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EX-31.1 - Fushi Copperweld, Inc.v165284_ex31-1.htm
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EX-32.1 - Fushi Copperweld, Inc.v165284_ex32-1.htm
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     September 30, 2009

or

o 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:  0-19276

FUSHI COPPERWELD, INC.
(Exact name of registrant as specified in its charter)
 
 Nevada
 13-3140715
 (State or other jurisdiction of incorporation or
organization)
 (I.R.S. Employer Identification No.)   
 
1 Shuang Qiang Road, Jinzhou
Dalian, People’s Republic of China 116100
 
(Address of principal executive offices) (Zip Code)

(011)-86-411-8770-3333
(Registrant’s telephone number, including area code)
 
______________________________________________________________________
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check 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 o

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 o No o

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

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

As of November 6, 2009 the registrant had 29,715,294 shares of common stock outstanding.

 
 

 

 TABLE OF CONTENTS

PAGE
PART I. FINANCIAL INFORMATION  
     
Item 1. Financial Statements
 
     
 
Consolidated Balance Sheets as of September 30, 2009 (Unaudited) and December 31, 2008
1
     
 
Consolidated Statements of Income and Other Comprehensive Income for the Three and Nine Months Ended September 30, 2009 and 2008 (Unaudited)
2
     
 
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2009 and 2008 (Unaudited)
3
     
 
Consolidated Statement of Stockholders’ Equity for the Nine Months Ended September 30, 2009 (Unaudited) and the Year Ended December 31, 2008
4
     
 
Notes to Consolidated Financial Statements
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
49 
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk
68
     
Item 4. Controls and Procedures
69
     
PART II. OTHER INFORMATION
 
     
Item 1. Legal Proceedings
70
     
Item 1A. Risk Factors
71
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
71
     
Item 3. Defaults Upon Revolving Line of Credit
71
   
Item 4. Submission of Matters to a Vote of Security Holders
72
     
Item 5. Other Information
72
     
Item 6. Exhibits
72
     
Signatures
72
 
 
 

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements


CONSOLIDATED  BALANCE SHEETS
AS OF SEPTEMBER 30, 2009 AND DECEMBER 31, 2008

   
September 30,
   
December 31,
 
   
2009
   
2008
 
   
Unaudited
       
ASSETS
             
CURRENT ASSETS:
           
Cash
  $ 60,009,611     $ 65,611,770  
Restricted cash
    -       1,000,000  
Accounts receivable, trade, net of allowance of bad debt of $1,181,365 and $318,529 as of September 30, 2009 and December 31, 2008, respectively
    69,052,683       49,782,548  
Inventories
    10,657,786       6,977,852  
Other receivables and prepaid expenses
    656,439       1,041,273  
Advances to suppliers
    5,164,959       20,261,585  
Deposit in derivative hedge
    1,000,000       1,000,000  
Prepaid taxes
    -       670,805  
Total current assets
    146,541,478       146,345,833  
                 
PLANT AND EQUIPMENT, net
    115,610,582       119,761,027  
                 
OTHER ASSETS:
               
Advances to suppliers, non-current
    5,862,776       4,022,879  
Notes receivables, non-current
    729,106       799,106  
Intangible assets, net of accumulated amortization
    12,042,501       12,406,920  
Deferred loan expense, net
    2,500,375       3,317,725  
Deferred tax assets
    11,057,111       7,804,027  
Total other assets
    32,191,869       28,350,657  
                 
Total assets
  $ 294,343,929     $ 294,457,517  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
                 
CURRENT LIABILITIES:
               
Revolver line of credit
  $ 3,988,509     $ 4,712,075  
Accounts payable, trade
    3,335,847       7,204,156  
Notes payable, current
    10,000,000       5,000,000  
Short-term bank loans
    -       17,588,400  
Other payables and accrued liabilities
    8,385,214       4,751,460  
Extinguished convertible note liabilities
    6,060,000       -  
Customer deposits
    297,533       542,540  
Taxes payable
    3,314,803       -  
Cross currency hedge payable
    1,071,557       104,324  
Obligation under capital lease, current
    68,976       -  
Loan from shareholder
    4,553,731       -  
Total current liabilities
    41,076,170       39,902,955  
                 
LONG-TERM LIABILITIES:
               
Notes payable, non-current
    25,000,000       40,000,000  
Obligation under capital lease, non-current
    174,046       -  
Fair value of derivative instrument
    7,652,664       4,377,076  
Total long-term liabilities
    32,826,710       44,377,076  
                 
Total liabilities
    73,902,880       84,280,031  
                 
COMMITMENTS AND CONTINGENCIES
            7,197,794  
                 
SHAREHOLDERS' EQUITY:
               
Preferred stock, $0.001 par value, 5,000,000 shares authorized, none issued or outstanding as of September 30, 2009 and December 31, 2008
    -       -  
Common stock, $0.006  par value, 100,000,000 shares authorized, September 30, 2009: 30,543,716 shares issued and 28,343,716 outstanding December 31, 2008: 27,499,034 shares issued and 27,399,034 outstanding
    170,063       164,395  
Restricted common stock in escrow
    13,200       600  
Additional paid in capital
    105,197,671       91,172,890  
Common stock subscription receivable
    (5,919,597 )     -  
Statutory reserves
    14,979,861       12,316,147  
Retained earnings
    88,450,844       78,613,158  
Accumulated other comprehensive income
    17,549,007       20,712,502  
Total shareholders' equity
    220,441,049       202,979,692  
                 
Total liabilities and shareholders' equity
  $ 294,343,929     $ 294,457,517  

 
The accompanying notes are an integral part of these consolidated statements.
 
