent parts used in our cold rolling mills and other equipment that
need to be replaced from time to time when necessary to ensure optimal operating
results, such as bearings and rollers.
 
 Inventories
amounting to $6,614,182 (June 30, 2010: $6,588,535) were pledged for short-term
loans totaling $26,617,609 at December 31, 2010 (June 30, 2010:
$25,965,421).
 
 7.
              Advances
      to Suppliers
 
 Advances
to suppliers are shown net of allowances of $1,687,999 and $1,643,419 at
December 31, 2010 and June 30, 2010, respectively.
 
 The
majority of our advances to suppliers greater than 180 days as of December 31,
2010 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:
 
 December 31,
                        2010
                      
                      
                      June 30,
                        2010Plant
      and machinery
                      
                      $
                      71,074,052
                      
                      
                      $
                      62,486,750Buildings
                      
                      
                      22,560,584
                      
                      
                      
                      21,964,748Motor
      vehicles
                      
                      
                      684,519
                      
                      
                      
                      554,368Office
      equipment
                      
                      
                      508,834
                      
                      
                      
                      472,53794,827,989
                      
                      
                      
                      85,478,403Less:
      Accumulated depreciation
                      
                      
                      (20,065,228
                      )
                      
                      
                      (15,571,209
                      )$
                      74,762,761
                      
                      
                      $
                      69,907,194
 
 Depreciation
expense related to manufacturing is included as a component of cost of goods
sold. During the three and six months ended December 31, 2010, depreciation
totaling $1,217,525 and $2,751,616, respectively, was included as a
component of cost of goods sold (December 31, 2009: $662,517 and
$1,396,252, respectively).
 
 Plant and
machinery amounting to $39,494,279 (June 30, 2010: $40,543,231) and $22,538,468
(June 30, 2010: $23,161,753) were pledged for short-term loans totaling
$26,617,609 and long-term loans totaling $18,566,257, respectively, at December
31, 2010.
  12
  9.
              Construction-In-Progress
 
 As of
December 31, 2010 and June 30, 2010, construction-in-progress consisted of the
following:
 
 December 31,
                        2010
                      
                      
                      June 30,
                        2010Construction
      costs
                      
                      $
                      3,669,447
                      
                      
                      $
                      3,983,450
 
 Construction-in-progress
represents construction and installations of annealing furnaces and testing
equipment.
 
 10.
              Intangible
      Assets
 
 Land use
rights amounting to $1,867,000 (June 30, 2010: $1,837,140) were pledged for
short-term loans totaling $26,617,609 (June 30, 2010: $25,965,421).
 
 The
Company acquired land use rights in August 2004 and December 2006 for 50 years
that expire in August 2054 and December 2056 respectively. The land use rights
are amortized over a fifty-year term. An amortization amount of approximately
$37,000 is to be recorded each year starting from the financial year ended June
30, 2009 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.
 
 11.
              Short-Term
      Loans
 
 Short-term
loans consisted of the following:
 December 31,
                                    2010
                                  
                                  
                                  June 30,
                                    2010Bank
      loan dated June 18, 2010, due July 31, 2011 with an interest rate at 115%
      of the standard market rate set by the People’s Bank of China (“PBOC”)
      (6.11% at September 30, 2010) (Notes 8 and 10)
                                  
                                  
                                  7,987,738
                                  
                                  
                                  
                                  5,300,000Bank
      loan dated July 23, 2009, due July 31, 2010 with an interest rate at 115%
      of the standard market rate set by PBOC (6.11% at September 30, 2010)
      (Notes 8 and 10)
                                  
                                  
                                  -
                                  
                                  
                                  
                                  2,527,573Bank
      loan dated June 18, 2010, due July 31, 2011 with an interest rate at 115%
      of the standard market rate set by PBOC (6.11% at September 30, 2010)
      (Notes 6, 8 and 10)
                                  
                                  
                                  18,629,871
                                  
                                  
                                  
                                  18,137,848$
                                  26,617,609
                                  
                                  
                                  $
                                  25,965,421
 
 The above
bank loans outstanding as at December 31, 2010 are Renminbi (“RMB”) loans, carry
an interest rate of 1.15 times of the standard market rate set by PBOC, due on
July 31, 2011, and are secured by inventories, land use rights, buildings and
plant and machinery, and guaranteed by PSHL and our Chairman, Mr. Wo Hing Li. In
addition, pursuant to a bank loan agreement entered into between the Company and
Raiffeisen Zentralbank Osterreich 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 at December 31, 2010 and June
30, 2010 was 6.6815% and 5.49%, respectively.
 
 12.
              Long-Term
      Loan
 
 On
January 29, 2010, Shanghai Blessford entered into a Senior Loan Agreement with
DEG-Deutsche Investitions-Und Entwicklungsgesellschaft Mbh (“DEG”) for a loan
amount up to $18,000,000 at an annual interest rate of 4.5% above the six-month
USD London Interbank Offered Rate (“LIBOR”). On June 23, 2010, the Company
drew $18,000,000 against this facility and exchanged such amount to
RMB122,580,000 at the then prevailing exchange rate. This RMB
loan balance is translated into USD at the exchange rates prevailing at
each balance sheet date.
 
 December 31,
                                      2010
                                    
                                    
                                    June 30,
                                      2010Bank
      loan dated January 29, 2010, due June 22, 2017 with an interest rate of
      LIBOR plus 4.5% (4.9584% at December 31, 2010) (Note 8)
                                    
                                    
                                    18,566,257
                                    
                                    
                                    $
                                    18,075,914
  13
  The above
loan is to be repaid semi-annually over five years starting on December 15,
2011and is secured by a mortgage on the new cold rolling line and annealing
furnaces at Shanghai Blessford’s facilities.
 
 Maturities
of long-term loan for the years ending June 30:
 
 2011
                    
                    $
                    -2012
                    
                    $
                    3,713,2512013
                    
                    $
                    3,713,2512014
                    
                    $
                    3,713,2512015
                    
                    $
                    3,713,2512016
                    
                    $
                    3,713,253Total
                    
                    $
                    18,566,257
  13.
              Stock
      Warrants
 
 In
connection with a Stock Purchase Agreement dated February 16, 2007 for the
Company’s private placement offerings (the “Private Placement”), on February 22,
2007, the Company issued warrants to the placement agents to purchase an
aggregate of 1,300,059 shares of Common Stock as partial compensation for
services rendered in connection with the Private Placement valued at $2,770,349.
The value of the warrants was considered syndication fees and was recorded to
additional paid-in capital. 851,667 of these warrants were 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. These
warrants were not exercised and expired on
February 22, 2010.
  On
November 6, 2007, in connection with the Subscription Agreement, the Company
issued to certain institutional accredited investors warrants to purchase
1,420,000 shares of Common Stock valued at $5,374,748, and Roth Capital
Partners, LLC, as placement agent, received warrants to purchase 225,600 shares
of Common Stock valued at $887,504. These amounts were recorded as syndication
fees offsetting additional paid-in capital.
 
 Information
with respect to stock warrants outstanding is as follows:
 
 Exercise
                      Price
                    
                    Outstanding
                      June 30, 2010
                    
                    
                    Granted
                    
                    
                    Expired or
                      Exercised
                    
                    
                    Outstanding
                      December 31,
                      2010
                    
                    Expiration Date$
                    7.38
                    
                    
                    225,600
                    
                    
                    
                    -0-
                    
                    
                    
                    225,600
                    
                    
                    
                    -0-
                    
                    November 5, 2010$
                    3.00
                    
                    
                    358,392
                    
                    
                    
                    -0-
                    
                    
                    
                    -0-
                    
                    
                    
                    358,392
                    
                    February 22, 2011$
                    8.45
                    
                    
                    1,420,000
                    
                    
                    
                    -0-
                    
                    
                    
                    -0-
                    
                    
                    
                    1,420,000
                    
                    May 5, 2013
 
 14.
              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.
 
 The tax
holiday resulted in tax savings as follows:
 
 Six months ended December 31,2010
                        
                        
                        2009Tax
      savings
                        
                        $
                        104,339
                        
                        
                        $
                        675,840Benefit
      per shareBasic
                        
                        $
                        0.00
                        
                        
                        $
                        0.01Diluted
                        
                        $
                        0.00
                        
                        
                        $
                        0.01
  14
  Significant
components of the Group’s deferred tax assets and liabilities as of December 31,
2010 and June 30, 2010 are as follows:
  Deferred tax assets and liabilities:
                    
                    December 31,
                      2010
                    
                    
                    June 30,
                      2010Net
      operating loss carried forward
                    
                    $
                    2,106,712
                    
                    
                    $
                    1,938,915Temporary
      differences resulting from allowances
                    
                    
                    1,971,372
                    
                    
                    
                    1,906,348Net
      deferred income tax asset
                    
                    
                    4,078,084
                    
                    
                    
                    3,845,263Valuation
      allowance
                    
                    
                    (4,078,084
                    )
                    
                    
                    (3,845,263
                    )$
                    -
                    
                    
                    $
                    -
 
 The
Company has not recognized a deferred tax liability in respect of the
undistributed earnings of its foreign subsidiaries of approximately
US$19,482,117 as of December 31, 2010 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
PRC income tax rate to income tax expense per books is as follows:
 
 Six months ended December 31,2010
                      
                      
                      2009Computed tax at
      the PRC statutory rate of 25%
                      
                      $
                      236,923
                      
                      
                      $
                      533,880Valuation
      allowance
                      
                      
                      232,821
                      
                      
                      
                      142,289Income
      not subject to tax
                      
                      
                      (65,011
                      )
                      
                      
                      (329
                      )Under/(over)
      provision
                      
                      
                      12,113
                      
                      
                      
                      (1,233
                      )Benefit
      of tax holiday
                      
                      
                      (104,339
                      )
                      
                      
                      (675,840
                      )Income
      tax expense/(benefit) per books
                      
                      $
                      312,507
                      
                      
                      
                      (1,233
                      )
 
 Income
tax expense consists of:
 Six months ended December 31,2010
                              
                              
                              2009Income
      tax expense for the period - PRC
                              
                              $
                              312,507
                              
                              
                              $
                              (1,233
                              )Deferred
      income tax benefit - PRC
                              
                              
                              -
                              
                              
                              
                              -Income
      tax expense/(benefit) per books
                              
                              $
                              312,507
                              
                              
                              $
                              (1,233
                              )
 
 15.
              Earnings
      Per Share
 
 ASC
260-10 requires a reconciliation of the numerator and denominator of the basic
and diluted earnings/(loss) per share (EPS) computations.
 
