Edgar Filing: China Precision Steel, Inc.

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, 2010

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

For the transition period from ____________ to _____________

Commission File Number: 000-23039

CHINA PRECISION STEEL, INC.

(Exact Name of Registrant as Specified in Its Charter)

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

18th Floor, Teda Building

87 Wing Lok Street, Sheungwan, Hong Kong

People’s Republic of China

(Address of principal executive offices, Zip Code)

852-2543-2290

(Registrant’s telephone number, including area code)

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

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

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

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

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

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

The number of shares outstanding of each of the issuer’s classes of common stock, as of February 10, 2011 is as follows:

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

CHINA PRECISION STEEL, INC.

Quarterly Report on Form 10-Q

Three and Six Months Ended December 31, 2010

TABLE OF CONTENTS

PART I

FINANCIAL INFORMATION

Item 1.	Financial Statements	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34
Item 4.	Controls and Procedures	34

PART II
OTHER INFORMATION

Item 1.	Legal Proceedings	34
Item 1A.	Risk Factors	34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34
Item 3.	Defaults Upon Senior Securities	35
Item 4.	(Removed and Reserved)	35
Item 5.	Other Information	35
Item 6.	Exhibits	35

PART I

FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS.

CHINA PRECISION STEEL, INC.

CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2010 AND 2009

INDEX TO FINANCIAL STATEMENTS

		Page(s)
Financial Statements

Consolidated Balance Sheets (unaudited)		2

Consolidated Statements of Operations and Comprehensive Income (unaudited)		3

Consolidated Statements of Changes in Stockholders’ Equity (unaudited)		4

Consolidated Statements of Cash Flows (unaudited)		5

Notes to Consolidated Financial Statements (unaudited)		6

China Precision Steel, Inc. and Subsidiaries

Consolidated Balance Sheets

		December 31,		June 30,
	Notes	2010		2010
		(Unaudited)
Assets

Current assets
Cash and cash equivalents		$	14,227,074	$	29,036,706
Accounts receivable
Trade, net of allowances of $1,041,244 and $1,013,744 at December 31, 2010 and June 30, 2010, respectively	5		26,903,637		39,598,845
Bills receivable			8,652,060		4,760,816
Other			638,134		1,369,219
Inventories	6		32,098,452		28,522,198
Prepaid expenses			487,070		534,882
Advances to suppliers, net of allowance of $1,687,999 and $1,643,419 at December 31, 2010 and June 30, 2010, respectively	7		30,211,920		13,959,206

Total current assets			113,218,347		117,781,872

Property, plant and equipment
Property, plant and equipment, net	8		74,762,761		69,907,194
Construction-in-progress	9		3,669,447		3,983,450

			78,432,208		73,890,644

Intangible assets, net	10		1,873,792		1,844,995

Goodwill			99,999		99,999

Total assets		$	193,624,346	$	193,617,510

Liabilities and Stockholders' Equity

Current liabilities
Short-term loans	11	$	26,617,609	$	25,965,421
Accounts payable and accrued liabilities			4,389,205		9,952,109
Advances from customers			2,223,022		3,266,377
Other taxes payable			4,622,729		3,868,220
Current income taxes payable			5,794,856		5,393,000

Total current liabilities			43,647,421		48,445,127

Long-term loan	12		18,566,257		18,075,914

Stockholders' equity:
Preferred stock: $0.001 per value, 8,000,000 shares authorized, no shares outstanding at December 31, 2010 and June 30, 2010, respectively	13
Common stock: $0.001 par value, 62,000,000 shares authorized, 46,562,955 issued and outstanding at December 31, 2010 and June 30, 2010, respectively	13		46,563		46,563
Additional paid-in capital	13		75,642,383		75,642,383
Accumulated other comprehensive income			14,098,882		10,630,975
Retained earnings			41,622,840		40,776,548

Total stockholders' equity			131,410,668		127,096,469

Total liabilities and stockholders' equity		$	193,624,346	$	193,617,510

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

China Precision Steel, Inc. and Subsidiaries

Consolidated Statements of Operations

For the Three and Six Months Ended December 31, 2010 and 2009

(Unaudited)

