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EX-23 - GENERAL STEEL HOLDINGS INCv177331_ex23.htm
EX-21 - GENERAL STEEL HOLDINGS INCv177331_ex21.htm
EX-3.2 - GENERAL STEEL HOLDINGS INCv177331_ex3-2.htm
EX-3.3 - GENERAL STEEL HOLDINGS INCv177331_ex3-3.htm
EX-31.2 - GENERAL STEEL HOLDINGS INCv177331_ex31-2.htm
EX-32.1 - GENERAL STEEL HOLDINGS INCv177331_ex32-1.htm
EX-31.1 - GENERAL STEEL HOLDINGS INCv177331_ex31-1.htm
EX-10.12 - GENERAL STEEL HOLDINGS INCv177331_ex10-12.htm
EX-3.5 - GENERAL STEEL HOLDINGS INCv177331_ex3-5.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
  

   
FORM 10-K
 
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2009
 
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 001-33717
 
General Steel Holdings, Inc.
(Exact Name of Registrant as Specified in its Charter)
 
Nevada
 
41-2079252
(State of Incorporation)
 
(I.R.S. Employer
Identification Number)
     
Kuntai International Mansion Building,
Suite 2315 
Yi No. 12 Chaoyangmenwai Avenue,
Chaoyang District,
Beijing, China
 
100020
(Address of Principal Executive Offices)
 
(Zip Code)
 
Registrant’s telephone number: +86 (10) 5879-7346
 
Securities registered pursuant to Section 12(b) of the Act:
     
Common Stock, $0.001 par value per share
 
New York Stock Exchange
(Title of each class)
 
(Name of each exchange on which registered)
 
Securities registered pursuant to Section 12(g) of the Act: None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x
 
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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    x
 
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 “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
     Large Accelerated Filer   ¨
Accelerated Filer   x
Non-accelerated Filer ¨
(Do not check if a smaller reporting company)
Smaller reporting company ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).   Yes   ¨   No   x
 
The aggregate market value of the voting common equity held by non-affiliates as of June 30, 2009, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $85 million.  General Steel has no non-voting common equity.
 
The number of shares outstanding of capital stock as of March 15, 2010 was 51,618,595.
 

Documents Incorporated by Reference:
 
The information called for by Part III is incorporated by reference to the Definitive Proxy Statement for the 2010 Annual Meeting of Stockholders of the Registrant which will be filed with the Securities and Exchange Commission not later than April 30, 2010.


 
TABLE OF CONTENTS
 
PART I
     
ITEM 1.
BUSINESS.
3
ITEM 1A.
RISK FACTORS.
11
ITEM 1B.
UNRESOLVED STAFF COMMENTS.
24
ITEM 2.
PROPERTIES.
24
ITEM 3.
LEGAL PROCEEDINGS.
26
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
26
     
PART II
   
  
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
26
ITEM 6.
SELECTED FINANCIAL DATA.
28
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
29
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
54
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
54
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
93
ITEM 9A.
CONTROLS AND PROCEDURES.
93
ITEM 9B.
OTHER INFORMATION.
96
     
PART III
     
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
96
ITEM 11.
EXECUTIVE COMPENSATION.
96
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
96
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
96
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES.
96
     
PART IV
     
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
97
   
SIGNATURES
97

 
2

 

PART I

ITEM 1. BUSINESS.

Overview
 
Our company was incorporated on August 5, 2002, in the State of Nevada. We are headquartered in Beijing, China and operate a diverse portfolio of Chinese steel companies. Our companies serve various industries and produce a variety of steel products including: reinforced bars (“rebar”), hot-rolled carbon and silicon sheets, spiral-weld pipes and high-speed wire. Our aggregate annual production capacity of steel products is 6.3 million metric tons, of which the majority is rebar. Individual industry segments have unique demand drivers, such as rural income, infrastructure construction and energy consumption. Domestic economic conditions are an overall driver for all our products.

Our vision is to become one of the largest and most profitable non-government owned steel companies in China.

Our mission is to acquire Chinese steel companies and increase their profitability and efficiencies with the application of  western management practices and advanced production technologies, and  the infusion of capital resources.

Our strategy is to grow through aggressive mergers, joint ventures and acquisitions targeting state-owned enterprise steel companies and selected entities with outstanding potential. We have executed this strategy in acquiring controlling interest positions in three joint ventures. Our business currently operates through four steel-related subsidiaries and we are actively pursuing a plan to acquire additional assets.
 
Unless the context indicates otherwise, as used herein the terms “General Steel”, the “company”, “we”, “our” and “us” refer to General Steel Holdings, Inc. 

Steel Related Subsidiaries

We presently have controlling interests in four steel-related subsidiaries:

 
·
Tianjin Daqiuzhuang Metal Sheet Co., Ltd.;
 
·
Baotou Steel - General Steel Special Steel Pipe Joint Venture Company Limited;
 
·
Shaanxi Longmen Iron and Steel Co., Ltd.; and
 
·
Maoming Hengda Steel Group, Ltd.

 
3

 

Tianjin Daqiuzhuang Metal Sheet Co., Ltd.

Tianjin Daqiuzhuang  Metal Sheet Co., Ltd. ("Daqiuzhuang Metal") started operations in 1988. Daqiuzhuang Metal’s core business is manufacturing high quality hot-rolled carbon and silicon steel sheets mainly used in the production of small agricultural vehicles and other specialty markets.
 
Daqiuzhuang Metal has ten steel sheet production lines capable of processing approximately 400,000 metric tons of 0.75mm to 2.0mm hot-rolled steel sheets per year. Products are sold through a nation-wide network of 35 distributors and three regional sales offices.

Daqiuzhuang Metal uses a traditional rolling mill production sequence, including heating, rolling, cutting, annealing, and flattening to process and cut coil segments into steel sheets which have a length of approximately 2,000mm; a width of approximately 1,000mm, and a thickness ranging from 0.75mm to 2.0mm. Limited size adjustments can be made to meet order requirements. Products sell under the registered “Qiu Steel” brand name.

On May 14, 2009, Daqiuzhuang Metal changed its official name from “Tianjin Daqiuzhuang Metal Sheet Co., Ltd.” to “General Steel (China) Co., Ltd.” to better reflect its role as a merger and acquisition platform for steel company investments in China.  In some instances, we retain the use of the name Daqiuzhuang Metal for brand recognition purposes within the industry.

By the end of March 2010, we expect to finalize the lease of our Daqiuzhuang facility and operation to the facility’s current general manager.  Changing the business model of this facility from a direct operations model to a leased operations model will allow us to reduce overhead costs and provide a steady revenue stream in the form of fixed monthly lease revenue.  We will disclose specific terms of the lease agreement when we sign the definitive agreement.

Baotou Steel - General Steel Special Steel Pipe Joint Venture Co., Ltd.

On April 27, 2007, Daqiuzhuang Metal and Baotou Iron and Steel Group Co., Ltd. (“Baotou Steel”) entered into an Amended and Restated Joint Venture Agreement amending the Joint Venture Agreement entered into on September 28, 2005 to increase Daqiuzhuang Metal's ownership interest in the related joint venture to 80%. The joint venture company’s name is Baotou Steel - General Steel Special Steel Pipe Joint Venture Company Limited, a Chinese limited liability company (“Baotou Steel Pipe Joint Venture”). Baotou Steel Pipe Joint Venture obtained its business license from government authorities in China on May 25, 2007, and started its normal operations in July 2007. Baotou Steel Pipe Joint Venture has four production lines capable of producing 100,000 metric tons of double spiral-weld pipes used mainly in the energy sector primarily to transport oil and steam. These pipes have a diameter ranging from 219mm to 1240mm, a wall thickness ranging from 6mm to 13mm, and a length ranging from 6m to 12m. Presently, Baotou Steel Pipe Joint Venture sells its products using an internal sales force to customers in the Inner Mongolia Autonomous Region and the northwest region of China.

Shaanxi Longmen Iron and Steel Co., Ltd.

Effective June 1, 2007, through two subsidiaries, Daqiuzhuang Metal and Tianjin Qiu Steel Investment Co., Ltd., we entered into a Joint Venture Agreement with Shaanxi Longmen Iron & Steel Group Co., Ltd. (“Long Steel Group”) to form Shaanxi Longmen Iron and Steel Co., Ltd. (“Longmen Joint Venture”). Through our two subsidiaries, we invested approximately $39 million cash and collectively hold approximately 60% of the Longmen Joint Venture.

 
4

 

Longmen Group, located in Hancheng city, Shaanxi province, in China’s central region, was founded in 1958 and incorporated in 2002. Longmen Group operates as a fully-integrated steel production facility.  Less than 10% of steel companies in China have fully-integrated steel production capabilities.  

Currently, the Longmen Joint Venture has four branch offices, six subsidiaries under direct control and six entities in which it has a non-controlling interest.  It employs approximately 6,317 full-time workers.  In addition to steel production, the Longmen Joint Venture operates transportation services through its Changlong Branch, located at Hancheng city, Shaanxi province. Changlong Branch owns 154 vehicles and provides transportation services exclusively to the Longmen Joint Venture.

Coke Operation: Longmen Joint Venture owns 22.76% of Hancheng Tongxing Metallurgy Co., Ltd. (“Tongxing”). Located in Hancheng city, Shaanxi province, Tongxing produces second grade coke used as part the fuel for our blast furnaces.  Its annualized coke production capacity is 200,000 metric tons.  Tongxing sells all of its output to Longmen Joint Venture.
 
Longmen Joint Venture does not own iron pelletizing facilities.

Longmen Joint Venture’s products are categorized within the steel industry as “longs” (referencing their shape). Rebar is generally considered a regional product because its weight and dimension make it ill-suited for cost-effective long-haul ground transportation. By our estimates, the provincial market demand for rebar is six to eight million metric tons per year. Slightly more than half of this demand comes from Xi’an, the capital of Shaanxi province, located 180km from the Longmen Joint Venture’s main steel production site. Currently, we estimate we have an approximate 72% share of the Xi’an market for rebar.

