Attached files

file filename
EX-31.2 - GENERAL STEEL HOLDINGS INCv221482_ex31-2.htm
EX-32.2 - GENERAL STEEL HOLDINGS INCv221482_ex32-2.htm
EX-32.1 - GENERAL STEEL HOLDINGS INCv221482_ex32-1.htm
EX-31.1 - GENERAL STEEL HOLDINGS INCv221482_ex31-1.htm
 


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q

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

For the quarterly period ended March 31, 2011

or

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

For the transition period from __________ to __________
 
Commission File Number 001-33717
 
General Steel Holdings, Inc.
(Exact name of registrant as specified in its charter)
 
Nevada
 
41-2079252
(State or other Jurisdiction of
 
(I.R.S. Employer Identification No.)
Incorporation or Organization)
   

Suite 2315, Kuntai International Mansion Building,
Yi No. 12, Chaoyangmenwai Ave.
Chaoyang District, Beijing, China 100020
(Address of Principal Executive Office, Including Zip Code)

+86(10)58797346
(Registrant's Telephone Number, Including Area Code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x   No  ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files).  Yes  ¨  No  ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer  ¨
 
Accelerated filer  x
 
Non-accelerated filer  ¨
(Do not check if a smaller reporting company)
 
Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨  No  x
 
As of May 9, 2011, 55,080,467 shares of common stock, par value $0.001 per share, were issued and outstanding.

 
 

 
 
Table of Contents
 
   
Page
Part I.  FINANCIAL INFORMATION
 
     
Item 1.
Financial Statements.
3
     
 
Consolidated Balance Sheets as of March 31, 2011 (Unaudited) and December 31, 2010.
3
     
 
Consolidated Statements of Operation and Other Comprehensive Income (Loss) for the Three Months Ended March 31, 2011 and 2010 (Unaudited).
4
     
 
Consolidated Statements of Changes In Equity (Unaudited).
5
     
 
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2011 and 2010 (Unaudited).
6
     
 
Notes to Consolidate Financial Statements (Unaudited).
7
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
39
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
54
     
Item 4.
Controls and Procedures.
54
     
Part II. OTHER INFORMATION
 
     
Item 1.
Legal Proceedings.
55
     
Item 1A.
Risk Factors.
55
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
55
     
Item 6.
Exhibits.
55
     
Signatures
57

 
2

 

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

GENERAL STEEL HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2011 AND DECEMBER 31, 2010
(In thousands, except per share data)

   
March 31,
   
December 31,
 
   
2011
   
2010
 
   
(Unaudited)
       
ASSETS
 
             
CURRENT ASSETS:
           
Cash
  $ 89,310     $ 65,271  
Restricted cash
    202,976       197,797  
Notes receivable
    117,804       49,147  
Restricted notes receivable
    322,814       240,298  
Accounts receivable, net
    24,947       17,591  
Other receivables, net
    8,853       11,150  
Other receivables - related parties
    35,255       17,428  
Inventories
    521,066       475,879  
Advances on inventory purchase
    32,129       24,577  
Advances on inventory purchase - related parties
    9,353       6,187  
Prepaid expense
    3,237       5,018  
Prepaid value added tax
    21,214       37,323  
Deferred tax assets
    6,304       6,925  
TOTAL CURRENT ASSETS
    1,395,262       1,154,591  
                 
PLANT AND EQUIPMENT, net
    607,195       602,612  
                 
OTHER ASSETS:
               
Advances on equipment purchase
    15,137       14,898  
Investment in unconsolidated subsidiaries
    19,172       17,456  
Long-term deferred expense
    1,377       1,439  
Intangible assets, net of accumulated amortization
    23,729       23,672  
TOTAL OTHER ASSETS
    59,415       57,465  
                 
TOTAL ASSETS
  $ 2,061,872     $ 1,814,668  
                 
LIABILITIES AND EQUITY
 
                 
CURRENT LIABILITIES:
               
Short term notes payable
  $ 556,812     $ 480,152  
Accounts payable
    269,719       241,367  
Accounts payable - related parties
    115,010       77,285  
Short term loans - bank
    311,020       285,198  
Short term loans - others
    81,502       89,765  
Short term loans - related parties
    114,845       114,468  
Other payables and accrued liabilities
    38,459       30,093  
Other payable - related parties
    3,502       18,214  
Customer deposit
    291,481       187,495  
Customer deposit - related parties
    67,029       60,760  
Deposit due to sales representatives
    28,416       52,079  
Taxes payable
    4,932       2,316  
TOTAL CURRENT LIABILITIES
    1,882,727       1,639,192  
                 
DERIVATIVE LIABILITIES
    2,022       5,573  
                 
TOTAL LIABILITIES
    1,884,749       1,644,765  
                 
COMMITMENT AND CONTINGENCIES
               
                 
EQUITY:
               
Preferred stock, $0.001 par value, 50,000,000 shares authorized, 3,092,899 shares issued and outstanding as of March 31, 2011 and December 31, 2010
    3       3  
Common Stock, $0.001 par value, 200,000,000 shares authorized, 55,080,467 and 54,839,733 issued, 54,366,807 and  54,522,973 outstanding as of March 31, 2011 and December 31, 2010, respectively
    55       55  
Treasury stock, $0.001 par value, 713,660 and 316,760 shares as of March 31, 2011 and December 31, 2010, respectively.
    (1,998 )     (871 )
Paid-in-capital
    105,619       104,971  
Statutory reserves
    6,246       6,202  
Accumulated deficits
    (21,482 )     (24,086 )
Accumulated other comprehensive income
    14,295       12,712  
TOTAL SHAREHOLDER'S EQUITY
    102,738       98,986  
                 
NONCONTROLLING INTERESTS
    74,385       70,917  
                 
TOTAL EQUITY
    177,123       169,903  
                 
TOTAL LIABILITIES AND EQUITY
  $ 2,061,872     $ 1,814,668  

The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
 
3

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATION AND OTHER COMPREHENSIVE INCOME (LOSS)
FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010
(UNAUDITED)
(In thousands, except per share data)

   
2011
   
2010
 
SALES
  $ 501,479     $ 317,628  
                 
SALES - RELATED PARTIES
    208,985       135,395  
TOTAL SALES
    710,464       453,023  
                 
COST OF GOODS SOLD
    481,487       317,576  
                 
COST OF GOODS SOLD - RELATED PARTIES
    200,653       129,714  
TOTAL COST OF GOODS SOLD
    682,140       447,290  
                 
GROSS PROFIT
    28,324       5,733  
                  
SELLING, GENERAL AND  ADMINISTRATIVE EXPENSES
    14,501       12,141  
                 
INCOME (LOSS) FROM OPERATIONS
    13,823       (6,408 )
                 
OTHER INCOME (EXPENSE)
               
Interest income
    1,063       1,120  
Finance/interest expense
    (14,119 )     (10,963 )
Change in fair value of derivative liabilities
    3,552       3,939  
Loss on disposal of fixed assets
    (397 )     -  
Income from equity investments
    1,655       1,682  
Foreign currency transaction gain
    619       -  
Other non-operating income (expense), net
    306       (4 )
Total other expense, net
    (7,321 )     (4,226 )
                 
