Unassociated Document
 
 


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, 2008
 
¨
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.)

Room B, 18th Floor, Teda Building
87 Wing Lok Street, Sheungwan, Hong Kong,
People’s Republic of China
(Address of principal executive offices, Zip Code)
 
+1-852-2543-2290
(Registrant’s telephone number, including area code)
 

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨ 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  ¨
Smaller reporting company ¨
(Do not check if a smaller reporting company)
 

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

The number of shares outstanding of each of the issuer’s classes of common equity, as of December 31, 2009 is as follows:
 
Class of Securities
 
Shares Outstanding
Common Stock, $0.001 par value
 
46,562,955
     
     
     
     


 
 
TABLE OF CONTENTS

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PART I
FINANCIAL INFORMATION
 
ITEM 1.   FINANCIAL STATEMENTS.

CHINA PRECISION STEEL, INC. AND SUBSIDIARIES  
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 
2

 
ITEM 1. FINANCIAL STATEMENTS.  

China Precision Steel, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets

         
(Unaudited)
       
          
December 31,
   
June 30,
 
    
Notes
   
2008
   
2008
 
                    
Assets
                 
                   
Current assets
                 
Cash and cash equivalents
        $ 14,763,665     $ 18,568,842  
Accounts receivable
                     
Trade, net of allowance for bad and doubtful debts of $4,877,672 and $1,033,479 at December 31 and June 30, 2008, respectively
          23,248,541       33,783,074  
                       
Bills receivable
          7,634,472       4,309,703  
                       
Other
          307,992       571,746  
                       
Inventories
   
5
      18,359,109       17,815,087  
                         
Prepaid expenses
            108,410       58,105  
Advances to suppliers, net of allowances of $2,534,410 and $2,522,837 at December 31 and June 30, 2008, respectively
            30,281,090       33,027,365  
                         
Total current assets
            94,703,279       108,133,922  
                         
Property and equipment
                       
                         
Property, plant and equipment, net
   
6
      40,646,361       39,199,305  
                         
Construction-in-progress
   
7
      25,698,608       16,476,454  
                         
              66,344,969       55,675,759  
                         
Intangible assets, net
            2,343,532       1,625,690  
                         
Goodwill
            99,999       99,999  
                         
Total assets
          $ 163,491,779     $ 165,535,370  
                         
Liabilities and Stockholders' Equity
                       
                         
Current liabilities
                       
Accounts payable and accrued liabilities
          $ 11,954,266     $ 12,047,981  
                         
Advances from customers
   
8
      4,014,580       6,996,996  
                         
Other taxes payables
            3,566,543       3,976,239  
                         
Current income taxes payable
            4,271,276       4,742,387  
                         
Short-term loans
   
9
      17,457,984       17,465,799  
                         
Total current liabilities
            41,264,649       45,229,402  
                         
                         
Stockholders' equity:
                       
Preferred stock: $0.001 per value, 8,000,000 shares authorized, no shares outstanding at December 31, and June 30, 2008
   
11
                 
Common stock: $0.001 par value, 62,000,000 shares authorized, 46,562,955 and 46,472,955 issued and outstanding at December 31, and June 30, 2008
   
11
      46,563       46,473  
                         
Additional paid-in capital
   
11
      75,642,383       75,372,488  
                         
Accumulated other comprehensive income
            10, 046,082       9,295,658  
                         
Retained earnings
            36,492,102       35,591,349  
                         
Total stockholders' equity
            122,227,130       120,305,968  
                         
Total liabilities and stockholders' equity
          $ 163,491,779     $ 165,535,370  

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

3


China Precision Steel, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
For the Three and Six Months Ended December 31. 2008 and 2007
(Unaudited)

         
Three Months Ended
   
Six Months Ended
 
          
December 31,
   
December 31,
   
December 31,
   
December 31,
 
    
Notes
   
2008
   
2007
   
2008
   
2007
 
                                
Revenues
                             
Sales revenue
        $ 17,573,959     $ 13,228,321     $ 42,924,378     $ 40,415,556  
Cost of goods sold
          14,122,622       8,528,852       35,520,383       28,773,987  
                                       
Gross profit
          3,451,337       4,699,469       7,403,995       11,641,569  
                                       