 
- 1 -

 

FUSHI COPPERWELD, INC.  AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(UNAUDITED)

   
Three months ended September 30,
   
Nine months ended September 30,
 
   
2009
   
2008
   
2009
   
2008
 
                         
REVENUES
  $ 47,676,346     $ 63,823,927     $ 131,234,427     $ 180,369,083  
                                 
COST OF GOODS SOLD
    32,506,879       46,931,400       93,672,906       131,996,263  
                                 
GROSS PROFIT
    15,169,467       16,892,527       37,561,521       48,372,820  
                                 
OPERATING EXPENSES
                               
Selling expenses
    1,078,158       1,223,087       3,366,719       3,274,048  
General and administrative expenses
    3,510,034       3,418,704       9,747,637       11,335,948  
Total operating expenses
    4,588,192       4,641,791       13,114,356       14,609,996  
                                 
INCOME FROM OPERATIONS
    10,581,275       12,250,736       24,447,165       33,762,824  
                                 
OTHER INCOME (EXPENSE)
                               
                                 
Interest income
    76,094       176,830       242,717       529,651  
Interest expense
    (1,201,014 )     (1,800,738 )     (4,150,086 )     (7,386,274 )
(Loss) gain on derivative instrument
    (1,199,438 )     (32,482 )     (1,581,812 )     322,708  
Gain on convertible note extinguishment
    3,842,935       -       3,842,935       -  
Change in fair value of derivative liability - warrants
    -       -       (752,114 )     -  
Change in fair value of derivative liability - conversion option
    (2,058,352 )     -       (7,181,198 )     -  
Other income (expense)
    53,421       (71,653 )     (193,061 )     (179,655 )
Total other expense, net
    (486,354 )     (1,728,043 )     (9,772,619 )     (6,713,570 )
                                 
INCOME BEFORE INCOME TAXES
    10,094,921       10,522,693       14,674,546       27,049,254  
                                 
PROVISION FOR INCOME TAXES
    899,988       1,475,743       815,996       3,150,962  
                                 
NET INCOME
    9,194,933       9,046,950       13,858,550       23,898,292  
                                 
OTHER COMPREHENSIVE INCOME
                               
Unrealized gain on marketable securities
    -       -       -       22,301  
Foreign currency translation adjustment
    72,136       1,899,163       112,093       14,062,515  
Change in fair value of derivative instrument
    237,768       3,940,908       (3,275,588 )     3,209,403  
                                 
COMPREHENSIVE INCOME
  $ 9,504,837     $ 14,887,021     $ 10,695,055     $ 41,192,511  
                                 
EARNINGS PER SHARE:
                               
Basic
  $ 0.33     $ 0.33     $ 0.50     $ 0.88  
Diluted
  $ 0.31     $ 0.31     $ 0.48     $ 0.83  
                                 
WEIGHTED AVERAGE SHARES:
                               
Basic
    28,084,416       27,387,302       27,827,152       27,263,638  
Diluted
    29,206,508       28,446,786       28,676,832       28,601,237  
 
The accompanying notes are an integral part of these consolidated statements.
 
 
- 2 -

 

FUSHI COPPERWELD, INC.  AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(UNAUDITED)

   
2009
   
2008
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income
  $ 13,858,550     $ 23,898,292  
Adjustments to reconcile net income provided by (used in) operating activities:
               
Bad debt expense
    862,302       355,293  
Inventories write-off
    119,133       -  
Reserve for inventories
    62,914       401,646  
Depreciation
    7,191,842       4,728,235  
Loss on sale of property and equipment
    117,430       -  
Deferred taxes
    (3,253,085 )     (1,295,286 )
Amortization of intangible assets
    357,449       256,722  
Amortization of loan commission
    817,349       2,525,756  
Interest penalty
    -       710,544  
Amortization of stock compensation expense
    1,108,254       1,437,557  
Loss (gain) on derivative instrument
    1,581,812       (322,708 )
Gain on convertible note extinguishment
    (3,842,935 )     -  
Change in fair value of derivative liability - conversion option
    7,181,198       -  
Change in fair value of derivative liability - warrants
    752,114       -  
Investment loss on marketable securities
    -       16,158  
Change in operating assets and liabilities
               
Accounts receivable
    (20,177,587 )     (24,965,036 )
Inventories
    (3,756,514 )     (7,885,132 )
Other receivables and prepayments
    501,770       1,092,497  
Advances to suppliers – current
    15,073,210       (22,061,823 )
Accounts payable
    (3,839,555 )     2,521,359  
Other payables and accrued liabilities
    (2,863,124 )     (2,737,772 )
Customer deposits
    (250,861 )     528,731  
Taxes payable
    3,984,006       960,752  
Net cash provided by (used in) operating activities
    15,585,672       (19,834,215 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Proceeds from sale of marketable securities
    -       2,983,842  
Payments on derivative instrument
    (614,580 )     -  
Proceeds from derivative instrument
    -       973,556  
Deposit in derivative hedge
    -       (1,000,000 )
Purchase of land use right
    -       (1,687,468 )
Proceeds from sale of property and equipment
    424,444       -  
Purchases of property and equipment
    (3,292,007 )     (15,540,210 )
Net of refund and (payments) on prepayment of equipment
    (1,877,177 )     (3,148,802 )
Net cash used in investing activities
    (5,359,320 )     (17,419,082 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Release of restricted cash
    1,000,000       -  
Net (payments) borrowings on revolver line of credit
    (723,566 )     2,279,289  
Proceeds from short-term bank loans
    -       16,908,000  
Proceeds from shareholder loan
    4,552,000       -  
Payments on short-term bank loans
    (17,553,600 )     (17,268,032 )
Payment on capital lease obligation
    (23,575 )     -  
Payment of high yield notes payable
    (5,000,000 )     -  
Proceeds from exercise of stock warrants
    -       139,394  
Proceeds on issuance of common stock and warrants
    1,920,000       -  
Net cash (used in) provided by financing activities
    (15,828,741 )     2,058,651  
                 
EFFECT OF EXCHANGE RATE ON CASH
    230       5,323,298  
                 
DECREASE IN CASH
    (5,602,159 )     (29,871,348 )
                 
CASH, beginning of period
    65,611,770       79,914,758  
                 
CASH, end of period
  $ 60,009,611     $ 50,043,410  
                 
Supplemental cash flow disclosures:
               
Interest paid
  $ 3,650,785     $ 5,895,129  
Income tax paid
  $ 3,609,505     $ 2,907,756  
 
The accompanying notes are an integral part of these consolidated statements.
 