 For the
three months ended December 31, 2010, warrants to purchase 358,392 shares of
common stock at an exercise price of $3.00, 1,420,000 shares at an exercise
price of $8.45 and 225,600 shares at an exercise price of $7.38 were not
included as their effect would have been anti-dilutive, however, these
securities could potentially dilute basic earnings per share in the
future.
 
 For the
three months ended December 31, 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.
  15
  The
following reconciles the components of the EPS computation:
 
 Income
                        
                        Shares
                        
                        Per Share(Numerator)
                        
                        (Denominator)
                        
                        AmountFor
      the three months ended December 31, 2010:Net
      income
                        
                        $
                        201,781Basic
      EPS income available to common shareholders
                        
                        $
                        201,781
                        
                        46,562,955
                        
                        $
                        0.00Effect
      of dilutive securities:Warrants
                        
                        
                        
                        
                        -Diluted
      EPS income available to common shareholders
                        
                        $
                        201,781
                        
                        46,562,955
                        
                        $
                        0.00For
      the three months ended December 31, 2009:Net
      income
                        
                        $
                        2,589,437Basic
      EPS income available to common shareholders
                        
                        $
                        2,589,437
                        
                        46,562,955
                        
                        $
                        0.06Effect
      of dilutive securities:Warrants
                        
                        
                        
                        
                        -Diluted
      EPS income available to common shareholders
                        
                        $
                        2,589,437
                        
                        46,562,955
                        
                        $
                        0.06
 
 Income
                        
                        Shares
                        
                        Per Share(Numerator)
                        
                        (Denominator)
                        
                        AmountFor
      the six months ended December 31, 2010:Net
      income
                        
                        $
                        846,292Basic
      EPS income available to common shareholders
                        
                        $
                        846,292
                        
                        46,562,955
                        
                        $
                        0.02Effect
      of dilutive securities:Warrants
                        
                        
                        
                        
                        -Diluted
      EPS income available to common shareholders
                        
                        $
                        846,292
                        
                        46,562,955
                        
                        $
                        0.02For
      the six months ended December 31, 2009:Net
      income
                        
                        $
                        2,314,246Basic
      EPS income available to common shareholders
                        
                        $
                        2,314,246
                        
                        46,562,955
                        
                        $
                        0.05Effect
      of dilutive securities:Warrants
                        
                        
                        
                        
                        -Diluted
      EPS income available to common shareholders
                        
                        $
                        2,314,246
                        
                        46,562,955
                        
                        $
                        0.05
 
 16.
              Capital
      Commitments
 
 As of
December 31, 2010, the Company had contractual commitments of
$6,921,421 (June 30, 2010: $4,556,039) for interest relating to its
short-term and long-term loans and share capital injection commitment related to
Shanghai Blessford.
 
 17.
              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 our market capitalization and stock price has triggered an
impairment test under ASC 360 for the six months ended December 31, 2010 and no
impairment charges were recognized for the relevant period. As of December 31,
2010, the Company expects these assets to be fully recoverable based on the
result of the impairment test. Goodwill amounting to $99,999 as at December
31, 2010 was considered immaterial and not tested for impairment in accordance
with ASC 350.
 
 18.
              Recent
      Accounting Pronouncements
 
 In June
2009, the Financial Accounting Standards Board (“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.
The adoption of this standard did not have an impact on the Company’s financial
position or results of operations.
  16
  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 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. 2009-15, “Accounting for Own-Share Lending
Arrangements in Contemplation of Convertible Debt Issuance or Other Financing”
(“ASU 2009-15”).  ASU 2009-15 amends ASC 470, “Debt with Conversion
and Other Options” (“ASC 470”), and ASC 260, “Earnings Per Share” (“ASC
260”).  Specifically, ASU 2009-15 requires companies to mark stock
loan agreements at fair value and recognize the cost of the agreements by
reducing the amount of additional paid-in capital on their financial
statements. The adoption of this standard did not have an impact on the
Company’s financial position or results of operations.
 
 In
December 2009, the FASB issued ASU 2009-17, “Improvements to Financial Reporting
by Enterprises Involved with Variable Interest Entities” (“ASU
2009-17”).  ASU 2009-17 details the amendments to ASC 810,
“Consolidation”, which are the result of FASB Statement No. 167, “Amendments to
FASB Interpretation No. 46(R)”.  That statement was issued by the FASB
in June 2009.  ASU 2009-17 amends the variable-interest entity
guidance in ASC 810 to clarify the accounting treatment for legal entities in
which equity investors do not have sufficient equity at risk for the entity to
finance its activities without financial support. The adoption of this
standard did not have an impact on the Company’s financial position or results
of operations.
 
 In
January 2010, the FASB issued ASU 2010-06, “Fair Value Measurements and
Disclosures (Topic 820) – Improving Disclosures about Fair Value Measurements”
(“ASU 2010-06”).  ASU 2010-06 requires reporting entities to provide
information about movements of assets among Levels 1 and 2 of the three-tier
fair value hierarchy established by ASC 820.  The guidance is
effective for any fiscal year that begins after December 15, 2010 and should be
used for quarterly and annual filings.  We are currently evaluating
the impact on our financial statements of adopting the amendments in ASU 2010-06
and cannot estimate the impact of adoption at this time.
  17
  ITEM
      2.
              MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS.
 
 Special
Note Regarding Forward Looking Statements
 
 In addition to historical
information, this report contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. We use words such as “believe,”
“expect,” “anticipate,” “project,” “target,” “plan,” “optimistic,” “intend,”
“aim,” “will” or similar expressions which are intended to identify
forward-looking statements. Such statements include, among others, those
concerning market and industry segment growth and demand and acceptance of new
and existing products; any projections of sales, earnings, revenue, margins or
other financial items; any statements of the plans, strategies and objectives of
management for future operations; and any statements regarding future economic
conditions or performance, as well as all assumptions, expectations,
predictions, intentions or beliefs about future events. You are cautioned that
any such forward-looking statements are not guarantees of future performance and
involve risks and uncertainties, as well as assumptions, which, if they were to
ever materialize or prove incorrect, could cause the results of the Company to
differ materially from those expressed or implied by such forward-looking
statements. Potential risks and uncertainties include, among other things,
factors such as: 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 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; and changes in our relationships with
customers and suppliers. 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, 2010.
 
 The
following discussion should be read in conjunction with our unaudited
consolidated financial statements and the related notes that appear in
Part I, Item 1, “Financial Statements,” of this quarterly report. Our
unaudited consolidated financial statements are stated in United States
Dollars and are prepared in accordance with United States Generally Accepted
Accounting Principles. The following discussion and analysis covers the
Company’s consolidated financial condition at December 31, 2010 (unaudited) and
June 30, 2010, the end of its prior fiscal year, and its unaudited
consolidated results of operation for the three months ended December 31, 2010
and 2009.
 
 Use
of Terms
 
 Except as
otherwise indicated by the context, all references in this report
to:
 
 ·
              “CPSL,”
      “Company,” “Group,” “we,” “us” or “our” are to China Precision Steel,
      Inc., a Delaware corporation, and its direct and indirect
      subsidiaries;
 ·
              “PSHL”
      are to our subsidiary Partner Success Holdings Limited, a BVI
      company;
 ·
              “Blessford
      International” are to our subsidiary Blessford International Limited, a
      BVI company;
 ·
              “Shanghai
      Blessford” are to our subsidiary Shanghai Blessford Alloy Company Limited,
      a PRC company;
 ·
              “Chengtong”
      are to our subsidiary Shanghai Chengtong Precision Strip Company Limited,
      a PRC company;
 ·
              “Tuorong”
      are to our subsidiary Shanghai Tuorong Precision Strip Company Limited, a
      PRC company;
 ·
              “China”
      and “PRC” are to the People’s Republic of
China;
 ·
              “BVI”
      are to the British Virgin Islands;
 ·
              “SEC”
      are to the United States Securities and Exchange
    Commission;
 ·
              “Securities
      Act” are to the Securities Act of 1933, as
  amended;
 ·
              “Exchange
      Act” are to the Securities Exchange Act of 1934, as
    amended;
 ·
              “RMB”
      are to Renminbi, the legal currency of China;
  and
 ·
              “U.S.
      dollar,” “USD,” “US$” and “$” are to the legal currency of the United
      States.
 
 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.
  18





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 China through our wholly-owned operating
subsidiaries, Chengtong and Shanghai Blessford, which are wholly owned
subsidiaries of our direct subsidiary, PSHL. Most of our sales are made
domestically in China; however, we began exporting during fiscal 2007
and our overseas market currently covers Indonesia, Thailand, the Caribbean,
Nigeria and Ethiopia. We intend to further expand into additional
overseas markets in the future, subject to suitable market conditions and
favorable regulatory controls.





Second
Quarter Financial Performance Highlights





During
the second fiscal quarter of 2011, we saw continuing growth in demand for our
cold rolled steel products as well as an increase in raw material prices. We
have seen increasing demand and orders from both our long term and new
customers, especially in the low-carbon cold-rolled steel segment and the
high-carbon cold-rolled steel segment, due to favorable policies and PRC
government subsidies for the home appliance industry and the auto industry,
where our products in these two segments are used in the manufacturing of
certain components. However, despite the positive growth we have seen during the
period, general industry problems such as excess capacity, low industrial
concentration and a lack of access to natural resources that have long plagued
China’s steel sector still remain. Commencing January 1, 2011, the
Chinese government ended subsidies for small cars with an engine capacity of 1.6
liters or lower in rural area, but analysts still expect the domestic automobile
market to grow at 10 to 15 percent annually during the next five to 10 years due
to a strong economy. As we may not be able to fully pass on the increase in cost
to our customers, we remain cautiously optimistic with increasing demand
but also rising prices.