Operating expenses
                                     
Selling expenses
          1,122,532       180,744       1,333,830       281,449  
Administrative expenses
          578,105       846,220       1,040,205       1,332,596  
Allowance for bad and doubtful debts
          3,829,462       25,782       3,829,462       651,780  
Depreciation and amortization expense
          33,318       15,798       59,521       29,430  
                                       
Total operating expenses
          5,563,417       1,068,544       6,263,018       2,295,255  
                                       
Income/(loss) from operations
          (2,112,080 )     3,630,925       1,140,977       9,346,314  
                                       
Other income (expense)
                                     
Other revenues
          138,998       783,255       259,701       792,410  
Interest and finance costs
          (320,777 )     (316,860 )     (648,182 )     (759,001 )
                                       
Total other income (expense)
          (181,779 )     466,395       (388,481 )     33,409  
                                       
Net income/(loss) from operations before income tax
          (2,293,859 )     4,097,320       752,496       9,379,723  
                                       
Provision for (benefit from) income tax
   
10
                                 
Current
            (318,878 )     610,869       (148,257 )     1,116,594  
Deferred
                              (1,064,028 )
                                         
Total income tax expense
            (318,878 )     610,869       (148,257 )     52,566  
                                         
Net income/(loss)
          $ (1,974,981 )   $ 3,486,451     $ 900,753     $ 9,327,157  
                                         
Basic earnings/(loss) per share
   
12
    $ (0.04 )   $ 0.08     $ 0.02     $ 0.23  
                                         
Basic weighted average shares outstanding
            46,562,955       43,031,346       46,559,531       40,204,745  
                                         
Diluted earnings/(loss) per share
   
12
    $ (0.04 )   $ 0.08     $ 0.02     $ 0.23  
                                         
Diluted weighted average shares outstanding
            46, 562,955       43,639,342       46,566,423       40,809,437  
                                         
The Components of comprehensive income:
                                       
Net income/(loss)
          $ (1,974,981 )   $ 3,486,451     $ 900,753     $ 9,327,157  
Foreign currency translation adjustment
            677,905       1,179,322       750,424       2,084,859  
                                         
Comprehensive income/(loss)
          $ (1,297,076 )   $ 4,665,773     $ 1, 651,177     $ 11,412,016  

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

4


China Precision Steel, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Stockholders' Equity
For the Six Months ended December 31, 2008
and the Year ended June 30, 2008

                     
Accumulated
             
                
Additional
   
Other
         
Total
 
    
Ordinary Shares
   
Paid-in
   
Comprehensive
   
Retained
   
Stockholders'
 
    
Share
   
Amount
   
Capital
   
Income
   
Earnings
   
Equity
 
                                                 
Balance at June 30, 2007
    37,378,141     $ 37,378     $ 31,867,063     $ 2,192,160     $ 17,008,238     $ 51,104,839  
                                                 
Sale of common stock
    7,100,000       7,100       44,498,650                   44,505,750  
                                                 
Syndication fees
                (130,468 )                 (130,468 )
                                                 
Make good shares
    2,000,000       2,000       (2,000 )                  
                                                 
Exercise of warrants
    765,872       766       1,729,235                   1,730,001  
                                                 
Cancellation of stock
    (771,060 )     (771 )     (2,589,992 )                 (2,590,763 )
                                                 
Foreign currency translation adjustment
                      7,103,498             7,103,498  
                                                 
Net income
                            18,583,111       18,583,111  
                                                 
Balance at June 30, 2008
    46,472,953       46,473       75,372,488       9,295,658       35,591,349       120,305,968  
                                                 
Exercise of warrants
    90,000       90       269,895                   269,985  
                                                 
Foreign currency translation adjustment
                      750,424             750,424  
                                                 
Net income
                            900,753       900,753  
                                                 
Balance at December 31, 2008 (unaudited)
    46,562,953     $ 46,563     $ 75,642,383     $ 10, 046,082     $ 36,492,102     $ 121,227,130  
 
5

 
China Precision Steel, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended December 31, 2008 and 2007
(Unaudited)

   
2008
   
2007
 
             
Cash flows from operating activities
           
Net Income
  $ 900,753     $ 9,327,157  
Adjustments to reconcile net income to net cash provided by operating activities
               
