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EX-23 - GENERAL STEEL HOLDINGS INCv214754_ex23.htm
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EX-32.1 - GENERAL STEEL HOLDINGS INCv214754_ex32-1.htm
EX-31.2 - GENERAL STEEL HOLDINGS INCv214754_ex31-2.htm
EX-31.1 - GENERAL STEEL HOLDINGS INCv214754_ex31-1.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, 2010
  
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, 10020
(Address of Principal Executive Offices, Including 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 Website, 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 “large accelerated filer”,“accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large Accelerated Filer   ¨
Accelerated Filer   x
Non-accelerated Filer ¨
 
Smaller reporting company ¨
   
(Do not check if a smaller reporting company)
   
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).   Yes   ¨   No   x
 
The aggregate market value of the voting common equity held by non-affiliates as of June 30, 2010, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $73.5 million.  General Steel has no non-voting common equity.
 
The number of shares outstanding of capital stock as of March 14, 2011 was 54,839,733.
  

Documents Incorporated by Reference:
 
Certain information required by Part III is incorporated by reference to the Definitive Proxy Statement in conjunction with the 2011 Annual Meeting of Stockholders of the Registrant, which will be filed with the Securities and Exchange Commission within 120 days after the end of the Registrant’s fiscal year.

 
 

 
 
TABLE OF CONTENTS
 
PART I
     
ITEM 1.
BUSINESS.
3
ITEM 1A.
RISK FACTORS.
9
ITEM 1B.
UNRESOLVED STAFF COMMENTS.
23
ITEM 2.
PROPERTIES.
23
ITEM 3.
LEGAL PROCEEDINGS.
24
ITEM 4.
(REMOVED AND RESERVED).
25
     
PART II
   
  
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
25
ITEM 6.
SELECTED FINANCIAL DATA.
26
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
27
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
45
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
48
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
86
ITEM 9A.
CONTROLS AND PROCEDURES.
86
ITEM 9B.
OTHER INFORMATION.
87
     
PART III
     
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
87
ITEM 11.
EXECUTIVE COMPENSATION.
88
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
88
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
88
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES.
88
     
PART IV
     
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
89
   
SIGNATURES.
92

 
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 Company 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 7 million crude steel 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 also 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 grow our business organically and through the acquisition of Chinese steel companies to increase their profitability and efficiencies utilizing western management practices and advanced production technologies, and the infusion of capital resources.

Our two-pronged strategy includes organic growth and mergers and acquisitions (“M&A”). On the organic growth side, we aim to grow through operation optimization, capacity expansion and margin expansion by improved operational efficiency and cost structure.  On the M&A side, we aim to expand 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 five steel-related subsidiaries and we are actively attempting to acquire additional assets.
 
Unless the context indicates otherwise, as used herein the terms “General Steel”, the “Company”, “Registrant”,“we”, “our” and “us” refer to General Steel Holdings, Inc. and its subsidiaries.

Steel Related Subsidiaries and Raw Material Trading Company

We presently have controlling interests in four steel-related subsidiaries and one raw material trading subsidiary:

 
·
General Steel (China) Co., Ltd. (“General Steel (China)”)
 
·
Baotou Steel - General Steel Special Steel Pipe Joint Venture Company Limited;
 
·
Shaanxi Longmen Iron and Steel Co., Ltd. (“Longmen Joint Venture”);
 
·
Maoming Hengda Steel Co., Ltd.; and
 
·
Tianwu General Steel Material Trading Co., Ltd.
 
General Steel (China) Co., Ltd.

General Steel (China), formerly known as “Tianjin Daqiuzhuang Metal Sheet Co., Ltd.” started operations in 1988. General Steel (China)’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.

 
3

 
 
General Steel (China) 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.

General Steel (China) 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, General Steel (China) changed its official name from “Tianjin Daqiuzhuang Metal Sheet 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.
 
On March 31, 2010, General Steel (China) entered into a lease agreement whereby General Steel (China) leased its facility to Tianjin Daqiuzhuang Steel Plates Co., Ltd. (“Lessee”).  The lease provides approximately 776,078 square feet of workshops, land, equipment and other facilities to the Lessee and reduces overhead costs while providing a recurring monthly revenue stream resulting from payments due thereunder.  The term of the lease is from January 1, 2010 to December 31, 2011 and the monthly base rental rate due to General Steel (China) is approximately $246,096 (RMB1.68 million).  The former General Manager of General Steel (China) currently manages Tianjin Daqiuzhuang Steel Plates Co., Ltd.  Changing the business model of this facility from a direct operations model to a leased operations model reduces overhead costs and provides a steady revenue stream in the form of fixed monthly lease revenue.
 
Baotou Steel - General Steel Special Steel Pipe Joint Venture Company Limited.

On April 27, 2007, General Steel (China) 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 General Steel (China)'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 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 primarily used in the energy sector 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, General Steel (China) 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 Longmen Joint Venture.
 
Long Steel Group, located in Hancheng city, Shaanxi province, in China’s central region, was founded in 1958 and incorporated in 2002. Long Steel Group operates as a fully-integrated steel production facility.  Less than 10% of steel companies in China have fully-integrated steel production capabilities.  

Currently, Longmen Joint Venture has five branch offices, five subsidiaries under direct control and six entities in which it has a non-controlling interest.  It employs approximately 7,984 full-time workers.  In addition to steel production, 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 Longmen Joint Venture.

 
4

 
 
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 Longmen Joint Venture’s main steel production site. Currently, we estimate that 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 Longmen Joint Venture’s products. All products sell under the registered brand name of “Yulong,” which has strong regional recognition and awareness. Rebar and billet products carry ISO 9001 and 9002 certification and other of Longmen Joint Venture’s products have won national quality awards. Products produced at the facility have been used in the construction of the Yangtze River Three Gorges Dam, the Xi’an International Airport, the Xi’an city subway system and the Xi Luo Du and the Xiang Jia Ba hydropower projects.
 
In September 24, 2007, Longmen Joint Venture acquired a 74.92% ownership interest of Longmen Iron and Steel Group Co., Ltd. Environmental Protection Industry Development Co., Ltd. (“Longmen EPID”). At the same time, Longmen Joint Venture also entered into a equity transfer agreement with Longmen Steel Group to acquire its 36% ownership interest in its subsidiary, Longmen Iron and Steel Group Co., Ltd. Hualong Fire Retardant Materials Co., Ltd. (“Hualong”). 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.
 
In January 2010, Longmen Joint Venture completed its acquisition of a controlling interest in Longmen EPID.  Longmen Joint Venture entered into an equity transfer agreement with Shaanxi Fangxin Industrial Co., Ltd. (“Shaanxi Fangxin”).  Longmen Joint Venture paid RMB8,678,383 to Shaanxi Fangxin to acquire its 25.08% ownership interest in Longmen EPID. Longmen EPID became a branch of Longmen Joint Venture.

On January 11, 2008, Longmen Joint Venture completed its acquisition of a controlling interest in Hancheng Tongxing Metallurgy Co., Ltd. (“Tongxing”). 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 Longmen Joint Venture a 22.76% ownership stake in Tongxing and making it Tongxing’s largest shareholder. Tongxing has a rebar processing facility with an annualized rolling capacity of 300,000 metric tons.

In November 2010, we brought online the 800,000 metric ton capacity rebar production line relocated from the Maoming Hengda facility.

From 2009 to 2010, we worked with Shaanxi Iron and Steel Group (“Shaanxi Steel Group”) who built new and state-of-the-art equipment, including two 1,280 cubic meter blast furnaces, two 120 metric ton converters and one 400 square meter sintering machine.  During the period of construction, we provided assistance such as labor and technology while we dismantled the operations of certain small furnaces to accommodate the new production systems. We are currently in the process of negotiating with Shaanxi Steel Group to enter into an agreement to operate the aforementioned equipment. We paid certain costs on behalf of Shaanxi Steel Group and economic losses during the construction. On December 22, 2010 we were reimbursed by Shaanxi Steel Group in the amount of approximately $25.0 million (RMB169.0 million) for the cost that we paid, on behalf of Shaanxi Steel Group, and compensated by Shaanxi Steel Group in the amount of approximately $27.1 million (RMB183.1 million) for the economic losses incurred through September 30, 2010.

 
5

 
 
•  Maoming Hengda Steel Co., Ltd.

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

Maoming Hengda’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 Hengda facility previously had 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 were sold through nine distributors targeting customers in Guangxi province and the western region of Guangdong province. 
 
