UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K/A 

(Amendment No. 1)

 

(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)

 

Level 21, Tower B, Jiaming Center

No. 27 Dong San Huan North Road

Chaoyang District,

Beijing, China, 100020

(Address of Principal Executive Offices, Including Zip Code)

 

Registrant’s telephone number: +86 (10) 5775 7691

 

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 ¨ No x

 

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 x

 

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

 

*Please note that while the registrant qualified as an accelerated filer at the time of filing its Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 16, 2011, as of the date of filing this Amendment No. 1 to Annual Report on Form 10-K, the registrant has exited the accelerated filer status at the end of the fiscal year ended December 31, 2011 and now holds the status as 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. The registrant has no non-voting common equity.

 

The number of shares outstanding of capital stock as of August 28, 2012 was 56,932,788.

 

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 was filed with the Securities and Exchange Commission on May 2, 2011.

 

 

EXPLANATORY NOTE

 

This Annual Report on Form 10-K/A is being filed as Amendment No. 1 to our Annual Report on Form 10-K (“Amendment No.1”), which amends and restates our Annual Report on Form 10-K for the fiscal year ended December 31, 2010 (the “Original 10-K”), originally filed on March 16, 2011 with the Securities and Exchange Commission (the “SEC”). This Amendment No. 1 restates the following items:

 

- Part I; Item I – Business;

- Part I; Item IA – Risk Factors;

- Part II; Item 6- Selected Financial Data;

- Part II, Item 7- Management’s Discussion and Analysis of Financial Condition and Results of Operations;

- Part II, Item 8 - Financial Statements and Supplementary Data;

- Part II, Item 9A- Controls and Procedures; and

- Part IV, Item 15- Exhibit, Financial Statement Schedules.

 

While the Original 10-K is being amended and restated as a whole, except for the Items noted above, no other information included in the Original 10-K is being amended or updated by this Amendment No. 1. This Amendment No. 1 continues to describe the conditions as of the date of the Original 10-K and, except as contained therein, we have not updated or modified the disclosures contained in the Original 10-K. Accordingly, this Amendment No. 1 should be read in conjunction with our filings made with the SEC subsequent to the filing of the Original 10-K, including any amendment to those filings.

 

This Amendment No. 1 is being filed in order to restate:

 

• Our consolidated balance sheets as of December 31, 2010 and 2009 by recording the deferred lease income on the land use right amounted to $57.6 million and $16.5 million, respectively.

 

• Our consolidated statements of operation and other comprehensive income (loss) for the years ended December 31, 2010, and 2009. As a result, our consolidated net loss attributable to controlling interest for the years ended December 31, 2010, and 2009 increased by $22.3 million and by $5.4 million respectively; and

 

• Our consolidated statements of changes in equity for the years ended December 31, 2010, and 2009. As a result, our consolidated total shareholder’s equity decreased by $29.4 million and $5.6 million for the years ended December 31, 2010 and 2009, respectively.

 

The restatement relates to our accounting treatment for certain reimbursements received in relation to the collaboration with Shaanxi Iron and Steel Group, Co. Ltd. ("Shaanxi Steel") on the construction of equipment by Shaanxi Steel during the period from June 2009 to March 2011. The Company believed that the original accounting treatment for the reimbursement was in accordance with U.S. GAAP, based upon its understanding of the economic substance and the nature of reimbursement and its interpretation of U.S. GAAP.

 

However, in connection with the preparation of its quarterly report on Form 10-Q for the quarter ended June 30, 2011, the Company revisited the appropriate treatment for these items. Given the complexity, and the unique structure of the transaction and the challenge with respect to finding the appropriate accounting guidance, either by direct application or analogy in relation to various aspects of the transaction, both the Company's current and former auditors agreed that a review by the Office of the Chief Accountant ("OCA") of the SEC with respect to the appropriate accounting treatment for the compensation would be helpful. On April 20, 2012, after several rounds of written and oral communications, the OCA provided the Company with its guidance with respect to the accounting treatment. Upon receipt of the guidance from the OCA, the Company concluded amendment to the Original 10-K was necessary.

 

 

A summary of the effects of this restatement to our financial statements included within this Amendment No. 1 is presented under Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA at Note 2, “Restatement”.

 

This Amendment No. 1 includes a re-issued dual dated audit report of Frazer Frost, LLP, and new officer certifications are being filed as exhibits to this Amendment No. 1.

 

 

TABLE OF CONTENTS

PART I
ITEM 1.	BUSINESS.	1
ITEM 1A.	RISK FACTORS.	9
ITEM 1B.	UNRESOLVED STAFF COMMENTS.	25
ITEM 2.	PROPERTIES.	25
ITEM 3.	LEGAL PROCEEDINGS.	27
ITEM 4.	(REMOVED AND RESERVED).	27
PART II
ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.	27
ITEM 6.	SELECTED FINANCIAL DATA.	29
ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.	30
ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.	53
ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.	55
ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.	87
ITEM 9A.	CONTROLS AND PROCEDURES.	87
ITEM 9B.	OTHER INFORMATION.	90
PART III
ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.	90
ITEM 11.	EXECUTIVE COMPENSATION.	90
ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.	90
ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.	91
ITEM 14.	PRINCIPAL ACCOUNTING FEES AND SERVICES.	91
PART IV
ITEM 15.	EXHIBITS, FINANCIAL STATEMENT SCHEDULES.	91
SIGNATURES.		94

 

 

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 serves various industries and produces 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 agriculture equipments, 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.

 

 

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 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.

 

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 Steel 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. After negotiating with Shaanxi Steel, our subsidiary, Longmen Joint Venture and Shaanxi Steel have entered into an agreement on April 29, 2011 to operate the aforementioned equipment. We paid certain costs on behalf of Shaanxi Steel and economic losses during the construction. On December 22, 2010 we were reimbursed by Shaanxi Steel in the amount of approximately $25.0 million (RMB169.0 million) for the cost that we paid, on behalf of Shaanxi Steel, and compensated by Shaanxi Steel in the amount of approximately $27.1 million (RMB183.1 million) for the economic losses incurred through September 30, 2010.

 

• 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

 

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 $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 $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 hydro projects, 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.

 

 

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			50.2	%

 

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			59.0	%

 

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			70.8	%

 

 

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.

 

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 wasted 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:

 

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Quality;

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Price/cost competitiveness;

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System and product performance;

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Reliability and timeliness of delivery;

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New product and technology development capability;

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Excellence and flexibility in operations;

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Degree of global and local presence;

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Effectiveness of customer service; and

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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;

• 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.

 

 

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.

 

 

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.

 

There have been historical deficiencies with our internal controls which require further improvements, and we are exposed to potential risks from regulations requiring companies to evaluate controls under Section 404 of the Sarbanes-Oxley Act of 2002.

 

We are exposed to potential risks from regulations requiring companies to evaluate controls under Section 404 of the Sarbanes-Oxley Act of 2002. Ensuring that we have adequate internal financial and accounting controls and procedures in place to produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. Failure on our part to have effective internal financial and accounting controls, including the material weakness described below, has and could in the future cause our financial reporting to be unreliable, has and could in the future have a material adverse effect on our business, operating results, and financial condition, and has and could in the future cause the trading price of our common stock to fall dramatically.

 

We and our independent registered public accounting firm have identified a material weakness in our internal control over financial reporting that is described in greater detail in “Item 9A—Controls and Procedures.” Remedying this material weakness and maintaining proper and effective internal controls has and will require substantial management time and attention and has resulted in our incurring substantial incremental expenses. Our outside consultants are assisting us with designing and implementing an adequate risk assessment process to identify complex transactions requiring specialized knowledge to ensure the appropriate accounting for and disclosure of such transactions. We cannot be certain that further remedies including accounting restatements will not occur in the future. Such remedies, including accounting restatements could create a significant strain on our internal resources and cause delays in our release of quarterly or annual financial results and the filing of related reports, increase our costs and cause management distraction.

 

Under the supervision and with the participation of our management, we have and will continue to evaluate 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 and will continue to perform 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 and will continue to incur additional expenses and a diversion of management’s time. If we are not able 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.

 

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.

 

 

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.

 

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.

 

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 sometime 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.

 

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:

·

It constitutes a Chinese controlled foreign company and shall be deemed to be a PRC resident enterprise.

·

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.

·

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.

·

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

 

 

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.

 

 

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.

 

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.

 

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.*		Ying Fong Road North, Daqiuzhuang, Jinghai country Tianjin		Commercial Use		1.14		50 years		40 and 43 years

 

*In the process of changing name to General Steel (China).

 

Baotou Steel Pipe Joint Venture

 

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

 

Longmen Joint Venture

 

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

 

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

 

Registered Owner of Land Use Right		Location & Certificate  Of Land Use Right		Usage		Space (acres)		Life of Land Use Right		Remaining Life
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.

 

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.

 

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.

 

Year ended December, 31

SUMMARY OF OPERATIONS		2010 As restated				2009 As restated				2008				2007				2006
(USD and number of shares in thousands, except per share amounts)
Sales		$	1,882,140			$	1,679,770			$	1,351,203			$	772,440			$	139,495
Cost of Goods Sold			1,850,725				1,590,958				1,343,275				715,751				135,324
Selling, General, and Administrative Expenses			52,577				41,059				36,942				16,164				2,421
Income (Loss) from operations			(21,162	)			47,753				(29,014	)			40,525				1,750
Net (Loss) Income
Attributable to Controlling Interest		$	(30,006	)		$	(30,620	)		$	(11,323	)		$	22,426			$	1,033
(Loss) Earnings per Share, Basic		$	(0.56	)		$	(0.73	)		$	(0.32	)		$	0.69			$	0.03
(Loss) Earnings per Share, Diluted		$	(0.56	)		$	(0.73	)		$	(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
		As restated				As restated
(USD in thousands, except the ratios)
Total Assets		$	1,799,380			$	1,224,370			$	865,714			$	478,407			$	73,822
Depreciation and Amortization		$	41,153			$	33,107			$	22,414			$	10,337			$	1,917
Current Ratio			0.72				0.59				0.43				0.67				0.87

 

Three months ended December, 31
STATEMENT OF
OPERATIONAL DATA		2010				2009				2008				2007				2006
		As restated				As restated
(USD in thousands, except share and per share amounts)
Statement of Operations Data
Sales		$	467,161			$	463,277			$	261,087			$	268,192			$	42,496
Cost of Goods sold			462,445				449,623				282,662				247,239				42,838
Gross Profit			4,716				13,654				(21,575	)			20,953				(342	)
Selling, General, and Administrative Expenses			17,204				11,855				8,578				5,894				266
Income (Loss) from Operations			(12,488	)			1,799				(30,153	)			15,059				(607	)
Net income (Loss) Attributable to Controlling Interest		$	(18,606	)		$	(14,652	)		$	(9,705	)		$	12,057			$	514
Earnings (Loss) per share
Basic		$	(0.34	)			$ (0. 35 )			$	(0.27	)		$	0.36			$	0.01
Diluted		$	(0.34	)		$	(0.35	)		$	(0.27	)		$	0.36			$	0.01
Balance Sheet Data
Current Assets		$	1,139,303			$	617,607			$	315,445			$	232,608			$	44,670
Total Assets		$	1,799,380				1,224,370			$	865,714			$	478,407			$	73,822
Total Liabilities		$	1,677,858				1,066,086			$	751,476			$	382,974			$	53,575
Noncontrolling interest		$	51,969				70,148			$	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 Amendment No. 1), and with our previously filed Original 10-K.

 

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, formation of a material trading company and compensation for economic losses:

 

·

Sales revenue increased by 12.0% year-over-year to $1.9 billion, up from $1.7 billion in 2009.

·

The construction of the two 1,280 cubic meter blast furnaces, two 120 metric ton converters and one 400 square meter sintering machine funded by Shaanxi Steel at the business property of Longmen Joint Venture were finalized.

 

 

	·	In connection with the construction of the two new blast furnaces, to compensate the Company, in the fourth quarter of 2010, Shaanxi Steel reimbursed Longmen Joint Venture $16.4 million (RMB 108 million) related to the value of assets dismantled, various site preparation costs incurred by Longmen Joint Venture and for rent under a 40-year property sub-lease that was entered into by the parties in June 2009 (the "Longmen Sub-lease"), and $27.8 million (RMB 183 million) for the reduced production efficiency caused by the construction. In addition, in 2010 and 2011, Shaanxi Steel reimbursed Longmen Joint Venture $13.5 million (RMB 89 million) each year for production inefficiencies related to the two new blast furnaces, two new converters and one new sintering machine constructed and owned by Shaanxi Steel. The compensations total $57.7 million (RMB 380 million), among which $52.0 million (RMB 343 million) as of December 31, 2010, was recorded as a deferred sub-lease income from the land which was sub-leased by Longmen Joint Venture to Shaanxi Steel on the new furnaces constructed.
	·	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 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
		2010				2009				2008				2010 VS 2009				2009 VS 2008
Unit-thousands except share data		As restated				As restated								As restated				As restated
Sales		$	1,882,140			$	1,679,770			$	1,351,203				12.0	%			24.3	%
Cost of Goods Sold			1,850,725				1,590,958				1,343,275				16.3	%			18.4	%
Gross Profit			31,415				88,812				7,928				(64.6	)%			1020.2	%
Gross Profit Margin %			1.7	%			5.3	%			0.6	%			(67.9	)%			783.3	%
Selling, General and Administrative Expenses			52,577				41,059				36,942				28.1	%			11.1	%
Income (Loss) from Operations			(21,162	)			47,753				(29,014	)			(144.3	)%			(264.6	)%
Total Other Income (expense), net			(33,891	)			(54,857	)			3,738				(38.2	)%			(1567.5	)%
Income (Loss) Before Provision for Income Tax and Noncontrolling Interest			(55,053	)			(7,104	)			(25,276	)			675.0	%			(71.9	)%
Total (Benefit) Provision for Income Taxes			(8,782	)			4,449				(5,411	)			(297.4	)%			(182.2	)%
Loss before Noncontrolling Interest			(46,271	)			(11,553	)			(19,865	)			300.5	%			(41.8	)%
Less: Net Income (loss) Attributable to Noncontrolling Interest			(16,265	)			19,067				(8,542	)			(185.3	)%			(323.2	)%
Net Loss Attributable to Controlling Interest		$	(30,006	)		$	(30,620	)		$	(11,323	)			(2.0	)%			170.4	%
Loss Per Share
Basic		$	(0.56	)		$	(0.73	)		$	(0.32	)			(23.3	)%			128.1	%
Diluted		$	(0.56	)		$	(0.73	)		$	(0.32	)			(23.3	)%			128.1	%

 

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
				As restated				As restated								As restated				As restated
Subsidiary		Product
Longmen Joint Venture		Rebar		$	1,845,577			$	1,540,367			$	1,182,433				19.8	%			30.3	%
Others				$	36,563				139,403				168,770				(73.8	)%			(17.4	)%
Total Revenue				$	1,882,140			$	1,679,770			$	1,351,203				12.0	%			24.3	%

 

 

Percentage Change

 

In thousands metric tons				2010				2009				2008				2010 VS 2009				2009 VS 2008
				As restated				As restated								As restated				As restated
Subsidiary		Product
Longmen Joint Venture		Rebar			3,510				3,420				2,030				2.6	%			68.5	%
Others					415				439				278				(5.5	)%			57.9	%
Total Production					3,925				3,859				2,308				1.7	%			67.2	%

 

Total Sales Revenue for the fiscal year 2010 increased 12.0% 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 1.7% and a 16.1% increase in the average selling price of rebar 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.

 

 

Income Statement for the three months ended December 31, 2010 and 2009:

 

Income Statement										Percentage Change
Unit-thousands except share data		2010 Q4 As restated				2009 Q4 As restated				2010 Q4 VS 2009 Q4
		(Unaudited)								As restated
Sales		$	467,161			$	463,277				0.8	%
Cost of Goods Sold			462,445				449,623				2.9	%
Gross Profit			4,716				13,654				(65.5	)%
Gross Profit Margin %			1.0	%			2.9	%			(65.5	)%
Selling, General and Administrative Expenses			17,204				11,855				45.1	%
Income (loss) from Operations			(12,488	)			1,799				(794.2	)%
Total Other expense, net			(18,405	)			(18,985	)			(3.1	)%
Income (Loss) Before Provision for Income Tax and Noncontrolling Interest			(30,893	)			(17,186	)			79.8	%
Total Expense (Benefit) for Income Taxes			(3,698	)			(1,416	)			161.2	%
Income (Loss) before Noncontrolling Interest			(27,195	)			(15,770	)			72.4	%
Less: Net Income Attributable to Noncontrolling Interest			(8,589	)			(1,118	)			668.2	%
Net Income (Loss) Attributable to Controlling Interest		$	(18,606	)		$	(14,652	)			27.0	%
Earnings(Loss) Per Share
Basic		$	(0.34	)		$	(0.35	)			(2.9	)%
Diluted		$	(0.34	)		$	(0.35	)			(2.9	)%

 

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 As restated			2009 Q4 As restated			2010 Q4 VS 2009 Q4 As restated
				(Unaudited)
Longmen Joint Venture		Rebar		456,339			433,489				5.3	%
Other				10,822			29,788				(63.7	)%
		Total Sales		467,161			463,277				0.8	%

 

Production by Subsidiary and Product (in thousand metric tons)												Percentage Change
Subsidiary		Product		2010 Q4 As restated				2009 Q4 As restated				2010 Q4 VS2009 Q4 As restated
				(Unaudited)
Longmen Joint Venture		Rebar			805				969				(16.9	)%
Other					134				180				(25.6	)%
		Total Production			939				1,149				(18.3	)%

 

Total Sales Revenue for the three months ended December 31, 2010 only increased 0.8% to $467.2 million from $463.3 million for the same period last year. The slight 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 and a 18.3% drop of production decrease from 1,149 metric tons in the fourth quarter of 2009 to 939 metric tons in the fourth quarter of 2010 due to the production inefficiency caused by the construction of Shaanxi Steel’s blast furnaces.