 
- 3 -

 

 
FUSHI COPPERWELD, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

   
Common stock
                                     
   
Shares outstanding
   
Shares In escrow
   
Additional
   
Common stock
   
Retained earnings
   
Accumulated
       
   
Number
   
Par
   
Number
   
Par
   
paid in
   
subscription
   
Statutory
   
Unrestricted
   
comprehensive
       
   
of shares
   
value
   
of shares
   
value
   
capital
   
receivable
   
reserves
   
earnings
   
income (loss)
   
Totals
 
                                                             
BALANCE, December 31, 2007
    25,211,304     $ 151,268       100,000     $ 600     $ 77,665,064     $       $ 8,321,726     $ 54,133,070     $ 4,015,930     $ 144,287,658  
                                                                                 
CB transfer to common stock @$7.00
    2,142,857       12,857                       14,987,143                                       15,000,000  
Adjustment to shares outstanding
    4,851       29                       (29 )                                     -  
Exercise of warrants for cash @ $3.11
    44,873       270                       139,124                                       139,394  
Stock compensation expense
                                    1,437,557                                       1,437,557  
Net income
                                                            23,898,292               23,898,292  
Allocation of APIC due to Kuhn's litigation
                                    (3,487,250 )                                     (3,487,250 )
Adjustment to statutory reserve
                                                    3,254,932       (3,254,932 )             -  
Change in fair value of derivative instrument
                                                                    3,209,403       3,209,403  
Foreign currency translation gain
                                                                    14,062,515       14,062,515  
Reverse unrealized loss on marketable securities
                                                                    22,301       22,301  
                                                                                 
BALANCE, September 30, 2008 (unaudited)
    27,403,885       164,424       100,000       600       90,741,609       -       11,576,658       74,776,430       21,310,149       198,569,870  
                                                                                 
Adjustment to shares outstanding
    (4,851 )     (29 )                     29                                       -  
Stock compensation expense
                                    431,252                                       431,252  
Net income
                                                            4,576,217               4,576,217  
Adjustments to statutory reserve 
                                                    739,489       (739,489 )             -  
Change in fair value of derivative instrument
                                                                    928,917       928,917  
Foreign currency translation loss
                                                                    (1,526,564 )     (1,526,564 )
                                                                                 
BALANCE, December 31, 2008, as previously reported
    27,399,034       164,395       100,000       600       91,172,890       -       12,316,147       78,613,158       20,712,502       202,979,692  
                                                                                 
Cumulative effect of reclassification of conversion option
                                                            (1,357,150 )             (1,357,150 )
BALANCE, January 1, 2009, as adjusted (unaudited)
    27,399,034       164,395       100,000       600       91,172,890       -       12,316,147       77,256,008       20,712,502       201,622,542  
                                                                                 
Shares issued for cash @ $4.80
    400,000       2,400                       1,706,157                                       1,708,557  
Shares issued for convertible note extinguishment @ $9.80
    440,529       2,643                       3,997,357                                       4,000,000  
Shares placed in escrow (subscription receivable)
                    2,200,000       13,200       6,249,481       (6,262,681 )                             -  
Shares removed from escrow as payment of liability
    100,000       600       (100,000 )     (600 )             343,084                               343,084  
Reclassification of derivative liability-warrant to equity
                                    963,557                                       963,557  
Exercise of stock option
    4,153       25                       (25 )                                     -  
Stock compensation expense
                                    1,108,254                                       1,108,254  
Net income
                                                            13,858,550               13,858,550  
Adjustment to statutory reserve
                                                    2,663,714       (2,663,714 )             -  
Change in fair value of derivative instrument
                                                                    (3,275,588 )     (3,275,588 )
Foreign currency translation gain
                                                                    112,093       112,093  
                                                                                 
BALANCE, September 30, 2009 (unaudited)
    28,343,716     $ 170,063       2,200,000     $ 13,200     $ 105,197,671     $ (5,919,597 )   $ 14,979,861     $ 88,450,844     $ 17,549,007     $ 220,441,049  
 
The accompanying notes are an integral part of these consolidated statements.
 
 
- 4 -

 
 
FUSHI COPPERWELD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER 30, 2009
(Unaudited)

Note 1 - Organization and Line of Business

Fushi Copperweld, Inc, a Nevada corporation (“Fushi”), is the holding company of Fushi Holdings, Inc., (“Fushi Holdings”) incorporated in the state of Delaware, which is a holding company for Dalian Fushi International Bimetallic Cable Co., Ltd (“Fushi International”) organized under the laws of the People's Republic of China (“PRC”).  Dalian Fushi Bimetallic Manufacturing Co., Ltd (“Dalian Fushi”) is a variable interest entity through a contractual relationship (Note 2). Dalian Fushi is a limited liability company organized under the laws of the PRC, which is engaged in the manufacturing and sale of bimetallic wire products.

Fushi acquired Copperweld Bimetallics Holdings, LLC, a North Carolina limited liability company and the holder of the partnership interest in Copperweld Bimetallics, LLC, (“Copperweld”) a limited liability company registered in the state of Delaware and the parent of Copperweld Bimetallics UK, Ltd. ("Copperweld UK"), a private company registered in the United Kingdom and Copperweld International Holdings, LLC a North Carolina limited liability company.  Copperweld is a bimetallic sales and manufacturing operation headquartered in Fayetteville, Tennessee. Copperweld UK is a manufacturing, distribution and customer service facility located in Telford, England. Copperweld International Holdings, LLC was a non-operating company that held partnership interests in a company located in Tongling, PRC at December 31, 2007.  Those interests were liquidated in an agreement entered into by Copperweld and its subsidiaries, affiliates and International Manufacturing Equipment Sales, Inc. on January 16, 2008. Additionally, Fushi acquired International Manufacturing Equipment Sales, LLC, a shell company that was, at the time of purchase, a non-affiliated but commonly owned limited liability company.

Three of the companies acquired on October 29, 2007 were dissolved in 2008:

1. Copperweld Holdings, LLC, a North Carolina limited liability company. This company had no liabilities and its only asset was the ownership of Copperweld Bimetallics, LLC, which the ownership rights were transferred to Fushi Copperweld, Inc. on October 29, 2007.

2. Copperweld Bimetallics International Holdings, LLC, a Delaware limited liability company was established to hold the partnership interest in the Tongling joint venture which has been dissolved.  This company was a shell company with no assets or liabilities at the time the joint venture was dissolved.

3. International Manufacturing Equipment Suppliers, LLC, a North Carolina limited liability company.  This company was not an affiliate of the Copperweld companies. This company was formed by the prior owner of Copperweld Bimetallics to facilitate the transfer of equipment to the Tongling joint venture.  As noted above, the Tongling joint venture has been dissolved.  This company had no assets or liabilities at the time of the dissolution.