In December 2010, we brought online a new 400,000 ton capacity production line. The new production line is the result of a strategic alliance agreement between Maoming and Zhuhai Yueyufeng Iron and Steel Co., Ltd. (“Yueyufeng”) on February 3, 2010.  According to the agreement, Yueyufeng paid the processing fee in advance in three installments to support the construction of the rebar production line at the Maoming facility.  In exchange, Maoming facility will process at least 25,000 metric tons of rebar for Yueyufeng on a monthly basis for two years.
 
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 Maoming Hengda’s facility to Longmen Joint Venture.

 In December 2010, we relocated the 1,000,000 metric ton capacity high-speed wire production line from Maoming Hengda’s facility to Longmen Joint Venture to meet the increasing demand in Shaanxi province.
 
•  Tianwu General Steel Material Trading Co., Ltd.

We formed Tianwu General Steel Material Trading Co., Ltd (“Tianwu JV”) with Tianjin Material and Equipment Group Corporation (“TME Group”).  The contributed capital of Tianwu JV is approximately $2.9 million (or RMB20 million), of which we hold a 60% controlling interest.  TME Group is one of the largest and most diversified commodity trading groups in China.

Tianwu JV will source raw materials, mainly overseas iron ore, and is expected to supply approximately 20% to 50% of our iron-ore needs, amounting to approximately two to three million metric tons on an annual basis.

On September 13, 2010, Tianwu JV entered into an iron ore Sales and Purchase Contract with Minera Santa Fe, a Chilean iron ore supplier. Pursuant to the contract, Tianwu JV received favorable pricing on the purchase of 138,000 tons of iron ore in 2010

Operating Information Summary by Subsidiaries

  
 
General Steel 
(China)
   
Baotou Steel Pipe
Joint Venture
 
Longmen Joint
Venture 
 
Maoming
Hengda
 
Annual Production
Capacity (metric tons)
                   
Crude Steel
    -       -  
7 million
    -  
Processing
    400,000       100,000  
2.1 million
    400,000  
                           
Main Products
 
Hot-rolled
sheet
   
Spiral-weld pipe
 
Rebar/High-speed
wire
 
Rebar
 
                           
Main Application
 
Light
agricultural
vehicles
   
Energy transport
 
Infrastructure and
construction
 
Infrastructure
and
construction
 
 
 
6

 
 
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 we 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 Shaanxi provincial government, the total fixed asset investment for Shaanxi province was approximately RMB850 billion (approximately US$129 billion) for the year ended December 31, 2010, an increase of 30% over the same period last year.
 
In January 2011, Shaanxi provincial government announced that it will invest RMB80billion (approximately US$12.2 billion) in the construction of hydroprojects, which is triple the amount invested during 11th Five Year National Economic and Social Development Plan.  In addition to hydroprojects, according to the central government, 5,000 miles of high-speed railway will be built in 2011, with 16,000 miles to be built by 2020.  In January 2011, the central government announced its low-income housing policy. Under this policy, 10 million low-income houses will be built in 2011, with 36 million low-income houses to be built over a five-year period.

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.

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 Hengda, infrastructure growth and business development in Maoming city, the surrounding Guangxi cities and the western region of Guangdong province drive demand for our construction steel products. As a second tier city, the industrialization and urbanization of Maoming city 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.  Baotou Steel Pipe Joint Venture uses hot-rolled steel coil as their main raw material.  Longmen Joint Venture uses iron ore and coke as its main raw materials.  Maoming Hengda 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 has 7 million tons of crude steel capacity. At Longmen Joint Venture, approximately 80% of production costs are associated with 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 Longmen Joint Venture), the Daxigou mine (owned by Long Steel Group, our partner in Longmen Joint Venture), and surrounding local mines and from abroad. According to the terms of our Longmen Joint Venture Agreement with the Long Steel 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.

 
7

 
 
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.

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 a 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
Long Steel Group
 
Iron Ore
   
23.8
%
Related Party
Shaanxi Haiyan Coal Chemical Industry Co., Ltd.
 
Coke
   
13.3
%
Related Party
Shaanxi Huanghe Material Co., Ltd.
 
Coke
   
7.0
%
Others
Shaanxi Yingde gas Co., Ltd.
 
Gas
   
3.2
%
Others
Shaanxi Longmen Iron & Steel Group Fuping Rolling Co., Ltd.
 
Iron Ore
   
2.9
%
Others
   
Total
   
50.1
%
 

Baotou Steel Pipe Joint Venture

Name of the Major Supplier
 
Raw Material
Purchased
 
% of Total Raw
Material
Purchased
 
Relationship with
GSI
Inner Mongolia Chenggang Material Co., Ltd
 
Steel coil
   
25.3
%
Others
Tianjin Baolai Industry Co., Ltd.
 
Steel coil
   
11.2
%
Others
Baotou Shunye Material Co., Ltd
 
Steel coil
   
8.5
%
Others
Tianjin Dazhan Industry Co., Ltd
 
Steel coil
   
7.2
%
Related Party
Baotou Jiaxiang Material Trading Co., Ltd
 
Steel coil
   
6.8
%
Others
   
Total
   
59.1
%
 

Maoming Hengda

Name of the Major Supplier
 
Raw Material
Purchased
 
% of Total Raw
Material
Purchased
 
Relationship with
GSI
Maoming Dazhongmao Petrochem Co., Ltd.
 
Billet
    38.4 %
Others
Maoming Zhengmao Develop Co., Ltd.
 
Heavy oil
    32.4 %
Others
   
Total
    70.7 %  

Industry consolidation

The central government has had 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. 

 
8

 
 
On July 12, 2010, the Ministry of Industry & Information Technology Commission issued the Steel Industry Admittance and Operation Qualifications. The new standard specified requirement for all aspects of steel production, which include: size of blast furnace, size of converters, emission of waster water, dust per ton of steel producing, quantity of coal used for each process of steel making and output capacity commencing in 2009.  The new policy once again confirms the central government’s determination to push forward the consolidation of this fragmented industry of more than 800 companies. While the operational conditions become more stringent, more small and medium size companies will likely to aggressively look for valued partners which could lead to opportunities for high quality acquisitions for our Company.  We believe the directives have indirectly strengthened our position as an industry consolidator by creating quantitative measures we can use to better qualify potential acquisition targets.
 
Intellectual Property Rights

“Qiu Steel” is the registered trademark under which we sell hot-rolled carbon and silicon steel sheets products produced at General Steel (China). 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. 

“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, 2010, we had approximately 8,407 full-time employees.
 
Executive Officers of the Registrant

The following sets forth certain information as of March 16, 2011 concerning our executive officers.

Name
Age
Title
Zuosheng Yu
46
Chairman and Chief Executive Officer
John Chen
39
Chief Financial Officer
 
Mr. Zuosheng Yu, age 46, Chairman of the Board of Directors.  Mr. Yu joined us in October 2004 and became Chairman of the Board at that time. He also serves as our Chief Executive Officer. Since February 2001, he has been President and Chairman of the Board of Directors of Beijing Wendlar Investment Management Group, Beijing, China. Since March 2001, he has been President and Chairman of the Board of Directors of Baotou Sheng Da Steel Pipe Limited, Inner Mongolia, China and Chairman of the Board of Directors of Sheng Da Steel and Iron Mill, Hebei province, China. Since April 2001, he has been President and Chairman of Sheng Da Industrial Park Real Estate Development Limited. Since December 2001, Mr. Yu has been President and Chairman of Beijing Shou Lun Real Estate Development Company, Beijing, China. Mr. Yu graduated in 1985 from Sciences and Engineering Institute, Tianjin, China. In July 1994, he received a Bachelor’s degree from Institute of Business Management for Officers. Mr. Yu received the title of “Senior Economist” from the Committee of Science and Technology of Tianjin City in 1994. In July 1997, he received an MBA degree from the Graduate School of Tianjin Party University. Since April 2003, Mr. Yu has held a position as a member of China’s APEC (Asia Pacific Economic Co-operation) Development Council.  

Mr. John Chen, age 39, Director.  Mr. Chen joined us in May 2004 and was elected as a director in March 2005. He also serves as our Chief Financial Officer. Mr. Chen graduated from Norman Bethune University of Medical Science, Changchun city, Jilin province, China in September 1992. He received a B.S. degree in accounting from California State Polytechnic University, Pomona, California, U.S. in July 1997.  He currently also serves on the board of directors of China Carbon Graphite Group, Inc. (OTCBB: CHGI).
 
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;

 
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Reliability and timeliness of delivery;

 
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 marketplace competing against our four operating subsidiaries as indicated:

• Competitors of General Steel (China) 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 Hengda 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.

 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;

 
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• 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.

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 a number of 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, 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.

 
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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.

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.  For the year ended December 31, 2010, approximately 28% of our sales were to five customers.  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.  We currently have an annual steel production capacity of 7 million metric tons of crude steel and if the market for steel cannot support such production levels, the price for our products may go down.  In addition, 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, coke, steel billets and steel coil.