 

 

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 16.9% to 805,000 metric tons from 969,000 metric tons. The decrease is due to the negative impact of blast furnace construction by Shaanxi Steel, 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 5.3% to $456.3 million from $433.5 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.

 

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 As restated				2009 As restated				2008				2010 VS 2009 As restated				2009 VS 2008 As restated
Cost of Goods Sold		$	1,369,523			$	1,141,471			$	999,318				20.0	%			14.2	%
Cost of Goods Sold - Related Parties		$	481,202			$	449,487			$	343,957				7.1	%			30.7	%
Total Cost of Goods Sold		$	1,850,725			$	1,590,958			$	1,343,275				16.3	%			18.4	%

 

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

 

										Percentage Change
(USD in thousands)		2010 Q4 As restated				2009 Q4 As restated				2010 Q4 VS 2009 Q4 As restated
Cost of Goods Sold		$	347,671			$	319,082				9.0	%
Cost of Goods Sold - Related Parties		$	114,774			$	130,541				(12.1	)%
Total Cost of Goods Sold		$	462,445			$	449,623				2.9	%

 

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 16.3% to $1.9 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 increased 2.9% slightly to $462.4 million in the fourth quarter of 2010 from $449.6 million in the same period of 2009 due to the negative impact of Shaanxi Steel’s construction and production inefficiencies 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 As restated				2009 As restated				2008				2010 VS 2009 As restated				2009 VS 2008 As restated
Gross Profit		$	31,415			$	88,812			$	7,928				(64.6	)%			1,020.2	%
Gross Profit Margin			1.7	%			5.3	%			0.6	%

 

Gross profit for 2010 decreased 64.6% to $31.4 million from $88.8 million in 2009. The decrease is primarily attributable to a drop in gross profit at Longmen Joint Venture because the costs for production inefficiencies from construction of furnaces that Shaanxi Steel compensated are recorded as deferred lease income. 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 As restated				2009 Q4 As restated				2010 Q4 VS 2009 V4 As restated
		(Unaudited)
Gross Profit		$	4,716			$	13,654				(65.5	)%
Gross Profit Margin			1.0	%			2.9	%

 

The gross margin decreased in the fourth quarter 2010 to 1.0% compared to 2.9% in the same period last year. The decrease is predominantly due to certain fees and costs for production inefficiencies from construction of furnaces that Shaanxi Steel compensated but recorded as deferred lease income. The deferred lease income will be amortized over the 40 year sub-lease term at Longmen Joint Venture during the construction of blast furnaces by Shaanxi Steel.

 

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 As restated				2009 As restated				2008				2010 VS 2009 As restated				2009 VS 2008 As restated
Selling, General and Administrative expenses		$	52,577			$	41,059			$	36,942				28.1	%			11.1	%
Selling, General and Administrative expenses as percentage of sales			2.8	%			2.4	%			2.7	%

 

 

SG&A Expenses increased 28.1% to $52.6 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 2.4% in 2009 and 2.7% in 2008.

 

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

 

(USD in thousands)		2010 Q4 As restated				2009 Q4 As restated				Percentage Change  2010 Q4 VS 2009 Q4 As restated
		(Unaudited)
Selling, General and Administrative expenses		$	17,204			$	11,855				45.1	%
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 45.1% to $17.2 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 As restated				2009 As restated				2008				2010 VS 2009 As restated				2009 VS 2008 As restated
Income (Loss) from Operations		$	(21,162	)		$	47,753			$	(29,014	)			(144.3	)%			(264.6	)%

 

The loss from operations in 2010 amounted to $21.2 million, as compared to income of $47.8 million income for the same period last year. The decrease is predominantly due to the drop in gross profit caused by higher purchase price of iron ore and coke in 2010 and costs for production inefficiencies from construction of furnaces that Shaanxi Steel compensated but recorded as deferred lease income.

 

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

 

(USD in thousands)										Percentage Change
		2010 Q4 As restated				2009 Q4 As restated				2010 Q4 VS 2009 Q4 As restated
		(Unaudited)
Income (Loss) from Operations		$	(12,488	)		$	1,799				(794.2	)%

 

 

Loss from operations for the three months ended December 31, 2010 decreased to $12.5 million from $1.8 million income for the same period last year. The decrease is primarily due to the revenue loss and cost increase from the production inefficiency caused by the construction of blast furnaces of Shaanxi Steel. Also costs for production inefficiencies from construction of the furnaces that Shaanxi Steel compensated but recorded as deferred lease income, has resulted in an extra decrease.

 

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 As restated				2009 As restated				2008				2010 VS 2009 As restated				2009 VS 2008 As restated
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	%
Government Grant			-				3,430				-				-				-
Loss on Disposal of Fixed Assets			(9,447	)			(15,265	)			-				(38.1	)%			-
Realized income from future contract			1,424				-				-				-				-
Income from Investment			6,383				6,257				1,896				2.0	%			230.0	%
Lease Income			943				119				-				692.4	%			-
Other Non-operating Income, net			(3,120	)			939				767				(432.3	)%			22.4	%
Total Other (Expense) Income, Net			(33,891	)			(54,857	)			3,738				(38.2	)%			(1,567.5	)%

 

Total other expenses for the year ended December 31, 2010 were $33.9 million compared to $54.9 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						Percentage Change
(USD in thousands)		2010 Q4 As restated				2009 Q4 As restated				2010 Q4 VS 2009 Q4 As restated
		(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				-	%
Government Grant			(1,381	)			-				-	%
Gain from Investment in Future Contracts			1,424				-				-	%
Loss on Disposal of Fixed assets			(9,447	)			(15,265	)			(38.1	)%
Income from Investment			2,316				2,596				(10.8	)%
Lease Income			345				82				320.7	%
Other Non-operating Expense, net		$	(2,150	)		$	7,692				(128.4	)%
Total Other Expense, net		$	(18,405	)		$	(18,985	)			(3.1	)%

 

 

Total other expenses, net for the three months ended December 31, 2010 were $18.4 million, a 3.1% decrease compared to $19.0 million in the same period last year. The decrease of total other expenses, net was mainly a result of the combined effect of a $4.2 million increase in Finance/Interest expense, a $9.5 million loss on disposal of fixed assets and a loss of $1.5 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.

 

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 As restated				2009 As restated				2008				2010 VS 2009 As restated				2009 VS 2008 As restated
Net loss before noncontrolling interest		$	(46,271	)		$	(11,553	)		$	(19,865	)			300.5	%			(41.8	)%

 

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

 

		2010 Q4 As restated				2009 Q4 As restated				Percentage Change As restated
		(Unaudited)
Net loss before noncontrolling interest		$	(27,195	)		$	(15,770	)			72.4	%

 

 

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 As restated				2009 As restated				2008				2010 VS 2009 As restated				2009 VS 2008 As restated
Net loss before noncontrolling interest		$	(46,271	)		$	(11,553	)		$	(19,865	)			300.5	%			(41.8	)%
Less: Net income (loss) attributable to noncontrolling interest		$	(16,265	)		$	19,067			$	(8,542	)			(185.3	)%			(323.2	)%
Net loss attributable to controlling interest		$	(30,006	)		$	(30,620	)		$	(11,323	)			(2.0	)%			170.4	%

 

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

 

(USD in thousands)										Percentage Change
		2010 Q4 As restated				2009 Q4 As restated				2010 Q4 VS 2009 Q4 As restated
		(Unaudited)
Net loss before noncontrolling interest		$	(27,195	)		$	(15,770	)			72.4	%
Less: Net loss attributable to noncontrolling interest		$	(8,589	)		$	(1,118	)			668.2	%
Net loss attributable to controlling interest		$	(18,606	)		$	(14,652	)			27.0	%

 

The income or loss attributable to the non-controlling interests are calculated by the income or loss after tax shared in percentage by the minority group in any subsidiaries which are not 100% owned by us. Long Steel Group’s non-controlling interest is calculated by using Longmen Joint Venture’s consolidated net income (loss) after tax, multiplied by the share percentage of Longmen Group in Longmen Joint Venture. Net income (loss) attributable to Long Steel Group is then equal to the net income (loss) of Longmen Joint Venture multiplied by the 40% non-controlling interest held by Long Steel Group.

 

At the consolidation level of Longmen Joint Venture, there are subsidiaries where Longmen Joint Venture does not have 100% ownership. Income/loss allocation to these non-controlling interests is based on their equity percentages and the actual results.

 

 

(Loss) Earnings per Share

 

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

 

														Percentage Change
(in thousands, except earnings per share)		2010 As restated				2009 As restated				2008				2010 VS 2009 As restated				2009 VS 2008 As restated
Net loss attributable to controlling interest		$	(30,006	)		$	(30,620	)		$	(11,323	)			(2.0	)%			170.4	%
Weighted average number of shares
Basic			53,113				41,860				35,381				26.9	%			18.3	%
Diluted			53,113				41,860				35,381				26.9	%			18.3	%
Loss per share
Basic		$	(0.56	)		$	(0.73	)		$	(0.32	)			(23.3	)%			128.1	%
Diluted		$	(0.56	)		$	(0.73	)		$	(0.32	)			(23.3	)%			128.1	%

 

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

 

(in thousands, except earnings per share)										Percentage Change
		2010 Q4 As restated				2009 Q4 As restated				2010 Q4 VS2009 Q4 As restated
		(Unaudited)
Net loss attributable to controlling interest		$	(18,606	)		$	(14,652	)			27.0	%
Weighted average number of shares
Basic			54,704				41,860				30.7	%
Diluted			54,704				41,860				30.7	%
Loss per share
Basic		$	(0.34	)		$	(0.35	)			(2.9	)%
Diluted		$	(0.34	)		$	(0.35	)			(2.9	)%

 

Income Taxes

 

We did not conduct any business and did not maintain any branch office in the United States during the three months ended December 31, 2010 and 2009. Therefore, no provision for withholding of U.S. federal or state income taxes or tax benefits on the undistributed earnings and/or losses of our Company has been made.

 

General Steel (China) is located in Tianjin Coastal Economic Development Zone and is 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 by the end of 2010. This special tax treatment will be evaluated on a year-to-year basis by the local tax bureau.

 

 

Baotou Steel Pipe Joint Venture is located in Inner Mongolia Autonomous Region and is subject to an effective income tax rate of 25%.

 

Maoming Hengda is located in Guangdong province and is subject to an effective income tax rate of 25%.

 

Tianwu Joint Venture is located in Tianjin Coastal Economic Development Zone and is subject to an effective income tax rate at 25%.

 

For the three months ended December 31, 2010, we had a total tax benefit of $3.7 million. For the years ended December 31, 2010, we had a total tax benefit of $8.8 million.

 

We had cumulative undistributed deficit of foreign subsidiaries of approximately $21.3 million as of December 31, 2010. 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.

 

We were incorporated in the United States and have incurred net operating losses for income tax purposes for the years ended December 31, 2010 and 2009. The net operating loss carry forwards for United States income taxes amounted to $1.8 million which may be available to reduce future years’ taxable income. These carry forwards will expire, if not utilized at the end of 2030. Management believes that the realization of the benefits from these losses appears uncertain due to our limited operating history and continuing losses for United States income tax purposes. Accordingly, we have provided a 100% valuation allowance on the deferred tax asset benefit to reduce the asset to zero. The valuation allowance as of December 31, 2010 was $0.6 million. The net change in the valuation allowance for the year ended December 31, 2010, versus the year ended December 31, 2009, was $0.1 million. Management will review this valuation allowance periodically and make adjustments as warranted.

 

Noncontrolling Interest

 

Noncontrolling interest mainly consists of Long Steel Group’s 40% interest in Longmen Joint Venture, Baotou Iron and Steel Group’s 20% interest in Baotou Steel Pipe Joint Venture, a 1% interest in Maoming Hengda by a third party and TME Group’s 40% interest in Tianwu GS.

 

Accounts Receivable

 

Accounts receivable and accounts receivable-related party were $22.7 million as of December 31, 2010 has decreased from $27.4 million on December 31, 2009. This decrease was due to a combination effect of increase of accounts receivable and decrease of accounts receivable-related parties. Accounts receivable has increased to $18.5 million as of December 31, 2010 from $9.1 million as of December 31, 2009 due to the fact that we have extended the payment terms with certain government projects.

 

 

Inventories

 

We had an inventory balance of $453.6 million as of December 31, 2010 compared to $177.4 million as of December 31, 2009. Such balance is comprised of raw material and finished products. The increase of raw materials at the end of 2010 is due to the management’s expectation of price rise and preparation for the test run of the new furnaces.

 

 

 

		December 31,2010				December 31,2009				Percentage Change
(in thousands)		As restated				As restated				As restated
Supplies		$	13,733			$	12,235				12.2	%
Raw materials			381,178				134,874				182.6	%
Finished goods			58,725				30,260				94.1	%
Total inventories		$	453,636			$	177,369				155.8	%

 

Quarterly Data

 

Year Ended December 31,		First				Second				Third				Fourth
(In thousands except per share data		Quarter				Quarter				Quarter				Quarter				Full Year
		As restated
2010
Revenues		$	453,023			$	501,679			$	460,277			$	467,161			$	1,882,140
Gross profit		$	5,746			$	7,364			$	13,589			$	4,716			$	31,415
Net loss  attributable to controlling Interest		$	(5,612	)		$	(2,004	)		$	(3,784	)		$	(18,606	)		$	(30,006	)
Basic loss per Share		$	(0.11	)		$	(0.04	)		$	(0.07	)		$	(0.34	)		$	(0.56	)
Diluted loss per Share		$	(0.11	)		$	(0.04	)		$	(0.07	)		$	(0.34	)		$	(0.56	)
2009
Revenues		$	322,794			$	408,947			$	484,752			$	463,277			$	1,679,770
Gross profit		$	12,921			$	22,499			$	39,738			$	13,654			$	88,812
Net income (loss) attributable to controlling Interest		$	7,334			$	(31,789	)		$	8,487			$	(14,652	)		$	(30,620	)
Basic earnings (loss) per Share		$	0.20			$	(0.80	)		$	0.19			$	(0.35	)		$	(0.73	)
Diluted earnings (loss) per Share		$	0.20			$	(0.80	)		$	0.17			$	(0.35	)		$	(0.73	)

 

LIQUIDITY AND CAPITAL RESOURCES

 

As of December 31, 2010, we had cash and restricted cash aggregating $263.1 million.

 

For the year ended December 31, 2010, we used cash flow from continuing operations, borrowings, cash and cash equivalents to fund working capital requirements, pay interest payments, capital expenditures and to make investments.

 

 

We believe our cash flows from operations (which include customer prepayment and vendor financing), existing cash balances, and credit facilities will be adequate to finance our working capital requirements, fund capital expenditures, make required debt and interest payments, pay taxes, and support our operating strategies.

 

The steel business is capital intensive and we utilize leverage greater than our industry peers which enables us to generate revenue compared to our shareholder equity at a rate higher than our industry peers. We utilize leverage in the form of credit from banks, vendor financing, customer deposits and others. This blended form of financing reduces our reliance on any single source.

 

Short-term notes payable

 

As of December 31, 2010, we had $480.2 million in short-term notes payables liabilities, which are secured by restricted cash of $167.7 million and restricted notes receivable of $159.3 million and other assets. These are lines of credit extended by banks for a maximum of 6 months and used to finance working capital. The short-term notes payables must be paid in full at maturity and credit availability is continued upon payment at maturity. There are no additional significant financial covenants. We pay zero interest on this type of credit as this is a monetary tool used by China’s central bank to inject liquidity into the Chinese monetary system.

 

Short-term loans – banks

 

As of December 31, 2010, we had $285.2 million in short-term bank loans. These are bank loans with a one year term and must be paid in full upon maturity. There are no additional significant financial covenants tied to these loans. Chinese banks have not been impacted as heavily by the financial crisis as U.S. banks and we believe our current creditors will renew their lending to us after our loans mature as they have in the past.

 

We are able to repay our short-term notes payables and short-term bank loans upon maturity using available capital resources.

 

For more details about our debts, please see Note 8 in our Notes to the financial statements.

 

Cash-flow

 

Operating activities

 

Net cash used in operating activities for the year ended December 31, 2010 was an outflow $164.2 million compared to an inflow $4.8 million in the same period of 2009. This change was mainly due to the combination of the following factors:

 

Some non-cash items included in net income resulting an impact of $21.9 million on the cash flow statement in 2010, compared to $71.1 million in the same period in 2009. The non-cash items are the following:

 

-

depreciation and amortization

-

debt extinguishment

-

bad debt allowance

 

 

-

inventory written-off

-

impairment of long-lived assets

-

gain/loss on disposal of equipment

-

stock issued for services and compensation

-

net income from compensation

-

make whole shares interest expense on notes conversion

-

amortization of deferred note issuance cost and discount on convertible notes

-

change in fair value of derivative instrument

-

income from investment

-

deferred tax assets

 

The primary reasons for the material fluctuations in cash inflow are as follow:

 

1.

Accounts payable/Accounts payable – related parties: the increase in accounts payable is mainly due to the increased raw material purchase for the trial production of the two new blast furnaces systems and the management expected that the raw materials purchase price and steel sales prices are going to be increased in the first quarter of 2011 and intended to storage more inventories.

2.

Other payables – related parties: the increase is mainly due to additional borrowing from the entities that are under common control by our CEO

3.

Deferred Lease Income: the increase is mainly due to the receipt of compensation in related to the construction of two new blast furnaces systems in the fourth quarter of 2010 that will be deferred for future periods.

