UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549




FORM
10-Q




Quarterly
report under Section 13 or 15(d) of the Securities Exchange Act of
1934





For
the quarterly period ended September 30, 2009





Commission
File Number 001-33717




General
Steel Holdings, Inc.


(Exact
name of registrant as specified in its charter)




Nevada
                (State
      or other Jurisdiction of
                Incorporation
      or Organization)
              
              412079252
                (I.R.S.
      Employer Identification No.)





Room 2315, Kuntai International
Mansion Building,


Yi
No. 12, Chaoyangmenwai Ave.


Chaoyang
District, Beijing, China 100020


(Address
of Principal Executive Office, Including Zip Code)





+86(10)58797346


(Registrant's
Telephone Number, Including Area Code)




Indicate by check mark whether the
registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past
90 days.    Yes x No  ̈




Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate website, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T during the preceding 12 months (or for
shorter period that the registrant was required to submit and post such files).
 Yes  o No  o




Indicate by check mark whether the
Registrant is a large accelerated filer, an accelerated filer, or a
non-accelerated filer. See definition of "accelerated filer and large
accelerated filer" in Rule 12b-2 of the Exchange Act (Check
one).




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





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




As of November 6, 2009, 45,959,439 shares of
common stock, par value $0.001 per share, were
issued and outstanding.









Table
of Contents


PagePart
      I: FINANCIAL INFORMATION:Item
      1.
                                                Financial
      Statements
                                                3Consolidated
      Balance Sheets as of September 30, 2009 (Unaudited) and December 31,
      2008
                                                3Consolidated
      Statements of Operation and Other Comprehensive Income for the Three and
      Nine Months Ended September 30, 2009 and 2008 (Unaudited)
                                                4Consolidated
      Statements of  Changes In Equity (Unaudited)
                                                5Consolidated
      Statements of Cash Flows for the Nine Months Ended September 30, 2009 and
      2008 (Unaudited)
                                                6Notes  to
      Consolidated Financial Statements (Unaudited)
                                                7Item
      2.
                                                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                                39Item
      3.
                                                Quantitative
      and Qualitative Disclosures About Market Risk
                                                65Item
      4.
                                                Controls
      and Procedures
                                                66Part
      II. OTHER INFORMATIONItem
      1.
                                                Legal
      Proceedings
                                                67Item
      1A.
                                                Risk
      Factors
                                                67Item
      2.
                                                Unregistered
      Sales of Equity Securities and Use of Proceeds
                                                77Item
      6.
                                                Exhibits
                                                77Signatures
                                                
                                                78


2


PART
I – FINANCIAL INFORMATION





ITEM
1. FINANCIAL STATEMENTS


GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED
BALANCE SHEETS
 AS OF
SEMPTEMBER 30, 2009 AND DECEMBER 31, 2008
 (In
thousands, except per share data)
  September
      30,
                        
                        
                        December
      31,2009
                        
                        
                        2008(Unaudited)ASSETSCURRENT
      ASSETS:Cash
                        
                        $
                        54,289
                        
                        
                        $
                        14,895Restricted
      cash
                        
                        
                        197,584
                        
                        
                        
                        130,700Notes
      receivable
                        
                        
                        27,373
                        
                        
                        
                        38,207Accounts
      receivable, net of allowance for doubtful accounts of $612 and $401 as of
      September 30, 2009 and December 31, 2008, respectively
                        
                        
                        12,151
                        
                        
                        
                        8,329Accounts
      receivable - related party
                        
                        
                        2,784
                        
                        
                        
                        -Other
      receivables, net of allowance for doubtful accounts of $566 and $564 as of
      September 30, 2009 and December 31, 2008, respectively
                        
                        
                        6,855
                        
                        
                        
                        5,100Other
      receivables - related parties
                        
                        
                        420
                        
                        
                        
                        523Dividend
      receivable
                        
                        
                        4,957
                        
                        
                        
                        631Inventories
                        
                        
                        221,502
                        
                        
                        
                        59,549Advances
      on inventory purchase
                        
                        
                        39,230
                        
                        
                        
                        47,154Advances
      on inventory purchase - related parties
                        
                        
                        17,853
                        
                        
                        
                        2,375Prepaid
      expense - current
                        
                        
                        926
                        
                        
                        
                        494Deferred
      tax assets
                        
                        
                        2,191
                        
                        
                        
                        7,487Total
      current assets
                        
                        
                        588,115
                        
                        
                        
                        315,444PLANT
      AND EQUIPMENT, net
                        
                        
                        558,407
                        
                        
                        
                        491,705OTHER
      ASSETS:Advances
      on equipment purchase
                        
                        
                        7,069
                        
                        
                        
                        8,965Investment
      in unconsolidated subsidiaries
                        
                        
                        17,640
                        
                        
                        
                        13,959Prepaid
      expense - non current
                        
                        
                        500
                        
                        
                        
                        1,195Prepaid
      expense related party - non current
                        
                        
                        172
                        
                        
                        
                        211Long
      term other receivable
                        
                        
                        2,674
                        
                        
                        
                        4,873Intangible
      assets, net of accumulated amortization
                        
                        
                        24,020
                        
                        
                        
                        24,556Note
      issuance cost
                        
                        
                        964
                        
                        
                        
                        4,218Plant
      and equipment to be disposed
                        
                        
                        6,455
                        
                        
                        
                        587Total
      other assets
                        
                        
                        59,494
                        
                        
                        
                        58,564Total
      assets
                        
                        $
                        1,206,016
                        
                        
                        $
                        865,713LIABILITIES
      AND EQUITYCURRENT
      LIABILITIES:Short
      term notes payable
                        
                        $
                        280,134
                        
                        
                        $
                        206,040Accounts
      payable
                        
                        
                        175,309
                        
                        
                        
                        149,239Accounts
      payable - related parties
                        
                        
                        19,324
                        
                        
                        
                        15,327Short
      term loans - bank
                        
                        
                        151,050
                        
                        
                        
                        67,840Short
      term loans - others
                        
                        
                        110,171
                        
                        
                        
                        87,834Short
      term loans - related parties
                        
                        
                        8,362
                        
                        
                        
                        7,350Other
      payables
                        
                        
                        8,655
                        
                        
                        
                        3,183Other
      payable - related parties
                        
                        
                        2,074
                        
                        
                        
                        677Accrued
      liabilities
                        
                        
                        14,716
                        
                        
                        
                        7,779Customer
      deposit
                        
                        
                        199,909
                        
                        
                        
                        141,102Customer
      deposit - related parties
                        
                        
                        -
                        
                        
                        
                        7,216Deposit
      due to sales representatives
                        
                        
                        39,286
                        
                        
                        
                        8,149Taxes
      payable
                        
                        
                        13,317
                        
                        
                        
                        13,917Distribution
      payable to former shareholders
                        
                        
                        15,934
                        
                        
                        
                        18,765Deferred
      tax liability
                        
                        
                        103
                        
                        
                        
                        -Total
      current liabilities
                        
                        
                        1,038,344
                        
                        
                        
                        734,418CONVERTIBLE
      NOTES PAYABLE, net of debt discount of $2,388 and $26,095 as of September
      30, 2009 and December 31, 2008, respectively
                        
                        
                        912
                        
                        
                        
                        7,155DERIVATIVE
      LIABILITIES
                        
                        
                        4,933
                        
                        
                        
                        9,903Total
      liabilities
                        
                        
                        1,044,189
                        
                        
                        
                        751,476COMMITMENT
      AND CONTINGENCIESEQUITY:Preferred
      stock, $0.001 par value, 50,000,000 shares authorized, 3,092,899 shares
      issued and outstanding as of September 30, 2009 and December 31, 2008,
      respectively
                        
                        
                        3
                        
                        
                        
                        3Common
      Stock, $0.001 par value, 200,000,000 shares authorized, 45,789,439 and
      36,128,833 shares  issued and outstanding as of September 30,
      2009 andDecember
      31, 2008, respectively
                        
                        
                        46
                        
                        
                        
                        36Paid-in-capital
                        
                        
                        79,923
                        
                        
                        
                        37,128Statutory
      reserves
                        
                        
                        6,827
                        
                        
                        
                        4,902Retained
      (deficits) earnings
                        
                        
                        (5,991
                        )
                        
                        
                        10,093Contribution
      receivable
                        
                        
                        -
                        
                        
                        
                        (960
                        )Accumulated
      other comprehensive income
                        
                        
                        8,531
                        
                        
                        
                        8,705Total
      shareholders' equity
                        
                        
                        89,339
                        
                        
                        
                        59,907NONCONTROLLING
      INTERESTS
                        
                        
                        72,488
                        
                        
                        
                        54,330Total
      equity
                        
                        
                        161,827
                        
                        
                        
                        114,237Total
      liabilities and equity
                        
                        $
                        1,206,016
                        
                        
                        $
                        865,713
  The
accompanying notes are an integral part of these consolidated financial
statements.
  3
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF OPERATION AND OTHER COMPREHENSIVE INCOME
 (UNAUDITED)
 (In
thousands, except per share data)
  Three
      months ended September 30,
                            
                            
                            Nine
      months ended September 30,2009
                            
                            
                            2008
                            
                            
                            2009
                            
                            
                            2008REVENUES
                            
                            $
                            361,652
                            
                            
                            $
                            325,911
                            
                            
                            $
                            875,374
                            
                            
                            $
                            781,918REVENUES
      - RELATED PARTIES
                            
                            
                            123,100
                            
                            
                            
                            85,610
                            
                            
                            
                            341,119
                            
                            
                            
                            308,198TOTAL
      REVENUES
                            
                            
                            484,752
                            
                            
                            
                            411,521
                            
                            
                            
                            1,216,493
                            
                            
                            
                            1,090,116COST
      OF SALES
                            
                            
                            340,483
                            
                            
                            
                            335,945
                            
                            
                            
                            822,392
                            
                            
                            
                            762,395COST
      OF SALES - RELATED PARTIES
                            
                            
                            104,534
                            
                            
                            
                            81,923
                            
                            
                            
                            318,946
                            
                            
                            
                            298,218TOTAL
      COST OF SALES
                            
                            
                            445,017
                            
                            
                            
                            417,868
                            
                            
                            
                            1,141,338
                            
                            
                            
                            1,060,613GROSS
      PROFIT
                            
                            
                            39,735
                            
                            
                            
                            (6,348
                            )
                            
                            
                            75,155
                            
                            
                            
                            29,503SELLING,
      GENERAL AND  ADMINISTRATIVE EXPENSES
                            
                            
                            10,487
                            
                            
                            
                            12,328
                            
                            
                            
                            29,219
                            
                            
                            
                            28,364INCOME(LOSS)
      FROM OPERATIONS
                            
                            
                            29,248
                            
                            
                            
                            (18,676
                            )
                            
                            
                            45,936
                            
                            
                            
                            1,139OTHER
      INCOME(EXPENSE), NETInterest
      income
                            
                            
                            826
                            
                            
                            
                            646
                            
                            
                            
                            2,468
                            
                            
                            
                            2,104Finance/interest
      expense
                            
                            
                            (4,174
                            )
                            
                            
                            (6,872
                            )
                            
                            
                            (18,422
                            )
                            
                            
                            (19,149
                            )Change
      in fair value of derivative liabilities
                            
                            
                            (616
                            )
                            
                            
                            29,885
                            
                            
                            
                            (23,228
                            )
                            
                            
                            4,769Gain
      from debt extinguishment
                            
                            
                            -
                            
                            
                            
                            7,169
                            
                            
                            
                            2,932
                            
                            
                            
                            7,169Government
      grant
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            3,433
                            
                            
                            
                            -Income
      from equity investments
                            
                            
                            963
                            
                            
                            
                            -
                            
                            
                            
                            3,661
                            
                            
                            
                            -Other
      non-operating (expense) income, net
                            
                            
                            (2,985
                            )
                            
                            
                            899
                            
                            
                            
                            (2,332
                            )
                            
                            
                            1,919Total
      other (expense) income, net
                            
                            
                            (5,986
                            )
                            
                            
                            31,727
                            
                            
                            
                            (31,488
                            )
                            
                            
                            (3,188
                            )INCOME(LOSS)
      BEFORE PROVISION FOR INCOME TAXES AND NONCONTROLLING
    INTEREST
                            
                            
                            23,262
                            
                            
                            
                            13,051
                            
                            
                            
                            14,448
                            
                            
                            
                            (2,049
                            )PROVISION
      FOR INCOME TAXESCurrent
                            
                            
                            6,717
                            
                            
                            
                            (813
                            )
                            
                            
                            12,451
                            
                            
                            
                            1,147Deferred
                            
                            
                            (2,925
                            )
                            
                            
                            (1,271
                            )
                            
                            
                            (5,265
                            )
                            
                            
                            (1,694
                            )Total
      provision for income taxes
                            
                            
                            3,792
                            
                            
                            
                            (2,084
                            )
                            
                            
                            7,186
                            
                            
                            
                            (547
                            )NET
      INCOME(LOSS) BEFORE NONCONTROLLING INTEREST
                            
                            
                            19,470
                            
                            
                            
                            15,135
                            
                            
                            
                            7,262
                            
                            
                            
                            (1,502
                            )Less:
      Net income (Loss) attributable to noncontrolling interest
                            
                            
                            9,088
                            
                            
                            
                            (5,329
                            )
                            
                            
                            21,421
                            
                            
                            
                            116NET
      INCOME(LOSS) ATTRIBUTABLE TO CONTROLLING INTEREST
                            
                            
                            10,382
                            
                            
                            
                            20,464
                            
                            
                            
                            (14,159
                            )
                            
                            
                            (1,618
                            )OTHER
      COMPREHENSIVE INCOME (LOSS) :Foreign
      currency translation adjustments
                            
                            
                            (246
                            )
                            
                            
                            95
                            
                            
                            
                            (174
                            )
                            
                            
                            6,552Comprehensive
      income (loss) attributable to noncontrolling interest
                            
                            
                            1,440
                            
                            
                            
                            (293
                            )
                            
                            
                            334
                            
                            
                            
                            3,912COMPREHENSIVE
      INCOME(LOSS)
                            
                            $
                            11,576
                            
                            
                            $
                            20,265
                            
                            
                            $
                            (13,999
                            )
                            
                            $
                            8,846WEIGHTED
      AVERAGE NUMBER OF SHARESBasic
                            
                            
                            44,973,882
                            
                            
                            
                            35,687,891
                            
                            
                            
                            40,295,924
                            
                            
                            
                            35,157,579Diluted
                            
                            
                            45,750,152
                            
                            
                            
                            35,687,891
                            
                            
                            
                            40,295,924
                            
                            
                            
                            35,157,579EARNINGS
      (LOSS) PER SHAREBasic
                            
                            $
                            0.23
                            
                            
                            $
                            0.57
                            
                            
                            $
                            (0.35
                            )
                            
                            $
                            (0.05
                            )Diluted
                            
                            $
                            0.22
                            
                            
                            $
                            0.57
                            
                            
                            $
                            (0.35
                            )
                            
                            $
                            (0.05
                            )
  The
accompanying notes are an integral part of these consolidated financial
statements.
  4
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF CHANGES IN EQUITY
 (In
thousands, except per share data)
  Retained earnings
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      Accumulated
                                                        otherPreferred stock
                                                      
                                                      
                                                      Common stock
                                                      
                                                      
                                                      Paid-in
                                                      
                                                      
                                                      Statutory
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      Contribution
                                                      
                                                      
                                                      comprehensive
                                                      
                                                      
                                                      NoncontrollingShares
                                                      
                                                      
                                                      Par value
                                                      
                                                      
                                                      Shares
                                                      
                                                      
                                                      Par value
                                                      
                                                      
                                                      capital
                                                      
                                                      
                                                      reserves
                                                      
                                                      
                                                      Unrestricted
                                                      
                                                      
                                                      receivable
                                                      
                                                      
                                                      income
                                                      
                                                      
                                                      interest
                                                      
                                                      
                                                      TotalsBALANCE,
      January 1, 2008
                                                      
                                                      
                                                      3,092,899
                                                      
                                                      
                                                      $
                                                      3
                                                      
                                                      
                                                      
                                                      34,634,765
                                                      
                                                      
                                                      $
                                                      35
                                                      
                                                      
                                                      $
                                                      23,429
                                                      
                                                      
                                                      $
                                                      3,632
                                                      
                                                      
                                                      $
                                                      22,687
                                                      
                                                      
                                                      $
                                                      (960
                                                      )
                                                      
                                                      $
                                                      3,285
                                                      
                                                      
                                                      $
                                                      43,322
                                                      
                                                      
                                                      $
                                                      95,433-Net
      loss
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      (1,618
                                                      )
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      116
                                                      
                                                      
                                                      
                                                      (1,502
                                                      )Adjustment
      to statutory reserve
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      648
                                                      
                                                      
                                                      
                                                      (648
                                                      )
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      -Common
      stock issued for compensation, $7.16
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      76,600
                                                      
                                                      
                                                      
                                                      0.08
                                                      
                                                      
                                                      
                                                      548
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      548Common
      stock issued for compensation, $10.43
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      150,000
                                                      
                                                      
                                                      
                                                      0.15
                                                      
                                                      
                                                      
                                                      1,564
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      1,564Common
      stock issued for compensation, $6.66
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      87,400
                                                      
                                                      
                                                      
                                                      0.09
                                                      
                                                      
                                                      
                                                      582
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      582Common
      stock issued for compensation, $10.29
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      90,254
                                                      
                                                      
                                                      
                                                      0.09
                                                      
                                                      
                                                      
                                                      929
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      929Common
      stock transferred by CEO for compensation, $6.91
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      138
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      138Common
      stock issued at $5/share
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      140,000
                                                      
                                                      
                                                      
                                                      0.14
                                                      
                                                      
                                                      
                                                      700
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      700Notes
      converted to common stock
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      541,299
                                                      
                                                      
                                                      
                                                      0.54
                                                      
                                                      
                                                      
                                                      6,103
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      6,104Acquired
      noncontrolling interest
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      15,768
                                                      
                                                      
                                                      
                                                      15,768Make
      whole shares issued on notes conversion
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      195,965
                                                      
                                                      
                                                      
                                                      0.20
                                                      
                                                      
                                                      
                                                      2,310
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      2,310Foreign
      currency translation adjustments
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      6,552
                                                      
                                                      
                                                      
                                                      3,912
                                                      
                                                      
                                                      
                                                      10,464-BALANCE,September
      30, 2008, unaudited
                                                      
                                                      
                                                      3,092,899
                                                      
                                                      
                                                      $
                                                      3
                                                      
                                                      
                                                      
                                                      35,916,283
                                                      
                                                      
                                                      $
                                                      36
                                                      
                                                      
                                                      $
                                                      36,303
                                                      
                                                      
                                                      $
                                                      4,280
                                                      
                                                      
                                                      $
                                                      20,421
                                                      
                                                      
                                                      $
                                                      (960
                                                      )
                                                      
                                                      $
                                                      9,837
                                                      
                                                      
                                                      $
                                                      63,118
                                                      
                                                      
                                                      $
                                                      133,038Net
      loss
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      (9,706
                                                      )
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      (8,658
                                                      )
                                                      
                                                      
                                                      (18,364
                                                      )Acquired
      noncontrolling interest
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      128
                                                      
                                                      
                                                      
                                                      128Adjustment
      to statutory reserve
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      622
                                                      
                                                      
                                                      
                                                      (622
                                                      )
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      -Common
      stock issued for consulting fee, $3.6
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      100,000
                                                      
                                                      
                                                      
                                                      0.10
                                                      
                                                      
                                                      
                                                      360
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      360Common
      stock issued for public relations, $3.6
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      25,000
                                                      
                                                      
                                                      
                                                      0.03
                                                      
                                                      
                                                      
                                                      90
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      90Common
      stock issued for compensation, $3.5
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      87,550
                                                      
                                                      
                                                      
                                                      0.09
                                                      
                                                      
                                                      
                                                      306
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      306Common
      stock transferred by CEO for compensation, $6.91
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      69
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      69Foreign
      currency translation adjustments
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      (1,132
                                                      )
                                                      
                                                      
                                                      (258
                                                      )
                                                      
                                                      
                                                      (1,390
                                                      )BALANCE,
      December 31, 2008
                                                      
                                                      
                                                      3,092,899
                                                      
                                                      
                                                      $
                                                      3
                                                      
                                                      
                                                      
                                                      36,128,833
                                                      
                                                      
                                                      $
                                                      36
                                                      
                                                      
                                                      $
                                                      37,128
                                                      
                                                      
                                                      $
                                                      4,902
                                                      
                                                      
                                                      $
                                                      10,093
                                                      
                                                      
                                                      $
                                                      (960
                                                      )
                                                      
                                                      $
                                                      8,705
                                                      
                                                      
                                                      $
                                                      54,330
                                                      
                                                      
                                                      $
                                                      114,237Net
      (loss)/income
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      (14,159
                                                      )
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      21,421
                                                      
                                                      
                                                      
                                                      7,262Disposal
      of subsidiaries
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      (293
                                                      )
                                                      
                                                      
                                                      (293
                                                      )Distribution
      of dividend to noncontrolling shareholders
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      (3,305
                                                      )
                                                      
                                                      
                                                      (3,305
                                                      )Adjustment
      to statutory reserve
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      1,925
                                                      
                                                      
                                                      
                                                      (1,925
                                                      )
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      -Common
      stock issued for compensation, $1.85
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      109,250
                                                      
                                                      
                                                      
                                                      0.11
                                                      
                                                      
                                                      
                                                      202
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      202Common
      stock issued for compensation, $2.77
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      106,750
                                                      
                                                      
                                                      
                                                      0.11
                                                      
                                                      
                                                      
                                                      296
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      296Common
      stock issued for interest payments
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      196,306
                                                      
                                                      
                                                      
                                                      0.20
                                                      
                                                      
                                                      
                                                      745
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      745Common
      stock issued for repayment of debt, $6.00
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      300,000
                                                      
                                                      
                                                      
                                                      0.30
                                                      
                                                      
                                                      
                                                      1,800
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      1,801Notes
      converted to common stock
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      7,045,274
                                                      