The major raw materials that we purchase for production are iron-ore, coke, steel billets 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 800 to 1,000 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.

 
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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 General Steel (China), Baotou Steel Pipe Joint Venture, Longmen Joint Venture, Maoming Hengda, and Tianwu JV, and our principal assets are our investments in these subsidiaries. As a result, we are dependent upon the performance of our subsidiaries 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.

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 on a timely basis.

 
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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 to cover production equipment. 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.

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.

 
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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.

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

Substantially all of our assets, and the assets of our operating subsidiary, are located in China and our revenue is derived from our operations in China. We anticipate that our revenues generated in China will continue to represent all of our revenues in the near future. Accordingly, our results of operations and prospects are subject, to a significant extent, to the economic, political and legal developments in China. Although the PRC economy has grown significantly in recent years, we cannot assure you that such growth will continue. In addition, the Chinese government also exercises significant control over Chinese 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. Efforts by the Chinese government to slow the pace of growth of the Chinese economy could result in reduced demand for our products. A slowdown in overall economic growth, an economic downturn or recession or other adverse economic developments in the PRC may materially reduce the demand for our products and materially and adversely affect our business.
 
The PRC government’s recent measures to curb inflation rates could adversely affect future results of operations.
 
In recent years, the Chinese economy has experienced periods of rapid expansion and high rates of inflation.  Rapid economic growth can lead to growth in the money supply and rising inflation.  China’s Consumer Price Index increased by 3.3% for full year of 2010 according to the National Bureau of Statistics of China, or the NBS. 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.  These factors have led to the adoption by the Chinese government, from time to time, of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation.  High inflation may in the future cause the Chinese government to impose controls on credit and/or prices, or to take other action, which could inhibit economic activity in China, and thereby harm the market for our products. 
 
In recent years, the government of China has undertaken various measures to alleviate the effects of inflation, especially with respect to key commodities. From time to time, the PRC National Development and Reform Commission announced national price controls on various products. The government of China has also encouraged local governments to institute price controls products. Such price controls could adversely affect our future results of operations and, accordingly, the price of our Common Stock.
 
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.

 
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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.

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 or RMB 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.

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.

 
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Currency fluctuations and restrictions on currency exchanges may adversely affect our business, including limiting our ability to convert RMB  into foreign currencies and, if RMB were to decline in value, reducing our revenue in U.S. dollar terms.
 
Our reporting currency is the U.S. dollar and our operations in China use their local currency as their functional currencies. Substantially all of our revenue and expenses are in Renminbi, or RMB. We are subject to the effects of exchange rate fluctuations with respect to local currencies. For example, the value of the RMB depends to a large extent on Chinese government policies and China’s domestic and international economic and political developments, as well as supply and demand in the local market. Since 1994, the official exchange rate for the conversion of RMB to the U.S. dollar had generally been stable and the RMB had appreciated slightly against the U.S. dollar. However, on July 21, 2005, the Chinese government changed its policy of pegging the value of RMB to the U.S. dollar.  Under the new policy, RMB may fluctuate within a narrow and managed band against a basket of certain foreign currencies. The four main currencies in the basket are the U.S. dollar, the Euro, the Japanese yen and the Korean won. In the three years that followed, a slight appreciation against the U.S. currency occurred and by the end of October 2008, the RMB exchange rate with the U.S. dollar had risen to nearly 6.8 to the U.S. dollar. Since mid-2008, the RMB has been held stable as the Chinese government considers how best to respond to the global economic crisis. In June 2010, the temporary dollar peg was again abandoned, after the Chinese RMB rose approximately 16% against the Euro as a result of the Greek fiscal crisis. However, the Chinese government has signaled that going forward its currency will only be allowed to appreciate gradually against the dollar. It is possible that the Chinese government could adopt a more flexible currency policy, which could result in more significant fluctuation of RMB against the U.S. dollar. We can offer no assurance that RMB will be stable against the U.S. dollar or any other foreign currency.
 
Our financial statements are translated into U.S. dollars at the average exchange rates in each applicable period. To the extent the U.S. dollar strengthens against foreign currencies, the translation of these foreign currency-denominated transactions results in reduced revenue, operating expenses and net income for our international operations. Similarly, to the extent the U.S. dollar weakens against foreign currencies, the translation of these foreign currency-denominated transactions results in increased revenue, operating expenses and net income for our international operations. We are also exposed to foreign exchange rate fluctuations as we convert the financial statements of our foreign consolidated subsidiaries into U.S. dollars in consolidation.  If there is a change in foreign currency exchange rates, the conversion of the foreign consolidated subsidiaries’ financial statements into U.S. dollars will lead to a translation gain or loss which is recorded as a component of other comprehensive income.  In addition, we have certain assets and liabilities that are denominated in currencies other than the relevant entity’s functional currency. Changes in the functional currency value of these assets and liabilities create fluctuations that will lead to a transaction gain or loss.  We have not entered into agreements or purchased instruments to hedge our exchange rate risks, although we may do so in the future.  The availability and effectiveness of any hedging transaction may be limited and we may not be able to hedge our exchange rate risks.
 
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.

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.

 
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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.

The PRC State Administration of Foreign Exchange, or SAFE, restrictions on currency exchange may limit our ability to receive and use our sales revenue effectively and to pay dividends.
 
All of our sales revenues and expenses are denominated in RMB. Under PRC law, RMB is currently convertible under the “current account,” which includes dividends and trade and service-related foreign exchange transactions, but not under the “capital account,” which includes foreign direct investment and loans. Currently, our PRC operating subsidiaries may purchase foreign currencies for settlement of current account transactions, including payments of dividends to us, without the approval of SAFE, by complying with certain procedural requirements.  However, the relevant PRC government authorities may limit or eliminate our ability to purchase foreign currencies in the future. Since substantially all of our future revenue will be denominated in RMB, any existing and future restrictions on currency exchange may limit our ability to utilize revenue generated in RMB to fund our business activities outside China that are denominated in foreign currencies.
 
Foreign exchange transactions by PRC operating subsidiaries under the capital account continue to be subject to significant foreign exchange controls and require the approval of or need to register with PRC government authorities, including SAFE. In particular, if our PRC operating subsidiaries borrow foreign currency through loans from us or other foreign lenders, these loans must be registered with SAFE, and if we finance our PRC operating subsidiaries by means of additional capital contributions, these capital contributions must be approved by certain government authorities, including the MOFCOM, or their respective local counterparts. These limitations could affect our PRC operating subsidiaries’ ability to obtain foreign exchange through debt or equity financing.
 
  The PRC government also may 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 foreign currency, we may be unable to meet obligations that may be incurred in the future that require payment in foreign currency.  
 
Under the New EIT Law, as defined below, we may be classified as a “resident enterprise” of China, which would likely result in unfavorable tax consequences to us and our non-PRC shareholders.
 
Under China’s Enterprise Income Tax Law, or the “New EIT Law”, and its implementing rules, which became effective in 2008, an enterprise established outside of China with “de facto management bodies” within China is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes.  Under the implementing rules of the New EIT Law, de facto management means substantial and overall management and control over the production and operations, personnel, accounting, and properties of the enterprise.  Because the New EIT Law and its implementing rules are new, it is unclear how tax authorities will determine tax residency based on the facts of each case.
 
 
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In April 2009, the State Administration of Taxation (“SAT”) issued a new circular to clarify the criteria for recognizing the resident enterprise status for Chinese controlled foreign companies.  According to the Circular Regarding the Determination Criteria on Chinese Controlled Offshore Companies as Resident Enterprises (Circular Guoshuifa 2009 No. 82), if a foreign company simultaneously satisfies the following four criteria:
 
 
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It constitutes a Chinese controlled foreign company and shall be deemed to be a PRC resident enterprise.
 
 
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The premises where the senior management and the senior management bodies responsible for the routine production and business management of the enterprise perform their functions are mainly located within China.
 
 
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The financial decisions (including, borrowing, lending, financing, financial risk management, etc.) and the personnel decisions (for example, appointment, dismissal, remuneration, etc.) of the enterprise are made by the bodies or persons within China or are subject to the approval of the bodies or persons within China.
 
 
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The enterprise’s primary properties, accounting books, company seals, minutes and archives of the meetings of the board of directors and shareholders are located or preserved within China. The enterprise’s directors or senior management with fifty percent or more of the voting rights usually live in China.
 