		Three Months Ended						Six Months Ended
		December 31,			December 31,			December 31,			December 31,
	Notes	2010			2009			2010			2009


Sales revenues		$	39,768,528		$	27,013,838		$	73,664,983		$	44,055,827
Cost of goods sold			37,859,665			23,377,883			69,372,035			39,716,513
Gross profit			1,908,863			3,635,955			4,292,948			4,339,314

Operating expenses
Selling expenses			(1,823	)		70,605			108,382			102,414
Administrative expenses			725,650			654,041			1,597,120			1,232,739
Allowance for bad and doubtful debts			19,697			101,067			19,697			218,184
Depreciation and amortization expense			49,551			36,755			93,711			80,493

Total operating expenses			793,075			862,468			1,818,910			1,633,830

Income from operations			1,115,788			2,773,487			2,474,038			2,705,484

Other income/(expense)
Other revenues			1,094			91,041			2,612			110,963
Interest and finance costs			(852,738	)		(275,091	)		(1,317,851	)		(503,434	)

Total other (expense)			(851,644	)		(184,050	)		(1,315,239	)		(392,471	)

Income from operations before income tax			264,144			2,589,437			1,158,799			2,313,013

Provision for income tax	14
Current			62,363			-			312,507			(1,233	)

Total income tax expense			62,363			-			312,507			(1,233	)

Net income		$	201,781		$	2,589,437		$	846,292		$	2,314,246

Basic earnings per share	15	$	0.00		$	0.06		$	0.02		$	0.05

Basic weighted average shares outstanding			46,562,955			46,562,955			46,562,955			46,562,955

Diluted earnings per share	15	$	0.00		$	0.06		$	0.02		$	0.05

Diluted weighted average shares outstanding			46,562,955			46,562,955			46,562,955			46,562,955

Components of comprehensive income:
Net income		$	201,781		$	2,589,437		$	846,292		$	2,314,246
Foreign currency translation adjustment			1,770,168			677,905			3,467,907			64,106

Comprehensive income		$	1,971,949		$	3,267,342		$	4,314,199		$	2,378,352

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

China Precision Steel, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders' Equity

For the Six Months Ended December 31, 2010

							Accumulated
					Additional		Other				Total
	Ordinary Shares				Paid-in		Comprehensive		Retained		Stockholders'
	Share		Amount		Capital		Income		Earnings		Equity
Balance at June 30, 2010		45,562,955		46,563		75,642,383		10,630,975		40,776,548		127,096,469

Foreign currency translation adjustment		-		-		-		3,467,907		-		3,467,907
Net income		-		-		-		-		846,292		846,292

Balance at December 31, 2010 (Unaudited)		45,562,955	$	46,563	$	75,642,383	$	14,098,882	$	41,622,840	$	131,410,668

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

China Precision Steel, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

For the Six Months Ended December 31, 2010 and 2009

(Unaudited)

	2010			2009

Cash flows from operating activities
Net income	$	846,292		$	2,314,246
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		5,891,211			2,181,380
Allowance for bad and doubtful debts		19,697			218,184
Inventory provision		-			42,534
Net changes in assets and liabilities:
Accounts receivable, net		10,755,506			7,189,783
Inventories		(2,802,535	)		(8,908,192	)
Prepaid expenses		93,809			(85,504	)
Advances to suppliers		(15,873,801	)		(601,926	)
Accounts payable and accrued expenses		(5,820,915	)		(801,406	)
Advances from customers		(1,131,961	)		1,042,492
Other taxes payable		649,577			(2,236,478	)
Income taxes payable		255,560			197,520

Net cash (used in)/provided by operating activities		(7,117,560	)		552,633

Cash flows from investing activities
Purchase of property, plant and equipment, including construction in progress		(8,365,838	)		(4,746,139	)

Net cash (used in) investing activities		(8,365,838	)		(4,746,139	)

Cash flows from financing activities
Loan proceeds		-			3,735,169
Repayments of short-term loans		(52,173	)		(444,400	)