Depreciation and amortization
    1,825,544       992,570  
     Allowance for bad and doubtful debts
    3,829,462       651,780  
Net changes in assets and liabilities:
               
Accounts receivable, net
    3,801,518       (31,266,517 )
Inventories
    (461,094 )     5,195,155  
Deposits
          15,018  
Prepaid expenses
    (50,382 )     (326,065 )
Advances to suppliers
    2,890,245       1,549,672  
Accounts payable and accrued liabilities
    (147,831 )     1,296,194  
Advances from customers
    (3,006,670 )     2,070,883  
Other taxes payable
    (426,823 )     2,747,055  
Current income taxes
    (491,584 )     1,748,480  
Deferred income taxes
          (1,064,028 )
                 
Net cash provided by (used in) operating activities
    8,663,138       (7,062,646 )
                 
Cash flows from investing activities
               
Purchases of property, plant and equipment including construction in progress
    (12,954,497 )     (5,508,327 )
                 
Net cash (used in) investing activities
    (12,954,497 )     (5,508,327 )
                 
Cash flows from financing activities
               
                 
Exercise of common stock warrants
    269,985        
Sale of common stock
            44,433,222  
                 
Advances from/(to) directors, net
          2,154,257  
                 
Short-term loans proceeds
          16,446,667  
                 
Repayments of short-term loans
    (87,690 )     (17,424,050 )
                 
Net cash provided by financing activities
    182,295       45,610,096  
                 
Effect of exchange rate
    303,887       1,661,126  
                 
Net (decrease)increase in cash
    (3,805,177 )     34,700,249  
                 
Cash and cash equivalents, beginning of period
    18,568,842       5,504,862  
                 
Cash and cash equivalents, end of period   $ 14,763,665     $ 40,205,111  
                 
Supplemental disclosure of cash flow information:
               
                 
    Cash paid during the period for interest
  $ 648,182     $ 759,001  
    Cash paid during the period for income taxes
  $ 364,058     $ -  

The accompanying notes are an integral part of these condensed consolidated financial statements.
 
6


China Precision Steel, Inc.
Notes to the Condensed Consolidated Financial Statements

1.   Description of Business

On December 28, 2006, China Precision Steel, Inc. (the “Company” or “we”), under our former name, OraLabs Holding Corp., issued 25,363,002 shares of common stock in exchange for 100% of the registered capital of Partner Success Holdings Limited (“PSHL”), a British Virgin Islands Business Company pursuant to a Stock Exchange Agreement, dated March 31, 2006. Subsequent to the closing of that transaction, on December 28, 2006, the Company redeemed 3,629,350 shares of its common stock in exchange for all of the common stock of OraLabs, Inc., a wholly-owned operating subsidiary. The Company issued 100,000 shares of its common stock to OraLabs, Inc. in exchange for $450,690, and received additional cash payments in the aggregate amount of $108,107 in payment of an estimated $558,797 tax liability to be incurred by the Company in connection with the spin off of OraLabs, Inc. and the supplemental payment received. The Company then changed its name to China Precision Steel, Inc.
 
These transactions were treated for financial reporting purposes as a recapitalization, with prior OraLabs, Inc. operating activities reflected on the statements of operations as income (loss) from discontinued operations. The $558,797 estimated tax liability incurred in connection with the spin off of OraLabs, Inc. was treated as a transaction cost for financial reporting purposes and was treated as a reduction in additional paid in capital to the extent of the additional cash received which was also $558,797.

PSHL, registered on April 30, 2002 in the Territory of the British Virgin Islands, had registered capital of $50,000 as of December 31, 2008 and 2007. It has three wholly-owned subsidiaries, Shanghai Chengtong Precision Strip Company Limited (“Chengtong”), Shanghai Tuorong Precision Strip Company Limited (“Tuorong”), and Blessford International Limited (“Blessford”).

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

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

The Company’s principal activities are conducted through its two operating subsidiaries, Chengtong and Shanghai Blessford. Chengtong and Shanghai Blessford are niche precision steel processing companies principally engaged in the manufacture and sales of cold-rolled and hot-rolled precision steel products and plates for downstream applications in the automobile industry (components and spare parts), kitchen tools and functional parts of electrical appliances. Raw materials, hot-rolled de-scaled (pickled) steel coils, will go through certain cold reduction processing procedures to give steel rolls and plates in different cuts and thickness for deliveries in accordance with customers’ specifications. Specialty precision steel offers specific control of thickness, shape, width, surface finish and other special quality features that compliment the emerging need for highly engineered end use applications. Precision steel pertains to the precision of measurements and tolerances of the above factors, especially thickness tolerance.
 