An established regional network of approximately 100 distributors and four sales offices sell the Longmen Joint Venture’s products. All products sell under the registered brand name of “Yulong,” which enjoys strong regional recognition and awareness. Rebar and billet products carry ISO 9001 and 9002 certification and many other products have won national quality awards. Products produced at the facility have been used in the construction of the Yangtze River Three Gorges Dam, Xi’an International Airport, the Xi’an city subway system and the Xi Luo Du and the Xiang Jia Ba hydropower projects.

On September 24, 2007, Longmen Joint Venture acquired a controlling interest in two subsidiaries of Longmen Group: Longmen Iron and Steel Group Co., Ltd. Environmental Protection Industry Development Co., Ltd. (“Longmen EPID”) and Longmen Iron and Steel Group Co., Ltd. Hualong Fire Retardant Materials Co., Ltd. (“Hualong”).

 
5

 
 
The Longmen Joint Venture entered into an equity transfer agreement with Longmen Group to acquire its 74.92% ownership interest in Longmen EPID. The Longmen Joint Venture paid $2.4 million (RMB18 million) in exchange for the ownership interest. The facility utilizes solid waste generated from the steel making process to produce landscape blocks, tiles, curb tops and ornamental tiles.

At the same time, the Longmen Joint Venture also entered into a second equity transfer agreement with the Longmen Group to acquire its 36% ownership interest in its subsidiary, Hualong. The Longmen Joint Venture paid $430,000 (RMB3.3 million) in exchange for the ownership interest and is the largest shareholder in Hualong. The facility produces fire-retardant materials used in various steel making processes.

On January 11, 2008, the Longmen Joint Venture completed its acquisition of a controlling interest in Hancheng Tongxing Metallurgy Co., Ltd. (“Tongxing”). The Longmen Joint Venture contributed its land use right of 21.45 hectares (approximately 53 acres) with an appraised value of approximately $4.1 million (RMB30 million). Pursuant to the agreement, the land was exchanged for shares of Tongxing valued at approximately $3.1 million (RMB22.7 million), giving the Longmen Joint Venture a 22.76% ownership stake in Tongxing and making it Tongxing’s largest shareholder. Tongxing has two operating areas: coking coal production and rebar processing. Its coking coal operations have an annual production capacity of 200,000 metric tons. Its rebar processing facility has an annualized rolling capacity of 300,000 metric tons.

•  Maoming Hengda Steel Group Limited

On June 25, 2008, through our subsidiary Qiu Steel Investment, we paid approximately $7.1 million (RMB50 million) in cash, to purchase 99% of Maoming Hengda Steel Group, Ltd. (“Maoming”).  The total registered capital of Maoming is approximately $77.8 million (RMB544.6 million).  

Maoming’s core business is the production of high-speed wire and rebar products used in the construction industry.  Located on 140 hectares (approximately 346 acres) in Maoming city, Guangdong province, the Maoming facility has two production lines capable of producing 1.8 million metric tons of 5.5mm to 16mm diameter high-speed wire and 12mm to 38mm diameter rebar annually. The products are sold through nine distributors targeting customers in Guangxi province and the western region of Guangdong province.  Previously, the Maoming facility had been operating at approximately 10% of its capacity which we believe was the result of the previous owners focus on matters unrelated to the Maoming facility.
 
To take advantage of stronger market demand in Shaanxi, in the second quarter of 2009, we relocated the 800,000 metric ton capacity rebar production line from the Maoming facility to the Longmen Joint Venture. In 2010, we intend to relocate the 1,000,000 metric ton capacity high-speed wire production line from the Maoming facility to the Longmen Joint Venture. We intend to install a new 400,000 metric ton capacity rebar line to operate in the Maoming facility.

 
6

 

Operating Information Summary by Subsidiaries

  
 
Daqiuzhuang
Metal
 
Baotou Steel Pipe
Joint Venture
 
Longmen Joint
Venture 
 
Maoming
                 
Annual Production
Capacity (metric tons)
 
400,000
 
100,000
 
4.8 million
 
1 million
                 
Main Products
 
Hot-rolled sheet
 
Spiral-weld pipe
 
Rebar/High-speed wire
 
High-speed wire
                 
Main Application
 
Light agricultural vehicles
 
Energy transport
 
Infrastructure and construction
 
Infrastructure and construction

Marketing and Customers 

We sell our products primarily to distributors, typically collecting payment from these distributors in advance. Our marketing efforts are mainly directed toward those customers who have exacting requirements for on-time delivery, customer support and product quality and believe that these requirements as well as product planning are critical factors in our ability to serve this segment of the market.

Demand for our products

Overall, domestic economic growth is an important demand driver of our products, especially construction and infrastructure projects, rural income growth and energy demand.

At Longmen Joint Venture, growth in regional construction and infrastructure projects drives demand for our products. According to the 12th Five Year National Economic and Social Development Plan (“NESDP”) (2011-2015), development of China’s western region is one of the top-five economic priorities of the nation. Shaanxi province, where Longmen Joint Venture is located, has been designated as a focal point for development into the western region, and Xi’an, the provincial capital, has been designated as a focal point for this development. Our Longmen Joint Venture is 180 km from Xi’an and does not have a major competitor within a 250 km radius. According to the information released by the Shaanxi Provincial Development and Reform Commission, total fixed assets investment for Shaanxi province was approximately RMB 113 billion for the year ended December 31, 2009, a 71% increase over the same period last year. There are 139 construction and infrastructure projects scheduled to begin in the province in 2010. Some of the major projects include: nine new railways, one new airport, expansion of the Xi’an airport, two new ring subway systems and 4 new dams. We anticipate strong demand for our products driven by these and many other construction and infrastructure projects. We believe there will be sustained regional demand for several years as the government continues to drive western region development efforts.

 
7

 

At Daqiuzhuang Metal, demand for hot-rolled sheets previously had been tied to their use in light agricultural vehicles. However, due to over capacity in the market of cold-rolled sheets and a resulting decline of cold-rolled sheet price, many producers of light agricultural vehicles have replaced our hot-rolled steel sheets with cold-rolled sheets. Demand for our product now comes mainly from smaller manufactures of metal security doors and wiring cabinets used in housing projects.

At Baotou Steel Pipe Joint Venture, energy sector growth, which spurs the need to transport oil, natural gas and steam, drives demand for spiral-weld steel pipe. Presently, demand is fueled by smaller pipeline projects and municipal energy infrastructure projects within the Inner Mongolia Autonomous Region.

At Maoming, infrastructure growth and business development in Maoming city, the surrounding Guangdong cities and the western region of Guangxi province drive demand for our construction steel products. As a second tier city, the industrialization and urbanization of Maoming is one of the focal points of economic development in the west Guangdong province.

Supply of raw materials

The primary raw materials we use for steel production are iron ore, coke, hot-rolled steel coil and steel billets.  Daqiuzhuang Metal and Baotou Steel Pipe Joint Venture use hot-rolled steel coil as their main raw material.  Longmen Joint Venture uses iron ore and coke as its main raw materials.  Maoming uses steel billets as its main raw material. Iron ore is the main raw material used to produce hot-rolled steel coil and steel billets. As a result, the prices of iron ore and coke are the primary raw material cost drivers for our products.

Longmen Joint Venture accounts for 4.8 million metric tons of our aggregate 6.3 million metric tons annual production capacity. At Longmen Joint Venture, approximately 90% of production costs associated with is raw materials, with iron ore being the largest component.

According to the China Iron and Steel Association, approximately, 60% of the China domestic steel industry demand for iron ore must be filled by imports. At Longmen Joint Venture, we purchase iron ore from four primary sources: the Mulonggou mine (owned by the Longmen Joint Venture), the Daxigou mine (owned by Longmen Group, our partner in the Longmen Joint Venture), surrounding local mines and from abroad. The Daxigou mine has 300 million metric tons of proven iron ore reserves. According to the terms of our Longmen Joint Venture Agreement with the Longmen Group, we have first rights of refusal for sales from the mine and for its development. We presently purchase all of the production from this mine.
 
Coke

Coke, produced from metallurgical coal (also known as coking coal), is our second most consumed raw material, after iron ore. It requires approximately 550kg to 600kg of coke to make one metric ton of crude steel.

 
8

 

Our Longmen Joint Venture facility is located in the center of China’s coal belt. We source all coke used at Longmen Joint Venture from the town in which Longmen Joint Venture is located. This ensures dependable supply and minimum transportation costs.

The sources and/or major suppliers of our raw materials are as follows (1):
 
Longmen Joint Venture

Name of the Major Supplier
 
Raw Material
Purchased
 
% of Total Raw
Material
Purchased
   
Relationship with
GSI
Shaanxi Longmen Iron & Steel Group Co., Ltd.
 
Iron Ore
    21.4 %  
Related party
Shaanxi Haiyan Coal Chemical Industry Co., Ltd.
 
Coke
    11.1 %  
Related party
Shaanxi Huanghe Material Co., Ltd.
 
Coke
    7.9 %  
Others
Yunnan Jinliyuan Co., Ltd.
 
Alloy
    2.8 %  
Others
Beijing Daishang Co., Ltd.
 
Iron Ore
    2.4 %  
Related party
   
Total
    45.6 %    

Daqiuzhuang Metal

Name of the Major Supplier
 
Raw Material
Purchased
 
% of Total Raw
Material
Purchased
   
Relationship with
GSI
Tianjin Hengying Trade Co., Ltd.
 
Hot-roll coil
    60.1 %  
Related party
General Tongyong Qiu Steel Pipe Co., Ltd.
 
Hot-roll coil
    17.4 %  
Related party
Tianjin Dazhan Industrial Co., Ltd.
 
Hot-roll coil
    12.4 %  
Related party
Shenghua Xinyuan
 
Hot-roll coil
    4.9 %  
Others
Tianjin Shengze Industrial Co., Ltd.
 
Hot-roll coil
    3.0 %  
Others
   
Total
    97.8 %    

Baotou Steel Pipe Joint Venture

Name of the Major Supplier
 
Raw Material
Purchased
 
% of Total Raw
Material
Purchased
   
Relationship with
GSI
Shaanxi Xinbang Trading Co., Ltd
 
Steel coil
    38.2 %  
Others
Tianjin Jinchang I&E Co., Ltd.
 
Steel coil
    14.1 %  
Others
Baotou Weifengda Trading Co., Ltd
 
Steel coil
    10.5 %  
Others
Tianjin Fulida Pipe Co., Ltd.
 
