Edgar Filing: China Precision Steel, Inc.

Unassociated Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10−Q

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

For the quarterly period ended: March 31, 2009

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

For the transition period from ____________ to _____________

Commission File No. 000-23039

CHINA PRECISION STEEL, INC.

(Exact name of registrant as specified in charter)

Delaware		14-1623047
(State or other jurisdiction of incorporation)		(IRS 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)

852-2543-2290

(Registrant’s telephone number, including area code)

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

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

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

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

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

The number of shares outstanding of each of the issuer’s classes of common equity, as of May 6, 2009 is as follows:

Class of Securities		Shares Outstanding
Common Stock, $0.001 par value		46,562,953

TABLE OF CONTENTS

PART I	FINANCIAL INFORMATION	3
ITEM 1.	FINANCIAL STATEMENTS.	3
ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.	22
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.	39
ITEM 4.	CONTROLS AND PROCEDURES.	41
PART II	OTHER INFORMATION	41
ITEM 1.	LEGAL PROCEEDINGS.	41
ITEM 1A.	RISK FACTORS.	41
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.	41
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES.	41
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.	42
ITEM 5.	OTHER INFORMATION.	42
ITEM 6.	EXHIBITS.	42

PART I

FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS.

CHINA PRECISION STEEL, INC.

INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED MARCH 31, 2009 AND 2008

Contents		Page(s)

Condensed Consolidated Balance Sheets as of March 31, 2009 and June 30, 2008		4

Condensed Consolidated Statements of Operations and Comprehensive Income for the nine months ended March 31, 2009 and 2008		5

Condensed Consolidated Statements of Stockholders’ Equity for the nine months ended March 31, 2009 and 2008		6

Condensed Consolidated Statements of Cash Flows for the nine months ended March 31, 2009 and 2008		7

Notes to the Condensed Consolidated Financial Statements		8

China Precision Steel, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

		(Unaudited)
		March 31,		June 30,
	Notes	2009		2008

Assets

Current assets
Cash and equivalents		$	5,569,806	$	18,568,842
Accounts receivable net of allowances of $1,036,609 and $1,033,479 at March 31, 2009 and June 30, 2008, respectively	5		21,029,146		33,783,074
Bills receivable			2,288,691		4,309,703
Other receivables			259,827		571,746
Inventories	6		22,606,039		17,815,087
Prepaid expenses			131,841		58,105
Advances to suppliers, net of allowances of $2,530,479 and $2,522,837 at March 31, 2009 and June 30, 2008,respectively	7		25,477,855		33,027,365

Total current assets			77,363,205		108,133,922

Property and equipment
Property and equipment, net	8		39,800,096		39,199,305
Deposit for plant and machinery			8,048,466		-
Construction-in-progress	9		29,949,380		16,476,454

			77,797,942		55,675,759

Intangible assets, net	10		2,394,406		1,625,690

Goodwill			99,999		99,999

Total assets		$	157,655,552	$	165,535,370

Liabilities and Stockholders' Equity

Current liabilities
Accounts payable and accrued liabilities		$	10,023,519	$	12,047,981
Advances from customers	11		3,581,863		6,996,996
Other taxes payables			3,529,867		3,976,239
Current income taxes payable			4,746,903		4,742,387
Short-term loans	12		17,430,904		17,465,799

Total current liabilities			39,313,056		45,229,402

Stockholders' equity:

Preferred stock: $0.001 per value, 8,000,000 shares authorized, no shares outstanding at March 31, 2009 and June 30, 2008	13
Common stock: $0.001 par value, 62,000,000 shares authorized, 46,562,953 and 46,472,953 issued and outstanding March 31, 2009 and June 30, 2008	13		46,563		46,473
Additional paid-in capital	13		75,642,383		75,372,488
Accumulated other comprehensive income			9,679,901		9,295,658
Retained earnings			32,973,649		35,591,349

Total stockholders' equity			118,342,496		120,305,968

Total liabilities and stockholders' equity		$	157,655,552	$	165,535,370

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

China Precision Steel, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

For the Three and Nine Months Ended March 31, 2009 and 2008

(Unaudited)