 

The primary reasons for the material fluctuations in cash outflows are as follow:

1.

Other receivables – related parties: the increase is mainly due to the additional borrowings to the entities that are under common control by our CEO

2.

Inventories: the increase is mainly due to the increase of their raw materials storage for the trial production of the two new blast furnaces systems and the management expected that the raw materials purchase price and steel sales prices are going to be increased in the first quarter of 2011 and intended to storage more inventories.

3.

Customer deposit: the decrease is mainly due to the completion of our customers’ orders during 2010.

 

Investing activities

 

Net cash used by investing activities was $86.9 million for the year ended December 31, 2010 compared to $166.3 million for the year ended December 31, 2009. Fluctuation in cash outflow between two periods was mainly due to the equipment purchases and advance on equipment purchases for the production line relocated from Maoming Hengda to Longmen Joint Venture in 2010, which improved the useful life of the production line, as well as the quality of the goods and efficiency of the production as a result of the technical updates. In 2009, our cash flow is mainly due to the equipment purchases in relation to our two 1,280 cubic meter blast furnaces at Longmen Joint Venture.

 

Financing activities

 

Net cash provided by financing activities was $232.4 million for the year ended December 31, 2010 compared to $228.8 million for the year ended December 31, 2009.

 

 

Compared to same the period in 2009, the increase of cash inflow from financing activities was mainly driven by the following:

 

1.

Short term loan: The Company increased more loan borrowing from the bank compared to the same period last year

2.

Notes payables: The Company increased more notes borrowing from the bank to settling the payables to suppliers

 

Compared to the same period in 2009, the increase of cash outflow from financing activities was mainly driven by the increase in restricted notes receivable as the Company has notes receivable pledged as collateral for short-term loans and short-term notes payable issued by banks, which is consistent to the increase of the loans and notes borrowings.

 

Substantially, all of our operations are conducted in China and substantially all of our assets are located in China. In addition, substantially all of our transactions are denominated in Renminbi (RMB). RMB is subject to the exchange control regulation in China, and, as a result, China has strict rules for converting RMB to other currencies and the transfer of funds from PRC subsidiaries to the offshore structure and the U.S. holding companies.

 

Under the laws of the PRC governing foreign invested enterprises, dividend distribution and other funds transfers are allowed but subject to special procedures under relevant rules and regulations. Foreign-invested enterprises in China may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, a foreign-invested enterprise in China is required to set aside at least 10.0% of its after-tax profit based on PRC accounting standards each year to its general reserves until the accumulative amount of such reserves reaches 50.0% of its registered capital. These reserves are not distributable as cash dividends. The board of directors of a foreign-invested enterprise has the discretion to allocate a portion of its after-tax profits to staff welfare and bonus funds, which may not be distributed to equity owners except in the event of liquidation. Under PRC regulations, RMB is currently convertible into U.S. Dollars under a company’s “current account” which includes dividends, trade and service-related foreign exchange transactions, without prior approval of the State Administration of Foreign Exchange (SAFE). Transfers from a company’s “capital account,” which includes foreign direct investments and loans, can’t be executed without the prior approval of the SAFE.

 

There are no restrictions to distribute or transfer other funds from General Steel Investment to us.

 

We have never declared or paid any cash dividends to our shareholders. We do not plan to pay any dividends out of our retained earnings for the year ended December 31, 2010. With respect to retained earnings accrued after such date, our Board of Directors may declare dividends after taking into account our operations, earnings, financial condition, cash requirements and availability and other factors as it may deem relevant at such time. Any declaration and payment, as well as the amount, of dividends will be subject to our By-Laws, charter and applicable Chinese and U.S. state and federal laws, including the approval from the shareholders of each subsidiary which intends to declare such dividends, if applicable.

 

We have previously raised money in the U.S. capital markets which has provided the capital needed for our operations and investments activities. Thus, the foreign currency restrictions and regulations in the PRC on the dividends distribution will not have a material impact on our liquidity, financial condition, and results of operation.

 

 

Shelf Registration SEC Form S-3

 

On October 22, 2009, our shelf registration statement on Form S-3 for an aggregate offering amount of $60 million was declared effective by the SEC. From time to time we may sell common stock, preferred stock, warrants, debt securities, rights and units in one or more offerings. As discussed below, in December 2009, we consummated a registered direct offering using the Form S-3 shelf registration statement to issue common stock and warrants. We may sell the remaining securities registered on the Form S-3 shelf registration statement to or through underwriters, directly to investors, through agents or any combination of the foregoing.

 

Each time we offer securities under our Form S-3 shelf registration statement, we will file a prospectus supplement with the SEC containing more specific information about the particular offering. The prospectus supplements may also add, update or change information contained in this prospectus. The Form S-3 shelf registration statement may not be used to offer or sell securities without a prospectus supplement which includes a description of the method of sale and terms of the offering.

 

Impact of Inflation

 

We are subject to commodity price risks arising from price fluctuations in the market prices of the raw materials. We have generally been able to pass on cost increases through price adjustments. However, the ability to pass on these increases depends on market conditions influenced by the overall economic conditions in China. We manage our price risks through productivity improvements and cost-containment measures. We do not believe that inflation risk is material to our business or our financial position, results of operations or cash flows.

 

Compliance with environmental laws and regulation

 

Longmen Joint Venture:

 

Along with our joint venture partner Longmen Steel Group and Shaanxi Steel, we have invested RMB580 million in a series of comprehensive projects to reduce its waste emissions of coal gas, water, and solid waste. In 2005, we received ISO 14001 certification for our overall environmental management system. We have received several awards from the Shaanxi provincial government as a result of our increased effort in environmental protection.

 

We have spent more than RMB57 million on a comprehensive waste water recycling and water treatment system. The 2,000 cubic meter/h treatment capacity system was implemented at the end of 2005. In 2010, 1.08 metric tons of new water was consumed per metric ton of steel produced.

 

We have one 10,000 cubic meter coke-oven gas tank and one 50,000 cubic meter blast furnace coal gas tank and one 80,000 cubic meter converter furnace coal gas tank to collect the residual coal gas produced from our facility and that of surrounding enterprises. We also have spent RMB230 million on a thermal power plant with two 25 Kilowatt generators that use the residual coal gas from the blast furnaces and converters as fuel to generate power.

 

We have several plants to further process solid waste generated from the steel making process into useful products such as construction materials, building blocks, porcelain tiles, curb tops, and ornamental tiles.

 

 

In 2009, we treated and recycled about 6.8 million tons of waste water, 335,320 tons of slag, 130 million m³ of gas from the converters and 6.1 billion m³ of gas from the blast furnaces. We also reused 855,714 tons of hot steam and generated 433 million KWH of electricity.

 

Recently, we spent more than RMB60 million on the technical upgrade and renovation of the converters and RMB5.5 billion on the upgrade of the blast furnaces and the sintering machines.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

There were no off-balance sheet arrangements for the 2010 fiscal year.

 

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

 

We have certain fixed contractual obligations and commitments that include future estimated payments. Changes in our business needs, cancellation provisions, changing interest rates, and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of payments. Throughout our operating history, we have funded our contractual obligations and commercial commitments through financing arrangements and operating cash flow, including but not limited to the operating income, payments collected from the customers in advance and stock issuances. Below, we have presented a summary of the most significant assumptions used in our determination of amounts presented in the tables, in order to assist in the review of this information within the context of our consolidated financial position, results of operations, and cash flows.

 

The following tables summarize our contractual obligations as of December 31, 2010 and the effect these obligations are expected to have on our liquidity and cash flows in future periods.

 

		Payment due by period
		Less than
Contractual obligations		Total As restated				1 year As restated				1-3 years				4- 5 years As restated
		Dollars amounts in thousands
Bank loans		$	285,198			$	285,198			$	-			$	-
Other loans			233,280				142,260				-				91,020
Notes payable			480,152				480,152				-				-
Deposits due to sales representatives			52,079				52,079								-
Lease with Bao Gang Group			410				273				137				-
Construction obligations - Longmen Joint Venture and Maoming Hengda			13,912				13,912				-				-
Total		$	1,065,031			$	973,874			$	137			$	91,020

 

Bank loans in China are either due on demand or more typically within one year. These loans can be renewed with the banks. This amount includes estimated interest payments as well as debt maturities.

 

As of December 31, 2010, Longmen Joint Venture guaranteed bank loans for related parties and third parties, including line of credit and others, amounted to $60.5 million.

 

 

		Guarantee
Nature of		amount
guarantee		In thousands				Guaranty period
Line of credit		$	11,608			March 2011 to January 2012
Bank Loans			7,585			March 2011 to May 2011
Notes payable			18,238			June 2011 to September 2012
Confirming Storage			19,089			April 2011 to December 2011
Financing by the rights of goods delivery in future			3,946			March 2011 to July 2011
Total		$	60,466

 

Critical Accounting Policies

 

Management’s discussion and analysis of its financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. Our financial statements reflect the selection and application of accounting policies which require management to make significant estimates and judgments. See Note 3 to our consolidated financial statements, “Summary of Significant Accounting Policies.” Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

 

We believe that the following reflect the more critical accounting policies that currently affect our financial condition and results of operations.

 

Principles of consolidation – subsidiaries

 

We follow ASC 810-10-15 “Consolidation – Scope and Scope Exceptions” when determining whether to consolidate an entity in our financial statements. All legal entities which we own directly or indirectly more than 50 percent of the outstanding voting shares are required to be consolidated given that control rests with the majority owner. Entities in which we own less than 50 percent voting shares are evaluated in accordance with generally accepted account principles to determine whether we may hold the power of control. If we hold established power of control in such entities, we consolidate the entities with recognition of the non-controlling interest in them accordingly.

 

Revenue recognition

 

We follow the generally accepted accounting principles of the United States regarding revenue recognition. Sales revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of us exist 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 our products sold in the PRC are subject to a Chinese value-added tax at a rate of 13% to 17% of the gross sales price. This VAT may be offset by VAT paid by us on raw materials and other materials included in the cost of producing the finished product.

 

 

Use of estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles of 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 our financial statements include the useful lives of and impairment for property, plant and equipment, potential losses on uncollectible receivables and convertible notes. Actual results could differ from these estimates.

 

Financial instruments

 

The accounting standard regarding “Disclosures about fair value of financial instruments” defines financial instruments and requires disclosure of the fair value of financial instruments held by us. We consider 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, we 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.

 

We also analyze all financial instruments with features of both liabilities and equity under the accounting standard establishing, “accounting for certain financial instruments with characteristics of both liabilities and equity,” the accounting standard regarding “accounting for derivative instruments and hedging activities” and “accounting for derivative financial instruments indexed to, and potentially settled in, a company’s own stock.” Additionally, we analyze registration rights agreements associated with any equity instruments issued to determine if penalties triggered for late filing should be accrued under accounting standard establishing “accounting for registration payment arrangements.”

 

Fair value measurements

 

The accounting standards regarding fair value of financial instruments and related fair value measurement define fair value, establish a three-level valuation hierarchy for disclosures of fair value measurement and enhance disclosures 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.

 

The December 2007 Warrants issued in conjunction with the December 2007 Notes and December 2009 Warrants issued in connection with a registered direct offering, were carried at fair value. The fair value was determined using the Cox Rubenstein Binomial Model. Because all inputs to the valuation methodology include quoted prices are observable, fair value is carried as level 2 inputs, and the change in earnings was recorded. As a result, the derivative liability is carried on the balance sheet at its fair value.

 

  

Noncontrolling interests

 

Effective January 1, 2009, we adopted generally accepted accounting principals regarding noncontrolling interests in consolidated financial statements. Certain provisions of this statement are required to be adopted retrospectively for all periods presented. Such provisions include a requirement that the carrying value of noncontrolling interests (previously referred to as minority interests) be removed from the mezzanine section of the balance sheet and reclassified as equity.

 

Further, as a result of adoption of this accounting standard, net income attributable to noncontrolling interests is now excluded from the determination of consolidated net income. In addition, the foreign currency translation adjustment is allocated between controlling and noncontrolling interests.

 

As a result, we reclassified noncontrolling interests in the amounts of $52.0 million and $70.1 million from the mezzanine section to equity on December 31, 2010 and 2009 balance sheets, respectively.

 

Deferred lease income

 

From June 2009 to March 2011, we worked with Shaanxi Steel to build new state-of-the-art equipment at the site of our principal subsidiary, Longmen Joint Venture. As a result, Longmen Joint Venture incurred certain costs of construction as well as economic losses on suspended production of certain small furnaces and other equipment to accommodate the construction of the new equipment, on behalf of Shaanxi Steel. To compensate us, in the fourth quarter of 2010, Shaanxi Steel reimbursed Longmen Joint Venture $16.4 million (RMB 108 million) related to the value of assets dismantled, various site preparation costs incurred by Longmen Joint Venture and rent under a 40-year property sub-lease that was entered into by the parties in June 2009 (the "Longmen Sub-lease"), and $27.8 million (RMB 183 million) for the reduced production efficiency caused by the construction. Applying the lease accounting guidance (ASC 840-20-25-1), we concluded that, except for the reimbursement for site preparation costs, the amount of reimbursement should be deferred and recognized as a component of the property that was sub-leased during the construction, to be amortized to income over the remaining terms of the 40-year sub-lease.

 

Deferred lease income represents the remaining balance of compensation being deferred. As of December 31, 2010 and December 31, 2009, the balance of $57.6 million and $16.5 million represented the balance of remaining deferred lease income respectively.

 

Recent Accounting Pronouncements

 

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-06 – Improving Disclosures about Fair Value Measurements. This update provides amendments to Subtopic 820-10 that requires new disclosure as follows: 1) Transfers in and out of Levels 1 and 2. A reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. 2) Activity in Level 3 fair value measurements. In the reconciliation for fair value measurements using significant unobservable inputs (Level 3), a reporting entity should present separately information about purchases, sales, issuances, and settlements (that is, on a gross basis rather than as one net number). This update provides amendments to Subtopic 820-10 that clarify existing disclosures as follows: 1) Level of disaggregation. A reporting entity should provide fair value measurement disclosures for each class of assets and liabilities. A class is often a subset of assets or liabilities within a line item in the statement of financial position. A reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities. 2) Disclosures about inputs and valuation techniques. A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. Those disclosures are required for fair value measurements that fall in either Level 2 or Level 3. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company is currently evaluating the impact of this ASU. However, the Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

 

 

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 July 2010, the FASB issued ASU 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” This update amends codification topic 310 on receivables to improve the disclosures that an entity provides about the credit quality of its financing receivables and the related allowance for credit losses. As a result of these amendments, an entity is required to disaggregate by portfolio segment or class certain existing disclosures and provide certain new disclosures about its financing receivables and related allowance for credit losses. This guidance is being phased in, with the new disclosure requirements for period end balances effective as of December 31, 2010, and the new disclosure requirements for activity during the reporting period are effective March 31, 2011. The troubled debt restructuring disclosures in this ASU have been delayed by ASU 2011-01 “Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20,” which was issued in January 2011.

 

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 is currently evaluating the impact of this ASU; however, the Company does not expect the adoption of this ASU will have a material impact on its consolidated financial statements.

 

 

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 is currently evaluating the impact of this ASU and expected the adoption of this ASU will have an impact on its future business combinations.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Commodity Price Risk and Related Risks

 

In the normal course of our business, we are exposed to market risk or price fluctuations related to the purchase, production or sale of steel products over which we have little or no control. We do not use any derivative commodity instruments to manage the price risk. Our market risk strategy has generally been to obtain competitive prices for our products and allow operating results to reflect market price movements dictated by supply and demand. Based upon a 2010 annual production capacity of 7 million metric tons, a $1 change in the annual average price of our steel products would change annual pre-tax profits by approximately $7 million.

 

Interest Rate Risk

 

We are subject to interest rate risk since our outstanding debts are short-term and bear interest at variable interest rates. The future interest expense would fluctuate in case of any change in the borrowing rates. We do not use swaps or other interest rate protection agreements to hedge this risk. We believe our exposure to interest rate risk is not material.

 

Foreign Currency Exchange Rate Risk

 

Our operating units, General Steel (China), Longmen Joint Venture, Baotou Steel Pipe Joint Venture, Maoming Hengda, and Tianwu Joint Venture are all located in China. They produce and sell all of their products domestically in the PRC. They are subject to the foreign currency exchange rate risks due to the effects of fluctuations in the RMB on revenues and operating costs and existing assets or liabilities. We have not generally used derivative instruments to manage this risk. Generally, a ten percent (10%) decrease in RMB exchange rate would result in a $1.9 million decrease in net income.

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and
Stockholders of General Steel Holdings, Inc.

 

We have audited the accompanying consolidated balance sheets of General Steel Holdings, Inc. and subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of operations and other comprehensive income, changes in equity, and cash flows for each of the years in the three-year period ended December 31, 2010. General Steel Holdings, Inc.’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of General Steel Holdings, Inc. as of December 31, 2010 and 2009, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), General Steel Holdings, Inc.’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 16, 2011, except for the effects of the material weakness described in the ninth paragraph of that report, as to which the date is August 29, 2012, expressed an adverse opinion on the effectiveness of internal control over financial reporting.