                                                      
                                                      
                                                      7.05
                                                      
                                                      
                                                      
                                                      32,073
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      32,080Make
      whole shares issued on notes conversion
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      1,795,976
                                                      
                                                      
                                                      
                                                      1.80
                                                      
                                                      
                                                      
                                                      7,085
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      7,087Common
      stock transferred by CEO for compensation, $6.91
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      207
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      207Common
      stock issued for compensation, $3.62
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      107,050
                                                      
                                                      
                                                      
                                                      0.11
                                                      
                                                      
                                                      
                                                      387
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      387Reduction
      of registered capital
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      960
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      960Foreign
      currency translation adjustments
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      (174
                                                      )
                                                      
                                                      
                                                      334
                                                      
                                                      
                                                      
                                                      160BALANCE,
      September 30, 2009, unaudited
                                                      
                                                      
                                                      3,092,899
                                                      
                                                      
                                                      $
                                                      3
                                                      
                                                      
                                                      
                                                      45,789,439
                                                      
                                                      
                                                      $
                                                      46
                                                      
                                                      
                                                      $
                                                      79,923
                                                      
                                                      
                                                      $
                                                      6,827
                                                      
                                                      
                                                      $
                                                      (5,991
                                                      )
                                                      
                                                      $
                                                      -
                                                      
                                                      
                                                      $
                                                      8,531
                                                      
                                                      
                                                      $
                                                      72,488
                                                      
                                                      
                                                      $
                                                      161,827
  The
accompanying notes are an integral part of these statements.
  5
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 FOR THE
NINE MONTHS ENDED SEPTEMBER 30
 (UNAUDITED)
 (In
thousands, except per share data)
  2009
                      
                      
                      2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss attributable to controlling interest
                      
                      $
                      (14,159
                      )
                      
                      $
                      (1,618
                      )Net
      income attributable to noncontrolling interest
                      
                      
                      21,421
                      
                      
                      
                      116Consolidated
      net income (loss)
                      
                      
                      7,262
                      
                      
                      
                      (1,502
                      )Adjustments
      to reconcile net income to cash (used in) provided by operating
      activities:Depreciation
                      
                      
                      22,760
                      
                      
                      
                      14,746Amortization
                      
                      
                      714
                      
                      
                      
                      696Debt
      extinguishment
                      
                      
                      (2,932
                      )
                      
                      
                      (7,169
                      )Bad
      debt allowance
                      
                      
                      212
                      
                      
                      
                      19(Gain)
      Loss on disposal of equipment
                      
                      
                      (3,312
                      )
                      
                      
                      13Stock
      issued for services and compensation
                      
                      
                      1,092
                      
                      
                      
                      2,197Interest
      expense accrued on mandatory redeemable stock
                      
                      
                      -
                      
                      
                      
                      2,630Make
      whole shares interest expense on notes conversion
                      
                      
                      2,754
                      
                      
                      
                      2,310Income
      from investment
                      
                      
                      (3,661
                      )
                      
                      
                      -Amortization
      of deferred note issuance cost
                      
                      
                      56
                      
                      
                      
                      34Change
      in fair value of derivative instrument
                      
                      
                      23,228
                      
                      
                      
                      (4,769
                      )Deferred
      tax assets
                      
                      
                      5,265
                      
                      
                      
                      (1,694
                      )Changes
      in operating assets and liabilitiesNotes
      receivable
                      
                      
                      10,826
                      
                      
                      
                      (22,858
                      )Accounts
      receivable
                      
                      
                      (4,150
                      )
                      
                      
                      41,525Accounts
      receivable - related parties
                      
                      
                      (2,709
                      )
                      
                      
                      25,765Other
      receivables
                      
                      
                      319
                      
                      
                      
                      (7,297
                      )Other
      receivables - related parties
                      
                      
                      15,766
                      
                      
                      
                      1,207Dividend
      receivable
                      
                      
                      1,775
                      
                      
                      
                      -Inventories
                      
                      
                      (161,833
                      )
                      
                      
                      (31,223
                      )Advances
      on inventory purchases
                      
                      
                      7,918
                      
                      
                      
                      22,843Advances
      on inventory purchases - related parties
                      
                      
                      (15,199
                      )
                      
                      
                      2,442Prepaid
      expense - current
                      
                      
                      (442
                      )
                      
                      
                      (1,373
                      )Prepaid
      expense - current - related parties
                      
                      
                      -
                      
                      
                      
                      (17
                      )Prepaid
      expense - non current
                      
                      
                      144
                      
                      
                      
                      46Prepaid
      expense - non current - related parties
                      
                      
                      57
                      
                      
                      
                      (102
                      )Accounts
      payable
                      
                      
                      26,053
                      
                      
                      
                      43,609Accounts
      payable - related parties
                      
                      
                      8,772
                      
                      
                      
                      (55,828
                      )Other
      payables
                      
                      
                      5,257
                      
                      
                      
                      (3,038
                      )Other
      payable - related parties
                      
                      
                      (2,594
                      )
                      
                      
                      2,642Accrued
      liabilities
                      
                      
                      5,308
                      
                      
                      
                      1,079Customer
      deposits
                      
                      
                      12,995
                      
                      
                      
                      77,729Customer
      deposits - related parties
                      
                      
                      38,245
                      
                      
                      
                      (7,819
                      )Taxes
      payable
                      
                      
                      (930
                      )
                      
                      
                      (12,922
                      )Distribution
      payable to former shareholders
                      
                      
                      (4,398
                      )
                      
                      
                      (464
                      )Net
      cash (used in) provided by operating activities
                      
                      
                      (5,382
                      )
                      
                      
                      83,459CASH
      FLOWS FROM INVESTING ACTIVITIES:Acquired
      long term investment
                      
                      
                      (6,593
                      )
                      
                      
                      -Cash
      acquired from subsidiary
                      
                      
                      -
                      
                      
                      
                      2,767Deposits
      due to sales representatives
                      
                      
                      31,113
                      
                      
                      
                      (743
                      )Advance
      on equipment purchases
                      
                      
                      1,895
                      
                      
                      
                      717Cash
      proceeds from sale of equipment
                      
                      
                      6,253
                      
                      
                      
                      127Equipment
      purchases
                      
                      
                      (103,394
                      )
                      
                      
                      (145,800
                      )Intangible
      assets purchases
                      
                      
                      (178
                      )
                      
                      
                      (233
                      )Payment
      to original shareholders
                      
                      
                      -
                      
                      
                      
                      (7,092
                      )Net
      cash used in investing activities
                      
                      
                      (70,904
                      )
                      
                      
                      (150,257
                      )CASH
      FLOWS FINANCING ACTIVITIES:Restricted
      cash
                      
                      
                      (66,830
                      )
                      
                      
                      (76,828
                      )Notes
      receivable - restricted
                      
                      
                      -
                      
                      
                      
                      13,087Borrowings
      on short term loans - bank
                      
                      
                      161,806
                      
                      
                      
                      58,486Payments
      on short term loans - bank
                      
                      
                      (77,074
                      )
                      
                      
                      (76,145
                      )Borrowings
      on short term loans - related parties
                      
                      
                      -
                      
                      
                      
                      3,326Payments
      on short term loans - related parties
                      
                      
                      -
                      
                      
                      
                      (7,652
                      )Borrowings
      on short term loan - others
                      
                      
                      104,495
                      
                      
                      
                      59,268Payments
      on short term loans - others
                      
                      
                      (83,759
                      )
                      
                      
                      (50,134
                      )Borrowings
      on short term loans - others-related parties
                      
                      
                      -
                      
                      
                      
                      -Payments
      on short term loans - others-related parties
                      
                      
                      2,932Borrowings
      on short term notes payable
                      
                      
                      545,164
                      
                      
                      
                      193,374Payments
      on short term notes payable
                      
                      
                      (471,126
                      )
                      
                      
                      (78,079
                      )Cash
      received from warrants conversion
                      
                      
                      -
                      
                      
                      
                      700-
                      
                      
                      
                      -Net
      cash provided by financing activities
                      
                      
                      115,608
                      
                      
                      
                      39,402EFFECTS
      OF EXCHANGE RATE CHANGE IN CASH
                      
                      
                      72
                      
                      
                      
                      1,670INCREASE
      (DECREASE) IN CASH
                      
                      
                      39,394
                      
                      
                      
                      (25,726
                      )CASH,
      beginning of period
                      
                      
                      14,895
                      
                      
                      
                      43,713CASH,
      end of period
                      
                      $
                      54,289
                      
                      
                      $
                      17,987
  The
accompanying notes are an integral part of these consolidated financial
statements.
  6


GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
 
 Note
1 – Background
 
 General
Steel Holdings, Inc. (the “Company”) was incorporated on August 5, 2002 in the
state of Nevada. The Company through its 100% owned subsidiary, General Steel
Investment operates a portfolio of Chinese steel companies serving various
industries. The Company presently has four production subsidiaries: General
Steel (China) Co. Ltd. (f/k/a Tianjin Daqiuzhuang Metal Co. Ltd.) (“Daqiuzhuang
Metal”), Baotou Steel – General Steel Special Steel Pipe Joint Venture Co.,
Ltd., (“Baotou Steel Pipe Joint Venture”), Shaanxi Longmen Iron and Steel Co.,
Ltd. (“Longmen Joint Venture”), and Maoming Hengda Steel Group Co., Ltd.
(“Maoming”). The Company’s main products include rebar, hot-rolled carbon and
silicon sheets and spiral-weld pipes.
 
 Note
2 – Summary of significant accounting policies
 
 Basis of
presentation
 
 The
consolidated financial statements of the Company reflect the activities of the
following directly and indirectly owned subsidiaries:
 PercentageSubsidiary
                        
                        OfOwnershipGeneral
      Steel Investment Co., Ltd.
                        British
      Virgin Islands
                        
                        
                        100.0
                        %General
      Steel (China) Co., Ltd.
                        P.R.C.
                        
                        
                        100.0
                        %Baotou
      Steel – General Steel Special Steel Pipe Joint Venture Co.,
      Ltd.
                        P.R.C.
                        
                        
                        80.0
                        %Yangpu
      Shengtong Investment Co., Ltd.
                        P.R.C.
                        
                        
                        99.1
                        %Qiu
      Steel Investment Co., Ltd. (“Qiu Steel”)
                        P.R.C.
                        
                        
                        98.7
                        %Shaanxi
      Longmen Iron and Steel Co. Ltd.
                        P.R.C.
                        
                        
                        60.0
                        %Maoming
      Hengda Steel Group Co., Ltd.
                        P.R.C.
                        
                        
                        99.0
                        %
 
 The
accompanying 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.
 
 Use of
estimates
 
 The
preparation of financial statements in conformity with generally accepted
accounting principles of the United States of America 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.
 
 Management
has included all adjustments, consisting only of normal recurring adjustments,
considered necessary to give a fair presentation of operating results for the
periods presented. Interim results are not necessarily indicative of results for
a full year. The information included in this Form 10-Q should be read in
conjunction with information included in the 2008 annual report filed on Form
10-K.
  7
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
 
 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 cash on hand and demand deposits in accounts maintained with state
owned banks within the People’s Republic of China, Hong Kong and the United
States. Total cash (including restricted cash balances) in these banks on
September 30, 2009 and December 31, 2008 amounted to $251.9million and
$145.6 million, respectively, none of which are covered by insurance. The
Company has not experienced any losses in such accounts and believes it is not
exposed to any risks on its cash in bank accounts.
 
 The
Company had five major customers, which represented approximately 27% and 41% of
the Company’s total sales for the three months ended September 30, 2009 and
2008, respectively, and approximately 20% and 36% of the Company’s total sales
for the nine months ended September 30, 2009 and 2008, respectively. Five
customers accounted for 20% and 0.5% of total accounts receivable as of
September 30, 2009 and 2008, respectively.
 
 The
purchase of raw materials from five major suppliers represent approximately 29%
and 34% of Company’s total purchase for the three months ended September
30, 2009 and 2008, respectively, and 48% and 32% of the Company’s total purchase
for the nine months ended September 30, 2009 and 2008. Five vendors accounted
for 20% and 4.6% of total accounts payable as of September 30,
2009 and 2008, respectively.
 
 Revenue
recognition
 
 The
Company follows the generally accepted accounting principles 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 the Company 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 of the Company’s 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 the Company on raw materials and other materials
included in the cost of producing the finished product.
 
 Foreign currency translation
and other comprehensive income
 
 The
reporting currency of the Company is the US dollar. The Company uses the local
currency, Renminbi (RMB), as its 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
shareholders’ 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.
  8
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
 
 Translation
adjustments resulting included in accumulated other comprehensive income
amounted to $8.5 million and $8.7 million as of September 30, 2009 and December
31, 2008, respectively. The balance sheet amounts, with the exception of equity
at September 30, 2009 and December 31, 2008 were translated at 6.82 RMB and 6.82
RMB to $1.00, respectively. The equity accounts were stated at their historical
rate. The average translation rates applied to income statement accounts for the
nine months ended September 30, 2009 and 2008 were 6.82 RMB, 6.94 RMB,
respectively. Cash flows are also translated at average translation rates for
the period, therefore, amounts reported on the statement of cash flows will not
necessarily agree with changes in the corresponding balances on the balance
sheet.
 
 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.
 
 In
December 2007, the Company issued convertible notes totaling $40 million
(“Notes”) and 1,154,958 warrants. Both the 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 marked-to-market each reporting period. The change in
the value of the derivative liabilities is charged against or credited to
income.
 
 The
accounting standards defines fair value, establishes a three-level valuation
hierarchy for disclosures of fair value measurement and enhances 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
Company’s investment in unconsolidated subsidiaries amounted to $ 17.64 million
as of September 30, 2009. Since there is no quoted or observable market price
for the fair value of similar long term investment, the Company then used the
level 3 inputs for its valuation methodology. The determination of the fair
value was based on the capital investment that the Company contributed and
income from investment. The carrying value of the long term investments
approximated the fair value as of September 30, 2009.
  9
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
 
 In 2007,
the conversion option on the $40 million Notes, as well as the 1,154,958
warrants issued in conjunction with the Notes are carried at fair value. 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 liability is carried on the balance sheet at its
fair value.
 
 As of
September 30, 2009, the outstanding principal amounted to $3.3 million, and the
carrying value of the convertible note amounted to $0.9 million. Company used
Level 3 inputs for its valuation methodology for the convertible note, and their
fair values are determined using cash flows discounted at relevant market
interest rates in effect at the period close since there is no observable market
price. The embedded warrants and conversion feature are valued by using level
two inputs to the Binomial Model and determined that the fair value amounted to
approximately $4.9 million due to the increase in the Company’s common stock
price.
 
 (inthousands)
                                  
                                  CarryingValueasof
                                    September30,2009
                                  
                                  
                                  FairValueMeasurementsatSeptember30,
                                    2009UsingFairValueHierarchyLevel1
                                  
                                  Level2
                                  
                                  
                                  Level3Long
      term investments
                                  
                                  $
                                  17,640
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  $
                                  17,640Derivative
      liabilities
                                  
                                  $
                                  4,933
                                  
                                  
                                  
                                  
                                  $
                                  4,933Convertible
      notes payable
                                  
                                  $
                                  912
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  $
                                  868
 
 Except
for the investments and 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, 2008
                      
                      $
                      7,155Current
      period effective interest charges on notes
                      
                      
                      2,135Current
      period cash payments made for principal and stated
interest
                      
                      
                      (745
                      )Current
      period note converted carrying value
                      
                      
                      (7,633
                      )Balance,
      September 30, 2009 (Unaudited)
                      
                      $
                      912
 
 Long term
                        Investment(in thousands)Balance,
      December 31, 2008
                      
                      $
                      13,959Current
      period investment
                      
                      
                      4,702Distribution
      of previous year dividend
                      
                      
                      (2,541
                      )Current
      period investment gain
                      
                      
                      1,591Foreign
      currency exchange loss
                      
                      
                      (71
                      )Balance,
      September 30, 2009 (Unaudited)
                      
                      $
                      17,640
 
 Cash and cash
equivalents
 
 Cash and
cash equivalents include cash on hand and demand deposits in banks with original
maturities of less than three months.
  10
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
 
 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.
 
 Receivables and allowance
for doubtful accounts
 
 Receivables
include trade accounts due from the customers and other receivables from cash
advances to employees, related parties or third parties.  An allowance
for doubtful account is established and recorded based on managements’
assessment of potential losses based on the credit history and relationship 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 represent trade accounts receivable due from various customers where
the customers’ banks have guaranteed the payment of the receivables. 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 $27.4 million and $38.2 million of notes
receivable outstanding as of September 30, 2009 and December 31, 2008,
respectively.
 
 Inventories
 
 Inventories
are stated at the lower of cost or market using weighted average 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.
 
 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 three months ended September 30, 2009 and 2008 amounted to $2.3 million
and $2.2 million respectively. Shipping and handling for the nine months ended
September 30, 2009 and 2008 amounted to $4.2 million and $3.8 million,
respectively.
 
 Intangible
assets
 
 All land
in the People’s Republic of China is owned by the government. However, the
government grants “land use rights”.  Daqiuzhuang Metal acquired land
use rights during the years ended 2000 and 2003 for a total of $3.2 million.
These land use rights are for 50 years and expire in 2050 and 2053. However,
Daqiuzhuang Metal's initial business license had a ten-year term. Therefore,
management elected to amortize the land use rights over the ten-year business
term. Daqiuzhuang Metal became a Sino-Foreign Joint Venture in 2004, and
obtained a new business license for twenty years; however, the Company decided
to continue amortizing the land use rights over the original ten-year business
term.
  11
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
 
 Longmen
Group contributed land use rights for a total amount of $19.8 million to the
Longmen Joint Venture. The land use rights are for 50 years and expire in 2048
to 2052.
 
 Maoming
has land use rights amounting to $2.0 million for 50 years expiring in
2054.
 
 Entity
                      
                      Original Cost
                      
                      Years of Expiration(in thousands)Daqiuzhuang
      Metal
                      
                      $
                      3,167
                      
                      2050&2053Longmen
      Joint Venture
                      
                      $
                      19,824
                      
                      2048&2052Maoming
      Hengda Steel Group Co., Ltd
                      
                      $
                      2,038
                      
                      2054
 
 Intangible
assets of the Company are reviewed at least annually, more often when
circumstances require, 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 amortization to determine whether subsequent
events and circumstances warrant revised estimates of useful
lives.  As of September 30, 2009, the Company expects these assets to
be fully recoverable.
 
 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 3%-5% residual value.
 
 The
estimated useful lives are as follows:
 
 Property
      and plant
                  
                  10-40YearsMachinery
      & Equipment
                  
                  10-30YearsOffice
      equipment and furniture
                  
                  5YearsMotor
      vehicles
                  
                  5Years
 
 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 plant, equipment and intangible assets are reviewed
annually, more often if necessary, 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 September 30, 2009, 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 is 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 cost method.
  12
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
 
 The
Company’s subsidiary, Hancheng Tongxing Metallurgy Co., Ltd. and EPID invested
in several companies from 2004 to 2009.
 
 Unconsolidated subsidiary
                              
                              Year
                                acquired
                              
                              
                              Amount
                                invested (In
                                thousands)
                              
                              
                              %
                                ownedShaanxi
      Daxigou Mining Co., Ltd
                              
                              2004
                              
                              
                              $
                              734
                              
                              
                              
                              11Shaanxi
      Xinglong Thermoelectric Co., Ltd
                              
                              2004-2007
                              
                              
                              
                              7,404
                              
                              
                              
                              20.7Shaanxi
      Longgang Group Xian steel Co., Ltd
                              
                              2005
                              
                              
                              
                              60
                              
                              
                              
                              10Huashan
      Metallurgical Equipment Co. Ltd.
                              
                              2003
                              
                              
                              
                              1,712
                              
                              
                              
                              25Hejin
      Liyuan Washing Coal Co., Ltd.
                              
                              2006
                              
                              
                              
                              135
                              
                              
                              
                              38Shanxi
      Longmen Coal Chemical Industry Co., Ltd
                              
                              2009
                              
                              
                              
                              6,602
                              
                              
                              
                              15Xian
      Delong Powder Engineering Materials Co., Ltd.
                              
                              2006
                              
                              
                              
                              993
                              
                              
                              
                              27Total
                              
                              
                              
                              
                              
                              $
                              17,640
 
 Total
investment in unconsolidated subsidiaries amounted to $17.6 million and $14.0
million as of September 31, 2009 and 2008, respectively.
 
 Short-term notes
payable
 
 Short-term
notes payable are lines of credit extended by banks. When purchasing raw
materials, the Company often issues a short-term note payable to the vendor.
This short-term note payable bears no interest and is guaranteed by the bank for
its complete face value and usually mature within three to six months 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.
 
 Earnings per
share
 
 The
Company has adopted the generally accepted accounting principles 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.
  13
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
 
 Income
taxes
 
 The
Company accounts for income taxes in accordance with the generally accepted
accounting principles 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 income tax basis and financial reporting basis of assets and
liabilities. Provision for income taxes consists of taxes currently due plus
deferred taxes. The generally accepted accounting principles for accounting for
uncertainty in income taxes clarifies 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 adoption had no effect on the
Company’s financial statements.
 
 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 financial statements and the corresponding tax
basis used in the computation of assessable tax profit. In principle, deferred
tax liabilities are recognized for all taxable temporary differences. Deferred
tax assets are recognized to the extent that it is probable that taxable profit
will be available against which deductible temporary differences can be
utilized. Deferred tax is calculated using tax rates that are expected to apply
to the period when the asset is realized or the liability is settled. Deferred
tax is charged or credited in the income statement, except when it is related to
items credited or charged directly to equity, in which case the deferred tax is
also dealt with in equity. Deferred tax assets and liabilities are offset when
they relate to income taxes levied by the same taxation authority and the
Company intends to settle its current tax assets and liabilities on a net
basis.
 
 Deferred
income taxes are recognized for temporary differences between the tax bases of
assets and liabilities and their reported amounts in the financial statements,
net operating loss carry forwards and credits, by applying enacted statutory tax
rates applicable to future years. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be realized.
Current income taxes are provided for in accordance with the laws of the
relevant taxing authorities.
 