		Three Months Ended						Nine Months Ended
		March 31,			March 31,			March 31,			March 31,
	Notes	2009			2008			2009			2008

Revenues
Sales revenues		$	7,623,209		$	18,773,504		$	50,547,587		$	59,189,060
Cost of goods sold			9,605,252			13,399,010			45,125,635			42,172,997

Gross profit/(loss)			(1,982,043	)		5,374,494			5,421,952			17,016,063

Operating expenses
Selling expenses			298,492			203,477			1,632,322			484,926
Administrative expenses			541,251			699,220			1,581,456			2,031,816
Bad and doubtful debts			672			10,150			3,830,134			661,930
Depreciation and amortization			33,624			17,155			93,145			46,585

Total operating expenses			874,039			930,002			7,137,057			3,225,257

Income/(loss) from operations			(2,856,082	)		4,444,492			(1,715,105	)		13,790,806

Other income/(expense)
Other revenues			76,556			152,894			336,257			945,304

Interest and finance costs			(257,123	)		(415,863	)		(905,305	)		(1,174,864	)

Total other income/(expense)			(180,567	)		(262,969	)		(569,048	)		(229,560	)

Net income/(loss) from operations before income tax			(3,036,649	)		4,181,523			(2,284,153	)		13,561,246

Income tax	15
Current			481,804			543,623			333,547			1,660,217

Deferred			-			-			-			(1,064,028	)

Total income tax			481,804			543,623			333,547			596,189

Net income/(loss)		$	(3,518,453	)	$	3,637,900		$	(2,617,700	)	$	12,965,057

Basic earnings/(loss) per share	16	$	(0.08	)	$	0.08		$	(0.06	)	$	0.31

Basic weighted average shares outstanding			46,562,953			45,896,288			46,560,656			42,088,128

Diluted earnings/(loss) per share	16	$	(0.08	)	$	0.08		$	(0.06	)	$	0.30

Diluted weighted average shares outstanding			46,562,953			46,365,778			46,560,656			42,555,912

The Components of comprehensive income/(loss):
Net income/(loss)		$	(3,518,453	)	$	3,637,900		$	(2,617,700	)	$	12,965,057
Foreign currency translation adjustment			(366,181	)		3,481,498			384,243			5,567,813

Comprehensive income/(loss)		$	(3,884,634	)	$	7,119,398		$	(2,233,457	)	$	18,532,870

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

China Precision Steel, Inc. and Subsidiaries

Condensed Consolidated Statements of Changes in Stockholders' Equity

For the Nine Months Ended March 31, 2009

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		-			-			-			384,243		-			384,243
Net loss		-			-			-			-		(2,617,700	)		(2,617,700	)

Balance at March 31, 2009 (unaudited)		46,562,953		$	46,563		$	75,642,383		$	9,679,901	$	32,973,649		$	118,342,496

China Precision Steel, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

For the Nine Months Ended March 31, 2009 and 2008

(Unaudited)

	2009			2008

Cash flows from operating activities
Net Income/(loss)	$	(2,617,700	)	$	12,965,057
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		2,746,541			1,841,947
Allowance for bad and doubtful debts		3,830,134			661,930
Net changes in assets and liabilities:
Accounts receivable, bills receivable and other receivables		11,360,509			(26,067,887	)
Inventories		(4,732,832	)		(2,616,526	)
Deposits		-			89,361
Prepaid expenses		(73,753	)		(429,556	)
Advances to suppliers		7,642,844			(25,893,725	)
Accounts payable and accrued expenses		(2,058,293	)		5,702,234
Advances from customers		(3,433,313	)		5,037,976
Other taxes payable		(458,015	)		2,220,328
Current income taxes		(9,841	)		2,365,673
Deferred income taxes		-			(1,064,028	)

Net cash (used in)/provided by operating activities		12,196,281			(25,187,216	)

Cash flows from investing activities
Purchases of property, plant and equipment		(3,231,638	)		-
Deposit for plant and machinery		(8,048,466	)		-
Purchases of land use rights		(786,643	)		-
Construction in progress		(13,423,016	)		(7,512,290	)