 

/s/ Frazer Frost, LLP

 

 

Brea, California

March 16, 2011, except for the effects on the consolidated financial statements of the restatement described in Note 2, as to which the date is August 29, 2012

 

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

 

GENERAL STEEL HOLDINGS INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2010 AND 2009

(In thousands, except per share data)

(As restated)

 

ASSETS
		2010				2009
CURRENT ASSETS:
Cash		$	65,271			$	82,118
Restricted cash			197,797				192,041
Notes receivable			49,147				29,185
Restricted notes receivable			240,298				-
Accounts receivable, net			18,500				9,140
Accounts receivable - related parties			4,160				18,225
Other receivables, net			11,150				5,357
Other receivables - related parties			10,938				43,620
Dividend receivable			-				3,926
Inventories			453,636				177,369
Advances on inventory purchase			24,577				28,407
Advances on inventory purchase - related parties			6,187				2,995
Prepaid expense			5,018				692
Prepaid value added tax			37,323				19,488
Deferred tax assets			15,301				5,044
TOTAL CURRENT ASSETS			1,139,303				617,607
PLANT AND EQUIPMENT, net			602,612				552,114
OTHER ASSETS:
Advances on equipment purchase			14,898				8,419
Investment in unconsolidated subsidiaries			17,456				20,022
Long-term deferred expense			1,439				2,069
Intangible assets, net of accumulated amortization			23,672				23,733
Note issuance cost			-				406
TOTAL OTHER ASSETS			57,465				54,649
TOTAL ASSETS		$	1,799,380			$	1,224,370
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Short term notes payable		$	480,152			$	254,608
Accounts payable			241,367				158,126
Accounts payable - related parties			79,694				48,151
Short term loans - bank			285,198				148,968
Short term loans - others			127,712				183,578
Short term loans - related parties			14,548				11,751
Other payables and accrued liabilities			30,087				30,596
Other payables - related parties			18,214				5,760
Customer deposits			133,464				118,900
Customer deposits - related parties			54,922				3,041
Deposit due to sales representatives			52,079				49,544
Taxes payable			6,237				12,186
Deferred lease income			57,591				16,487
TOTAL CURRENT LIABILITIES			1,581,265				1,041,696
NONCURRENT LIABILITIES:
Long term loans - related parties			91,020				-
TOTAL NONCURRENT LIABILITIES			91,020				-
CONVERTIBLE NOTES PAYABLE, net of debt discount of $0 and $2,250 as of December 31, 2010 and 2009, respectively			-				1,050
DERIVATIVE LIABILITIES			5,573				23,340
TOTAL LIABILITIES			1,677,858				1,066,086
COMMITMENT AND CONTINGENCIES
EQUITY:
Preferred stock, $0.001 par value, 50,000,000 shares authorized, 3,092,899 shares issued and outstanding as of December 31, 2010 and 2009			3				3
Common Stock, $0.001 par value, 200,000,000 shares authorized, 54,678,083 and 51,618,595 issued, 54,522,973 and  51,618,595 outstanding as of December 31, 2010 and 2009, respectively			55				52
Treasury stock, $0.001 par value, 316,760 shares as of December 31, 2010			(871	)			-
Paid-in-capital			104,970				95,588
Statutory reserves			6,202				6,162
Accumulated deficits			(51,793	)			(21,787	)
Accumulated other comprehensive income			10,987				8,118
TOTAL SHAREHOLDER'S EQUITY			69,553				88,136
NONCONTROLLING INTERESTS			51,969				70,148
TOTAL EQUITY			121,522				158,284
TOTAL LIABILITIES AND EQUITY		$	1,799,380			$	1,224,370

 

See report of independent registered public accounting firm.

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

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF OPERATION AND OTHER COMPREHENSIVE INCOME (LOSS)

FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008

(In thousands, except per share data)

 

		2010				2009				2008
		As restated				As restated
SALES		$	1,392,770			$	1,205,191			$	1,004,848
SALES - RELATED PARTIES			489,370				474,579				346,355
TOTAL SALES			1,882,140				1,679,770				1,351,203
COST OF GOODS SOLD			1,369,523				1,141,471				999,318
COST OF GOODS SOLD - RELATED PARTIES			481,202				449,487				343,957
TOTAL COST OF GOODS SOLD			1,850,725				1,590,958				1,343,275
GROSS PROFIT			31,415				88,812				7,928
SELLING, GENERAL AND  ADMINISTRATIVE EXPENSES			52,577				41,059				36,942
INCOME (LOSS) FROM OPERATIONS			(21,162	)			47,753				(29,014	)
OTHER INCOME (EXPENSE)
Interest income			6,154				3,334				4,251
Finance/interest expense			(51,283	)			(27,843	)			(23,166	)
Change in fair value of derivative liabilities			15,055				(33,159	)			12,821
Gain from debt extinguishment			-				7,331				7,169
Government grant			-				3,430				-
Loss on disposal of fixed assets			(9,447	)			(15,265	)			-
Realized income from future contracts			1,424				-				-
Income from equity investments			6,383				6,257				1,896
Lease income			943				119				-
Other non-operating (expense) income, net			(3,120	)			939				767
Total other income (expense), net			(33,891	)			(54,857	)			3,738
LOSS BEFORE PROVISION FOR INCOME TAXES AND NONCONTROLLING INTEREST			(55,053	)			(7,104	)			(25,276	)
PROVISION FOR INCOME TAXES
Current			1,267				2,154				1,424
Deferred			(10,049	)			2,295				(6,835	)
Total (benefit) provision for income taxes			(8,782	)			4,449				(5,411	)
NET LOSS BEFORE NONCONTROLLING INTEREST			(46,271	)			(11,553	)			(19,865	)
Less: Net income (loss) attributable to noncontrolling interest			(16,265	)			19,067				(8,542	)
NET LOSS ATTRIBUTABLE TO CONTROLLING INTEREST			(30,006	)			(30,620	)			(11,323	)
OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation adjustments			2,869				(587	)			5,420
Comprehensive income attributable to noncontrolling interest			1,754				349				3,654
COMPREHENSIVE LOSS		$	(25,383	)		$	(30,858	)		$	(2,249	)
WEIGHTED AVERAGE NUMBER OF SHARES
Basic & Diluted			53,113,177				41,860,238				35,381,210
LOSS PER SHARE
Basic & Diluted		$	(0.56	)		$	(0.73	)		$	(0.32	)

 

See report of independent registered public accounting firm.

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

 

 

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								Contribution				comprehensive				Noncontrolling
		Shares				Par value				Shares				Par value				Shares				Par value				capital				reserves				Unrestricted				receivable				income				interest				Totals
BALANCE, December 31, 2007			3,092,899			$	3				34,634,765			$	35				-				-			$	23,429			$	3,632			$	22,686			$	(960	)		$	3,285			$	43,322			$	95,432
Net loss attributable to controlling interest																																			(11,323	)															(11,323	)
Net income attributable to noncontrolling interest																																															(8,542	)			(8,542	)
Adjustment to statutory reserve																															1,270				(1,270	)															-
Common stock issued for compensation											491,804				0.49												3,929																								3,929
Common stock transferred by CEO for compensation																											207																								207
Common stock issued for consulting fee											100,000				0.10												360																								360
Common stock issued for public relations											25,000				0.03												90																								90
Common stock issued for cash											140,000				0.14												700																								700
Acquired noncontrolling interest																																															15,896				15,896
Notes converted to common stock											541,299				0.54												6,103																								6,104
Make whole shares issued on notes conversion											195,965				0.18												2,310																								2,310
Foreign currency translation adjustments																																											5,420				3,654				9,074
BALANCE, December 31, 2008			3,092,899			$	3				36,128,833			$	36				-			$	-			$	37,128			$	4,902			$	10,093			$	(960	)		$	8,705			$	54,330			$	114,237
Net loss attributable to controlling interest, as restated																																			(30,620	)															(30,620	)
Net income attributable to noncontrolling interest, as restated																																															19,067				19,067
Disposal of subsidiaries																																															(293	)			(293	)
Distribution of dividend to noncontrolling shareholders																																															(3,305	)			(3,305	)
Adjustment to statutory reserve																															1,260				(1,260	)															-
Common stock issued for compensation											596,650				0.77												1,875																								1,876
Common stock issued for interest payments											196,305				0.20												745																								745
Common stock issued for repayment of debt											300,000				0.30												1,800																								1,800
Notes converted to common stock											7,045,274				7.05												32,072																								32,079
Make whole shares issued on notes conversion											1,795,977				1.80												7,085																								7,087
Common stock transferred by CEO for compensation																											276																								276
Reduction of registered capital																																							960												960
Common stock issued for private placement											5,555,556				5.56												14,607																								14,613
Foreign currency translation adjustments, as restated																																											(587	)			349				(238	)
BALANCE, December 31, 2009, as restated			3,092,899			$	3				51,618,595			$	52				-			$	-			$	95,588			$	6,162			$	(21,787	)		$	-			$	8,118			$	70,148			$	158,284
Net loss attributable to controlling interest, as restated																																			(30,006	)															(30,006	)
Net income attributable to noncontrolling interest, as restated																																															(16,265	)			(16,265	)
Distribution of dividend to noncontrolling shareholders																																															(3,934	)			(3,934	)
Noncontrolling interest acquired																																															(1,270	)			(1,270	)
Registered capital received from noncontrolling shareholders																																															1,182				1,182
Adjustment to special reserve																															40																354				394
Common stock issued for compensation											733,300				0.73												2,201																								2,202
Common stock issued for repayment of debt											928,163				0.93												2,403																								2,404
Common stock transferred by CEO for compensation																											276																								276
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, as restated																																											2,869				1,754				4,623
BALANCE, December 31, 2010, as restated			3,092,899			$	3				54,522,973			$	55				316,760			$	(871	)		$	104,970			$	6,202			$	(51,793	)		$	-			$	10,987			$	51,969			$	121,522

 

See report of independent registered public accounting firm.

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

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2010, 2009  AND 2008

(In thousands, except per share data)

 

 

		2010				2009				2008
CASH FLOWS FROM OPERATING ACTIVITIES:		As restated				As restated
Consolidated net loss		$	(46,271	)		$	(11,553	)		$	(19,865	)
Adjustments to reconcile net loss to cash used in (provided by) operating activities:
Depreciation and amortization			41,153				33,107				22,414
Debt extinguishment			-				(7,331	)			(7,169	)
Bad debt allowance			326				(714	)			704
Inventory written-off			1,061				(1,533	)			2,204
Impairment of long-lived assets			1,747				-				-
Loss (gain) on disposal of equipment			8,257				12,995				(598	)
Stock issued for services and compensation			2,479				2,063				2,723
Net income from compensation			(1,377	)			-				-
Make whole shares interest expense on notes conversion			1,130				2,892				2,310
Amortization of deferred note issuance cost and discount on convertible notes			17				60				833
Change in fair value of derivative instrument			(15,055	)			33,159				(12,821	)
Income from investment			(7,806	)			(6,257	)			(1,896	)
Deferred tax assets			(10,058	)			2,700				(6,937	)
Changes in operating assets and liabilities
Notes receivable			(18,498	)			9,017				(33,064	)
Accounts receivable			(8,647	)			18,911				2,091
Accounts receivable - related parties			14,065				(37,829	)			(18,275	)
Other receivables			(3,210	)			3,526				(2,426	)
Other receivables - related parties			(38,524	)			6,666				2,423
Inventories			(270,046	)			(116,196	)			29,220
Advances on inventory purchase			4,681				52,655				19,916
Advances on inventory purchase - related parties			13,782				(13,341	)			7,814
Accounts payable			76,003				10,421				11,975
Accounts payable - related parties			45,480				55,445				44,725
Other payables and accrued liabilities			(1,527	)			12,578				(8,828	)
Other payables - related parties			30,618				(13,346	)			(1,482	)
Customer deposits			(24,433	)			(23,400	)			95,132
Customer deposits - related parties			18,855				(14,319	)			(2,287	)
Taxes payable			(19,543	)			(22,067	)			(22,443	)
Deferred lease income			41,104				16,487				-
Net cash (used in) provided by operating activities			(164,237	)			4,796				106,393
CASH FLOWS FROM INVESTING ACTIVITIES:
Restricted cash			741				(61,303	)			(87,121	)
Acquired long term investment			(2,021	)			(6,597	)			-
Dividend receivable							-
Cash proceeds from disposal of long-term investment			8,137				4,912				2,782
Cash proceeds from investment in future contracts			1,424				-				-
Long-term other receivable			-				-				(4,788	)
Cash proceeds from sales of equipment			1,828				7,231				598
Advance on equipment purchases			(7,106	)			1,604				(8,029	)
Equipments purchase and intangible assets			(89,916	)			(112,194	)			(194,644	)
Net cash used in investing activities			(86,913	)			(166,347	)			(291,202	)
CASH FLOWS FINANCING ACTIVITIES:
Notes receivable - restricted			(234,342	)			-				13,158
Dividend payable			-				(2,343	)			(815	)
Cash received on stock issuance			-				23,090				700
Payments made for treasury stock acquired			(870	)			-				-
Capital contributed by noncontrolling interest			1,184				-				-
Payments made to dividend distribution			(2,855	)			-				-
Borrowings on short term loans - bank			327,807				174,290				71,057
Payments on short term loans - bank			(199,905	)			(93,212	)			(103,641	)
Borrowings on short term loan - others			152,517				159,296				87,207
Payments on short term loans - others			(174,913	)			(126,650	)			(53,031	)
Borrowings on short term loan - related parties			71,714				4,398				7,222
Payments on short term loans - related parties			(11,850	)			-				(7,693	)
Borrowings on short term notes payable			905,124				636,136				335,870
Payments on short term notes payable			(693,633	)			(587,598	)			(200,416	)
Borrowings on long term loan - related parties			91,020				-				-
Deposits due to sales representatives			1,431				41,370				4,782
Net cash provided by financing activities			232,429				228,777				154,400
EFFECTS OF EXCHANGE RATE CHANGE IN CASH			1,874				(3	)			1,591
(DECREASE) INCREASE IN CASH			(16,847	)			67,223				(28,818	)
CASH, beginning of period			82,118				14,895				43,713
CASH, end of period		$	65,271			$	82,118			$	14,895
Non-cash transactions of investing and financing activities:
Share issuance for debt settlement		$	2,404			$	82,118			$	-
Other receivable - related parties offset with short-term loans of the same related party		$	43,323			$	-			$	-

 

See report of independent registered public accounting firm.

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

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010

 

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

 

The Company has formed a new joint venture, Tianwu General Steel Material Trading Co., Ltd. (“Tianwu JV”) with Tianjin Materials and Equipment Group Corporation. The contributed capital of Tianwu JV is approximately $2.9 million (or RMB20 million), of which General Steel holds a 60% controlling interest.

 

Effective January 1, 2010, one of the Company’s subsidiaries, General Steel (China) Co. Ltd. changed its business model from a direct operations model to a lease operations model which will provide a steady revenue stream in the form of fixed monthly lease revenue.  See note 16 for details of the lease transaction.

 

Note 2 – Restatement

 

This financial statements contain restatements related to the certain reimbursements received related to its collaboration with Shaanxi Iron and Steel Group Co., Ltd. ("Shaanxi Steel") on the construction of equipment by Shaanxi Steel during the period from June 2009 to March 2011.

 

During June 2009 to March 2011, General Steel worked with Shaanxi Steel to build new state-of-the-art equipment at the site of General Steel's principal subsidiary, Shaanxi Longmen Iron and Steel Co., Ltd. ("Longmen JV"). As a result, the Company's Longmen JV incurred certain costs of construction as well as economic losses on suspended production of certain small furnaces and other equipment to accommodate the construction of the new equipment, on behalf of Shaanxi Steel.

 

Dismantling began in June 2009. From that point forward through construction and testing until completion of the project in March 2011, Longmen JV recorded these certain costs as they were incurred according to the nature of these costs. At the beginning of the construction in June 2009, Longmen JV reached an oral agreement with Shaanxi Steel that these costs would be reimbursed by Shaanxi Steel. In December 2010, Shaanxi Steel and Longmen JV were able to finalize the amount of costs incurred by the Longmen JV and executed two signed agreements between the two parties on December 20, 2010. Therefore, to compensate the Company, in the fourth quarter of 2010, Shaanxi Steel reimbursed Longmen JV USD 16.4 million (RMB 108 million) related to the value of assets dismantled, various site preparation costs incurred by Longmen JV and rent under a 40-year property sub-lease that was entered into by the parties in June 2009 (the "Longmen Sub-lease"), and USD 27.8 million (RMB 183 million) for the reduced production efficiency caused by the construction. These reimbursements were reported as other income and a reduction of cost of goods sold in the fourth quarter of 2010. In addition, in 2010 and 2011, Shaanxi Steel reimbursed Longmen JV USD 13.5 million (RMB 89 million) each year for trial production costs related to the two new blast furnaces, two new converters and one new sintering machine constructed and owned by Shaanxi Steel, which were recorded as reductions to cost of goods sold in the fourth quarter of 2010 and in the first quarter of 2011. All of these reimbursements were settled by offsetting other payables due from Longmen JV to Shaanxi Steel.

 

The Company believed that the original accounting treatment for the reimbursement was in accordance with U.S. GAAP, based upon its understanding of the economic substance and the nature of reimbursement and its interpretation of U.S. GAAP. Specifically, the reimbursement to Longmen JV of the costs incurred was recognized and treated as income as the reimbursements were received, based on an oral agreement reached with Shaanxi Steel at the onset of the construction in June 2009. Subsequently, the parties entered into a written agreement in December 2010, which was effectively the implementation of the prior oral agreement and the confirmation that such costs would be reimbursed subject to an independent audit firm's verification. The reimbursements were legally and contractually unrelated to any future agreements between the parties, which may have changed the accounting treatment.

 

However, in connection with the preparation of its quarterly report on Form 10-Q for the quarter ended June 30, 2011, the Company revisited the appropriate treatment for these items. Given the complexity, and the unique structure of the transaction and the challenge with respect to finding the appropriate accounting guidance, either by direct application or analogy in relation to various aspects of the transaction, both the Company's current and former auditors agreed that a review by the Office of the Chief Accountant ("OCA") of the SEC with respect to the appropriate accounting treatment for the compensation would be helpful.

 

See report of independent registered public accounting firm.