During
the three months ended December 31, 2010, we sold a total of 47,236 tons of
products, an increase of 11,648  tons from 35,588 tons during the same
period a year ago, due to an increase in demand in a gradually improving market
as well as the addition of our 3rd mill
which began production in January 2010. We believe that such increase was mainly
caused by increases in demand from construction materials and home appliance
products due to successful PRC government stimulus policies to encourage
consumer spending in these segments during the period ended December 31, 2010.
Increased volume and sales have led to a gross profit of $1,908,863 and a
net income of $201,781 for the three months ended December 31, 2010. We are
currently operating a total of three cold rolling mills at a combined
utilization rate of approximately 80% as of December 31, 2010.  Total
Company backlog as of December 31, 2010 was $28,156,958.





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





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





·
            Revenues:
      Our revenues were approximately $39.8 million for the second quarter, an
      increase of 47.2% from last year.





·
            Gross
      Margin: Gross margin was 4.8% for the second quarter, as compared
      to 13.5% last year.


19





·
            Income from
      operations before tax: Income from operations before tax was
      approximately $0.3 million for the second quarter, as compared to
      approximately $2.6 million last
year.





·
            Net
      Income: Net income was approximately $0.2 million for the second
      quarter, as compared to approximately $2.6 million last
    year.





·
            Fully
      diluted Income per share: Fully diluted income per share was $0.00
      for the second quarter compared to $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  and Six Months Ended December 31, 2010 and
2009





Three Months Ended December 31,
                                                                                              
                                                                                              
                                                                                              Six Months Ended December 31,2010
                                                                                              
                                                                                              
                                                                                              2009
                                                                                              
                                                                                              
                                                                                              2010
                                                                                              
                                                                                              
                                                                                              2009Amount
                                                                                              
                                                                                              
                                                                                              %
      of
                                                                                                Revenues
                                                                                              
                                                                                              
                                                                                              Amount
                                                                                              
                                                                                              
                                                                                              %
      of
                                                                                                Revenues
                                                                                              
                                                                                              
                                                                                              Amount
                                                                                              
                                                                                              
                                                                                              %
      of
                                                                                                Revenues
                                                                                              
                                                                                              
                                                                                              Amount
                                                                                              
                                                                                              
                                                                                              %
      of
                                                                                                RevenuesRevenues
                                                                                              
                                                                                              $
                                                                                              39,768,528
                                                                                              
                                                                                              
                                                                                              
                                                                                              100.0
                                                                                              
                                                                                              
                                                                                              $
                                                                                              27,013,838
                                                                                              
                                                                                              
                                                                                              
                                                                                              100.0
                                                                                              
                                                                                              
                                                                                              $
                                                                                              73,664,983
                                                                                              
                                                                                              
                                                                                              
                                                                                              100.0
                                                                                              
                                                                                              
                                                                                              $
                                                                                              44,055,827
                                                                                              
                                                                                              
                                                                                              
                                                                                              100.0Cost
      of sales (including depreciation and amortization)
                                                                                              
                                                                                              
                                                                                              37,859,665
                                                                                              
                                                                                              
                                                                                              
                                                                                              95.2
                                                                                              
                                                                                              
                                                                                              
                                                                                              23,377,883
                                                                                              
                                                                                              
                                                                                              
                                                                                              86.5
                                                                                              
                                                                                              
                                                                                              
                                                                                              69,372,035
                                                                                              
                                                                                              
                                                                                              
                                                                                              94.2
                                                                                              
                                                                                              
                                                                                              
                                                                                              39,716,513
                                                                                              
                                                                                              
                                                                                              
                                                                                              90.2Gross
      profit
                                                                                              
                                                                                              
                                                                                              1,908,863
                                                                                              
                                                                                              
                                                                                              
                                                                                              4.8
                                                                                              
                                                                                              
                                                                                              
                                                                                              3,635,955
                                                                                              
                                                                                              
                                                                                              
                                                                                              13.5
                                                                                              
                                                                                              
                                                                                              
                                                                                              4,292,948
                                                                                              
                                                                                              
                                                                                              
                                                                                              5.8
                                                                                              
                                                                                              
                                                                                              
                                                                                              4,339,314
                                                                                              
                                                                                              
                                                                                              
                                                                                              9.8Selling
      and marketing expenses
                                                                                              
                                                                                              
                                                                                              (1,823
                                                                                              )
                                                                                              
                                                                                              
                                                                                              >(0.1
                                                                                              )
                                                                                              
                                                                                              
                                                                                              70,605
                                                                                              
                                                                                              
                                                                                              
                                                                                              0.3
                                                                                              
                                                                                              
                                                                                              
                                                                                              108,382
                                                                                              
                                                                                              
                                                                                              
                                                                                              0.1
                                                                                              
                                                                                              
                                                                                              
                                                                                              102,414
                                                                                              
                                                                                              
                                                                                              
                                                                                              0.2Administrative
      expenses
                                                                                              
                                                                                              
                                                                                              725,650
                                                                                              
                                                                                              
                                                                                              
                                                                                              1.8
                                                                                              
                                                                                              
                                                                                              
                                                                                              654,041
                                                                                              
                                                                                              
                                                                                              
                                                                                              2.4
                                                                                              
                                                                                              
                                                                                              
                                                                                              1,597,120
                                                                                              
                                                                                              
                                                                                              
                                                                                              2.2
                                                                                              
                                                                                              
                                                                                              
                                                                                              1,232,739
                                                                                              
                                                                                              
                                                                                              
                                                                                              2.8Allowance
      for bad and doubtful debts
                                                                                              
                                                                                              
                                                                                              19,697
                                                                                              
                                                                                              
                                                                                              
                                                                                              >0.1
                                                                                              
                                                                                              
                                                                                              
                                                                                              101,067
                                                                                              
                                                                                              
                                                                                              
                                                                                              0.4
                                                                                              
                                                                                              
                                                                                              
                                                                                              19,697
                                                                                              
                                                                                              
                                                                                              
                                                                                              >0.1
                                                                                              
                                                                                              
                                                                                              
                                                                                              218,184
                                                                                              
                                                                                              
                                                                                              
                                                                                              0.5Depreciation
      and amortization expense
                                                                                              
                                                                                              
                                                                                              49,551
                                                                                              
                                                                                              
                                                                                              
                                                                                              0.1
                                                                                              
                                                                                              
                                                                                              
                                                                                              36,755
                                                                                              
                                                                                              
                                                                                              
                                                                                              0.1
                                                                                              
                                                                                              
                                                                                              
                                                                                              93,711
                                                                                              
                                                                                              
                                                                                              
                                                                                              0.1
                                                                                              
                                                                                              
                                                                                              
                                                                                              80,493
                                                                                              
                                                                                              
                                                                                              
                                                                                              0.2Total
      operating expenses
                                                                                              
                                                                                              
                                                                                              793,075
                                                                                              
                                                                                              
                                                                                              
                                                                                              2.0
                                                                                              
                                                                                              
                                                                                              
                                                                                              862,468
                                                                                              
                                                                                              
                                                                                              
                                                                                              3.2
                                                                                              
                                                                                              
                                                                                              
                                                                                              1,818,910
                                                                                              
                                                                                              
                                                                                              
                                                                                              2.5
                                                                                              
                                                                                              
                                                                                              
                                                                                              1,633,830
                                                                                              
                                                                                              
                                                                                              
                                                                                              3.7Income
      from operations
                                                                                              
                                                                                              
                                                                                              1,115,788
                                                                                              
                                                                                              
                                                                                              
                                                                                              2.8
                                                                                              
                                                                                              
                                                                                              
                                                                                              2,773,487
                                                                                              
                                                                                              
                                                                                              
                                                                                              10.3
                                                                                              
                                                                                              
                                                                                              
                                                                                              2,474,038
                                                                                              
                                                                                              
                                                                                              
                                                                                              3.4
                                                                                              
                                                                                              
                                                                                              
                                                                                              2,705,484
                                                                                              
                                                                                              
                                                                                              
                                                                                              6.1Other
      revenues
                                                                                              
                                                                                              
                                                                                              1,094
                                                                                              
                                                                                              
                                                                                              
                                                                                              >0.1
                                                                                              
                                                                                              
                                                                                              
                                                                                              91,041
                                                                                              
                                                                                              
                                                                                              
                                                                                              0.3
                                                                                              
                                                                                              
                                                                                              
                                                                                              2,612
                                                                                              
                                                                                              
                                                                                              
                                                                                              >0.1
                                                                                              
                                                                                              
                                                                                              
                                                                                              110,963
                                                                                              
                                                                                              
                                                                                              
                                                                                              0.3Interest
      and finance costs
                                                                                              
                                                                                              
                                                                                              (852,738
                                                                                              )
                                                                                              
                                                                                              
                                                                                              (2.1
                                                                                              )
                                                                                              
                                                                                              
                                                                                              (275,091
                                                                                              )
                                                                                              
                                                                                              
                                                                                              (1.0
                                                                                              )
                                                                                              
                                                                                              
                                                                                              (1,317,851
                                                                                              )
                                                                                              
                                                                                              
                                                                                              (1.8
                                                                                              )
                                                                                              
                                                                                              
                                                                                              (503,434
                                                                                              )
                                                                                              
                                                                                              
                                                                                              (1.1
                                                                                              )Total
      other (expense)
                                                                                              
                                                                                              
                                                                                              (851,644
                                                                                              )
                                                                                              
                                                                                              
                                                                                              (2.1
                                                                                              )
                                                                                              
                                                                                              
                                                                                              (184,050
                                                                                              )
                                                                                              
                                                                                              
                                                                                              (0.7
                                                                                              )
                                                                                              
                                                                                              
                                                                                              (1,315,239
                                                                                              )
                                                                                              
                                                                                              
                                                                                              (1.8
                                                                                              )
                                                                                              
                                                                                              
                                                                                              (392,471
                                                                                              )
                                                                                              
                                                                                              
                                                                                              (0.9
                                                                                              )Income
      before income taxes
                                                                                              
                                                                                              
                                                                                              264,144
                                                                                              
                                                                                              
                                                                                              
                                                                                              0.7
                                                                                              
                                                                                              
                                                                                              
                                                                                              2,589,437
                                                                                              
                                                                                              
                                                                                              
                                                                                              9.6
                                                                                              
                                                                                              
                                                                                              
                                                                                              1,158,799
                                                                                              
                                                                                              
                                                                                              
                                                                                              1.6
                                                                                              
                                                                                              
                                                                                              