Net cash (used in)/ investing activities		(25,489,763	)		(7,512,290	)

Cash flows from financing activities
Exercise of common stock warrants		269,985			-
Sale of common stock					44,375,282
Advances from/(to) directors, net		-			2,572,846
Notes payable proceeds		-			16,446,667
Repayments of short-term loan		(87,801	)		(23,757,121	)

Net cash provided by financing activities		182,184			39,637,674

Effect of exchange rate		112,262			1,852,473

Net increase/(decrease) in cash		(12,999,036	)		8,790,641

Cash and cash equivalents, beginning of period		18,568,842			5,504,862

Cash and cash equivalents, end of period	$	5,569,806		$	14,295,503

Supplemental disclosure of cash flow information:

Cash paid during the period for:
Interest paid	$	905,305		$	1,174,864
Taxes paid	$	363,493		$	-
Fixed asset purchases in accounts payable	$	-		$	233,885

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

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 spinoff of OraLabs, Inc. and the supplemental payment received. The Company then changed its name to China Precision Steel, Inc.

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

PSHL, registered on April 30, 2002 in the Territory of the British Virgin Islands, had registered capital of $50,000 as of December 31, 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.

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 March 31, 2009 and June 30, 2008, and the results of their operations and cash flows for the three and nine months ended March 31, 2009 and 2007. The results of operations for the three or nine months ended March 31, 2009 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.

Allowance for Doubtful Accounts - We provide an allowance for doubtful accounts to ensure accounts receivables are not overstated due to uncollectibility. Allowances for bad and doubtful accounts are maintained for the Company’s domestic and international customers and clients based on factors surrounding the credit risk of specific customers and clients, historical trends, and other information. Our allowance for doubtful accounts is a subjective critical estimate that has a direct impact on reported net earnings, and 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 customer’s inability to meet its financial obligations. At March 31, 2009 and June 30, 2008, the Company had $1,036,609 and $1,033,479 of allowances for doubtful accounts, respectively.

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 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. The Company created this partial reserve against advances to suppliers for goods ordered and not received within one year of the advance payment made.

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.

Impairment of Long-Lived Assets - The Company accounts for impairment of plant and equipment and amortizable intangible assets in accordance with SFAS No. 142 and SFAS No. 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 nine months ended March 31, 2009 and 2008, 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.

Functional Currency and Translating Financial Statements – The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Our functional currency is Chinese Renminbi; however, the accompanying consolidated financial statements have been expressed in USD. The consolidated balance sheets have been translated into USD at the exchange rates prevailing at each balance sheet date. The consolidated statements of operations and cash flows have been translated using the weighted-average exchange rates prevailing during the periods of each statement.

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.

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

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

United States

China Precision Steel, Inc. is subject to United States federal income tax at a tax rate of 34%. No provision for 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’s tax holiday of a 50% reduction in the 25% statutory rates had expired on December 31, 2008 and will be subject to the 25% statutory rates from January 1, 2009 onward, Shanghai Blessford is currently enjoying a full tax exemption from the enterprise income tax that will expire on December 31, 2009, and is entitled to a 50% reduction for the three subsequent years expiring on December 31, 2012. Subsequent to the expiry of their tax holidays, Chengtong and Shanghai Blessford will be subject to enterprise income taxes at 25% or the prevailing statutory rates. The discontinuation of any such special or preferential tax treatment or other incentives would have an adverse effect on any organization’s business, fiscal condition and current operations in 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 March 31, 2009, is not material to its results of operations, financial condition or cash flows. The Company also believes that the total amount of unrecognized tax benefits as of March 31, 2009, if recognized, would not have a material effect on its effective tax rate. The Company further believes that there are no tax positions for which it is reasonably possible, based on current Chinese tax law and policy, that the unrecognized tax benefits will significantly increase or decrease over the next 12 months producing, individually or in the aggregate, a material effect on the Company’s results of operations, financial condition or cash flows.