Despite the issuance of the new clarifying circular referenced above, the application of these standards remains uncertain. If the PRC tax authorities determine that we are a “resident enterprise” for PRC enterprise income tax purposes, unfavorable PRC tax consequences could follow. First, we will be subject to enterprise income tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations. Second, although under the New EIT Law and its implementing rules dividends paid to us from our PRC subsidiaries would qualify as “tax-exempt income,” such dividends may be subject to a 10% withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax, have not yet issued guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise income tax purposes. Finally, it is possible that future guidance issued with respect to the new “resident enterprise” classification would result in a situation in which a 10% withholding tax is imposed on dividends we pay to our non-PRC shareholders and with respect to gains derived by our non-PRC shareholders from transferring our shares. We are actively monitoring the possibility of “resident enterprise” treatment for the 2008 and 2009 tax years and are evaluating appropriate organizational changes to avoid this treatment, to the extent possible.
 
If we were treated as a “resident enterprise” by PRC tax authorities, we would be subject to tax in both the U.S. and China, and our PRC tax may not be creditable against our U.S. tax.  In addition, we have not accrued any tax liability associated with the possible payment of dividends to our U.S. parent company. Such a tax would be an added expense appearing on our income statement, which would reduce our net income.
 
The PRC legal system embodies uncertainties which could limit the legal protections available to us and you, or could lead to penalties on us.
 
The PRC legal system is a civil law system based on written statutes. Unlike common law systems, it is a system in which decided legal cases have little precedential value. In 1979, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters in general. Our PRC operating subsidiaries are subject to laws and regulations applicable to foreign investment in China. In addition, our VIE and all of our subsidiaries that are incorporated in China are subject to all applicable Chinese laws and regulations. Because of the relatively short period for enacting such a comprehensive legal system, the laws, regulations and legal requirements are relatively recent, and their interpretation and enforcement involve uncertainties. These uncertainties could limit the legal protections available to us and other foreign investors, including you, and may lead to penalties imposed on us because of the different understanding between the relevant authority and us. For example, according to current tax laws and regulations, we are responsible to pay business tax on a “Self-examination and Self-application” basis. However, since there is no clear guidance as to the applicability of certain preferential tax treatments, we may be found in violation of the interpretation of local tax authorities with regard to the scope of taxable services and the percentage of tax rate and therefore might be subject to penalties, including but not limited to, monetary penalties. In addition, we cannot predict the effect of future developments in the PRC legal system, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement thereof, or the preemption of local regulations by national laws
 
 
19

 
 
We may have limited legal recourse under the PRC laws if disputes arise under our contracts with third parties.
 
The Chinese government has enacted significant laws and regulations dealing with matters, such as corporate organization and governance, foreign investment, commerce, taxation and trade.  However, the PRC’s experience in implementing, interpreting and enforcing these laws and regulations is limited, and our ability to enforce commercial claims or to resolve commercial disputes is unpredictable. If our new business ventures are unsuccessful, or other adverse circumstances arise from these transactions, we face the risk that the parties to these ventures may seek ways to terminate the transactions, or may hinder or prevent us from accessing important information regarding the financial and business operations of these acquired companies. The resolution of these matters may be subject to the exercise of considerable discretion by agencies of the Chinese government, and forces unrelated to the legal merits of a particular matter or dispute may influence their determination. Any rights we may have to specific performance or to seek an injunction under the PRC laws, in either of these cases, are severely limited, and without a means of recourse by virtue of the Chinese legal system, we may be unable to prevent these situations from occurring. The occurrence of any such events could have a material adverse effect on our business, financial condition and results of operations. Although legislation in China over the past 30 years has significantly improved the protection afforded to various forms of foreign investment and contractual arrangements in China, these laws, regulations and legal requirements are relatively new and their interpretation and enforcement involve uncertainties, which could limit the legal protection available to us and foreign investors, including you.  The inability to enforce or obtain a remedy under any of our future agreements could result in a significant loss of business, business opportunities or capital and could have a material adverse effect on our results of operations. 
 
Our labor costs are likely to increase as a result of changes in Chinese labor laws.
 
We expect to experience an increase in our cost of labor due to recent changes in Chinese labor laws, which are likely to increase costs further and also to impose restrictions on our relationship with our employees.  In June 2007, the Standing Committee of the National People’s Congress of the PRC enacted labor law legislation called the Labor Contract Law and more strictly enforced existing labor laws.  This law, which became effective on January 1, 2008, amended and formalized workers’ rights concerning overtime hours, pensions, layoffs, employment contracts and the role of trade unions.  As a result of this law, we had to reduce the number of hours of overtime our employees can work, substantially increase the salaries of our employees, provide additional benefits to our employees, and revise certain of our other labor practices. The increase in labor costs has increased our operating costs, and we have not always been able to pass through this increase to our customers. As a result, we have incurred certain operating losses as our costs of manufacturing increased.  No assurance can be given that we will not in the future be subject to labor strikes or that we will not have to make other payments to resolve future labor issues.  Furthermore, there can be no assurance that the labor laws will not change further or that their interpretation and implementation and enforcement will not vary, which may have a negative effect upon our business and results of operations.
 
Failure to comply with the U.S. Foreign Corrupt Practices Act could subject us to penalties and other adverse consequences.
 
We are subject to the U.S. Foreign Corrupt Practices Act, or FCPA, which generally prohibits United States companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. In addition, we are required to maintain records that accurately and fairly represent our transactions and have an adequate system of internal accounting controls. Foreign companies, including some that may compete with us, are not subject to these prohibitions, and therefore may have a competitive advantage over us. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time-to-time in the PRC. We can make no assurance that our employees or other agents will not engage in such conduct for which we might be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations. 
 
 
20

 
 
If we make equity compensation grants to persons who are PRC citizens, they may be required to register with SAFE. We may also face regulatory uncertainties that could restrict our ability to adopt equity compensation plans for our directors and employees and other parties under PRC laws.
 
On March 28, 2007, SAFE issued the “Operating Procedures for Administration of Domestic Individuals Participating in the Employee Stock Ownership Plan or Stock Option Plan of An Overseas Listed Company,” also known as “Circular 78.” It is not clear whether Circular 78 covers all forms of equity compensation plans or only those which provide for the granting of stock options. For any plans which are so covered and are adopted by a non-PRC listed company, such as our Company, after March 28, 2007, Circular 78 requires all participants who are PRC citizens to register with and obtain approvals from SAFE prior to their participation in the plan. In addition, Circular 78 also requires PRC citizens to register with SAFE and make the necessary applications and filings if they participated in an overseas listed company’s covered equity compensation plan prior to March 28, 2007. We believe that the registration and approval requirements contemplated in Circular 78 will be burdensome and time consuming. 
 
In the future, we may adopt an equity incentive plan and make numerous stock option grants under the plan to our officers, directors and employees, some of whom are PRC citizens and may be required to register with SAFE. If it is determined that any of our equity compensation plans are subject to Circular 78, failure to comply with such provisions may subject us and participants of any such equity incentive plan who are PRC citizens to fines and legal sanctions and prevent us from being able to grant equity compensation to our PRC employees. In that case, our ability to compensate our employees and directors through equity compensation would be hindered and our business operations may be adversely affected.
 
Due to various restrictions under PRC laws on the distribution of dividends by our PRC operating companies, we may not be able to pay dividends to our shareholders.
 
The Wholly-Foreign Owned Enterprise Law (1986), as amended and the Wholly-Foreign Owned Enterprise Law Implementing Rules (1990), as amended and the Company Law of the PRC (2006) contain the principal regulations governing dividend distributions by wholly foreign owned enterprises. Under these regulations WFOE’s may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. Additionally, a WFOE is required to set aside a certain amount of its accumulated profits each year, if any, to fund certain reserve funds.  These reserves are not distributable as cash dividends, except in the event of liquidation, and cannot be used for working capital purposes.    
 
Furthermore, if any of our consolidated subsidiaries in China incurs debt in the future, the instruments governing the debt may restrict our ability to pay dividends or make other payments. If we or our consolidated subsidiaries are unable to receive all of the revenues from our operations due to these contractual or dividend arrangements, we may be unable to pay dividends on our Common Stock. In addition, under WFOE regulations mentioned above, we must retain a reserve equal to 10 percent of net income after taxes, not to exceed 50 percent of registered capital. Accordingly, this reserve will not be available to be distributed as dividends to our shareholders. We presently do not intend to pay dividends in the foreseeable future. Our management intends to follow a policy of retaining all of our earnings to finance the development and execution of our strategy and the expansion of our business.
 
We may have difficulty establishing adequate management, legal and financial controls in the PRC.
 