 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 SFAS’s
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.
  14
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
 
 Non controlling
interests
 
 Effective
January 1, 2009, the Company adopted generally accepted accounting
principles regarding non-controlling interest 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 this accounting standard, net income attributable to
noncontrolling interests is now excluded from the determination of consolidated
net income. In addition, foreign currency translation adjustment is allocated
between controlling and noncontrolling interests.
 
 Subsequent
event
 
 In May
2009, the Company adopted generally accepted accounting principles
which provide guidance to for disclosures of events that occur after the
balance sheet date but before financial statements are issued or are
available to be issued. The standard also requires entities to disclose the date
through which subsequent events were evaluated as well as the rationale for
why that date was selected. The standard is effective for interim and annual
periods ending after June 15, 2009, and accordingly, the Company adopted
this Standard during the second quarter of 2009.
 
 Recently issued accounting
pronouncements
 
 In
January 2009, the Financial Accounting Standards Board issued an accounting
standard which amended the impairment model by removing its exclusive reliance
on “market participant” estimates of future cash flows used in determining fair
value. Changing the cash flows used to analyze other-than-temporary impairment
from the “market participant” view to a holder’s estimate of whether there has
been a “probable” adverse change in estimated cash flows allows companies to
apply reasonable judgment in assessing whether another-than-temporary impairment
has occurred. The adoption of this accounting standard did not have a material
impact on the Company’s consolidated financial statements because all of the
investments in debt securities are classified as trading
securities.
 
 In April
2009, the Financial Accounting Standards Board issued an accounting standard
that makes the other-than-temporary impairments guidance more operational and
improves the presentation of other-than-temporary impairments in the financial
statements. This standard replaced the existing requirement that the entity’s
management assert it has both the intent and ability to hold an impaired debt
security until recovery with a requirement that management assert it does not
have the intent to sell the security, and it is more likely than not it will not
have to sell the security before recovery of its cost basis. This standard
provides increased disclosure about the credit and noncredit components of
impaired debt securities that are not expected to be sold and also requires
increased and more frequent disclosures regarding expected cash flows, credit
losses, and an aging of securities with unrealized losses. Although this
standard does not result in a change in the carrying amount of debt securities,
it does require that the portion of an other-than-temporary impairment not
related to a credit loss for a held-to-maturity security be recognized in a new
category of other comprehensive income and be amortized over the remaining life
of the debt security as an increase in the carrying value of the security. The
Company adopted this accounting standard, but it did not have a material impact
on its consolidated financial statements.
  15
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
 
 In April
2009, the Financial Accounting Standards Board issued an accounting standard
that requires disclosures about fair value of financial instruments not measured
on the balance sheet at fair value in interim financial statements as well as in
annual financial statements. Prior to this accounting standard, fair values for
these assets and liabilities were only disclosed annually. This standard applies
to all financial instruments within its scope and requires all entities to
disclose the method(s) and significant assumptions used to estimate the fair
value of financial instruments. This standard does not require disclosures for
earlier periods presented for comparative purposes at initial adoption, but in
periods after the initial adoption, this standard requires comparative
disclosures only for periods ending after initial adoption. The Company adopted
this accounting standard, but it did not have a material impact on the
disclosures related to its consolidated financial statements.
 
 In June
2009, the Financial Accounting Standards Board issued an accounting standard
amending the accounting and disclosure requirements for transfers of financial
assets. This accounting standard requires greater transparency and additional
disclosures for transfers of financial assets and the entity’s continuing
involvement with them and changes the requirements for derecognizing financial
assets. In addition, it eliminates the concept of a qualifying special-purpose
entity (“QSPE”). This accounting standard is effective for financial statements
issued for fiscal years beginning after November 15, 2009, and the Company does
not expect this standard to have a material effect on its consolidated financial
statements.
 
 In June
2009, the Financial Accounting Standards Board also issued an accounting
standard amending the accounting and disclosure requirements for the
consolidation of variable interest entities (“VIEs”). The elimination of the
concept of a QSPE, as discussed above, removes the exception from applying the
consolidation guidance within this accounting standard. Further, this accounting
standard requires a company to perform a qualitative analysis when determining
whether or not it must consolidate a VIE. It also requires a company to
continuously reassess whether it must consolidate a VIE. Additionally, it
requires enhanced disclosures about a company’s involvement with VIEs and any
significant change in risk exposure due to that involvement, as well as how its
involvement with VIEs impacts the company’s financial statements. Finally, a
company will be required to disclose significant judgments and assumptions used
to determine whether or not to consolidate a VIE. This accounting standard is
effective for financial statements issued for fiscal years beginning after
November 15, 2009, and the Company does not expect this standard to have a
material effect on its consolidated financial statements.
 
 In June
2009, the Financial Accounting Standards Board issued an accounting standard
which establishes the FASB Accounting Standards CodificationTM (the
“Codification”) as the source of authoritative accounting principles recognized
by the FASB to be applied by nongovernmental entities in the preparation of
financial statements in conformity with U.S. GAAP. The Codification does not
change current U.S. GAAP, but is intended to simplify user access to all
authoritative U.S. GAAP by providing all the authoritative literature related to
a particular topic in one place. The Codification is effective for interim
and annual periods ending after September 15, 2009, and as of the
effective date, all existing accounting standard documents will be
superseded. The Codification is effective for the Company in the third quarter
of 2009, and accordingly, the Company’s Quarterly Report on Form 10-Q for
the quarter ending September 30, 2009 and all current and subsequent public
filings will reference the Codification as the sole source of authoritative
literature.
 
 In August
2009, the Financial Accounting Standards Board issued an Accounting Standards
Update (“ASU”) regarding measuring liabilities at fair value. This ASU provides
additional guidance clarifying the measurement of liabilities at fair value in
circumstances in which a quoted price in an active market for the identical
liability is not available; under those circumstances, a reporting entity is
required to measure fair value using one or more of valuation techniques, as
defined. This ASU is effective for the first reporting period, including interim
periods, beginning after the issuance of this ASU. The Company is currently
evaluating the impact of this ASU on its consolidated financial
statements.
  16
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
 
 In
October 2009, the Financial Accounting Standards Board issued an ASU regarding
accounting for own-share lending arrangements in contemplation of convertible
debt issuance or other financing.  This ASU requires that at the date
of issuance of the shares in a share-lending arrangement entered into in
contemplation of a convertible debt offering or other financing, the shares
issued shall be measured at fair value and be recognized as an issuance cost,
with an offset to additional paid-in capital. Further, loaned shares are
excluded from basic and diluted earnings per share unless default of the
share-lending arrangement occurs, at which time the loaned shares would be
included in the basic and diluted earnings-per-share
calculation.  This ASU is effective for fiscal years beginning on or
after December 15, 2009, and interim periods within those fiscal years for
arrangements outstanding as of the beginning of those fiscal years. The Company
is currently evaluating the impact of this ASU on its consolidated financial
statements.
 
 Note
3 – Accounts receivable and allowance for doubtful accounts
 
 Accounts
receivable, including related party receivables, net of allowance for doubtful
accounts consists of the following:
 
 September 30,
                    2009
                  
                  
                  December 31,
                    2008Unaudited(inthousands)
                  
                  
                  (inthousands)Accounts
      receivable
                  
                  $
                  12,763
                  
                  
                  $
                  8,730Less:
      allowance for doubtful accounts
                  
                  
                  (612
                  )
                  
                  
                  (401
                  )Net
      accounts receivable
                  
                  $
                  12,151
                  
                  
                  $
                  8,329
 
 Movement
of allowance for doubtful accounts is as follows:
 
 September30,
                    2009
                  
                  
                  December31,
                    2008Unaudited(in thousands)
                  
                  
                  (in
      thousands)Beginning
      balance
                  
                  $
                  401
                  
                  
                  $
                  148Charge
      to expense
                  
                  
                  212
                  
                  
                  
                  124Addition
      from acquisition
                  
                  
                  -
                  
                  
                  
                  238Less
      Written-off
                  
                  
                  -
                  
                  
                  
                  (119
                  )Exchange
      rate effect
                  
                  
                  (1
                  )
                  
                  
                  10Ending
      balance
                  
                  $
                  612
                  
                  
                  $
                  401
  17
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
 
 Note
4 – Inventories
 
 Inventory
consists of the following:
 
 September 30,
                    2009
                  
                  
                  December 31,
                    2008Unaudited(inthousands)
                  
                  
                  (inthousands)Supplies
                  
                  $
                  1,708
                  
                  
                  $
                  1,884Raw
      materials
                  
                  
                  135,822
                  
                  
                  
                  41,084Work
      in process
                  
                  
                  318
                  
                  
                  
                  334Finished
      goods
                  
                  
                  83,654
                  
                  
                  
                  16,247Totals
                  
                  $
                  221,502
                  
                  
                  $
                  59,549
 
 Raw
materials consist primarily of iron ore and coke at Longmen Joint Venture, steel
strip at Daqiuzhuang Metal and billet at Maoming. Work in process primarily
consists of pig iron and other semi-finished products. 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.
 
 The
Company values its inventory at the lower of cost or market, determined on a
weighted average method, or net realizable value. As of September 30, 2009 and
December 31, 2008, management determined the carrying amount of inventory
exceeded net realizable value, therefore $0.3 million and $2.2 million had been
written down, respectively, and included in cost of goods sold.
 
 Note
5 – 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 $57.1 million and $49.5 million as of
September 30, 2009 and December 31, 2008, respectively.
 
 Note 6 – Plant and equipment,
net
 
 Plant and
equipment consist of the following:
 
 September30
                          2009
                        
                        
                        December31,
                          2008(in
      thousands)
                        
                        UnauditedBuildings
      and improvements
                        
                        $
                        117,242
                        
                        
                        $
                        118,144Machinery
                        
                        
                        476,082
                        
                        
                        
                        226,594Transportation
      equipment
                        
                        
                        8,007
                        
                        
                        
                        7,299Other
      equipment
                        
                        
                        9,965
                        
                        
                        
                        2,756Construction
      in process
                        
                        
                        25,714
                        
                        
                        
                        199,818Totals
                        
                        
                        637,010
                        
                        
                        
                        554,611Less
      accumulated depreciation
                        
                        
                        (78,603
                        )
                        
                        
                        (62,906
                        )Totals
                        
                        $
                        558,407
                        
                        
                        $
                        491,705
  18
 
 GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
 
 Longmen
Joint Venture constructed two blast furnaces and a sintering system.  All
costs related to construction have been capitalized as construction in progress
and amounted to $180.5 million as of December 31, 2008. The two blast furnaces
and its facilities amounting $242.4 million had been transferred to fixed assets
as of September 30 2009.
 
 Depreciation,
including amounts in cost of sales, for the three months ended September 30,
2009 and 2008 amounted to $10.9 million and $5.9 million, respectively, and for
the nine months ended September 30, 2009 and 2008, amount to $22.8 million and
$14.7 million, respectively.
 
 The rebar
production line from our Maoming subsidiary was sold and transferred to our
Longmen Joint Venture for a value of $16.5 million (RMB112.5 million). There is
no change in fixed asset accounts because it is an intercompany
transaction.
 
 The
Company has fixed assets to be disposed amounting to $6.5 million and $0.6
million as of September 30, and December 31, 2008, respectively.
 
 Note
7 – Intangible assets
 
 Intangible
assets consist of the following:
 September 30,
                      2009
                    
                    
                    December 31,
                      2008(in thousands)
                    
                    UnauditedLand
      use right
                    
                    $
                    27,515
                    
                    
                    $
                    27,467Software
                    
                    
                    424
                    
                    
                    
                    293Subtotal
                    
                    
                    27,939
                    
                    
                    
                    27,760Accumulated
      Amortization – Land use right
                    
                    
                    (3,884
                    )
                    
                    
                    (3,204
                    )Accumulated
      Amortization – software
                    
                    
                    (35
                    )
                    
                    
                    -Accumulated
      Amortization subtotal
                    
                    
                    (3,919
                    )
                    
                    
                    (3,204
                    )Totals
                    
                    $
                    24,020
                    
                    
                    $
                    24,556
 
 Total
amortization expense for the three months ended September 30, 2009 and 2008,
amounted to $0.3 million and $0.3 million, respectively, and for nine months
ended September 30, 2009 and 2008, amounted to $0.7 million and $0.7 million,
respectively.
  19
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
 
 The estimated
aggregate amortization expense for each of the five succeeding fiscal years is
as follows:
 
 Years
                      
                      Estimated Amortization
                        Expense
                      
                      
                      Gross carrying
                        Amount(in thousands)2009
                      
                      $
                      1,000
                      
                      
                      $
                      24,0202010
                      
                      
                      1,000
                      
                      
                      
                      23,0202011
                      
                      
                      1,000
                      
                      
                      
                      22,0202012
                      
                      
                      1,000
                      
                      
                      
                      21,0202013
                      
                      
                      1,000
                      
                      
                      
                      20,020
 
 Note
8 – Debt
 
 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 with the banks,
related parties and other parties.
 
 Short
term loans due banks, related parties and other parties consisted of the
following:
  September 30,
                                                2009
                                              
                                              
                                              December 31,
                                                2008Unaudited
                                                (in thousands)
                                              
                                              
                                              (in thousands)Daqiuzhuang
      Metal: Loan from banks in China, due various dates on 2010. Weighted
      average interest rate 6.1% per annum, either guaranteed by another company
      or secured by equipment/inventory.
                                              
                                              $
                                              25,476
                                              
                                              
                                              $
                                              27,383Longmen
      Joint Venture: Loan from banks in China, due various dates from October
      2009 to September 2010. Weighted average interest rate 6.2% per annum,
      either guaranteed by another company or secured by
      equipment/buildings/land use right.
                                              
                                              
                                              125,574
                                              
                                              
                                              
                                              38,876Baotou
      Steel Pipe Joint Venture: Loan from banks in China, due March 2009. Annual
      interest rate of 12%, Guaranteed by another company and secured by
      equipment.
                                              
                                              
                                              -
                                              
                                              
                                              
                                              115Maoming:
      Loan from banks in China, due January 2009. Annual interest rate of 7.47%,
      guaranteed by another company.
                                              
                                              
                                              -
                                              
                                              
                                              
                                              1,466Total
      – bank loans
                                              
                                              $
                                              151,050
                                              
                                              
                                              $
                                              67,840
  20
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
 
 September 30,
                      2009
                    
                    
                    December 31,
                      2008Unaudited
                      (in thousands)
                    
                    
                    (in thousands)Longmen
      Joint Venture: Loans from various unrelated companies and individuals, due
      various dates from November 2009 to January 2010, and interest rates up to
      12% per annum
                    
                    $
                    86,517
                    
                    
                    $
                    58,440Maoming:
      Loans from two unrelated parties, no due date without interest
      bearing.
                    
                    
                    23,654
                    
                    
                    
                    29,394Total
      – other loans
                    
                    $
                    110,171
                    
                    
                    $
                    87,834
 
 September 30,
                        2009
                      
                      
                      December 31,
                        2008Unaudited
                        (in thousands)
                      
                      
                      (in thousands)Qiu
      Steel: Related party loans from Tianjin Heng Ying and Tianjin Da Zhan, due
      June 2010. Annual interest rate of 5%.
                      
                      $
                      7,350
                      
                      
                      $
                      7,350Daqiuzhuang
      Metal: Related party loans from Wendlar, due January 2010. Annual interest
      rate of 10%.
                      
                      
                      1,012
                      
                      
                      
                      -Total
      – related party loans
                      
                      $
                      8,362
                      
                      
                      $
                      7,350
 
 The
Company had various loans from unrelated companies and individuals. The balances
amounted to $110.1 million and $87.8 million as of September 30, 2009 and
December 31, 2008, respectively. Out of the $110.1 million, $23.7 million loans
was prior year balance carries no interest and the remaining $86.5 million are
subject to interest rates ranging from 6.1% to 12%. All short term loans from
unrelated companies and individuals are due on demand and
unsecured.
 
 Short term notes
payable
 
 Short
term notes payable are lines of credit extended by the banks. When purchasing
raw materials, the Company often issues a short term note payable to the vendor
funded with draws on the lines of credit. 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.
  21
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
 
 The
Company had the following short term notes payable:
 
 September 30,
                      2009
                    
                    
                    December
                      31, 2008Unaudited
                      (in thousands)
                    
                    
                    (in
                      thousands)Daqiuzhuang
      Metal: Notes payable from banks in China, due various dates from October
      2009 to February 2010. Restricted cash required of $3,998 and $15,728 for
      September 30, 2009 and December 31, 2008, respectively and either
      guaranteed by another company.
                    
                    $
                    7,628
                    
                    
                    $
                    18,631Longmen
      Joint Venture: Notes payable from banks in China, due various dates from
      October 2009 to August 2010. Restricted cash of $173,487 and $98,073 for
      September 30, 2009 and December 31, 2008, respectively and either
      guaranteed by another company or secured by equipment, or no
      guarantee.
                    
                    
                    233,337
                    
                    
                    
                    159,536Bao
      Tou: Notes payable from banks in China. Restricted cash of $0 and $5,135
      for September 30, 2009 and December 31, 2008, respectively and guaranteed
      by buildings.
                    
                    
                    -
                    
                    
                    
                    7,335Maoming:
      Notes payable from banks in China, due various dates from Octomber 2009 to
      March 2010. Restricted cash of $20,098 and $11,765 for September 30, 2009
      and December 31, 2008 and guaranteed by buildings and
      equipments.
                    
                    
                    39,169
                    
                    
                    
                    20,538Grand
      totals
                    
                    $
                    280,134
                    
                    
                    $
                    206,040
 
 Total
interest expense for the three months ended September 30, 2009 and 2008 on the
debt listed above amounted to $8.3 million and $4.6 million, respectively, and
for the nine months ended September 30 2009 and 2008, interest expense amounted
to $16.1 million and $13.2 million, respectively.
 
 Capitalized
interest amounted to $6.7 million and $3.8 million for the three months ended
September 30, 2009 and 2008, respectively and for the nine months ended
September 30, 2009 and 2008, capitalized interest amounted to $12.8 million and
$6.6 million.
 
 Note
9 – Customer deposit
 
 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 September 30, 2009 and December 31, 2008, customer
deposits amounted to $199.9 million and $148.3 million, including related
parties deposits $0 and $7.2 million, respectively.
  22
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
 
 Note
10 – Deposit due to sales representatives
 
 Daqiuzhuang
Metal and two of Longmen Joint Venture’s subsidiaries, Yuxin Trading and Yuteng
Trading, entered into agreements with various entities to act as the Company’s
exclusive sales agent in a specified 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 to 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 $39.3 million and $8.1 million in
deposits due to sales representatives as of September 30, 2009 and December 31,
2008. In 2009 the Company received deposit amounted $32 million from sales
representatives to secure sales quantity. These deposits are refundable in one
year based on volume fulfillment and bear interest at 3%-8% per
annum.
 
 Note
11 – Convertible notes
 
 On
December 13, 2007, the Company entered into a Securities Purchase Agreement (the
“Agreement”) with certain institutional investors (the “Buyers”) issuing $40.0
million (“Notes”) and 1,154,958 warrants (the “Warrants”). The warrants can be
converted to common stock through May 13, 2013 at $13.51 per share, subject to
customary anti-dilution adjustment.
 
 The Notes
bear initial interest at 3% per annum, which will be increased each year as
specified in the Notes, 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 common stock, subject to customary
anti-dilution adjustments. The initial conversion price is $12.47. 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.
 
 The Notes
are secured by a first priority, perfected security interest in certain shares
of common stock of Zuosheng Yu, as evidenced by the pledge agreement. The Notes
are subject to events of default customary for convertible securities and for a
secured financing.
 
 The
Warrants grant the Buyers the right to acquire shares of common stock at $13.51
per share, subject to customary anti-dilution adjustments.  The Warrants
may be exercised at any time on or after May 13, 2008, but not after May 13,
2013, the expiration date of the Warrants.
 
 Pursuant
APB’s accounting standard -,accounting 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 calculated using the Cox
Rubenstein Binomial model based on the following variables:
 
 ·
              Expected
      volatility of 125%
 ·
              Expected
      dividend yield of 0%
 ·
              Risk-free
      interest rate of 1.70%
 ·
              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,
      respectively
 
 Pursuant
to generally accepted accounting principles, 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 marked to
market each reporting period.
  23
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
 
 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.
 
 In July
2008, $6.8 million of notes was converted to 541,299 shares of common stock at a
conversion price of $12.47. Pursuant to generally accepted accounting
principles, the Company valued the conversion option on note conversion date. A
total of $6.1 million of carrying value and derivative liability had been
reclassified into equity. In addition, 195,965 shares of common stock were
issued as make whole interest expense of $2.3 million.
 
 Reset of Conversion
Price:
 
 Paragraph
7(f) of the Convertible Notes (which were issued on December 13, 2007) provides
for adjustment of the conversion price of the Notes, as follows: Adjustment. If
on the earlier of the (i) one (1) year anniversary of the Initial Effective Date
(as defined in the Registration Rights Agreement) and (ii) two (2) year
anniversary of the Closing Date (the "Adjustment Date"), the
Conversion Price in effect exceeds the Market Price as of the Adjustment Date
(the "Adjusted Conversion
Price"), the Conversion Price hereunder shall be reset to the Adjusted
Conversion Price as of the Adjustment Date. For the avoidance of doubt, the
Adjusted Conversion Price, if any, shall not apply to any Conversion Amount
converted into Common Stock prior to the Adjustment Date.
 
 The
“Market Price” is defined in paragraph 30(v) of the Senior Convertible Notes as:
“Market Price” means, for any given date, the lower of (x) the arithmetic
average of the Weighted Average Price of the Common Stock for the thirty (30)
consecutive Trading Day period ending on the Trading Day immediately preceding
such date and (y) the Weighted Average Price of the Common Stock on the Trading
Day immediately preceding such date.
 