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 nine months ended March 31, 2009, the Company’s pension cost charged to the statements of operations under the plan amounted to $70,709 and $231,594, respectively, all of which have been paid to the National Social Security Fund (2008: $83,273 and $215,931, 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 March 31, 2009 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.

4. Concentrations of Business and Credit Risk

The Company’s list of customers whose purchases exceeded 10% of total sales during the nine months ended March 31, 2009 and 2008 is as follows:

Customers	2009			% to sales			2008			% to sales
Salzgitter Mannesmann International GMBH		13,653,466			27			—	*		—	*
Shanghai Changshuo Stainless Steel Co., Ltd.		—	*		—	*		14,174,957			24
Shanghai Shengdejia Metal Products Limited		—	*		—	*		10,854,529			18
Sinosteel Company Limited		—	*		—	*		10,854,529			18

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

Suppliers	2009		% to consumption		2008		% to purchase

BaoSteel Steel Products Trading Co. Ltd.		10,758,080		31		13,259,732		34

Shanghai Pinyun Steel Co., Ltd		8,486,770		25		8,278,110		21

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 $21,029,146 and $33,783,074 as of March 31, 2009 and June 30, 2008, respectively.

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

6. Inventories

As of March 31, 2009 and June 30, 2008 inventories consisted of the following:

At cost:	March 31, 2009		June 30, 2008
Raw materials	$	10,255,186	$	8,376,173
Work in progress		3,206,718		3,247,093
Finished goods		7,029,177		3,918,801
Consumable items		2,114,958		2,273,020
	$	22,606,039	$	17,815,087

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.

7. Advance to Suppliers

Cash advances are shown net of allowances of $2,530,479 and $2,522,837 at March 31, 2009 and June 30, 2008, respectively.

Two of the Company’s major long-term suppliers, who each represent 33% and 27% of our advances to suppliers as of March 31, 2009, respectively, have advised the management that they are committed to delivering the contracted raw materials in accordance with the terms of their supply contracts. Management expects to receive these raw materials in the next 6 months.

8. Property, Plant and Equipment

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

	March 31, 2009			June 30, 2008
Plant and machinery	$	25,839,027		$	22,725,528
Buildings		21,763,406			21,685,208
Motor vehicles		526,552			379,885
Office equipment		214,669			185,161
		48,343,654			44,975,782
Less: Accumulated depreciation		(8,543,558	)		(5,776,477	)
	$	39,800,096		$	39,199,305

Depreciation expense related to manufacturing is included as a component of cost of goods sold. During the three and nine months ended March 31, 2009, depreciation totaling $1,437,115 and $3,021,547, respectively, was included as a component of cost of goods sold (2008: $770,556 and $1,430,250, respectively).

Plant and machinery amounting to $17,827,400 (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 $17,430,904.

9. Construction-In-Progress

As of March 31, 2009 and June 30, 2008, construction-in-progress consisted of the following:

		March 31, 2009				June 30, 2008
Construction costs		$	29,949,380			$	16,476,454

Construction-in-progress represents construction and installations of a cold-rolling mill and annealing furnaces.

10. 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 $35,000 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, or more frequently if there are triggering events, 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.

11. 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.

12. Short-Term Loans

Short-term loans consisted of the following:

	March 31, 2009		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% (4.2% at March 31, 2009) (Note 8)		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 (6.11% at March 31, 2009) (Note 8)		2,902,130		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 (6.11% at March 31, 2009) (Note 8)		9,228,774		9,278,847

	$	17,430,904	$	17,465,799

The above short-term loans are secured by land use rights, buildings, plant and machinery.

The weighted-average interest rate on short-term loans at March 31, 2009 and June 30, 2008 was 5.53% and 7.72%, respectively.

13. Equity

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

In conjunction with the 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 construction of the third cold rolling mill. During the nine months ended March 31, 2009, we invested an additional $13,423,016 in construction in progress and property, production plants and equipment in relation to the third cold rolling mill and expansion of the Shanghai Blessford production facilities.