 
- 5 -

 

FUSHI COPPERWELD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER 30, 2009
(Unaudited)

Fushi, Fushi Holdings, Fushi International, Dalian Fushi, Copperweld and Copperweld UK are hereinafter referred to as “the Company”.
 
The Company is in the business of developing, designing, manufacturing, marketing and distributing bimetallic wire products, principally copper-clad aluminum and copper-clad steel. The Company's products are primarily focused on serving end-user applications in the telecommunication, electrical utility, and transportation markets. The Company’s products are sold in North America, Europe, North Africa, the Middle East, and the PRC.

Note 2 - Summary of Significant Accounting Policies

Management has included all adjustments, consisting only of normal recurring adjustments, considered necessary to give a fair presentation of operating results for the periods presented. Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with information included in the 2008 annual report filed on Form 10-K.

Principles of consolidation

The accompanying consolidated financial statements include the financial statements of Fushi and its wholly owned subsidiaries, Fushi Holdings, Fushi International, Copperweld, Copperweld UK and its 100% variable interest entity Dalian Fushi. All significant inter-company transactions and balances have been eliminated in consolidation.

In accordance with the interpretation of Generally Accepted Accounting Principles (GAAP), variable interest entities (VIEs) are generally entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders lack adequate decision making ability.  All VIEs with which the Company is involved must be evaluated to determine the primary beneficiary of the risks and rewards of the VIE. The primary beneficiary is required to consolidate the VIE for financial reporting purposes.

Fushi International owns 0% of Dalian Fushi; however, pursuant to the Entrusted Management Agreement, Voting Proxy Agreement and the Share Pledge Agreement (collectively, “Restructuring Agreements”) reached by Fushi International, Dalian Fushi and its registered shareholders in 2005, Fushi International has full control over Dalian Fushi’s remaining operations and financial affairs as a result. Fushi International is the primary beneficiary of Dalian Fushi, thus Dalian Fushi is a 100% VIE of Fushi International, which means 100% Voting Rights and 100% Financial Obligation to Fushi International. Thus Dalian Fushi is considered a Variable Interest Entity (“VIE”) and is consolidated within the financial statements.

 
- 6 -

 

FUSHI COPPERWELD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER 30, 2009
(Unaudited)

Use of estimates
 
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. For example, the Company estimates the fair value of its derivative instrument. Actual results could differ from those estimates.

Revenue recognition
 
Sales revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are recorded as customer deposits.

Shipping and handling costs

Shipping and handling costs related to costs of goods sold are included in selling costs which totaled $562,051 and $530,891 for the three months ended September 30, 2009 and 2008, respectively, and $1,547,274 and $1,585,406 for the nine months ended September 30, 2009 and 2008, respectively.

Foreign currency translation and other comprehensive income

The reporting and functional currency of the Company is the US dollar. The subsidiaries Fushi International, VIE Dalian Fushi and Beijing Office use the local currency Renminbi (RMB) to conduct business. Copperweld UK conducts business in British Pounds.

For the subsidiaries whose functional currencies are other than the US dollar, all assets and liabilities accounts were translated at the exchange rate on the balance sheet date; stockholder's equity is translated at the historical rates and items in the consolidated statements of operations and consolidated cash flow statements are translated at the average rate in each applicable period. Translation adjustments resulting from this process are included in accumulated other comprehensive income in the consolidated statement of shareholders’ equity. The resulting translation gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.

The consolidated balance sheet amounts with the exception of equity at September 30, 2009, were translated at 6.826 RMB and £0.625 to $1.00, respectively. The consolidated balance sheet amounts with the exception of equity at December 31, 2008, were translated at 6.823 RMB and £0.684 to $1.00. The average translation rates applied to the consolidated income and cash flow statement amounts for nine months ended September 30, 2009, were 6.832 RMB and £0.648 to $1.00, respectively.
 
Cash flows from the Company's operations is calculated based upon the local currencies. As a result, amounts related to assets and liabilities reported on the consolidated statements of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheets.

 
- 7 -

 

FUSHI COPPERWELD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER 30, 2009
(Unaudited)

Cash and concentration of risk

The Company considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents, for cash flow statement purposes. Cash includes cash on hand and demand deposits in accounts maintained with state owned banks within the PRC and with banks in the United Kingdom (“UK”) and the USA.

Certain financial instruments, which subject the Company to concentration of credit risk, consist of cash. The Company maintains balances at financial institutions which, from time to time, may exceed deposit insurance limits for the banks located in the United States and UK. Balances at financial institutions or state owned banks within the PRC are not covered by insurance. As of September 30, 2009, the Company had deposits in excess of federally insured limits totaling $59,368,494. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant risks on its cash in bank accounts.

Parts of the Company’s operations are carried out in the PRC and UK. Accordingly, the Company's business, financial condition and results of operations may be influenced by the political, economic and legal environments in the two countries, and by the general state of the two countries' economy. The Company's operations in the two countries are subject to specific considerations and significant risks not typically associated with companies in North America. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. The Company's results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

Restricted cash

Restricted cash consists of monies placed in escrow for the Kuhns lawsuit settlement. On May 21, 2009, the Company delivered $1,000,000 plus accrued interest (the “Escrow Payment”) as partial payment to reduce the settlement liability owed to Kuhns pursuant to the Settlement Agreement signed on May 19, 2009. See Note 18 for details.

Additional product sales information
 
The Company has expanded its geographic sales area from the Chinese domestic market to the international market. The following chart shows that sales were spread across international markets during the nine months ended September 30, 2009 and 2008 as follows:

   
September 30,
2009
   
September 30,
2008
 
   
(Unaudited)
   
(Unaudited)
 
China
  $ 103,028,466     $ 125,585,203  
USA
    21,692,506       38,650,665  
Europe
    3,357,305       8,177,409  
Other countries
    3,156,150       7,955,806  
Total sales
  $ 131,234,427     $ 180,369,083  

 
- 8 -

 

FUSHI COPPERWELD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER 30, 2009
(Unaudited)

The following chart shows that sales were spread across international markets during the three months ended September 30, 2009 and 2008 as follows:

   
September 30,
2009
   
September 30,
2008
 
   
(Unaudited)
   
(Unaudited)
 
China
  $ 38,817,579     $ 45,725,853  
USA
    6,758,832       12,705,837  
Europe
    1,414,149       2,305,901  
Other countries
    685,786       3,086,336  
Total sales
  $ 47,676,346     $ 63,823,927  

Major customers and suppliers

Ten major customers accounted for 27% and 19% of sales for the nine months ended September 30, 2009 and 2008, respectively, and 27% and 17% of net sales for the three months ended September 30, 2009 and 2008, respectively. Total receivable balance due from the top ten customers at September 30, 2009 and December 31, 2008 amounted to $19,803,794 and $11,838,214, respectively.