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010

 

On April 20, 2012, after several rounds of written and oral communications, the OCA provided the Company with its guidance with respect to the accounting treatment. Following receipt of the guidance from the OCA, the Company centered the accounting treatment on the Longmen Sub-lease, under which Longmen JV sub-leased the land to Shaanxi Steel on which the new furnaces were constructed. Under this approach, the reimbursement for the net book value of the fixed assets that were demolished and for the inefficiency costs caused by the construction and loss incurred in the beginning stages of the system production are considered a part of the sub-lease. Applying the leasing guidance, these reimbursements are effectively additional rent under the sub-lease and are incorporated into the accounting treatment for the sub-lease and amortized to income over the remaining sub-lease term. In other words, the Company has concluded that, except for the reimbursement for site preparation costs, for which the income statement treatment will remain unchanged, the amount of reimbursement and previously recorded income should be deferred and recognized as a component of the property that was sub-leased during the construction, to be amortized to income over the remaining terms of the 40-year sub-lease.

 

As a result of the restatement, the deferred lease income on the land used right was $57.6 million and $16.5 million as of December 31, 2010 and 2009, respectively. For the year ended December 31, 2010 and 2009, the Company recognized deferred lease income of $942,619 and $118,900, respectively. The net loss attributable to controlling interest increased by $22.3 million and $5.4 million for the years ended December 31, 2010 and 2009, respectively.

 

The impact of these restatements on the December 31, 2010 and 2009 financial statements is reflected in the following table:

(In thousands except earnings per share) 

		December 31, 2010												December 31, 2009
Consolidated Balance Sheets		Original				Restatement				Restated				Original				Restatement				Restated
Current Assets		$	1,154,591			$	(15,288	)		$	1,139,303			$	615,278			$	2,329			$	617,607
Plant and Equipments, net			602,612				-				602,612				555,111				(2,997	)			552,114
Total Assets			1,814,668				(15,288	)			1,799,380				1,228,064				(3,694	)			1,224,370
Total Liabilities			1,644,765				33,093				1,677,858				1,061,735				4,351				1,066,086
Accumulated Deficits			(24,086	)			(27,707	)			(51,793	)			(16,411	)			(5,376	)			(21,787	)
Total Shareholders' Equity			98,986				(29,433	)			69,553				93,731				(5,595	)			88,136
Consolidated Statements of Operation
Gross Profit		$	71,913			$	(40,498	)		$	31,415			$	88,554			$	258			$	88,812
Other Expense, net			(28,561	)			(5,330	)			(33,891	)			(45,008	)			(9,849	)			(54,857	)
Net Loss Attributable to Controlling Interest			(7,675	)			(22,331	)			(30,006	)			(25,244	)			(5,376	)			(30,620	)
Loss Per Share
Basic & Diluted			(0.14	)			(0.42	)			(0.56	)			(0.60	)			(0.13	)			(0.73	)
Consolidated Statements of Cash Flow
Consolidated net loss		$	(7,487	)		$	(38,784	)		$	(46,271	)		$	(3,681	)		$	(7,872	)		$	(11,553	)
Net cash (used in) provided by operating activities			(165,089	)			852				(164,237	)			4,798				(2	)			4,796
Net cash used in investing activities			(88,764	)			1,851				(86,913	)			(63,674	)			(102,673	)			(166,347	)
Net cash provided by financing activities			234,280				(1,851	)			232,429				126,104				102,673				228,777

 

See report of independent registered public accounting firm.

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010

 

Note 3 – 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	%
Shaanxi Longmen Iron and Steel Co. Ltd. (“Longmen Joint Venture”) (1)	PRC			60.0	%
Maoming Hengda Steel Company, Ltd. (“Maoming Hengda”)	PRC			99.0	%
Tianwu General Steel Material Trading Co., Ltd	PRC			60.0	%

 

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.

 

(1)

Longmen Joint Venture has three consolidated subsidiaries, Hualong Fire Retardant Material Co., Ltd. (“Hualong”), Hancheng Tongxing Metallurgy Co., Ltd. (“Tongxing”) and Beijing Huatianyulong International Steel Trading Co., Ltd. (“Huatianyulong”), in which Longmen Joint Venture does not hold a controlling equity interest. Hualong, Tongxing and Huatianyulong are separate legal entities established in the PRC as limited liability companies and subsequently acquired by Longmen Joint Venture in June 2007, January 2008 and July 2008, respectively. Prior to and subsequent to their acquisition by Longmen Joint Venture, these three entities have been operating as self-sustaining integrated sets of activities and assets conducted and managed for the purpose of providing a return to shareholders consisting of all the inputs, processes and outputs, which has indicated their business nature as defined in ASC 805-10-20. A step by step examination approach then has been undertaken to determine whether the aforementioned entities are eligible for a scope exception under ASC 810-10-15-17(d). After a comprehensive analysis, the Company has concluded that none of the conditions of ASC 810-10-15 and, in particular 810-10-15-14 were met upon acquisition. Therefore, Hualong, Tongxing and Huatianyulong are not VIEs. Further consideration was given to whether consolidation was appropriate under the voting interest model, specifically, ASC 810-10-15-8 which states that the power of control may exist also with a lesser percentage of ownership (i.e. less than 50%).

 

Hualong

 

Longmen Joint Venture, the single largest shareholder, holds a 36.0% equity interest in Hualong. The other two shareholders, who own 34.67% and 29.33% respectively, have assigned their voting rights to Longmen Joint Venture in writing at the time of the acquisition of Hualong. The voting rights have been assigned through the date Hualong ceases its business operation or the other two shareholders sell their interest in Hualong. Hualong’s main business is to supply refractory. For the years ended December 31, 2008, 2009 and 2010, 97.4%, 99.7% and 92.1% sales of Hualong were generated through sales to Longmen Joint Venture, respectively.

 

Tongxing

 

Longmen Joint Venture holds a 22.76% equity interest in Tongxing and hundreds of employees of Longmen Joint Venture own the remaining 77.24%. Each individual employee shareholder comprising the remaining 77.24% has assigned its voting rights to Longmen Joint Venture in writing at the time of the acquisition of Tongxing. The voting rights have been assigned through the date Tongxing ceases its business operation or the employees sell their interest in Tongxing. Tongxing’s business highly relies on Longmen Joint Venture. Tongxing’s rebar processing is fully and solely engaged by Longmen Joint Venture. The metallurgical coke produced has been primarily sold to Longmen Joint Venture until August 2010 when the coke ovens were dismantled. Tongxing’s sales to Longmen Joint Venture has accounted for 98.3%, 98.4% and 98.4% of the total revenue for the year ended December 31, 2008, 2009 and 2010, respectively.

 

See report of independent registered public accounting firm.

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010

 

Huatianyulong

 

Longmen Joint Venture holds a 50.0% equity interest in Huatianyulong and the other unrelated shareholder holds the remaining 50.0%. The other shareholder has assigned its voting rights to Longmen Joint Venture in writing at the time of acquisition of Huatianyulong. The voting rights have been assigned through the date Huatianyulong ceases its business operation or the other unrelated shareholder sells its interest in Huatianyulong. Huatianyulong mainly sells imported iron ore. For the consecutive three years from 2008 to 2010, more than 90% of its sales were generated through selling iron ore to Longmen Joint Venture, directly and indirectly.

 

The Company has determined that it is appropriate for Longmen Joint Venture to consolidate these three entities with appropriate recognition in the Company’s financial statements of the non-controlling interests in each entity, beginning on the acquisition dates as these were also the effective dates of the agreements with other stockholders granting a majority voting rights in each entity, and thereby, the power of control, to Longmen Joint Venture.

 

Principles of consolidation – subsidiaries

 

The Company follows ASC 810-10-15 “Consolidation – Scope and Scope Exceptions” when determining whether to consolidate an entity in our financial statements. All legal entities which the Company owns directly or indirectly more than 50 percent of the outstanding voting shares are required to be consolidated given that control rests with the majority owner. Entities in which the Company owns less than 50 percent voting shares are evaluated in accordance with generally accepted account principles to determine whether the Company may hold the power of control. If we hold established power of control in such entities, the Company consolidates the entities with recognition of the non-controlling interest in them accordingly.

 

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, 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 December 31, 2010 and 2009 amounted to $263.1 million and $274.2 million, respectively. As of December 31, 2010, $1.1 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 28%, 29% and 34% of the Company’s total sales for the years ended December 31, 2010, 2009 and 2008 respectively. These five major customers accounted for 0%, 1% and 0% of total accounts receivable as of December 31, 2010, 2009 and 2008, respectively.

 

For years ended December 31, 2010, 2009 and 2008, the Company purchased approximately 48%, 42% and 30% of its raw materials from five major suppliers, respectively. These five vendors accounted for 28%, 10% and 7% of total accounts payable as of December 31, 2010, 2009 and 2008, respectively, none of the five major suppliers individually accounted for more than 10% of total accounts payable.

 

See report of independent registered public accounting firm.

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010

 

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 (as restated)

 

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 $11.0 million and $8.1 million as of December 31, 2010 and 2009, respectively. The balance sheet amounts, with the exception of equity at December 31, 2010 and 2009 were translated at 6.59 RMB and 6.82 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 years ended December 31, 2010, 2009 and 2008 were 6.76 RMB, 6.82 RMB and 7.07 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.

 

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.

 

See report of independent registered public accounting firm.

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010

 

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 December 31, 2010

Fair Value Measurements at December 31, 2010 Using Fair Value Hierarchy

Level 1

Level 2

Level 3

Derivative liabilities

$

5,573

$

5,573

 

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.

 

Level 3 Valuation Reconciliation:

 

		Convertible Notes
		(in thousands)
Balance, December 31, 2009		$	1,050
Current period effective interest charges on notes			389
Current period payments made for principal and stated interest			(217	)
Current period note converted carrying value			(1,222	)
Balance, December 31, 2010		$	-

 

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 request 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 $49.1 million and $29.2 million outstanding as of December 31, 2010 and 2009, respectively.

 

Restricted notes receivable represents notes receivable pledged as collateral for short-term loans and short-term notes payable issued by banks. As of December 31, 2010 and 2009, restricted notes receivable amounted to $240.3 million and $0, respectively.

 

See report of independent registered public accounting firm.

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010

 

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 with them as a guarantee that the Company will complete its purchases on a timely basis.

 

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 $30.8 million and $31.4 million as of December 31, 2010 and 2009, 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 $1.1 million inventory cost as of December 31, 2010.

 

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 finished goods for the years ended December 31, 2010, 2009 and 2008 amounted to $9.5 million, $6.8 million and $4.9 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.

 

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. As of December 31, 2010, the Company impaired long lived assets in the amount of $1.7 million.

 

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.

 

See report of independent registered public accounting firm.

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010

 

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 December 31, 2010, 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.

 

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		$	4,779				22.0
Shaanxi Xinglong Thermoelectric Co., Ltd		2004 - 2007			8,534				20.7
Huashan Metallurgical Equipment Co.,  Ltd.		2003			2,907				25.0
Shaanxi Longgang Group Xian Steel Co., Ltd		2005			-				10.0
Xian Delong Powder Engineering Materials Co., Ltd.		2006			1,236				27.0
Total				$	17,456

 

Total investment income in unconsolidated subsidiaries amounted to $6.4 million and $6.3 million for the years ended December 31, 2010 and 2009, respectively.

 

On May 2010, Tongxing Metallurgy disposed its long-term investment in Shaanxi Longmen Coal Chemical Industry Co., Ltd to an unrelated party for consideration of $8.1 million (RMB 55 million). Tongxing Metallurgy realized a $1.5 million gain on disposal for the year ended December 31, 2010.

 

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.

 

See report of independent registered public accounting firm.

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010

 

Customer deposits (as restated)

 

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 December 31, 2010 and 2009, customer deposits amounted to $188.4 million and $121.9 million, including deposits paid to relate parties, which amounted to $54.9 million and $3.0 million, respectively.

 

Deferred lease income (as restated)

 

During June 2009 to March 2011, General Steel worked with Shaanxi Steel to build new state-of-the-art equipment at the site of General Steel's principal subsidiary, Shaanxi Longmen Iron and Steel Co., Ltd. ("Longmen JV"). As a result, the Company's Longmen JV incurred certain costs of construction as well as economic losses on suspended production of certain small furnaces and other equipment to accommodate the construction of the new equipment, on behalf of Shaanxi Steel. To compensate the Company, in the fourth quarter of 2010, Shaanxi Steel reimbursed Longmen JV USD 16.4 million (RMB 108 million) related to the value of assets dismantled, various site preparation costs incurred by Longmen JV and rent under a 40-year property sub-lease that was entered into by the parties in June 2009 (the "Longmen Sub-lease"), and USD 27.8 million (RMB 183 million) for the reduced production efficiency caused by the construction. Applying the lease accounting guidance (ASC 840-20-25-1), the Company has concluded that, except for the reimbursement for site preparation costs, the amount of reimbursement should be deferred and recognized as a component of the property that was sub-leased during the construction, to be amortized to income over the remaining terms of the 40-year sub-lease.

 

Deferred lease income represents the remaining balance of compensation being deferred. As of December 31, 2010 and December 31, 2009, the balance of $57.6 million and $16.5 million represented the balance of remaining deferred lease income 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.

 

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.

 

See report of independent registered public accounting firm.

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010

 

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.

 

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.

 

Noncontrolling interests

 

Effective January 1, 2009, the Company adopted accounting principles generally accepted in the United States regarding noncontrolling interest in the consolidated financial statements. Certain provisions of this statement are required to be adopted retrospectively for all periods presented. Such provisions include a requirement that the carrying value of noncontrolling interests (previously referred to as minority interests) be removed from the mezzanine section of the balance sheet and reclassified as equity.

 

Further, as a result of adopting this accounting standard, net income attributable to noncontrolling interests is now excluded from the determination of consolidated net income. In addition, the foreign currency translation adjustment is allocated between controlling and noncontrolling interests.

 

Recently issued accounting pronouncements

 

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-06 – Improving Disclosures about Fair Value Measurements. This update provides amendments to Subtopic 820-10 that requires new disclosure as follows: 1) Transfers in and out of Levels 1 and 2. A reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers.  2)  Activity in Level 3 fair value measurements.  In the reconciliation for fair value measurements using significant unobservable inputs (Level 3), a reporting entity should present separately information about purchases, sales, issuances, and settlements (that is, on a gross basis rather than as one net number). This update provides amendments to Subtopic 820-10 that clarify existing disclosures as follows: 1) Level of disaggregation. A reporting entity should provide fair value measurement disclosures for each class of assets and liabilities. A class is often a subset of assets or liabilities within a line item in the statement of financial position. A reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities. 2) Disclosures about inputs and valuation techniques. A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. Those disclosures are required for fair value measurements that fall in either Level 2 or Level 3. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company is currently evaluating the impact of this ASU. However, the Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

 

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.

 

See report of independent registered public accounting firm.

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010

 

In July 2010, the FASB issued ASU 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” This update amends codification topic 310 on receivables to improve the disclosures that an entity provides about the credit quality of its financing receivables and the related allowance for credit losses. As a result of these amendments, an entity is required to disaggregate by portfolio segment or class certain existing disclosures and provide certain new disclosures about its financing receivables and related allowance for credit losses. This guidance is being phased in, with the new disclosure requirements for period end balances effective as of December 31, 2010, and the new disclosure requirements for activity during the reporting period are effective March 31, 2011. The troubled debt restructuring disclosures in this ASU have been delayed by ASU 2011-01 “Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20,” which was issued in January 2011.

  

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 is currently evaluating the impact of this ASU; however, the Company does not expect the adoption of this ASU will have a material impact on its consolidated financial statements.

 

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 is currently evaluating the impact of this ASU and expected the adoption of this ASU will have an impact on its future business combinations.

 

Reclassifications

 

Certain prior period amounts have been reclassified to conform to the current period presentation. These classifications have no effect on net income.

 

Note 4 – Accounts receivable, net (as restated)

 

Accounts receivable, excluding related party receivables, net of allowance for doubtful accounts consists of the following:  

 

		December 31, 2010 As restated				December 31,2009 As restated
		(in thousands)				(in thousands)
Accounts receivable		$	18,796			$	9,630
Less: allowance for doubtful accounts			(296	)			(490	)
Net accounts receivable		$	18,500			$	9,140

 

See report of independent registered public accounting firm.

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010

 

Movement of allowance for doubtful accounts is as follows:

 

		December 31, 2010				December 31, 2009
		(in thousands)				(in thousands)
Beginning balance		$	490			$	401
Charge to expense			174				246
Less Write-off			(386)				(157)
Exchange rate effect			18				-
Ending balance		$	296			$	490

 

Note 5 – Inventories (as restated)

 

Inventories consist of the following:

 

		December 31, 2010				December 31, 2009
		As restated				As restated
		(in thousands)				(in thousands)
Supplies		$	13,733			$	12,235
Raw materials			381,178				134,874
Finished goods			58,725				30,260
Total inventories		$	453,636			$	177,369

 

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 are also included in the cost of inventory.

 

Note 6 – Plant and equipment, net (as restated)

 

Plant and equipment consist of the following:

 

		December 31, 2010				December 31, 2009
		As restated				As restated
		(in thousands)				(in thousands)
Buildings and improvements		$	116,294			$	121,837
Machinery			502,958				464,070
Transportation and other equipment			13,253				8,660
Construction in progress			65,749				31,715
Subtotal			698,254				626,282
Less accumulated depreciation			(95,642	)			(74,168	)
Total		$	602,612			$	552,114

 

Construction in progress consisted of the following as of December 31, 2010:

 

Construction in progress		Value				Estimated completion		Estimated additional cost
description		In thousands				date		In thousands
Employee cafeteria		$	4,527			July 2011		$	1,070
3# lime stone grinding machine			2,572			In trial production			-
Rebar production line			51,969			June 2011			3,078
Transformation of slag processing			1,392			September, 2011			7,892
Grand handling for new material yard			1,088			May 2011			85
Other			4,201			By the end of 2011			3,669
Total		$	65,749					$	15,794

 

See report of independent registered public accounting firm.