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

14. Stock Warrants

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 March 31, 2009	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

15. 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 March 31,					Nine months ended March 31
	2009		2008			2009			2008
Tax savings	$	188,410	$	(589,520	)	$	(223,567	)	$	(1,935,620	)

Benefit per share
Basic	$	0.004	$	(0.01)		$	(0.005	)	$	(0.04	)
Diluted	$	0.004	$	(0.01	)	$	(0.005	)	$	(0.04	)

Significant components of the Group’s deferred tax assets and liabilities as of March 31, 2009 and June 30, 2008 are as follows:

Deferred tax assets and liabilities:	March 31 2009			June 30, 2008

Book depreciation in excess of tax depreciation	$	770,458		$	169,962

Temporary differences resulting from allowances		891,770			573,324

Net deferred income tax asset	$	1,662,228		$	743,286
Valuation allowance		(1,662,228	)		(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 March 31,						Nine months ended March 31,
	2009			2008			2009			2008
Computed tax at federal statutory rate of 34%	$	(1,032,462	)	$	1,421,718		$	(776,613	)	$	4,610,824
Less adjustment to China Enterprise Income Tax statutory rate of 25% in 2009 and 2008		248,556			(517,760	)		141,784			(1,131,579	)
Tax effect of US losses not deductible in PRC		595,494			229,185			743,004			446,953
Income not subject to tax		—			—			—			(330,361	)
Deferred taxes		—			—			—			(1,064,028	)
Benefit of tax holiday		188,410			(589,520	)		(223,567	)		(1,935,620	)
Expenses not deductible for tax		478,767			—			478,767			—
Others		3,039			—			(29,828	)		—
Income tax expense per books	$	481,804		$	543,623		$	333,547		$	596,189

Income tax expense consists of:

	Three months ended March 31,						Nine months ended March 31,
	2009			2008			2009			2008
Income tax expense for the current year - PRC		$	481,804		$	543,623		$	333,547		$	1,660,217
Deferred income tax (benefit) - PRC			—			—			—			(1,064,028	)
Income tax expense per books		$	481,804		$	543,623		$	333,547		$	596,189

16. Earnings/(loss) Per Share

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

For the nine months ended March 31, 2009, warrants to purchase 358,392 shares of common stock at an exercise price of $3.00; 100,000 shares at an exercise price of $3.60; 1,420,000 shares at an exercise price of $8.45 and 225,600 shares at an exercise price of $7.38 were not included as their effect would have been anti-dilutive, however, these securities could potentially dilute basic earnings per share in the future. For the nine months ended March 31, 2008, dilutive shares include outstanding warrants to purchase 1,025,059 shares of common stock at an exercise price of $3.00 and 100,000 shares at an exercise price of $3.60. Warrants to purchase 1,420,000 shares at an exercise price of $8.45; and 225,600 shares at an exercise price of $7.38 were not included as their effect would have been anti-dilutive.

For the three months ended March 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.

The following reconciles the components of the EPS computation:

	Income(Loss)			Shares	Per Share
	(Numerator)			(Denominator)	Amount
For the three months ended March 31, 2009:
Net (loss)	$	(3,518,453	)
Basic EPS income/(loss) available to common shareholders	$	(3,518,453	)	46,562,953	$	(0.08	)
Effect of dilutive securities				-
Diluted EPS income/(loss) available to common shareholders	$	(3,518,453)		46,562,953	$	(0.08	)

For the three months ended March 31, 2008:
Net income	$	3,637,900
Basic EPS income available to common shareholders	$	3,637,900		45,896,288	$	0.08
Effect of dilutive securities				-
Warrants				469,490
Diluted EPS income available to common shareholders	$	3,637,900		46,562,953	$	0.08

	Income			Shares	Per Share
	(Numerator)			(Denominator)	Amount
For the nine months ended March 31, 2009:
Net income/(loss)	$	(2,617,700	)
Basic EPS income available to common shareholders	$	(2,617,700	)	46,560,656	$	(0.06	)
Effect of dilutive securities				-
Diluted EPS income available to common shareholders	$	(2,617,700	)	46,560,656	$	(0.06	)
For the nine months ended March 31, 2008:
Net income	$	12,965,057
Basic EPS income available to common shareholders	$	12,965,057		42,088,128	$	0.31
Effect of dilutive securities				-
Warrants				467,784
Diluted EPS income available to common shareholders	$	12,965,057		42,555,912	$	0.30

17. Capital Commitments

As of March 31, 2009, the Company had contractual commitments $2,495,610 for the construction of a cold rolling mill and annealing furnaces.