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES AND NONCONTROLLING INTEREST
    6,502       (10,634 )
                 
PROVISION FOR INCOME TAXES
               
Current
    750       621  
Deferred
    (77 )     (2,588 )
Total provision (benefit) for income taxes
    673       (1,967 )
                 
NET INCOME (LOSS) BEFORE NONCONTROLLING INTEREST
    5,829       (8,667 )
                 
Less: Net income (loss) attributable to noncontrolling interest
    3,225       (3,160 )
                 
NET INCOME (LOSS) ATTRIBUTABLE TO CONTROLLING INTEREST
    2,604       (5,507 )
                 
OTHER COMPREHENSIVE INCOME (LOSS)
               
Foreign currency translation adjustments
    1,583       (299 )
Comprehensive income attributable to noncontrolling interest
    243       165  
                 
COMPREHENSIVE INCOME (LOSS)
  $ 4,430     $ (5,641 )
                 
WEIGHTED AVERAGE NUMBER OF SHARES
               
Basic & Diluted
    54,839,733       51,652,843  
                 
EARNINGS (LOSS) PER SHARE
               
Basic & Diluted
  $ 0.05     $ (0.11 )

The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
 
4

 
 
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(In thousands, except per share data)

    
Preferred stock
 
Common stock
 
Treasury stock
     
Retained earnings / Accumulated deficits
 
Accumulated other
         
                           
Paid-in
 
Statutory
     
comprehensive
 
Noncontrolling
     
   
Shares
 
Par value
 
Shares
 
Par value
 
Shares
 
Value
 
capital
 
reserves
 
Unrestricted
 
income
 
interest
 
Totals
 
                                                   
BALANCE, December 31, 2009
    3,092,899   $ 3     51,618,595   $ 52     -     -   $ 95,589   $ 6,162   $ (16,411 ) $ 8,336   $ 72,598   $ 166,329  
                                                                           
Net loss attributable to controlling interest
                                                    (5,507 )               (5,507 )
Net loss attributable to noncontrolling interest
                                                                (3,160 )   (3,160 )
Distribution of dividend to noncontrolling shareholders
                                                                (1,045 )   (1,045 )
Noncontrolling interest acquired
                                                                (1,270 )   (1,270 )
Common stock issued for compensation
                237,100     0.24                 927                             927  
Common stock transferred by CEO for compensation, $6.91
                                        69                             69  
Foreign currency translation adjustments
                                                          (299 )   165     (134 )
                                                                           
BALANCE, March 31, 2010 (Unaudited)
    3,092,899     3     51,855,695     52     -     -     96,585     6,162     (21,918 )   8,037     67,288     156,209  
                                                                           
Net loss attributable to controlling interest
                                                    (2,168 )               (2,168 )
Net loss attributable to noncontrolling interest
                                                                3,348     3,348  
Distribution of dividend to noncontrolling shareholders
                                                                (2,889 )   (2,889 )
Noncontrolling interest acquired
                                                                -     -  
Registered capital received from noncontrolling shareholders
                                                                1,182     1,182  
Adjustment to special reserve
                                              40                 354     394  
Common stock issued for compensation
                496,200     0.50                 1,274                             1,275  
Common stock issued for repayment of debt
                928,163     0.93                 2,403                             2,404  
Common stock transferred by CEO for compensation
                                        207                             207  
Notes converted to common stock
                1,208,791     1.21                 3,544                             3,545  
Make whole shares issued on notes conversion
                271,507     0.27                 741                             741  
Common stock issued for accrued interest on notes
                79,377     0.08                 217                             217  
Treasury stock purchased
                (316,760 )   (0.32 )   316,760     (871 )                                 (871 )
Foreign currency translation adjustments
                                                          4,675     1,634     6,309  
                                                                           
BALANCE, December 31, 2010
    3,092,899   $ 3     54,522,973   $ 55     316,760   $ (871 ) $ 104,971   $ 6,202   $ (24,086 ) $ 12,712   $ 70,917   $ 169,903  
                                                                           
Net income attributable to controlling interest
                                                    2,604                 2,604  
Net income attributable to noncontrolling interest
                                                                3,225     3,225  
Common stock issued for compensation
                240,734     0.24                 579                             579  
Common stock transferred by CEO for compensation
                                        69                             69  
Treasury stock purchased
                (396,900 )   (0.40 )   396,900     (1,127 )                                 (1,127 )
Adjustment to special reserve
                                              44                       44  
Foreign currency translation adjustments
                                                          1,583     243     1,826  
                                                                        -  
                                                                           
BALANCE, March 31, 2011 (Unaudited)
    3,092,899   $ 3     54,366,807   $ 55     713,660   $ (1,998 ) $ 105,619   $ 6,246   $ (21,482 ) $ 14,295   $ 74,385   $ 177,123   

The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
 
5

 
 
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010
(UNAUDITED)
(In thousands, except per share data)

   
Three months ended March 31,
 
   
2011
   
2010
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income (loss) attributable to controlling interest
  $ 2,604     $ (5,507 )
Net income (loss) attributable to noncontrolling interest
    3,225       (3,160 )
Consolidated net income (loss)
    5,829       (8,667 )
Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities:
               
Depreciation and amortization
    8,922       9,586  
Bad debt recovery (allowance)
    5       (94 )
Inventory written-off
    1,947       -  
Loss on disposal of equipment
    397       -  
Stock issued for services and compensation
    647       996  
Amortization of deferred note issuance cost and discount on convertible notes
    -       68  
Change in fair value of derivative instrument
    (3,552 )     (3,939 )
Income from investment
    (1,655 )     (1,682 )
Deferred tax assets
    693       (2,484 )
Changes in operating assets and liabilities
               
Notes receivable
    (68,315 )     4,760  
Accounts receivable
    (7,269 )     (13,556 )
Accounts receivable - related parties
    -       (4,750 )
Other receivables
    3,686       256  
Other receivables - related parties
    (15,701 )     (389 )
Inventories
    (43,694 )     (36,689 )
Advances on inventory purchases
    (7,451 )     (5,945 )
Advances on inventory purchases - related parties
    (3,137 )     (44,257 )
Accounts payable
    27,484       1,556  
Accounts payable - related parties
    37,367       8,699  
Other payables and accrued liabilities
    8,246       (3,502
Other payables - related parties
    (14,732 )     17,291  
Customer deposits
    103,096       14,521  
Customer deposits - related parties
    3,028       36,280  
Taxes payable
    18,791       9,978  
Net cash provided by (used in) operating activities
    54,632       (21,963 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Payments made for treasury stock acquired
    (1,128 )     -  
Dividend receivable
    -       (1,554 )
Deposits due to sales representatives
    (23,771 )     16,894  
Cash proceeds from sales of equipment
    328       -  
Advance on equipment purchases
    (190 )     (4,664 )
Equipments purchase and intangible assets
    (10,912 )     (6,816 )
Net cash (used in) provided by investing activities
    (35,673 )     3,860  
                 
CASH FLOWS FINANCING ACTIVITIES:
               