Net cash (used in)/provided by financing activities		(52,173	)		3,290,769

Effect of exchange rate		725,939			5,438

Net (decrease) in cash		(14,809,632	)		(897,299	)

Cash and cash equivalents, beginning of period		29,036,706			13,649,587

Cash and cash equivalents, end of period	$	14,227,074		$	12,752,288

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

China Precision Steel, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

1.	Description of Business

China Precision Steel, Inc. (the “Company”, “CPSL” or “we”) is a niche and high value-added steel processing company principally engaged in the manufacture and sale of cold-rolled precision steel products for downstream applications including automobile components and spare parts, kitchen tools, electrical appliances, roofing and food packaging materials. Raw materials, hot-rolled steel coils, will go through certain reduction, heating and cutting processing procedures to give steel coils or plates different thickness and specifications for deliveries in accordance with customers’ requirements. Specialty precision steel offers specific control of thickness, shape, width, surface finish and other special quality features that compliment the emerging need for highly engineered end use applications. Precision steel pertains to the precision of measurements and tolerances of the above factors, especially thickness tolerance.

We have five wholly-owned subsidiaries, Partner Success Holdings Limited (“PSHL”), Blessford International Limited (“Blessford International”), Shanghai Chengtong Precision Strip Company Limited (“Chengtong”), Shanghai Blessford Alloy Company Limited (“Shanghai Blessford”) and Shanghai Tuorong Precision Strip Company Limited (“Tuorong”). The Company’s principal activities are conducted through our two operating subsidiaries, Shanghai Chengtong and Shanghai Blessford with manufacturing facilities located in Shanghai, the People’s Republic of China (the “PRC”). The sole activity of Tuorong is the ownership of land use rights with respect to facilities utilized by Chengtong and Shanghai Blessford. PSHL and Blessford International are both British Virgin Islands companies with the sole purpose of investment holding.

2.	Basis of Preparation of Financial Statements

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

The accompanying unaudited consolidated financial statements as of December 31 and June 30, 2010 and for the periods ended December 31, 2010 and 2009 have been prepared in accordance with US GAAP and with the instructions to Form 10-Q and Regulation S-X applicable to smaller reporting companies. In the opinion of management, these unaudited consolidated financial statements include all adjustments considered necessary to make the financial statements not misleading. The results of operations for the six months ended December 31, 2010 are not necessarily indicative of the results to be expected for the full year ending June 30, 2011.

3.	Summary of Significant Accounting Policies

The following is a summary of significant accounting policies:

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

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

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

Allowance for Doubtful Accounts - The Company maintains an allowance for doubtful accounts based on its assessment of the collectability of the accounts receivable. Management determines the collectability of outstanding accounts by maintaining regular communication with such customers and obtaining confirmation of their intent to fulfill their obligations to the Company. Management also considers past collection experience, our relationship with customers and the impact of current economic conditions on our industry and market. However, we note that the continuation or intensification of the current global economic crisis may have negative consequences on the business operations of our customers and adversely impact their ability to meet their financial obligations. To reserve for potentially uncollectible accounts receivable, management has made a 50% provision for all accounts receivable that are over 180 days past due and full provision for all accounts receivable over 1 year past due. From time to time, we will review these credit periods, along with our collection experience and the other factors discussed above, to evaluate the adequacy of our allowance for doubtful accounts, and to make changes to the allowance, if necessary. If our actual collection experience or other conditions change, revisions to our allowances may be required, including a further provision which could adversely affect our operating income, or write back of provision when estimated uncollectible accounts are actually collected. At December 31, 2010 and June 30, 2010, the Company had $1,041,244 and $1,013,744 of allowances for doubtful accounts, respectively.

Bad debts are written off for past due balances over two years or when it becomes known to management that such amount is uncollectible. Provision for bad debts recognized for the six months ended December 31, 2010 and 2009 were $19,697 and $218,184, respectively. The current period charge reflects a provision for doubtful accounts based on our policy described above. Our management is continually working to ensure that any known uncollectible amounts are immediately written off as bad debt against outstanding balances.