 The
Initial Registration Statement became effective on May 7, 2008 and thus the
Adjustment Date was May 7, 2009. The Weighted Average Price of the Common Stock
for the 30 consecutive Trading Day period ended on May 6, 2009 was $4.2511 and,
accordingly, in accordance with the existing terms of the Convertible Notes, the
conversion price was adjusted on May 7, 2009 to $4.2511.
 
 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 Income Statement.
 
 From May
7 to September 30 2009, $30.0 million of notes was converted to 7,045,274 shares
of common stock at a conversion price of $4.2511. Pursuant to generally accepted
accounting principles, the Company valued the conversion option on note
conversion date. A total of $32.1 million of 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.
 
 As of
September 30 2009, in accordance with generally accepted accounting principles,
the fair value of derivative liabilities was recalculated and decreased by $5.0
million during the period, including $0.4 million for the decrease in fair value
of the warrants and $4.6 million for the decrease in fair value of the
conversion option.
  24
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
 
 As of
September 30 2009, the balance of derivative liabilities was $4.9 million, which
consisted of $2.7 million for the warrants and $2.2 million for the conversion
option, and the carrying value of the notes was $0.9 million effective interest
charges on notes totaled $0.3 million and $0.9 million  for the three
months ended September 30, 2009 and 2008, respectively, and for the nine months
ended September 30, 2009 and 2008, the effective interest amounted to $2.1
million and $2.6 million, respectively.
 
 Note
issuance cost was amortized to interest expense for the three months ended
September 30, 2009 and 2008 amounted to $0.012 million and $0.013 million,
respectively. Note issuance cost was amortized to interest expense for the nine
months ended September 30, 2009 and 2008 amounted to $0.056 million and $0.034
million, respectively.
 
 Note
12 – Supplemental disclosure of cash flow information
 
 Interest
paid amounted to $4.7 million and $1.9 million for the three months ended
September 30 2009 and 2008, respectively, and for the nine months ended
September 30 2009 and 2008, amounted to $9.3 million and $10.6 million,
respectively.
 
 Income
tax payments amounted to $0.6 million and $0.8 million for the three months
ended September 30 2009 and 2008, respectively, and for the nine months
ended September 30 2009 and 2008, amounted to $2.4 million and $ 6.5
million, respectively.
 
 Make
whole Interest of $6.04 million has been capitalized into construction in
progress and subsequently transferred to fixed assets for the nine month ended
September 30, 2009.
 
 Note
13 - Gain from debt extinguishment and Government grant
 
 Debt
extinguishment
 
 For the
nine months ended September 30, 2009, the Company recorded gain from debt
extinguishment totaling $2.9 million. On February 20, 2009, Maoming Hengda, a
subsidiary entered into a Debt Waive Agreement with Guangzhou Hengda, pursuant
to which Guangzhou Hengda agreed to waive $2.9 million (RMB 20.0 million) of the
total $24.0 million (RMB 163.5 million) debt that Maoming Hengda owes to
Guangzhou Hengda. The Company determined that the subsequent debt settlement
does not constitute a contingency at date of purchase as defined in SFAS’s
accounting standard - business Combinations and thus should not result in a
reallocation of the purchase price. The waiver is irrevocable.
 
 Government
grant
 
 Based on
national industrial policies and environmental protection laws and regulations,
in order to reduce energy consumption, emissions Shaanxi Province Development
and Reform Commission worked with local industries to eliminate of outdated iron
and steel production capacity in form of government grant. Longmen Joint Venture
received $4.3 million (RMB 29.2 million) in government grant for compliance in
dismantling two blast furnaces. The Company wrote off the residual book value of
the furnaces dismantled totaling $0.7 million (RMB 5.8 million), and recorded
other income of $3.5 million for the nine months ended September 30,
2009.
  25
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
 
 Note
14 – Taxes
 
 Income
tax
 
 On
January 1, 2008, the new Enterprise Income Tax (“EIT”) law replaced the existing
laws for Domestic Enterprises (“DES”) and Foreign Invested Enterprises (“FIEs”).
The new standard EIT rate of 25% has replaced the 33% rate currently applicable
to both DES and FIEs. The two-year tax exemption and three-year 50% tax
reduction tax holiday for production-oriented FIEs will not be eliminated for
certain entities incorporated on or before March 16, 2007.
 
 Significant
components of the provision for income taxes on earnings and deferred taxes on
net operating losses from operation for the three months ended September 30,
2009 and 2008 are as follows:
 
 September 30,
                      2009
                    
                    
                    September 30,
                      2008Unaudited
                      (in thousands)
                    
                    
                    Unaudited
                      (in thousands)Current
                    
                    $
                    6,717
                    
                    
                    
                    (813
                    )Deferred
                    
                    
                    (2,925
                    )
                    
                    
                    (1,271
                    )Total
      income taxes
                    
                    $
                    3,792
                    
                    
                    
                    (2,084
                    )
 
 Significant
components of the provision for income taxes on earnings and deferred taxes on
net operating losses from operation for the nine months ended September 30, 2009
and 2008 are as follows:
 
 September 30,
                      2009
                    
                    
                    September 30,
                      2008Unaudited
                      (in thousands)
                    
                    
                    Unaudited
                      (in thousands)Current
                    
                    $
                    12,451
                    
                    
                    
                    1,147Deferred
                    
                    
                    (5,265
                    )
                    
                    
                    (1,694
                    )Total
      income taxes
                    
                    $
                    7,186
                    
                    
                    
                    (547
                    )
 
 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.
  26
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
 
 The
principal component of the deferred income tax assets is as
follows:
 
 September 30,
                      2009
                    
                    
                    December 31,
                      2008Unaudited
                      (in thousands)
                    
                    
                    (in thousands)Beginning
      balance
                    
                    $
                    7,487
                    
                    
                    $
                    400Xi’an
      Rolling Mill’s ,YuXin,  YuTeng, HuaLong and TongXing
                      Net
      operating loss carry-forward
                    
                    
                    (19
                    )
                    
                    
                    4,946Effective
      tax rate
                    
                    
                    25
                    %
                    
                    
                    25
                    %Deferred
      tax asset
                    
                    $
                    (5
                    )
                    
                    $
                    1,236Long
      Gang Headquarter’s
                      Net
      operating loss carry-forward
                    
                    
                    (35,096
                    )
                    
                    
                    36,809Effective
      tax rate
                    
                    
                    15
                    %
                    
                    
                    15.2
                    %Deferred
      tax asset
                    
                    $
                    (5,264
                    )
                    
                    $
                    5,595Exchange
      difference
                    
                    
                    (27
                    )
                    
                    
                    256Totals
                    
                    $
                    2,191
                    
                    
                    $
                    7,487
 
 Under the
Income Tax Laws of PRC, the Company’s subsidiary, Daqiuzhuang Metal, 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. Daqiuzhuang Metal, 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. Daqiuzhuang Metal is located in
Tianjin Costal Economic Development Zone and under the Income Tax Laws of
Tianjin City of PRC, it is eligible for an income tax rate of 24%. Therefore,
Daqiuzhuang Metal is exempt from income taxes for the years ended December 31,
2005 and 2006 and is entitled to 50% income tax reduction of the special income
tax rate of 24%, which is a rate of 12% for the years ended December 31, 2007,
2008 and 2009.
 
 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 calculated at 15%.
 
 Baotou
Steel Pipe Joint Venture is located in Inner Mongolia, is subject to an income
tax at an effective rate of 25%.
 
 Maoming
Henggang is located in Guangdong province, is subject to an income tax at an
effective rate of 25%.
 
 The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the nine months ended September 30 2009 and 2008 as
follows:
 
 September 30,
                      2009
                    
                    
                    September 30,
                      2008UnauditedU.S.
      Statutory rates
                    
                    
                    34.0
                    %
                    
                    
                    34.0
                    %Foreign
      income not recognized in USA
                    
                    
                    (34.0
                    )%
                    
                    
                    (34.0
                    )%China
      income taxes
                    
                    
                    25.0
                    %
                    
                    
                    25.0
                    %Tax
      effect of expenses not taxable for tax purpose (1)
                    
                    
                    (1.51
                    %
                    
                    
                    (4.3
                    )%Effect
      of different tax rate of subsidiaries operating in other
      jurisdictions
                    
                    
                    (3.95
                    )%
                    
                    
                    (12.0
                    )%Total
      provision for income taxes
                    
                    
                    19.54
                    %
                    
                    
                    8.7
                    %
 
 (1)This
represents derivative expenses (income) and stock compensation expenses incurred
by GSI that are not deductible/taxable in PRC for the nine months ended
September 30, 2009 and 2008.
  27
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
 
 The
Company has cumulative undistributed earnings of foreign subsidiaries of
approximately $23.2 million as of September 30, 2009, is included in
consolidated retained earnings and will continue to be indefinitely reinvested
in international operations.  Accordingly, no provision has been made for
U.S. deferred taxes related to future repatriation of these earnings, nor is it
practicable to estimate the amount of income taxes that would have to be
provided if we concluded that such earnings will be remitted in the
future.
 
 General
Steel Holdings Inc. was incorporated in the United States and has incurred net
operating losses for income tax purposes for the nine months ended September 30,
2009 and 2008, respectively. The net operating loss carry forwards for United
States income taxes amounted to $4.9 million which may be available to reduce
future years’ taxable income. These carry forwards will expire, if not utilized,
through 2029. 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 at September 30,
2009 was $1.7 million. The net change in the valuation allowance for the nine
months ended September 30, 2009 and year ended December 31, 2008 was an increase
of $0.7 million and $0.6 million, respectively. 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
Chinese laws. The value added tax standard rate is 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.
 
 VAT on
sales and VAT on purchases amounted to $123.1 million and $106.6 million for the
three months ended September 30, 2009, VAT on sales and VAT on purchases
amounted to $85.9 million and $85.5 million for the three months ended September
30, 2008, respectively. 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.
 
 VAT on
sales and VAT on purchases amounted to $302.3 million and $272.5 million for the
nine months ended September 30, 2009, VAT on sales and VAT on purchases amounted
to $259.1 million and $221.4 million for the nine months ended
September 30, 2008, respectively. 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:
 September 30,
                      2009
                    
                    
                    December 31,
                      2008(in
      thousands)
                    
                    UnauditedVAT
      taxes payable
                    
                    $
                    8,938
                    
                    
                    $
                    8,985Income
      taxes payable
                    
                    
                    1,999
                    
                    
                    
                    2,510Misc
      taxes
                    
                    
                    2,380
                    
                    
                    
                    2,422Totals
                    
                    $
                    13,317
                    
                    
                    $
                    13,917
  28
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
 
 Note
15 – Earnings per share
 
 The
calculation of earnings per share is as follows:
 
 Three months ended
                    September 30,
                  
                  
                  Nine months ended September 30,Unaudited
                  
                  
                  Unaudited2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008(in
      thousands except per share data)Income
      (loss) attributable to holders of common shares
                  
                  $
                  10,382
                  
                  
                  $
                  20,464
                  
                  
                  $
                  (14,159
                  )
                  
                  $
                  (1,618
                  )Add:
      Derivative expense
                  
                  
                  812Subtract:
      Unamortized note issuance cost
                  
                  
                  (963
                  )Subtract:
      Make whole interest
                  
                  
                  (330
                  )Income
      (loss) used in diluted computation
                  
                  $
                  9,901
                  
                  
                  $
                  20,464
                  
                  
                  $
                  (14,159
                  )
                  
                  $
                  (1,618
                  )Basic
      weighted average number of common shares outstanding
                  
                  
                  44,973,882
                  
                  
                  
                  35,687,891
                  
                  
                  
                  40,295,924
                  
                  
                  
                  35,157,579Diluted
      weighted average number of common shares outstanding
                  
                  
                  45,750,152
                  
                  
                  
                  35,687,891
                  
                  
                  
                  40,295,924
                  
                  
                  
                  35,157,579Earnings
      per shareBasic
                  
                  $
                  0.23
                  
                  
                  $
                  0.57
                  
                  
                  $
                  (0.35
                  )
                  
                  $
                  (0.05
                  )Diluted
                  
                  $
                  0.22
                  
                  
                  $
                  0.57
                  
                  
                  $
                  (0.35
                  )
                  
                  $
                  (0.05
                  )
 
 For the
three months ended September 30, 2009, 1,154,958 warrants with exercise price of
$13.51 is excluded from EPS as they are anti-dilutive.  The $3.3 million
convertible notes with conversion price of $4.2511 were included in the diluted
earnings per share.
 
 For the
nine months ended September 30, 2009 and 2008, the Company incurred net loss;
therefore there is no dilutive effect for its earnings per share.
 
 Note
16 – Related party balances and transactions
 
 The
Company subleased a portion of its land use rights to Tianjin Jing Qiu Steel
Market Company, a related party under common control. The Company’s Chairman,
CEO and majority shareholder, Zuosheng Yu (aka Henry Yu), is the chairman and
the largest shareholder of Jing Qiu Steel Market Company. The lease term is one
year and is renewed annually.
  29
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
 
 Forthethreemonthsended
                      September30,2009
                    
                    
                    Forthethreemonthsended
                      September30,2008Unaudited
                      (inthousands)
                    
                    
                    Unaudited
                      (inthousands)Rental
      Income
                    
                    $
                    381
                    
                    
                    $
                    439
 
 For the nine months ended
                      September 30, 2009
                    
                    
                    For the nine months ended
                      September 30, 2008Unaudited
                      (in thousands)
                    
                    
                    Unaudited
                      (in thousands)Rental
      Income
                    
                    $
                    1,260
                    
                    
                    $
                    1,290
 
 The
Company’s short term loan of $1.5 million from Shenzhen Development Bank is
personally guaranteed by the Company’s Chairman, CEO, and majority shareholder
Zuosheng Yu (aka Henry Yu).
 
 Tianjin
Dazhan Industry Co., Ltd. (“Dazhan”) and Tianjin Hengying Trading Co., Ltd.
(“Hengying”) are steel trading companies controlled by the Company’s Chairman,
CEO and majority shareholder, Zuosheng Yu. Dazhan and Hengying acted as trading
agents of the Company to make purchases and sales for the Company.
 
 For the three months ended
                      September 30, 2009
                    
                    
                    For the three months ended
                      September 30, 2008Unaudited
                      (in thousands)
                    
                    
                    Unaudited
                      (in thousands)Purchase
      from Hengying and Dazhan
                    
                    $
                    11,751
                    
                    
                    $
                    14,871Sales
      to Hengying and Dazhan
                    
                    $
                    39,733
                    
                    
                    $
                    9,814
 
 For the nine months ended
                      September 30, 2009
                    
                    
                    For the nine months ended
                      September 30, 2008Unaudited
                      (in thousands)
                    
                    
                    Unaudited
                      (in thousands)Purchase
      from Hengying and Dazhan
                    
                    $
                    27,615
                    
                    
                    $
                    69,221Sales
      to Hengying and Dazhan
                    
                    $
                    40,758
                    
                    
                    $
                    15,786
 
 All
transactions with related parties are short term in nature. Settlements for the
balances are usually in cash. The following charts summarize the related party
transactions as of September 30, 2009 and December 31, 2008.
  30
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
 
 a.
              Accounts
      receivable – related party
  Name
      of related parties
                              
                              Relationship
                              
                              September 30,
                                2009
                              
                              
                              December 31,
                                2008Unaudited
                                (in
      thousands)
                              
                              
                              (in
      thousands)Tianjin
      Tongyong Qiugang Company
                              
                              Chairman
      of General Steel Holdings, Inc. owns more than 5% in this
      company
                              
                              $
                              2,784
                              
                              
                              $
                              -
 
 b.
              Other
      receivables - related parties
 
 Name of related parties
                                        
                                        Relationship
                                        
                                        September 30
                                          2009
                                        
                                        
                                        December 31,
                                          2008Unaudited
                                          (in
      thousands)
                                        
                                        
                                        (in
      thousands)Beijing
      Wendlar
                                        
                                        Chairman
      of General Steel Holdings, Inc. owns more than 5% in this
      company
                                        
                                        $
                                        273
                                        
                                        
                                        $
                                        376Tianjin
      Jin Qiu Steel Market
                                        
                                        Chairman
      of General Steel Holdings, Inc. owns more than 5% in this
      company
                                        
                                        
                                        147
                                        
                                        
                                        
                                        147Total
                                        
                                        
                                        
                                        $
                                        420
                                        
                                        
                                        $
                                        523
 
 c.
              Advances
      on inventory purchase – related
parties
 
 Name of related parties
                                        
                                        Relationship
                                        
                                        September 30,
                                          2009
                                        
                                        
                                        December 31,
                                          2008Unaudited
                                          (in
      thousands)
                                        
                                        
                                        (in
      thousands)Baogang
      Jiannan Company
                                        
                                        Owned
      by noncontrolling shareholders of one subsidiary
                                        
                                        $
                                        35
                                        
                                        
                                        $
                                        1,873Long
      Men Group
                                        
                                        General
      Steel’s joint venture partner
                                        
                                        
                                        12,573
                                        
                                        
                                        
                                        502Maoming
      Shengze Trading
                                        
                                        Chairman
      of General Steel Holdings, Inc. owns more than 5% in this
      company
                                        
                                        
                                        5,245
                                        
                                        
                                        
                                        -Total
                                        
                                        
                                        
                                        $
                                        17,853
                                        
                                        
                                        $
                                        2,375
 
 d.
              Accounts
      payable due to related parties
 
 Name
      of related parties
                                                            
                                                            Relationship
                                                            
                                                            September 30,
                                                              2009
                                                            
                                                            
                                                            December 31,
                                                              2008Unaudited
                                                              (in
      thousands)
                                                            
                                                            
                                                            (in
      thousands)Dazhan
                                                            
                                                            Controlled
      by the Company’s Chairman, CEO and majority shareholders
                                                            
                                                            $
                                                            10,154
                                                            
                                                            
                                                            $
                                                            10,630Henan
      Xinmi Kanghua
                                                            
                                                            Longmen
      JV’s subsidiary’s joint venture partner
                                                            
                                                            
                                                            786
                                                            
                                                            
                                                            
                                                            1,501Zhengzhou
      Shenglong
                                                            
                                                            Longmen
      JV’s subsidiary’s joint venture partner
                                                            
                                                            
                                                            164
                                                            
                                                            
                                                            
                                                            -Baotou
      Shengda Steel Pipe
                                                            
                                                            Chairman
      of General Steel Holdings, Inc. owns more than 5% in this
      company
                                                            
                                                            
                                                            57
                                                            
                                                            
                                                            
                                                            1,558ShanXi  Fangxin
                                                            
                                                            Longmen
      JV’s subsidiary’s joint venture partner
                                                            
                                                            
                                                            203
                                                            
                                                            
                                                            
                                                            1,451Baogang
      Jianan Group
                                                            
                                                            General
      Steel’s joint venture partner
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            187Jingma
      Jiaohua
                                                            
                                                            Longmen
      JV’s subsidiary (unconsolidated)
                                                            
                                                            
                                                            3,636
                                                            
                                                            
                                                            
                                                            -Beijing
      Daishang Trading Co
                                                            
                                                            Owned
      by noncontrolling shareholder of one subsidiary of Longmen Joint
      Venture
                                                            
                                                            
                                                            4,324
                                                            
                                                            
                                                            
                                                            -Total
                                                            
                                                            
                                                            
                                                            $
                                                            19,324
                                                            
                                                            
                                                            $
                                                            15,327
  31
 GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
 e.
              Short
      term loans due to related parties
 
 Name
      of related parties
                                        
                                        Relationship
                                        
                                        September 30,
                                          2009
                                        
                                        
                                        December 31,
                                          2008Unaudited
                                          (in
      thousands)
                                        
                                        
                                        (in
      thousands)Dazhan
                                        
                                        Chairman
      of General Steel Holdings, Inc. owns more than 5% in this
      company
                                        
                                        $
                                        3,946
                                        
                                        
                                        $
                                        3,946Hengying
                                        
                                        Chairman
      of General Steel Holdings, Inc. owns more than 5% in this
      company
                                        
                                        
                                        3,404
                                        
                                        
                                        
                                        3,404Beijing
      Wendlar
                                        
                                        Chairman
      of General Steel Holdings, Inc. owns more than 5% in this
      company
                                        
                                        
                                        1,012
                                        
                                        
                                        
                                        -De
      Long Fen Ti
                                        
                                        
                                        
                                        $
                                        8,362
                                        
                                        
                                        $
                                        7,350
 
 f.
              Other
      payables due to related parties
 
 Name
      of related parties
                                        
                                        Relationship
                                        
                                        September 30,
                                          2009
                                        
                                        
                                        December 31,
                                          2008Unaudited
                                          (in
      thousands)
                                        
                                        
                                        (in
      thousands)Golden
      Glister
                                        
                                        Chairman
      of General Steel Holdings, Inc. owns more than 5% in this
      company
                                        
                                        $
                                        600
                                        
                                        
                                        $
                                        600Hengyin
                                        
                                        Chairman
      of General Steel Holdings, Inc. owns more than 5% in this
      company
                                        
                                        
                                        1,474
                                        
                                        
                                        
                                        -Baotou
      Shengda Steel Pipe
                                        
                                        Chairman
      of General Steel Holdings, Inc. owns more than 5% in this
      company
                                        
                                        
                                        -
                                        
                                        
                                        
                                        77Total
                                        
                                        
                                        
                                        $
                                        2,074
                                        
                                        
                                        $
                                        677
 
 32
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
 g.
              Customer
      deposit – related parties
 
 Name
      of related parties
                                        
                                        Relationship
                                        
                                        September 30,
                                          2009
                                        
                                        
                                        December 31,
                                          2008Unaudited
                                          (in
      thousands)
                                        
                                        
                                        (in
      thousands)Dazhan
                                        
                                        Chairman
      of General Steel Holdings, Inc. owns more than 5% in this
      company
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        2,760Haiyan
                                        
                                        Longmen
      JV’s subsidiary (unconsolidated)
                                        
                                        
                                        -
                                        
                                        
                                        1,522Maoming
      Heng Da Materials
                                        
                                        Chairman
      of General Steel Holdings, Inc. owns more than 5% in this
      company
                                        
                                        
                                        -
                                        
                                        
                                        
                                        2,934Total
                                        
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        7,216
 
 Note
17 – Business combination
 
 On
January 14, 2008, the Company through Longmen Joint Venture, completed its
acquisition of a controlling interest in Hancheng Tongxing Metallurgy Co., Ltd.
(“Tongxing”). Tongxing contributed its land use right of approximately 53 acres
(217,487 square meters) with an appraised value of approximately $4.1 million
(RMB 30 million). Pursuant to the agreement, the land will be converted into
shares valued at approximately $3.1 million (RMB 23 million), providing the
Joint Venture stake of 22.76% ownership in Tongxing and making it Tongxing’s
largest and controlling shareholder. The parties agreed to make the effective
date of the transaction January 1, 2008. The acquisition is accounted for as
acquisition under common control.
 