Five major suppliers provided approximately 72% and 63% of the Company’s raw materials for the nine months ended September 30, 2009 and 2008, respectively, and 52% and 63% of the Company’s raw materials for the three months ended September 30, 2009 and 2008, respectively. At September 30, 2009, advances to the Company’s major five suppliers were $1,261,067, all of which was current. At December 31, 2008, advances to the Company’s major five suppliers were $20,111,644, all of which was current.

Accounts receivables

During the normal course of business, the Company extends unsecured credit to its customers. Management regularly reviews aging of receivables and changes in payment trends by its customers, and records a reserve when they believe collection of amounts due are at risk. Accounts considered uncollectible are written off through a charge to the valuation allowance. As of September 30, 2009 and December 31, 2008, management concluded its allowance for bad debts was sufficient.

Inventories
 
Inventories are stated at the lower of cost or market using a weighted average method. Inventories consist of raw materials, work in process, finished goods and packing materials. Raw materials consist of copper, aluminum and steel used in production. The cost of finished goods includes direct costs of raw materials as well as direct labor used in production. Indirect production costs such as utilities and indirect labor related to production such as assembling, shipping and handling for raw material costs are also included in the cost of inventories.

 
- 9 -

 

FUSHI COPPERWELD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER 30, 2009
(Unaudited)

The Company reviews its inventories regularly for possible obsolete goods and establishes reserves when determined necessary.

Derivative instrument

Effective January 1, 2009, the Company began disclosing qualitative disclosures about objectives and strategies for using derivatives and quantitative disclosures about the fair value of and gains and losses on derivative instruments. The Company uses a cross currency hedge, a derivative financial instrument, to hedge the risk of rising interest rates on its variable interest rate debt. This type of derivative financial instrument is known as a cash flow hedge. The Company accounts for this interest rate swap at fair value for hedge accounting treatment. The above derivative qualifies for hedge accounting, changes in the fair value effective portion is reported in accumulated other comprehensive income, net of related income tax effects. Amounts included in accumulated other comprehensive income are reclassified into earnings when the hedged transaction affects earnings.

At the inception of the transaction, the Company documented the relationship between hedging instruments and hedged items, as well as its risk management objective and the strategy for undertaking various hedge transactions. This process includes linking all derivatives designated to specific firm commitments of forecast transactions. The Company also documents its assessment, both at inception and on an ongoing basis, of whether the derivative financial instruments that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. Any portion deemed ineffective is recorded in earnings with the effective portion reflected in accumulated other comprehensive. Changes in the fair values of derivative financial instruments accounted for as cash flow hedges to the extent they qualify for hedge accounting, are recorded in accumulated other comprehensive income. See Note 12 for additional information related to the instrument.

Financial instruments

The Company analyzes all financial instruments with features of both liabilities and equity under GAAP requirements. The convertible note issued in 2007 did not require bifurcation or result in liability accounting. However, with the adoption of amended GAAP requirements in first quarter of 2009, the embedded conversion feature was bifurcated from its host instrument and accounted for separately as a derivative liability. Additionally, the Company analyzes registration rights agreements associated with any equity instruments issued to determine if penalties triggered for late filing should be accrued.

 
- 10 -

 

FUSHI COPPERWELD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER 30, 2009
(Unaudited)

The Company adopted Fair Value Measurements on January 1, 2008 which defines fair value and establishes a three-level valuation hierarchy for disclosures of fair value measurement. Receivables, payables, notes, loans, and derivatives all meet the definition of financial instruments. The carrying amounts reported in the balance sheets for accounts receivable, notes receivable, accounts payable, other payables, and short term bank loans qualify as financial instruments are a reasonable estimate of fair value because of the short period of time between the origination and their expected realization and, if applicable, the stated interest rate is equivalent to interest rates currently available.  The three levels are defined as follows:

 
·
Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
 
·
Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.
 
·
Level 3 inputs to the valuation methodology are unobservable and significant to the fair value.

Other than as listed below, the Company did not identify any assets or liabilities that are required to be presented on the balance sheet at fair value.

During 2007, the Company borrowed $40,000,000 in the form of a high yield debenture note with a floating rate. As of September 30, 2009, the outstanding principal of the high yield debenture note amounted to $35,000,000. The Company used Level 3 inputs for its valuation methodology for the notes payable, and their fair values are determined using cash flows discounted at relevant market interest rates in effect at the period close since there is no observable market price.

As of September 30, 2009, the Company had a derivative instrument with a carrying value of approximately $7.7 million. The Management calculated the fair value of the derivative instrument using Level 3 inputs since there is no observable market price.

   
Carrying Value
September 30,
2009
(Unaudited)
 
Fair Value Measurements
September 30, 2009
Using Fair Value Hierarchy
(Unaudited)
 
       
Level 1
 
Level 2
 
Level 3
 
Derivative instrument
  $ 7,652,664           $ 7,652,664  

Derivative liability

Using the criteria under GAAP, a contract is designated as an asset or a liability and is carried at fair value on a company’s balance sheet, with any changes in fair value recorded in a company’s results of operations.  The Company then determines which options, warrants and embedded features require liability accounting and records the fair value as a derivative liability. The changes in the values of these instruments are shown in the accompanying consolidated statements of income and other comprehensive income as “change in fair value of derivative liability – warrants or conversion option and change in fair value of derivative instrument.”

 
- 11 -

 

FUSHI COPPERWELD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER 30, 2009
(Unaudited)

Prior to January 1, 2009, the conversion option embedded in the Company’s $5,000,000 convertible notes was not separately accounted for as a derivative instrument liability.  However, effective January 1, 2009, the conversion option met the criteria of a derivative instrument liability because it required that the conversion price be adjusted in certain circumstances that do not meet the “fixed-for-fixed’ criteria in that issue.  As a result, the Company is now required to separately account for the embedded conversion option as a derivative instrument liability, carried at fair value and marked-to-market each period, with changes in the fair value each period charged or credited to income.