Restricted cash
    (4,516 )     (34,660 )
Notes receivable - restricted
    (81,509 )     (24,216 )
Borrowings on short term loans - bank
    85,312       95,015  
Payments on short term loans - bank
    (60,495 )     (69,336 )
Borrowings on short term loan - others
    36,128       27,945  
Payments on short term loans - others
    (44,664 )     (24,954 )
Payments on short term loans - related parties
    -       (11,747 )
Borrowings on short term notes payable
    243,985       251,725  
Payments on short term notes payable
    (169,105 )     (182,369 )
Net cash provided by financing activities
    5,136       27,403  
                 
EFFECTS OF EXCHANGE RATE CHANGE IN CASH
    (56 )     (386 )
                 
INCREASE IN CASH
    24,039       8,914  
                 
CASH, beginning of period
    65,271       82,118  
                 
CASH, end of period
  $ 89,310     $ 91,032  
                 
Non-cash transactions of investing and financing activities:
               
Share issuance for debt settlement
  $ -     $ 82,118  

The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
 
6

 
 
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
 
Note 1 – Background
 
General Steel Holdings, Inc. (the “Company”) was incorporated on August 5, 2002 in the state of Nevada. The Company through its 100% owned subsidiary, General Steel Investment, operates a portfolio of steel companies serving various industries in the People’s Republic of China (“PRC”). The Company’s main operation is manufacturing and sales of steel products such as steel rebar, hot-rolled carbon and silicon sheets and spiral-weld pipes.
 
Recent developments
 
On April 29, 2011, the Company and its subsidiary – Shaanxi Longmen Iron and Steel Co. Ltd. (“Longmen Joint Venture”) have signed a 20-year unified management agreement with Shaanxi Coal and Chemical Industry Group Co., Ltd. ("Shaanxi Coal") and Shaanxi Iron and Steel Group (“Shaanxi Steel Group”). Under terms of the agreement, Longmen Joint Venture will provide daily management of operations and operate production equipment constructed by Shaanxi Steel Group at a facility owned by Longmen Joint Venture in Hancheng Shaanxi province, China. For the first two years under the agreement Longmen Joint Venture will receive 60% of the pre-tax profit on the sale of products manufactured at the Longmen Joint Venture facility, with the remaining 40% distributed to Shaanxi Steel Group. Profit distributed to Shaanxi Steel Group will be classified as an operating expense on the Company's consolidated statements of operations. See Note 21 for details.
 
Note 2 – Summary of significant accounting policies
 
Basis of presentation
 
The consolidated financial statements of the Company reflect the activities of the following directly and indirectly owned subsidiaries: 
 
Subsidiary
 
Percentage
of Ownership
 
General Steel Investment Co., Ltd.
 
British Virgin Islands
    100.0 %
General Steel (China) Co., Ltd. (“General Steel (China)”)
 
PRC
    100.0 %
Baotou Steel – General Steel Special Steel Pipe Joint Venture Co., Ltd.
 
PRC
    80.0 %
Yangpu Shengtong Investment Co., Ltd.
 
PRC
    99.1 %
Qiu Steel Investment Co., Ltd. (“Qiu Steel”)
 
PRC
    98.7 %
Longmen Joint Venture
 
PRC
    60.0 %
Maoming Hengda Steel Company, Ltd. (“Maoming Hengda”)
 
PRC
    99.0 %
Tianwu General Steel Material Trading Co., Ltd (“Tianwu Joint Venture”)
 
PRC
    60.0 %

 
7

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
 
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and include the accounts of all directly and indirectly owned subsidiaries listed above. All material intercompany transactions and balances have been eliminated in consolidation.
 
Management has included all adjustments, consisting only of normal recurring adjustments, considered necessary to give a fair presentation of operating results for the periods presented. Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with information included in the 2010 annual report filed on Form 10-K.
 
 Use of estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant accounting estimates reflected in the Company’s financial statements include the fair value of financial instruments, the useful lives of and impairment for property, plant and equipment, trial production cost for two blast furnaces owned by Shaanxi Steel Group and potential losses on uncollectible receivables. Actual results could differ from these estimates.
 
Concentration of risks
 
The Company’s operations are carried out in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC’s economy. The Company’s operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in North America and Western Europe. The Company’s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.
 
Cash includes demand deposits in accounts maintained with banks within the PRC, Hong Kong and the United States. Total cash (including restricted cash balances) in these banks on March 31, 2011 and December 31, 2010 amounted to $292.3 million and $263.1 million, respectively. As of March 31, 2011, $0.1 million cash in the bank was covered by insurance. The Company has not experienced any losses in other bank accounts and believes it is not exposed to any risks on its cash in bank accounts.
 
The Company’s five major customers are all distributors and collectively represented approximately 32.3% and 31.0% of the Company’s total sales for the three months ended March 31, 2011 and 2010 respectively, including one customer accounted for 16.9% and 9.0% of total sales for the three months ended March 31, 2011 and 2010. These five major customers accounted for 7.5% and 0% of total accounts receivable as of March 31, 2011 and 2010, respectively.

 
8

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
 
For the three months ended March 31, 2011 and 2010, the Company purchased approximately 60.3% and 47.5% of its raw materials from five major suppliers, respectively. Three out of the five major suppliers individually accounted for more than 10% of the total purchase for the three-month ended March 31, 2011, comparatively, two of the five major suppliers accounted for more than 10% of the total purchase for the three-month ended March 31, 2010.  These five vendors accounted for 39.2% and 9.0% of total accounts payable as of March 31, 2011 and 2010, respectively.
 
 Revenue recognition
 
Sales revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, the Company has no other significant obligations and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are recorded as customer deposits. Sales revenue represents the invoiced value of goods, net of value-added tax (VAT). All of the Company’s products sold in the PRC are subject to a Chinese value-added tax at a rate of 13% or 17% of the gross sales price. This VAT may be offset by VAT paid by the Company on raw materials and other materials included in the cost of producing the finished product.
 
Foreign currency translation and other comprehensive income
 
The reporting currency of the Company is the US dollar. The Company’s subsidiaries in China use the local currency, Renminbi (RMB), as their functional currency. Assets and liabilities are translated at the unified exchange rate as quoted by the People’s Bank of China at the end of the period. Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statement of equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.
 
Translation adjustments included in accumulated other comprehensive income amounted to $14.3 million and $12.7 million as of March 31, 2011 and December 31, 2010, respectively. The balance sheet amounts, with the exception of equity at March 31, 2011 and December 31, 2010 were translated at 6.57 RMB and 6.59 RMB to $1.00, respectively. The equity accounts were stated at their historical rate. The average translation rates applied to statement of operations accounts for the three months ended March 31, 2011 and 2010 were 6.59 RMB and 6.82 RMB, respectively. Cash flows are also translated at average translation rates for the periods, therefore, amounts reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheet.
 
The PRC government imposes significant exchange restrictions on fund transfers out of the PRC that are not related to business operations. These restrictions have not had a material impact on the Company because it has not engaged in any significant transactions that are subject to the restrictions.