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010

 

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 years ended December 31, 2010, 2009 and 2008 amounted to $40.1 million, $32.1 and $21.5 million, respectively.

 

Note 7 – Intangible assets, net

 

Intangible assets consist of the following:

 

		December 31, 2010				December 31, 2009
		(in thousands)				(in thousands)
Land use rights		$	28,462			$	27,519
Software			660				424
Subtotal			29,122				27,943
Accumulated amortization – land use right			(5,316)				(4,143)
Accumulated amortization – software			(134)				(67)
Subtotal			(5,450)				(4,210)
Intangible assets, net		$	23,672			$	23,733

 

 

The gross amount of the intangible assets amounted to $29.1 million and $27.9 million as of December 31, 2010 and 2009, respectively. The remaining weighted average amortization period is 32.0 years.

 

Total amortization expense for the years ended December 31, 2010, 2009 and 2008 amounted to $1.1 million, $1.0 million and $0.9 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)				(in thousands)
December 31, 2011		$	1,070			$	22,602
December 31, 2012			976				21,626
December 31, 2013			950				20,677
December 31, 2014			946				19,730
December 31, 2015			946				18,784
Thereafter			18,784				-
Total		$	23,672

 

Note 8 – Debt (as restated)

 

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 $167.7 million and $192.0 million as of December 31, 2010 and 2009, respectively. Restricted notes receivable as a guarantee for the notes payable amounted to $159.3 million as of December 31, 2010.

 

See report of independent registered public accounting firm.

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010

 

The Company had the following short-term notes payable:

 

		December 31, 2010				December 31, 2009
		(in thousands)				(in thousands)
General Steel (China): Notes payable from banks in China, due various dates from January to May 2011. Restricted cash required of $11.7 million and $4.0 million as of December 31, 2010 and 2009, respectively; guaranteed by third parties.		$	21,541			$	7,628
Longmen Joint Venture: Notes payable from banks in China, due various dates from January to June 2011. $150.7 million restricted cash and $159.3 million notes receivable are secured for notes payable as of December 31, 2010, and comparatively $162.3 million restricted cash secured as of December 31, 2009, respectively; some notes are further guaranteed by third parties while others are secured by equipments and land use rights.			447,992				216,173
Bao Tou: Notes payable from banks in China, due date in April 2011, restricted cash of $5.3 million and $5.1 million as of December 31, 2010 and 2009, respectively; pledged by buildings.			10,619				10,269
Maoming Hengda: Notes payable from banks in China, restricted cash of $0 and $20.6 million as of December 31, 2010 and 2009, respectively.			-				20,538
Total short-term notes payable		$	480,152			$	254,608

 

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:

 

		December 31, 2010				December 31, 2009
		(in thousands)				(in thousands)
General Steel (China): Loan from banks in China, due various dates from March 2011 to October 2011. Weighted average interest rate 6.0% per annum; some are guaranteed by third parties while others are secured by equipment and inventory.		$	24,220			$	25,476
Longmen Joint Venture: Loan from banks in China, due various dates from February to November 2011. Weighted average interest rate 6.0% 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.			260,978				123,492
Total short-term loans - bank		$	285,198			$	148,968

 

		December 31, 2010 As restated				December 31, 2009 As restated
		(in thousands)				(in thousands)
Longmen Joint Venture: Loans from various unrelated companies and individuals, due various dates from January to June 2011, and weighted average interest rates 6.0% per annum.		$	75,380			$	91,106
Longmen Joint Venture: due on demand, average interest rates ranging between 0.6% and 3.2% per annum.			37,947				73,220
Maoming Hengda: Loans from one unrelated parties and one related party, due on demand, none interest bearing.			14,385				19,252
Total short-term loans – others		$	127,712			$	183,578

 

See report of independent registered public accounting firm.

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010

 

		December 31, 2010 As restated				December 31, 2009
		(in thousands)				(in thousands)
Longmen Joint Venture: Loans from Shaanxi Steel, due July 2011, and interest rates 5.6% per annum.		$	14,548			$	-
Longmen Joint Venture: Loans from one subsidiary of Long Steel Group, due in May 2010, and interest rates 8.4% per annum.			-				4,401
Qiu Steel: Related party loans from Tianjin Heng Ying and Tianjin Da Zhan, due in 2010. Annual interest rate of 5.0%.			-				7,350
Total short-term loans - related parties		$	14,548			$	11,751

 

		December 31, 2010 As restated				December 31, 2009 As restated
		(in thousands)				(in thousands)
Longmen Joint Venture: Loans from Shaanxi Steel, due November 2015, and interest rates 5.6% per annum.		$	91,020			$	-
Total long-term loans - related parties		$	91,020			$	-

 

The Company had various loans from unrelated companies. The balances amounted to $127.7 million and $183.6 million as of December 31, 2010 and 2009, respectively. Of the $127.7 million, $14.4 million loans carry no interest, $37.9 million are subject to interest rates ranging between 0.6% and 3.2% and the remaining $75.4 million are subject to interest rates ranging from 5.6% to 6.0%. All short term loans from unrelated companies are due on demand and unsecured.

 

Total interest expenses, excluding capitalized interest, amounted to $51.3 million, $27.8 million and $23.2 million for the years ended December 31, 2010, 2009 and 2008, respectively.

 

Capitalized interest amounted to $2.1 million, $13.1 million and $10.6 million for the years ended December 31, 2010, 2009 and 2008, respectively.

 

Note 9 – 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 $52.1 million and $49.5 million in deposits due to sales representatives as of December 31, 2010 and 2009, respectively.

 

Note 10 – Convertible notes and derivative liabilities

 

On December 13, 2007, the Company entered into a Securities Purchase Agreement (the “Agreement”) with certain institutional investors (the “Buyers”) issuing $40.0 million in promissory notes (“Notes”) and 1,154,958 warrants. The warrants can be converted to common stock through May 13, 2013 at an initial exercise price of $13.51 per share, subject to customary anti-dilution adjustments. On December 24, 2009, the warrant exercise price was reset to $5.00 per share.

 

See report of independent registered public accounting firm.

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010

 

The Notes bear initial interest at 3% per annum, which will be increased each year as specified in the Agreement, payable semi-annually in cash or shares of the Company’s common stock. The Notes have a five year term through December 12, 2012. They are convertible into shares of the Company’s common stock, subject to customary anti-dilution adjustments. The initial conversion price was $12.47 which was reset to $4.25 on May 7, 2009. The Company may redeem the Notes at 100% of the principal amount, plus any accrued and unpaid interest, beginning December 13, 2008, provided the market price of the common stock is at least 150% of the then applicable conversion price for 30 consecutive trading days prior to the redemption.

 

Pursuant to the generally accepted accounting standards of the United States for convertible debt and debt issued with stock purchase warrants, the Company discounted the Notes equal to the fair value of the warrants. The Notes were further discounted for the fair value of the conversion option. The combined discount is being amortized to interest expense over the life of the Notes using the effective interest method.

 

The fair value of conversion option and the warrants were initially calculated using the Cox Rubenstein Binomial model based on the following variables:

 

Expected volatility adjusted to 125%

Expected dividend yield of 0%

Risk-free interest rate of 1.27%

 

Expected lives of five years

Market price at issuance date of $10.43

Strike price of $12.47 and $13.51, for the conversion option and the warrants

 

Pursuant to accounting principles generally accepted in the United States, the Company determined that both the warrants and the conversion option embedded in the Notes meet the definition of a derivative instrument and must be carried as a liability and recorded at fair value in each reporting period. On December 13, 2007, the Company recorded $34.7 million as derivative liability, including $9.3 million for the fair value of the warrants and $25.4 million for fair value of the conversion option. The initial carrying value of the Notes was $5.3 million. The financing cost of $5.2 million was recorded as note issuance cost and is being amortized to interest expense over the term of the Notes using the effective interest method.

 

Reset of conversion price

 

The derivative liability related to the embedded conversion option was adjusted as of May 7, 2009, based on the revised conversion price. As a result of the reduced conversion price, the derivative liability increased as of May 7, 2009 by $27.1 million, which amount is included in the change in the value of the derivative liability in the consolidated statement of operations and other comprehensive income (loss).

 

Note conversion

 

On August 5, 2010, the $3.3 million Notes were converted to 1,208,791 shares of common stocks. Pursuant to accounting principles generally accepted in the United States, the Company valued the conversion option on the note conversion date. A total of $3.5 million of the carrying value and derivative liability had been reclassified into equity. In connection with such conversion, the Company incurred the make-whole interest expense of $0.7 million and accrued interest of $0.2 million for the year ended December 31, 2010. All accrued interest and make-whole interest were settled with 350,884 shares of common stocks.

 

$30.0 million of the Notes was converted to 7,045,274 shares of common stock at a conversion price of $4.2511 in 2009. A total of $32.1 million of the carrying value and derivative liability had been reclassified into equity. According to the convertible note agreement, the Company incurred the make-whole interest expense of $8.8 million for the year ended December 31, 2009.

 

The carrying value of the Notes was $0 million and $1.1 million as of December 31, 2010 and 2009, respectively. The effective interest charges on the Notes totaled $0.4 million, $2.3 million and $3.6 million for the years ended December 31, 2010, 2009 and 2008, respectively.

 

Note issuance cost was amortized to interest expense for the years ended December 31, 2010, 2009 and 2008 amounted to $0.02 million, $0.06 million and $0.05 million, respectively. A total of $0.4 million deferred fees remaining unamortized at the date of conversion are transferred (charged) to equity (debited to additional paid-in capital).

 

See report of independent registered public accounting firm.

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010

 

Reset of warrants exercise price

 

On December 24, 2009, the holders of the existing warrants to purchase 1,154,958 shares of the Company’s common stock entered into warrant reset agreements whereby the exercise price was reset from $13.51 to $5.00 per share and the number of shares of common stock issuable upon exercise of warrants was increased by 2.3775 times from 1,154,958 to 3,900,871. The Company booked $10.1 million derivative loss in 2009 for this reset accordingly.

 

As of December 31 2009, the balance of derivative liabilities, including 2009 issued warrants (see Note 17), was $23.3 million, which consisted of $20.8 million for the warrants and $2.5 million for the conversion option. As of December 31, 2010, the balance of derivative liabilities was $5.6 million.

 

Note 11 – Supplemental disclosure of cash flow information (as restated)

 

Interest paid amounted to $20.9 million, $14.5 million and $12.0 million for the years ended December 31, 2010, 2009 and 2008, respectively.

 

The Company paid income tax amounted to $1.8 million, $3.0 million and $6.6 million for the years ended December 31, 2010, 2009 and 2008, respectively.

 

Effective interest charge on the Notes of $0.4 million was capitalized into construction in progress for the year ended December 31, 2010.

 

Other receivables – related parties from Shaanxi Steel in the amount of $43.3 million was offset with short-term loans due to the same related party for the year ended December 31, 2010.

 

Note 12 – Deferred lease income (as restated)

 

As discussed in Note 2, in connection to construction of two new blast furnaces systems, to compensate the Company, in the fourth quarter of 2010, Shaanxi Steel reimbursed Longmen JV USD 16.4 million (RMB 108 million) related to the value of assets dismantled, various site preparation costs incurred by Longmen JV and rent under a 40-year property sub-lease that was entered into by the parties in June 2009 (the "Longmen Sub-lease"), and USD 27.8 million (RMB 183 million) for the reduced production efficiency caused by the construction. In addition, in 2010 and 2011, Shaanxi Steel reimbursed Longmen JV USD 13.5 million (RMB 89 million) each year for trial production costs related to the two new blast furnaces, two new converters and one new sintering machine constructed and owned by Shaanxi Steel. The compensations totaled USD 57.7 million (RMB 380 million), among which USD 52.0 million (RMB 343 million) as of December 31, 2010, was recorded as a deferred sub-lease income from the land which was sub-leased by Longmen Joint Venture to Shaanxi Steel on the new furnaces constructed as of December 31, 2010. The deferred lease income is amortized to income over the remaining term of the 40-year sub-lease. For the year ended December 31, 2010 and 2009, the Company recognized deferred lease income of $942,619 and $118,900, respectively. As of December 31, 2010 and 2009, the balance of deferred lease income amounted to $57.6 million and $16.5 million.

 

 

		December 31, 2010 As restated				December 31, 2009 As restated
		(in thousands)				(in thousands)
Beginning balance		$	16,487			$	-
Add: Compensation for dismantled assets			568				9,735
Add: Compensation for loss of efficiency			20,676				6,871
Add: Compensation for trial production cost			13,584				-
Add: Deferred depreciation cost during trial production			6,656				-
Less: Lease income realized			(943	)			(119	)
Exchange rate effect			563
Ending balance		$	57,591			$	16,487

 

See report of independent registered public accounting firm.

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010

 

Note 13 - Other income (expense)

 

Debt extinguishment

 

For the year ended December 31, 2009, the Company recorded gain from debt extinguishment totaling $7.3 million. In 2009, Maoming Hengda, a subsidiary, entered into a Debt Waiver Agreement with Guangzhou Hengda, pursuant to which Guangzhou Hengda agreed to waive $7.3 million (RMB 50.0 million) of debt that Maoming Hengda owes to Guangzhou Hengda. The Company determined that the subsequent debt settlement does not constitute a contingency at the date of purchase as defined in the accounting standard - business Combinations and thus should not result in a reallocation of the purchase price. The waiver is irrevocable.

 

Government grant

 

Due to an increasing emphasis the government puts on energy savings and pollution emission controls, the Shaanxi Province Development and Reform Commission provided incentives for local companies to eliminate outdated iron and steel production machineries and equipment. Longmen Joint Venture, received $4.3 million (RMB 29.2 million) in government grants as compensation for the loss of dismantling two blast furnaces in 2009. The Company wrote off the residual book value of the furnaces dismantled totaling $0.9 million (RMB 5.8 million), and recorded gain on compensation of $3.4 million for the year ended December 31, 2009.

  

Realized income from future contracts

 

On May 2010, the Company entered a future brokerage contract with one unrelated party and engaged speculative investment to hedge price fluctuations of steel rebar. For the year ended December 31, 2010, the Company realized $1.4 million gain on investment of future contracts. There was no cash deposit held in the brokerage account and no trading financial assets held as of December 31, 2010.

 

Lease income (as restated)

 

The deferred lease income from the reimbursement from Shaanxi Steel for the net book value of the fixed assets that were demolished and for the inefficiency costs caused by the construction and loss incurred in the beginning stages of the system production is amortized to income over the remaining sub-lease term. For the year ended December 31, 2010 and 2009, the Company recognized deferred lease income of $942,619 and $118,900, respectively.

 

Note 14 – Taxes (as restated)

 

Income tax

 

Significant components of the provision for income taxes on earnings and deferred taxes on net operating losses from operation for the years ended December 31, 2010, 2009 and 2008 are as follows:

  

(In thousands)		December 31,2010 As restated				December 31,2009 As restated				December 31,2008
Current		$	1,267			$	2,154			$	1,424
Deferred			(10,049	)			2,295				(6,835	)
Total provision (benefit) for income taxes		$	(8,782	)		$	4,449			$	(5,411	)

 

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.

 

See report of independent registered public accounting firm.

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010

 

The principal component of the deferred income tax assets is as follows:

 

		December 31, 2010 As restated				December 31, 2009 As restated
		(in thousands)				(in thousands)
Beginning balance		$	5,044			$	7,487
Net operating loss carry forward (tax assets realized) for subsidiaries			2,343				(864	)
Effective tax rate			25	%			25	%
Deferred tax asset		$	586			$	(216	)
Long Gang Headquarter, net operating loss carry-forward (tax asset realized)			65,019				(14,840	)
Effective tax rate			15	%			15	%
Deferred tax asset		$	9,753			$	(2,226	)
Exchange difference			(82	)			(1	)
Totals		$	15,301			$	5,044

 

The estimated tax savings due to the reduced tax rate for the years ended December 31, 2010, 2009 and 2008 are $(6.1) million, $2.0 million and $(3.3) million, respectively. The net effect on income per share if the income tax had been applied would increase loss per share by $0.11 and $0.09 for the year ended December 31, 2010 and 2008, and decrease loss per share by $0.05 for the years ended December 31, 2009.

 

Under the Income Tax Laws of the PRC, the Company’s subsidiary, General Steel (China), is generally subject to an income tax at an effective rate of 25% on income reported in the statutory financial statements after appropriate tax adjustments, unless the enterprise is located in a specially designated region where it allows foreign enterprises a two-year income tax exemption and a 50% income tax reduction for the following three years. General Steel (China) became a Chinese Sino-foreign joint venture at the time of the merger on October 14, 2004 and it became eligible for the tax benefit. General Steel (China) is located in Tianjin Costal Economic Development Zone and under the Income Tax Laws of Tianjin City of the PRC; it is eligible for an income tax rate of 25% and 12% for the periods ended December 31, 2010 and 2009, respectively.

 

The Company’s subsidiary, Longmen Joint Venture, is located in the mid-west region of China. It qualifies for the “Go-West” tax rebate of 15% tax rate promulgated by the government; therefore, income tax is at 15% deducted rate till December 31, 2010.

 

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%.