                                                                                              2,313,013
                                                                                              
                                                                                              
                                                                                              
                                                                                              5.3Income
      tax expense/(benefit)
                                                                                              
                                                                                              
                                                                                              62,363
                                                                                              
                                                                                              
                                                                                              
                                                                                              0.2
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              312,507
                                                                                              
                                                                                              
                                                                                              0.4
                                                                                              
                                                                                              
                                                                                              
                                                                                              (1,233
                                                                                              )
                                                                                              
                                                                                              
                                                                                              >(0.1
                                                                                              )Net
      income
                                                                                              
                                                                                              $
                                                                                              201,781
                                                                                              
                                                                                              
                                                                                              
                                                                                              0.5
                                                                                              
                                                                                              
                                                                                              $
                                                                                              2,589,437
                                                                                              
                                                                                              
                                                                                              
                                                                                              9.6
                                                                                              
                                                                                              
                                                                                              $
                                                                                              846,292
                                                                                              
                                                                                              
                                                                                              
                                                                                              1.1
                                                                                              
                                                                                              
                                                                                              $
                                                                                              2,314,246
                                                                                              
                                                                                              
                                                                                              
                                                                                              5.3Basic
      earnings per share
                                                                                              
                                                                                              $
                                                                                              0.00
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              $
                                                                                              0.06
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              $
                                                                                              0.02
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              $
                                                                                              0.05Diluted
      earnings per share
                                                                                              
                                                                                              $
                                                                                              0.00
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              $
                                                                                              0.06
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              $
                                                                                              0.02
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              $
                                                                                              0.05





Sales
Revenues.Sales
volume increased by 11,648 tons, or 32.7%, period-on-period, to 47,236 tons, for
the period ended December 31, 2010, from 35,588 tons for the period ended
December 31, 2009 and, as a result, sales revenues increased by $12,754,690, or
47.2%, period-on-period, to $39,768,528 for the period ended December 31, 2010,
from $27,013,838 for the period ended December 31, 2009. The increase in sales
revenues is mainly attributable to an increase in demand for low-carbon
cold-rolled products used in home appliances production due to favorable
government policies and subsidies to encourage consumer
spending.





Sales by Product
Line





A
break-down of our sales by product line for the three months ended
December 31, 2010 and 2009 is as follows:


20





Three Months Ended December 31,2010
                            
                            
                            2009
                            
                            
                            Period-on-
                              Period Qty.
                              VarianceProduct Category
                            
                            Quantity
                              (tons)
                            
                            
                            $ Amount
                            
                            
                            % of
                              Sales
                            
                            
                            Quantity
                              (tons)
                            
                            
                            $ Amount
                            
                            
                            % of
                              SalesLow
      carbon hard rolled
                            
                            
                            834
                            
                            
                            
                            726,908
                            
                            
                            
                            2
                            
                            
                            
                            4,453
                            
                            
                            
                            3,520,889
                            
                            
                            
                            13
                            
                            
                            
                            (3,619
                            )Low
      carbon cold-rolled
                            
                            
                            29,956
                            
                            
                            
                            27,196,747
                            
                            
                            
                            68
                            
                            
                            
                            16,627
                            
                            
                            
                            11,303,581
                            
                            
                            
                            42
                            
                            
                            
                            13,329High-carbon
      hot-rolled
                            
                            
                            1,562
                            
                            
                            
                            1,557,960
                            
                            
                            
                            4
                            
                            
                            
                            1,440
                            
                            
                            
                            1,236,831
                            
                            
                            
                            5
                            
                            
                            
                            122High-carbon
      cold-rolled
                            
                            
                            7,277
                            
                            
                            
                            6,544,544
                            
                            
                            
                            16
                            
                            
                            
                            7,167
                            
                            
                            
                            7,402,355
                            
                            
                            
                            27
                            
                            
                            
                            110Subcontracting
      income
                            
                            
                            7,607
                            
                            
                            
                            3,097,803
                            
                            
                            
                            8
                            
                            
                            
                            5,901
                            
                            
                            
                            3,256,866
                            
                            
                            
                            12
                            
                            
                            
                            1,706Sales
      of scrap metal
                            
                            
                            -
                            
                            
                            
                            644,566
                            
                            
                            
                            2
                            
                            
                            
                            -
                            
                            
                            
                            293,316
                            
                            
                            
                            1
                            
                            
                            
                            -Total
                            
                            
                            47,236
                            
                            
                            
                            39,768,528
                            
                            
                            
                            100
                            
                            
                            
                            35,588
                            
                            
                            
                            27,013,838
                            
                            
                            
                            100
                            
                            
                            
                            11,648





There
were different trends of demand across various product categories during the
three months ended December 31, 2010. High-carbon cold-rolled steel products
accounted for 16% of the current sales mix at an average selling price of $899
per ton for the period ended December 31, 2010, compared to 27% of the
sales mix at an average selling price per ton of $1,033 for the period ended
December 31, 2009. The products in this category are mainly used in the
automobile industry. Although sales percentages decreased, absolute
sales volume increased period-on-period as a result of the Chinese
government’s automobile stimulus policies in the 2009 and 2010 calendar
years, which increased demand during the period. Low-carbon cold-rolled steel
products accounted for 68% of the current sales mix at an average selling price
of $908 per ton for the three months ended December 31, 2010, compared to 42% of
the sales mix at an average selling price per ton of $680 for the three months
ended December 31, 2009. The increase in demand in this category during the
period was a result of our expanded customer base and increased orders of
steel used in the production of home appliances due to subsidies granted by the
Chinese government to encourage consumer spending. Low-carbon hard-rolled steel
products accounted for 2% of the current sales mix at an average selling price
of $872 per ton for the three months ended December 31, 2010, compared to 13% of
the sales mix at an average selling price per ton of $791 for the three months
ended December 31, 2009, due to a decrease in demand and volatilities in
pricing in the international market period-on-period and stronger demand from
the customers within China, and therefore a higher percentage of products sold
domestically during the three months ended December 31, 2010. 
Subcontracting income revenues accounted for $3,097,803, or 8% of the sales mix
for the three months ended December 31, 2010, as compared to $3,256,866, or 12%,
of the sales mix for the three months ended December 31, 2009.





Three Months Ended
                                                                December 31,2010
                                                              
                                                              
                                                              2009
                                                              
                                                              
                                                              VarianceAverage Selling Prices
                                                              
                                                              ($)
                                                              
                                                              
                                                              ($)
                                                              
                                                              
                                                              ($)
                                                              
                                                              
                                                              (%)Low-carbon
      hard rolled
                                                              
                                                              
                                                              872
                                                              
                                                              
                                                              
                                                              791
                                                              
                                                              
                                                              
                                                              81
                                                              
                                                              
                                                              
                                                              10Low-carbon
      cold-rolled
                                                              
                                                              
                                                              908
                                                              
                                                              
                                                              
                                                              680
                                                              
                                                              
                                                              
                                                              228
                                                              
                                                              
                                                              
                                                              34High-carbon
      hot-rolled
                                                              
                                                              
                                                              997
                                                              
                                                              
                                                              
                                                              859
                                                              
                                                              
                                                              
                                                              138
                                                              
                                                              
                                                              
                                                              16High-carbon
      cold-rolled
                                                              
                                                              
                                                              899
                                                              
                                                              
                                                              
                                                              1,033
                                                              
                                                              
                                                              
                                                              (134
                                                              )
                                                              
                                                              
                                                              (13
                                                              )Subcontracting
      income
                                                              
                                                              
                                                              407
                                                              
                                                              
                                                              
                                                              552
                                                              
                                                              
                                                              
                                                              (145
                                                              )
                                                              
                                                              
                                                              (26
                                                              )





The
average selling price per ton increased to $842 for the three months ended
December 31, 2010, compared to $759 last year, representing
an increase of $83, or 11%, period-on-period. This increase was mainly due
to increases in general steel prices and therefore our selling prices during the
period.





Sales Breakdown by Major
Customer





Three
      Months Ended December 31,2010
                                
                                
                                2009Customers
                                
                                $
                                
                                
                                %
      of Sales
                                
                                
                                $
                                
                                
                                %
      of SalesShanghai
      Shengdejia Metal Products Co., Ltd.
                                
                                
                                9,509,090
                                
                                
                                
                                24
                                
                                
                                
                                6,468,783
                                
                                
                                
                                24Shanghai
      Changshuo Steel Co., Ltd.
                                
                                
                                6,581,765
                                
                                
                                
                                17
                                
                                
                                
                                4,626,449
                                
                                
                                
                                17Shaoxing
      Wangheng Metal Plate Co., Ltd.
                                
                                
                                4,096,298
                                
                                
                                
                                10
                                
                                
                                
                                1,819,561
                                
                                
                                
                                7Wuxi
      Xingyu Thin Plate Co., Ltd.
                                
                                
                                2,957,368
                                
                                
                                
                                7
                                
                                
                                
                                -
                                
                                
                                
                                -Zhangjiagang
      Gangxing Innovative Construction Material Co., Ltd.
                                
                                
                                2,799,660
                                
                                
                                
                                7
                                
                                
                                
                                -
                                
                                
                                
                                -Hangzhou
      Cogeneration Co., Ltd.
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                1,906,610
                                
                                
                                
                                7Marubeni-Itochu
      Steel Inc.
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                1,126,107
                                
                                
                                
                                425,944,181
                                
                                
                                
                                65
                                
                                
                                
                                15,947,510
                                
                                
                                
                                59Others
                                
                                
                                13,824,347
                                
                                
                                
                                35
                                
                                
                                
                                11,066,328
                                
                                
                                
                                41Total
                                
                                
                                39,768,528
                                
                                
                                
                                100
                                
                                
                                
                                27,013,838
                                
                                
                                
                                100


*
Not major customers for the relevant periods


21


Sales
revenues generated from our top five major customers as a percentage of total
sales increased to 65% for the period ended December 31, 2010, compared to 59%
for the period ended December 31, 2009. The change in customer mix reflects
management’s continuous efforts in expanding our customer base and geographical
coverage during the course of the quarter.