Steel coil
    9.9 %  
Others
Tianjin Zhaoliang Trade Co., Ltd.
 
Steel coil
    8.7 %  
Others
   
Total
    81.4 %    

 
9

 

Maoming

Name of the Major Supplier
 
Raw Material
Purchased
 
% of Total Raw
Material
Purchased
   
Relationship with
GSI
Maoming Shengze Trading Co., Ltd.
 
Billet
    63.3 %  
Related party
China Railway Material Commercial Corporation Tianjin Office
 
Billet
    22.4 %  
Others
Guangxi Shenglong Metallurgy Co., Ltd.
 
Heavy oil
    10.0 %  
Others
Maoming Dazhongmao Petrochem Co., Ltd.
 
Billet
    2.3 %  
Others
Maoming Zhengmao Develop Co., Ltd.
 
Heavy oil
    1.1 %  
Others
   
Total
    99.1 %    

Industry consolidation

The central government has a long-stated goal to consolidate 50% of domestic steel production among the top ten producers by 2010 and 70% by 2020.  In September 2009, the central government published an industry target to eliminate 80 million metric tons of inefficient capacity from the steel industry by the end of 2011.  Along with this target, the government added new steel making operational and environmental restrictions and tasked ten government agencies with enforcing these measures. In 2010, the government plans to issue revised steel industry guidelines which are expected to further strengthen measures to minimize old and inefficient steel producing.  We believe the government’s action this year demonstrates increased resolve to bring about industry consolidation.  We see the pace of industry consolidation quickening in the coming years.

Intellectual Property Rights 

“Qiu Steel” is the registered trademark under which we sell hot-rolled carbon and silicon steel sheets products produced at Daqiuzhuang Metal. The “Qiu Steel” logo has been registered with the China National Trademark Bureau under No. 586433. “Qiu Steel” is registered under the GB 912-89 national quality standard, and certified under the National Quality Assurance program.

“Baogang Tongyong” is the trademark under which we sell spiral-weld steel pipes products produced at Baotou Steel Pipe Joint Venture. This trademark is currently being registered with China National Trademark Bureau. 

 
10

 

“Yu Long” is the registered trademark under which we sell rebar and high-speed wire products produced in Longmen Joint Venture. The trademark is registered under the ISO9001:2000 international quality standard.
 
“Heng Da” is the registered trademark under which we sell high-speed wire and rebar products produced at our Maoming facility. The trademark is registered under the ISO9001:2000 international quality standard.

Employees

As of December 31, 2009, we had approximately 7,067 full-time employees.

ITEM 1A. RISK FACTORS.
 
Our business, financial condition and results of operations are subject to various risks, including those discussed below, which may affect the value of our securities.  The risks discussed below are those that we believe are currently the most significant, although additional risks not presently known to us or that we currently deem less significant may also impact our business, financial condition and results of operations, perhaps materially.

Risks Related to Our Business

We face substantial competition which, among other things, may lead to price pressure and adversely affect our sales.

We compete with other market players on the basis of product quality, responsiveness to customer needs and price. There are two types of steel and iron companies in China: state-owned enterprises (“SOEs”) and privately owned companies.

Criteria important to our customers when selecting a steel supplier include:

 
Quality;

 
Price/cost competitiveness;

 
System and product performance;

 
Reliability and timeliness of delivery;

 
11

 

 
New product and technology development capability;

 
Excellence and flexibility in operations;

 
Degree of global and local presence;

 
Effectiveness of customer service; and

 
Overall management capability.
 
We compete with both SOEs and privately owned steel manufacturers. While we believe that our price and quality are superior to other manufacturers, many of our competitors are better capitalized, more experienced, and have deeper ties in the Chinese marketplace. We consider there to be the following ten major competitors of similar size, production capability and product line in the market place competing against our four operating subsidiaries as indicated:

• Competitors of Daqiuzhuang Metal include: Tianjin No. 1 Rolling Steel Plant, Tianjin Yinze Metal Sheet Plant and Tangshan Fengrun Metal Sheet Plant;
 
• Competitors of Longmen Joint Venture include: Shanxi Haixin Iron and Steel Co., Ltd. and Gansu Jiuquan Iron and Steel Co., Ltd.;
 
•  Competitors of Baotou Steel Pipe Joint Venture include: Tianjin Bo Ai Steel Pipe Co., Hebei Cangzhou Zhong Yuan Steel Pipe Co., and Shanxi Taiyuan Guo Lian Steel Pipe Co.; and
 
• Competitors of Maoming include: Guangdong Shao Guan Iron and Steel Group and Zhuhai Yue Yu Feng Iron and Steel Co., Ltd.

In addition, with China’s entry into the World Trade Organization and China’s agreements to lift many of the barriers to foreign competition, we believe that competition will increase as a whole with the entry of foreign companies into this market. This may limit our opportunities for growth, lead to price pressure and reduce our profitability. We may not be able to compete favorably and this increased competition may harm our business, our business prospects and results of operations.

 
12

 

 Our limited operating history may not serve as an adequate basis to judge our future prospects and results of operations.

Our limited operating history may not provide a meaningful basis on which to evaluate our business. Although our revenues have grown rapidly since inception, we might not be able to maintain our profitability or we may incur net losses in the future. We expect that our operating expenses will increase as we expand. Any significant failure to realize anticipated revenue growth could result in significant operating losses. We will continue to encounter risks and difficulties frequently experienced by companies at a similar stage of development, including our potential failure to:

• Implement our business model and strategy and adapt and modify them as needed;

• Increase awareness of our brands, protect our reputation and develop customer loyalty;

• Manage our expanding operations and service offerings, including the integration of any future acquisitions;

• Maintain adequate control of our expenses;

• Anticipate and adapt to changing conditions in the markets in which we operate as well as the impact of any changes in government regulation; and

• Anticipate mergers and acquisitions involving our competitors, technological developments and other significant competitive and market dynamics.

Our inability to fund our capital expenditure requirements may adversely affect our growth and profitability.

Our continued growth is dependent upon our ability to raise additional capital from outside sources. Our strategy is to grow through aggressive mergers, joint ventures and acquisitions targeting SOE steel companies and selected entities with outstanding potential. Our growth strategy will require us to obtain additional financing through capital markets. In the future, we may be unable to obtain the necessary financing on a timely basis and on favorable terms, and our failure to do so may weaken our financial position, reduce our competitiveness, limit our growth and reduce our profitability. Our ability to obtain acceptable financing at any given time may depend on a number of factors, including:

• Our financial condition and results of operations;

• The condition of the PRC economy and the industry sectors in which we operate; and

• Conditions in relevant financial markets in the United States, the PRC and elsewhere in the world.

 
13

 

Disruptions in world financial markets and the resulting governmental action of the United States and other countries could have a material adverse impact on our ability to obtain financing, our results of operations, financial condition and cash flow and could cause the market price of our common shares to decline.
 
The current deep and potentially prolonged global recession that began in the United States in December 2007 has, since the beginning of the third quarter of 2008, had a material adverse effect on demand for our products and consequently the results of our operations, financial condition and cash flows. In mid-February 2009, the Federal Reserve warned that the United States economy faces an “unusually gradual and prolonged” period of recovery from this deep, recessionary period.

The credit markets worldwide and in the United States have experienced significant contraction, de-leveraging and reduced liquidity, and the United States government and foreign governments have either implemented or are considering a broad variety of governmental action and/or new regulation of the financial markets. Securities and futures markets and the credit markets are subject to comprehensive statutes, regulations and other requirements.

The uncertainty surrounding the future of the global credit markets has resulted in reduced access to credit worldwide. Major market disruptions, the current adverse changes in global market conditions, and the regulatory climate in the United States and worldwide may adversely affect our business or impair our ability to borrow funds as needed. The current market conditions may last longer than we anticipate. These recent and developing economic and governmental factors may have a material adverse effect on our results of operations, financial condition or cash flows and could cause the price of our common stock to decline significantly.

We have made and may continue to make acquisitions which could divert management's attention, cause ownership dilution to our stockholders, or be difficult to integrate, which may adversely affect our financial results.
 
We have made several acquisitions, and it is our current plan to continue to acquire companies and technologies that we believe are strategic to our future business. Integrating newly acquired businesses or technologies could put a strain on our resources, could be costly and time consuming, and might not be successful. Such acquisitions could divert our management's attention from other business concerns. In addition, we might lose key employees while integrating new organizations. Acquisitions could also result in customer dissatisfaction, performance problems with an acquired company or technology, potentially dilutive issuances of equity securities or the incurrence of debt, the assumption or incurrence of contingent liabilities, possible impairment charges related to goodwill or other intangible assets or other unanticipated events or circumstances, any of which could harm our business. We might not be successful in integrating any acquired businesses, products or technologies, and might not achieve anticipated revenues and cost benefits.
 
We may not be able to effectively control and manage our growth.

If our business and markets grow and develop, it will be necessary for us to finance and manage such an expansion in an orderly fashion. This growth will lead to an increase in the responsibilities of existing personnel, the hiring of additional personnel and expansion of our scope of operations. It is possible that we may not be able to obtain the required financing under terms that are acceptable to us or hire additional personnel to meet the needs of our expansion.

 
14

 

Our business, revenues and profitability are dependent on a limited number of large customers.

Our revenue is dependent, in large part, on significant contracts with a limited number of large customers.  As of December 31, 2009, approximately 29% of our sales were to five customers. These customers accounted for 0% of total account receivables as of December 31, 2009.  We believe that revenue derived from our current and future large customers will continue to represent a significant portion of our total revenue. Our inability to continue to secure and maintain a sufficient number of large contracts or the loss of, or significant reduction in purchases by, one or more of our major customers would have the effect of reducing our revenues and profitability.

Moreover, our success will depend in part upon our ability to obtain orders from new customers, as well as the financial condition and success of our customers and general economic conditions in China.

Steel consumption is cyclical and worldwide overcapacity in the steel industry and the availability of alternative products have resulted in intense competition, which may have an adverse effect on profitability and cash flow.

Steel consumption is highly cyclical and follows general economic and industrial conditions both worldwide and in regional markets. The steel industry has historically been characterized by an excess in the world supply, which has led to substantial price decreases during periods of economic weakness. Future economic downturns could decrease the demand for our products. Substitute materials are increasingly available for many steel products, which further reduces demand for steel.