 Assumed
      byTongxing
                    
                    Fair Value
                    
                    
                    Longmen Joint Venture
                      (22.76%)(in
      thousands)
                    
                    
                    (in
      thousands)Current
      assets
                    
                    $
                    55,505
                    
                    
                    $
                    12,633Non
      current assets
                    
                    
                    8,088
                    
                    
                    
                    1,841Total
      assets
                    
                    
                    63,593
                    
                    
                    
                    14,474Total
      liabilities
                    
                    
                    50,782
                    
                    
                    
                    11,558Net
      assets
                    
                    $
                    12,811
                    
                    
                    $
                    2,916
 
 On August
11, 2008, the Company through its subsidiary, Longmen Joint Venture, completed
its acquisition of a controlling interest in Beijing Hua Tian Yu Long
International Steel Trade Co., Ltd. The Longmen Joint Venture paid $0.1 million
(RMB0.9 million) for 50% equity based on the appraisal value on September 30
2008.
  33
 GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
 On June
25, 2008, The Company through Qiu Steel Investment entered into equity purchase
agreement with the shareholders of Maoming to acquire 99% equity of Maoming. The
total purchase price for the acquisition is $7.3 million (RMB 50 million). The
fair value of Maoming was $10.1 million (RMB 69 million) as of September 30
2008.  Pursuant to Generally accepted accounting principles, the
excess of total fair value acquired over purchase price should be allocated as a
pro rata reduction of non-current assets. Subsequently, the Company recorded the
difference as a reduction of fixed assets acquired.
 
 The joint
venture’s name is Maoming Heng Da Steel Group Co. Ltd., a company formed under
the laws of the PRC. It is located in Maoming city, Guangdong province in China.
It produces and sells high speed wire.
 
 Assumed
      byMaoming
                    
                    Fair Value
                    
                    
                    The Company(in
      thousands)
                    
                    
                    (in
      thousands)Current
      assets
                    
                    $
                    45,314
                    
                    
                    $
                    44,861Non-current
      assets
                    
                    
                    81,780
                    
                    
                    
                    78,291Total
      assets
                    
                    
                    127,094
                    
                    
                    
                    123,152Total
      liabilities
                    
                    
                    117,027
                    
                    
                    
                    115,857Net
      assets
                    
                    $
                    10,067
                    
                    
                    $
                    7,295
 
 Distribution
payable to former shareholders for the above acquisitions amount to $15.9
million and $18.8 million as of September 30 2009 and December 31, 2008,
respectively.
 
 Note
18 - Equity
 
 On
January 8, 2008 the Company issued 150,000 shares of common stock at $10.43 per
share as additional note issuance cost totaled $1.6 million. The shares price is
determined as the quoted market price on the date granted.
 
 On
February 5, 2008, the Company issued senior management and directors 76,600
shares of common stock at $7.16 per share, as compensation. The shares were
valued at the quoted market price on the date granted. The Company recorded
compensation expense of $0.5 million.for the year ended December 31,
2008.
 
 On April
14, 2008, the Company, Mr, Zuosheng Yu, (CEO of the Company) and Mr. Zhang Dan
Li (BOD member of Long Men Joint Venture) entered into a compensation agreement
in which Mr. ZuoSheng Yu agreed to transfer his own 600,000 shares to Mr. Zhang
Dan Li in exchange for 15 years of service in the Company. Pursuant to Generally
accepted accounting principles (Share-Based Payment) share-based payments
awarded to an employee of the reporting entity by a related party or other
holder of an economic interest in the entity is treated as compensation as if
the shareholder has made a capital contribution. The shares are valued at $6.91
on grant date for a total of $4.1 million and will be amortized over the life
agreement. A total of $0.2 million of compensation expense and additional paid
in capital has been recorded in 2008.
  34
 GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
 On April
15, 2008, the Company granted senior management and directors 87,400 shares of
common stock at $6.66 per share, as compensation. The shares were valued at the
quoted market price on the date granted. The Company recorded compensation
expense of $0.6 million  for the year ended December 31,
2008.
 
 On July
3, 2008, the Company granted senior management and directors 90,254 shares of
common stock at $10.29 per share, as compensation. The shares were valued at the
market price on the date granted. The Company recorded compensation expense of
$0.9 million for the year ended December 31, 2008.
 
 541,299
shares of common stock were issued upon conversion of notes with a carrying
value of $6.8 million at a conversion price of $12.48. In addition 195,965
shares of common stock were issued as make whole interest expense of $2.3
million.
 
 In
September 2008, 140,000 warrants, issued in connection with the redeemable
preferred stock, were exercised at $5.00 per share.
 
 On
October 28, 2008, the company granted Teamlink Investment Limited, 100,000
shares of commons stock at $3.6 per share as consulting service expense $0.4
million. According to the period of service provided, $0.1 million was recorded
as expense in 2008 and $0.3 million will be amortized within 10 months. $0.3
million of public relationship expense had been recorded for the nine months
ended September 30, 2009.
 
 On
November 24, 2008, the Company granted senior management and directors 87,550
shares of common stock at $3.50 per share, as compensation. The shares were
valued at the market price on the date granted. The Company recorded
compensation expense of $0.3 million for the year ended December 31,
2008.
 
 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
March 9, 2009, the Company granted senior management and directors 109,250
shares of common stock at $1.85 per share, as compensation. The shares were
valued at the quoted market price on the date granted. The Company recorded
compensation expense of $0.2 million for the nine months ended September 30,
2009.
 
 On
April 7, 2009, the Company granted senior management and directors 106,750
shares of common stock at $2.77 per share, as compensation. The shares were
valued at the quoted market price on the date granted. The Company recorded
compensation expense of $0.3 million for the nine months ended September 30,
2009.
 
 On May 8,
2009, the Company issued 300,000 shares of common stock to Maoming Hengda
Steel’s debtor, Guangzhou Hengda at $6 per share, as cash payments made for
settling other short term loan.
 
 From May
7 to September 30, 2009, $30.0 million of notes was converted to 7,045,274
shares of common stock at Conversion Price, $4.2511. According to the
convertible bond agreement, the Company incurred the make whole interest expense
of $8.8 million. As of September 30, 2009, 1,795,977 shares of common stock had
been issued. See note 11 for details.
  35
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
 On July
15 and Aug 21, the Company granted convertible notes holders 44,065 shares of
common stock at price of $4.2511 as cash payments made for
interest.
 
 On
September 2, 2009, the Company granted senior management and directors 107,050
shares of common stock at $3.62 per share, as compensation. The shares were
valued at the quoted market price on the date granted. The Company recorded
compensation expense of $0.4 million..
 
 The
Company has the following warrants outstanding:
 
 Outstanding
      as of January 1, 2008
                        
                        
                        1,388,292Granted
                        
                        
                        -Forfeited
                        
                        
                        (93,334
                        )Exercised
                        
                        
                        (140,000
                        )Outstanding
      As of December 31, 2008
                        
                        
                        1,154,958Granted
                        
                        
                        -Forfeited
                        
                        
                        -Exercised
                        
                        
                        -Outstanding
      As of September 30, 2009
                        
                        
                        1,154,958
 
 Outstanding Warrants
                        
                        
                        Exercisable WarrantsExercise
                          Price
                        
                        
                        Number
                        
                        
                        Average
                          Remaining
                          Contractual
                          Life
                        
                        
                        Average
                          Exercise
                          Price
                        
                        
                        Number
                        
                        
                        Average
                          Remaining
                          Contractual Life$
                        13.51
                        
                        
                        
                        1,154,958
                        
                        
                        
                        3.62
                        
                        
                        $
                        13.51
                        
                        
                        
                        1,154,958
                        
                        
                        
                        3.62
 
 Note
19 – Retirement plan
 
 Regulations
in the People’s Republic of China 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. Employees are required to contribute
8% of their base salary to the plan. Total pension expense incurred by the
Company amounted to $0.6 million and $1.1 million for the three months ended
September 30, 2009 and 2008, respectively, and $2.2 million and $2.4 million for
the nine months ended September 30, 2009 and 2008, respectively.
 
 Note
20 – 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.
  36
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
 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
21 – Commitment and contingencies
 
 Hancheng
Tongxing Metallurgy Co., Ltd., one subsidiary of Longmen Joint Venture, is
obligated to contribute $33.0 million (RMB 225 million), as registered capital
to Shaanxi Longmen Coal and Chemical Co., Ltd by the end of 2010. Tongxing had
contributed $6.6 million as of September 30, 2009.
 
 Daqiuzhuang
Metal provides dormitory facilities for its employees under a 10 year rental
contract. The agreement began January 2006 and required full prepayment for the
10 year period totaling $0.5 million.
 
 Daqiuzhuang
Metal rented land for 50 years starting September 2005. Total amount of the rent
over the 50 years period is approximately $1.0 million (or RMB 8
million).
 
 Baotou
Steel Pipe Joint Venture has 5 years rental agreement with Bao Gang Jian An for
property and buildings. The agreement began June 2007 for $0.3 million (or
RMB1.8 million) per year.
 
 As of
September 30, 2009, total future minimum lease payments for the unpaid portion
under an operating lease were as follows:
 
 Year ended December 31,
                    
                    Amount(in thousands)2009
                    
                    $
                    7902010
                    
                    
                    2642011
                    
                    
                    2642012
                    
                    
                    1322013
                    
                    
                    -Thereafter
                    
                    
                    -Total
                    
                    $
                    1,450
 
 Total
rental expense amounted to $0.1 million and $0.1 million for the three months
ended September 30 2009 and 2008, respectively and rental expense for the nine
months ended September 30, 2009 and 2008, amounted to $0.3 million and $0.3
million, respectively.
  37
 
 GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
  Long Men
Joint Venture has $19.2 mil contractual obligation in its construction
projects.as of September 30 2009.
 
 Note
22 – Segments
 
 The
Company sells steel which are 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 SFAS, 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 SFAS 131, the
Company's net revenue from external customers by main product lines is as
follows:
 
 For
      the three months ended
                        
                        
                        For
      the nine months ended2009
                        
                        
                        2008
                        
                        
                        2009
                        
                        
                        2008(in
      thousands)ProductsRe-bar
                        
                        $
                        455,054
                        
                        
                        $
                        355,938
                        
                        
                        $
                        1,112,536
                        
                        
                        $
                        948,171Hot-Rolled
      Sheets
                        
                        
                        14,982
                        
                        
                        
                        35,631
                        
                        
                        
                        41,559
                        
                        
                        
                        117,997High
      Speed Wire
                        
                        
                        10,271
                        
                        
                        
                        14,376
                        
                        
                        
                        54,007
                        
                        
                        
                        14,376Spiral-Welded
      Steel Pipe
                        
                        
                        4,445
                        
                        
                        
                        5,576
                        
                        
                        
                        8,391
                        
                        
                        
                        9,572Total
      sales revenue
                        
                        $
                        484,752
                        
                        
                        $
                        411,521
                        
                        
                        $
                        1,216,493
                        
                        
                        $
                        1,090,116
 
 Note
23 – Subsequent Event
 
 The
Company has performed an evaluation of subsequent events through November 6,
2009, which is the date of financial statements issuance and concluded no event
has occurred that required disclosure.
  38




ITEM
2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS




Note
Regarding 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.





Recent
Developments





Continued Record Growth:





We have experienced continued record
growth in revenue, shipment volume and income from operations.





For the three month period ended
September 30, 2009 revenue was $484.75 million; shipment volume was 1.04 million
metric tons and income from operations was $29.25 million. This is the highest
revenue, shipment volume and operating profit in one quarter ever recorded by
us.


Operating
results for the three months and nine months ending September 30, 2009 are shown
below:


Three
      months ended
                
                
                
                
                
                Nine
      months endedSeptember
      30,
                
                
                
                
                
                September
      30,unaudited
                
                
                unaudited
                
                
                
                
                
                unaudited
                
                
                unauditedIn
      thousands
                
                2009
                
                
                2008
                
                
                Increase
                
                
                2009
                
                
                2008
                
                
                IncreaseSHIPMENT
      VOLUME (metric tons)
                
                
                1,036
                
                
                
                619
                
                
                
                67.4
                %
                
                
                2,710
                
                
                
                1,733
                
                
                
                56.4
                %TOTAL
      REVENUES
                
                $
                484,752
                
                
                $
                411,521
                
                
                
                17.8
                %
                
                $
                1,216,493
                
                
                $
                1,090,116
                
                
                
                11.6
                %GROSS
      PROFIT
                
                
                39,735
                
                
                
                -6,347
                
                
                
                726.0
                %
                
                
                75,155
                
                
                
                29,503
                
                
                
                154.7
                %GROSS
      PROFIT MARGIN
                
                
                8.20
                %
                
                
                -1.54
                %
                
                
                632.5
                %
                
                
                6.18
                %
                
                
                2.71
                %
                
                
                128.0
                %INCOME
      FROM OPERATIONS
                
                $
                29,248
                
                
                $
                -18,675
                
                
                
                256.6
                %
                
                $
                45,936
                
                
                $
                1,139
                
                
                
                3933.0
                %





Our
shipment volume for the nine months ended September 30, 2009, increased by 56.4%
as compared to the same nine month period in 2008.  For the nine month
period ended September 30, 2009 our gross profit increased 154.7%, our gross
margin increased from 2.7% to 6.2% and our income from operations increased
3933.0% compared with the same period last year.




39





Our
Shaanxi Longmen Iron and Steel Co., Ltd. (“Longmen Joint Venture”), located in
the developing region of Shaanxi province, comprises 94% of our total revenue.
Shaanxi province, where we hold dominant market share for construction steel,
has seen steady demand resulting from the central government’s “Go West”
economic development initiative and economic stimulus package focused on
infrastructure construction.





Our positive operating results during a
period of global economic slowdown demonstrate the following
strengths:





·
            Our
      two-pronged growth strategy of upgrading our existing operations and
      growth through merger and acquisition activities has proven
      successful;


·
            We
      are a direct beneficiary of the China economic stimulus infrastructure
      spending program; and


·
            The
      developing regions of China are growing and have not been significantly
      impacted by the global economic
slowdown.





Company
Overview





Through our headquarters in Beijing,
China, we operate a diverse portfolio of Chinese steel companies. Our companies
serve various industries and produce a variety of steel products including:
rebar, hot-rolled sheets,spiral-weld pipes
and high-speed wire. Our aggregate production capacity of steel products is 6.3
million metric tons per year, of which the majority is
rebar.  Individual industry segments have unique demand drivers, such
as rural income, infrastructure construction and energy consumption. Domestic
economic conditions are an overall driver for all our products.





We aim to become one of the largest and
most profitable non-government owned steel companies in China through the
acquisition of Chinese steel companies. We intend to increase the profitability
and efficiencies of the steel companies we acquire through the infusion of
applied western management practices, advanced production technologies and
capital resources.





Our strategy is to grow through
aggressive mergers, joint ventures and acquisitions targeting state-owned
enterprise steel companies and selected entities with outstanding growth
potential. We have executed this strategy by acquiring controlling interest
positions in three joint ventures. We are actively pursuing a plan to acquire
additional assets.





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





·
            Tianjin
      Daqiuzhuang Metal Sheet Co., Ltd.;


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


·
            Shaanxi
      Longmen Iron and Steel Co., Ltd.;
and


·
            Maoming
      Hengda Steel Group Limited.





Steel
Operating Companies





•
Tianjin Daqiuzhuang Metal
Sheet Co., Ltd.





Tianjin Daqiuzhuang Metal Sheet Co.,
Ltd. (“Daqiuzhuang Metal”), started operations in 1988. Daqiuzhuang Metal’s core
business is manufacturing high quality hot-rolled carbon and silicon steel
sheets mainly used in the production of small agricultural vehicles and other
specialty markets.




40





Daqiuzhuang Metal has ten steel sheet
production lines capable of processing approximately 400,000 metric tons of
0.75mm to 2.0mm hot-rolled steel sheets per year. Products are sold through a
nation-wide network of 35 distributors and three regional sales
offices.





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





On May 14, 2009, Daqiuzhuang Metal
changed its official name from “Tianjin Daqiuzhuang Metal Sheet Co. Ltd.” to
“General Steel (China) Co., Ltd.” to better reflect its role as a merger and
acquisition platform for steel company investments in China.





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





On April 27, 2007 Daqiuzhuang Metal and
Baotou Iron and Steel Group Co., Ltd. (“Baotou Steel”) entered into an Amended
and Restated Joint Venture Agreement (the “Baotou Steel Joint Venture
Agreement”), amending the Joint Venture Agreement entered into by the parties on
September 28, 2005.  The Baotou Steel Joint Venture Agreement
increased Daqiuzhuang Metal's ownership interest in the Baotou Steel - General
Steel Special Steel Pipe Joint Venture Co., Ltd. (“Baotou Steel Pipe Joint
Venture”) to 80%.





Baotou Steel Joint Venture has four
production lines capable of producing 100,000 metric tons of double spiral-weld
pipes used mainly in the energy sector primarily to transport oil and steam.
These pipes have a diameter ranging from 219mm to 1240mm, a wall thickness
ranging from 6mm to 13mm, and a length ranging from 6m to12m. Presently, Baotou
Steel Pipe Joint Venture sells its products using an internal sales force to
customers in the Inner Mongolia Autonomous Region and the northwest region of
China.





•
Shaanxi Longmen Iron and Steel
Co., Ltd.





Effective June 1, 2007 through two
subsidiaries, Daqiuzhuang Metal and Tianjin Qiu Steel Investment Co., Ltd., we
entered into a joint venture agreement with Shaanxi Longmen Iron & Steel
Group Co., Ltd. (“Long Steel Group”) to form Shaanxi Longmen Iron and Steel Co.,
Ltd. (“Longmen Joint Venture”). Through Daqiuzhuang Metal and Tianjin Qiu Steel
Investment Co., Ltd., we invested approximately $39 million in cash and
collectively hold approximately 60% of the 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 capacity.  Our Longmen Joint
Venture, assumed existing operating units of the Long Steel Group. The Long
Steel Group contributed most of its working assets to the Longmen Joint
Venture.





Currently, the Longmen Joint Venture
has four branch offices, seven subsidiaries under direct control and eight
entities in which it has a non-controlling interest.  It employs
approximately 6,250 full-time workers.  In addition to steel
production, the Longmen Joint Venture operates transportation services through
its Changlong Branch, located at Hancheng city, Shaanxi province. Changlong
Branch owns 153 vehicles and provides transportation services exclusively to the
Longmen Joint Venture.





Coke
Operation: Longmen Joint Venture owns 22.76% of Hancheng Tongxing Metallurgy
Co., Ltd. (“Tongxing”). Located in Hancheng city, Shaanxi province, Tongxing
produces second grade coke used as part the fuel for our blast
furnaces.  Its annualized coke production capacity is 150,000 metric
tons.  Tongxing sells all of its output to Longmen Joint
Venture.




41





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 radiates from
Xi’an, the capital of Shaanxi province, located 180km from the Longmen Joint
Venture’s main steel production site. We estimate we have approximately 72%
share of the Xi’an market for rebar according to Xi’an Steel Market Statistics
dated April 7, 2009





An established regional network of 40
agents and eight sales offices sell the Longmen Joint Venture’s products. All
products sell under the registered brand name of “Yulong” which enjoys strong
regional recognition and awareness. Rebar and billet products carry ISO 9001 and
9002 certification and many other products have won national quality awards.
Products produced at the facility have been used in the construction of the
Yangtze River Three Gorges Dam, Xi’an International Airport, the Xi Han, Xi Tong
and Xi Da provincial expressways, and are currently being used in the
construction of the Xi’an city subway system.





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





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





At the same time, the Longmen Joint
Venture also entered into a second equity agreement with the Long Steel Group to
acquire its 36% ownership interest in its subsidiary, Hualong. The Longmen Joint
Venture paid $430 thousand (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 processes in making steel.





On January 11, 2008, the Longmen Joint
Venture completed its acquisition of a controlling interest in Hancheng Tongxing
Metallurgy Co., Ltd. (“Tongxing”). The Longmen Joint Venture contributed its
land use right of 21.45 hectares (approximately 53 acres) with an appraised
value of approximately $4.1 million (RMB30 million). Pursuant to the agreement,
the land was converted into shares valued at approximately $3.1 million (RMB22.7
million), providing the Longmen Joint Venture a 22.76% ownership stake in
Tongxing and making it Tongxing’s largest and controlling shareholder. Tongxing
has two operating areas: coking coal production and rebar processing. Its coking
coal operations have an annual production capacity of 150,000 metric tons. Its
rebar processing facility has an annualized rolling capacity of 300,000 metric
tons.





•  Maoming
Hengda Steel Group Limited





On June 25, 2008 through our subsidiary
Tianjin Qiu Steel Investment, we acquired 99% of Maoming Hengda Steel Group,
Limited (“Maoming”) for $7.3 million (approximately RMB 50 million). Maoming’s
core business is the production of high-speed wire and rebar, products used in
the construction industry.  Located on 140 hectares (approximately 346
acres) in Maoming city, Guangdong province, the facility has two production
lines capable of producing 1.8 million metric tons of 5.5mm to 16mm diameter
high-speed wire and 12mm to 38mm diameter rebar annually. The products are sold
through nine distributors targeting customers in Guangxi province and the
western region of Guangdong province.  Previously, the Maoming
facility had been operating at approximately 10% of its capacity due to, we
believe, the previous owners corporate focus on matters unrelated to the Maoming
facility.