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

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

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

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

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

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

Capitalized Interest - The Company capitalizes interest cost on borrowings incurred during the new construction or upgrade of qualified assets. Capitalized interest is added to the cost of the underlying assets and is amortized over the useful lives of the assets. During the three months ended December 31, 2010 and 2009, the Company capitalized $nil and $137,140, respectively, of interest to construction-in-progress.

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

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

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

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

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

Advances from Customers - Advances from customers represent advance cash receipts from customers and for which goods have not been delivered or services have not been rendered at each balance sheet date. Advances from customers for goods to be delivered or services to be rendered in the subsequent period are carried forward as deferred revenue.

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

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

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

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

United States

China Precision Steel, Inc. is subject to United States federal income tax at a tax rate of 34%. No provision for income taxes in the United States has been made as China Precision Steel, Inc. had no taxable income in the 2010 and 2009 periods.

BVI

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

PRC

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

Enterprise income tax

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

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

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

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

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

Based on all known facts and circumstances and current tax law, the Company believes that the total amount of unrecognized tax benefits as of December 31, 2010 is not material to its results of operations, financial condition or cash flows. The Company also believes that the total amount of unrecognized tax benefits as of December 31, 2010, if recognized, would not have a material effect on its effective tax rate. The Company further believes that there are no tax positions for which it is reasonably possible, based on current Chinese tax law and policy, that the unrecognized tax benefits will significantly increase or decrease over the next 12 months producing, individually or in the aggregate, a material effect on the Company’s results of operations, financial condition or cash flows.

Value added tax

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

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

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

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

For the six months ended December 31, 2010 and 2009, the Company’s pension cost charged to the statements of operations under the plan amounted to $121,058 and $80,263, respectively, all of which have been paid to the National Social Security Fund.

Fair Value of Financial Instruments - The carrying amounts of certain financial instruments, including cash, accounts receivable, other receivables, short-term loans, accounts payable, accrued expenses, and other payables approximate their fair values as at December 31, 2010 and June 30, 2010 because of the relatively short-term maturity of these instruments. The Company considers the carrying amount of long-term loans to approximate their fair values based on the interest rates of the instruments and the current market rate of interest.

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

4.	Concentrations of Business and Credit Risk

The Company’s list of customers whose purchases from us were 10% or more of total sales during six months ended December 31, 2010 and 2009 is as follows:

a. Customers	2010		% to sales		2009		% to sales
Shanghai Shengdejia Metal Co. Ltd		18,683,105		25		9,097,037		27
Shanghai Changshuo Steel Company, Ltd		1,991,623		16		5,825,690		17

The Company’s list of suppliers whose sales to us exceeded 10% of our total purchases during six months ended December 31, 2010 and 2009 is as follows:

b. Suppliers	2010		% to consumption		2009		% to consumption
Dachang Huizu Baosheng Steel Products Co., Ltd.		18,482,732		24		8,767,582		24
Zhejinag Wuchan Metal Group Co., Ltd.		14,403,294		18		8,209,383		22
Wuxi Hangda Trading Co., Ltd.		9,018,547		12		-*		-*
Hangzhou Steel Materials Co., Ltd.		7,640,373		10		7,576,264		21

* Not 10% suppliers for the relevant period

Our management continues to take appropriate actions to perform ongoing business and credit reviews of our customers to reduce our exposure to new and recurring customers who have been deemed to pose a high credit risk to our business based on their commercial credit reports, our collection history, and our perception of the risk posed by their geographic location. We have halted all of our direct sales to customers located in the Philippines since the year ended June 30, 2009 as we consider the associated credit risk to be relatively high. Based on publicly available reports, such as that issued by A.M. Best, there is a high risk that financial volatility may erupt in that country due to inadequate reporting standards, a weak banking system or asset markets and/or poor regulatory structure. We expect to resume such exports when conditions improve.

5.	Accounts Receivable

The Company provides credit in the normal course of business. The Company performs ongoing credit evaluations of its domestic and international customers and clients and maintains allowances for bad and doubtful accounts based on factors surrounding the credit risk of specific customers and clients, historical trends, and other information. Trade accounts receivable, net totaled $26,903,637 and $39,598,845 as of December 31, 2010 and June 30, 2010, respectively.