We may not be able to pass on to customers the increases in the costs of our raw materials, particularly iron-ore and steel coil.

The major raw materials that we purchase for production are iron-ore and steel coil. The price and availability of these raw materials are subject to market conditions affecting supply and demand. Our financial condition or results of operations may be impaired by further increases in raw material costs to the extent we are unable to pass those increases to our customers. In addition, if these materials are not available on a timely basis or at all, we may not be able to produce our products and our sales may decline.

The price of steel may decline due to an overproduction by the Chinese steel companies.

According to the China Iron and Steel Association, there are approximately 1,100 steel companies in China. Each steel company has its own production plan. The Chinese government released new guidance on the steel industry to encourage consolidation within the fragmented steel sector to mitigate problems of low-end repetitive production and inefficient use of resources. The current overproduction may not be solved by these measures enacted by the Chinese government. If the current overproduction continues, our product shipments could decline, our inventory could build up and eventually we may be required to decrease our sales price, which may decrease our profitability.

 
15

 

Disruptions to our manufacturing processes could adversely affect our operations, customer service and financial results.
 
Steel manufacturing processes are dependent on critical steel-making equipment, such as furnaces, continuous casters, rolling mills and electrical equipment (such as transformers), and such equipment may become temporarily inoperable as a result of unanticipated malfunctions or other events, such as fires or furnace breakdowns. Although our manufacturing plants have not experienced plant shutdowns or periods of reduced production as a result of such equipment failures or other events, we may experience such problems in the future. To the extent that lost production as a result of such a disruption could not be recovered by unaffected facilities, such disruptions could have an adverse effect on our operations, customer service and financial results.

Because we are a holding company with substantially all of our operations conducted through our subsidiaries, our performance will be affected by the performance of such subsidiaries.

We have no operations other than Daqiuzhuang Metal, Baotou Steel Pipe Joint Venture, Longmen Joint Venture and Maoming, and our principal assets are our investments in these subsidiaries. As a result, we are dependent upon the performance of Daqiuzhuang Metal, Baotou Steel Pipe Joint Venture, Longmen Joint Venture and Maoming and we will be subject to the financial, business and other factors affecting them as well as general economic and financial conditions. As substantially all of our operations are and will be conducted through our subsidiaries, we will be dependent on the cash flow of our subsidiaries to meet our obligations.

Because virtually all of our assets are and will be held by operating subsidiaries, the claims of our stockholders will be structurally subordinate to all existing and future liabilities and obligations, and trade payables of such subsidiaries. In the event of our bankruptcy, liquidation or reorganization, our assets and those of our subsidiaries will be available to satisfy the claims of our stockholders only after all of our subsidiaries’ liabilities and obligations have been paid in full.

We depend on acquiring companies to fulfill our growth plan.

An important element of our planned growth strategy is the pursuit and acquisitions of other businesses that increase our existing production capacity. However, integrating businesses involves a number of special risks, including the possibility that management may be distracted from regular business concerns by the need to integrate operations, unforeseen difficulties in integrating operations and systems, problems relating to assimilating and retaining employees of the acquisition, challenges in retaining customers, and potential adverse short-term effects on operation results. If we are unable to successfully complete and integrate strategic acquisitions in a timely manner, our growth strategy may be adversely impacted.

We depend on bank financing for our working capital needs.

We have various financing facilities which are due on demand or within one year. So far, we have not experienced any difficulties in repaying such financing facilities. However, we may in the future encounter difficulties in repaying or refinancing such loans on time and may face severe difficulties in our operations and financial position.

 
16

 

We rely on Mr. Zuosheng Yu for important business leadership.

We depend, to a large extent, on the abilities and operations of our current management team. However, we have a particular reliance upon Mr. Zuosheng Yu, our Chairman, Chief Executive Officer and significant shareholder, for the direction of our business and leadership in our growth effort. The loss of the services of Mr. Yu, for any reason, may have a material adverse effect on our business and prospects. We cannot guarantee that Mr. Yu will continue to be available to us, or that we will be able to find a suitable replacement for Mr. Yu in a timely basis.
 
There have been historical deficiencies with our internal controls which require further improvements, and we are exposed to potential risks from legislation requiring companies to evaluate controls under Section 404 of the Sarbanes-Oxley Act of 2002.

While we believe that we currently have adequate internal control procedures in place, we are still exposed to potential risks from legislation requiring companies to evaluate controls under Section 404 of the Sarbanes-Oxley Act of 2002. Under the supervision and with the participation of our management, we have evaluated our internal controls systems in order to allow management to report on, and our registered independent public accounting firm to attest to, our internal controls, as required by Section 404 of the Sarbanes-Oxley Act. We have performed the system and process evaluation and testing required in an effort to comply with the management certification and auditor attestation requirements of Section 404. As a result, we have incurred additional expenses and a diversion of management’s time. If we are not able to continue to meet the requirements of Section 404 in a timely manner or with adequate compliance, we might be subject to sanctions or investigation by regulatory authorities, such as the SEC or the New York Stock Exchange. Any such action could adversely affect our financial results and the market price of our stock.
 
We do not presently maintain product liability insurance in China, and our property and equipment insurance does not cover the full value of our property and equipment, which leaves us with exposure in the event of loss or damage to our properties or claims filed against us.

We currently do not carry any product liability or other similar insurance in China. We cannot assure you that we would not face liability in the event of the failure of any of our products.

We have purchased automobile insurance with third party liability coverage for our vehicles. In addition, we have purchased property insurance from China United Property Insurance Company to cover real property and plant. Except for property and automobile insurance, we do not have other insurance such as business liability or disruption insurance coverage for our operations in China. In the event of a significant product liability claim or other uninsured event, our financial results and the price of our common stock may be adversely affected.

 
17

 

Risks Related to Operating Our Business in China

We face the risk that changes in the policies of the Chinese government could have significant impact upon the business we may be able to conduct in China and the profitability of such business.

The economy of China is transitioning from a planned economy to a market oriented economy, subject to five-year and annual plans adopted by the government that set down national economic development goals. Policies of the Chinese government can have significant effects on the economic conditions of China. The Chinese government has confirmed that economic development will follow a model of a market economy under socialism. Under this direction, we believe that China will continue to strengthen its economic and trading relationships with foreign countries and business development in China will follow market forces. While we believe that this trend will continue, there can be no assurance that such will be the case. A change in policies by the Chinese government could adversely affect our interests through, among other factors: changes in laws; regulations or the interpretation thereof; confiscatory taxation; restrictions on currency conversion; imports or sources of supplies; or the expropriation or nationalization of private enterprises. Although the Chinese government has been pursuing economic reform policies for approximately two decades, the Chinese government may significantly alter such policies, especially in the event of a change in leadership, social or political disruption, or other circumstances affecting China’s political, economic and social climate.

The Chinese laws and regulations governing our current business operations and contractual arrangements are uncertain, and if we are found to be in violation, we could be subject to sanctions. In addition, any changes in such Chinese laws and regulations may have a material and adverse effect on our business.
 
There are substantial uncertainties regarding the interpretation and application of Chinese laws and regulations, including but not limited to the laws and regulations governing our business, or the enforcement and performance of our arrangements with customers in the event of the imposition of statutory liens, death, bankruptcy and criminal proceedings. Along with our subsidiaries, we are considered foreign persons or foreign funded enterprises under Chinese laws, and as a result, we are required to comply with certain Chinese laws and regulations. These laws and regulations are relatively new and may be subject to future changes, and their official interpretation and enforcement may involve substantial uncertainty. The effectiveness of newly enacted laws, regulations or amendments may be delayed, resulting in detrimental reliance by foreign investors. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively. In addition, the Chinese authorities retain broad discretion in dealing with violations of laws and regulations, including levying fines, revoking business licenses and requiring actions necessary for compliance. In particular, licenses, permits and beneficial treatment issued or granted to us by relevant governmental bodies may be revoked at a later time under contrary findings of higher regulatory bodies. We cannot predict what effect the interpretation of existing or new Chinese laws or regulations may have on our businesses. We may be subject to sanctions, including fines, and could be required to restructure our operations. Such restructuring may not be deemed effective or may encounter similar or other difficulties. As a result of these substantial uncertainties, there is a risk that we may be found in violation of current or future Chinese laws or regulations.

 
18

 

A slowdown or other adverse developments in the Chinese economy may materially and adversely affect our customers, demand for our services and our business.

All of our operations are conducted in China and all of our revenues are generated from sales to businesses operating in China. Although the Chinese economy has grown significantly in recent years, such growth may not continue. We do not know how sensitive we are to a slowdown in economic growth or other adverse changes in the Chinese economy which may affect demand for our products. A slowdown in overall economic growth, an economic downturn or recession or other adverse economic developments in China may materially reduce the demand for our products and in turn adversely affect our results of operations and our productivity.
 
Inflation in China could negatively affect our profitability and growth.

While the Chinese economy has experienced rapid growth, such growth has been uneven among various sectors of the economy and in different geographical areas of the country. Rapid economic growth can lead to growth in the money supply and rising inflation. If prices for our products rise at a rate that is insufficient to compensate for the rise in the costs of supplies, it may have an adverse effect on profitability. In order to control inflation in the past, the Chinese government has imposed controls on bank credits, limits on loans for fixed assets and restrictions on state bank lending. Such policy can lead to a slowing of economic growth.

If relations between the United States and China deteriorate, our stock price may decrease and we may experience difficulties accessing the United States capital markets.

At various times during recent years, the United States and China have had disagreements over political and economic issues. Controversies may arise in the future between these two countries. Any political or trade controversies between the United States and China could impact the market price of our common stock and our ability to access United States capital markets.

The Chinese Government could change its policies toward private enterprises, which could result in the total loss of our investments in China.

Our business is subject to political and economic uncertainties in China and may be adversely affected by its political, economic and social developments. Over the past several years, the Chinese government has pursued economic reform policies including the encouragement of private economic activity and greater economic decentralization. The Chinese government may not continue to pursue these policies or may alter them to our detriment. Conducting our business might become more difficult or costly due to changes in policies, laws and regulations, or in their interpretation or the imposition of confiscatory taxation, restrictions on currency conversion, restrictions or prohibitions on dividend payments to stockholders, devaluations of currency or the nationalization or other expropriation of private enterprises. In addition, nationalization or expropriation could result in the total loss of our investments in China.