 
9

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
 
Financial instruments
 
The accounting standards regarding fair value of financial instruments and related fair value measurements defines financial instruments and requires disclosure of the fair value of financial instruments held by the Company. The Company considers the carrying amount of cash, accounts receivable, other receivables, accounts payable and accrued liabilities, to approximate their fair values because of the short period of time between the origination of such instruments and their expected realization. For short term loans and notes payable, the Company concluded the carrying values are a reasonable estimate of fair value because of the short period of time between the origination and repayment and their stated interest rate approximates current rates available.
 
The Company analyzes all financial instruments with features of both liabilities and equity, pursuant to which the Company’s warrants were required to be recorded as a liability at fair value and marked to market each reporting period.
 
The accounting standards define fair value, establish a three-level valuation hierarchy for disclosures of fair value measurement and enhance disclosure requirements for fair value measures. The three levels are defined as follow:
 
 
·
Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
 
 
·
Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.
 
 
·
Level 3 inputs to the valuation methodology are unobservable and significant to the fair value.
 
In December 2007, the Company issued convertible notes totaling $40 million (“Notes”) and 1,154,958 warrants. In December 2009, the Company issued 2,777,778 warrants in connection with a registered direct offering. The aforementioned warrants and the conversion option embedded in the Notes meet the definition of a derivative instrument in the accounting standards. Therefore these instruments are accounted for as derivative liabilities and recorded at fair value on each reporting period. The change in the value of the derivative liabilities is charged against or credited to income.  The fair value was determined using the Cox Rubenstein Binomial Model, defined in the accounting standard as level 2 inputs, and recorded the change in earnings. As a result, the derivative liabilities are carried on the consolidated balance sheet at their fair value.
 
(in thousands)
 
Carrying Value
as of March 31,
2011
   
Fair Value Measurements at March 31, 2011
Using Fair Value Hierarchy
 
         
Level 1
   
Level 2
   
Level 3
 
Derivative liabilities (Unaudited)
  $ 2,022             $ 2,022          

 
10

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
 
Except for the derivative liabilities, the Company did not identify any other assets or liabilities that are required to be presented on the balance sheet at fair value in accordance with the accounting standard.
 
Cash
 
Cash includes cash on hand and demand deposits in banks with original maturities of less than three months.
 
Restricted cash
 
The Company has notes payable outstanding with various banks and is required to keep certain amounts on deposit that are subject to withdrawal restrictions. The notes payable are generally short term in nature due to its maturity period of six months or less, thus restricted cash is classified as a current asset.
 
 Accounts receivable and allowance for doubtful accounts
 
Accounts receivable include trade accounts due from customers and other receivables from cash advances to employees, related parties or third parties. An allowance for doubtful accounts is established and recorded based on managements’ assessment of potential losses based on the credit history and relationships with the customers. Management reviews its receivable on a regular basis to determine if the bad debt allowance is adequate, and adjusts the allowance when necessary. Delinquent account balances are written-off against allowance for doubtful accounts after management has determined that the likelihood of collection is not probable.
 
Notes receivable
 
Notes receivable represents trade accounts receivable due from various customers where the customers’ banks have guaranteed the payment. The notes are non-interest bearing and normally paid within three to six months. The Company has the ability to submit requests for payment to the customer’s bank earlier than the scheduled payment date, but will incur an interest charge and a processing fee. The Company had $440.6 million and $289.4 million notes receivable outstanding as of March 31, 2011 and December 31, 2010, respectively.
 
Restricted notes receivable represents notes receivable pledged as collateral for short-term loans and short-term notes payable issued by banks. As of March 31, 2011 and December 31, 2010, restricted notes receivable amounted to $322.8 million and $240.3, respectively.
 
Advances on inventory purchase
 
Advances on inventory purchases are monies deposited or advanced to outside vendors or related parties on future inventory purchases. Due to the high shortage of steel in China, most of the Company’s vendors require a certain amount of money to be deposited as a guarantee that the Company will complete its purchases on a timely basis.

 
11

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
 
This amount is refundable and bears no interest. The Company has legally binding contracts with its vendors, which required the deposit to be returned to the Company when the contract ends. The inventory is normally delivered within one month after the monies have been advanced. The total outstanding amount, including advances to related parties, was $41.5 million and $30.8 million as of March 31, 2011 and December 31, 2010, respectively.
 
Inventories
 
Inventories are comprised of raw materials, work in progress and finished goods and are stated at the lower of cost or market using the weighted average cost method. Management reviews inventories for obsolescence and cost in excess of net realizable value at least annually and records a reserve against the inventory and additional cost of goods sold when the carrying value exceeds net realizable value. The Company had written-off $1.9 million inventory cost for the three months ended March 31, 2011.
 
Shipping and handling
 
Shipping and handling for raw materials purchased are included in cost of goods sold. Shipping and handling cost incurred to ship finished products to customers are included in selling expenses. Shipping and handling expenses for the three months ended March 31, 2011 and 2010 amounted to $3.6 million and $2.1 million, respectively.
 
Plant and equipment, net
 
Plant and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets with a 3%-5% residual value.
 
The estimated useful lives are as follows:
 
Buildings and Improvements
 
10-40 Years
Machinery
 
10-30 Years
Other equipment
 
5 Years
Transportation Equipment
 
5 Years
 
Construction in progress represents the costs incurred in connection with the construction of buildings or new additions to the Company’s plant facilities. No depreciation is provided for construction in progress until such time as the assets are completed and are placed into service, maintenance, repairs and minor renewals are charged directly to expense as incurred. Major additions and betterment to buildings and equipment are capitalized. Interest incurred during construction is capitalized into construction in progress. All other interest is expensed as incurred.

 
12

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
 
Long lived assets, including buildings and improvements, equipment and intangible assets are reviewed if events and changes in circumstances indicate that its carrying amount may not be recoverable, to determine whether their carrying value has become impaired. The Company considers assets to be impaired if the carrying value exceeds the future projected cash flows from related operations. The Company also re-evaluates the periods of depreciation and amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives.
 
Intangible assets
 
All land in the PRC is owned by the government. However, the government grants “land use rights.”  General Steel (China) acquired land use rights in 2001 for a total of $3.6 million. These land use rights are for 50 years and expire in 2050 and 2053. Management elected to amortize the land use rights over the ten-year business term because its initial business license had a ten-year term. Although General Steel (China) became a Sino-Foreign Joint Venture in 2004, and obtained a new business license for twenty years, the Company decided to continue amortizing the land use rights over the original ten-year business term.
 
Long Steel Group contributed land use rights for a total amount of $22.5 million to the Longmen Joint Venture. The contributed land use rights are for 50 years and expire in 2048 to 2052.
 
Maoming Hengda has land use rights amounting to $2.3 million for 50 years that expire in 2054.
 
Entity
 
Original Cost
 
Expires on
    
(in thousands)
   
General Steel (China)  
$
3,599
  2050 & 2053
Longmen Joint Venture
 
$
22,546
 
2048 & 2052
Maoming Hengda
 
$
2,317
 
2054
 
Intangible assets of the Company are reviewed at least annually, more often when circumstances require, determining whether their carrying value has become impaired. The Company considers assets to be impaired if the carrying value exceeds the future projected cash flows from related operations. The Company also re-evaluates the periods of amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives.  As of March 31, 2011, the Company expects these assets to be fully recoverable.
 