7

 
2.     Basis of Preparation of Financial Statements

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and related notes. The accompanying unaudited condensed consolidated financial statements and related notes should be read in conjunction with the audited consolidated financial statements of the Company and notes thereto for the year ended June 30, 2008.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (which include only normal recurring adjustments) necessary to present fairly the balance sheet of China Precision Steel, Inc. and subsidiaries as of December 31, 2008 and June 30, 2008, and the results of their operations and cash flows for the three and six months ended December 31, 2008 and 2007. The results of operations for the three or six months ended December 31, 2008 are not necessarily indicative of the results to be expected for the entire year ending June 30, 2009.

3.    Summary of Significant Accounting Policies

The following is a summary of significant accounting policies:

Cash and Cash Equivalents - The Company considers all highly liquid debt instruments purchased with maturity period of six 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 - The Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts. It is reasonably possible that the Company’s estimate of the allowance will change. At December 31, 2008 and June 30, 2008, the Company had $1,038,220 and $1,033,479 of allowances for doubtful accounts, respectively.

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.

The 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. The costs of conversion of inventories include fixed and variable production overheads, taking into account the stage of completion.

Advances to Suppliers - In order to secure a steady supply of raw materials, the Company is required from time to time to make cash advances when placing its purchase orders. Cash advances are shown net of allowances for unrecoverable advances of $2,534,410 and $2,522,837 at December 31, 2008 and June 30, 2008, respectively.

Intangible assets - 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 $50,000 is to be recorded each year starting from the current financial year ending June 30, 2009 for the remaining lease period.

Intangible assets of the Company are reviewed annually to determine whether their carrying value has become impaired, in conformity with SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142”). The Company also re-evaluates the periods of amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives. As of December 31, 2008, the Company expects these assets to be fully recoverable.

8


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 years
Buildings
 
10 years
Motor vehicles
 
5 years
Office 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.

Property, plant and equipment are evaluated annually in accordance with SFAS No. 144, “Accounting for Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of” (“SFAS 144”) for any impairment in value. There were no property and equipment impairments recognized during the six months ended December 31, 2008 and 2007.

Impairment of Long-Lived Assets - The Company accounts for impairment of plant and equipment and amortizable intangible assets in accordance with SFAS 144, which requires the Company to evaluate a long-lived asset for recoverability when there is event or circumstance that indicate the carrying value of the asset may not be recoverable. An impairment loss is recognized when the carrying amount of a long-lived asset or asset group is not recoverable (when carrying amount exceeds the gross, undiscounted cash flows from use and disposition) and is measured as the excess of the carrying amount over the asset’s (or asset group’s) fair value.

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 six months ended December 31, 2008 and 2007, the Company capitalized no 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 fixed assets.

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

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

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

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


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

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

Foreign Currencies - The Company’s principal country of operations is the PRC. The financial position and results of operations of the Company are determined using the local currency (“Renminbi” or “Yuan”) as the functional currency. Transactions not conducted in Renminbi are translated into Renminbi at the exchange rates prevailing at the times of such transactions. The results of operations denominated in foreign currencies are translated at the average rate of exchange during the reporting period. Assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the market rate of exchange ruling at that date. The registered equity capital denominated in the functional currency is translated at the historical rate of exchange at the time of capital contribution. All translation adjustments resulting from the translation of the financial statements into the reporting currency (“US Dollars”) are dealt with as an exchange fluctuation reserve in shareholders’ equity.

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

United States

China Precision Steel, Inc. is subject to United States federal income tax at a tax rate of 34%. No provision for income taxes in the United States has been made as China Precision Steel, Inc. had no taxable income in fiscal years 2009 and 2008.