18. Impairment

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 adjust the asset to the lower of its carrying value or fair value and charging current operations for the measured impairment. The determination of the asset fair value is subject to significant judgment.

The recent decline in market cap and stock price has triggered an interim impairment test under SFAS No. 142 and SFAS No. 144, an impairment test was performed for the nine months ended March 31, 2009 and no impairment charges were recognized for the relevant period. As of March 31, 2009, the Company expects these assets to be fully recoverable. Goodwill amounting to $99,999 as at March 31, 2009 was considered immaterial and not tested for impairment.

19. Recent Accounting Pronouncements

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 No. 141(R)”). SFAS No. 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 No. 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 No. 160”). SFAS No. 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 No. 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 No. 161”). SFAS No. 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 No. 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 No. 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 No. 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 SFAS No. 162 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 No. 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 No. 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 will not impact our consolidated financial statements in any material respect.

In December 2008, the FASB issued FSP No. FAS 132 (R) -1, Employers’ Disclosures about Postretirement Benefit Plan Assets, an amendment of FASB Statement No. 132 (revised 2003) ("FSP No. 132 (R) -1"). It provides guidance on an employer’s disclosures about plan assets, including: how investment allocation decisions are made and factors that are pertinent to an understanding of investment policies and strategies; the major categories of plan assets; the inputs and valuation techniques used to measure the fair value of plan assets; the effect of fair value measurements using significant unobservable inputs (level 3) on changes in plan assets for the period, and significant concentrations of risks within plan assets. FSP 132 (R) -1 is effective for fiscal years ending after December 15, 2009. We are currently assessing the potential impact that adoption of this standard may have on our financial statements.

In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments. It requires the fair value for all financial instruments within the scope of SFAS No. 107, Disclosures about Fair Value of Financial Instruments ("SFAS No. 107"), to be disclosed in the interim periods as well as in annual financial statements. This standard is effective for the quarter ending after June 15, 2009. We are currently assessing the potential impact that adoption of this standard may have on our financial statements.

In April 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. It clarifies the objective and method of fair value measurement even when there has been a significant decrease in market activity for the asset being measured. This standard is effective for the quarter ending after June 15, 2009. We are currently assessing the potential impact that adoption of this standard may have on our financial statements.

In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments. The objective of an other-than-temporary impairment analysis under existing U.S. GAAP is to determine whether the holder of an investment in a debt or equity security for which changes in fair value are not regularly recognized in earnings (such as securities classified as held-to-maturity or available-for-sale) should recognize a loss in earnings when the investment is impaired. An investment is impaired if the fair value of the investment is less than its amortized cost basis. This FSP amends the other-than-temporary impairment guidance in U.S. GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This FSP does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. We are currently assessing the potential impact that adoption of this standard may have on our financial statements.

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

Forward-Looking Statements

This quarterly report contains forward-looking statements relating to us that are based on the beliefs of our management as well as assumptions made by, and information currently available to, our management. When used in this Report, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan” and similar expressions, as they relate to us or our management, are intended to identify forward-looking statements. These statements reflect management's current view of us concerning future events and are subject to certain risks, uncertainties and assumptions, including among many others: our potential inability to raise additional capital, changes in domestic and foreign laws, regulations and taxes, changes in economic conditions, uncertainties related to China's legal system and economic, political and social events in China, a general economic downturn, a downturn in the securities markets, Securities and Exchange Commission regulations which affect trading in the securities of “penny stocks,” and other risks and uncertainties. Should any of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in this Report as anticipated, estimated or expected. We undertake no obligation to publicly release any revisions to the forward-looking statements after the date of this document. You should carefully review the risk factors described in other documents we file from time to time with the U.S. Securities and Exchange Commission, including our Annual Report on Form 10-K for our fiscal year ended June 30, 2008.