 The PRC historically has been deficient in western style management and financial reporting concepts and practices, as well as in modern banking and other control systems.  We may have difficulty in hiring and retaining a sufficient number of qualified employees to work in the PRC.  As a result of these factors, and especially given that we are an exchange listed company in the U.S. and subject to regulation as such, we may experience difficulty in establishing management, legal and financial controls, collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet western standards. As there is a shortage of well-educated and experienced professionals who have bilingual and bicultural backgrounds in China, especially in remote areas where our factories are located, we may experience high turnover in our staff. Therefore, we may, in turn, experience difficulties in implementing and maintaining adequate internal controls as required under Section 404 of the Sarbanes-Oxley Act and other applicable laws, rules and regulations.  This may result in significant deficiencies or material weaknesses in our internal controls which could impact the reliability of our financial statements and prevent us from complying with SEC rules and regulations and the requirements of the Sarbanes-Oxley Act.  Any such deficiencies, weaknesses or lack of compliance could have a material adverse effect on our results of operations and the public announcement of such deficiencies could adversely impact our stock price.
 
 
21

 
 
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 39.8% of our common stock. Mr. Zuosheng Yu, our major stockholder, beneficially owns approximately 39.5% 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 or China and, even if civil judgments are obtained in United States courts, such judgments may not be enforceable in Chinese courts. Most of 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.
 
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 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 August 5, 2010, all of the convertible notes had been converted.   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.  
 
 
22

 

 
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.   

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.

General Steel (China)

The properties of General Steel (China) 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 square feet (29,667 square meters) 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
 
41 years
                     
Tianjin Daqiuzhuang Metal Sheet Co., Ltd.
 
No. 35 Baiyi Road, Daqiuzhuang, Jinghai County, Tianjin
 
Industrial Use
 
9.89
 
50 years
 
41 years
                     
Tianjin Daqiuzhuang Metal Sheet Co., Ltd.
(in the processing of changing name to General Steel (China)).
 
Ying Fong Road North, Daqiuzhuang, Jinghai country Tianjin
 
Commercial Use
 
1.14
 
50 years
 
40 and 43 years
 
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.
 
 
23

 
 
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
Longmen Joint Venture
 
North Huanyuan Road, Weiyang District, Xi'an, Shaanxi
 
Industrial Use
 
19.1
 
50 Years
 
38 Years
                     
Longmen Joint Venture
 
Longmen Town, Hancheng, Shaanxi
 
Industrial Use
 
173.2
 
40-48 Years
 
35-39 Years
                     
Longmen Joint Venture
 
Sanping Village, Shipo Town, Zhashui County, Shaanxi
 
Industrial Use
 
103.2
 
50 Years
 
45 Years
                     
Longmen Joint Venture
 
Zhaikouhe Village, Xunjian Town, Zhashui County, Shaanxi
 
Industrial Use
 
1.9
 
50 Years
 
45 Years
                     
Longmen Joint Venture
 
East Taishi Avenue, Xincheng District, Hancheng, Shaanxi
 
Commercial Use
 
3.6
 
40 Years
 
36 Years

Maoming Hengda

The properties of Maoming Hengda 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
 
Diancheng Town, Dianbai County, Maoming City, Industrial Zone of Bohe Port, Guangdong
 
Industrial Use
 
239.6
 
50 Years
 
44 Years

ITEM 3. LEGAL PROCEEDINGS.

From time to time, we are subject to certain legal proceedings, claims and disputes that arise in the ordinary course of our business. Although we cannot predict the outcomes of these legal proceedings, we do not believe these actions, in the aggregate, will have a material adverse impact on our financial position, results of operations or liquidity.
 
 
24

 
 
ITEM 4. (Removed and Reserved)

PART II

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

Our common stock is listed on the New York Exchange under the symbol “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
 
2010
                       
High
 
$
5.04
   
$
4.22
   
$
3.54
   
$
3.15
 
Low
 
$
3.78
   
$
2.35
   
$
2.28
   
$
2.38
 
2009
                               
High
 
$
4.59
   
$
7.35
   
$
5.74
   
$
5.79
 
Low
 
$
1.85
   
$
2.77
   
$
3.32
   
$
3.62
 

As of March 14, 2011, there were approximately 315 holders of record of our common stock. On the same date, the trading price of our common stock closed at $2.45 per share.

Stock Repurchase Program

ISSUER PURCHASES OF EQUITY SECURITIES(1)
 
Period
 
(a) Total
Number of
Shares
Purchased
   
(b)
Average
Price Paid
per Share
   
(c) Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
   
(d) Maximum Number 
(or Approximate Dollar
Value) of Shares that
May Yet Be Purchased
Under the Plans or
Programs
 
December 1, 2010 through December 31, 2010
    316,760     $ 2.7475       316,760       683,240  

 
 
(1)
On December 21, 2010, we issued a press release announcing that our Board of Directors had authorized the repurchase of up to an aggregate of one million (1,000,000) shares of our common stock as part of a share repurchase program (the “Share Repurchase Program”).  The Share Repurchase Program does not have an expiration date and these repurchases may be made from time to time in the open market or in privately negotiated transactions in accordance with applicable laws. As of December 31, 2010, we have repurchased in open market transactions 316,760 shares of common stock at an average per share price of $2.7475.
 
 
25

 
 
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

None
 
ITEM 6. SELECTED FINANCIAL DATA.
 
SUMMARY OF OPERATIONS
 
2010
   
2009
   
2008
   
2007
   
2006
 
(USD and number of shares in thousands, except per share amounts)
                             
Sales
  $ 1,893,572     $ 1,668,446     $ 1,351,203     $ 772,440     $ 139,495  
Cost of Goods Sold
    1,821,659       1,579,892       1,343,275       715,751       135,324  
Selling, General, and Administrative Expenses
    52,949       41,074       36,942       16,164       2,421  
Income (Loss) from operations
    18,964       47,480       (29,014 )     40,525       1,750  
Net (Loss) Income 
                                       
Attributable to Controlling Interest
  $ (7,675 )   $ (25,244 )   $ (11,323 )   $ 22,426     $ 1,033  
(Loss) Earnings per Share, Basic
  $ (0.14 )   $ (0.60 )   $ (0.32 )   $ 0.69     $ 0.03  
(Loss) Earnings per Share, Diluted
  $ (0.14 )   $ (0.60 )   $ (0.32 )   $ 0.69     $ 0.03  
Basic Weighted Average Shares Outstanding
    53,113       41,860       35,381       32,425       31,250  
Diluted Weighted Average Shares Outstanding
    53,113       41,860       35,381       32,558       31,250  
LONG TERM OBLIGATIONS
                                       
Convertible Notes Payables
  $ -     $ 1,050     $ 7,155     $ 5,440       -  
Derivative Liabilities
  $ 5,573     $ 23,340     $ 9,903     $ 28,483       -  
 
As of December, 31
FINANCIAL DATA
 
2010
   
2009
   
2008
   
2007
   
2006
 
(USD in thousands, except the ratios)
                             
Total Assets
  $ 1,814,668     1,228,064     $ 865,714     $ 478,407     $ 73,822  
Depreciation and Amortization
  $ 41,153     33,107     $ 22,414     $ 10,337     $ 1,917  
Current Ratio
    0.70       0.59       0.43       0.67       0.87  
 
Three months ended December, 31
                             
STATEMENT OF
                             
OPERATIONAL DATA
 
2010
   
2009
   
2008
   
2007
   
2006
 
(USD in thousands, except share and per share amounts)
                             
Statement of Operations Data
                             
Sales
  $ 478,593     $ 451,953     $ 261,087     $ 268,192     $ 42,496  
Cost of Goods sold
    435,365       438,554       282,662       247,239       42,838  
Gross Profit
    43,228       13,399       (21,575 )     20,953       (342 )
Selling, General, and Administrative Expenses
    17,569       11,855       8,578       5,894       266  
Income (Loss) from Operations
    25,659       1,544       (30,153 )     15,059       (607 )
Net income (Loss) Attributable to Controlling Interest
  $ 2,221     $ (11,085 )   $ (9,705 )   $ 12,057     $ 514  
Earnings (Loss) per share
                                       
Basic
  $ 0.04     $ (0.26 )   $ (0.27 )   $ 0.36     $ 0.01  
Diluted
  $ 0.04     $ (0.26 )   $ (0.27 )   $ 0.36     $ 0.01  
                                         
Balance Sheet Data
                                       
Current Assets
  $ 1,154,591     $ 615,278     $ 315,445     $ 232,608     $ 44,670  
Total Assets
  $ 1,814,668       1,228,064     $ 865,714     $ 478,407     $ 73,822  
Total Liabilities
  $ 1,639,192       1,061,735     $ 751,476     $ 382,974     $ 53,575  
Noncontrolling interest
  $ 70,917       72,598     $ 54,330     $ 42,044     $ 6,186  
 
The financial data included within the proceeding table should be read in conjunction with our Management’s Discussion and Analysis as well as the Financial Statements and Supplementary Data (Items 7 and 8 of this Form 10-K), and with our previously filed Forms 10-K.
 