Investments in unconsolidated subsidiaries
 
Subsidiaries in which the Company has the ability to exercise significant influence, but does not have a controlling interest, are accounted for using the equity method. Significant influence is generally considered to exist when the Company has an ownership interest in the voting stock between 20% and 50%, and other factors, such as representation on the Board of Directors, voting rights and the impact of commercial arrangements, are considered in determining whether the equity method of accounting is appropriate. The Company accounts for investments with ownership less than 20% using the cost method.

 
13

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
 
Longmen Joint Venture and its subsidiary - Hancheng Tongxing Metallurgy Co., Ltd. (“Tongxing Metallurgy”) invested in several companies from 2004 to 2009.
 
Unconsolidated subsidiary
 
Year acquired
 
Amount invested
(In thousands)
   
% owned
 
Shaanxi Daxigou Mining Co., Ltd
 
2004
 
$
5,510
     
22.0
 
Shaanxi Xinglong Thermoelectric Co., Ltd
 
2004 - 2007
   
9,487
     
20.7
 
Huashan Metallurgical Equipment Co.,  Ltd.
 
2003
   
2,935
     
25.0
 
Shaanxi Longgang Group Xian Steel Co., Ltd
 
2005
   
-
     
10.0
 
Xian Delong Powder Engineering Materials Co., Ltd.
 
2006
   
1,240
     
27.0
 
Total (Unaudited)
     
$
19,172
         
 
Short-term notes payable
 
Short-term notes payable are lines of credit extended by banks. The banks in-turn issue the Company a bankers acceptance note, which can be endorsed and assigned to vendors as payments for purchases. The notes payable are generally payable at a determinable period, generally three to six months. This short-term note payable bears no interest and is guaranteed by the bank for its complete face value and usually matures within three to six-month period. The banks usually require the Company to deposit a certain amount of cash at the bank as a guarantee deposit, which is classified on the balance sheet as restricted cash.
 
Customer deposits
 
Customer deposits represent amounts advanced by customers on product orders. The product normally is shipped within one month after receipt of the advance payment, and the related sale is recognized in accordance with the Company’s revenue recognition policy. As of March 31, 2011 and December 31, 2010, customer deposits amounted to $358.5 million and $248.3 million, including deposits paid to relate parties amounted to $67.0 million and $60.8 million, respectively.
 
Earnings per share
 
The Company has adopted the accounting principles generally accepted in the United States regarding earnings per share (“EPS”), which requires presentation of basic and diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings per share.
 
Basic earnings per share are computed by dividing income available to common stockholders by the weighted average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock.

 
14

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
 
Income taxes
 
The Company accounts for income taxes in accordance with the accounting principles generally accepted in the United States for income taxes. Under the asset and liability method as required by this accounting standard, the recognition of deferred income tax liabilities and assets for the expected future tax consequences of temporary differences between the income tax basis and financial reporting basis of assets and liabilities. Provision for income taxes consists of taxes currently due plus deferred taxes. The accounting principles generally accepted in the United States for accounting for uncertainty in income taxes clarify the accounting and disclosure for uncertain tax positions.  A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.
 
The charge for taxation is based on the results for the year as adjusted for items, which are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.
 
Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the consolidated financial statements and the corresponding tax basis used in the computation of assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences. Deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which deductible temporary differences can be utilized. Deferred tax is calculated using tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it is related to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis.
 
 Deferred income taxes are recognized for temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements, net operating loss carry forwards and credits, by applying enacted statutory tax rates applicable to future years. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Current income taxes are provided for in accordance with the laws of the relevant taxing authorities.

 
15

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
 
Share-based compensation
 
The Company accounts for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance with the accounting standards regarding accounting for stock-based compensation and accounting for equity instruments that are issued to other than employees for acquiring or in conjunction with selling goods or services. Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably determinable. The value of equity instruments issued for consideration other than employee services is determined on the earlier of a performance commitment or completion of performance by the provider of goods or services as defined by these accounting standards. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement.
 
Recently issued accounting pronouncements
 
In April 2010, the FASB issued ASU 2010-13, “Compensation—Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades,” or ASU 2010-13. ASU 2010-13 provides amendments to Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in currency of a market in which a substantial porting of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010.  The Company does not expect the adoption of ASU 2010-13 to have a significant impact on its consolidated financial statements.
 
In December 2010, the FASB issued ASU 2010-28 which amend “Intangibles- Goodwill and Other” (Topic 350). The ASU modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting entities, they are required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. An entity should consider whether there are any adverse qualitative factors indicating that impairment may exist. The qualitative factors are consistent with the existing guidance in Topic 350, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances changes that would more likely than not reduce the faire value of a reporting unit below its carrying amount. ASU 2010-28 is effective for fiscal years, and interim periods within those years beginning after December 15, 2010. Early adoption is not permitted. The Company does not expect the adoption of ASU 2010-13 to have a significant impact on its consolidated financial statements.

 
16

 
 
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
 
In December 2010, the FASB issued ASU 2010-29 which address diversity in practice about the interpretation of the pro forma revenue and earnings disclosure requirements for business combinations (Topic 805). This ASU specifies that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. This ASU also expands the supplemental pro forma disclosures under Topic 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. ASU 2010-29 is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. The Company does not expect the adoption of ASU 2010-13 to have a significant impact on its consolidated financial statements.
 
Reclassifications
 
Certain prior period amounts have been reclassified to conform to the current period presentation. These classifications have no effect on net income.
 
Note 3 – Accounts receivable, net
 
Accounts receivable, including related party receivables, net of allowance for doubtful accounts consists of the following:  
 
   
March 31, 2011
   
December 31,2010
 
   
(in thousands)
(Unaudited)
   
(in thousands)
 
Accounts receivable
  $ 25,206     $ 17,887  
Less: allowance for doubtful accounts
    (259 )     (296 )
Net accounts receivable
  $ 24,947     $ 17,591  
 
Movement of allowance for doubtful accounts is as follows:
 
     
March 31, 2011
     
December 31, 2010
  
     
(in thousands)
(Unaudited)
     
(in thousands)
  
Beginning balance
 
$
296
   
$
490
 
Charge to expense
   
12
     
174
 
Less Write-off
   
(49)
     
(386)
 
Exchange rate effect
   
-
     
18
 
Ending balance
 
$
259
   
$
296
 
 
 
17

 
 
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
 
Note 4 – Inventories
 
Inventories consist of the following:
 
     
March 31,
2011
     
December 31,
2010
  
     
(in thousands)
(Unaudited)
     
(in thousands)
  
Supplies
  
$
17,181
   
$
13,733
 
Raw materials
   
294,232
     
381,178
 
Finished goods
   
209,653
     
80,968
 
Total inventories
 
$
521,066
   
$
475,879
 
 
Raw materials consist primarily of iron ore and coke at Longmen Joint Venture. The cost of finished goods includes direct costs of raw materials as well as direct labor used in production. Indirect production costs such as utilities and indirect labor related to production such as assembling, shipping and handling costs for purchasing are also included in the cost of inventory.
 