Cost of Goods
Sold.Cost
of sales increased by $14,481,782, or 61.9%, period-on-period, to $37,859,665
for the period ended December 31, 2010, from $23,377,883 for the period ended
December 31, 2009. Cost of sales represented 95.2% of sales revenues for the
period ended December 31, 2010, compared to 86.5% for the period ended December
31, 2009. Average cost of production per ton increased to $842 for the period
ended December 31, 2010, compared to an average cost of production per ton of
$759 for the period ended December 31, 2009,  representing an increase
of $83 per ton, or 10.%, period-on-period.





Three
      Months Ended December 31,2010
                          
                          
                          2009
                          
                          
                          Variance($)
                          
                          
                          ($)
                          
                          
                          ($)
                          
                          
                          (%)Cost
      of goods sold-
      Raw materials
                          
                          
                          34,264,014
                          
                          
                          
                          20,501,079
                          
                          
                          
                          13,762,935
                          
                          
                          
                          67.1-
      Direct labor
                          
                          
                          154,025
                          
                          
                          
                          161,579
                          
                          
                          
                          (7,554
                          )
                          
                          
                          (4.7
                          )-
      Manufacturing overhead
                          
                          
                          3,441,626
                          
                          
                          
                          2,715,225
                          
                          
                          
                          726,401
                          
                          
                          
                          26.837,859,665
                          
                          
                          
                          23,377,883
                          
                          
                          
                          14,481,782
                          
                          
                          
                          61.9Cost
      per unit soldTotal
      units sold (tons)
                          
                          
                          47,236
                          
                          
                          
                          35,588
                          
                          
                          
                          11,648
                          
                          
                          
                          32.7Average
      cost per unit sold ($/ton)
                          
                          
                          802
                          
                          
                          
                          657
                          
                          
                          
                          145
                          
                          
                          
                          22.0





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





·
            an increase in cost of raw
      materials per unit sold of $149, or 25.9%, from $576 for the period ended
      December 31, 2009, to $725 for the period ended December 31,
      2010;





·
            a
      decrease in direct labor per unit sold of $2, or 40.0%, from $5 for the
      period ended December 31, 2009, to $3 for the period ended December 31,
      2010;





·
            a decrease in factory overhead
      per unit sold of $3, or 3.9%, from $76 for the period ended December 31,
      2009, to $73 for the period ended December 31,
  2010.





The cost
of raw materials consumed increased by $13,762,935, or 67.1%, period-on-period,
to $34,264,014 for the period ended December 31, 2010, from $20,501,079 for the
period ended December 31, 2009. This increase was mainly due to the increases in
total units sold along with the increase in the cost per unit sold.





Direct
labor costs decreased by $7,554, or 4.7%, period-on-period, to $154,025 for the
period ended December 31, 2010, from $161,579 for the period ended December 31,
2009. The decrease
was due to increase in total units sold offset by decrease in average cost per
unit sold as a result of economies of scale during the period.





Manufacturing
overhead costs increased by $726,401, or 26.8%, period-on-period, to $3,441,626
for the period ended December 31, 2010, from $2,715,225 for the period ended
December 31, 2009. The increase was mainly attributable to the combined effect
of an increase in depreciation of $871,574, or 131.6%, period-on-period, to
$1,534,091 for the period ended December 31, 2010, from $662,517 for the period
ended December 31, 2009, offset by an decrease in utilities and outsourcing of
$42,958, or 5.3%, period-on-period, to $771,567 for the period ended December
31, 2010, from $814,525 for the period ended December 31, 2009, due to decreased
outsourcing costs period-on-period.


22





Gross
Profit. Gross
profit in absolute terms decreased by $1,727,092, or 47.5%, period-on-period, to
$1,908,863 for the period ended December 31, 2010, from $3,635,955 for the
period ended December 31, 2009, while gross profit margin decreased to 4.8% for
the period ended December 31, 2010, from 13.5% for the period ended December 31,
2009. The decrease in gross profit is mainly attributable to a 47.2%
period-on-period increase in sales revenues, offset by a 61.9% period-on-period
increase in cost of goods sold. The decrease in gross profit margin principally
resulted from an increase in average cost per unit sold, due to the increase in
raw material prices during the three months ended December 31,
2010.




Selling
Expenses. Selling expenses decreased by $72,428, or 102.6%,
period-on-period, to $(1,823) for the period ended December 31, 2010, compared
to the corresponding period in 2009 of $70,605. The decrease was mainly
attributable to refund of commissions during the
period.




Administrative
Expenses.Administrative
expenses increased by $71,609, or 10.9%, period-on-period, to $725,650 for the
period ended December 31, 2010 compared to $654,041 for the period ended
December 31, 2009. This increase was chiefly associated with travelling costs
related to meetings and investment conferences during the period ended December
31, 2010.




Provision
for bad debt. Provision for bad debt was $19,697 based on
our policy for allowance for doubtful accountsfor the period ended
December 31, 2010, representing a decrease in the amount of $81,370, or 80.5%,
period-on-period.




Income
from Operations. Income from operations before income tax decreased by
$1,657,699, or 59.8%, period-on-period, to $1,115,788 for the period ended
December 31, 2010 from $2,773,487 for the period ended December 31, 2009, as a
result of the factors discussed above.




Other
income.  Our other income decreased $89,947, or 98.8%, to
$1,094 for the period ended December 31, 2010 from $91,041 for the period ended
December 31, 2009.  The decrease in other income was primarily due to
lower cash balances period-on-period.




Interest
Expense.  Total interest expense increased $577,647, or 210.0%,
to $852,738 for the period ended December 31, 2010, from $275,091 for the period
ended December 31, 2009, due to the additional long-term loan and increased
interest rate period-on-period.




Income
Tax. For the period ended December 31, 2010, we recognized an income tax
expense of $62,363, compared to nil for the period ended December 31, 2009. The
increase in income taxes reflects a higher enterprise income tax
rate period-on-period subsequent to the expiry of full income tax
exemption of Shanghai Blessford on December 31, 2009.




Net
Income. Net income decreased by $2,387,656, or 92.2%, period-on-period,
to a net income of $201,781 for the period ended December 31, 2010 from net
income of $2,589,437 for the period ended December 31, 2009. The decrease in net
income is attributable to a combination of the factors discussed above,
including lower gross profit margin, higher interest expenses and higher
income taxes rate period-on-period.




Comparison
of Six Months Ended December 31, 2010 and 2009




Sales
Revenues.Sales volume increased by 31,868 tons, or 55.1%,
period-on-period, to 89,749 tons for the period ended December 31, 2010 from
57,881 tons for the period ended December 31, 2009 and, as a result, sales
revenues increased by $29,609,156 or 67.2%, period-on-period, to $73,664,983 for
the period ended December 31, 2010, from $44,055,827 for the period ended
December 31, 2009. The increase in sales revenues is mainly attributable to
increases in demand for low-carbon cold-rolled products used in home appliances
production and high carbon cold-rolled products used in auto components
manufacturing both due to favorable government policies and subsidies to
encourage consumer spending.




Sales by
Product Line




A
break-down of our sales by product line for the six months
ended December 31, 2010 and 2009 is as follows:


23




Six Months Ended December 31,2010
                      
                      
                      2009
                      
                      
                      Period-on-
                        PeriodQty.
                        VarianceProduct Category
                      
                      Quantity
                        (tons)
                      
                      
                      $ Amount
                      
                      
                      % of
                        Sales
                      
                      
                      Quantity
                        (tons)
                      
                      
                      $ Amount
                      
                      
                      % of
                        SalesLow
      carbon hard rolled
                      
                      
                      4,459
                      
                      
                      
                      3,527,120
                      
                      
                      
                      4.8
                      
                      
                      
                      9,012
                      
                      
                      
                      6,584,452
                      
                      
                      
                      14.9
                      
                      
                      
                      (4,553
                      )Low
      carbon cold-rolled
                      
                      
                      53,454
                      
                      
                      
                      48,278,755
                      
                      
                      
                      65.5
                      
                      
                      
                      27,260
                      
                      
                      
                      17,660,685
                      
                      
                      
                      40.1
                      
                      
                      
                      26,194High-carbon
      hot-rolled
                      
                      
                      3,214
                      
                      
                      
                      2,960,844
                      
                      
                      
                      4.0
                      
                      
                      
                      3,422
                      
                      
                      
                      2,793,319
                      
                      
                      
                      6.3
                      
                      
                      
                      (208
                      )High-carbon
      cold-rolled
                      
                      
                      12,749
                      
                      
                      
                      11,681,006
                      
                      
                      
                      15.9
                      
                      
                      
                      9,664
                      
                      
                      
                      11,721,415
                      
                      
                      
                      26.6
                      
                      
                      
                      3,085Subcontracting
      income
                      
                      
                      15,873
                      
                      
                      
                      6,243,005
                      
                      
                      
                      8.5
                      
                      
                      
                      8,523
                      
                      
                      
                      4,904,501
                      
                      
                      
                      11.1
                      
                      
                      
                      7,350Sales
      of scrap metal
                      
                      
                      -
                      
                      
                      
                      974,253
                      
                      
                      
                      1.3
                      
                      
                      
                      -
                      
                      
                      
                      391,455
                      
                      
                      
                      0.9
                      
                      
                      
                      -Total
                      
                      
                      89,749
                      
                      
                      
                      73,664,983
                      
                      
                      
                      100
                      
                      
                      
                      57,881
                      
                      
                      
                      44,055,827
                      
                      
                      
                      100
                      
                      
                      
                      31,868





There
were different trends of demand across various product categories during the six
months ended December 31, 2010. High-carbon cold-rolled steel products accounted
for 15.9% of the current sales mix at an average selling price of $916 per ton
for the period ended December 31, 2010, compared to 26.6% of the sales mix at an
average selling price per ton of $1,213 for the period ended December 31, 2009.
The products in this category are mainly used in the automobile industry.
Although percentage of sales decreased, absolute sales volume increased by
3,085 tons, period-on-period, as a result of the Chinese government’s
automobile stimulus policies in the 2009 and 2010 calendar years, which
increased demand during the period. Low-carbon cold-rolled steel products
accounted for 65.5% of the current sales mix at an average selling price of $903
per ton for the six months ended December 31, 2010, compared to 40.1% of the
sales mix at an average selling price per ton of $680 for the six months ended
December 31, 2009. The increase in demand in this category during the period was
a result of our expanded customer base and increased orders of steel used
in the production of home appliances due to government subsidies to
encourage consumer spending. Low-carbon hard-rolled steel products accounted for
4.8% of the current sales mix at an average selling price of $791 per ton for
the six months ended December 31, 2010, compared to 14.9% of the sales mix at an
average selling price per ton of $731 for the three months ended December 31,
2009, due to a decrease in demand and volatilities in pricing in the
international market period-on-period and stronger demand from the customers
within China, and therefore a higher percentage of products sold domestically
during the six months ended December 31, 2010.  Subcontracting income
revenues accounted for $6,243,005, or 8.5% of the sales mix for the six months
ended December 31, 2010, as compared to $4,904,501, or 11.1%, of the sales mix
for the six months ended December 31, 2009.