BVI 

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

PRC

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

Enterprise income tax

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

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


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

In 2006, the Financial Accounting Standards Board (“FASB”) issued FIN 48, which clarifies the application of SFAS No. 109 by defining a criterion that an individual income tax position must meet for any part of the benefit of that position to be recognized in an enterprise’s financial statements and provides guidance on measurement, derecognition, classification, accounting for interest and penalties, accounting in interim periods, disclosure and transition. In accordance with the transition provisions, the Company adopted FIN 48 effective January 1, 2007.

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

Based on all known facts and circumstances and current tax law, the Company believes that the total amount of unrecognized tax benefits as of December 31, 2008, 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, 2008, 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.

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 three and six months ended December 31, 2008, the Company’s pension cost charged to the statements of operations under the plan amounted to $63,486 and $160,885, respectively, all of which have been paid to the National Social Security Fund (2007: $72,059 and $132,658, respectively).

Fair Value of Financial Instruments - The carrying amounts of certain financial instruments, including cash, accounts receivable, other receivables, accounts payable, accrued expenses, and other payables approximate their fair values as at December 31, 2008 and June 30, 2008 because of the relatively short-term maturity of these instruments.

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.

Recent Accounting Pronouncements -

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

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”). SFAS 141(R) will change the accounting for business combinations. Under SFAS No. 141(R), an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. SFAS No. 141(R) will change the accounting treatment and disclosure for certain specific items in a business combination. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. SFAS 141(R) will impact the Company in the event of any future acquisition.
 
In December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements—an amendment of Accounting Research Bulletin No. 51” (“SFAS 160”). SFAS 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. The Company does not believe that SFAS 160 will have a material impact on its consolidated financial statements.
 
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133” (“SFAS 161”). SFAS 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. The guidance in SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. This Statement encourages, but does not require, comparative disclosures for earlier periods at initial adoption. The adoption of SFAS No. 161 did not impact our consolidated financial statements in any material respect.

In April 2008, the FASB issued FASB Staff Position (“FSP”) FAS 142-3, “Determination of the Useful Life of Intangible Assets”(“FAS 142-3”), which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”).  The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141(R), “Business Combinations,” and other U.S. generally accepted accounting principles.  This FSP is effective for fiscal years beginning after December 15, 2008 (the Company’s fiscal year 2010), and interim periods within those fiscal years.  The Company does not believe the adoption of FSP 142-3 will have a material impact on the Company’s consolidated financial position, results of operations and cash flows. 


In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles"(“SFAS 162”).  This statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of non-governmental entities that are presented in conformity with US GAAP. The provisions of SFAS162 become effective 60 days following the SEC's approval of the amendment to AU Section 411, "The Meaning of Presents Fairly in Conformity with Generally Accepted Accounting Principles" by the Public Company Accounting Oversight Board.  The adoption of this statement is not expected to have a material effect on the Company’s future reported financial position or results of operations.

In May 2008, the FASB issued FASB Statement No. 163, “Accounting for Financial Guarantee Insurance Contracts”(FASB 163”). The new standard clarifies how FASB Statement No. 60, “Accounting and Reporting by Insurance Enterprises”, applies to financial guarantee insurance contracts issued by insurance enterprises, including the recognition and measurement of premium revenue and claim liabilities. It also requires expanded disclosures about financial guarantee insurance contracts. FASB 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years, except for disclosures about the insurance enterprise’s risk-management activities, which are effective the first period (including interim periods) beginning after May 23, 2008. Except for the required disclosures, earlier application is not permitted. The standard is not applicable to this Company.

In October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active”(“FAS 157-3”). This FSP clarifies the application of FASB Statement No. 157, “Fair Value Measurements”, in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FAS 157-3 was effective upon issuance. The adoption of FAS 157-3 did not impact our consolidated financial statements in any material respect.

4.  Concentrations of Business and Credit Risk

The Company provides credit in the normal course of business. The Company performs ongoing credit evaluations of its customers and clients and maintains allowances for doubtful accounts based on factors surrounding the credit risk of specific customers and clients, historical trends, and other information. Trade accounts receivable, net totaled $23,248,541 and $33,783,074 as of December 31, 2008 and June 30, 2008, respectively.