 

The following table reconciles the U.S. statutory rates to the Company’s effective tax rate for the years ended December 31, 2010, 2009 and 2008 are as follows:

 

		December 31,2010 As restated				December 31,2009 As restated				December 31,2008
U.S. Statutory rates			34.0	%			34.0	%			34.0	%
Foreign income not recognized in the US			(34.0	)%			(34.0	)%			(34.0	)%
China income taxes			25.0	%			25.0	%			25.0	%
Tax effect of income not taxable for tax purposes (1)			2.3	%			1.1	%			(4.3	)%
Effect of different tax rate of subsidiaries operating in other jurisdictions			(12.3	)%			7.3	%			(12.0	)%
Total provision for income taxes			15.0	%			33.4	%			8.7	%

 

(1)	This represents derivative expenses (income) and stock compensation expenses incurred by the Company that are not deductible/taxable in the PRC for the years ended December 31, 2010, 2009 and 2008.

 

The Company has cumulative undistributed deficit of foreign subsidiaries of approximately $21.3 million as of December 31, 2010. 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.

 

See report of independent registered public accounting firm.

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010

 

General Steel Holdings, Inc. was incorporated in the United States and has incurred net operating losses for income tax purposes for the years ended December 31, 2010, 2009 and 2008. The net operating loss carry forwards for United States income taxes amounted to $1.8 million, which may be available to reduce future years’ taxable income. These carry forwards will expire, if not utilized, through 2030. 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 December 31, 2010 was $0.6 million. The net change in the valuation allowance for the year ended December 31, 2010 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 December 31, 2010 and 2009, the Company had $37.3 million and $19.5 million value added tax credit which were available to offset the future VAT payable, respectively.

 

VAT on sales and VAT on purchases amounted to $519.0 million and $482.44 million, respectively, for the year ended December 31, 2010, $440.4 million and $409.8 million, respectively, for the year ended December 31, 2009, $341.5 million and $308.5 million, respectively, for the year ended December 31, 2008. 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:

 

		December 31, 2010 As restated				December 31, 2009 As restated
		(in thousands)				(in thousands)
VAT taxes payable		$	3,921			$	9,126
Income taxes payable			840				1,633
Misc taxes			1,476				1,427
Totals		$	6,237			$	12,186

  

Note 15 – Earnings per share (as restated)

 

The calculation of earnings per share is as follows:

 

(in thousands except per share data)		2010 As restated				2009 As restated				2008
Loss attributable to holders of common shares		$	(30,006	)		$	(30,620	)		$	(11,323	)
Basic and diluted weighted average number of common shares outstanding			53,113,177				41,860,238				35,381,210
Loss per share
Basic & diluted		$	(0.56	)		$	(0.73	)		$	(0.32	)

 

There is no dilutive effect for its earnings per share as the Company incurred net loss for the years ended December 31, 2010, and 2009.

 

Note 16 – Related party transactions and balances (as restated)

 

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 year ended December 31, 2010, General Steel (China) realized rental income in the amount of $3.0 million from the Lessee. 

 

See report of independent registered public accounting firm.

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010

 

The future rental payments to be received associated with the Lease Agreement are as follow:

 

Year ended December 31,		Amount
		(in thousands)
2011		$	2,982
Thereafter			-
Total		$	2,982

 

 The following chart summarized sales to the related party transactions for the years ended December 31, 2010 and 2009.

 

Name of related parties		Relationship		December 31,2010 As restated				December 31,2009 As restated
				(in thousands)				(in thousands)
Shaanxi Longmen (Group) Co, Ltd and its subsidiaries (“Long Steel Group”)		Noncontrolling shareholder of Longmen Joint Venture		$	344,556			$	351,912
Tianjin Hengying Trading Co., Ltd		Common control under CEO			47,268				26,398
Tianjin Dazhan Industry Co, Ltd		Common control under CEO			43,778				18,279
Hancheng Haiyan Coking		Investee of Long Steel Group			38,545				49,541
Shaanxi Steel		Majority shareholder of Long Steel Group			1,152				112
Beijing Daishang Trade Co., Ltd.		Noncontrolling shareholder of Longmen Joint Venture’s subsidiary			5,503				6,923
Tianjin Daqiuzhuang Steel Plates Co., Ltd.		Common control under CEO			8,385				-
Maoming Shengze Trade Co., Ltd.					-				19,002
Others					183				2,412
Total				$	489,370			$	474,579

 

 The following charts summarize purchases from the related party transactions for the years ended December 31, 2010 and 2009.

 

Name of related parties		Relationship		December 31, 2010				December 31, 2009
				(in thousands)				(in thousands)
Long Steel Group		Noncontrolling shareholder of Longmen Joint Venture			553,752				382,948
Hengying and Dazhan		Common control under CEO			-				45,296
Jingma Jiaohua		Investee of Longmen Joint Venture’s subsidiary (unconsolidated)			8,489				17,099
Hancheng Haiyan Coking		Investee of Long Steel Group			234,479				148,091
Beijing Daishang Trade Co., Ltd.		Noncontrolling shareholder of Longmen Joint Venture’s subsidiary			1,984				32,346
Others					1,019				1,259
Total				$	799,723			$	627,039

 

See report of independent registered public accounting firm.

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010

 

Related party balances

 

a.

Accounts receivables – related parties:

Name of related parties				December 31,2010			December 31,2009
		Relationship		As restated			As restated
				(in thousands)			(in thousands)
Long Steel Group		Noncontrolling shareholder of Longmen Joint Venture		$	3,023		$	18,225
Tianjin Hengying Trading Co., Ltd.		Common control under CEO			1,054			-
Shaanxi Steel		Majority shareholder of Long Steel Group			83			-
Total				$	4,160		$	18,225

 

 

b.	Other receivables - related parties:

 

Name of related parties		Relationship		December 31,2010 As restated				December 31,2009 As restated
				(in thousands)				(in thousands)
Long Steel Group		Noncontrolling shareholder of Longmen Joint Venture		$	993			$	13,258
Shaanxi Steel		Majority shareholder of Long Steel Group			-				16,918
Mao Ming Sheng Zhe		Common control under CEO			8,095				3,021
Tianjin Daqiuzhuang Steel Plates Co., Ltd.		Common control under CEO			1,078				-
Tianjin Dazhan Industry Co, Ltd		Common control under CEO			455				10,268
Others					317				155
Total				$	10,938			$	43,620

 

 

c.	Advances on inventory purchase – related parties:

 

Name of related parties		Relationship		December 31, 2010				December 31, 2009
				(in thousands)				(in thousands)
Tianjin General Qiugang Pipe		Common control under CEO		$	6,187			$	-
Others					-				2,995
Total				$	6,187			$	2,995

 

d.	Accounts payable - related parties:

 

Name of related parties		Relationship		December 31,2010 As restated				December 31,2009
				(in thousands)				(in thousands)
Tianjin Hengying Trading Co., Ltd		Common control under CEO		$	17,264			$	17,256
Tianjin Dazhan Industry Co., Ltd		Common control under CEO			2,764				6,047
Tianjin General Qiugang Pipe		Common control under CEO			-				4,800
Hancheng Haiyan Coking		Investee of Long Steel Group			25,708				-
Henan Xinmi Kanghua		Noncontrolling shareholder of Longmen Joint Venture’s subsidiary			880				960
Jingma Jiaohua		Investee of Longmen Joint Venture’s subsidiary (unconsolidated)			1,579				1,360
Long Steel Group		Noncontrolling shareholder of Longmen Joint Venture			28,329				15,310
Beijing Daishang Trading Co., Ltd		Noncontrolling shareholder of Longmen Joint Venture’s subsidiary			1,101				1,315
Mao Ming Sheng Zhe		Common control under CEO			1,954				-
Others					115				1,103
Total				$	79,694			$	48,151

 

See report of independent registered public accounting firm.

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010

 

e.	Short-term loans - related parties:

 

Name of related parties		Relationship		December 31,2010 As restated				December 31,2009
				(in thousands)				(in thousands)
Shaanxi Steel		Majority shareholder of Long Steel Group		$	14,548			$	-
Tianjin Dazhan Industry Co., Ltd		Common control under CEO			-				3,946
Tianjin Hengying Trading Co., Ltd		Common control under CEO			-				3,404
Shaanxi Shenganda Trading Co., Ltd		Common control under Long Steel Group			-				4,401
Total				$	14,548			$	11,751

 

f.	Other payables - related parties:

 

Name of related parties		Relationship		December 31, 2010				December 31, 2009
				(in thousands)				(in thousands)
Tianjin Hengying Trading Co, Ltd		Common control under CEO		$	10,168			$	2,415
Beijing Wendlar Co., Ltd		Common control under CEO			-				704
Yangpu Capital Automobile		Common control under CEO			1,350				587
Tianjin General Qiugang Pipe		Common control under CEO			4,547				-
Wenchun Han		Director of General Steel (China)			2,124				2,054
Others					25				-
Total				$	18,214			$	5,760

 

g.	Customer deposits – related parties:

 

Name of related parties		Relationship		December 31,2010 As restated				December 31,2009 As restated
				(in thousands)				(in thousands)
Tianjin Dazhan Industry Co., Ltd		Common control under CEO		$	-			$	1,544
Hancheng Haiyan Coking		Investee of Long Steel Group			5,081				566
Long Steel Group		Noncontrolling shareholder of Longmen Joint Venture			48,161				-
Beijing Shenhua Xinyuan		Common control under CEO			1,299				-
Beijing Daishang Trading Co., Ltd		Noncontrolling shareholder of Longmen Joint Venture’s subsidiary			-				728
Others					381				203
Total				$	54,922			$	3,041

 

See report of independent registered public accounting firm.

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010

 

h.

Long-term loans – related parties:

Name of related parties		Relationship		December 31,2010 As restated				December 31,2009
				(in thousands)				(in thousands)
Shaanxi Steel		Majority shareholder of Long Steel Group		$	91,020			$	-
Total				$	91,020			$	-

 

The Company also guaranteed bank loans of related parties amounting to $3.0 million as of December 31, 2010.

 

i. Deferred lease income

		December 31, 2010				December 31, 2009
		As restated				As restated
		(in thousands)				(in thousands)
Beginning balance		$	16,487			$	-
Add: Compensation for dismantled assets			568				9,735
Add: Compensation for loss of efficiency			20,676				6,871
Add: Compensation for trial production cost			13,584				-
Add: Deferred depreciation cost during trial production			6,656				-
Less: Lease income realized			(943	)			(119	)
Exchange rate effect			563				-
Ending balance		$	57,591			$	16,487

 

For the year ended December 31, 2010 and 2009, the Company realized deferred lease income from Shaanxi Steel, a related party, amounting $942,619 and $118,900, respectively.

 

Note 17 - Equity

 

2009 Equity Transactions

 

The Company granted senior management and directors 596,650 shares of common as compensation in 2009. The shares were valued at the quoted market price on the date granted. The Company recorded compensation expense of $1.9 million for the year ended December 31, 2009.

 

On January 15, 2009, the Company granted convertible notes holders 152,240 shares of common stock at $3.66 per share, as share payments for interest. The shares were computed as 90% of the arithmetic average of the Weighted Average Price of the Common Shares on each for the ten consecutive Trading Days immediately preceding the applicable Interest Date.

 

On July 15, 2009 and August 21, 2009 the Company granted convertible notes holders 44,065 shares of common stock at price of $4.2511 as cash payments made for interest.

 

On May 8, 2009, the Company issued 300,000 shares of common stock to Maoming Hengda’s debtor, Guangzhou Hengda at $6.00 per share, as cash payments made for settling other short term loan.

 

From May 7 to December 31, 2009, $30.0 million of notes was converted to 7,045,274 shares of common stock at a conversion price of $4.2511. According to the convertible note agreement, the Company incurred the make whole interest expense of $8.8 million and 1,795,977 shares of common stock were issued. See Note 11 for details.

 

See report of independent registered public accounting firm.

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010

 

On December 24, 2009, the Company entered into a Securities Purchase Agreement with certain institutional investors issuing 5,555,556 shares and 2,777,778 warrants (the “2009 Warrants”). The 2009 Warrants can be converted to common stock from June 24, 2010 to June 23, 2013 at $5.00 per share. The 2009 Warrants have a strike price equal to $5.00 and a term of two and a half years. Because the 2009 Warrants are denominated in U.S. dollars and the Company’s functional currency is the Renminbi, and the 2009 Warrants permit the holder to request cash buy-back in the event of a Fundamental Transaction, this results in a significant change in the Company structure and/or equity. The 2009 Warrants do not meet the requirements of the accounting standards to be indexed only to the Company’s stock.  Accordingly, they are accounted for at fair value as derivative liabilities each period.

 

The initial value of the 2009 Warrants was determined using the Cox-Ross-Rubinstein binomial model using the following assumptions:

 

	·	Expected volatility of 125%
	·	Expected dividend yield of 0%
	·	Risk-free interest rate of 1.28%
	·	Expected lives of two and a half years
	·	Market price at issuance date of $4.57
	·	Strike price of $5.00

 

The 2009 Warrants were valued at $8.5 million when they were issued on December 24, 2009. At December 31, 2010 and 2009, the estimated fair value of the warrants was $2.0 million and $8.1 million, resulting in a gain of $6.1 million and $0.4 million, respectively. The gain was recorded in the Company’s consolidated statement of operations and other comprehensive income (loss).

 

The volatility of the Company’s common stock was based on the Company’s historical stock prices, the risk free interest rate was based on Treasury Constant Maturity Rates published by the U.S. Federal Reserve for periods applicable to the life of the warrants, the dividend yield was based on the Company’s current and expected dividend policy and the expected term is equal to the contractual life of the warrants.  The value of the warrants was based on the Company’s common stock price on the date the warrants were issued.

 

2010 Equity Transactions

 

The Company granted senior management and directors 733,300 shares of common stock as compensation in 2010. The shares were valued at the quoted market price on the date granted. The Company recorded compensation expense of $2.2 million for the year ended December 31, 2010.

 

On June 7, 2010, the Company issued 928,163 shares of common stock to one of Maoming Hengda’s creditor to settle the other short-term loans.

 

On August 4, 2010, $3.3 million of the Notes was converted to 1,208,791 shares of common stock. According to the Notes agreement, the Company incurred the make whole interest expense of $0.7 million and accrued interest expense of $0.2 million, 350,885 shares of common stock were issued. See Note 11 for details.

 

On December 21, 2010, the Company’s Board of Directors has authorized to repurchase up to an aggregate of one million (1,000,000) shares of its 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, the Company has repurchased 316,760 shares with $ 0.9 million cost.

 

The Company has the following warrants outstanding:

 

Outstanding as of January 1, 2009			1,154,958
Granted			5,523,691
Forfeited			-
Exercised			-
Outstanding As of December 31, 2009			6,678,649
Granted			-
Forfeited			-
Exercised			-
Outstanding As of December 31, 2010			6,678,649

 

See report of independent registered public accounting firm.

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010

 

Outstanding Warrants												Exercisable Warrants
Exercise Price				Number				Average Remaining Contractual Life				Average Exercise Price				Number				Average Remaining Contractual Life
$	5.00				6,678,649				2.0			$	5.00				6,678,649				2.0

 

Note 18 – Retirement plan

 

Regulations in the PRC require the Company to contribute to a defined contribution retirement plan for all employees. All Joint Venture employees are entitled to a retirement pension amount calculated based upon their salary at their date of retirement and their length of service in accordance with a government managed pension plan. The PRC government is responsible for the pension liability to the retired staff. The Company is required to contribute 20% of the employees’ monthly base salary or 12% of the minimum social average salary of the city where the factory located, which is higher. Employees are required to contribute 8% of their base salary to the plan. The minimum social average salary is announced by local Social Security bureau and renewed annually. Total pension expense incurred by the Company amounted to $5.1million, $3.8 million and $3.0 million for the years ended December 31, 2010, 2009 and 2008, respectively.

 

Note 19 – Statutory reserves

 

The laws and regulations of the People’s Republic of China require that before an enterprise distributes profits to its partners, it must first satisfy all tax liabilities, provide for losses in previous years, and make allocations, in proportions determined at the discretion of the board of directors, to the statutory reserves. The statutory reserves include the surplus reserve funds and the enterprise fund and these statutory reserves represent restricted retained earnings.

 

Surplus reserve fund

 

The Company is required to transfer 10% of its net income, as determined in accordance with the PRC accounting rules and regulations, to a statutory surplus reserve fund until such reserve balance reaches 50% of the Company’s registered capital.

 

The transfer to this reserve must be made before distribution of any dividend to shareholders. The surplus reserve fund is non-distributable other than during liquidation and can be used to fund previous years’ losses, if any, and may be utilized for business expansion or converted into share capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing the par value of the shares currently held by them, provided that the remaining reserve balance after such issue is not less than 25% of the registered capital.

 

Note 20 – Commitment and contingencies

 

Commitments

 

Baotou Steel Pipe Joint Venture has a 5 years rental agreement with Bao Gang Jianan for buildings. The agreement began on June 2007 for $0.3 million (or RMB1.8 million) per year.

 

As of December 31, 2010, total future minimum lease payments for the unpaid portion under an operating lease were as follows:

 

Year ended,		Amount
		(in thousands)
December 31, 2011		$	273
December 31, 2012			137
Total		$	410

 

See report of independent registered public accounting firm.

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010

 

Total rental expense amounted to $0.4 million, $0.3 million and $0.3 million for the years ended December 31, 2010, 2009 and 2008, respectively,

 

Longmen Joint Venture has $13.9 million contractual obligations in its construction project as of December 31 2010.

 

The Company entered an agreement to build a TRT Electricity Generator (“TRT”) inside Longmen Joint Venture’s production plant. The Company makes payments for the cost via scheduled payments after the TRT was put into use in April 2009. The future payment schedule associated with the arrangement is as follow:

 

Years ended,		Amount
		(in thousands)
December 31, 2011		$	1,428
Thereafter			-
Total		$	1,428

 

Contingencies

 

As of December 31, 2010, Longmen Joint Venture guaranteed bank loans for related parties and third parties bank loans, including line of credit and others, amounting to $60.5 million.