The cumulative effect of this change in accounting principle of $1,357,150 has been recognized as a reduction of the opening balance of Retained Earnings as January 1, 2009.  That cumulative effect adjustment is the difference between the amounts previously recognized in the Company’s consolidated balance sheet as of December 31, 2008 and the amounts that would have been recognized if the Convertible Notes had been accounted for as a derivative instrument liability from the issuance date.

For the nine months ended September 30, 2009 and 2008, the Company recognized a loss in the change in fair value of derivative liability – conversion option in the amounts of $7,181,198 and $0, respectively. For the three months ended September 30, 2009 and 2008, the Company recognized a loss in the change in fair value of derivative liability – conversion option in the amounts of $2,058,352 and $0, respectively.

For the nine months ended September 30, 2009 and 2008, the Company recognized a loss in the change in fair value of derivative liability – warrants in the amounts of $752,114 and $0, respectively. For the three months ended September 30, 2009 and 2008, the Company recognized a loss in the change in fair value of derivative liability – warrants in the amounts of $0 and $0, respectively.

Stock-based compensation

The Company records and reports stock-based compensation by measuring the cost of services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is recognized over the period during which services are received. Stock compensation for stock granted to non-employees is determined as the fair value of the consideration received or the fair value of equity instruments issued, whichever is more reliably measured.

Plant and equipment, net
 
Plant and equipment are stated at cost. When the asset property and equipment is retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation of property and equipment is provided using the straight-line method for substantially all assets with estimated lives as follows:

 
Estimated Useful Life
Buildings
20-39.5 years
Machinery and equipment
7-15 years
Other equipment
3-5 years
Transportation equipment
3-5 years

 
- 12 -

 

FUSHI COPPERWELD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER 30, 2009
(Unaudited)

Construction in progress represents the costs incurred in connection with the construction of buildings or new additions to the Company’s plant facilities. Costs classified to construction in progress include all cost of obtaining the asset and bringing it to the location and condition necessary for its intended use. No depreciation is provided for construction in progress until such time as the assets are completed and are placed into service. Interest incurred during construction is capitalized into construction in progress. All other interest is expensed as incurred.  Total interest capitalized for the nine months ended September 30, 2009 and 2008 amounted to $1,350 and $67,976, respectively. Total interest capitalized for the three months ended September 30, 2009 and 2008 was $0 and $5,164, respectively.

If a cost does not extend an assets useful life, increase its productivity, improve its operating efficiency or add additional production capacity, the cost is regarded as repairs and maintenance and recognized as an expense as incurred; if it does, the cost is regarded as major renewals and betterments and capitalized.  For the nine and three months ended September 30, 2009 and 2008, there were no amounts expended for major renewals and betterments that were capitalized.

Repairs and maintenance expense for the nine months ended September 30, 2009 and 2008, amounted to $391,809 and $707,564, respectively, and the three months ended September 30, 2009 and 2008 amounted to $66,696 and $192,792, respectively.

Long-lived assets

The Company evaluates the carrying value of long-lived assets each reporting. When estimated cash flows generated by those assets are less than the carrying amounts of the asset, the Company recognizes an impairment loss. Based on its review, the Company believes that, as of September 30, 2009 and December 31, 2008, there were no impairments of its long-lived assets.

Intangible assets

Land use rights – land in the People’s Republic of China is government owned. However, the government grants “land use rights." The Company amortizes land use rights on a straight line basis over the 50 year life.

Patents – Patents are stated at cost, less accumulated amortization. The Company amortizes patents on a straight line basis over 7-15 years.

The Company evaluates intangible assets for impairment, at least annually and more often whenever events or changes in circumstances indicate that the carrying value may not be recoverable from its estimated future cash flows. Recoverability of intangible assets, other long-lived assets, and goodwill is measured by comparing their net book value to the related projected undiscounted cash flows from these assets, considering a number of factors including past operating results, budgets, economic projections, market trends and product development cycles. If the net book value of the asset exceeds the related undiscounted cash flows, the asset is considered impaired, and a second test is performed to measure the amount of impairment loss. Based on its review, the Company believes that, as of September 30, 2009 and December 31, 2008, there was no impairment of intangible assets.

 
- 13 -

 

FUSHI COPPERWELD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER 30, 2009
(Unaudited)

Research and development

Research and development expenses include salaries, consultant fees, supplies and materials, as well as costs related to other overhead such as facilities, utilities and other departmental expenses. The costs the Company incurs with respect to internally developed technology and engineering services are included in research and development expenses as incurred as they do not directly relate to any particular licensee, license agreement or license fees.

Research and development costs are recorded in general and administrative expenses. Research and development costs were $138,155 and $271,930 for the nine months ended September 30, 2009 and 2008, respectively, and $30,454 and $116,890 for the three months ended September 30, 2009 and 2008, respectively.

Earnings per share

The Company reports earnings per share and present both basic and diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings per share. Basic earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock using the treasury method. For the nine and three months ended September 30, 2009 and 2008, the Company properly excluded options, warrants and convertible notes with anti-dilutive effects from the diluted earnings per share calculation.

Income taxes

The provision for income taxes consists of taxes currently due plus deferred taxes. The recognition of deferred income tax liabilities and assets for the estimated future tax effects is attributable to temporary differences and operating loss and tax credit carryforwards. Deferred tax liability or asset attributable to temporary differences is accounted for using the balance sheet liability method in respect of temporary differences between income tax basis and financial reporting basis of assets and liabilities. Deferred tax expense or benefit is the change during the year in deferred tax liabilities and assets.  Deferred taxes are determined separately for each tax-paying component (an individual entity or group of entities that is consolidated for tax purposes) in each tax jurisdiction. Deferred tax liability or asset is calculated at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it is related to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis. Deferred tax assets are reduced by a valuation allowance   if, based on the weight of available evidence, it is more likely than not (a likelihood of more than 50 percent) that some portion or all of the deferred tax assets will not be realized.

 
- 14 -

 

FUSHI COPPERWELD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER 30, 2009
(Unaudited)

The evaluation of a tax position is a two-step process. The first step is to determine whether it is more-likely-than-not that a tax position will be sustained upon examination, including the resolution of any related appeals or litigation based on the technical merits of that position. The second step is to measure a tax position that meets the more-likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first subsequent financial reporting period in which the threshold is no longer met. GAAP also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosures and transition.