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

6.	Inventories

The Company was required under GAAP to write down the value of our inventories to their net realizable values (average selling prices less reasonable costs to convert the inventories into completed form) in the amount of $42,816 for the year ended June 30, 2010.

As of December 31, 2010 and June 30, 2010, inventories consisted of the following:

At cost:	December 31, 2010		June 30, 2010
Raw materials	$	9,259,714	$	5,551,003
Work in progress		9,852,815		15,443,410
Finished goods		9,879,191		4,291,384
Consumable items		3,106,732		3,279,217
		32,098,452		28,565,014
Less: provision		-		(42,816	)
	$	32,098,452	$	28,522,198

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

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

Inventories amounting to $6,614,182 (June 30, 2010: $6,588,535) were pledged for short-term loans totaling $26,617,609 at December 31, 2010 (June 30, 2010: $25,965,421).

7.	Advances to Suppliers

Advances to suppliers are shown net of allowances of $1,687,999 and $1,643,419 at December 31, 2010 and June 30, 2010, respectively.

The majority of our advances to suppliers greater than 180 days as of December 31, 2010 is attributable to our advances to a single supplier, a subsidiary of a state-owned company in the PRC. We believe that advances paid to state-owned companies are ultimately collectible because they are backed by the full faith and credit of the PRC government. As such, we generally do not provide allowances against such advances.

8.	Property, Plant and Equipment

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

	December 31, 2010			June 30, 2010
Plant and machinery	$	71,074,052		$	62,486,750
Buildings		22,560,584			21,964,748
Motor vehicles		684,519			554,368
Office equipment		508,834			472,537
		94,827,989			85,478,403
Less: Accumulated depreciation		(20,065,228	)		(15,571,209	)
	$	74,762,761		$	69,907,194

Depreciation expense related to manufacturing is included as a component of cost of goods sold. During the three and six months ended December 31, 2010, depreciation totaling $1,217,525 and $2,751,616, respectively, was included as a component of cost of goods sold (December 31, 2009: $662,517 and $1,396,252, respectively).

Plant and machinery amounting to $39,494,279 (June 30, 2010: $40,543,231) and $22,538,468 (June 30, 2010: $23,161,753) were pledged for short-term loans totaling $26,617,609 and long-term loans totaling $18,566,257, respectively, at December 31, 2010.

9.	Construction-In-Progress

As of December 31, 2010 and June 30, 2010, construction-in-progress consisted of the following:

		December 31, 2010				June 30, 2010
Construction costs		$	3,669,447			$	3,983,450

Construction-in-progress represents construction and installations of annealing furnaces and testing equipment.

10.	Intangible Assets

Land use rights amounting to $1,867,000 (June 30, 2010: $1,837,140) were pledged for short-term loans totaling $26,617,609 (June 30, 2010: $25,965,421).

The Company acquired land use rights in August 2004 and December 2006 for 50 years that expire in August 2054 and December 2056 respectively. The land use rights are amortized over a fifty-year term. An amortization amount of approximately $37,000 is to be recorded each year starting from the financial year ended June 30, 2009 for the remaining lease period.

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

11.	Short-Term Loans

Short-term loans consisted of the following:

	December 31, 2010		June 30, 2010
Bank loan dated June 18, 2010, due July 31, 2011 with an interest rate at 115% of the standard market rate set by the People’s Bank of China (“PBOC”) (6.11% at September 30, 2010) (Notes 8 and 10)		7,987,738		5,300,000
Bank loan dated July 23, 2009, due July 31, 2010 with an interest rate at 115% of the standard market rate set by PBOC (6.11% at September 30, 2010) (Notes 8 and 10)		-		2,527,573
Bank loan dated June 18, 2010, due July 31, 2011 with an interest rate at 115% of the standard market rate set by PBOC (6.11% at September 30, 2010) (Notes 6, 8 and 10)		18,629,871		18,137,848
	$	26,617,609	$	25,965,421