 

Nature of guarantee		Guarantee amount			Guaranty period
		(In thousands)
Line of credit		$	11,608		Various from March 2011 to January 2012
Bank loans			7,585		Various from March 2011 to May 2011
Notes payable			18,238		Various from June 2011 to September 2012
Confirming storage			19,089		Various from April 2011 to December 2011
Financing by the rights of goods delivery in future			3,946		Various from March 2011 to July 2011
Total		$	60,466

 

The Company has evaluated the debt guarantees and concluded that the likelihood of having to make payments under the guarantees is remote.

 

Note 21 – Segments (as restated)

 

The Company sells steel which is used by customers in various industries.  The Company’s chief operating decision-makers (i.e. chief executive officer and his direct reports) review financial information presented on a consolidated basis, accompanied by disaggregated information about revenues by product lines for purposes of allocating resources and evaluating financial performance. There are no segment managers who are held accountable for operations, operating results and plans for levels or components below the consolidated unit level.  Based on qualitative and quantitative criteria established by the accounting standards, the Company considers itself to be operating within one reportable segment.

 

 The Company does not have long-lived assets located in foreign countries. In accordance with the enterprise-wide disclosure requirements of the accounting standard, the Company's net sales from external customers by main product lines are as follows:

 

		For the years ended
Products (in thousands)		2010 As restated				2009 As restated				2008
Re-bar		$	1,854,991			$	1,540,367			$	1,182,433
Hot-Rolled Sheets			8,385				58,833				132,458
High Speed Wire			1,100				68,140				23,280
Spiral-Welded Steel Pipe			12,315				12,430				13,032
Iron Powder			5,349				-				-
Total sales revenue		$	1,882,140			$	1,679,770			$	1,351,203

 

See report of independent registered public accounting firm.

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010

 

Note 22 – Subsequent events

 

On January 31, 2011, General Steel Holdings, Inc. (the “Company”) issued a press release announcing that it will test run two newly constructed 1,280 cubic meter blast furnaces, two 120 metric ton converters and one 400 square meter sintering machine at its Shaanxi Longmen Iron and Steel Co., Ltd. facilities, a joint venture with Shaanxi Longmen Iron & Steel Group Co., Ltd.  The Company will have the opportunity to sell and collect revenue from the crude steel produced during the test run of the new equipment.

 

The construction of the new equipment was funded by Shaanxi Steel. The Company is currently in negotiations with Shaanxi Steel to enter into an agreement to operate the new equipment. During this test run period, the Company will be able to use the equipment to produce and deliver products to its customers. It is anticipated that this test run period will continue until a lease agreement between Shaanxi Steel and the Company is finalized.

 

See report of independent registered public accounting firm.

 

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

 

None.

 

ITEM 9A. CONTROLS AND PROCEDURES.

 

a)

Evaluation Disclosure Controls and Procedures

 

Our Company, with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the ‘Exchange Act”), as of December 31, 2010. Our Company’s disclosure controls and procedures are designed (i) to ensure that information required to be disclosed by us in the reports that we file or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on their original evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our Company’s disclosure controls and procedures were effective as of December 31, 2010.

 

In connection with the preparation of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, the Company revisited the appropriate treatment for certain reimbursements received related to the Company’s collaboration with Shaanxi Steel on the construction of equipment by Shaanxi Steel during the period from June 2009 to March 2011. Based on the guidance received from the OCA, which provided materially different accounting treatment for the reimbursements, management determined that restatement was necessary and a material weakness existed with respect to the reporting of the complex, non-routine transactions.

 

Solely as a result of the material weakness indentified with respect to our reporting of complex non-routine transactions, our Chief Executive Officer and our Chief Financial Officer have re-evaluated our disclosure controls and procedures, and on June 8, 2012, concluded that our disclosure controls and procedures were not effective as of December 31, 2010.

 

Despite the existence of the material weakness in reporting, we believe that the consolidated financials included in this Amendment No. 1 present, in all material aspects, our financial position, results of operations, comprehensive income and cash flows for the periods presented in conformity with U.S. GAAP.

 

b)

Management’s Annual Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with US GAAP. Our internal control over financial reporting includes those policies and procedures that:

 

· pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;

 

· provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles of the United States, and that our receipts and expenditures are being made only in accordance with authorizations of our management and members of our board of directors; and

 

 

· provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements.

 

Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process, and it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

 

In connection with this Amendment No.1, management conducted the above-referenced assessment of the effectiveness of our internal control over financial reporting as of December 31, 2010 using the framework set forth in the report entitled, “Internal Control—Integrated Framework,” issued by the Committee of Sponsoring Organizations of the Treadway Commission, or the COSO Report. Based on such evaluation, management revised its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010, originally included in Management’s Report on Internal Control Over Financial Reporting in the Company’s Original 10-K. In the Original 10-K, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2010. Subsequent to the Original 10-K, we have restated our 2010 and 2009 financial statements under specific guidance of the OCA. Management has concluded that the restatements resulted from control deficiencies that represent material weaknesses in internal control over financial reporting. As a result, management has revised its assessment of the effectiveness of our internal control over financial reporting due to a material weakness in our reporting of complex, non-routine transactions.

 

Based on this assessment and the determination that a material weakness exists with our reporting of non-routine, complex transactions, our management concluded that, as of December 31, 2010, our internal control over financial reporting was not effective based on those criteria due to the material weakness described above.

 

The Company’s independent registered public accounting firm, Frazer Frost, LLP, has audited and issued an audit report on management’s revised assessment of the Company’s internal control over financial reporting and their report is included herein.

 

Remediation

 

Our management has dedicated significant resources to correcting the accounting items discussed with the OCA and to ensure that we take proper steps to improve our internal control over financial reporting in the areas of accounting for complex and non-routine transactions.

 

We have taken a number of remediation actions that we believe will improve the effectiveness of our internal control over financial reporting including the following:

 

·

We have engaged an outside professional consulting firm to supplement us with our internal control over financial reporting;

·

We have engaged accounting experts to identify complicated accounting transactions and apply applicable accounting policies thereto;

 

 

·

We have established an enhanced staff training program to update our employees on current accounting pronouncements.

 

Subsequent to June 8, 2012, management believes the foregoing efforts will effectively remediate the material weakness described above.

 

c)

Changes in Internal Control over Financial Reporting

 

Except as otherwise noted above, there has not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and
Stockholders of General Steel Holdings, Inc.

 

We have audited General Steel Holdings, Inc.(“the Company”)’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). General Steel Holdings, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management’s Report on Internal Control Over Financial Reporting (as revised)”. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our report dated March 16, 2011, we expressed an unqualified opinion on the effectiveness of internal control over financial reporting as of December 31, 2010. As described in the following paragraph, the Company subsequently indentified material misstatements in its financial statements, which caused the annual financial statements to be restated. Accordingly, our opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010, expressed herein is different from that expressed in our previous report.

 

A material weakness is a control deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management’s assessment.

 

In connection with the preparation of its quarterly report on Form 10Q for the quarter ended June 30, 2011 the Company revisited the appropriate treatment for certain reimbursements received related to the Company’s collaboration with Shaanxi Iron and Steel Group, Co. Ltd (“Shaanxi Steel”) on the construction of equipment by Shaanxi Steel during the period from June 2009 to March 2011. Upon guidance received from the OCA, which provided materially different accounting treatment for the reimbursements. Thus the management determined that restatement was necessary and a material weakness exited with respect to the reporting of the complex, non-routine transactions.

 

This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2010 consolidated financial statements, and this report does not affect our report dated March 16, 2011, except for the effects on the consolidated financial statements of the restatement described in Note 2, as to which the date is August 29, 2012, on those financial statements.

 

In our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets as of December 31, 2010 and 2009, and the related consolidated statements of operations and other comprehensive income, changes in equity, and cash flows for each of the years in the three-year period ended December 31, 2010 of General Steel Holdings, Inc. and Subsidiaries, and our report dated March 16, 2011, except for the effects on the consolidated financial statements of the restatement described in Note 2, as to which the date is August 29, 2012, expressed an unqualified opinion.

 

/s/ Frazer Frost, LLP

 

 

Brea, California

March 16, 2011, except for the effects of the material weakness described in the ninth paragraph above, as to which the date is August 29, 2012

 

 

ITEM 9B. OTHER INFORMATION.

 

None.

 

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

 

In addition to the information set forth under the caption “Executive Officers of the Registrant” in Part I, Item I of this Amendment No. 1 and as set forth herein, the information that is required by this Item is incorporated by reference to the Company’s definitive Proxy Statement filed pursuant to Regulation 14A, in connection with the Company’s 2011 Annual Meeting of Stockholders.

 

Code of Ethics

 

We have adopted a Code of Ethics and Business Conduct and Corporate Governance Guidelines which provide information to guide employees so that their business conduct is consistent with our ethical standards and improve the understanding of our ethical standards among customers, suppliers and others outside the Company. Our Code of Ethics and Business Conduct and Corporate Governance Guidelines are available on our website at www.gshi-steel.com. This website address is not intended to function as a hyperlink, and the information contained in our website is not intended to be a part of this Amendment No. 1.

 

ITEM 11. EXECUTIVE COMPENSATION.

 

The information required by this Item is incorporated by reference to the Company’s definitive Proxy Statement filed pursuant to Regulation 14A, in connection with the Company’s 2011 Annual Meeting of Stockholders.

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

 

The information required by this Item is incorporated by reference to the Company’s definitive Proxy Statement filed pursuant to Regulation 14A, in connection with the Company’s 2011 Annual Meeting of Stockholders.

 

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

 

The information required by this Item is incorporated by reference to the Company’s definitive Proxy Statement filed pursuant to Regulation 14A, in connection with the Company’s 2011 Annual Meeting of Stockholders.

 

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.

 

On December 31, 2010, the Audit Committee of our Company’s Board of Directors approved the engagement of PricewaterhouseCoopers Zhong Tian CPAs Limited Company (“PwC”) as our Company’s new independent registered public accounting firm for the fiscal year ending December 31, 2011. During the two most recent fiscal years and the interim periods preceding the engagement, our Company has not consulted PwC regarding either (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on our Company’s financial statements, and either a written report was provided to our Company or oral advice was provided that PwC concluded was an important factor considered by our Company in reaching a decision as to the accounting, auditing or financial reporting issue; or (ii) any matter that was the subject of a disagreement or reportable event as defined in Regulation S-K, Item 304(a)(1)(iv) and Item 304(a)(1)(v).

 

We were notified that, effective January 1, 2010, certain partners of its previous independent accounting firm, Moore Stephens Wurth Frazer and Torbet, LLP (“MSWFT”), and certain partners of Frost, PLLC (“Frost”) formed Frazer Frost, LLP (“Frazer Frost”), a new partnership. Pursuant to the terms of a combination agreement by and among MSWFT, Frazer Frost and Frost (the “Combination Agreement”), each of MSWFT and Frost contributed all of their assets and certain of their liabilities to Frazer Frost, resulting in Frazer Frost assuming MSWFT’s engagement letter with us. On January 7, 2010, the Audit Committee of our Board of Directors approved the engagement of Frazer Frost as MSWFT’s successor to continue as our independent accounting firm.

 

Other than as set forth herein, the information required by this Item is incorporated by reference to the Company’s definitive Proxy Statement filed pursuant to Regulation 14A, in connection with the Company’s 2011 Annual Meeting of Stockholders.

 

PART IV

 

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

 

(a)

(1) and (2) – LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

(b)

  

The following financial statements are included herein under Part II, Item 8, Financial Statements and Supplementary Data:

 

Ÿ

Report of Independent Registered Public Accounting Firm

Ÿ

Consolidated Balance Sheets—December 31, 2010 and 2009

	Ÿ	Consolidated Statements of Operations and Other Comprehensive (Loss) Income for the years ended December 31, 2010, 2009, and 2008

Ÿ

Consolidated Statements of Changes in Equity for the years ended December 31, 2010, 2009, and 2008

Ÿ

Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009, and 2008

Ÿ

Notes to Consolidated Financial Statements

 

All other schedules for which provision is made in the applicable accounting regulation of the SEC are not required under the related instructions, are not applicable, or information required is included in the financial statements or notes thereto and, therefore, have been omitted.

 

(3) – LIST OF EXHIBITS

 

Exhibit Number		Description
3.1		Articles of Incorporation of General Steel Holdings, Inc. (included as Exhibit 3.1 to the Form SB-2 filed with the Commission on June 6, 2003 and incorporated herein by reference).
3.2		Amendment to the Articles of Incorporation dated February 22, 2005 (included as Exhibit 3.2 to the Form 10-K filed March 16, 2010 and incorporated herein by reference).
3.3		Amendment to the Articles of Incorporation dated November 14, 2007 (included as Exhibit 3.3 to the Form 10-K filed March 16, 2010 and incorporated herein by reference).
3.4		Certificate of Designation of Series A Preferred Stock of the registrant (included as Exhibit 10.6 to the Form 10-K filed March 31, 2008 and incorporated herein by reference).
3.5		Bylaws of General Steel Holdings, Inc. (included as Exhibit 3.5 to the Form 10-K filed March 16, 2010 and incorporated herein by reference).
4.1		Form of Common Stock Purchase Warrant (included as Exhibit 4.1 to the Form 8-K filed on December 24, 2009 and incorporated herein by reference).
10.1		Form of Warrant Reset Agreement by and between General Steel Holdings, Inc. and Hudson Bay Fund, LP (included as Exhibit 10.3 to the Form 8-K filed on December 24, 2009 and incorporated herein by reference).
10.2		Form of Warrant Reset Agreement by and between General Steel Holdings, Inc. and the holders of the December 2007 Warrants (not including Hudson Bay Fund, LP) (included as Exhibit 10.4 to the Form 8-K filed on December 24, 2009 and incorporated herein by reference).
10.3		General Steel Holdings, Inc. 2008 Equity Incentive Plan (included as Appendix A to the Schedule 14A filed June 20, 2008 and incorporated herein by reference).
10.4		Service Agreement, dated February 25, 2009, by and between General Steel Holdings, Inc. and James Hu thereto (included as Exhibit 10.1 to the Form 8-K filed with the Commission on February 27, 2009 and incorporated herein by reference).

 

 

10.5		Form of Securities Purchase Agreement, dated as of December 24, 2009, by and between General Steel Holdings, Inc. and each purchaser signatory thereto (included as Exhibit 10.1 to Form 8-K filed with the Commission on December 24, 2009 and incorporated herein by reference).
10.6		Form of Voting Agreement (included as Exhibit 10.2 to the Form 8-K filed on December 24, 2009 and incorporated herein by reference).
10.7		Amendment to the Securities Purchase Agreement dated October 5, 2009 to the Securities Purchase Agreement, December 13, 2007 by and among General Steel Holdings, Inc. and the Buyers set forth therein  (included as Exhibit 10.12 to the Annual Report on Form 10-K filed with the Commission on March 16, 2010 and incorporated herein by reference).
10.8		Lease Agreement, dated March 31, 2010, by and between General Steel (China) Co., Ltd. and Tianjin Daqiuzhuang Steel Plates Co., Ltd. (included as Exhibit 10.1 to the Form 8-K filed with the Commission on April 6, 2010 and incorporated herein by reference).
10.9		Joint Venture Framework Agreement, dated May 13, 2010, by and between General Steel Holdings, Inc. and Shanxi Meijin EnergeryEmerge Group Co., Ltd. (included as Exhibit 10.1 to the Form 8-K filed with the Commission on May 18, 2010 and incorporated herein by reference).
10.10		Debt Repayment Agreement, dated June 7, 2010, by and between General Steel Holdings, Inc., Maoming Hengda Group Ltd., Guangzhou Hengda Industrial Group Ltd., and Ms. Ding Yumei (included as Exhibit 10.1 to the Form 8-K filed with the Commission on June 9, 2010 and incorporated herein by reference).
16.1		Letter of Frazer Frost, LLP to the Commission dated January 4, 2011 (included as Exhibit 16.1 to the Form 8-K filed with the Commission on January 5, 2011 and incorporated herein by reference).
21		Subsidiaries of the registrant (included as Exhibit 21 to the Annual Report on Form 10-K filed with the Commission on March 16, 2011 and incorporated herein by reference).
23		Consent of Frazer Frost, LLP (filed herewith).
31.1		Certification of Chief Executive Officer (filed herewith).
31.2		Certification of Chief Financial Officer (filed herewith).
32.1		Certification of Chief Executive Officer and Chief Financial Officer (filed herewith).

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	GENERAL STEEL HOLDINGS, INC
	By:	/s/ Zuosheng Yu
		Name: Zuosheng Yu
		Title: Chairman and Chief Executive Officer
		(Principal Executive Officer)
		Date: August 29, 2012

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

SIGNATURE		TITLE		DATE
/s/ Zuosheng Yu		Chairman and Chief Executive Officer and Director		August 29, 2012
YU, Zuosheng		(Principal Executive Officer)
/s/ John Chen		Chief Financial Officer and Director		August 29, 2012
CHEN, John		(Principal Accounting and Financial Officer)
/s/ Xiao Zeng Xu		Director		August 29, 2012
XU, Xiao Zeng
/s/ Si Yong Tao		Independent Director		August 29, 2012
TAO, Si Yong
/s/ Angela He		Independent Director		August 29, 2012
HE, Angela
/s/ Zhong Kui Cao		Independent Director		August 29, 2012
CAO, Zhong Kui
/s/ Chris Wang		Independent Director		August 29, 2012
WANG, Chris
/s/ James Hu		Independent Director		August 29, 2012
HU, James
/s/ Quinghai Du		Independent Director		August 29, 2012
DU, Quinghai