 
19

 

The Chinese State Administration of Foreign Exchange, or SAFE, requires Chinese residents to register with, or obtain approval from SAFE regarding their direct or indirect offshore investment activities.
 
China’s State Administration of Foreign Exchange Regulations regarding offshore financing activities by Chinese residents has undertaken continuous changes which may increase the administrative burden we face and create regulatory uncertainties that could adversely affect the implementation of our acquisition strategy. A failure by our shareholders who are Chinese residents to make any required applications and filings pursuant to such regulations may prevent us from being able to distribute profits and could expose us and our Chinese resident shareholders to liability under Chinese law.
 
Our business, results of operations and overall profitability are linked to the economic, political and social conditions in China.

All of our business, assets and operations are located in China. The economy of China differs from the economies of most developed countries in many respects, including government involvement, level of development, growth rate, control of foreign exchange, and allocation of resources. The economy of China has been transitioning from a planned economy to a more market-oriented economy. Although the Chinese government has recently implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the Chinese government. In addition, the Chinese government continues to play a significant role in regulating industry by imposing industrial policies. It also exercises significant control over China’s economic growth through the allocation of resources, controlling payment of foreign currency denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Therefore, the Chinese government’s involvement in the economy may negatively affect our business operations, results of operations and our financial condition.

Governmental control of currency conversion may cause the value of your investment in our common stock to decrease.

The Chinese government imposes controls on the conversion of Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all of our revenues in Renminbi, which is currently not a freely convertible currency. Shortages in the availability of foreign currency may restrict our ability to remit sufficient foreign currency to pay dividends, or otherwise satisfy foreign currency denominated obligations. Under existing Chinese foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from the transaction, can be made in foreign currencies without prior approval from China’s State Administration of Foreign Exchange by complying with certain procedural requirements. However, approval from appropriate governmental authorities is required where Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of bank loans denominated in foreign currencies.

 
20

 

The Chinese government may also at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay certain of our expenses as they come due.
 
The fluctuation of the Renminbi may cause the value of your investment in our common stock to decrease.

The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in China’s political and economic conditions. As we rely entirely on revenues earned in China, our cash flows, revenues and financial condition will be affected by any significant revaluation of the Renminbi. For example, to the extent that we need to convert U.S. dollars we receive from an offering of our securities into Renminbi for our operations, if the Renminbi appreciates against the U.S. dollar, the Renminbi equivalent of the US dollar we convert would be reduced. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments for dividends on our common shares or for other business purposes and the U.S. dollar appreciates against the Renminbi, the U.S. dollar equivalent of the Renminbi we convert would be reduced. To date, however, we have not engaged in transactions of either type. In addition, the depreciation of significant U.S. dollar denominated assets could result in a charge to our income statement and a reduction in the value of these assets.
 
Since 1994, China pegged the value of the Renminbi to the U.S. dollar. We do not believe that this policy has affected our business. However, there have been indications that the Chinese government may be reconsidering its monetary policy in light of the overall devaluation of the U.S. dollar against the Euro and other currencies during the last two years. In July 2005, the Chinese government revalued the Renminbi by 2.1% against the U.S. dollar, moving from Renminbi 8.28 to Renminbi 8.11 per dollar. If the pegging of the Renminbi to the U.S. dollar is loosened, we anticipate that the value of the Renminbi will appreciate against the dollar with the consequences discussed above. As of December 31, 2009, the exchange rate of the Renminbi to the U.S. dollar was 6.82 yuan to 1 dollar.
 
We are subject to environmental and safety regulations, which may increase our compliance costs and reduce our overall profitability.

We are subject to the requirements of environmental and occupational safety and health laws and regulations in China. We may incur substantial costs or liabilities in connection with these requirements. Additionally, these regulations may become stricter, which will increase our costs of compliance in a manner that could reduce our overall profitability. The capital requirements and other expenditures that may be necessary to comply with environmental requirements could increase and become a significant expense linked to the conduct of our business.

 
21

 

Our operating subsidiaries must comply with environmental protection laws that could adversely affect our profitability.

We are required to comply with the environmental protection laws and regulations promulgated by the national and local governments of China. Yearly inspections of waste treatment systems require the payment of a license fee which could become a penalty fee if standards are not maintained. If we fail to comply with any of these environmental laws and regulations in China, depending on the types and seriousness of the violation, we may be subject to, among other things, warning from relevant authorities, imposition of fines, specific performance and/or criminal liability, forfeiture of profits made, being ordered to close down our business operations and suspension of relevant permits.
 
Because the Chinese legal system is not fully developed, our legal protections may be limited.

The Chinese legal system is based upon written statutes. Prior court decisions may be cited for reference but are not binding on subsequent cases and have limited value as precedent. Since 1979, China’s legislative bodies have promulgated laws and regulations dealing with economic matters such as foreign investment, corporate organization and governance, commerce, taxation and trade. However, China has not developed a fully integrated legal system and the array of new laws and regulations may not be sufficient to cover all aspects of economic activities in China. In particular, because these laws and regulations are relatively new, and because of the limited volume of published decisions and their non-binding nature, the interpretation and enforcement of these laws and regulations involves uncertainties. In addition, published government policies and internal rules may have retroactive effects and, in some cases, the policies and rules are not published at all. As a result, we may be unaware of our violation of these policies and rules until some time later. The laws of China govern our contractual arrangements with our affiliated entities and the enforcement of these contracts and the interpretation of the laws governing these relationships are subject to uncertainty.
 
Risks Related to Our Common Stock

Our officers, directors and affiliates control us through their positions and stock ownership and their interests may differ from other stockholders.

Our officers, directors and affiliates beneficially own approximately 41.3% of our common stock. Mr. Zuosheng Yu, our major stockholder, beneficially owns approximately 40.9% of our common stock. Mr. Yu can effectively control us and his interests may differ from other stockholders.
 
All our subsidiaries are located in China and substantially all of our assets are located outside the United States. It may therefore be difficult for investors in the United States to enforce their legal rights based on the civil liability provisions of the U.S. federal securities laws against us in the courts of either the United States and China and, even if civil judgments are obtained in United States courts, such judgments may not be enforceable in Chinese courts. All our directors and officers reside outside of the United States. It is unclear if extradition treaties now in effect between the United States and China would permit effective enforcement against us or our officers and directors of criminal penalties under the U.S. federal securities laws or otherwise.

 
22

 
 
We have never paid cash dividends and are not likely to do so in the foreseeable future.

We currently intend to retain any future earnings for use in the operation and expansion of our business. We do not expect to pay any cash dividends in the foreseeable future but will review this policy as circumstances dictate.

Our common stock is subject to price volatility unrelated to our operations.

The market price of our common stock could fluctuate substantially due to a variety of factors, including market perception of our ability to achieve our planned growth, quarterly operating results of other steel makers, trading volume in our common stock, changes in general conditions in the economy and the financial markets or other developments affecting our competitors or us. In addition, the stock market is subject to extreme price and volume fluctuations. This volatility has had a significant effect on the market price of securities issued by many companies for reasons unrelated to their operating performance and could have the same effect on our common stock.

Investors may experience dilution from any conversion of the senior convertible notes or exercise of warrants we issued in December 2007 and December 2009.

Shares of our common stock are issuable upon conversion of senior convertible notes and warrants to purchase common stock issued in a private placement that closed  on December 13, 2007.  The senior convertible notes were initially convertible into 4,170,009 shares of our common stock based on a conversion price of $12.47 per share and applicable interest rates.   Prior to the adjustments described below, upon the exercise of the warrants, an additional aggregate amount of 1,154,958 shares of our common stock were issuable based upon the then exercise price of $13.51 per share.  The senior convertible notes have a five year term through December 12, 2012, and the warrants are exercisable from May 13, 2008, to May 13, 2013.  The conversion price of the notes and the exercise price of the warrants (and the number of shares issuable under the warrants) are each subject to adjustment under certain customary circumstances, including, among others, if the sale price of securities issued by us in subsequent offerings is less than the conversion or exercise prices then in effect.  The conversion price of the notes was adjusted and reset to $4.2511, the market price (as defined in the notes) on May 7, 2009.  As of December 31, 2009, approximately $36.7 million of the convertible notes had been converted, resulting in the issuance of 9,578,518 shares of our common stock.    As discussed below, the warrants have been adjusted such that upon their exercise, an aggregate of 3,900,871 shares of our common stock  are now issuable based upon the  current adjusted exercise price of $5.00 per share.  

In addition to the notes and warrants issued in December 2007, we issued 5,555,556 shares of our common stock and warrants to purchase 2,777,778 shares of our common stock in a registered direct offering that closed on December 30, 2009.  The warrants issued as part of the December 2009 transaction are exercisable beginning six months from the date of issuance for a period of two years from the initial exercise date, and carry an initial exercise price per share equal to $5.00. Certain anti-dilution adjustment provisions contained in the warrants issued in 2007 may have been triggered by the December 2009 transaction.  Rather than giving full effect to the anti-dilution provisions, we entered into warrant reset agreements with investors from our December 2007 financing whereby the aggregate number of shares of common stock issuable upon exercise of the warrants issued in the December 2007 transaction is increased from 1,154,958 shares to 3,900,871 shares, and the exercise price of the December 2007 Warrants was reduced from $13.51 per share to $5.00 per share.   

 
23

 

The issuance of shares of our common stock upon conversion of the notes which remain outstanding and exercise of any of our outstanding warrants (including any increased amount of shares that may be issued in the future because of reductions in exercise price and conversion price) will dilute our current shareholders. 

ITEM 1B. UNRESOLVED STAFF COMMENTS.

None.

ITEM 2. PROPERTIES.

Daqiuzhuang Metal

The properties of Daqiuzhuang Metal consist of manufacturing sites and office buildings located in Jinghai county, about 20 miles (45 kilometers) southwest of the Tianjin city center on a total of 17.81 acres (7.21 hectares) of land, which includes 320,390 sq. ft. (29,667 sq. m.) of building space.

Under Chinese law, all land in China is owned by the government, which grants a “land use right” to an individual or entity after a purchase price for such “land use right” is paid to the government. The land use right allows the holder the right to use the land for a specified long-term period of time and enjoy all the ownership incidents to the land. We are the registered owner of the land use rights for the parcels of land identified in the chart below.