The above bank loans outstanding as at December 31, 2010 are Renminbi (“RMB”) loans, carry an interest rate of 1.15 times of the standard market rate set by PBOC, due on July 31, 2011, and are secured by inventories, land use rights, buildings and plant and machinery, and guaranteed by PSHL and our Chairman, Mr. Wo Hing Li. In addition, pursuant to a bank loan agreement entered into between the Company and Raiffeisen Zentralbank Osterreich AG ("RZB"), Mr. Li undertakes to maintain a shareholding percentage in the Company of not less than 33.4% unless otherwise agreed to with RZB.

The weighted-average interest rate on short-term loans at December 31, 2010 and June 30, 2010 was 6.6815% and 5.49%, respectively.

12.	Long-Term Loan

On January 29, 2010, Shanghai Blessford entered into a Senior Loan Agreement with DEG-Deutsche Investitions-Und Entwicklungsgesellschaft Mbh (“DEG”) for a loan amount up to $18,000,000 at an annual interest rate of 4.5% above the six-month USD London Interbank Offered Rate (“LIBOR”). On June 23, 2010, the Company drew $18,000,000 against this facility and exchanged such amount to RMB122,580,000 at the then prevailing exchange rate. This RMB loan balance is translated into USD at the exchange rates prevailing at each balance sheet date.

		December 31, 2010				June 30, 2010
Bank loan dated January 29, 2010, due June 22, 2017 with an interest rate of LIBOR plus 4.5% (4.9584% at December 31, 2010) (Note 8)			18,566,257			$	18,075,914

The above loan is to be repaid semi-annually over five years starting on December 15, 2011and is secured by a mortgage on the new cold rolling line and annealing furnaces at Shanghai Blessford’s facilities.

Maturities of long-term loan for the years ending June 30:

2011	$	-
2012	$	3,713,251
2013	$	3,713,251
2014	$	3,713,251
2015	$	3,713,251
2016	$	3,713,253
Total	$	18,566,257

13.	Stock Warrants

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

On February 22, 2007, the Company issued warrants to purchase up to 100,000 shares of Common Stock to the Company's then investor relations consultants valued at $447,993. The value of these was considered syndication fees in association with the Private Placement and was recorded to additional paid-in capital. These warrants were not exercised and expired on February 22, 2010.

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

Information with respect to stock warrants outstanding is as follows:

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

14.	Income Taxes

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

The tax holiday resulted in tax savings as follows:

	Six months ended December 31,
	2010		2009
Tax savings	$	104,339	$	675,840

Benefit per share
Basic	$	0.00	$	0.01
Diluted	$	0.00	$	0.01

Significant components of the Group’s deferred tax assets and liabilities as of December 31, 2010 and June 30, 2010 are as follows:

Deferred tax assets and liabilities:	December 31, 2010			June 30, 2010
Net operating loss carried forward	$	2,106,712		$	1,938,915
Temporary differences resulting from allowances		1,971,372			1,906,348
Net deferred income tax asset		4,078,084			3,845,263
Valuation allowance		(4,078,084	)		(3,845,263	)
	$	-		$	-

The Company has not recognized a deferred tax liability in respect of the undistributed earnings of its foreign subsidiaries of approximately US$19,482,117 as of December 31, 2010 because the Company currently plans to reinvest those unremitted earnings such that the remittance of the undistributed earnings of those foreign subsidiaries to the Company will be postponed indefinitely. A deferred tax liability will be recognized when the Company no longer plans to permanently reinvest undistributed earnings.