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 March 31, 2009 (unaudited) and June 30, 2008, the end of its prior fiscal year, and its unaudited consolidated results of operation for the three and nine month periods ended March 31, 2009 and 2008.

Use of Terms

Except as otherwise indicated by the context, all references in this Quarterly Report to: “Blessford International” are to PSHL’s subsidiary Blessford International Limited, a BVI company; “Chengtong” are to PSHL’s subsidiary Shanghai Chengtong Precision Strip Co., Limited, a PRC company; “China” and “PRC” are to the People’s Republic of China; the “Company,” the “Group,” “we,” “us” or “our” are to China Precision Steel, Inc., a Delaware corporation, and its direct and indirect subsidiaries; “Exchange Act” means the Securities Exchange Act of 1934, as amended; “PSHL” are to our subsidiary Partner Success Holdings Limited, a BVI company; “RMB” are to Renminbi, the legal currency of China; “Securities Act” are to the Securities Act of 1933, as amended; “Shanghai Blessford” are to Blessford International’s subsidiary Shanghai Blessford Alloy Company Limited, a PRC company; “Tuorong” are to PSHL’s subsidiary Shanghai Tuorong Precision Strip Company Limited, a PRC company; “U.S. dollar,” “$” and “US$” are to the legal currency of the United States; and “BVI” are to the British Virgin Islands.

Where You Can Find Additional Information

We file annual, quarterly and other reports, proxy statements and other information with the SEC. You may obtain and copy any document we file with the SEC at the SEC’s public reference room at 100 F Street, NE, Room 1580, Washington, D.C. 20549. You may obtain information on the operation of the SEC’s public reference facilities by calling the SEC at 1-800-SEC-0330. You can request copies of these documents, upon payment of a duplicating fee, by writing to the SEC at its principal office at 100 F Street, NE, Room 1580, Washington, D.C. 20549-1004. The SEC maintains an Internet website at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. Our SEC filings, including exhibits filed therewith, are accessible through the Internet at that website.

You may also request a copy of our SEC filings, at no cost to you, by writing or telephoning us at: China Precision Steel, Inc., Room B, 18th Floor, Teda Building, 87 Wing Lok Street, Sheungwan, Hong Kong, People’s Republic of China, attention Corporate Secretary, telephone 852-2543-2290. We will not send exhibits to the documents, unless the exhibits are specifically requested and you pay our fee for duplication and delivery.

Overview of Our Business

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

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

We conduct our operations principally in 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 Philippines, Nigeria and Ethiopia. We intend to further expand into additional overseas markets in the future, subject to suitable market conditions and favorable regulatory controls.

Recent Developments

We are currently faced with multiple challenges. Excess capacity, low industrial concentration and a lack of access to natural resources have long plagued China's steel sector, and these problems have been exacerbated by the impact of the global financial and economic crisis.

The RMB400 billion economic stimulus package formulated jointly by the Chinese government’s National Development and Reform Commission and the Ministry of Industry and Information Technology in November 2008 is now planned to focus mainly on nine pillar industries, which include steel, automobiles, shipbuilding, petrochemicals, light industry, textiles, non-ferrous metals, machinery, and information technology, all with serious production surpluses in the whole industrial system.

Automobiles and steel sectors have been given priority and are the two main industries out of the nine pillars for which the government is expected to announce specific support packages and further details. On January 14, 2009, China's State Council approved a "rejuvenation plan" to support the steel industry, with the immediate aim to deal with the effects of the global financial and economic crisis and to also ease the industry's long-term structural problems. The steel industry plan includes eliminating obsolete capacity, speeding up innovation, promoting alliances and mergers and cutting export tariffs. The government will also subsidize loans of about RMB15 billion to encourage technological upgrading and product rationalization to better meet demand.

With more specific support details yet to be announced and the global crisis and its impact on China yet to run their full course, we expect to continue to experience weak demands and volatilities in both domestic and international markets in the foreseeable future.