Registered Owner of
Land use 
Right
 
Location & Certificate of 
Land Use 
Right
 
Usage
 
Space
(acres)
 
Life of 
Land 
Use 
Right
 
Remaining
Life
Tianjin Daqiuzhuang Metal Sheet Co., Ltd.
 
No. 6 West Gangtuan Road, Daqiuzhuang, Jinghai Country, Tianjin
 
Industrial Use
    6.78  
50 years
 
42 years
                       
Tianjin Daqiuzhuang Metal Sheet Co., Ltd.
 
No. 35 Baiyi Road, Daqiuzhuang, Jinghai County, Tianjin
 
Industrial Use
    9.89  
50 years
 
42 years
                       
Tianjin Daqiuzhuang Metal Sheet Co., Ltd.
 
Ying Fong Road North, Daqiuzhuang, Jinghai country Tianjin
 
Commercial Use
    1.14  
50 years
 
42 years

 
24

 

Baotou Steel Pipe Joint Venture

The properties of Baotou Steel Pipe Joint Venture consist of our production and administrative sites located on the main production campus of the Baotou Steel Pipe Joint Venture located in Baotou, Inner Mongolia Autonomous Region. The land is leased from Baotou Iron and Steel Group Co., Ltd., our strategic partner in the Baotou Steel Pipe Joint Venture.

Longmen Joint Venture

The properties of Longmen Joint Venture consist of production and administrative sites located in various locations throughout the southern half of Shaanxi province on land totaling approximately 301 acres (121.5 hectares).

We are the registered owner of the land use rights for the parcels of land identified in the chart below.

Registered Owner of
Land use 
Right
 
Location & Certificate of
Land Use 
Right
 
Usage
 
Space
(acres)
 
Life of 
Land
Use 
Right
 
Remaining
Life
Shaanxi Longmen Iron and Steel Co., Ltd.
 
North Huanyuan Road, Weiyang District, Xi'an, Shaanxi
 
Industrial Use
    19.1  
50 Years
 
36 Years
                       
Shaanxi Longmen Iron and Steel Co., Ltd.
 
Longmen Town, Hancheng, Shaanxi
 
Industrial Use
    173.2  
40-48 Years
 
36-40 Years
                       
Shaanxi Longmen Iron and Steel Co., Ltd.
 
Sanping Village, Shipo Town, Zhashui County, Shaanxi
 
Industrial Use
    103.2  
50 Years
 
44 Years
                       
Shaanxi Longmen Iron and Steel Co., Ltd.
 
Zhaikouhe Village, Xunjian Town, Zhashui County, Shaanxi
 
Industrial Use
    1.9  
50 Years
 
44 Years
                       
Shaanxi Longmen Iron and Steel Co., Ltd.
 
East Taishi Avenue, Xincheng District, Hancheng, Shaanxi
 
Commercial Use
    3.6  
40 Years
 
35 Years

 
25

 

Maoming

The properties of Maoming consist of our production and administrative sites located in two separated sites inside Maoming city, Guangdong province, on land totaling approximately 239.6 acres (96.9 hectares).

We are the registered owner of the land use rights for the parcels of land identified in the chart below.

Registered Owner of Land
use
Right
 
Location & Certificate of
Land Use
Right
 
Usage
 
Space
(acres)
 
Life
of
Land
Use
Right
 
Remaining
Life
Maoming Hengda Steel Co., Ltd.
 
Diancheng Town, Dianbai County, Maoming City, Industrial Zone of Bohe Port, Guangdong
 
Industrial Use
    239.6  
50 Years
 
44 Years

ITEM 3. LEGAL PROCEEDINGS.

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

 Beginning October 3, 2007 through March 5, 2008, our common stock was listed on the American Stock Exchange and from March 6, 2008 to August 7, 2008 our common stock was traded on the NYSE Arca exchange.  On August 8, 2008, our common stock began trading on the NYSE. Our ticker symbol is "GSI." The high and low closing common stock price for each quarter of the last two years is as follows:
  
HIGH AND LOW STOCK PRICES
 
1ST QTR
   
2ND QTR
   
3RD QTR
   
4TH QTR
 
2009
                       
High
 
$
4.59
   
$
7.35
   
$
5.74
   
$
5.79
 
Low
 
$
1.85
   
$
2.77
   
$
3.32
   
$
3.62
 
2008
                               
High
 
$
9.08
   
$
15.70
   
$
15.50
   
$
7.16
 
Low
 
$
6.23
   
$
6.66
   
$
7.14
   
$
2.53
 

 
26

 

As of March 5, 2010, there were approximately 10,000 holders of record of our common stock.

Dividend Policy
  
Our board of directors currently does not intend to declare dividends or make any other distributions to our shareholders. Any determination to pay dividends in the future will be at our board’s discretion and will depend upon our results of operations, financial condition and prospects as well as other factors deemed relevant by our board of directors.

Recent Sales of Unregistered Sale Securities

On September 1, 2009, we granted Huamei 21st Century Limited, 170,000 shares of our common stock at $3.60 per share for consulting services. The Company relied on the exemption from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”) provided under Section 4(2) of the Securities Act in granting the shares to Huamei 21st Century Limited.

 
27

 

ITEM 6. SELECTED FINANCIAL DATA.

SUMMARY OF OPERATIONS
 
2009
   
2008
   
2007
   
2006
   
2005
 
(USD and number of shares in thousands, except per share amounts)
                             
Revenues
  $ 1,668,446     $ 1,351,203     $ 772,440     $ 139,495     $ 89,740  
Cost of Revenues
  $ 1,579,892     $ 1,343,275     $ 715,751     $ 135,324     $ 81,166  
Selling, General, and Administrative Expenses
  $ 41,074     $ 36,942     $ 16,164     $ 2,421     $ 2,781  
Income (Loss) from operations
  $ 47,480     $ (29,014 )   $ 40,525     $ 1,749     $ 5,793  
Net Income                                         
(Loss) Attributable to Controlling Interest
  $ (25,244 )   $ (11,323 )   $ 22,426     $ 1,033     $ 2,740  
(Loss) Earnings per Share, Basic
  $ (0.60 )   $ (0.32 )   $ 0.69     $ 0.03     $ 0.09  
(Loss) Earnings per Share, Diluted
  $ (0.60 )   $ (0.32 )   $ 0.69     $ 0.03     $ 0.09  
Basic Weighted Average Shares Outstanding
    41,860       35,381       32,425       31,250       31,250  
Diluted Weighted Average Shares Outstanding
    41,860       35,381       32,558       31,250       31,250  
LONG TERM OBLIGATIONS
                                       
Convertible Notes Payables
  $ 1,050     $ 7,155     $ 5,440                  
Derivative Liabilities
  $ 23,340     $ 9,903     $ 28,483                  
 
   
As of DECEMBER 31
 
FINANCIAL DATA
 
2009
   
2008
   
2007
   
2006
   
2005
 
(USD in thousands, except the ratios)
                             
Total Assets
  $ 1,228,064     $ 865,714     $ 478,407     $ 73,822     $ 58,993  
Depreciation and Amortization
  $ 33,107     $ 22,414     $ 10,337     $ 1,917     $ 1,344  
Current Ratio
    0.59       0.43       0.67       0.87       0.96  
   
Three months ended December 31
 
STATEMENT OF
 
(Unaudited)
 
OPERATIONAL DATA
 
2009
   
2008
   
2007
   
2006
   
2005
 
(USD in thousands, except share and per share amounts)
                             
Statement of Operations Data
                             
Revenues
  $ 451,953     $ 261,087     $ 268,192     $ 42,496     $ 17,719  
Cost of Revenues
  $ 438,554     $ 282,662     $ 247,239     $ 42,838     $ 17,509  
Gross Profit
  $ 13,399     $ (21,575 )   $ 20,953     $ (342 )   $ 210  
Selling, General, and Administrative Expenses
  $ 11,855     $ 8,578     $ 5,894     $ 266     $ 1,017  
Income (Loss) form Operations
  $ 1,544     $ (30,153 )   $ 15,059     $ (607 )   $ (808 )
Net income (Loss) Attributable to Controlling Interest
  $ (11,085 )   $ (9,705 )   $ 12,057     $ 514     $ 386  
(Loss) Earnings per share
                                       
Basic
  $ (0.26 )   $ (0.27 )   $ 0.36     $ 0.01     $ 0.01  
Diluted
  $ (0.26 )   $ (0.27 )   $ 0.36     $ 0.01     $ 0.01  
                                         
Balance Sheet Data
                                       
Current Assets
  $ 615,278     $ 315,445     $ 232,608     $ 44,670     $ 37,017  
Total Assets
  $ 1,228,064     $ 865,714     $ 478,407     $ 73,822     $ 58,993  
Total Liabilities
  $ 1,061,735     $ 751,476     $ 382,974     $ 53,575     $ 41,256  
Noncontrolling interest
  $ 72,598     $ 54,330     $ 42,044     $ 6,186     $ 5,387  

 
28

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Forward-Looking Statements:

The following discussion of the financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes thereto. The following discussion contains forward-looking statements. General Steel Holdings, Inc. is referred to herein as “we” or “our.” The words or phrases “would be,” “will allow,” “expect to”, “intends to,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” or similar expressions are intended to identify forward-looking statements. Such statements include those concerning our expected financial performance, our corporate strategy and operational plans. Actual results could differ materially from those projected in the forward-looking statements as a result of a number of risks and uncertainties, including: (a) those risks and uncertainties related to general economic conditions in China, including regulatory factors that may affect such economic conditions; (b) whether we are able to manage our planned growth efficiently and operate profitable operations, including whether our management will be able to identify, hire, train, retain, motivate and manage required personnel or that management will be able to successfully manage and exploit existing and potential market opportunities; (c) whether we are able to generate sufficient revenues or obtain financing to sustain and grow our operations; and (d) whether we are able to successfully fulfill our primary requirements for cash which are explained below under “Liquidity and Capital Resources”. Unless otherwise required by applicable law, we do not undertake, and we specifically disclaim any obligation, to update any forward-looking statements to reflect occurrences, developments, unanticipated events or circumstances after the date of such statement.