A reconciliation of the provision for income taxes with amounts determined by the PRC income tax rate to income tax expense per books is as follows:

	Six months ended December 31,
	2010			2009
Computed tax at the PRC statutory rate of 25%	$	236,923		$	533,880
Valuation allowance		232,821			142,289
Income not subject to tax		(65,011	)		(329	)
Under/(over) provision		12,113			(1,233	)
Benefit of tax holiday		(104,339	)		(675,840	)
Income tax expense/(benefit) per books	$	312,507			(1,233	)

Income tax expense consists of:

	Six months ended December 31,
	2010		2009
Income tax expense for the period - PRC	$	312,507	$	(1,233	)

Deferred income tax benefit - PRC		-		-

Income tax expense/(benefit) per books	$	312,507	$	(1,233	)

15.	Earnings Per Share

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

For the three months ended December 31, 2010, warrants to purchase 358,392 shares of common stock at an exercise price of $3.00, 1,420,000 shares at an exercise price of $8.45 and 225,600 shares at an exercise price of $7.38 were not included as their effect would have been anti-dilutive, however, these securities could potentially dilute basic earnings per share in the future.

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

The following reconciles the components of the EPS computation:

	Income		Shares	Per Share
	(Numerator)		(Denominator)	Amount
For the three months ended December 31, 2010:
Net income	$	201,781
Basic EPS income available to common shareholders	$	201,781	46,562,955	$	0.00
Effect of dilutive securities:
Warrants			-
Diluted EPS income available to common shareholders	$	201,781	46,562,955	$	0.00
For the three months ended December 31, 2009:
Net income	$	2,589,437
Basic EPS income available to common shareholders	$	2,589,437	46,562,955	$	0.06
Effect of dilutive securities:
Warrants			-
Diluted EPS income available to common shareholders	$	2,589,437	46,562,955	$	0.06

	Income		Shares	Per Share
	(Numerator)		(Denominator)	Amount
For the six months ended December 31, 2010:
Net income	$	846,292
Basic EPS income available to common shareholders	$	846,292	46,562,955	$	0.02
Effect of dilutive securities:
Warrants			-
Diluted EPS income available to common shareholders	$	846,292	46,562,955	$	0.02
For the six months ended December 31, 2009:
Net income	$	2,314,246
Basic EPS income available to common shareholders	$	2,314,246	46,562,955	$	0.05
Effect of dilutive securities:
Warrants			-
Diluted EPS income available to common shareholders	$	2,314,246	46,562,955	$	0.05

16.	Capital Commitments

As of December 31, 2010, the Company had contractual commitments of $6,921,421 (June 30, 2010: $4,556,039) for interest relating to its short-term and long-term loans and share capital injection commitment related to Shanghai Blessford.

17.	Impairment

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

The recent decline in our market capitalization and stock price has triggered an impairment test under ASC 360 for the six months ended December 31, 2010 and no impairment charges were recognized for the relevant period. As of December 31, 2010, the Company expects these assets to be fully recoverable based on the result of the impairment test. Goodwill amounting to $99,999 as at December 31, 2010 was considered immaterial and not tested for impairment in accordance with ASC 350.

18.	Recent Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (“FASB”) issued guidance now codified as ASC 810, “Amendments to FASB Interpretation No. 46(R)” (“ASC 810”), which amends FASB Interpretation No. 46 (revised December 2003), now codified as ASC 810-10, to address the elimination of the concept of a qualifying special purpose entity. ASC 810 also replaces the quantitative-based risks and rewards calculation for determining which enterprise has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity and the obligation to absorb losses of the entity or the right to receive benefits from the entity. Additionally, ASC 810 provides more timely and useful information about an enterprise’s involvement with a variable interest entity. The adoption of this standard did not have an impact on the Company’s financial position or results of operations.

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

In October 2009, the FASB issued ASU No. 2009-13 on ASC 605, “Revenue Recognition” (“ASC 605”), regarding multiple-deliverable revenue arrangements. This ASU provides amendments to the existing criteria for separating consideration in multiple-deliverable arrangements. The amendments establish a selling price hierarchy for determining the selling price of a deliverable, eliminate the residual method of allocation of arrangement consideration to all deliverables and require the use of the relative selling price method in allocation of arrangement consideration to all deliverables, require the determination of the best estimate of a selling price in a consistent manner, and significantly expand the disclosures related to the multiple-deliverable revenue arrangements. The adoption of this standard did not have an impact on the Company’s financial position or results of operations.