Note 5 – Plant and equipment, net
 
Plant and equipment consist of the following:
 
  
 
March 31, 2011
   
December 31, 2010
 
   
(in thousands)
(Unaudited)
   
(in thousands)
 
Buildings and improvements
 
$
118,166
   
$
116,294
 
Machinery
   
504,602
     
502,958
 
Transportation and other equipment
   
14,478
     
13,253
 
Construction in progress
   
74,623
     
65,749
 
Subtotal
   
711,869
     
698,254
 
Less accumulated depreciation
   
(104,674)
     
(95,642)
 
Total
 
$
607,195
   
$
602,612
 
 
 
18

 
 
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
 
Construction in progress consisted of the following as of March 31, 2011:
 
Construction in progress
 
Value
 
Estimated
completion
 
Estimated
additional cost
 description
 
In thousands
 
 date
 
 In thousands
Employee cafeteria
 
$
4,412
 
July 2011
 
845
Steel rebar & wire production line
   
53,041
 
June 2011
 
3,669
Transformation of slag processing
   
1,282
 
September, 2011
 
7,888
3# Tailings
   
1,629
  August 2012     1,872
Sintering machine transformation
   
583
 
By the end of 2011
 
141
Others
   
13,676
 
By the end of 2012
 
4,033
Total (Unaudited)
   
74,623
     
18,448
 
Long lived assets, including construction in progress are reviewed if events and changes in circumstances indicate that its carrying amount may not be recoverable, to determine whether their carrying value has become impaired. The Company determined that the construction in progress in Maoming Hengda was impaired as of June 30, 2010. For the year ended December 31, 2010, $1.7 million construction-in-progress has been written off and included in operating expense.
 
Depreciation, including amounts in cost of goods sold, for the three months ended March 31, 2011 and 2010 amounted to $8.7 million and $9.3 million, respectively.
 
 Note 6 – Intangible assets, net
 
Intangible assets consist of the following:
 
  
 
March 31, 2011
   
December 31, 2010
 
   
(in thousands)
(Unaudited)
   
(in thousands)
 
Land use rights
 
$
28,817
   
$
28, 462
 
Software
   
609
     
660
 
Subtotal
   
29,426
     
29,122
 
                 
Accumulated amortization
   
(5,697)
     
(5,450
)
    Intangible assets, net
 
$
23,729
   
$
23,672
 
 
The gross amount of the intangible assets amounted to $29.4 million and $29.1 million as of March 31, 2011 and December 31, 2010, respectively. The remaining weighted average amortization period is 31.5 years.
 
 
19

 
 
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
 
Total amortization expense for the three months ended March 31, 2011 and 2010 amounted to $0.2 million and $0.3 million, respectively.
 
The estimated aggregate amortization expense for each of the five succeeding years is as follows:
 
 Years ended
 
Estimated
Amortization Expense
   
Gross carrying
Amount
 
   
(in thousands)
(Unaudited)
   
(in thousands)
 
March 31, 2012
  $ 912     $ 22,817  
March 31, 2013
    912       21,905  
March 31, 2014
    912       20,993  
March 31, 2015
    912       20,081  
March 31, 2016
    912       19,169  
Thereafter
    19,169       -  
Total
  $ 23,729          
 
Note 7 – Debt
 
Short-term notes payable
 
Short-term notes payable are lines of credit extended by the banks. The banks in turn issue the Company a bank acceptance note, which can be endorsed and assigned to vendors as payments for purchases. The notes payable are generally payable at a determinable period, generally three to six months. This short-term note payable is guaranteed by the bank for its complete face value. The banks usually do not charge interest on these notes but require the Company to deposit a certain amount of cash at the bank as a guarantee deposit, which is classified on the balance sheet as restricted cash. Restricted cash as a guarantee for the notes payable amounted to $175.9 million and $167.7 million as of March 31, 2011 and December 31, 2010, respectively. Restricted notes receivable as a guarantee for the notes payable amounted to $219.0 million and $159.3 million as of March 31, 2011 and December 31, 2010, respectively.
 
 
20

 
 
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)

The Company had the following short-term notes payable:
 
   
March 31, 2011
   
December 31, 2010
 
   
(in thousands)
(Unaudited)
   
(in thousands)
 
General Steel (China): Notes payable from banks in China, due various dates from April to August 2011. Restricted cash required of $17.8 million and $11.7 million as of March 31, 2011 and December 31, 2010, respectively; guaranteed by third parties.
 
$
29,874
   
$
21,541
 
Longmen Joint Venture: Notes payable from banks in China, due various dates from April to November 2011. $152.7 million restricted cash and $219.0 million notes receivable are secured for notes payable as of March 31, 2011, and comparatively $150.7 million restricted cash and $159.3 million notes receivable are secured for notes payable as of December 31, 2010, respectively; some notes are further guaranteed by third parties while others are secured by equipments and land use rights.
   
516,284
     
447,992
 
Bao Tou: Notes payable from banks in China, due date in April 2011, restricted cash of $5.3 million and $5.3 million as of March 31, 2011 and December 31, 2010, respectively; pledged by buildings.
   
10,654 
     
10,619 
 
Total short-term notes payable
 
$
556,812
   
$
480,152
 
 
Short-term loans
 
Short-term loans represent amounts due to various banks, other companies and individuals, and related parties, normally due within one year. The principles of loans are due at maturity. However, the loans can be renewed.
 
Short term loans due to banks, related parties and other parties consisted of the following:
 
   
March 31, 2011
   
December 31, 2010
 
   
(in thousands)
(Unaudited)
   
(in thousands)
 
General Steel (China): Loans from banks in China, due various dates from April 2011 to March 2012. Weighted average interest rate 6.1% per annum; some are guaranteed by third parties while others are secured by equipment and inventory.
 
$
24,300
   
$
24,220
 
Longmen Joint Venture: Loans from banks in China, due various dates from April 2011 to March 2012. Weighted average interest rate 5.4% per annum; some are guaranteed by third parties, restricted cash or notes receivables while others are secured by equipment, buildings, land use right and inventory.
   
287,341
     
260,978
 
Total short-term loans - bank
 
$
311,641
   
$
285,198
 
 
 
21

 
 
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
 
   
March 31, 2011
   
December 31, 2010
 
   
(in thousands)
(Unaudited)
   
(in thousands)
 
Longmen Joint Venture: Loans from various unrelated companies and individuals, due various dates from April 2011 to November 2012, and weighted average interest rates 6.2% per annum.
 
$
70,910
   
$
75,380
 
Maoming Hengda: Loans from one unrelated parties, due on demand, none interest bearing.
   
10,592
     
14,385
 
Total short-term loans – others
 
$
81,502
   
$
89,765
 
 
   
March 31, 2011
   
December 31,
2010
 
   
(in thousands)
(Unaudited)
   
(in thousands)
 
Longmen Joint Venture: Loans from Shaanxi Steel Group, due on demand and interest rates 5.3% per annum.
 