OVERVIEW

General Steel was founded on the strategy to aggressively merge, partner with, and acquire State-owned enterprises and private steel companies within China’s highly fragmented steel industry.  As of December 31, 2009, we were comprised of four operating subsidiaries of which the Longmen Joint Venture is the largest.  Located in Shaanxi province, the Longmen Joint Venture contributed approximately 92% of our total revenue for the 2009 fiscal year.

Highlights of 2009

Fiscal year 2009 was highlighted by record revenue, shipment volume and income from operations.

 
·
Revenue in 2009 was the highest in our history, reaching $1.67 billion, a 23.5% increase over 2008.
 
·
Shipment volume in 2009 was the highest in our history, reaching 3.8 million metric tons, a 66.1% increase over 2008.
 
·
Gross margin increased from 0.59% in 2008 to 5.31% in 2009.

 
29

 

 
·
Income from Operations in 2009 was the highest in our history, reaching $47.5 million, compared to an operating loss of $29 million in 2008.
 
·
Non-GAAP EBITDA in 2009 was $93.2 million, a significant increase from $3.2 million in 2008 due primarily to implementation of cost cutting measures.
 
·
We have been given an unqualified opinion by our auditors on our internal control system according to criteria established in the framework in Internal Control  Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  We have concluded that our internal control over financial reporting was effective as of December 31, 2009.
 
·
We brought the second of two new 1280 cubic meter blast furnaces on-line at the Longmen Joint Venture, effectively doubling the annualized total crude steel capacity at the facility to 4 million metric tons.
 
·
We secured commitment for 70% of our 2010 estimated production at Longmen Joint Venture through signed contracts from established distributors.
 
·
We were awarded two contracts to supply an aggregate of 240,000 metric tons of steel to support the Xi Luo Du and the Xiang Jia Ba hydropower projects, both located in western China.
 
·
We completed a $25 million capital raise through the issuance of common stock and warrants.

The record results reflect the strong demand for our construction steel products in our principal markets of Shaanxi and western China. Our Longmen Joint Venture continued to benefit from a large number of infrastructure projects in the region fueled by the national stimulus plan and the national “Go West” economic development initiative.

RESULTS OF OPERATIONS

General

The first three quarters of the year saw reduced raw material prices as the world commodity markets regained their footing after suffering an abrupt collapse as part of the financial crisis in late 2008.  During this time, demand for our construction steel products in our principal market of Shaanxi and western China grew rapidly as downstream infrastructure and construction projects boomed as the national $586 billion national stimulus plan gained traction.  As a result of this strong demand, in the third quarter, the Shaanxi provincial GDP exceeded 18%.

In the fourth quarter of 2009, unit cost of sales decreased 20.6% compared to the same quarter last year. Additionally, during the fourth quarter of 2009 the average selling price for rebar fell 30% due primarily to a weather-related slowdown in overall construction as compared to the fourth quarter of 2008.

 
30

 

 Fiscal year ended December 31, 2009 compared with fiscal year ended December 31, 2008 and 2007

Income Statement
                         
Income Statement
                   
Percentage Change
 
Unit-thousands except share data
 
2009
   
2008
   
2007
   
2009 VS 2008
   
2008 VS 2007
 
Revenues
  $ 1,668,446     $ 1,351,203     $ 772,440       23 %     75 %
Cost of Revenues
  $ 1,579,892     $ 1,343,275     $ 715,751       18 %     88 %
Gross Profit
  $ 88,554     $ 7,928     $ 56,689       1017 %     -86 %
 Gross Profit Margin %
    5.31 %     0.59 %     7.34 %                
Selling, General and Administrative Expenses
  $ 41,074     $ 36,492     $ 16,164       13 %     126 %
Income (Loss) from Operations
  $ 47,480     $ (29,014 )   $ 40,525                  
                                         
Total Other Income (expense), net
  $ (45,008 )   $ 3,738     $ (1,262 )                
                                         
Income (Loss) Before Provision for Income Tax and Noncontrolling Interest
  $ 2,472     $ (25,276 )   $ 39,263                  
                                         
Total Provision (Benefit) for Income Taxes
  $ 6,153     $ (5,411 )   $ 4,836                  
Income (Loss) before the Noncontrolling Interest
  $ (3,681 )   $ (19,865 )   $ 34,427                  
Less: Net Income (loss) Attributable to the Noncontrolling Interest
  $ 21,563     $ (8,542 )   $ 12,001                  
Net Income (Loss) Attributable to Controlling Interest
  $ (25,244 )   $ (11,323 )   $ 22,426                  
(Loss) Earnings Per Share
                                       
Basic
  $ (0.603 )   $ (0.320 )   $ 0.690                  
Diluted
  $ (0.603 )   $ (0.320 )   $ 0.690                  

Revenue

Revenue in 2009 was the highest in our history, reaching $1.67 billion, a 23.5% increase over 2008. This increase in revenue is attributed to an increase of 67.3% in additional shipment volume at our Longmen Joint Venture. The shipment volume increase was made possible by the new capacity of two 1280 cubic meter blast furnaces brought on line in December 2008 and January 2009. The aggregate revenue for 2009 also reflects a full twelve months of operations at our Maoming facility, whereas 2008 reflected only six months of such consolidation. For 2009, our Longmen Joint Venture comprised 92% of total sales.
 
 
31

 

Three months ended December 31, 2009 compared with Three months ended December 31, 2008

   
Three months ended December 31
 
   
(Unaudited)
 
Income Statement
             
Percentage Change
 
Unit-thousands except share data
 
2009 Q4
   
2008 Q4
   
2009 Q4 VS 2008 Q4
 
Revenues
  $ 451,953     $ 261,087       73 %
Cost of Revenues
  $ 438,554     $ 282,662       55 %
Gross Profit (loss)
  $ 13,399     $ (21,575 )        
 Gross Profit Margin %
    2.96 %     (8.26 )%        
Selling, General and Administrative Expenses
  $ 11,855     $ 8,578       38 %
Income (Loss) from Operations
  $ 1,544     $ (30,153 )        
       Total Other Income (expense), net
  $ (13,520 )   $ 6,926          
Loss Before Provision for Income Tax and Noncontrolling Interest
  $ (11,976 )   $ (23,227 )        
Total Benefit for Income Taxes
  $ (1,033 )   $ (4,864 )        
                         
Loss before the Noncontrolling Interest
  $ (10,943 )   $ (18,363 )        
                         
Less: Net Income (loss) Attributable to the Noncontrolling Interest
  $ 142     $ (8,658 )        
Net Loss Attributable to Controlling Interest
  $ (11,085 )   $ (9,705 )        
(Loss) Earnings Per Share
                       
Basic
  $ (0.26 )   $ (0.27 )        
Diluted
  $ (0.26 )   $ (0.27 )        

Production and Revenue by Subsidiary and Product
 
Each subsidiary produces one main product. Revenue and production volume by product is seen by looking at the results of each subsidiary.

Fiscal year ended December 31, 2009 compared with fiscal year ended December 31, 2008 and 2007
 
Production by Subsidiary and Product (in thousand metric tons)
                 
Subsidiary
Product
 
2009
   
2008
   
2007
 
Longmen Joint Venture
Rebar
    3,395       2,030       1,441  
Daqiuzhuang Metal
Hot-Rolled Sheets
    156       196       323  
Maoming
High-Speed Wire
    254       48          
Baotou Steel Pipe
Spiral-Welded Steel Pipes
    29       34       13  
 
Total Production
    3,834       2,308       1,777  
 
Revenue by Subsidiary and Product (USD in thousands)
                 
Subsidiary
Product
 
2009
   
2008
   
2007
 
Longmen Joint Venture
Rebar
    1,534,696       1,182,433       618,315  
Daqiuzhuang Metal
Hot-Rolled Sheets
    58,833       132,458       147,727  
Maoming
High-Speed Wire
    62,487       23,280          
Baotou Steel Pipe
Spiral-Welded Steel Pipes
    12,430       13,032       6,397  
 
Total Revenue
    1,668,446       1,351,203       772,439  

Revenue at the Longmen Joint Venture increased 29.8% to $1.5 billion in 2009 up from $1.2 billion in 2008. The increased production at the facility of nearly 1.4 million metric tons accounted for the increase and offset the overall drop in selling price during the year. Revenue at the Maoming facility increased 168.4% to $62.5 million in 2009 from $23.3 million in 2008, owing to a full year consolidation of operating results in 2009. We acquired Maoming in July 2008 and recorded only six months of the facility’s operations for 2008.

 
32

 

Three months ended December 31, 2009 compared with three months ended December 31, 2008
         
     
Three months ended December 31
 
     
(Unaudited)
 
Production by Subsidiary and Product (in thousand metric tons)
             
Percentage Change
 
Subsidiary
Product
 
2009 Q4
   
2008 Q4
   
2009 Q4 VS 2008 Q4
 
Longmen Joint Venture
Rebar
    944       507       86 %
Daqiuzhuang Metal
Hot-Rolled Sheets
    74       29       155 %
Maoming
High-Speed Wire
    94       26       262 %
Baotou Steel Pipe
Spiral-Welded Steel Pipes
    12       13       -8 %
 
Total Production
    1,124       575       95 %

     
Three months ended December 31
 
     
(Unaudited)
 
Revenue by Subsidiary and Product (USD in thousands)
             
Percentage Change
 
Subsidiary
Product
 
2009 Q4
   
2008 Q4
   
2009 Q4 VS 2008 Q4
 
Longmen Joint Venture
Rebar
    422,165       234,262       80 %
Daqiuzhuang Metal
Hot-Rolled Sheets
    17,274       14,461       19 %
Maoming
High-Speed Wire
    8,480       8,904       -5 %
Baotou Steel Pipe
Spiral-Welded Steel Pipes
    4,034       3,460       17 %
 
Total Revenue
    451,953       261,087       73 %

Cost of Revenues
 
Fiscal year ended December 31, 2009 compared with fiscal years ended December 31, 2008 and 2007
                   
(USD in thousand)
 
2009
   
2008
   
2007
 
Cost of Revenues
  $ 1,139,630     $ 999,318     $ 389,615  
Cost of Revenues - Related Parties
  $ 440,262     $ 343,957     $ 326,136  
Total Cost of Revenues
  $ 1,579,892     $ 1,343,275     $ 715,751  

Our primary cost of revenues is the cost of raw material such iron ore, coke, alloy and scrap steel. The cost of iron ore and coke accounts for approximately 75% of our total cost of sales. As a result, the price of iron ore and coke are the primary raw material cost drivers for our products. In 2009, we were able to control our costs with the two new blast furnaces at Longmen Joint Venture which are more efficient with lower coke usage in production. In addition, we successfully increased our raw material inventory, especially iron ore, at relatively low prices throughout the year which helped us to control our cost of revenues.