Third Quarter Financial Performance Highlights

During the third fiscal quarter of 2009, we continued to see slower demands and lower steel prices compared to same period a year ago as a result of the impacts of the persisting global crisis. There were decreases in sales volume across all of our product lines over the three months ended March 31, 2009 as we are faced with multiple challenges and experiencing a difficult time with the global economic downturn. Demand is weak in all of the end segments we sell to, especially the high-carbon cold-rolled steel which are mainly used in auto components manufacturing, due to excess capacity and high inventory levels in the industry. Our two cold-rolling mills that were running at full capacity at the end of calendar 2008 are now operating at approximately 60% utilization rate due to reduced orders on hand.

For the three months ended March 31, 2009, we sold a total of 11,000 tons of products, a decrease of 13,273 tons from 24,273 tons same period a year ago, due to slower demands and reduced orders on hand. Management believes that such decrease was caused by various factors including decrease in product orders from auto components manufacturers and from the Chinese auto industry that is experiencing weak demand and excess capacity; decrease in low-carbon cold rolled products, our exported products, due to the current credit crisis and the need to reduce exposure in the exporting business, and reduced orders in subcontracting income due to slower demand from customers during a downward economy and trending uncertainties of the industry. Lower sales and high raw material costs have led to a gross loss of $1,982,043 and a net loss of $3,518,453 for the three months ended March 31, 2009.

It is currently unclear whether and to what extent the economic stimulus measures and other actions taken or contemplated by the Chinese government and other governments throughout the world will mitigate the effects of the crisis on the industries that affect our business. Furthermore, deteriorating economic conditions, including business layoffs, downsizing, industry slowdowns and other similar factors that affect our customers. could have further negative consequences on our business operations. For the foreseeable future, we expect a continuation of weak demand and volatility in both domestic and international markets across all product segments, and significantly adverse impacts on our gross margin due to a decrease in sales of our high margin high carbon cold rolled steel used mainly in auto components manufacturing. However, due to the nature of our niche segment and high-end products, we have been able to keep quality customers and negotiate new contracts with a number of new customers during the quarter, including three new customers in the high carbon cold rolled product segment. Management continues to be in talks with potential customers whose past orders we had been unable to fill due to full capacity. If these talks are successful, we could see additional sales from a broadened customer base which would further mitigate the impact of the current global slowdown on our business and results of operations.

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

The following are some financial highlights for the third quarter of 2009:

Revenues: Our revenues were approximately $7.6 million for the third quarter of 2009, a decrease of 59.4% from the same quarter of last year.

Gross Margin: Gross margin was (26.0)% for the third quarter of 2009, as compared to 28.6% for the same period in 2008.

Income/(loss) from operations before tax: Loss from operations before tax was approximately $2.9 million for the third quarter of 2009, as compared to income from operations before tax of $4.4 million of the same period last year.

Net Income/(loss): Net loss was approximately $3.5 million for the third quarter of 2009, a decrease of 196.7% from a net income of approximately $3.6 million for the same period last year.

Fully diluted loss per share was $0.08 for the third quarter of 2009 compared to a fully diluted earnings per share of $0.08 for the same period last year.

Results of Operations

The following table sets forth key components of our results of operations for the periods indicated, in millions of U.S. dollars and as a percentage of revenues.

All amounts, other than percentages, in U.S. dollars

	Three Months ended March 31,									Nine Months ended March 31,
	2009					2008				2009				2008
Revenues	$	7,623,209		100.0	%	$	18,773,504	100.0	%	$	50,547,587	100.0	%	$	59,189,060	100.00	%
Cost of sales (including depreciation and amortization)		9,605,252		126.0	%		13,399,010	71.4	%		45,125,635	89.3	%		42,172,997	71.3	%
Gross profit/(loss)		(1,982,043	)	(26.0	)%		5,374,494	28.6	%		5,421,952	10.7	%		17,016,063	28.7	%
Selling and marketing		298,492		3.9	%		203,477	1.1	%		1,632,322	3.2	%