Six
      Months Ended
                                                      December
      31,2010
                                                    
                                                    
                                                    2009
                                                    
                                                    
                                                    VarianceAverage
      Selling Prices
                                                    
                                                    ($)
                                                    
                                                    
                                                    ($)
                                                    
                                                    
                                                    ($)
                                                    
                                                    (%)Low-carbon
      hard rolled
                                                    
                                                    
                                                    791
                                                    
                                                    
                                                    
                                                    731
                                                    
                                                    
                                                    
                                                    60
                                                    
                                                    
                                                    
                                                    8.2Low-carbon
      cold-rolled
                                                    
                                                    
                                                    903
                                                    
                                                    
                                                    
                                                    648
                                                    
                                                    
                                                    
                                                    255
                                                    
                                                    
                                                    
                                                    39.4High-carbon
      hot-rolled
                                                    
                                                    
                                                    921
                                                    
                                                    
                                                    
                                                    816
                                                    
                                                    
                                                    
                                                    105
                                                    
                                                    
                                                    
                                                    12.9High-carbon
      cold-rolled
                                                    
                                                    
                                                    916
                                                    
                                                    
                                                    
                                                    1,213
                                                    
                                                    
                                                    
                                                    (297
                                                    )
                                                    
                                                    
                                                    (24.5
                                                    )Subcontracting
      income
                                                    
                                                    
                                                    393
                                                    
                                                    
                                                    
                                                    575
                                                    
                                                    
                                                    
                                                    (182
                                                    )
                                                    
                                                    
                                                    (31.7
                                                    )





The
average selling price per ton increased to $821 for the six months ended
December 31, 2010, compared to the $761 in 2009, representing a increase of
$60, or 7.9%, period-on-period. This increase was mainly due to increases in
general steel prices and therefore our selling prices during the six months
ended December 31, 2010.


24




Sales Breakdown by Major
Customer





Six
      Months Ended December 31,2010
                              
                              
                              2009Customers
                              
                              $
                              
                              
                              %
      of Sales
                              
                              
                              $
                              
                              
                              %
      of SalesShanghai
      Shengdejia Metal Products Co., Ltd.
                              
                              
                              18,683,105
                              
                              
                              
                              25
                              
                              
                              
                              6,465,502
                              
                              
                              
                              15Shanghai
      Changshuo Steel Co., Ltd.
                              
                              
                              11,991,623
                              
                              
                              
                              16
                              
                              
                              
                              8,473,414
                              
                              
                              
                              19Zhangjiagang
      Gangxing Innovative Construction Material Co., Ltd.
                              
                              
                              5,273,974
                              
                              
                              
                              7
                              
                              
                              
                              2,857,042
                              
                              
                              
                              6Shaoxing
      Wangheng Metal Plate Co., Ltd.
                              
                              
                              4,096,298
                              
                              
                              
                              6
                              
                              
                              
                              3,587,461
                              
                              
                              
                              8Zhejiang
      Zhoongwei Materials Co., Ltd
                              
                              
                              3,595,100
                              
                              
                              
                              5
                              
                              
                              
                              -
                              
                              
                              
                              -Hangzhou
      Cogeneration Co., Ltd.
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              2,269,786
                              
                              
                              
                              543,640,100
                              
                              
                              
                              59
                              
                              
                              
                              23,653,205
                              
                              
                              
                              53Others
                              
                              
                              30,024,883
                              
                              
                              
                              41
                              
                              
                              
                              20,402,622
                              
                              
                              
                              47Total
                              
                              
                              73,664,983
                              
                              
                              
                              100
                              
                              
                              
                              44,055,827
                              
                              
                              
                              100




* Not major customers for the
relevant periods





Sales
revenues generated from our top five major customers as a percentage of total
sales increased to 59% for the period ended December 31, 2010, compared to 53%
for the period ended December 31, 2009. The change in customer mix reflects
management’s continuous efforts in expanding our customer base and geographical
coverage during the course of the quarter.




Cost of Goods
Sold.Cost
of sales increased by $29,655,522, or 74.7%, period-on-period, to $69,372,035
for the period ended December 31, 2010, from $39,716,513 for the period ended
December 31, 2009. Cost of sales represented 94.2% of sales revenues for the
period ended December 31, 2010 compared to 90.2% for the period ended December
31, 2009. Average cost of production per ton increased to $773 for the period
ended December 31, 2010, compared to an average cost of production per ton of
$686 for the period ended December 31, 2009,  representing an increase
of $87 per ton, or 12.6%, period-on-period.





Six
      Months Ended December 31,2010
                            
                            
                            2009
                            
                            
                            Variance($)
                            
                            
                            ($)
                            
                            
                            ($)
                            
                            
                            (%)Cost
      of goods sold-
      Raw materials
                            
                            
                            62,834,193
                            
                            
                            
                            34,807,381
                            
                            
                            
                            28,026,812
                            
                            
                            
                            80.5-
      Direct labor
                            
                            
                            283,884
                            
                            
                            
                            212,473
                            
                            
                            
                            71,411
                            
                            
                            
                            33.6-
      Manufacturing overhead
                            
                            
                            6,253,958
                            
                            
                            
                            4,696,659
                            
                            
                            
                            1,557,299
                            
                            
                            
                            33.269,372,035
                            
                            
                            
                            39,716,513
                            
                            
                            
                            29,655,522
                            
                            
                            
                            74.7Cost
      per unit soldTotal
      units sold (tons)
                            
                            
                            89,749
                            
                            
                            
                            57,881
                            
                            
                            
                            31,868
                            
                            
                            
                            55.0Average
      cost per unit sold ($/ton)
                            
                            
                            773
                            
                            
                            
                            686
                            
                            
                            
                            87
                            
                            
                            
                            12.6





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





·
            an increase in cost of raw
      materials per unit sold of $99, or 16.4%, from $601 for the period ended
      December 31, 2009, compared to $700 for the period ended December 31,
      2010;





·
            a
      decrease in direct labor per unit sold of $1, or 13.8%, from $4 for the
      period ended December 31, 2009, compared to $3 for the period ended
      December 31, 2010;





·
            a decrease in factory overhead
      per unit sold of $11, or 14.1%, from $81 for the period ended December 31,
      2009, compared to $70 for the period ended December 31,
      2010.





The cost
of raw materials consumed increased by $28,026,812, or 80.5%, period-on-period,
to $62,834,193 for the period ended December 31, 2010 from $34,807,381 for the
period ended December 31, 2009. This increase was mainly due to the increases in
total units sold along with the increase in the cost per unit sold.





Direct
labor costs increased by $71,411, or 33.6%, period-on-period, to $283,884 for
the period ended December 31, 2010, from $212,473 for the period ended December
31, 2009. The increase was due to increases in total units sold offset by the
decrease in average labor cost per unit sold due to economies of scale
period-on-period.


25




Manufacturing
overhead costs increased by $1,557,299, or 33.2%, period-on-period, to
$6,253,958 for the period ended December 31, 2010, from $4,696,659 for the
period ended December 31, 2009. The increase was mainly attributable to the
combined effect of an increase in depreciation of $1,534,091, or 126.0%,
period-on-period, to $2,751,616 for the period ended December 31, 2010, from
$1,217,525 for the period ended December 31, 2009 and an increase in utilities
of $771,567, or 81.6%, period-on-period, to $1,717,548 for the period ended
December 31, 2010, from $945,981 for the period ended December 31, 2009 due to
increase in total units sold.





Gross
Profit. Gross profit in
absolute terms decreased by $46,366, or 1.1%, period-on-period, to $4,292,948
for the period ended December 31, 2010, from $4,339,314 for the period ended
December 31, 2009, while gross profit margin decreased to 5.8% for the period
ended December 31, 2010, from 9.8% for the period ended December 31, 2009. The
decrease in gross profit is mainly attributable to a 67.2% period-on-period
increase in sales revenues, offset by a 74.7% period-on-period increase in cost
of goods sold. The decrease in gross profit margin principally resulted from an
increase in average cost per unit sold due to the increase in raw material
prices during the six months ended December 31, 2010.





Selling
Expenses. Selling expenses increased by $5,968, or 5.8%,
period-on-period, to $108,382 for the period ended December 31, 2010 compared to
the corresponding period in 2009 of $102,414. The increase was mainly
attributable to controlling sales expenses while increasing sales during the
current period.




Administrative
Expenses.Administrative expenses
increased by $364,381, or 29.6%, period-on-period, to $1,597,120 for the period
ended December 31, 2010 compared to $1,232,739 for the period ended December 31,
2009. This increase was chiefly associated with travelling costs related to
meetings and investment conferences during the six months ended December 31,
2010.





Provision for bad
debt. Provision for bad debt was $19,697 based on our policy for
allowance for doubtful accountsfor the period ended December 31, 2010,
representing a decrease in the amount of $198,487, or 91.0%,
period-on-period.





Income from
Operations. Income from operations before income tax decreased by
$231,446, or 8.6%, period-on-period, to $2,474,038 for the period ended December
31, 2010 from $2,705,484 for the period ended December 31, 2009, as a result of
the factors discussed above.





Other
income.  Other income decreased $108,351, or 97.6%, to $2,612
for the period ended December 31, 2010 from $110,963 for the period ended
December 31, 2009.  The decrease in other income was primarily due to
lower cash balances period-on-period.





Interest
Expense.  Total interest expense increased $814,417, or 161.8%,
to $1,317,851 for the period ended December 31, 2010, from $503,434 for the
period ended December 31, 2009 due to the additional long-term loan and
increased interest rate period-on-period.