$
114,845
   
$
114,468
 
Total short-term loans - related parties
 
$
114,845
   
$
114,468
 
 
The Company had various loans from unrelated companies amounted to $81.5 million and $89.8 million as of March 31, 2011 and December 31, 2010, respectively. Of the $81.5 million, $10.6 million loans carry no interest and the remaining $70.9 million are subject to interest rates ranging from 5.6% to 9.0%. All short term loans from unrelated companies are due on demand and unsecured.
 
Total interest expenses, excluding capitalized interest, amounted to $8.6 million and $4.1 million for the three months ended March 31, 2011 and 2010, respectively.
 
Capitalized interest amounted to $0.7 million and $0.4 million for the three months ended March 31, 2011 and 2010, respectively.
 
Note 8 – Deposit due to sales representatives
 
Longmen Joint Venture entered into agreements with various entities to act as the Company’s exclusive sales agent in a specified geographic area.  These exclusive sales agents must meet certain criteria and are required to deposit a certain amount of money with the Company. In return the sales agents receive exclusive sales rights in a specified area and discounted prices on products they order. These deposits bear no interest and are required to be returned to the sales agent once the agreement has been terminated. The Company had $28.4 million and $52.1 million in deposits due to sales representatives as of March 31, 2011 and December 31, 2010, respectively.
 
 
22

 
 
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
 
Note 9 – Derivative liabilities
 
The Company has 3,900,871 warrants outstanding as result of $40 million notes issued in 2007 and 2,777,778 warrants outstanding in connection with a registered direct offering in  2009. The aforementioned warrants met the definition of a derivative instrument in the accounting standards and are recorded at fair value on each reporting period. The change in the value of the derivative liabilities is charged against or credited to income.
 
As of March 31, 2011 and December 31, 2010, derivative liabilities amounted to $2.0 million and 5.6 million, respectively.
 
The Company has the following warrants outstanding:
 
Outstanding As of December 31, 2010
   
6,678,649
 
Granted
   
-
 
Forfeited
   
-
 
Exercised
   
-
 
Outstanding As of March 31, 2011 (Unaudited)
   
6,678,649
 
 
Outstanding Warrants
   
Exercisable Warrants
 
Exercise Price
 
Number
   
Average
Remaining
Contractual Life
   
Average
Exercise Price
   
Number
   
Average
Remaining
Contractual
Life
 
$ 5.00    
6,678,649
     
1.8
   
$
5.00
     
6,678,649
     
1.8
 
 
Note 10 – Supplemental disclosure of cash flow information
 
Interest paid amounted to $4.7 million and $2.4 million for the three months ended March 31, 2011 and 2010, respectively.
 
The Company paid income tax amounted to $0.4 million and $0.8 million for the three months ended March 31, 2011 and 2010, respectively.
 
Effective interest charge on the Notes of $0.2 million was capitalized into construction in progress for the three months ended March 31, 2010.
 
 
23

 
 
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
 
Note 11 – Compensation for services provided
 
From 2009 to 2010, Longmen Joint Venture worked with Shaanxi Steel Group to build two new blast furnaces systems. During the period of construction, Longmen Joint Venture provided labor and technology assistance while dismantled certain small production systems to accommodate the new production systems. Longmen Joint Venture paid certain cost and fees on behalf of Shaanxi Steel Group and incurred loss resulting from lower production efficiency caused by the interruption of construction and trial production.  On December 22, 2010, Shaanxi Steel Group agreed to reimburse $25.0 million (RMB169.0 million) for the fees and cost and $27.1 (RMB183.1 million) for the loss of lower productive efficiency incurred by Longmen Joint Venture through September 30, 2010.
 
The detail cost and fee incurred on behalf of Shaanxi Steel Group were following:
 
Loss on disposal of equipment systems
  $ 11,466  
Trial production cost through September 30, 2010
    2,423  
Salary and benefit of employees
    3,471  
Materials consumed and shipping expense
    4,150  
Relocation fee paid on behalf of Shaanxi Steel Group
    1,746  
Land rental fee
    836  
Others
    40  
Total cost and fee incurred
  $ 24,132  
         
Total compensation for fees incurred
  $ 25,008  
Net compensation for services
  $ 876  
         
Compensation for loss of lower productive efficiency
  $ 27,092  
 
The Company offset the $25.0 million reimbursement with related costs and expenses incurred and recorded net compensation for services of $0.9. The $27.1 million (RMB183.1 million) compensation for lowering of production efficiency was recorded as a reduction to cost of goods sold for the year ended December 31, 2010.
 
Longmen Joint Venture also recorded $ 23.2 million and $6.3 million receivable for the trial production cost incurred by the two new blast furnaces as of March 31, 2011 and December 31, 2010. According to the signed unified management agreement with Shaanxi Steel Group, Shaanxi Steel Group will make compensation on the trial production costs incurred the test run period by Longmen Joint Venture. Management believes that the receivable will be reimbursed by Shaanxi Steel Group within next six months. The two blast furnace systems were in trial production stage as of March 31, 2011 and expect to reach the regular production status on May 2011.
 
 
24

 
 
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
 
Note 12 – Taxes
 
Income tax
 
Significant components of the provision for income taxes on earnings and deferred taxes on net operating losses from operation for the three months ended March 31, 2011 and 2010 are as follows:
 
 
 
March 31, 2011
   
March 31, 2010
 
 (In thousands)  
(Unaudited)
       
Current
  $ 750     $ 621  
Deferred
    (77 )     (2,588 )
Total provision (benefit) for income taxes
  $ 673     $ (1,967 )
 
According to Chinese tax regulations, the net operating loss can be carried forward to offset with operating income for the next five years. Management believes the deferred tax asset is fully realizable.
 
The principal component of the deferred income tax assets is as follows:
 
   
March 31, 2011
   
December 31, 2010
 
   
(in thousands)
(Unaudited)
   
(in thousands)
 
Beginning balance
  $ 6,925     $ 3,341  
(Tax assets realized) net operating loss carry forward for other subsidiaries
    (1,128 )     2,343  
Effective tax rate
    25 %     25 %
Deferred tax asset
  $ (282 )   $ 586  
Longmen Joint Venture and some subsidiaries, (tax asset realized) net operating loss carry-forward
    (2,420 )     20,539  
Effective tax rate
    15 %     15 %
Deferred tax asset
  $ (363 )   $ 3,081  
Exchange difference
    24       (82 )
Totals
  $ 6,304     $ 6,925  
 
The estimated tax savings due to the reduced tax rate for the three months ended March 31, 2011 and 2010 are $0.3 million and $(1.5) million, respectively. The net effect on income per share if the income tax had been applied would increase loss per share by $0.01 and $(0.04) for the three months ended March 31, 2011 and 2010, respectively.
 
 
25

 
 
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
 
Under the Income Tax Laws of the PRC, General Steel (China), is subject to an income tax at an effective rate of 25%. Baotou Steel Pipe Joint Venture is located in Inner Mongolia province, Maoming Hengda is located in Guangdong province and Tianwu Joint Venture is located in Tianjin Port Free Trade Zone. The three subsidiaries are subject to an effective income tax rate at 25%.
 