42





To take
advantage of stronger market demand, in the second quarter of 2009, we relocated
the 800,000 metric ton capacity rebar production line from the Maoming facility
to the Longmen Joint Venture.





Operating
Information Summary by Subsidiaries





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





Stock
listing





Our
stock trades on the NYSE under the ticker symbol “GSI”.





Factors
affecting our operating results





Demand
for our products:





Overall, domestic economic growth is an
important demand driver for our products. Currently, China is experiencing an
economic downturn after eight years of record growth.  Nevertheless,
according to estimates issued by Hong Kong and Shanghai Banking Cooperation
Ltd., HSBC on November 1, 2009, it estimates that China’s economy will still
grow by approximately 8.1% in 2009, well above many western developed economies.
Industry demand drivers for our products include construction and infrastructure
growth, 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 11th
Five-Year National Economic and Social Development Plan (the
“NESDP”)(2006-2010), development of China’s western region is one of the
top-five national economic priorities.  Shaanxi, the province where
Longmen Joint Venture is located, has been designated as a bridgehead 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
180km from Xi’an and does not have another major competitor within a 250km
radius. According to Shaanxi Provincial Development and Reform Commission,
total fix assets investment was approximately RMB113billion for the first nine
months of 2009, a 71% increase over the same period last year. Major projects
include thirty-four new highways, expressways and railways, one new airport, the
expansion of the Xi’an airport, two new ring subway systems and seven irrigation
reservoirs. We see strong demand for our products driven by these and many other
construction and infrastructure projects. We believe that there will be
sustained regional demand for several years ahead as the government continues to
strengthen its western region development efforts.





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





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




43





At Maoming, infrastructure growth and
business development drive demand for our construction steel products. Guangdong
province serves as an export hub to Southeast Asia and abroad for many products
produced in China, and is one of China’s most economically advanced
provinces.





Supply of
raw materials:





Iron ore





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





Longmen Joint Venture represents 4.8
million metric tons of our aggregate 6.3 million metric ton annual production
capacity.  At Longmen Joint Venture, approximately 90% of the
production costs are attributable to the purchase of raw materials, with iron
ore being the largest component of the purchase.





According to the China Iron and Steel
Association, approximately 60% of the domestic steel industry’s demand for iron
ore must be filled by imports. At our Longmen Joint Venture, we purchase iron
ore from four primary sources: the Mulonggou mine (owned by the Longmen Joint
Venture), the Daxigou mine (owned by Long Steel Group, our joint venture
partner), domestic sources and from foreign sources. The Daxigou mine has 300
million metric tons of iron ore reserves. According to the terms of our joint
venture agreement with our strategic partner, the Long Steel Group, we have
first rights of refusal for sales and development 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 pig-iron.





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





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




Longmen Joint
Venture





Major
Suppliers





Name of the Supplier
                                
                                Raw Material
                                  Purchased
                                
                                % of Total Raw
                                  Material
                                  Purchased
                                
                                Relationship with GSIShaanxi
      Longmen Iron & Steel Group Co., Ltd.
                                
                                Iron
      Ore
                                
                                11.2%
                                
                                Affiliated
      companyShaanxi
      Haiyan Coal Chemical Industry Co., Ltd.
                                
                                Coke
                                
                                9.6%
                                
                                Related
      partyShaanxi
      Huanghe Material Co., Ltd.
                                
                                Coke
                                
                                7.4%
                                
                                OthersShaanxi
      Jinhu Industrial and Commercial Co., Ltd.
                                
                                Iron
      Ore
                                
                                2.6%
                                
                                OthersYunnan
      Jingliyuan Industrial Co., Ltd.
                                
                                Alloy
                                
                                2.5%
                                
                                OthersTotal
                                
                                33.3%
  44





Daqiuzhuang
Metal





Major
Suppliers





Name of the Supplier
                            
                            Raw Material
                              Purchased
                            
                            % of Total Raw
                              Material
                              Purchased
                            
                            Relationship with GSITianjin
      Hengying Trade Co., Ltd.
                            
                            Hot-roll
      coil
                            
                            56.1%
                            
                            Related
      partyTianjin
      Dazhan Industrial Co., Ltd.
                            
                            Hot-roll
      coil
                            
                            16.7%
                            
                            Related
      partyGeneral
      Tongyong Qiu Steel Pipe Co., Ltd.
                            
                            Hot-roll
      coil
                            
                            16.2%
                            
                            OthersShenghua
      Xinyuan
                            
                            Hot-roll
      coil
                            
                            6.9%
                            
                            OthersTianjin
      Zhaoliang Trading Co., Ltd.
                            
                            Hot-roll
      coil
                            
                            1.3%
                            
                            OthersTotal
                            
                            97.2%





Baotou Steel Pipe Joint
Venture





Major
Suppliers





Name of the Supplier
                            
                            Raw Material
                              Purchased
                            
                            % of Total Raw
                              Material
                              Purchased
                            
                            Relationship with GSIShaanxi
      Xinbang Trading Co., Ltd
                            
                            Steel
      coil
                            
                            46.2%
                            
                            OthersTianjin
      Jinchang I&E Co., Ltd.
                            
                            Steel
      coil
                            
                            12.7%
                            
                            OthersTianjin
      Zhaoliang Trade Co., Ltd.
                            
                            Steel
      coil
                            
                            12.3%
                            
                            OthersTianjin
      Fulida Pipe Co., Ltd.
                            
                            Steel
      coil
                            
                            10.2%
                            
                            OthersBaotou
      Xinzhongyuan Trade Co., Ltd.
                            
                            Steel
      coil
                            
                            6.3%
                            
                            OthersTotal
                            
                            87.7%





Maoming





Major
Suppliers





Name of the Supplier
                            
                            Raw Material
                              Purchased
                            
                            % of Total Raw
                              Material
                              Purchased
                            
                            Relationship with GSIMaoming
      Shengze Trading Co., Ltd.
                            
                            Billet
                            
                            46.6%
                            
                            Related
      partyChina
      Railway Material Commercial Corporation Tianjin Office
                            
                            Billet
                            
                            21.8%
                            
                            OthersGuangxi
      Shenglong Metallurgy Co., Ltd.
                            
                            Heavy
      oil
                            
                            9.7%
                            
                            OthersMaoming
      Zhengmao Develop Co., Ltd.
                            
                            Billet
                            
                            1.0%
                            
                            OthersMaoming
      Dazhongmao Petrochemical Co., Ltd.
                            
                            Heavy
      oil
                            
                            0.9%
                            
                            OthersTotal
                            
                            80.0%





(1) For
purposes of the above tables, the term (i) “Affiliated company” refers to our
joint venture partners, (ii) “Related party” refers to a company over whose
operating policies we can exercise control or significant influence and (iii)
“Others” refers to entities that are not related to us and are not an Affiliated
party or Related party.




45




Industry
consolidation





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





Results
of Operations





The
following table sets forth, for the periods indicated, statement of operations
data.





Three
      months ended
                  
                  
                  
                  
                  
                  Nine
      months endedIn
      thousands
                  
                  September
      30,
                  
                  
                  %
                  
                  
                  September
      30,
                  
                  
                  %2009
                  
                  
                  2008
                  
                  
                  Change
                  
                  
                  2009
                  
                  
                  2008
                  
                  
                  ChangeUnaudited
                  
                  
                  Unaudited
                  
                  
                  
                  
                  
                  Unaudited
                  
                  
                  UnauditedTOTAL
      REVENUES
                  
                  $
                  484,752
                  
                  
                  $
                  411,521
                  
                  
                  
                  17.8
                  %
                  
                  $
                  1,216,493
                  
                  
                  $
                  1,090,116
                  
                  
                  
                  11.6
                  %GROSS
      PROFIT
                  
                  
                  39,735
                  
                  
                  
                  -6,347
                  
                  
                  
                  726.0
                  %
                  
                  
                  75,155
                  
                  
                  
                  29,503
                  
                  
                  
                  154.7
                  %GROSS
      PROFIT MARGIN
                  
                  
                  8.2
                  %
                  
                  
                  -1.5
                  %
                  
                  
                  632.5
                  %
                  
                  
                  6.2
                  %
                  
                  
                  2.7
                  %
                  
                  
                  128.3
                  %SELLING,
      GENERAL AND ADMINISTRATIVE EXPENSES
                  
                  
                  10,487
                  
                  
                  
                  12,328
                  
                  
                  
                  -14.9
                  %
                  
                  
                  29,219
                  
                  
                  
                  28,364
                  
                  
                  
                  3.0
                  %INCOME
      (LOSS) FROM OPERATIONS
                  
                  
                  29,248
                  
                  
                  
                  -18,675
                  
                  
                  
                  256.6
                  %
                  
                  
                  45,936
                  
                  
                  
                  1,139
                  
                  
                  
                  3933.0
                  %Total
      other income (expense), net
                  
                  
                  -5,986
                  
                  
                  
                  31,726
                  
                  
                  
                  -118.9
                  %
                  
                  
                  -31,488
                  
                  
                  
                  -3,188
                  
                  
                  
                  887.7
                  %INCOME
      (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST
                  
                  
                  23,262
                  
                  
                  
                  13,051
                  
                  
                  
                  78.2
                  %
                  
                  
                  14,448
                  
                  
                  
                  -2,049
                  
                  
                  
                  805.1
                  %NET
      INCOME
                  
                  
                  19,470
                  
                  
                  
                  15,135
                  
                  
                  
                  28.6
                  %
                  
                  
                  7,262
                  
                  
                  
                  -1,502
                  
                  
                  
                  583.5
                  %NET
      INCOME ATTRIBUTABLE TO GENERAL STEEL
                  
                  
                  10,382
                  
                  
                  
                  20,464
                  
                  
                  
                  -49.3
                  %
                  
                  
                  -14,159
                  
                  
                  
                  -1,618
                  
                  
                  
                  775.1
                  %EARNINGS
      PER SHAREBasic
                  
                  $
                  0.23
                  
                  
                  $
                  0.57
                  
                  
                  
                  -59.6
                  %
                  
                  $
                  (0.35
                  )
                  
                  $
                  (0.05
                  )
                  
                  
                  660.9
                  %Diluted
                  
                  $
                  0.22
                  
                  
                  $
                  0.57
                  
                  
                  
                  -61.4
                  %
                  
                  $
                  (0.35
                  )
                  
                  $
                  (0.05
                  )
                  
                  
                  660.9
                  %





Sales
Revenue





Three
months ended September 30, 2009 compared with three months ended September 30,
2008





The
following table sets forth sales revenue and volume in metric tons for each of
our reporting segments.




SALES
      REVENUE
                                
                                Three
      months endingSeptember
      30, 2009
                                
                                
                                September
      30, 2008
                                
                                
                                Change
                                
                                
                                Changein
      thousands
                                
                                Volume
                                
                                
                                Revenue
                                
                                
                                %
                                
                                
                                Volume
                                
                                
                                Revenue
                                
                                
                                %
                                
                                
                                Volume
      %
                                
                                
                                Revenue
      %Unaudited
                                
                                
                                
                                
                                
                                UnauditedLongmen
      Joint Venture
                                
                                
                                958
                                
                                
                                $
                                455,054
                                
                                
                                
                                94
                                %
                                
                                
                                535
                                
                                
                                $
                                355,938
                                
                                
                                
                                87
                                %
                                
                                
                                79.1
                                %
                                
                                
                                27.8
                                %Maoming
                                
                                
                                41
                                
                                
                                $
                                10,271
                                
                                
                                
                                2
                                %
                                
                                
                                22
                                
                                
                                $
                                14,376
                                
                                
                                
                                3
                                %
                                
                                
                                86.4
                                %
                                
                                
                                -28.6
                                %Daqiuzhuang
      Metal
                                
                                
                                29
                                
                                
                                $
                                14,982
                                
                                
                                
                                3
                                %
                                
                                
                                47
                                
                                
                                $
                                35,631
                                
                                
                                
                                9
                                %
                                
                                
                                -38.3
                                %
                                
                                
                                -58.0
                                %Baotou
      Steel Pipe Joint Venture
                                
                                
                                8
                                
                                
                                $
                                4,445
                                
                                
                                
                                1
                                %
                                
                                
                                15
                                
                                
                                $
                                5,576
                                
                                
                                
                                1
                                %
                                
                                
                                -46.7
                                %
                                
                                
                                -20.3
                                %Total
                                
                                
                                1,036
                                
                                
                                $
                                484,752
                                
                                
                                
                                100
                                %
                                
                                
                                619
                                
                                
                                $
                                411,521
                                
                                
                                
                                100
                                %
                                
                                
                                67.4
                                %
                                
                                
                                17.8
                                %





Total Sales Revenue for the three
months ended September 30, 2009 increased 17.8% to $484.75 million from $411.52
million for the same period last year.





The increase in sales revenue compared
to the same period last year is predominantly due to production volume increases
of 79.1% at our Longmen Joint Venture and 86.4% at Maoming, offset by lower
average selling prices and production volume declines of 38.3% at Daqiuzhuang
Metal and 46.7% at Baotou Steel Pipe Joint Venture.





Longmen Joint Venture - Comprised 94%
of third quarter total sales. The 79% production volume increase was fueled by
stable demand for construction steel in our addressable markets and increased
production capacity from our two new 1,280 cubic meter blast
furnaces.





Maoming  - Comprised 2% of
third quarter total sales. The 86.4% production volume increase is due to higher
factory utilization compared to the same period last year. Maoming was acquired
June 25, 2008 and commenced operations in the same month.




46





Daqiuzhuang Metal – Comprised 3% of
third quarter total sales. The 38.3% production volume decrease reflects a drop
in demand for hot-rolled sheets. Currently, there is excess cold-rolled sheet
production capacity in the market which has driven down the price of cold-rolled
sheets.  At lower prices, cold-rolled sheets become a cost-effective
alternative for hot-rolled sheets typically used in the production of light
agricultural vehicles. Cold-rolled sheets are believed to have superior
qualities to hot-rolled sheets.





Baotou Steel Pipe Joint Venture –
Comprised 1% of third quarter total sales. The 46.7% volume decrease is due to a
large pipe processing order last year which is not present this
year.





Nine
months ended September 30, 2009 compared with nine months ended September 30,
2008




The
following table sets forth sales revenue and volume in metric tons for each of
our reporting segments.




SALES
      REVENUE
                                            
                                            Nine
      months endingSeptember
      30, 2009
                                            
                                            
                                            
                                            
                                            
                                            September
      30, 2008
                                            
                                            
                                            
                                            
                                            
                                            Change
                                            
                                            
                                            Changein
      thousands
                                            
                                            Volume
                                            
                                            
                                            Revenue
                                            
                                            
                                            %
                                            
                                            
                                            Volume
                                            
                                            
                                            Revenue
                                            
                                            
                                            %
                                            
                                            
                                            Volume
      %
                                            
                                            
                                            Revenue
      %Unaudited
                                            
                                            
                                            
                                            
                                            
                                            
                                            UnauditedLongmen
      Joint Venture
                                            
                                            
                                            2,451
                                            
                                            
                                            $
                                            1,112,536
                                            
                                            
                                            
                                            92
                                            %
                                            
                                            
                                            1,522
                                            
                                            
                                            $
                                            948,171
                                            
                                            
                                            
                                            87
                                            %
                                            
                                            
                                            61.0
                                            %
                                            
                                            
                                            17.3
                                            %Maoming
                                            
                                            
                                            160
                                            
                                            
                                            $
                                            54,007
                                            
                                            
                                            
                                            4
                                            %
                                            
                                            
                                            22
                                            
                                            
                                            $
                                            14,376
                                            
                                            
                                            
                                            1
                                            %
                                            
                                            
                                            627.3
                                            %
                                            
                                            
                                            275.7
                                            %Daqiuzhuang
      Metal
                                            
                                            
                                            82
                                            
                                            
                                            $
                                            41,559
                                            
                                            
                                            
                                            3
                                            %
                                            
                                            
                                            167
                                            
                                            
                                            $
                                            117,997
                                            
                                            
                                            
                                            11
                                            %
                                            
                                            
                                            -50.9
                                            %
                                            
                                            
                                            -64.8
                                            %Baotou
      Steel Pipe Joint Venture
                                            
                                            
                                            17
                                            
                                            
                                            $
                                            8,391
                                            
                                            
                                            
                                            1
                                            %
                                            
                                            
                                            22
                                            
                                            
                                            $
                                            9,572
                                            
                                            
                                            
                                            1
                                            %
                                            
                                            
                                            -22.7
                                            %
                                            
                                            
                                            -12.3
                                            %Total
                                            
                                            
                                            2,710
                                            
                                            
                                            
                                            1,216,493
                                            
                                            
                                            
                                            100
                                            %
                                            
                                            
                                            1,733
                                            
                                            
                                            
                                            1,090,116
                                            
                                            
                                            
                                            100
                                            %
                                            
                                            
                                            56.4
                                            %
                                            
                                            
                                            11.6
                                            %





Sales
revenue for the nine months ended September 30, 2009 increased 11.6% to $1.22
billion compared to $1.09 billion for the same period last year.





The increase in sales revenue compared
to the same period last year is predominantly due to production volume increases
of 61% at our Longmen Joint Venture and 627.3% at Maoming, offset by lower
selling prices and production volume decreases of 50.9% at Daqiuzhuang Metal and
22.7% at Baotou Steel Pipe Joint Venture.





The Sales Revenue increase is also
attributed to our Maoming acquisition, which we acquired June 25, 2008. Sales
Revenue for the nine months ended September 30, 2009 reflects a full nine months
of operations whereas this subsidiary only operated three months during the same
period last year.





Gross
Profit





Three
months ended September 30, 2009 compared with three months ended September 30,
2008


The
following table sets forth gross profit and volume in metric tons by each of our
reporting segments.




GROSS
      PROFIT
                                                                
                                                                Three
      Months Endingin
      thousands
                                                                
                                                                September
      30, 2009
                                                                
                                                                
                                                                September
      30, 2008
                                                                
                                                                
                                                                Change
      %unaudited
                                                                
                                                                
                                                                unauditedVolume
                                                                
                                                                
                                                                Gross
      profit
                                                                
                                                                
                                                                Margin
      %
                                                                
                                                                
                                                                Volume
                                                                
                                                                
                                                                Gross
      profit
                                                                
                                                                
                                                                Margin
      %
                                                                
                                                                
                                                                Gross
      ProfitLongmen
      Joint Venture
                                                                
                                                                
                                                                958
                                                                
                                                                
                                                                $
                                                                40,864
                                                                
                                                                
                                                                
                                                                8.98
                                                                %
                                                                
                                                                
                                                                535
                                                                
                                                                
                                                                $
                                                                (6,401
                                                                )
                                                                
                                                                
                                                                -1.80
                                                                %
                                                                
                                                                
                                                                738.4
                                                                %Maoming
                                                                
                                                                
                                                                41
                                                                
                                                                
                                                                $
                                                                (750
                                                                )
                                                                
                                                                
                                                                -7.31
                                                                %
                                                                
                                                                
                                                                22
                                                                
                                                                
                                                                $
                                                                (1,630
                                                                )
                                                                
                                                                
                                                                -11.34
                                                                %
                                                                
                                                                
                                                                54.0
                                                                %Daqiuzhuang
      Metal
                                                                
                                                                
                                                                29
                                                                
                                                                
                                                                $
                                                                (120
                                                                )
                                                                
                                                                
                                                                -0.80
                                                                %
                                                                
                                                                
                                                                47
                                                                
                                                                
                                                                $
                                                                1,092
                                                                
                                                                
                                                                
                                                                3.06
                                                                %
                                                                
                                                                
                                                                -111.0
                                                                %Baotou
      Steel Pipe Joint Venture
                                                                
                                                                
                                                                8
                                                                
                                                                
                                                                $
                                                                (259
                                                                )
                                                                
                                                                
                                                                -5.86
                                                                %
                                                                
                                                                
                                                                15
                                                                
                                                                
                                                                $
                                                                592
                                                                
                                                                
                                                                
                                                                10.61
                                                                %
                                                                
                                                                
                                                                -143.8
                                                                %Total
                                                                
                                                                
                                                                1,036
                                                                
                                                                
                                                                $
                                                                39,735
                                                                
                                                                
                                                                
                                                                8.20
                                                                %
                                                                
                                                                
                                                                619
                                                                
                                                                
                                                                $
                                                                (6,347
                                                                )
                                                                
                                                                
                                                                -1.54
                                                                %
                                                                
                                                                
                                                                726.0
                                                                %




Gross profit for the three months ended
September 30, 2009 increased 726.0% to $39.74 million from a loss of $6.35
million for the same period last year.




47





Longmen Joint
Venture





The Gross
Profit Margin of our largest subsidiary, Longmen Joint Venture, improved
significantly due to lower raw material prices compared to the same period last
year.  Additionally, selling prices trended upward in July and August
reaching peaks equal to highs of last year and began descending in
September.





Maoming





Although the Gross Profit at Maoming
improved by 54%, the Gross Profit of this subsidiary remains at a loss due to
low factory utilization and volatile price swings for steel billet, our raw
material.





Daqiuzhuang
Metal





Daqiuzhuang Metal is experiencing the
effects of the global economic slowdown, specifically weak demand and
competition from cold-rolled steel sheets has negatively affected our Gross
Profit.





Baotou Steel Pipe Joint
Venture





At our Baotou Steel Pipe Joint Venture,
gross margins have been negatively impacted by volatile raw material
prices.





Nine
months ended September 30, 2009 compared with nine months ended September 30,
2008




The
following table sets forth gross profit and volume in metric tons for each of
our reporting segments.