 
26

 
 
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

We were founded on the strategy to aggressively merge, partner with, and acquire State-owned enterprises and selected steel companies with great growth potential within China’s highly fragmented steel industry.  As of December 31, 2010, we were comprised of four steel producing and processing subsidiaries of which Longmen Joint Venture is the largest, and one raw material trading company subsidiary.  Located in Shaanxi province, Longmen Joint Venture contributed approximately 98.1% of our total revenue for the 2010 fiscal year.

Fiscal year 2010 was highlighted by increased sales revenue, increased gross margin, formation of a material trading company and compensation for economic losses:

 
·
Sales revenue increased by 13.5% year-over-year to $1.9 billion, up from $1.7 billion in 2009.
 
·
In the fourth quarter of 2010, the gross margin increased 600 basic points year over year to 9.0%. The increase in gross margin is mainly due to the compensation from Shaanxi Steel Group for the loss of production volume and production efficiency at Longmen Joint Venture during the construction of blast furnaces by Shaanxi Steel Group.
 
·
We finalized the construction of two 1,280 cubic meter blast furnaces, two 120 metric ton converters and one 400 square meter sintering machine funded by Shaanxi Steel Group at Longmen Joint Venture.
 
·
At the end of 2010, we were reimbursed by Shaanxi Steel Group in the amount of approximately $25.0 million (RMB169.0 million) and reimbursed in the amount of approximately $27.1 million (RMB180.1 million), in two separate payments for the loss of production volume and production efficiency at Longmen Joint Venture during the construction of blast furnaces by Shaanxi Steel Group.
 
 
27

 
 
 
·
In December 2010, we brought online a new 400,000 metric tons capacity rebar production line at Maoming Hengda’s facility.
 
·
In September 2010, we formed Tianwu JV with TME Group, one of the largest and most diversified commodity trading groups in China. We hold a 60% controlling interest in Tianwu JV. Tianwu JV will source raw materials including iron ore domestically and overseas, and is expected to supply approximately 20% to 50% of our iron-ore needs amounting to approximately two to three million metric tons on an annual basis.
 
·
 
On December 21, 2010, we announced the adoption of a share repurchase program (“Share Repurchase Program”) pursuant to which we may repurchase up to an aggregate of 1,000,000 shares of our Company's common stock. The repurchases may be made from time to time in the open market or in privately negotiated transactions in accordance with applicable federal securities laws. The Share Repurchase Program does not have an expiration date. As of December 31, 2010, we have repurchased 316,760 shares of common stock in open market transactions at an average price of $2.7475 price per share.

The results reflect the strong demand for our construction steel products in our principal markets of Shaanxi and western China. Our subsidiary, Longmen Joint Venture, continues 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

Industry Environment

In 2010, China’s steel industry experienced positive growth compared to fiscal 2009 due to the recovering and restabilazation of the domestic economy. While the price of steel continued to fluctuate in 2010, the price was still lower, on average, than the price that existed before the 2008 financial crisis. However, the price did reach its highest point of the year in the end of 2010. In addition, according to the Ministry of Industry and Information Technology, the price of rebar had increased approximately 23.1% at the end of the year of 2010 compared to the beginning of the year.  As a result of the gradual recovery in the global markets, the demand for raw materials has increased due to increased production of main crude steel producers which has resulted in rapid increases in the international demand for such raw materials which has resulted in increased prices of raw materials in China. Such increased prices in raw materials, coupled with the relatively lower price of steel in China, have led to a decrease in the overall profitability of China’s steel industry.
 
Overview of Company Operations.

Income Statement for the year ended December 31, 2010, 2009 and 2008:
 
                     
Percentage Change
 
Unit-thousands except share data
 
2010
   
2009
   
2008
   
2010 VS 2009
   
2009 VS 2008
 
Sales
  $ 1,893,572     $ 1,668,446     $ 1,351,203       13.5 %     23.5 %
Cost of Goods Sold
    1,821,659       1,579,892       1,343,275       15.3 %     17.6 %
Gross Profit
    71,913       88,554       7,928       (18.8 )%     1017.0 %
 Gross Profit Margin %
    3.80 %     5.31 %     0.59 %     (28.4 ) %     804.6 %
Selling, General and Administrative Expenses
    52,949       41,074       36,492       28.9 %     12.6 %
Income (Loss) from Operations
    18,964       47,480       (29,014 )     (60.1 ) %     (263.6 ) %
                                         
Total Other Income (expense), net
    (28,561 )     (45,008 )     3,738       (36.5 )%     (1304.1 ) %
                                         
Income (Loss) Before Provision for Income Tax and Noncontrolling Interest
    (9,597 )     2,472       (25,276 )     (488.2 ) %     (109.8 ) %
                                         
Total (Benefit) Provision for Income Taxes
    (2,110 )     6,153       (5,411 )     (134.3 )%     (213.7 ) %
Loss before Noncontrolling Interest
    (7,487 )     (3,681 )     (19,865 )     103.4 %     (81.5 ) %
Less: Net Income (loss) Attributable to Noncontrolling Interest
    188       21,563       (8,542 )     (99.1 ) %     (352.4 )%
Net Loss Attributable to Controlling Interest
  $ (7,675 )   $ (25,244 )   $ (11,323 )     (69.6 )%     122.9 %
Loss Per Share
                                       
Basic
  $ (0.14 )   $ (0.60 )   $ (0.32 )     (76.7 )%     88.4 %
Diluted
  $ (0.14 )   $ (0.60 )   $ (0.32 )     (76.7 )%     88.4 %
 
 
28

 
  
Revenue

Fiscal year ended December 31, 2010 compared to fiscal year ended December 31, 2009 and 2008
 
Revenue by Subsidiary and Product
   
Percentage Change
 
USD in thousands 
 
2010
   
2009
   
2008
   
2010 VS
2009
   
2009 VS
2008
 
Subsidiary
 
Product
                             
Longmen Joint Venture
 
Rebar
  $ 1,857,009     $ 1,534,696     $ 1,182,433       21.0 %     29.8 %
Others
      $ 36,563       133,750       168,770       (72.7 )%     (20.8 )%
                                             
Total Revenue
  $ 1,893,572     $ 1,668,446     $ 1,351,203       13.5 %     23.5 %
 
Production Volume by Subsidiary and Product
   
Percentage Change
 
In thousand metric tons
 
2010
   
2009
   
2008
   
2010 VS
2009
   
2009 VS
2008
 
Subsidiary
 
Product
                             
Longmen Joint Venture
 
Rebar
    3,540       3,395       2,030       4.3 %     67.2 %
Others
        415       439       278       (5.5 )%     57.9 %
                                         
Total Production
    3,955       3,834       2,308       3.2 %     66.1 %

Total Sales Revenue for the fiscal year 2010 increased 13.5% to $1.9 billion from $1.7 billion in last year. The increase in sales revenue compared to last year is predominantly due to the sales volume increase of 4.3% and a 16.1% increase in the average selling price of rebar over the total shipment volume at Longmen Joint Venture to approximately $524.6 (RMB3,546) in 2010 from approximately $452.0 (RMB3,083) in 2009.

Longmen Joint Venture comprised 98.1% of total sales for 2010. We operated at about 89% of our total capacity in 2010 due to a stable market demand for our construction steel products.

Maoming Hengda comprised $10.0 million, or less than 1% of our total sales in 2010.  The decrease in sales revenue compared to last year is primarily due to a greater number of processing contracts versus production contracts. In 2010, Maoming Hengda only executed processing contracts which generated less sale revenue whereas both processing and production contracts were performed in 2009.
 