Income
Tax. For the period ended December 31, 2010, we recognized an income tax
expense of $312,507, compared to $1,233 of tax benefit for the period ended
December 31, 2009. The increase in income taxes reflects a
higher enterprise income tax rate period-on-period subsequent to the
expiry of full income tax exemption of Shanghai Blessford on December 31,
2009.





Net
Income. Net income decreased by $1,467,954, or 63.4%, period-on-period,
to $846,292 for the period ended December 31, 2010 from net income of $2,314,246
for the period ended December 31, 2009. The decrease in net income is
attributable to a combination of factors discussed above, including lower
gross profit margin, higher interest expenses and higher income taxes rate
period-on-period.





Liquidity
and Capital Resources




General





Our
business is capital intensive and requires substantial expenditures for, among
other things, the purchase and maintenance of plant and equipment used in our
operations. Our short-term and long-term liquidity needs arise primarily from
capital expenditures, working capital requirements and principal and interest
payments related to our outstanding indebtedness. We have met these liquidity
requirements with cash provided by operations, equity financing, and bank
debt. As of December 31, 2010, we had cash and cash equivalents of
approximately $14.2 million.


26




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





CASH
FLOW





Six
      Months Ended December 31,2010
                      
                      
                      2009Net
      cash (used in)/provided by operating activities
                      
                      $
                      (7,117,560
                      )
                      
                      $
                      552,633Net
      cash used in investing activities
                      
                      
                      (8,365,838
                      )
                      
                      
                      (4,746,139
                      )Net
      cash (used in)/provided by financing activities
                      
                      
                      (52,173
                      )
                      
                      
                      3,290,769Net
      cash flow
                      
                      
                      (14,809,632
                      )
                      
                      
                      (897,299
                      )





Operating
Activities





Net cash
flows used in operating activities for the period ended December 31, 2010 was
$7,117,560, as compared with $552,633 provided by operating activities for the
period ended December 31, 2009, for a net increase of $7,670,193 used. This
increase was mainly due to reduction in cash flows from the increase in advances
to suppliers of $15,271,875, as compared with a cash outflow in the amount of
$601,926 for advances to suppliers during the period ended December 31, 2009.
The increase in cash outflow for advances to suppliers is in line with the
increasing demand for our cold-rolled products as well as orders on hand as of
December 31, 2010.The
decrease in operating cash flows used in operating activities was also
attributed to a decrease in accounts payable and accrued expenses of $5,019,509,
compared to a cash outflow of $801,406 during the period ended December 31,
2009.





For the
period ended December 31, 2010, sales revenues generated from the top five major
customers as a percentage of total sales increased to 59%, as compared to 53%
for the period ended December 31, 2009. 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
worldwide economic crisis may have negative consequences on the business
operations of our customers and adversely impact their ability to meet their
financial obligations to us, resulting in unrecoverable losses on our accounts
receivable. We have been strengthening our collection activities and will
continue to closely monitor any changes in collection experience and the credit
ratings of our customers.  From time to time we will review credit periods
offered, along with our collection experience and the other relevant factors, to
evaluate the adequacy of our allowance for doubtful accounts, and to make
changes to the allowance, if necessary. Delays or non-payment of accounts
receivable would have an adverse effect on our operating cash
flows.




Investing
Activities





Our main
uses of cash for investing activities during the period ended December 31, 2010
were for the purchase of property, plant and equipment related to the addition
of annealing furnaces and slitting equipment 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 December 31, 2010 was
$8,365,838 as compared with $4,746,139 for the period ended December 31, 2009.
The increase in investing activity was due to payment of the construction
project related to the annealing furnaces and slitting equipment during the
period ended December 31, 2010.





As of
December 31, 2010, the Company had $6,921,421 in commitments for interest
relating to its short-term and long-term loans and share capital injection
commitment related to Shanghai Blessford. Management believes that we currently
have sufficient capital resources to meet these contractual commitments. We also
forecast lower capital expenditures in the coming years as the Company does not
have material expansion plans as at December 31, 2010.





Financing
Activities




Net cash
flows used in financing activities for the period ended December 31, 2010 was
$52,173 as compared with $3,290,769 provided by financing activities for the
period ended December 31, 2009. During the period ended December 31, 2009, the
Company received short-term loans of $3,735,169, which was partially offset by
repayment of short-term loans in the amount of $444,400.


27




On
December 30, 2008, we filed a universal shelf registration statement with the
SEC which has been declared effective. The shelf registration permits us to
issue securities valued at up to an aggregate of $40 million and give us 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 2011, 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 decreased by $4,563,524, or 3.9%, period-on-period, to $113,218,348 as of
December 31, 2010, from $117,781,872 as of June 30, 2010, principally as a
result of a decrease in accounts receivable of $12,695,208, or 32.1%,
period-on-period, due to our strengthened efforts in credit collection during
the period, a decrease in cash and cash equivalents by $14,809,632, or 51.0%,
period-on-period, and offset by an increase in inventories of $3,576,254, or
12.5%, period-on-period, and advances to suppliers of $16,252,714, or 116.4%,
period-on-period.





Accounts
receivable, representing 23.8% of total current assets as of December 31, 2010,
is a significant asset of the Company. We offer credit to our customers in the
normal course of our business and accounts receivable is stated net of allowance
for doubtful accounts. Credit periods vary substantially across industries,
segments, types and size of companies in China where we operate our business.
Because of the niche products that we process, our customers are usually also
niche players in their own respective segment, who then sell their products to
the end product manufacturers. The business cycle is relatively long, as well as
the credit periods. The Company offers credit to its customers for periods of 60
days, 90 days, 120 days and 180 days. We generally offer the longer credit terms
to longstanding recurring customers with good payment histories and sizable
operations. From time to time we review these credit periods, along with our
collection experience and the other factors discussed above, to evaluate the
adequacy of our allowance for doubtful accounts, and to make changes to the
allowance, if necessary.  If our actual collection experience or other
conditions change, revisions to our allowances may be required, including a
further provision which could adversely affect our operating income, or write
back of provision when estimated uncollectible accounts are actually
collected.





Our
management determines the collectability of outstanding accounts by maintaining
quarterly communication with such customers and obtaining confirmation of their
intent to fulfill their obligations to the Company. In making this
determination, our management also considers past collection experience, our
relationship with customers and the impact of current economic conditions on our
industry and market. We note that the continuation or intensification of the
current global economic crisis may have negative consequences on the business
operations of our customers and adversely impact their ability to meet their
financial obligations. To reserve for potentially uncollectible accounts
receivable, for the period ended December 31, 2010, 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 December 31 and
June 30, 2010:





December 31,
2010





US$
                              
                              Total
                              
                              
                              Current
                              
                              
                              1 to 30
                                days
                              
                              
                              31 to
                                90 days
                              
                              
                              91 to 180
                                days
                              
                              
                              181 to 360
                                Days
                              
                              
                              over
                                1 yearTOTAL
                              
                              
                              27,944,881
                              
                              
                              
                              19,812,869
                              
                              
                              
                              554,371
                              
                              
                              
                              1,615,693
                              
                              
                              
                              4,898,381
                              
                              
                              
                              156,240
                              
                              
                              
                              907,327%
                              
                              
                              100
                              
                              
                              
                              71
                              
                              
                              
                              2
                              
                              
                              
                              6
                              
                              
                              18
                              
                              
                              >1
                              
                              
                              3


28


June 30,
2010




US$
                      
                      Total
                      
                      
                      Current
                      
                      
                      1 to 30
                        days
                      
                      
                      31 to
                        90 days
                      
                      
                      91 to 180
                        days
                      
                      
                      181 to 360
                        Days
                      
                      
                      over
                        1 yearTOTAL
                      
                      
                      40,612,589
                      
                      
                      
                      16,750,361
                      
                      
                      
                      1,521,900
                      
                      
                      
                      5,485,380
                      
                      
                      
                      15,398,743
                      
                      
                      
                      1,177,748
                      
                      
                      
                      278,457%
                      
                      
                      100
                      
                      
                      
                      41
                      
                      
                      
                      4
                      
                      
                      
                      14
                      
                      
                      
                      38
                      
                      
                      
                      3
                      
                      
                      
                      <1





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, since the year ended June
30, 2009, we have halted all our sales transactions directly with customers
in the Philippines as we consider the associated credit risk being 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 decreased by $4,797,706, or 9.9%, period-on-period, to $43,647,421
as of December 31, 2010, from $48,445,127 as of June 30, 2010. The decrease was
mainly attributable to a decrease in accounts payable and accrued expenses of
$5,562,904, or 55.9%, period-on-period, and a decrease in advances from
customers of $1,043,355, or 31.9%, period-on-period, offset by an increase in
current income taxes payable of $401,856, or 7.5%,
period-on-period.





As of
December 31, 2010, we had $26,617,609 in short term-loans. These short term
loans were renewed in July 2010 for one year and will be due on July 31, 2011.
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 December 31, 2010, we invested $6,500,332 in purchases of
property, plant and equipment, and construction projects in relation to the new
annealing furnaces and slitting equipment.




Loan
Facilities





The
following table illustrates our credit facilities as of December 31, 2010,
providing the name of the lender, the amount of the facility, the date of
issuance and the maturity date:





All
amounts in U.S. dollars





Lender
                                                                  
                                                                  Date of Loan
                                                                  
                                                                  Maturity
                                                                    Date
                                                                  
                                                                  Duration
                                                                  
                                                                  Interest Rate
                                                                  
                                                                  Principal
                                                                    AmountRaiffeisen
                                                                    Zentralbank
      Österreich AG
                                                                  
                                                                  July
      23, 2010
                                                                  
                                                                  July
      31, 2011
                                                                  
                                                                  1
      year
                                                                  
                                                                  1.15
      times of
                                                                    the
      PBOC rate
                                                                  
                                                                  $
                                                                    RMB
                                                                  7,987,738
                                                                    (52,737,444
                                                                  )Raiffeisen
                                                                    Zentralbank
      Österreich AG
                                                                  
                                                                  July
      23, 2010
                                                                  
                                                                  July
      31, 2011
                                                                  
                                                                  1
      year
                                                                  
                                                                  1.15
      times of the
                                                                    PBOC
      rate
                                                                  
                                                                  $
                                                                    RMB
                                                                  18,629,871
                                                                    (123,000,000
                                                                  )DEG
      – Deutsche Investitions – und
                                                                    Entwicklungsgesellschaft
      mbH
                                                                  
                                                                  June
      29, 2010
                                                                  
                                                                  June
      15, 2016
                                                                  
                                                                  6
      years
                                                                  
                                                                  6
      month USD
                                                                    LIBOR
      + 4.5%
                                                                  
                                                                  $
                                                                    RMB
                                                                  18,566,257
                                                                    (122,580,000
                                                                  )Total
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  $
                                                                  45,183,866





As of
December 31, 2010, we had $26,617,609 in short-term loans secured by
inventories, land use rights, buildings, plant and machinery, and $18,566,257 in
long-term loan secured by plant and machinery, as illustrated in the above
table.