Three months ended December 31, 2009 compared with three months ended December 31, 2008

Gross Profit
 
Fiscal year ended December 31, 2009 compared with fiscal year ended December 31, 2008

(USD in thousand)
 
2009
   
2008
   
2007
 
Gross Profit
  $ 88,554     $ 7,928     $ 56,689  
Gross Profit Margin
    5.31 %     0.59 %     7.34 %

Gross profit in 2009 was $88.6 million, compared to $7.9 million in 2008. The increase was mainly due to our Longmen Joint Venture and its 67.3% increase in sales volume in 2009.

 
33

 

Higher gross profit in 2009 came not only from the overall lowering of raw material costs following record highs in the first half of 2008, but also from improved cost control in production, efficiencies in raw material usage with the new blast furnaces at Longmen Joint Venture and an increase in raw material inventory, especially iron ore, at relatively low prices through out the year.

Three months ended December 31, 2009 compared with fiscal year ended December 31, 2008
     
   
Three months ended December 31
   
(Unaudited)
(USD in thousand)
           
Percentage Change
   
2009 Q4
   
2008 Q4
 
2009 Q4 VS 2008 Q4
Gross Profit (loss)
  $ 13,399     $ (21,575 )  
Gross Profit Margin
    2.96 %     (8.26 )%  

Selling, General and Administrative Expenses
 
Fiscal year ended December 31, 2009 compared with fiscal year ended December 31, 2008 and 2007
                   
(USD in thousand)
 
2009
   
2008
   
2007
 
Selling, General and Administrative expenses
  $ 41,074     $ 36,942     $ 16,164  
SG&A / Revenue %
    2.46 %     2.73 %     2.09 %

Our revenue grew by 23.5% while the dollar amount of our Selling, General and Administrative Expenses (“SG&A”), which includes costs such as executive compensation, office expense, legal and accounting charges, travel charges, and various taxes, also increased 11.2% to $41.1 million in 2009 from $36.9 million in 2008. SG&A as a percentage of revenue decreased to 2.5% in fiscal year 2009 from 2.7% in year 2008.

Three months ended December 31, 2009 compared with three months ended December 31, 2008
       
   
Three months ended December 31
 
   
(Unaudited)
 
(USD in thousand)
             
Percentage Change
 
   
2009 Q4
   
2008 Q4
   
2009 Q4 VS 2008 Q4
 
Selling, General and Administrative expenses
  $ 11,855     $ 8,578       38 %
SG&A/Revenue %
    2.62 %     3.29 %        

SG&A as a percentage of revenue for the three months ended December 31 decreased to 2.6% in fiscal year 2009 from 3.3% in year 2008.

Income (Loss) from Operations
 
Fiscal year ended December 31, 2009 compared with fiscal year ended December 31, 2008 and 2007
 
(USD in thousand)
 
2009
   
2008
   
2007
 
Income (Loss) form Operations
  $ 47,480     $ (29,014 )   $ 40,525  
 
Income from operations reached a record high of $47.5 million compared to an operating loss in 2008 of $29.0 million.

 
34

 

Three months ended December 31, 2009 compared with three months ended December 31, 2008
     
   
Three months ended December 31
   
(Unaudited)
(USD in thousand)
           
Percentage Change
   
2009 Q4
   
2008 Q4
 
2009 Q4 VS 2008 Q4
Income (Loss) from Operations
  $ 1,544     $ (30,153 )  
 
Total Other Income (Expense), Net
 
Fiscal year ended December 31, 2009 compared with fiscal years ended December 31, 2008 and 2007

OTHER INCOME (EXPENSE), NET (USD in thousand)
 
2009
   
2008
   
2007
 
Interest Income
  $ 3,334     $ 4,251     $ 871  
Finance/interest expense
  $ (27,843 )   $ (23,166 )   $ (9,297 )
Change in Fair Value of Derivative Liabilities
  $ (33,159 )   $ 12,821     $ 6,236  
Gain from Debt Extinguishment
  $ 7,331     $ 7,169          
Government Grant
  $ 3,430                  
Loss on Disposal of Fixed Assets
  $ (4,643 )                
Income from Investment
  $ 4,730     $ 1,896          
Other Non-operating Income (Expense), net
  $ 1,812     $ 767     $ 928  
Total other income (expense), net
  $ (45,008 )   $ 3,738     $ (1,262 )
 
 
-
Finance/interest expense: interest paid on bank loans, early redemption of Notes Receivables, convertible debt and various bank fees.
 
-
Change in fair value of derivation liabilities: related to variation of warrant liability of our convertible debt. This is non-cash, non-operating item. According to GAAP, valuation of our December 2007 convertible promissory notes and common stock purchase warrants must be marked-to-market using a formula, which includes our stock price.
     
    The change in fair value of derivative liabilities for the year ended December 31, 2009 was a loss of $33.2 million compared to a gain of $12.8 million for the same period last year. 
 
a)  The global disruption in the financial markets in the third and fourth quarters of 2008 had a severe negative effect on stock prices worldwide. Because our stock price dropped substantially, as of December 31, 2008, we recorded a $12.8 million gain in the fair value of derivative liabilities in 2008.
b)  We recorded a $4.8 million gain in the fair value of derivative liabilities in 2009 due to the change in our stock price.
c)  $30.0 million of convertible notes was converted to 7,045,274 shares of common stock at a conversion price of $4.2511 in 2009 and we recorded a $28.2 million loss of derivative liability as a result.
d)  On December 24, 2009, we issued 5,555,556 shares of common stock and warrants to purchase 2,777,778 shares of common stock for fund raising. The 1,154,958 existing warrants issued in our December 2007 private placement were increased by 2.3775 times to 3,900,871 shares, and the per share exercise price was reduced from $13.51 to $5.00. We recorded a $9.7 million loss of fair value of derivative liabilities as a result.

35

 
 
-
Gain from debt extinguishment: debt waiver by Hengda Group, $7.3 million in 2009.
 
-
Government Grant: $3.4 million government compensation for blast furnaces replacement.
 
-
Loss on disposal of fixed assets, $3.1 million associated with the disposal of old less efficient fixed assets at our Longmen Joint Venture after new blast furnaces were put in use.
 
-
Income from investments: Entities in which we have neither controlling interest nor consolidated results as part of our statements.
 
-
Other non-operating income (expense): $1.8 million rental generated by Daqiuzhuang Metal by leasing its storage space.

Three months ended December 31, 2009 compared with three months ended December 31, 2008
       
   
Three months ended December 31
 
   
(Unaudited)
 
OTHER INCOME(EXPENSE), NET (USD in thousand)
       
Percentage Change
 
   
 2009 Q4
   
2008 Q4
   
2009 Q4 VS 2008 Q4
 
Interest Income
  $ 866     $ 2,147       -60 %
Finance/interest Expense
  $ (9,421 )   $ (4,017 )        
Change in Fair Value of Derivative Liabilities
  $ (9,931 )   $ 8,052          
Gain from Debt Extinguishment
  $ 4,399     $ 0          
Government Grant
                       
Loss on Disposal of Fixed Assets
                       
Income from Investment
  $ 1,069     $ 1,896       -44 %
Other Non-operating Expense, net
  $ (502 )   $ (1,152 )        
     Total Other Income (Expense), net
  $ (13,520 )   $ 6,926          

Net Income Attributable to Controlling Interest
 
Fiscal year ended December 31, 2009 compared with fiscal year ended December 31, 2008 and 2007
                   
(USD in thousand)
 
2009
   
2008
   
2007
 
Income (Loss) Before Provision Income Taxes and Noncontrolling Interest
  $ 2,472     $ (25,276 )   $ 39,263  
LESS: Total Provision for Income Taxes
  $ 6,153     $ (5,411 )   $ 4,836  
           Net Income (Loss) Attributable to the Noncontrolling Interest
  $ 21,563     $ (8,542 )   $ 12,001  
Net Income (Loss) attributable to Controlling Interest
  $ (25,244 )   $ (11,323 )   $ 22,426  

Three months ended December 31, 2009 compared with three months ended December 31, 2008
     
   
Three months ended December 31
   
(Unaudited)
(USD in thousand)
           
Percentage Change
   
2009 Q4
   
2008 Q4
 
2009 Q4 VS 2008 Q4
Loss Before Provision Income Taxes and Noncontrolling Interest
  $ (11,976 )   $ (23,227 )  
LESS: Total Benefit for Income Taxes
  $ (1,033 )   $ (4,864 )  
           Net Income (Loss) Attributable to the Noncontrolling Interest
  $ 142     $ (8,658 )  
Net Loss Attributable to Controlling Interest
  $ (11,085 )   $ (9,705 )  

 
36

 

(Loss) Earnings per Share
Fiscal year ended December 31, 2009 compared with fiscal year ended December 31, 2008 and 2007
                   
(USD in thousand, except EPS)
 
2009
   
2008
   
2007
 
Net Income (Loss) Attributable to Controlling Interest
  $ (25,244 )   $ (11,323 )   $ 22,426  
                         
Weighted Average Number of Shares
                       
Basic
    41,860,238       35,381,210       32,424,652  
Diluted
    41,860,238       35,381,210       32,558,350  
                         
(Loss) Earnings Per Share
                       
Basic
  $ (0.603 )   $ (0.320 )   $ 0.692  
Diluted
  $ (0.603 )   $ (0.320 )   $ 0.689  

Three months ended December 31, 2009 compared three months ended December 31, 2008
</
       
   
Three months ended December 31
 
   
(Unaudited)
 
(USD in thousand, except EPS)
             
Percentage Change
 
   
2009 Q4
   
2008 Q4
   
2009 Q4 VS 2008 Q4
 
Net Loss Attributable to Controlling Interest
  $ (11,085 )   $ (9,705 )