Longmen Joint Venture is located in the Mid-West region of China. It qualifies for the “Go-West” tax rate of 15% promulgated by the government. In 2010, the Chinese government announced that the “Go-West” tax initiative will extended for 10 years, and thus, the preferential tax rate of 15% will be in effect until 2020. This special tax treatment for Longmen Joint Venture will be evaluated on a year-to-year basis by the local tax bureau.
 
The following table reconciles the U.S. statutory rates to the Company’s effective tax rate for the years ended March 31, 2011 and 2010 are as follows:
 
   
March 31, 2011
   
March 31, 2010
 
   
(Unaudited)
   
(Unaudited)
 
U.S. Statutory rates
    34.0 %     34.0 %
Foreign income not recognized in the US
    (34.0 )%     (34.0 )%
China income taxes
    25.0 %     25.0 %
Tax effect of income not taxable for tax purposes (1)
    (13.0 )%     0.6 %
Effect of different tax rate of subsidiaries operating in other jurisdictions
    1.9 %     (9.7 )%
Total provision for income taxes
    13.9 %     16.0 %
 
(1)
This represents derivative expenses (income) and stock compensation expenses incurred by the Company that are not deductible/taxable in the PRC for the three months ended March 31, 2011 and 2010.
 
The Company has cumulative undistributed earnings of foreign subsidiaries of approximately $6.6 million as of March 31, 2011, and is included in consolidated retained earnings and will continue to be indefinitely reinvested in international operations. Accordingly, no provision has been made for U.S. deferred taxes related to future repatriation of these earnings, nor is it practicable to estimate the amount of income taxes that would have to be provided if we concluded that such earnings will be remitted in the future.
 
 
26

 
 
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
 
General Steel Holdings, Inc. was incorporated in the United States and has incurred net operating losses for income tax purposes for the three months ended March 31, 2011. The net operating loss carry forwards for United States income taxes amounted to $1.9 million, which may be available to reduce future years’ taxable income. These carry forwards will expire, if not utilized, through 2031. Management believes that the realization of the benefits from these losses appears uncertain due to the Company’s limited operating history and continuing losses for United States income tax purposes. Accordingly, the Company has provided a 100% valuation allowance on the deferred tax asset benefit to reduce the asset to zero. The valuation allowance as of March 31, 2011 was $0.6 million. The net change in the valuation allowance for the three months ended March 31, 2011 was $0.1 million. Management will review this valuation allowance periodically and make adjustments as warranted.
 
Value added tax
 
Enterprises or individuals who sell commodities, engage in repair and maintenance or import and export goods in the PRC are subject to a value added tax in accordance with PRC laws. The value added tax standard rates are 13% to 17% of the gross sales price. A credit is available whereby VAT paid on the purchases of semi-finished products or raw materials used in the production of the Company’s finished products can be used to offset the VAT due on sales of the finished product. As of March 31, 2011 and December 31, 2010, the Company had $21.2 million and $37.3 million value added tax credit which were available to offset the future VAT payable, respectively.
 
VAT on sales and VAT on purchases amounted to $214.5 million and $176.9 million, respectively, for the three months ended March 31, 2011, $117.5 million and $87.8 million, respectively, for the three months ended March 31, 2010. Sales and purchases are recorded net of VAT collected and paid as the Company acts as an agent for the government. VAT taxes are not impacted by the income tax holiday.
 
Taxes payable consisted of the following:
 
 
 
March 31, 2011
   
December 31, 2010
 
   
(in thousands)
(Unaudited)
   
(in thousands)
 
VAT taxes payable
 
$
2,423
   
$
-
 
Income taxes payable
   
475
     
840
 
Misc taxes
   
2,034
     
1,476
 
Totals
 
$
4,932
   
$
2,316
 
 
Note 13 – Earnings per share
 
The calculation of earnings per share is as follows:
 
(in thousands except per share data)
 
March 31, 2010
   
March 31, 2010
 
   
(Unaudited)
   
(Unaudited)
 
Income attributable to holders of common shares
  $ 2,604     $ (5,507 )
Basic and diluted weighted average number of common shares outstanding
    54,839,733       51,652,843  
Earnings (Loss) per share
               
Basic & diluted
  $ 0.05     $ (0.11 )
 
 
27

 
 
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
 
There is no dilutive effect for its earnings per share as the exercise price of warrants were higher than the stock market price during the period. There is no dilutive effect for its earnings per share for the three months ended March 31, 2011 and 2010.
 
Note 14 – Related party transactions and balances
 
Related party transactions
 
On March 31, 2010, General Steel (China), a subsidiary in which the Company holds a controlling interest, entered into a lease agreement with Tianjin Daqiuzhuang Steel Plates Co., Ltd. (the “Lessee”), whereby General Steel (China) will lease its facility located at No. 1, Tonga Street, Daqizhuang Town, Junghai County, Tianjin City to the Lessee (the “Lease Agreement”). The Lease Agreement provides approximately 776,078 square feet of workshops, lands, equipments and other facilities to the Lessee and allows the Company to reduce overhead costs while providing a recurring monthly revenue stream resulting from payments due thereunder. The term of the Lease Agreement is from January 1, 2010 to December 31, 2011 and the monthly base rental rate due to General Steel (China) is approximately $0.2 million (RMB1.68 million). The lessee partially owned by a related party Beijing Wendlar Co., Ltd, and is managed by the former general manager of General Steel (China). For the three months ended March 31, 2011 and 2010, General Steel (China) realized rental income in the amount of $0.8 million and $0.7 million from the Lessee, respectively. 
 
The future rental payments to be received associated with the Lease Agreement are as follow:
 
Year ended March 31,
 
Amount
 
   
(in thousands)
 
2012
 
$
2,301
 
Thereafter
   
-
 
Total
 
$
2,301
 
 
The following chart summarized sales to the related party transactions for the three months ended March 31, 2011 and 2010.
 
 
28

 
 
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
 
Name of related parties
 
Relationship
 
March 31,2011
   
March 31,2010
 
       
(in thousands)
(Unaudited)
   
(in thousands)
 
Shaanxi Longmen (Group) Co, Ltd and its subsidiaries (“Long Steel Group”)
 
Noncontrolling shareholder of Longmen Joint Venture
 
$
144,173
   
$
104,453
 
Tianjin Hengying Trading Co., Ltd
 
Common control under CEO
   
25,486
     
9,850
 
Tianjin Dazhan Industry Co, Ltd
 
Common control under CEO
   
20,261
         
Hancheng Haiyan Coking
 
Investee of Long Steel Group
   
11,393
     
10,325
 
General Qiugang steel tube  Co, Ltd
 
Common control under CEO
   
7,150
         
Shaanxi Steel Group
 
Majority shareholder of Long Steel Group
   
521
         
Beijing Daishang Trade Co., Ltd.
 
Noncontrolling shareholder of Longmen Joint Venture’s subsidiary
           
2,405
 
Tianjin Daqiuzhuang Steel Plates Co., Ltd.
 
Common control under CEO
   
-
     
8,312
 
Others
       
1
     
50
 
Total
     
$