In October 2009, the FASB issued ASU No. 2009-15, “Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing” (“ASU 2009-15”). ASU 2009-15 amends ASC 470, “Debt with Conversion and Other Options” (“ASC 470”), and ASC 260, “Earnings Per Share” (“ASC 260”). Specifically, ASU 2009-15 requires companies to mark stock loan agreements at fair value and recognize the cost of the agreements by reducing the amount of additional paid-in capital on their financial statements. The adoption of this standard did not have an impact on the Company’s financial position or results of operations.

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

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

ITEM 2.

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

Special Note Regarding Forward Looking Statements

In addition to historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We use words such as “believe,” “expect,” “anticipate,” “project,” “target,” “plan,” “optimistic,” “intend,” “aim,” “will” or similar expressions which are intended to identify forward-looking statements. Such statements include, among others, those concerning market and industry segment growth and demand and acceptance of new and existing products; any projections of sales, earnings, revenue, margins or other financial items; any statements of the plans, strategies and objectives of management for future operations; and any statements regarding future economic conditions or performance, as well as all assumptions, expectations, predictions, intentions or beliefs about future events. You are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, as well as assumptions, which, if they were to ever materialize or prove incorrect, could cause the results of the Company to differ materially from those expressed or implied by such forward-looking statements. Potential risks and uncertainties include, among other things, factors such as: plans to expand our exports outside of China; plans to increase our production capacity and the anticipated dates that such facilities may commence operations; our ability to obtain additional funding for our continuing operations and to fund our expansion; our ability to meet our financial projections for any financial year; our ability to retain our key executives and to hire additional senior management; continued growth of the Chinese economy and industries demanding our products; our ability to secure at acceptable prices the raw materials we need to produce our products; political changes in China that may impact our ability to produce and sell our products in our target markets; general business conditions and competitive factors, including pricing pressures and product development; and changes in our relationships with customers and suppliers. You should carefully review the risk factors described in other documents we file from time to time with the U.S. Securities and Exchange Commission, including our Annual Report on Form 10-K for our fiscal year ended June 30, 2010.

The following discussion should be read in conjunction with our unaudited consolidated financial statements and the related notes that appear in Part I, Item 1, “Financial Statements,” of this quarterly report. Our unaudited consolidated financial statements are stated in United States Dollars and are prepared in accordance with United States Generally Accepted Accounting Principles. The following discussion and analysis covers the Company’s consolidated financial condition at December 31, 2010 (unaudited) and June 30, 2010, the end of its prior fiscal year, and its unaudited consolidated results of operation for the three months ended December 31, 2010 and 2009.

Use of Terms

Except as otherwise indicated by the context, all references in this report to:

“CPSL,” “Company,” “Group,” “we,” “us” or “our” are to China Precision Steel, Inc., a Delaware corporation, and its direct and indirect subsidiaries;

“PSHL” are to our subsidiary Partner Success Holdings Limited, a BVI company;

“Blessford International” are to our subsidiary Blessford International Limited, a BVI company;

“Shanghai Blessford” are to our subsidiary Shanghai Blessford Alloy Company Limited, a PRC company;

“Chengtong” are to our subsidiary Shanghai Chengtong Precision Strip Company Limited, a PRC company;

“Tuorong” are to our subsidiary Shanghai Tuorong Precision Strip Company Limited, a PRC company;

“China” and “PRC” are to the People’s Republic of China;

“BVI” are to the British Virgin Islands;

“SEC” are to the United States Securities and Exchange Commission;

“Securities Act” are to the Securities Act of 1933, as amended;

“Exchange Act” are to the Securities Exchange Act of 1934, as amended;

“RMB” are to Renminbi, the legal currency of China; and

“U.S. dollar,” “USD,” “US$” and “$” are to the legal currency of the United States.

Overview of our Business

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

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

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

Second Quarter Financial Performance Highlights

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

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

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

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

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

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

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

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

Fully diluted Income per share: Fully diluted income per share was $0.00 for the second quarter compared to $0.06 last year.

Results of Operations

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

Comparison of Three and Six Months Ended December 31, 2010 and 2009

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

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

Sales by Product Line

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

Three Months Ended December 31,

2010

2009