The Company’s list of customers whose purchases exceeded 10% of total sales during the six months ended December 31, 2008 and 2007 is as follows:

Customers
   2008    
% to
sales
   
2007
   
% to
sales
 
Salzgitter Mannesmann International GMBH
    13,651,071       32       *     *
Shanghai Changshuo Stainless Steel Co., Ltd. 
    4,555,411       11       11,076,780       27  
Shanghai Shengdejia Metal Co. Ltd. 
    *     *     6,492,562       16  
 
The Company’s list of suppliers whose sales exceeded 10% of total consumption during the six months ended December 31, 2008 and 2007 is as follows:

Suppliers
 
2008
   
% to
consumption
   
2007
   
% to
consumption
 
                                 
BaoSteel Steel Products Trading Co. Ltd. 
    10,756,193       35       1,257,169       7  
                                 
Shanghai Pinyun Steel Co., Ltd 
    6,877,828       22       3,262,936       18  
Hangzhou Relian Company Limited  
    *         2,291,248       12  
 

5.    Inventories

As of December 31, 2008 and June 30, 2008 inventories consisted of the following:

At cost: 
 
December 31,
2008
   
June 30,
2008
 
Raw materials
  $ 6,208,271     $ 8,376,173  
Work in progress
    1,866,089       3,247,093  
Finished goods
    7,997,314       3,918,801  
Consumable items
    2,287,435       2,273,020  
     $ 18,359,109     $ 17,815,087  

6.    Property, Plant and Equipment

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

   
December 31,
2008
   
June 30,
2008
 
Plant and machinery
  $ 25,723,384     $ 22,725,528  
Buildings
    21,797,217       21,685,208  
Motor vehicles
    527,369       379,885  
Office equipment
    216,391       185,161  
      48,264,361       44,975,782  
Less: Accumulated depreciation
    (7,618,000 )     (5,776,477 )
    $ 40,646,361     $ 39,199,305  

Depreciation expense related to manufacturing is included as a component of cost of goods sold. During the three and six months ended December 31, 2008, depreciation totaling $941,991 and $1,766,023, respectively, was included as a component of cost of goods sold (2007: $483,482 and $961,462, respectively).

Plant and machinery amounting to $18,417,528 (June 30, 2008: $18,972,430) and land use right amounting to $555,943 (June 30, 2008: $553,404) were pledged for short-term loans totaling $17,457,984.

7.  Construction-In-Progress

As of December 31, 2008 and June 30, 2008, construction-in-progress consisted of the following:

   
December 31,
2008
   
June 30,
2008
 
Construction costs
  $ 25,698,608     $ 16,476,454  

Construction-in-progress represents construction and installations of the new 1450mm cold-rolling mill at Shanghai Blessford’s facilities.

8.    Advances from Customers

Advances from customers represent advance cash receipts from new customers and for which goods have not been delivered or services rendered as of the balance sheets dates. Advances from customers for goods to be delivered or services to be rendered in the subsequent period are carried forward as deferred revenue. As of December 31, 2008 and June 30, 2008, there were advances from customers of $4,014,580 and $6,996,996, respectively.


9.  Short-Term Loans

Short-term loans consisted of the following:

   
December 31,
2008
   
June 30,
2008
 
Bank loan dated August 1, 2008, due in one year with an interest rate of the Singapore Interbank Offered Rate (“SIBOR”) plus 3% (4.44% at December 31, 2008) (Note 6)
    5,300,000       5,300,000  
                 
Bank loan dated August 1, 2008, due in one year with an interest rate at 115% of the standard market rate set by the People’s Bank of China for Renminbi loans, secured by land use rights, buildings, plant and machinery (6.11% at December 31, 2008) (Note 6)
    2,904,700       2,886,952  
                 
Bank loan dated July 26, 2008, due in one year with an interest rate at 115% of the standard market rate set by the People’s Bank of China for Renminbi loans, secured by land use rights, buildings, plant and machinery (6.11% at December 31, 2008) (Note 6)
    9,253,284       9,278,847  
                 
    $ 17,457,984     $ 17,465,799  

The weighted average interest rate on short-term loans at December 31, 2008 and June 30, 2008 was 5.60% and 7.72%, respectively.

The above bank loans outstanding as at June 30, 2008 have been renewed at an interest rate of 115% of the standard market rate set by the People’s Bank of China for Renminbi loans and at SIBOR plus 3% for USD loans, due on July 31, 2009 and secured by land use rights, buildings, plant and machinery.