GROSS
      PROFIT
                  
                  Nine
      Months Endingin
      thousands
                  
                  September
      30, 2009
                  
                  
                  September
      30, 2008
                  
                  
                  Change
      %unaudited
                  
                  
                  unauditedVolume
                  
                  
                  Gross
      profit
                  
                  
                  Margin
      %
                  
                  
                  Volume
                  
                  
                  Gross
      profit
                  
                  
                  Margin
      %
                  
                  
                  Gross
      ProfitLongmen
      Joint Venture
                  
                  
                  2,451
                  
                  
                  $
                  80,259
                  
                  
                  
                  7.21
                  %
                  
                  
                  1,522
                  
                  
                  $
                  25,788
                  
                  
                  
                  2.72
                  %
                  
                  
                  211.2
                  %Maoming
                  
                  
                  160
                  
                  
                  $
                  (4,323
                  )
                  
                  
                  -8.00
                  %
                  
                  
                  22
                  
                  
                  $
                  (1,631
                  )
                  
                  
                  -11.34
                  %
                  
                  
                  165.1
                  %Daqiuzhuang
      Metal
                  
                  
                  82
                  
                  
                  $
                  (523
                  )
                  
                  
                  -1.26
                  %
                  
                  
                  167
                  
                  
                  $
                  4,718
                  
                  
                  
                  4.00
                  %
                  
                  
                  -111.1
                  %Baotou
      Steel Pipe Joint Venture
                  
                  
                  17
                  
                  
                  $
                  (258
                  )
                  
                  
                  -3.09
                  %
                  
                  
                  22
                  
                  
                  $
                  628
                  
                  
                  
                  6.56
                  %
                  
                  
                  -141.1
                  %Total
                  
                  
                  2,710
                  
                  
                  $
                  75,155
                  
                  
                  
                  6.18
                  %
                  
                  
                  1,733
                  
                  
                  $
                  29,503
                  
                  
                  
                  2.71
                  %
                  
                  
                  154.7
                  %





Gross
profit for the nine months ended September 30, 2009 increased 154.7% to $75.16
million from $29.5 million for the same period last year.





Our
significant gross profit increase is due to the increased gross profit at
Longmen Joint Venture. Our Longmen Joint Venture makes up 94% of our total
revenue and offsets the combined negative gross profit from our smaller
subsidiaries.





Selling,
General and Administrative Expenses





Three
months ended September 30, 2009 compared with three months ended September 30,
2008


In
      thousands
                
                Three months endedSeptember 30, 2009
                
                
                September 30, 2008
                
                
                Change %unaudited
                
                
                unauditedSELLING,
      GENERAL AND ADMINISTRATIVE EXPENSES
                
                $
                10,487
                
                
                $
                12,328
                
                
                
                -14.9
                %





Selling, general and administrative
expenses, such as executive compensation, office expenses, legal and accounting
charges, travel charges, equipment maintenance and various taxes decreased 14.9%
to $10.49 million for the three months ended September 30, 2009, compared to
$12.33 million for the same period of 2008. The
decrease is mainly due to the new blast furnaces requiring less maintenance
expenses.




Nine
months ended September 30, 2009 compared with nine months ended September 30,
2008


In
      thousands
                
                Nine months endedSeptember 30, 2009
                
                
                September 30, 2008
                
                
                Change %unaudited
                
                
                unauditedSELLING,
      GENERAL AND ADMINISTRATIVE EXPENSES
                
                $
                29,219
                
                
                $
                28,364
                
                
                
                3.0
                %




48





Selling,
general and administrative expenses increased 3% to $29.22 million for the nine
months ended September 30, 2009, compared to $28.36 million for the same period
of 2008. This minor increase in expenses during a period of 56.4% sales volume
increase was achieved by careful cost control measures.




Income
from operations
 
 Three
months ended September 30, 2009 compared with three months ended September 30,
2008





In thousands
                        
                        Three months endedSeptember 30, 2009
                        
                        
                        September 30, 2008
                        
                        Change %unaudited
                        
                        
                        unauditedINCOME
      (LOSS) FROM OPERATIONS
                        
                        $
                        29,248
                        
                        
                        $
                        -18,675
                        
                        256.6
                        %





Income
from operations for the three months ended September 30, 2009 increased to
$29.25 million from a loss of $18.68 million for the same period last year. This
was the highest income from operations we have ever recorded for a single
quarter.





This
result is a due to a combination of the following factors at our Longmen Joint
Venture:


·      Efficient
business plan execution by management;


·      Increased
capacity from our two newly completed 1280 cubic meter blast
furnaces;





·      High
selling prices in July and August; and


·      Stable
raw material prices.





Nine
months ended September 30, 2009 compared with nine months ended September 30,
2008




In thousands
                
                Nine months endedSeptember 30, 2009
                
                
                September 30, 2008
                
                
                Change %unaudited
                
                
                unauditedINCOME
      (LOSS) FROM OPERATIONS
                
                $
                45,936
                
                
                
                1,139
                
                
                
                3933.0
                %





Income from operations for the nine
months ended September 30, 2009 increased 3933.0% to $45.94 million from $1.14
million for the same period last year.





Our
increase in income from operations for the nine months ending September 2009
compared to the same period last year is primarily due the operating performance
of our Longmen Joint Venture.





Other
income (expense)





Three
months ended September 30, 2009 compared with three months ended September 30,
2008





Total
other income (expense) for the three months ended September 30, 2009 was an
expense of $5.99 million compared to an income of $31.73 million for the same
period last year.


49




In thousands
            
            Three months endedSeptember 30, 2009
            
            
            September 30, 2008
            
            
            Change %unaudited
            
            
            unauditedOTHER
      INCOME (EXPENSE), NETInterest
      income
            
            $
            826
            
            
            $
            646
            
            
            
            27.9
            %Interest/finance
      expense
            
            
            -4,174
            
            
            
            -6,872
            
            
            
            -39.3
            %Change
      in fair value of derivative liabilities
            
            
            -616
            
            
            
            29,885
            
            
            
            102.1
            %Gain
      from debt extinguishment
            
            
            
            
            
            
            7,169Government
      grantIncome
      from equity investments
            
            
            963
            
            
            
            -Other
      nonoperating income( expense), net
            
            
            -2,985
            
            
            
            898
            
            
            
            -432.4
            %Total
      other income (expense), net
            
            $
            -5,986
            
            
            $
            31,726
            
            
            
            -118.9
            %


The
difference between the $5.99 million expense for the three months ended
September 30, 2009 and the $31.73 million income for the three months ended 2008
is caused by following factors:





·
            The
      39.3% decrease in interest/finance expense is as a result of more interest
      expense was capitalized into construction in progress in
      2009;


·
            Change
      in fair value of derivative liabilities was a loss of $0.62 million for
      the three months ended September 30, 2009 compared to a gain of $29.89
      million for the same period last
year;


·
            Gain
      from debt extinguishment is none for the three months ended September 30,
      2009 compared to $7.17 million debt extinguishment at our Maoming facility
      for the three months ended September 30, 2008;
  and


·
            Other
      non-operating expense of $2.99 million for the three months ended
      September 30, 2009 is mainly comprised of costs associated with the
      disposal of fixed assets at our Longmen Joint
  Venture.





Change
in fair value of derivative liabilities and notes converted make whole
expense





These are
non-cash item linked to our convertible promissory notes issued December 13,
2007 (“December 2007 Notes”) and accompanying common stock purchase
warrants (“December 2007 Warrants”). We used the proceeds from the sale of
the December 2007 Notes and the December 2007 Warrants to finance the
acquisition of our largest subsidiary, Longmen Joint Venture.





These
items are not related to the operational performance of our iron and steel
business, but significantly impact our net income and earnings per
share.





Change
in fair value of derivative liabilities





According
to GAAP, our December 2007 Notes with the December 2007 Warrants 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.





Change in
fair value of derivative liabilities for the three months ended September 30,
2009 was a loss of $0.62 million compared to a gain of  $29.89 million
for the same period last year. The reason of the significant gain for the three
months ended September 30, 2008 was due to disruptions in the financial markets
causing stock prices globally to drop, including the stock price our company.
According to GAAP rules in valuing derivatives, the large drop in our share
price required us to record a $29.89 million gain in change in fair value of
derivative liabilities.





Notes
converted make whole interest




There is
a Make Whole Interest Payment clause in our December 2007 Notes. This
clause encourages our note holders to convert the December 2007 Notes into
our common stock in advance of the note maturity date.  GAAP requires
a portion of notes converted make whole interest expense to be
capitalized.


50




As of
September 30, 2009, 91.75% of our December 2007 Notes have been converted into
our common stock in advance of the note maturity date and only 8.25% of the
December 2007 Notes remain outstanding. This expense will no longer be incurred
once all the December 2007 Notes have been converted.




Nine months ended
September 30, 2009 compared with nine months ended September 30,
2008





In thousands
                    
                    Nine months endedSeptember 30, 2009
                    
                    
                    September 30, 2008
                    
                    
                    Change %unaudited
                    
                    
                    unauditedOTHER
      INCOME (EXPENSE), NETInterest
      income
                    
                    $
                    2,468
                    
                    
                    $
                    2,104
                    
                    
                    
                    17.3
                    %Interest/finance
      expense
                    
                    
                    (18,422
                    )
                    
                    
                    (19,149
                    )
                    
                    
                    -3.8
                    %Change
      in fair value of derivative liabilities
                    
                    
                    (23,228
                    )
                    
                    
                    4,769
                    
                    
                    
                    -587.1
                    %Gain
      from debt extinguishment
                    
                    
                    2,932
                    
                    
                    
                    7,169
                    
                    
                    
                    -59.1
                    %Government
      grant
                    
                    
                    3,433
                    
                    
                    
                    -Income
      from equity investments
                    
                    
                    3,661
                    
                    
                    
                    -Other
      nonoperating income( expense), net
                    
                    
                    (2,332
                    )
                    
                    
                    1,919
                    
                    
                    
                    -221.5
                    %Total
      other income (expense), net
                    
                    $
                    (31,488
                    )
                    
                    $
                    (3,188
                    )
                    
                    
                    887.7
                    %





The other
income (expense) for the nine months ended September 30, 2009 is an expense of
$31.49 million compared to expense of $3.19 million for the same period last
year.





The
difference between the $31.49 million expense for the nine months ended
September 30, 2009 and the $3.19 million expense for the three months ended 2008
is caused by following factors:







·
            Change
      in fair value of derivative liabilities was a loss of $23.23 million for
      the nine months ended September 30, 2009 compared to a gain of $4.77
      million for the same period last
year;


·
            Gain
      from debt extinguishment is $2.93 million at our Maoming facility for the
      nine months ended September 30, 2009 compared to $7.17 million debt
      extinguishment at our Maoming facility for the nine months ended September
      30, 2008; and


·
            Other
      non-operating expense $2.33 million for the nine months ended September
      30, 2009 is mainly comprised of costs associated with the disposal of
      fixed assets at our Longmen Joint Venture compared to gain of $1.92
      million for the same period last
year.





Change
in fair value of derivative liabilities and notes converted make whole
expense





These are
non-cash items linked to our December 2007 Notes along with our December
2007 Warrants. We used the proceeds from the sale of the December 2007
Notes and the December 2007 Warrants to finance the acquisition of our largest
subsidiary, Longmen Joint Venture.





For a complete discussion of change in
fair value of derivative liabilities and notes converted make whole expense, see
the discussion under -Other income (expense) three months ended September 30, 2009
compared with three months ended September 30, 2008.





Change
in fair value of derivative liabilities





Change in
fair value of derivative liabilities for the nine months ended September 30,
2009 was a loss of $23.23 million compared to a gain of  $4.77 million
for the same period last year.


51


Notes
converted make whole expense
 
 December
2007 Notes converted make whole interest for the nine months ended
September 30, 2009 was an expense of $2.75 million compared to none for the same
period last year.
 
 For the
purposes of the above disclosure, the following terms have the definitions set
forth below:


·
            Interest
      Income: interest received from deposits held in
  banks;





·
            Interest
      /finance expense: interest paid on bank loans, on early redemption of
      Notes Receivables various bank
fees;





·
            Notes-converted–make-whole
      expense: non-cash incentive written in our convertible bond agreement for
      early conversion by our note
holders;





·
            Change
      in fair value of derivative liabilities: related to valuation of the
      conversion features and warrant liabilities of our convertible debt; a
      non-cash, non-operating item;





·
            Gain
      from debt extinguishment: RMB20 million debt extinguishment by Hengda
      Group (Not only does the debt extinguishment add to our profitability, it
      also reduces cash needed to be paid
out.);





·
            Government
      grant: To reduce energy consumption and pollutant emissions, Shaanxi
      Province Development and Reform Commission worked with local industries to
      eliminate outdated iron and steel production facilities. During first
      quarter 2009 Longmen Joint Venture received RMB29 million in government
      incentives for compliance in dismantling two small blast furnaces, less
      RMB5 million residual book value of the
  furnaces;





·
            Income
      from equity investments: entities in which we do not have controlling
      interest and do not consolidate results into our financial statements;
      and





·
            Other
      non-operating income (expense), net: rental income collected by
      Daqiuzhuang Metal offset by disposal of obsolete equipment at our Longmen
      Joint Venture.




For
detail regarding the change in fair value of derivative liabilities and the
associated convertible note, see note 11 in the financial statement
footnotes.




Net
income before noncontrolling interest




Three
months ended September 30, 2009 compared to three months ended September 30,
2008




In thousands
                  
                  ThreemonthsendedSeptember30,2009
                  
                  
                  September30,2008
                  
                  
                  Change%Unaudited
                  
                  
                  UnauditedNet
      income before noncontrolling interest
                  
                  $
                  19,470
                  
                  
                  $
                  15,135
                  
                  
                  
                  28.6
                  %




Net
Income for the three months ended September 30, 2009 increased 28.6% to $19.47
million from $15.14 million for the same period last year.




For the
three months ended September 30, 2009 we had record income from operations of
$29.25 million, which was offset by $5.99 million in other expenses, and $3.79
million in taxes.




Nine
months ended September 30, 2009 compared to three months ended September 30,
2008





In
      thousands
                  
                  Nine months endedSeptember 30, 2009
                  
                  
                  September 30, 2008
                  
                  Change %Unaudited
                  
                  
                  UnauditedNet
      income (loss) before noncontrolling interest
                  
                  $
                  7,262
                  
                  
                  $
                  (1,502
                  )
                  583.5
                  %


52




Net
Income before noncontrolling interest for the nine months ended September 30,
2009 increased to a gain of $7.26 million from a loss of $1.50 million for the
same period last year.




For the
nine months ended September 30, 2009, we had record income from operations of
$45.94 million, which was offset by $31.49 million in other expenses, and $7.19
million in taxes.




Compared
to the nine months ended September 30, 2008, we had income from operations of
$1.14 million, which was offset by $3.19 million in other expenses, and a gain
of $0.55 million in taxes.




Net
income attributable to General Steel Holdings, Inc.





Three
months ended September 30, 2009 compared with three months ended September 30,
2008





In
      thousands
                      
                      Three months endedSeptember 30, 2009
                      
                      
                      September 30, 2008
                      
                      
                      Change %unaudited
                      
                      
                      unauditedNET
      INCOME (LOSS) BEFORE NONCONTROLLING INTEREST
                      
                      $
                      19,470
                      
                      
                      $
                      15,135
                      
                      
                      
                      28.6
                      %LESS:Net
      income (loss) attributable to the noncontrolling
    interest
                      
                      
                      9,088
                      
                      
                      
                      -5,329
                      
                      
                      
                      270.5
                      %NET
      INCOME ATTRIBUTABLE TO GENERAL STEEL
                      
                      $
                      10,382
                      
                      
                      $
                      20,464
                      
                      
                      
                      -49.3
                      %




Net
income attributable to General Steel Holdings, Inc. for the three months ended
September 30, 2009 decreased 49.3% to $10.38 million compared to $20.46 million
for the same period of last year.




For the three months ended September
30, 2009 income from operations was $29.25 million of which $9.09 million was
distributed to non-controlling interest.




For the
three months ended September 30, 2008 loss from operations was $18.68 million of
which $5.33 million loss was distributed to non-controlling
interest.





Nine
months ended September 30, 2009 compared with nine months ended September 30,
2008





In
      thousands
                    
                    Nine months endedSeptember 30, 2009
                    
                    
                    September 30, 2008
                    
                    
                    Change %unaudited
                    
                    
                    unauditedNET
      INCOME (LOSS) BEFORE NONCONTROLLING INTEREST
                    
                    $
                    7,262
                    
                    
                    $
                    -1,502
                    
                    
                    583.5
                    %LESS:Net
      income attributable to the noncontrolling interest
                    
                    
                    21,421
                    
                    
                    
                    116
                    
                    
                    
                    18366.4
                    %NET
      (LOSS) ATTRIBUTABLE TO GENERAL STEEL
                    
                    $
                    -14,159
                    
                    
                    $
                    -1,618
                    
                    
                    
                    775.1
                    %





Net loss attributable to General Steel
Holdings, Inc. for the nine months ended September 30, 2009 increased 775.1% to
a loss of $14.16 million compared to a loss of $1.62 million for the same period
of last year.




For the nine months ended September 30,
2009 income from operations was $45.94 million of which $21.42 million was
distributed to non-controlling interest.




For the
nine months ended September 30, 2008 income from operations was $1.14 million of
which $0.12 million was distributed to non-controlling interest.





Earnings
per share





Three
months ended September 30, 2009 compared with three months ended September 30,
2008





Three months endedEarnings per Share
                
                September 30, 2009
                
                
                September 30, 2008
                
                
                Change %unaudited
                
                
                unauditedNET
      INCOME ATTRIBUTABLE TO GENERAL STEEL
                
                $
                10,382
                
                
                $
                20,464
                
                
                
                -49.3
                %WEIGHTED
      AVERAGE NUMBER OF SHARESBasic
                
                
                44,973,882
                
                
                
                35,687,891
                
                
                
                26.0
                %Diluted
                
                
                45,750,152
                
                
                
                35,687,891
                
                
                
                28.2
                %EARNINGS
      PER SHAREBasic
                
                $
                0.23
                
                
                $
                0.57
                
                
                
                -59.9
                %Diluted
                
                $
                0.22
                
                
                $
                0.57
                
                
                
                -61.6
                %


53





Earnings
per share (basic) for the three months ended September 30, 2009 decreased 59.9%
to $0.23 per share compared to $0.57 for the same period of last
year.





Earnings
per share (diluted) for the three months ended September 30, 2009 decreased
61.6% to $0.22 per share compared to $0.57 for the same period of last
year.





The
primary reasons for the decrease in net income attributable to General Steel
Holdings, Inc. is due to change in fair value of derivative liabilities and
notes converted make whole expense.




It is
important to understand the items – change in fair value of derivative
liabilities and notes converted make whole expense to understand our financial
statements.





These
items are not related to the operational performance of our iron and steel
business, but significantly impact our net income and earnings per
share.





For a complete discussion of change in
fair value of derivative liabilities and notes converted make whole expense, see
the discussion under -Other income (expense) three months ended September 30, 2009
compared with three months ended September 30, 2008.





The
primary reason for the increase in our total number of shares outstanding is the
reduced conversion price of our outstanding convertible promissory notes (and
the conversions into common stock resulting there from) and the make whole
interest expense paid in shares also associated with the conversions of the
convertible promissory notes.





Nine
months ended September 30, 2009 compared with nine months ended September 30,
2008





Nine months endedEarnings per Share
                
                September 30, 2009
                
                
                September 30, 2008
                
                
                Change %unaudited
                
                
                unauditedNET
      INCOME (LOSS) ATTRIBUTABLE TO GENERAL STEEL
                
                $
                (14,159
                )
                
                $
                (1,618
                )
                
                
                775.1
                %WEIGHTED
      AVERAGE NUMBER OF SHARESBasic
                
                
                40,295,924
                
                
                
                35,157,579
                
                
                
                14.6
                %Diluted
                
                
                40,295,924
                
                
                
                35,157,579
                
                
                
                14.6
                %LOSS
      PER SHAREBasic
                
                $
                (0.35
                )
                
                $
                (0.05
                )
                
                
                660.3
                %Diluted
                
                $
                (0.35
                )
                
                $
                (0.05
                )
                
                
                660.3
                %





Loss per
share (basic and diluted) for the nine months ended September 30, 2009 increased
660.3% to a loss of $0.35 per share compared to a loss of $0.05 per share for
the same period of last year.





The
primary reasons for the increase in net loss attributable to General Steel
Holdings, Inc. is due to change in fair value of derivative liabilities and
notes converted make whole expense.




It is
important to understand the items – change in fair value of derivative
liabilities and notes converted make whole expense to understand our financial
statements.





These
items are not related to the operational performance of our iron and steel
business, but significantly impact our GAAP net income and earnings per
share.





For a complete discussion of change in
fair value of derivative liabilities andDecember 2007 Notesconverted make whole interest payment
expense, see the
discussion under -Other income
(expense) three months
ended September 30, 2009 compared with three months ended September 30,
2008.




The
primary factors for increase in share count are due to conversion of the
December 2007 Notes into our common stock and make whole interest expense paid
in shares also associated with the December 2007 Notes.


54





Adjusted
Earnings and Earnings per share





The
management of General Steel Holdings, Inc. uses non-GAAP adjusted net earnings
to measure the performance of our business internally by excluding non-recurring
items as well as non-cash charges related to our convertible promissory notes
issued December 13, 2007.  Our management believes that these non-GAAP
adjusted financial measures allow the management to focus on managing business
operating performance because these measures reflect the essential operating
activities of General Steel Holdings and provide a consistent method of
comparison to historical periods. We believe that providing the non-GAAP
measures that management uses internally to our investors is useful to investors
for a number of reasons. The non-GAAP measures provide a consistent basis for
investors to understand General Steel Holding’s financial performance in
comparison to historical periods without variation of non-recurring items and
non-operating related charges. In addition, it allows investors to evaluate our
performance using the same methodology and information as that used by the
management. Non-GAAP measures are subject to inherent limitations because they
do not include all of the expenses included under GAAP and because they involve
the exercise of judgment of which charges are excluded from the non-GAAP
financial measure. However, the management of General Steel Holdings, Inc.
compensates for these limitations by providing the relevant disclosure of the
items excluded.