 
29

 
 
Income Statement for the three months ended December 31, 2010 and 2009:
          
Income Statement
                  
Percentage Change
  
Unit-thousands except share data
  
2010 Q4
     
2009 Q4
     
2010 Q4 VS 2009 Q4
  
   
(Unaudited)
       
Sales
 
$
478,593
   
$
451,953
     
5.9
%
Cost of Goods Sold
   
435,365
     
438,554
     
(0.7
)%
Gross Profit
   
43,228
     
13,399
     
222.6
 Gross Profit Margin %
   
9.03
%
   
2.96
%
      204.7
Selling, General and Administrative Expenses
   
17,569
     
11,855
     
48.2
%
Income from Operations
   
25,659
     
1,544
     
1,561.9
Total Other expense, net
   
(15,192
)
   
(13,520
   
 12.4
Income (Loss) Before Provision for Income Tax and Noncontrolling Interest
   
10,467
     
(11,976
)
   
 (187.4)
Total Expense (Benefit) for Income Taxes
   
2,589
     
(1,033
)
   
(350.6)
                         
Income (Loss) before Noncontrolling Interest
   
7,878
     
(10,943
)
   
(172.0)
                         
Less: Net Income Attributable to Noncontrolling Interest
   
5,657
     
142
     
 3,883.8
%
Net Income (Loss) Attributable to Controlling Interest
 
$
2,221
   
$
(11,085
)
   
(120.0)
Earnings(Loss) Per Share
                       
Basic
 
$
0.04
   
$
(0.26
)
   
115.4
Diluted
 
$
0.04
   
$
(0.26
)
   
115.4

Three months ended December 31, 2010 compared to three months ended December 31, 2009
Revenue by Subsidiary and Product
                 
USD in thousands
                  
Percentage Change
  
Subsidiary
 
Product
  
2010 Q4
     
2009 Q4
     
2010 Q4 VS 2009 Q4
  
        (Unaudited)        
Longmen Joint Venture
 
Rebar
   
467,771
     
422,165
     
10.8
%
Other
       
10,822
     
29,788
     
(63.7)
%
   
Total Sales
   
478,593
     
451,953
     
5.9
%
 
Production by Subsidiary and Product
(in thousand metric tons)
             
Percentage Change
 
Subsidiary
 
Product
  
2010 Q4
     
2009 Q4
     
2010 Q4 VS 2009 Q4
  
         (Unaudited)        
Longmen Joint Venture
 
Rebar
   
835
     
944
     
(11.5)
%
Other
       
134
     
180
     
(25.6)
%
   
Total Production
   
969
     
1,124
     
(13.8)
%

Total Sales Revenue for the three months ended December 31, 2010 increased 5.9% to $478.6 million from $451.9 million for the same period last year. The increase is predominantly a result of a 25.3% rise in the average selling price of rebar from approximately $447.2 (RMB3,048) in the fourth quarter of 2009 to approximately $560.2 (RMB3,787) in fourth quarter of 2010
 
Longmen Joint Venture comprised 97.7% of total sales for the fourth quarter of 2010. Compared to the same period in 2009, the production decreased 11.5% to 835,000 metric tons from 944,000 metric tons. The decrease is due to the negative impact of blast furnace construction by Shaanxi Steel Group, as is more fully described in the gross profit analysis section. Total Sales Revenue of Longmen Joint Venture for the three months ended December 31, 2010 increased 10.8% to $467.8 million from $422.2 million in the same period last year. The increase is predominantly a result of a 25.3% rise in the average selling price of rebar to approximately $560.2 (RMB3,787) in fourth quarter of 2010 from approximately $447.2 (RMB3,048) in the fourth quarter of 2009.
 
 
30

 
 
Compared to the same period last year, the sales revenue of other subsidiaries decreased 63.7% to $10.8 million from $29.8 million in the fourth quarter in 2009. The decrease is mainly because we changed the operating model at General Steel (China) and only executed processing contracts at Maoming Hengda which generated less sale revenue in 2010.
 
Cost of Goods Sold
 
Fiscal year ended December 31, 2010 compared with fiscal years ended December 31, 2009 and 2008

Cost of Goods Sold
         
Percentage Change
 
USD in thousands 
 
2010
   
2009
   
2008
   
2010 VS 2009
   
2009 VS 2008
 
                               
Cost of Goods Sold
  $ 1,343,160     $ $1,139,630     $ 999,318       (17.9 )%     14.0 %
Cost of Good Sold - Related Parties
  $ 478,499     $ 440,262     $ 343,957       8.7 %
 
  28 %
                                         
Total Cost of Goods Sold
  $ 1,821,659     $ 1,579,892     $ 1,343,275       15.3 %
 
  17.6 %

Three months ended December 31, 2010 compared to three months ended December 31, 2009

                    
Percentage Change
  
(USD in thousands)
  
2010 Q4
     
2009 Q4
     
2010 Q4 VS 2009 Q4
  
Cost of Goods Sold
 
$
317,216
   
$
317,238
     
0
Cost of Goods Sold - Related Parties
 
$
118,149
   
$
121,316
     
(2.6
)% 
Total Cost of Goods Sold
 
$
435,365
   
$
438,554
     
(0.7
)% 
 
Our primary cost of goods sold is the cost of raw materials such as iron ore, coke, alloy and scrap steel. The costs of iron ore and coke account for approximately 80% of our total cost of sales. As a result, the cost of goods sold increased by 15.3% to $1.8 billion in 2010 from $1.6 billion in the year ago period. The increase is mainly due to the ascending of sales volume and the rise of iron ore and coke price. The cost of goods sold decreased 0.1% slightly to $435.4 million in the fourth quarter of 2010 from $438.6 million in the same period of 2009 due to the compensation from Shaanxi Steel Group which was recorded in the fourth quarter of 2010 and which is discussed in detail in the following section.
 
Gross Profit

Fiscal year ended December 31, 2010 compared to fiscal year ended December 31, 2009 and 2008
           
Percentage Change
 
USD in thousands
 
2010
   
2009
   
2008
   
2010 VS 2009
   
2009 VS 2008
 
                               
Gross Profit
  $ 71,913     $ 88,554     $ 7,928       (18.8 )%     1,017.0 %
                                         
Gross Profit Margin
    3.8 %     5.3 %     0.6 %                
 
 
31

 
 
Gross profit for 2010 decreased 18.8% to $71.9 million from $88.6 million in 2009. The decrease is primarily attributable to a drop in gross profit at Longmen Joint Venture. The purchase price of our primary raw materials including iron ore and coke increased in 2010, which had a negatively impact on gross profit margin.

Three months ended December 31, 2010 compared to three months ended December 31, 2009
 
(USD in thousands)
             
Percentage Change
 
     2010 Q4     2009 Q4    
2010 Q4 VS 2009 Q4
 
   
(Unaudited)
       
Gross Profit
  $ 43,228     $ 13,399       222.6 %
Gross Profit Margin
    9.0 %     3.0 %        
 
The gross margin improved in the fourth quarter 2010 to 9.0% compared to 3.0% in the same period last year. The increase is predominantly due to the compensation from Shaanxi Steel Group for the loss of production volume and production efficiency at Longmen Joint Venture during the construction of blast furnaces by Shaanxi Steel Group. Longmen Joint Venture could not reasonably estimate the amount of compensation for the loss until we received an approval notice from Shaanxi Steel Group in December of 2010. The compensation was recorded as an offset to the cost of goods sold in December 2010 to reduce the impact of lower production volume and efficiency during the period of construction in the entire year of 2010.
 
The following chart illustrates the comparison of gross profit with or without the compensation from Shaanxi Steel Group:
 
Year Ended December 31
With Compensation
   
Without Compensation
 
(USD in thousands except gross
profit margin)
2010 Q4
   
2010
Full Year
   
2010 Q4
   
2010
Full Year
 
                       
Sales
  $ 478,593     $ 1,893,572     $ 478,593     $ 1,893,572  
                                 
Gross profit
  $ 43,228     $ 71,913     $ 16,136     $ 44,821  
                                 
Gross profit Margin
    9.0 %     3.8 %     3.4 %     2.4 %

Selling, General and Administrative Expenses
 
Fiscal year ended December 31, 2010 compared with fiscal year ended December 31, 2009 and 2008

Selling, General and Administrative Expenses
         
Percentage Change
 
USD in thousands
 
2010
   
2009
   
2008
   
2010 VS 2009
   
2009 VS 2008
 
                               
Selling, General and Administrative expenses
  $ 52,949     $ 41,074     $ 36,942       28.9 %     11.2 %
                                         
Selling, General and Administrative expenses
    2.8 %     2.5 %     2.7 %                

 
32

 
 
SG&A Expenses increased 28.9% to $52.9 million in 2010 compared to $41.1 million in 2009. The increase is mainly due to the climbing transportation and sales agent charges at Longmen Joint Venture related to the increase of shipping volume and long distance sales deliveries to markets in Henan, Hubei and Chongqing. SG&A expenses as a percentage of revenue increased slightly to 2.8% for 2010 from 2.5% in 2009 and 2.7% in 2008.
 
Three months ended December 31, 2010 compared with three months ended December 31, 2009

(USD in thousands)
                  
Percentage Change
  
     
2010 Q4
     
2009 Q4
     
2010 Q4 VS 2009 Q4
  
   
(Unaudited)
       
Selling, General and Administrative expenses
 
$
17,569
   
$
11,855
     
48.2
%
SG&A/Revenue %
   
3.7
%
   
2.6
%
       

Selling, general and administrative expenses, including transportation charges, executive compensation, office expenses, legal and accounting charges, travel charges, equipment maintenance and various taxes increased 48.2% to $17.6 million for the three months ended December 31, 2010 compared to $11.9 million in the same period of 2009. The increase is mainly due to the rising transportation and sales agent charges on long distance deliveries outside of Shaanxi Province.
 