10.  Income Taxes

For enterprise income tax reporting purposes, the Company reports income and expenses on an accrual basis and is required to compute a 10% salvage value when computing depreciation expense. For financial reporting purposes, the Company reports income and expenses on the accrual basis and does not take into account a 10% salvage value when computing depreciation expenses.

The tax holiday resulted in tax savings as follows:

   
Three months ended December 31,
   
Six months ended December 31
 
   
2008
   
2007
   
2008
   
2007
 
Tax savings
  $ (233,193 )   $ 668,444     $ 411,977     $ 1,345,100  
                                 
Benefit per share
                               
Basic
  $ (0.01 )   $ 0.01     $ 0.01     $ 0.07  
Diluted
  $ (0.01 )   $ 0.01     $ 0.01     $ 0.07  
 
 
Significant components of the Group’s deferred tax assets and liabilities as of December 31, 2008 and June 30, 2008 are as follows:

Deferred tax assets and liabilities: 
 
December 31
2008
   
June 30,
2008
 
             
Book depreciation in excess of tax depreciation
  $ 226,107     $ 169,962  
                 
Temporary differences resulting from allowances
    1,844,343       573,324  
                 
Net deferred income tax asset
  $ 2,070,450     $ 743,286  
Valuation allowance
    (2,070,450 )     (743,286 )
     $     $  
 
A reconciliation of the provision for income taxes with amounts determined by the U.S. federal income tax rate to income before income taxes is as follows.

   
Three months ended
December 31,
   
Six months ended
December 31,
 
   
2008
   
2007
   
2008
   
2007
 
Computed tax at the federal statutory rate of 34%
  $ (779,912 )   $ 1,393,089     $ 255,849     $ 3,189,106  
Less adjustment to EIT statutory rate of 25% in 2008 and 27% in 2007
    183,696       (244,051 )     (106,772 )     (613,819 )
Tax effect of US losses not deductible in PRC
    92,894       130,275       147,510       216,768  
Income not subject to tax
                      (330,361
Deferred taxes
                      (1,064,028
Benefit of tax holiday
    233,193       (668,444 )     (411,977 )     (1,345,100 )
                                 
Others
    (48,749 )           (32,867 )      
Income tax expense per books
  $ (318,878 )   $ 610,689     $ (148,257 )   $ 52,566  

Income tax expense (benefit) consists of:

 
Three months ended
December 31,
 
Six months ended
December 31,
 
 
2008
 
2007
 
2008
 
2007
 
Income tax expense (benefit) for the current year - PRC
$ (318,878 )   $ 610,869     $ (148,257 )   $ 1,116,594  
Deferred income tax expense (benefit) - PRC
                    (1,064,028 )
Income tax expense (benefit) per books
$ (318,878 )   $ 610,869     $ (148,257 )   $ 52,566  

11.  Equity

On November 6, 2007, in connection with a Subscription Agreement, dated November 1, 2007 (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. In connection with the transaction, Roth Capital Partners, LLC, as placement agent, received warrants to purchase 225,600 shares of Common Stock valued at $887,504.
 

Information with respect to stock warrants outstanding is as follows:
 
Exercise
Price
 
Outstanding
June 30, 2008
 
Granted
 
Expired or
Exercised
 
Outstanding
December 31,
2008
 
Expiration Date
$
3.00
   
448,392
 
-0-
   
(90,000
)
358,392
 
February 22, 2011
$
3.60
   
100,000
 
-0-
   
-0-
 
100,000
 
February 22, 2010
$
8.45
   
1,420,000
 
-0-
   
-0-
 
1,420,000
 
May 5, 2013
$
7.38
   
225,600
 
-0-
   
-0-
 
225,600
 
November 5, 2010

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

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

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

The Company closed the Offering on November 6, 2007 (the “Closing Date”). The net proceeds of the offering were approximately $44 million, after deducting underwriting commissions and discounts and other fees and expenses relating to the offering. The warrants were valued at $5.3 million and were recorded to additional paid-in capital. The intended usage of the net proceeds was for repayment of certain bank debt, capital expenditure, and general corporate purposes. During the year ended June 30, 2008, long-term bank loans of $13,042,159 were paid off, and a progress payment of $7,016,729 was made in relation to the third cold rolling mill. During the six months ended December 31, 2008, we invested an additional $12,954,497 in construction in progress and property, production plants and equipment in relation to the third cold rolling mill and expansion of the Shanghai Blessford production facilities.