29




The
short-term loans have been renewed for one year and will be due and renewable on
July 31, 2011. We are not aware of any existing issues that may lead to a
withdrawal of such loan at its maturity. Our inability to renew, 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.




We
believe that our currently available working capital and the credit facilities
referred to above should be adequate to sustain our operations at our current
levels and support our contractual commitments through the next twelve months.
However, our working capital requirements and the cash flow provided by future
operating activities vary from quarter to quarter, depending on the volume of
business during the period and payment terms with our customers. As we expect a
continuation of volatility in demand and steel prices in both domestic and
international markets in the foreseeable future, our operating cash flows might
be significantly negatively impacted by reduced sales and margins. Management
has strengthened its sales and marketing activities, and continues to be in
talks with potential customers, which if successful, could result in additional
sales and mitigate the impact of the weakened demand and margins on our
operating cash flow. As of December 31, 2010, the Company also had $6,921,421 in
contractual commitments for interest relating to its short-term and long-term
loans and share capital injection commitment related to Shanghai Blessford. As
such, we may need to rely on access to the financial markets to provide us with
significant discretionary funding capacity. However, continued 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 December 31,
2010, debt obligations include principal repayments and interest
payments:





Payments Due By YearTotal
                                          
                                          
                                          Fiscal Year
                                            2011
                                          
                                          
                                          Fiscal
                                            Year
                                            2012-2013
                                          
                                          
                                          Fiscal
                                            Year
                                            2014-2015
                                          
                                          
                                          Fiscal Years
                                            2016 and
                                            BeyondContractual obligations:Short-Term
      Debt Obligations
                                          
                                          $
                                          28,396,066
                                          
                                          
                                          $
                                          889,228
                                          
                                          
                                          $
                                          27,506,838
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          -Long-Term Debt Obligations
                                          
                                          $
                                          21,558,173
                                          
                                          
                                          $
                                          460,295
                                          
                                          
                                          $
                                          8,991,505
                                          
                                          
                                          $
                                          8,255,033
                                          
                                          
                                          $
                                          3,851,340Share
      Capital Injection Commitments
                                          
                                          $
                                          2,151,050
                                          
                                          
                                          
                                          2,151,050
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -Total
                                          
                                          $
                                          52,105,289
                                          
                                          
                                          $
                                          3,500,573
                                          
                                          
                                          $
                                          36,498,342
                                          
                                          
                                          $
                                          8,255,033
                                          
                                          
                                          $
                                          3,851,340





Recent
Accounting Pronouncements





The
Financial Accounting Standards Board, or 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 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. The adoption of
this standard did not have an impact on the Company’s financial position or
results of operations.





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.


30




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 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. 2009-15, “Accounting for Own-Share Lending
Arrangements in Contemplation of Convertible Debt Issuance or Other Financing”
(“ASU 2009-15”).  ASU 2009-15 amends ASC 470, “Debt with Conversion
and Other Options” (“ASC 470”), and ASC 260, “Earnings Per Share” (“ASC
260”).  Specifically, ASU 2009-15 requires companies to mark stock
loan agreements at fair value and recognize the cost of the agreements by
reducing the amount of additional paid-in capital on their financial
statements.  The adoption of this standard did not have an impact on
the Company’s financial position or results of operations.





In
December 2009, the FASB issued ASU 2009-17, “Improvements to Financial Reporting
by Enterprises Involved with Variable Interest Entities” (“ASU
2009-17”).  ASU 2009-17 details the amendments to ASC 810,
“Consolidation”, which are the result of FASB Statement No. 167, “Amendments to
FASB Interpretation No. 46(R)”.  That statement was issued by the FASB
in June 2009.  ASU 2009-17 amends the variable-interest entity
guidance in ASC 810 to clarify the accounting treatment for legal entities in
which equity investors do not have sufficient equity at risk for the entity to
finance its activities without financial support. The adoption of this
standard did not have an impact on the Company’s financial position or results
of operations.





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





Critical
Accounting Policies and Estimates




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





Functional
Currency and Translating Financial Statements





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


31





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 longer credit terms to long-standing recurring
customers with good payment histories and sizable operations.





Accounts
receivable is recorded at the time revenue is recognized and is stated net of
allowance for doubtful accounts. The Company maintains an allowance for doubtful
accounts based on its assessment of the collectability of the accounts
receivable. Management determines the collectability of outstanding accounts by
maintaining regular communication with such customers and obtaining confirmation
of their intent to fulfill their obligations to the Company. Management
also considers past collection experience, our relationship with customers and
the impact of current economic conditions on our industry and market. However,
we note that the continuation or intensification of the current global economic
crisis may have negative consequences on the business operations of our
customers and adversely impact their ability to meet their financial
obligations. At December 31, 2010, approximately 4% of our accounts receivable
were past due over 180 days. To reserve for potentially uncollectible accounts
receivable, for the period ended December 31, 2010, our management has made a
50% provision for all accounts receivable that are over 180 days past due and
full provision for all accounts receivable over one year past due. From time to
time, we will review these credit periods, along with our collection experience
and the other factors discussed above, to evaluate the adequacy of our allowance
for doubtful accounts, and to make changes to the allowance, if necessary. If
our actual collection experience or other conditions change, revisions to our
allowances may be required, including a further provision which could adversely
affect our operating income, or write back of provision when estimated
uncollectible accounts are actually collected. At December 31, 2010 and June 30,
2010, the Company had $1,041,244 and $1,013,744 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 six months ended December 31, 2010 and 2009 were $19,697 and $218,184,
respectively. The current period charge reflects a provision for doubtful
accounts based on our policy described above. Our management is continually
working to ensure that any known uncollectible amounts are immediately written
off as bad debt against outstanding balances.





Advances
to Suppliers





In order
to insure a steady supply of raw materials, the Company is required from time to
time to make cash advances to its suppliers when placing purchase orders, for a
guaranteed minimum delivery quantity at future times when raw materials are
required. The advance is seen as a deposit to suppliers and guarantees our
access to raw materials during periods of shortages and market volatility, and
is therefore considered an important component of our
operations.  Contracted raw materials are priced at prevailing market
rates agreed by us with the suppliers prior to each delivery date. Advances to
suppliers are shown net of an allowance which represents potentially
unrecoverable cash advances at each balance sheet date. Such allowances are
based on an analysis of past raw materials receipt experience and the
credibility of each supplier according to its size and background. In general,
we don’t provide allowances against advances paid to state owned companies as
there is minimal risk of default. Our allowances for advances to suppliers are
subjective critical estimates that have a direct impact on reported net
earnings, and are reviewed quarterly at a minimum to reflect changes from our
historic raw material receipt experience and to ensure the appropriateness of
the allowance in light of the circumstances present at the time of the
review.  It is reasonably possible that the Company’s estimate of the
allowance will change, such as in the case when the Company becomes aware of a
supplier’s inability to deliver the contracted raw materials or meet its
financial obligations. At December 31 and June 30, 2010, the Company had
allowances for advances to suppliers of $1,687,999 and $1,643,419,
respectively.





The
majority of our advances to suppliers of over 180 days is attributable to our
advances to a subsidiary of a state-owned company in China, whose risk of
default is minimal. At December 31, 2010, 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.


32




Inventory





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





Intangible
Assets




Intangible
assets represent land use rights in China acquired by the Company and are stated
at cost less amortization. Amortization of land-use rights is calculated on the
straight-line method, based on the period over which the right is granted by the
relevant authorities in China. The Company acquired land use rights in August
2004 and December 2006 that both expire in December 2056. The land use rights
are amortized over a fifty-year term. Intangible assets of the Company are
reviewed for impairment if there are triggering events, to determine whether
their carrying value has become impaired, in conformity with ASC 360. The
Company also re-evaluates the periods of amortization to determine whether
subsequent events and circumstances warrant revised estimates of useful lives.
An impairment test was performed as of June 30, 2010 and no impairment charges
were recognized for the relevant periods. As of December 31, 2010, 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.
As of December 31, 2010, the Company’s market capitalization
was significantly lower than its total stockholders’
equity. Management considered this to be an indicator of impairment,
and accordingly, performed an impairment test, 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 current 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.


33




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 December 31, 2010, we did not have any off-balance sheet
arrangements.





ITEM 3.
            QUANTITATIVE AND QUALITATIVE
      DISCLOSURES ABOUT MARKET
RISK.





Not
Applicable.





ITEM
      4.
            CONTROLS
      AND PROCEDURES.





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. Hai Sheng Chen, and Chief Financial Officer, Ms.
Leada Tak Tai Li, evaluated the effectiveness of the design and operation of our
disclosure controls and procedures as of December 31, 2010.  Based on our
assessment, Mr. Chen and Ms. Li determined that, as of December 31, 2010, 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 Controls over Financial Reporting





We
regularly review our system of internal control over financial reporting and
make changes to our processes and systems to improve controls and increase
efficiency, while ensuring that we maintain an effective internal control
environment.  Changes may include such activities as implementing new,
more efficient systems, consolidating activities, and migrating
processes.





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.


34




ITEM
      3.
            DEFAULTS
      UPON SENIOR SECURITIES.





None.





ITEM
      4.
            (REMOVED
      AND RESERVED).








ITEM
      5.
            OTHER
      INFORMATION.





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





ITEM
      6.
            EXHIBITS.





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





Exhibit
      No.
                
                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.


35




SIGNATURES




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




Date:
      February 14, 2011
                  CHINA
      PRECISION STEEL, INC.By:
                  /s/
      Hai Sheng ChenHai
      Sheng Chen, 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)




36