Value-added tax

Sales revenue represents the invoiced value of goods, net of a value-added tax (“VAT”). All of the Company’s products that are produced and sold in the PRC are subject to a Chinese VAT at a rate of 17% of the gross sales price. All of the Company’s products that are manufactured and sold in the UK are subject to a UK VAT at a rate of 15% of the gross sales price. This VAT may be offset by VAT paid by the Company on raw materials and other materials included in the cost of producing their finished product. The Company recorded VAT payable and VAT receivable net of payments in the consolidated financial statements. The VAT tax return is filed offsetting the payables against the receivables.

Segment Reporting

The Company uses a “management approach” model for segment reporting. The management approach model is based on the way a company’s management organizes segments within the company for making operating decisions and assessing performance. The Company has determined that it has two reportable segments, China and U.S. (See Note 19).

 
- 15 -

 

FUSHI COPPERWELD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER 30, 2009
(Unaudited)

Recently issued accounting pronouncements

In December 2007, the FASB issued revised business combinations guidance. The revised guidance retains the fundamental requirements of the previous guidance in that the acquisition method of accounting be used for all business combinations, that an acquirer be identified for each business combination and for goodwill to be recognized and measured as a residual. The revised guidance expands the definition of transactions and events that qualify as business combinations to all transactions and other events in which one entity obtains control over one or more other businesses. The revised guidance broadens the fair value measurement and recognition of assets acquired, liabilities assumed and interests transferred as a result of business combinations..The guidance 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. The Company has adopted the guidance and believes that if the Company consummated a business combination transaction, the Company’s adoption of the guidance would have a material impact on the consolidated financial statements.

In January 2009, the FASB issued an accounting standard which amended the impairment model by removing its exclusive reliance on “market participant” estimates of future cash flows used in determining fair value. Changing the cash flows used to analyze other-than-temporary impairment from the “market participant” view to a holder’s estimate of whether there has been a “probable” adverse change in estimated cash flows allows companies to apply reasonable judgment in assessing whether an other-than-temporary impairment has occurred. The adoption of this accounting standard did not have a material impact on the Company’s consolidated financial statements because all of the investments in debt securities are classified as trading securities.

In April 2009, the FASB issued authoritative guidance related to the determination of fair value when the volume and level of activity for an asset or liability has significantly decreased, the identification of transactions that are not orderly, the recognition and presentation of other-than-temporary impairments, and the disclosure of the fair value of financial instruments on an interim basis. The adoption of the guidance did not have a material impact on the Company’s consolidated financial statements.

In April 2009, the FASB issued an accounting standard to make the other-than-temporary impairments guidance more operational and to improve the presentation of other-than-temporary impairments in the financial statements. This standard will replace the existing requirement that the entity’s management assert it has both the intent and ability to hold an impaired debt security until recovery with a requirement that management assert it does not have the intent to sell the security, and it is more likely than not it will not have to sell the security before recovery of its cost basis. This standard provides increased disclosure about the credit and noncredit components of impaired debt securities that are not expected to be sold and also requires increased and more frequent disclosures regarding expected cash flows, credit losses, and an aging of securities with unrealized losses. Although this standard does not result in a change in the carrying amount of debt securities, it does require that the portion of an other-than-temporary impairment not related to a credit loss for a held-to-maturity security be recognized in a new category of other comprehensive income and be amortized over the remaining life of the debt security as an increase in the carrying value of the security. This standard became effective for interim and annual periods ending after June 15, 2009. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

 
- 16 -

 

FUSHI COPPERWELD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER 30, 2009
(Unaudited)

In April 2009, the FASB issued an accounting standard that requires disclosures about fair value of financial instruments not measured on the balance sheet at fair value in interim financial statements as well as in annual financial statements. Prior to this accounting standard, fair values for these assets and liabilities were only disclosed annually. This standard applies to all financial instruments within its scope and requires all entities to disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments. This standard does not require disclosures for earlier periods presented for comparative purposes at initial adoption, but in periods after the initial adoption, this standard requires comparative disclosures only for periods ending after initial adoption. The adoption of this standard did not have a material impact on the disclosures related to its consolidated financial statements.

In May 2009, the FASB an accounting standard which provides guidance to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The standard also requires entities to disclose the date through which subsequent events were evaluated as well as the rationale for why that date was selected. The standard is effective for interim and annual periods ending after June 15, 2009, and accordingly, the Company adopted this Standard during the second quarter of 2009. The standard requires that public entities evaluate subsequent events through the date that the financial statements are issued.

In June 2009, the FASB issued an accounting standard amending the accounting and disclosure requirements for transfers of financial assets. This accounting standard requires greater transparency and additional disclosures for transfers of financial assets and the entity’s continuing involvement with them and changes the requirements for derecognizing financial assets. In addition, it eliminates the concept of a qualifying special-purpose entity (“QSPE”). This accounting standard is effective for financial statements issued for fiscal years beginning after November 15, 2009. The Company has not completed the assessment of the impact this new standard will have on the Company’s financial condition, results of operations or cash flows.

In June 2009, the FASB also issued an accounting standard amending the accounting and disclosure requirements for the consolidation of variable interest entities (“VIEs”). The elimination of the concept of a QSPE, as discussed above, removes the exception from applying the consolidation guidance within this accounting standard. Further, this accounting standard requires a company to perform a qualitative analysis when determining whether or not it must consolidate a VIE. It also requires a company to continuously reassess whether it must consolidate a VIE. Additionally, it requires enhanced disclosures about a company’s involvement with VIEs and any significant change in risk exposure due to that involvement, as well as how its involvement with VIEs impacts the company’s financial statements. Finally, a company will be required to disclose significant judgments and assumptions used to determine whether or not to consolidate a VIE. This accounting standard is effective for financial statements issued for fiscal years beginning after November 15, 2009.  The Company has not completed their assessment of the impact that this pronouncement will have on the Company’s financial condition, results of operations or cash flows.