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


12.  Earnings Per Share

SFAS 128 requires a reconciliation of the numerator and denominator of the basic and diluted earnings per share (EPS) computations.

For the six months ended December 31, 2008, dilutive shares include outstanding warrants to purchase 358,392 shares of common stock at an exercise price of $3.00 and warrants to purchase 100,000 shares at an exercise price of $3.60; 1,420,000 shares at an exercise price of $8.45 and 225,600 shares at an exercise price of $7.38 were not included as their effect would have been anti-dilutive, however, these securities could potentially dilute basic earnings per share in the future. For the six months ended December 31, 2007, dilutive shares include outstanding warrants to purchase 1,300,059 shares of common stock at an exercise price of $3.00 and 100,000 shares at an exercise price of $3.60.

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

The following reconciles the components of the EPS computation:

  
 
Income(Loss)
 
Shares
 
Per Share
 
  
 
(Numerator)
 
(Denominator)
 
Amount
 
For the three months ended December 31, 2008:
                 
Net income (loss)
 
$
(1,974,981
         
Basic EPS income (loss) available to common shareholders
 
$
(1,974,981
46,562,955
 
$
(0.04
Effect of dilutive securities:
                 
Diluted EPS income (loss) available to common shareholders
 
$
(1,974,981)
 
46,562,955
 
$
(0.04
                   
For the three months ended December 31, 2007:
                 
Net income
 
$
3,486,451
           
Basic EPS income available to common shareholders
 
$
3,486,451
 
43,031,346
 
$
0.08
 
Effect of dilutive securities:
                 
Warrants
       
607,996
       
Diluted EPS income available to common shareholders
 
$
3,486,451
 
43,639,342
 
$
0.08
 
 
   
Income
 
Shares
 
Per Share
 
   
(Numerator)
 
(Denominator)
 
Amount
 
For the six months ended December 31, 2008:
             
Net income
 
$
900,753
           
Basic EPS income available to common shareholders
 
$
900,753
 
46,559,531
 
$
0.02
 
Effect of dilutive securities:
                 
Warrants
       
6,892
       
Diluted EPS income available to common shareholders
 
$
900,753
 
46,566,423
 
$
0.02
 
For the six months ended December 31, 2007:
                 
Net income
 
$
9,327,157
           
Basic EPS income available to common shareholders
 
$
9,327,157
 
40,204,745
 
$
0.23
 
Effect of dilutive securities:
                 
Warrants
       
604,692
       
Diluted EPS income available to common shareholders
 
$
9,327,157
 
40,809,437
 
$
0.23
 
 

13.  Capital Commitments

As of December 31, 2008, the Company had contractual commitments $917,000 for the construction projects related to expansion of Shanghai Blessford’s production facilities.


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

Special Note Regarding Forward Looking Statements

This Quarterly Report on Form 10-Q, including the following “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements that are based on the beliefs of our management, and involve risks and uncertainties, as well as assumptions, that, if they ever materialize or prove incorrect, could cause actual results to differ materially from those expressed or implied by such forward-looking statements.  The words “believe,” “expect,” “anticipate,” “project,” “targets,” “optimistic,” “intend,” “aim,” “will” or similar expressions are intended to identify forward-looking statements.  All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including statements regarding new and existing products, technologies and opportunities; statements regarding 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; any statements regarding future economic conditions or performance; uncertainties related to conducting business in China; any statements of belief or intention; any of the factors and risks mentioned in the “Risk Factors” sections of the Quarter Report and our Annual Report on Form 10-K for the year ended June 30, 2008 and subsequent SEC filings, and any statements of assumptions underlying any of the foregoing.  All forward-looking statements included in this report are based on information available to us on the date of this report.  We assume no obligation and do not intend to update these forward-looking statements, except as required by law.

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, 2008 (unaudited) and June 30, 2008, the end of its prior fiscal year, and its unaudited consolidated results of operation for the three and six month periods ended December 31, 2008 and 2007.

Use of Terms

Except as otherwise indicated by the context, all references in this Quarterly Report to
 
 
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R