Selling, general and administrative expenses as a percentage of revenue increased to 3.7% for the fourth quarter of 2010 from 2.6% in the same period of 2009. The increase is mainly due to the rising transportation and sales agent charges on long distance deliveries outside of Shaanxi province.
 
Income (Loss) from Operations
 
Fiscal year ended December 31, 2010 compared to fiscal year ended December 31, 2009 and 2008

 
         
Percentage Change
 
USD in thousands
 
2010
   
2009
   
2008
   
2010 VS 2009
   
2009 VS 2008
 
                               
Income (Loss) from Operations
  $ 18,964     $ 47,480     $ (29,014 )     (60.1 )%     (263.6 )%

The income from operations in 2010 decreased to $19.0 million from $47.5 million income for the same period last year. The decrease was predominantly due to the drop in gross profit caused by higher purchase price of iron ore and coke in 2010.

Three months ended December 31, 2010 compared with three months ended December 31, 2009

(USD in thousand)
             
Percentage Change
 
       2010 Q4       2009 Q4    
2010 Q4 VS 2009 Q4
 
   
(Unaudited)
       
Income from Operations
  $ 25,659     $ 1,544       1,561.8 %

Income from operations for the three months ended December 31, 2010 increased to $25.7 million from $1.5 million income for the same period last year. The increase is primarily due to the compensation received from Shaanxi Steel Group for the loss as a result of their construction of the blast furnaces.
 
 
33

 
 
Total Other Income (Expense), Net
 
Fiscal year ended December 31, 2010 compared with fiscal years ended December 31, 2009 and 2008

Total Other Income (Expense), Net
         
Percentage Change
 
USD in thousands
 
2010
   
2009
   
2008
   
2010 VS 2009
   
2009 VS 2008
 
Interest Income
  $ 6,154       3,334     $ 4,251       84.6 %   $ (21.6 )%
Finance/interest expense
    (51,283 )     (27,843 )     (23,166 )     84.2 %     20.2 %
Change in Fair Value of Derivative Liabilities
    15,055       (33,159 )     12,821       (145.4 )%     (358.6 )%
Gain from Debt Extinguishment
    -       7,331       7,169       -       2.3 %
Net compensation for service
    876       -       -       -       -  
Government Grant
    -       3,430       -       -       -  
Loss on Disposal of Fixed Assets
    (9,977 )     (4,643 )     -       114.9 %     -  
Realized income from future contract
    1,424       -       -       -       -  
Income from Investment
    7,910       4,730       1,896       67.2 %     149.5 %
Other Non-operating Income, net
    1,280       1,812       767       (29.4 )%     136.2 %
Total Other (Expense) Income, Net
    (28,561 )     (45,008 )     3,738       (36.5 )%     (1,304.1 )%

Total other expenses for the year ended December 31, 2010 were $28.6 million compared to $45.0 million in 2009 and total other income of $3.7 million in 2008.

The decrease of total other expenses, net was mainly a result of the combined effect of a $23.4 million increase in Finance/Interest expense and a gain of $48.2 million in the change in fair value of derivative liabilities.

 Three months ended December 31, 2010 compared with three months ended December 31, 2009
       
OTHER INCOME(EXPENSE), NET (USD in thousand)
          
Percentage Change
  
     
2010 Q4
     
2009 Q4
     
2010 Q4 VS 2009 Q4
  
   
(Unaudited)
       
Interest Income
 
$
2,678
   
$
866
     
209.2
%
Finance/interest Expense
   
(13,666
   
(9,421
   
45.1
%
Change in Fair Value of Derivative Liabilities
   
1,476
     
(9,931
)    
(114.9)
Gain from Debt Extinguishment
   
-
     
4,399
     
-
Net Income from Compensation
   
876
     
-
     
-
Gain from investment in future contracts
   
1,424
     
-
     
-
Loss on Disposal of Fixed assets
   
(9,977
   
-
     
-
Income from Investment
   
2,315
     
1,069
     
116.6
%
Other Non-operating Expense, net
 
$
(318
 
$
(502
   
(36.7
)% 
     Total Other Expense, net
 
$
(15,192
 
$
(13,520
   
 12.4

Total other expenses, net for the three months ended December 31, 2010 were $15.2 million, a 12.4% increase compared to $13.5 million in the same period last year. The increase of total other expenses, net was mainly a result of the combined effect of a $4.2 million increase in Finance/Interest expense, a $10 million loss on disposal of fixed assets and a gain of $11.4 million in the change in fair value of derivative liabilities.

Change in Fair Value of Derivative Liabilities
 
According to GAAP, our December 2007 Convertible Notes, December 2007 Warrants and the December 2009 Warrants (as defined below) are considered a derivative and therefore must be “marked to market.”  One of the drivers used to calculate the value of this derivative is stock price. Changes in our stock price cause gains or losses to this income statement item.
 
 
34

 

The change in fair value of derivative liabilities for the years ended December 31, 2010 was a gain of $15.1 million compared to a loss of $33.2 million for the same period last year. The change in fair value of derivative liabilities for the three months ended December 31, 2010 was a gain of $1.5 million compared to a loss of $9.9 million for the same period last year. This gain is due to a change of stock price of our common stock as of December 31, 2010 compared to the one as of December 31, 2009. According to accounting principles generally accepted in the United States regarding valuing derivatives, the drop in our share price and the conversion of our convertible notes resulted in a $1.5 million and $15.1 million gain for the three months and the year ended December 31, 2010, respectively.

As of August 5, 2010, all of the convertible promissory notes issued in connection with the private placement that closed on December 13, 2007 have been converted into common stock.

Net Income (Loss) Before Noncontrolling Interest

Fiscal year ended December 31, 2010 compared with fiscal year ended December 31, 2009 and 2008
 
Net Income (Loss) Before Noncontrolling Interest
         
Percentage Change
 
USD in thousands
 
2010
   
2009
   
2008
   
2010 VS
2009
   
2009 VS
2008
 
                               
NET LOSS BEFORE NONCONTROLLING  INTEREST
  $ (7,487 )   $ (3,681 )   $ (19,865 )     103.4 %     (81.5 )%

 
Three months ended December 31, 2010 compared with three months ended December 31, 2009
   
2010 Q4
   
2009 Q4
   
Change %
 
   
(Unaudited)
       
   
 
   
 
        
NET INCOME (LOSS) BEFORE NONCONTROLLING  INTEREST
  $ 7,878     $ (10,943 )     172.0 %
 
Net (Loss) Income attributable to General Steel Holdings, Inc.

Fiscal year ended December 31, 2010 compared to fiscal year ended December 31, 2009 and 2008
 
           
Percentage Change
 
USD in thousands
 
2010
   
2009
 
2008
   
2010 VS
2009
   
2009 VS
2008
 
NET LOSS BEFORE NONCONTROLLING  INTEREST
  $ (7,487 )   $ (3,681 )   $ (19,865 )     103.4 %     (81.5 )%
LESS: Net Income attributable to noncontrolling interest
  $ 188     $ 21,563     $ (8,542 )     (99.1 )%     (352.4 )%
NET(LOSS) INCOME ATTRIBUTABLE TO CONTROLLING INTEREST
  $ (7,675 )   $ (25,244 )   $ (11,323 )     (69.6 )%     122.9 %
 
 
35

 

 
Three months ended December 31, 2010 compared with three months ended December 31, 2009

(USD in thousands)
             
Percentage Change
 
       2010 Q4       2009 Q4    
2010 Q4 VS 2009 Q4
 
   
(Unaudited)
       
NET INCOME (LOSS) BEFORE NONCONTROLLING  INTEREST
  $ 7,878     $ (10,943 )     172.0 %
LESS: Net Income attributable to noncontrolling interest
  $ 5,657     $ 142       3883.8 %
NET INCOME (LOSS) ATTRIBUTABLE TO CONTROLLING INTEREST
  $ 2,221     $ (11,085 )     120.0 %
 
(Loss) Earnings per Share

Fiscal year ended December 31, 2010 compared to fiscal year ended December 31, 2009 and 2008

           
Percentage Change
 
(in thousand, except earnings per share)
 
2010
   
2009
   
2008
   
2010 VS
2009
   
2009 VS
2008
 
NET LOSS ATTRIBUTABLE TO CONTROLLING INTEREST
  $ (7,675 )   $ (25,244 )   $ (11,323 )     (69.6 )%     122.9 %
                                         
WEIGHTED AVERAGE NUMBER OF SHARES
                                       
                                         
Basic
    53,113       41,860