 
- 17 -

 

FUSHI COPPERWELD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER 30, 2009
(Unaudited)

In June 2009, the FASB issued an accounting standard which establishes the FASB Accounting Standards Codification™ (the “Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with U.S. GAAP. The Codification does not change current U.S. GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by providing all the authoritative literature related to a particular topic in one place. The Codification is effective for interim and annual periods ending after September 15, 2009, and as of the effective date, all existing accounting standard documents will be superseded. The Codification is effective for the Company in the third quarter of 2009, and accordingly, the Company’s Quarterly Report on Form 10-Q for the quarter ending September 30, 2009 and all current and subsequent public filings will reference the Codification as the sole source of authoritative literature.

In August 2009, the FASB issued an Accounting Standards Update (“ASU”) regarding measuring liabilities at fair value. This ASU provides additional guidance clarifying the measurement of liabilities at fair value in circumstances in which a quoted price in an active market for the identical liability is not available; under those circumstances, a reporting entity is required to measure fair value using one or more of valuation techniques, as defined. This ASU is effective for the first reporting period, including interim periods, beginning after the issuance of this ASU. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In October 2009, the FASB issued an ASU regarding accounting for own-share lending arrangements in contemplation of convertible debt issuance or other financing.  This ASU requires that at the date of issuance of the shares in a share-lending arrangement entered into in contemplation of a convertible debt offering or other financing, the shares issued shall be measured at fair value and be recognized as an issuance cost, with an offset to additional paid-in capital. Further, loaned shares are excluded from basic and diluted earnings per share unless default of the share-lending arrangement occurs, at which time the loaned shares would be included in the basic and diluted earnings-per-share calculation.  This ASU is effective for fiscal years beginning on or after December 15, 2009, and interim periods within those fiscal years for arrangements outstanding as of the beginning of those fiscal years. The Company is currently evaluating the impact of this ASU on its consolidated financial statements.

Reclassification

Certain reclassifications have been made to the 2008 consolidated financial statements to conform to the 2009 consolidated financial statement presentation. These reclassifications had no effect on net income or cash flows as previously reported.

Note 3 - Accounts receivable

Accounts receivable consisted of the following:

   
September 30, 2009
   
December 31, 2008
 
   
(Unaudited)
       
Trade accounts receivable
  $ 70,234,048     $ 50,101,077  
Allowance for bad debts
    (1,181,365 )     (318,529 )
Trade accounts receivable, net
  $ 69,052,683     $ 49,782,548  

 
- 18 -

 

FUSHI COPPERWELD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER 30, 2009
(Unaudited)

The following table consists of allowance for doubtful accounts.

Allowance for doubtful accounts at December 31, 2007
  $ 135,418  
Reserve adjustment
    355,293  
Accounts receivable write off
    (9,426 )
Effect of foreign currency translation
    16,920  
Allowance for doubtful accounts at September 30, 2008 (Unaudited)
    498,205  
Reserve adjustment
    (176,826 )
Accounts receivable write off
    8,333  
Effect of foreign currency translation
    (11,183 )
Allowance for doubtful accounts at December 31, 2008
    318,529  
Reserve adjustment
    862,302  
Accounts receivable write off
    -  
Effect of foreign currency translation
    534  
Allowance for doubtful accounts at September 30, 2009 (Unaudited)
  $ 1,181,365  

Note 4 - Inventories

Inventories consisted of the following:

   
September 30, 2009
   
December 31, 2008
 
   
(Unaudited)
       
Raw materials
  $ 6,149,824     $ 3,929,585  
Work in process
    2,238,037       1,337,703  
Finished goods
    2,493,326       1,832,511  
Scrap
    -       38,540  
Totals
    10,881,187       7,138,339  
Less allowance for obsolete inventory
    (223,401 )     (160,487 )
Totals
  $ 10,657,786     $ 6,977,852  

The following table consists of allowance for obsolete inventory:

Allowance for obsolete inventory at December 31, 2007
  $ 63,594  
Reserve adjustment
    401,646  
Allowance for obsolete inventory at September 30, 2008 (Unaudited)
    465,240  
Reserve adjustment
    (304,753 )
Allowance for obsolete inventory at December 31, 2008
    160,487  
Reserve adjustment
    62,914  
Allowance for obsolete inventory at September 30, 2009 (Unaudited)
  $ (223,401 )

 
- 19 -

 

FUSHI COPPERWELD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER 30, 2009
(Unaudited)

Note 5 - Plant and equipment

Plant and equipment consisted of the following:

   
September 30, 2009
   
December 31, 2008
 
   
(Unaudited)
       
Land
  $ 100,726     $ 100,726  
Buildings and improvements
    43,662,801       43,418,544  
Transportation equipment
    4,177,659       4,138,892  
Machinery and equipment
    73,131,989       55,147,707  
Office furniture
    1,169,789       1,166,477  
Construction in progress
    16,865,916       33,163,330  
Totals
    139,108,880       137,135,676  
Less accumulated depreciation
    (23,498,298 )     (17,374,649 )
Totals
  $ 115,610,582     $ 119,761,027  

Construction in progress at September 30, 2009, consisted of the following:

       
September 30,
2009
 
Commencement
 
Expected
Completion
No.
 
Project Description
 
(Unaudited)
 
Date
 
Date
1
 
Manufacturing machinery and equipment for CCA/CCS (Multiple)
  $ 3,081,574  
Dec-07
 
Mar-10
2
 
Corporation administration office building
    13,143,496  
May-03
 
Dec-10
3
 
Manufacture building (Dalian)
    630,346  
Jan-08
 
Dec-09
4
 
Manufacturing machinery and equipment for CCA
    10,500  
Jul-09
 
Mar-10
   
Total
  $ 16,865,916        
                   
Construction in progress as of December 31, 2008 consisted of the following:

       
December 31, 
 
Commencement
 
Expected
Completion
No.
 
Project Description
 
2008 
 
Date
 
Date
1
 
Manufacturing machinery and equipment for CCA/CCS
  $ 14,507,534  
Dec-07
 
Dec-09
2
 
Corporation administration office building
    12,964,718  
May-03
 
Dec-10
3
 
Manufacturing machinery and equipment for CCA (Multiple)
    3,298,681  
Oct-07 thru Jan-08
 
Mar-09 thru Dec-09
4
 
Manufacturing machinery and equipment for CCS (Multiple)
    1,775,300  
Mar-07 thru Sep-08
 
Mar-09 thru Dec-09
5
 
Manufacture building
    617,097  
Jan-08
 
Dec-09
   
Total