Specifically,
in December 2007 we issued convertible promissory notes (“December 2007 Notes”)
and common stock purchase warrants (“December 2007 Warrants”) as part of a
private placement financing transaction. The convertible feature of the December
2007 Notes and the December 2007 Warrants are considered a derivative and GAAP
requires us to value this derivative using a valuation model linked to our stock
price,
conversion price and other variables. The period covering the third quarter of
2008 through the third quarter of 2009 has seen our stock price reach a high of
$15.15 and a low of $1.84. This wide fluctuation in our stock price has created
large derivative gains and losses not correlated to the underlying business of
the company. The end result is that derivative gain or loss may impact GAAP Net
Income to the extent that GAAP Net Income does not reflect the underlying
business of the company.





The
following table provides the non-GAAP financial measure and a reconciliation of
the non-GAAP measure to the GAAP net income.





Adjusted
Earnings and Earnings per share





Three
months ended September 30, 2009 compared with three months ended September 30,
2008





ADJUSTED  EARNING
      PER SHARE
                  
                  ThreemonthsendedSeptember30,
                    2009
                  
                  
                  September30,
                    2008
                  
                  
                  Change%Unaudited
                  
                  
                  UnauditedNET
      INCOME (LOSS) ATTRIBUTABLE TO GENERAL STEEL
                  
                  
                  10,382
                  
                  
                  
                  20,464
                  
                  
                  
                  -49.3
                  %less
      - Non-operating, non-cash expenses associated with our December 2007
      Convertible BondNotes
      converted-make-whole interest
                  
                  
                  3,700
                  
                  
                  
                  -Change
      in fair value of derivative liabilities
                  
                  
                  -616
                  
                  
                  
                  29,885
                  
                  
                  
                  -102.1
                  %ADJUSTED
      NET INCOME (LOSS)
                  
                  
                  7,298
                  
                  
                  
                  -9,421
                  
                  
                  
                  177.5
                  %WEIGHTED
      AVERAGE NUMBER OF SHARESBasic
                  
                  
                  44,973,882
                  
                  
                  
                  35,687,891
                  
                  
                  
                  26.0
                  %Diluted
                  
                  
                  45,750,152
                  
                  
                  
                  35,687,891
                  
                  
                  
                  28.2
                  %ADJUSTED
      EARNING (LOSS) PER SHAREBasic
                  
                  $
                  0.16
                  
                  
                  $
                  (0.26
                  )
                  
                  
                  161.5
                  %Diluted
                  
                  $
                  0.16
                  
                  
                  $
                  (0.26
                  )
                  
                  
                  161.5
                  %


55





For the
three months ended September 30, 2009, the adjusted net income was $7.3 million,
with an adjusted EPS of $0.16 per share. For the three months ended September
30, 2008, the adjusted net loss was $9.42 million, with an adjusted EPS loss of
$0.26 per share.





The
results of the three month period ended September 30, 2008 illustrate why
management uses adjusted earnings and adjusted earnings per share to measure the
performance of our business. According to GAAP, valuation of our December 2007
Notes and December 2007 Warrants must be marked-to-market using a
formula, which includes our stock price.  The global disruption in the
financial markets in the third and fourth quarters of 2008, severely drove down
stock prices worldwide. Because our stock price dropped substantially in the
quarter ended September 30, 2008, according to GAAP we are required to record a
$29.88 million gain in fair value of derivative liabilities for the third
quarter of 2008. This allowed us to record the largest quarterly GAAP net income
gain in the history of our company.





While
GAAP required us to book the largest single quarter GAAP net income gain in the
history of our company for third quarter 2008, our operations were losing money
and experiencing negative gross margins. The GAAP net income for third quarter
of 2008 clearly did not reflect our business operating results. By eliminating
the GAAP-required account impact of the non-cash; non-operating expenses
associated with our December 2007 Notes, the results better reflect the
operating performance of our iron and steel business.





Nine
months ended September 30, 2009 compared with nine months ended September 30,
2008





ADJUSTED  EARNING
      PER SHARE
                                
                                NinemonthsendedSeptember30,2009
                                
                                
                                September30,2008
                                
                                
                                Change%Unaudited
                                
                                
                                UnauditedNET
      INCOME (LOSS) ATTRIBUTABLE TO GENERAL STEEL
                                
                                
                                -14,159
                                
                                
                                
                                -1,618
                                
                                
                                
                                775.1
                                %less
      - Non-operating, non-cash expenses associated with our December 2007
      Convertible BondNotes
      converted-make-whole interest
                                
                                
                                -2,754Change
      in fair value of derivative liabilities
                                
                                
                                -23,228
                                
                                
                                
                                4,769
                                
                                
                                
                                -587.1
                                %ADJUSTED
      NET INCOME (LOSS)
                                
                                
                                11,823
                                
                                
                                
                                -6,387
                                
                                
                                
                                285.1
                                %WEIGHTED AVERAGE NUMBER OF SHARESBasic
                                
                                
                                40,295,924
                                
                                
                                
                                35,157,579
                                
                                
                                
                                14.5
                                %Diluted
                                
                                
                                40,295,924
                                
                                
                                
                                35,157,579
                                
                                
                                
                                14.5
                                %ADJUSTED EARNING (LOSS) PER SHAREBasic
                                
                                $
                                0.29
                                
                                
                                $
                                (0.18
                                )
                                
                                
                                261.1
                                %Diluted
                                
                                $
                                0.29
                                
                                
                                $
                                (0.18
                                )
                                
                                
                                261.1
                                %





For the
nine months ended September 30, 2009 the adjusted net income is $11.82 million
and the adjusted EPS is $0.29 per share. For the nine months ended September 30,
2008, the adjusted net loss was $6.39 million, with an adjusted EPS loss of
$0.18 per share.





Income
taxes





We did not carry on any business and
did not maintain any branch office in the United States during the three months
ended September 30, 2009 and 2008. Therefore, no provision for withholding or
U.S. federal or state income taxes or tax benefits on the undistributed earnings
and/or losses of our company has been made.





Under the Income Tax Laws of PRC, our
subsidiary, Daqiuzhuang Metal, 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.  Daqiuzhuang Metal 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.  Daqiuzhuang Metal is located in Tianjin Costal Economic
Development Zone and under the Income Tax Laws of Tianjin City of PRC, it is
eligible for an income tax rate of 24%.  Therefore, Daqiuzhuang Metal is
exempt from income taxes for the years ended December 31, 2005 and 2006 and is
entitled to 50% income tax reduction of the special income tax rate of 24%,
which is a rate of 12% for the years ended December 31, 2007, 2008 and
2009.


56


Our 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
accrued at 15%.




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




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




For the three months ended September
30, 2009, we had a tax expense of $3.79 million and for the nine months ended
September 30, 2009 we had a tax expense of $7.19 million.





We have cumulative undistributed
earnings of foreign subsidiaries of approximately $23.2 million as of September
30, 2009, is included in consolidated retained earnings and will continue to be
indefinitely reinvested in international operations.  Accordingly, no
provision has been made for U.S. deferred taxes related to future repatriation
of these earnings, nor is it practicable to estimate the amount of income taxes
that would have to be provided if we concluded that such earnings will be
remitted in the future.




General
Steel Holdings, Inc. was incorporated in the United States and has incurred net
operating losses for income tax purposes for the nine months ended September 30,
2009 and 2008, respectively. The net operating loss carry forwards for United
States income taxes amounted to $4.9 million which may be available to reduce
future years’ taxable income. These carry forwards will expire, if not utilized,
through 2029. 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 at September 30,
2009 was $1.7 million. The net change in the valuation allowance for the nine
months ended September 30, 2009 and year ended December 31, 2008 was an increase
of $0.7 million and $0.6 million, respectively. 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 and 1% interest in Maoming by another entity.





Accounts
Receivable





Accounts receivable and accounts
receivable-related party were $14.94 million as of September 30, 2009 compared
to $8.33 million on December 31, 2008.





We recognize revenue when we ship out
products and pass the titles of the products to our customers and distributors.
We extended short-term credit to our customers and distributors with good
reputations and long-term business relationships. We have not experienced any
bad debt in these accounts. Also, we review our accounts receivable on a regular
basis to determine if the bad debt allowance is adequate and adjust the
allowance amount if needed. We believe the accounts receivable amount is
collectible. Nevertheless, to be conservative and prudent in our management
practice, as of September 30, 2009, we reserved $0.6 million for bad debt
allowance based on our reasonable estimate.





Liquidity
and capital resources





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.


57





Short-term
notes payable





As of September 30, 2009, we had
$280.13 million in short-term notes payables liabilities, which are secured by
restricted cash of $197.58 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.





Short-term notes payable are the lowest
cost form of financing available in China. We pay zero interest on this type of
credit. 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 September 30, 2009, we had
$151.05 million in short-term bank loans. These are bank loans with a one year
maturity 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 of the financial statements.





Convertible
Notes





On December 13, 2007, we entered into a
Securities Purchase Agreement (the “Agreement”) with certain institutional
investors (the “Buyers”) issuing convertible promissory notes in the principal
amount of $40 million (“December 2007 Notes”) and 1,154,958 warrants (the
“December 2007 Warrants”). The December 2007 Warrants can be exercised to
purchase common stock through May 13, 2013 at an exercise price of $13.51 per
share, subject to customary anti-dilution adjustments.





The December 2007 Notes bear initial
interest at 3% per annum, which will be increased each year as specified in the
December 2007 Notes, payable semi-annually in cash or shares of our common
stock. The December 2007 Notes have a five year term through December 12, 2012.
They are convertible into shares of the common stock, subject to customary
anti-dilution adjustments. The initial conversion price was
$12.47.  We may redeem the December 2007 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.





The December 2007 Notes are secured by
a first priority, perfected security interest in certain shares of common stock
of Zuosheng Yu, as evidenced by a pledge agreement. The December 2007 Notes are
subject to events of default customary for convertible securities and for a
secured financing.





The December 2007 Warrants grant the
Buyers the right to acquire shares of common stock at $13.51 per share, subject
to customary anti-dilution adjustments. The December 2007 Warrants may be
exercised at any time on or after May 13, 2008 until May 13, 2013, the
expiration date of the December 2007 Warrants.  In connection with
this transaction, our Company and the Buyers entered into a registration rights
agreement whereby we agreed to register within 60 calendar days common stock
issuable to the Buyers for resale on a registration statement to be effective by
90 calendar days or 120 days if the registration statement is subject to a full
review by the U.S. Securities and Exchange Commission.  We were
required to register at least 120% of the sum of shares issuable upon conversion
of the December 2007 Notes, the exercise of the December 2007 Warrants and the
payment of interest accrued on the December 2007 Notes. The registration rights
are subject to customary exceptions and qualifications and compliance with
certain registration procedures. We were required to file the registration
statement on February 11, 2008. We filed the registration statement on February
13, 2008, which was two days after the required filing date. We reached an
agreement with all note holders to waive the related penalty of $0.4
million.


58





In connection with this transaction,
our Company and Zuo Sheng Yu, the Chief Executive Officer, and Victory New
Holding Limited entered into a voting agreement (the “Voting Agreement”),
pursuant to which such shareholders agree to vote in favor of the approval of
this transaction. Certain of our management members also entered into a lock-up
agreement with us pursuant to which each of such management members agrees not
to sell or offer to sell the Common Stock held by such a management member for
one year after the initial effective date of the resale Form S-3 Registration
Statement described above.





According to the terms of the December
2007 Notes, on May 7, 2009 the conversion price of $12.47 was reset to the
market price, which is defined as the lower of $12.47 or the average of the
weighted average price of our common stock for 30 consecutive days preceding May
7, 2009.  This resulted in the conversion price being reset to
$4.2511.





As of September 30, 2009, $36.7
million of December 2007 Notes debt have been converted to equity. Such
conversion has reduced our debt and increased our public float.





Considering the proceeds from the sale
of the December 2007 Notes and December 2007 Warrants were used to purchase our
controlling interest in the Longmen Joint Venture (which provides approximately
90% of our total revenue), this financing played an important role in executing
our growth strategy. The acquisition of Longmen Joint Venture was
transformational to our company.





Cash-flow





Operating
activities





Net cash used by operating activities
for the nine months ended September 30, 2009 was $5.38 million compared to cash
provided in operating activities of $83.46 million in the same period of 2008.
This change was mainly due to the combination of the following
factors:





·
            Cash
      inflow after the adjustments of some non-cash items to the net income such
      as depreciation and amortization, (Gain) Loss from debt extinguishment,
      (Gain) Loss on disposal of equipment, stock issued for service and
      compensation, amortization of deferred note issuance cost, amortization of
      discount on convertible notes, Change in fair value of derivative
      instrument, make whole expense on note conversion, income from investment
      and deferred tax assets, totaled of $53.44
  million;





·
            Cash
      outflow resulting from accounts receivable, accounts
      receivables-related parties, inventory, advance on inventory
      purchase-related parties, prepaid expense, other payable-related parties,
      taxes payable and dividend payable,which was $192.26 million,
      compared to the same period last year an outflow of $142.94 million. The
      increase of $49.32 million is mainly due to inventory;
  and





·
            Cash
      inflow due to the increase in note
      receivable, other receivables, other receivables-related parties, dividend
      receivables, advance on inventory purchases, other receivables, accounts
      payable, accounts payable-related parties, other payable, accrued
      liabilities, customer deposits and customer deposits-related partiestotaled of $133.44 million compared to the same period last year an
      inflow of $218.89 million. The decrease of $85.45 million is mainly due to
      decrease in customer deposits and accounts
  payable.


59





Investing
activities





Net cash used in investing activities
was $70.9 million for the nine months ended September 30, 2009 compared to
$150.26 million used in the same period of 2008. This reduction in cash outflow
is mainly to increase in deposits due to sales representatives and reduction of
equipment purchases.





Financing
activities





Net cash provided by financing
activities was $115.6 million for the nine months ended September 30, 2009
compared to $39.4 million in the same period of 2008.





Shelf
Registration SEC Form S-3





On October 22, 2009, the SEC declared
effective our shelf registration statement SEC Form S-3, which is effective for
a term of three years.





We may from time to time sell common
stock, preferred stock, warrants, debt securities, rights and units in one or
more offerings, for an aggregate offering price of up to $60 million. We may
sell the 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 provide a prospectus supplement
containing more specific information about the particular offering and attach it
to this prospectus. 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 regulations





Longmen
Joint Venture:





Since 2002, our joint venture partner,
Long Steel Group, has invested $76 million (RMB580 million) in a series of
comprehensive projects to reduce its waste emissions of coal gas, water, and
solid waste.  In 2005, it received ISO 14001 certification for its
overall environmental management system.  Long Steel Group has
received several awards from the Shaanxi provincial government for its
increasing effort in environmental protection.





Long Steel Group has spent more than
$4.3 million (RMB33 million) on a comprehensive waste water recycling and water
treatment system. The 2,000m3/h
treatment capacity system was implemented at the end of 2005. In the first
quarter of 2009, new water consumption per metric ton of steel produced was 1.1
metric ton.





Long Steel Group has one 10,000m3
coke-oven gas tank and one 50,000m3 blast
furnace coal gas tank to collect the residual coal gas produced from its own
facility and that of surrounding enterprises. Long Steel Group also has a
thermal power plant with two 25KW dynamos that uses the residual coal gas from
the blast furnaces and converters as fuel to generate power.


60





Long Steel Group also has 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, ornamental tiles, etc. The plants are capable of processing
400,000 metric tons of solid waste and generate revenue of more than $2.6
million (RMB20 million) each year.





Daqiuzhuang
Metal:





Based on the equipment, technologies
and measures adopted, Daqiuzhuang Metal is not considered a high-pollutant
factory in China. The production process does not need much water and produces
only a minimal amount of chemical waste.  Daqiuzhuang Metal uses
gas-fired reheat furnaces recommended by the State Environmental Protection
Agency to heat raw materials and semi-finished products.





In 2005, Daqiuzhuang County ordered an
environmental clean-up campaign and required harmful waste water discharge to be
reduced. In order to meet these requirements, we invested $94,190 to remodel our
industrial water recycling system to reduce new water consumption and industrial
water discharge.





This wastewater recycling system is
able to process 350 metric tons of wastewater daily. We can realize yearly
savings using this system of approximately $10,000.





We believe that future costs relating
to environmental compliance will not have a materially adverse effect on our
financial position. There is always the possibility, however, that unforeseen
changes, such as new laws or enforcement policies, could result in materially
adverse costs.





Off-balance
sheet arrangements




There were no off-balance sheet
arrangements in the third quarter of 2009.





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 2 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.





Revenue
recognition




The
Company follows the generally accepted accounting principles 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 the Company 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 of the Company’s 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 the Company on raw materials and other materials
included in the cost of producing the finished
product.


61




Use of
estimates





The preparation of financial statements
in conformity with generally accepted accounting principles of the United States
of America 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.





Derivative
Instruments





We entered into a Securities Purchase
Agreement (the “Agreement”) with certain institutional investors (the “Buyers”).
Pursuant to the Agreement, we agreed to sell to the Buyers (i) senior
convertible notes in the aggregate principal amount of $40 million (“December
2007 Notes”) and (ii) warrants to purchase an additional aggregate amount of
1,154,958 shares of Common Stock of our Company (the “December 2007 Warrants”).
Both the December 2007 Warrants and the conversion option embedded in the
December 2007 Notes meet the definition of a derivative instrument as per the
accounting standard for accounting for derivative instruments and hedging
activities. Therefore these instruments are accounted for as derivative
liabilities and periodically marked-to-market. The change in the value of the
derivative liabilities is charged against or credited to income.





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 defines
fair value, establishes a three-level valuation hierarchy for disclosures of
fair value measurement and enhances 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.


62





Our investment in unconsolidated
subsidiaries amounted to $17.64 million as of September 30, 2009. Since there is
no quoted or observable market price for the fair value of similar long term
investment, we then used the level 3 inputs for its valuation methodology. The
determination of the fair value was based on the capital investment that we
contributed and income from investment. The carrying value of the long term
investments approximated the fair value as of September 30, 2009.





In 2007, the conversion feature on the
December 2007 Notes, as well as the December 2007 Warrants issued in conjunction
with the December 2007 Notes are carried at fair value. 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 liability is carried on the balance sheet at its
fair value.





As of September 30, 2009, the
outstanding principal amounted to $3.3 million, and the carrying value of the
December 2007 Notes amounted to $0.9 million. We used Level 3 inputs for our
valuation methodology for the December 2007 Notes, and their fair values are
determined using cash flows discounted at relevant market interest rates in
effect at the period close since there is no observable market price. The
December 2007 Warrants and their conversion feature are valued by using level 2
inputs to the Binomial Model and determined that the fair value amounted to
approximately $4.9 million due to the decrease in our common stock
price.





Noncontrolling
interest





Effective January 1, 2009, we
adopted generally
accepted accounting principals regarding noncontrolling interest 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,
foreign currency translation adjustment is allocated between controlling and
noncontrolling interests.





As a result, we reclassified
noncontrolling interests in the amounts of $72.5 million and $54.3 million from
the mezzanine section to equity in the September 30, 2009 and December 31,
2008 balance sheets, respectively.





New
Accounting Pronouncements




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




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


63





In April
2009, the Financial Accounting Standards Board issued an accounting standard
that requires disclosures about fair value of financial instruments not measured
on the balance sheet at fair value in interim financial statements as well as in
annual financial statements. Prior to this accounting standard, fair values for
these assets and liabilities were only disclosed annually. This standard applies
to all financial instruments within its scope and requires all entities to
disclose the method(s) and significant assumptions used to estimate the fair
value of financial instruments. This standard does not require disclosures for
earlier periods presented for comparative purposes at initial adoption, but in
periods after the initial adoption, this standard requires comparative
disclosures only for periods ending after initial adoption. We adopted this
accounting standard, but it did not have a material impact on the disclosures
related to our consolidated financial statements.
  In June
2009, the Financial Accounting Standards Board issued an accounting standard
amending the accounting and disclosure requirements for transfers of financial
assets. This accounting standard requires greater transparency and additional
disclosures for transfers of financial assets and the entity’s continuing
involvement with them and changes the requirements for derecognizing financial
assets. In addition, it eliminates the concept of a qualifying special-purpose
entity (“QSPE”). This accounting standard is effective for financial statements
issued for fiscal years beginning after November 15, 2009, and we do not
expect this standard to have a material effect on our consolidated financial
statements.
  In June
2009, the Financial Accounting Standards Board also issued an accounting
standard amending the accounting and disclosure requirements for the
consolidation of variable interest entities (“VIEs”). The elimination of the
concept of a QSPE, as discussed above, removes the exception from applying the
consolidation guidance within this accounting standard. Further, this accounting
standard requires a company to perform a qualitative analysis when determining
whether or not it must consolidate a VIE. It also requires a company to
continuously reassess whether it must consolidate a VIE. Additionally, it
requires enhanced disclosures about a company’s involvement with VIEs and any
significant change in risk exposure due to that involvement, as well as how its
involvement with VIEs impacts the company’s financial statements. Finally, a
company will be required to disclose significant judgments and assumptions used
to determine whether or not to consolidate a VIE. This accounting standard is
effective for financial statements issued for fiscal years beginning after
November 15, 2009, and we do not expect this standard to have a material effect
on our consolidated financial statements.
  In June
2009, the Financial Accounting Standards Board issued an accounting standard
which establishes the FASB Accounting Standards CodificationTM (the
“Codification”) as the source of authoritative accounting principles recognized
by the FASB to be applied by nongovernmental entities in the preparation of
financial statements in conformity with U.S. GAAP. The Codification does not
change current U.S. GAAP, but is intended to simplify user access to all
authoritative U.S. GAAP by providing all the authoritative literature related to
a particular topic in one place. The Codification is effective for interim
and annual periods ending after September 15, 2009, and as of the
effective date, all existing accounting standard documents will be
superseded. The Codification is effective for us in the third quarter of 2009,
and accordingly, our Quarterly Report on Form 10-Q for the quarter ending
September 30, 2009 and all current and subsequent public filings will reference
the Codification as the sole source of authoritative
literature.
  In August
2009, the Financial Accounting Standards Board issued an Accounting Standards
Update (“ASU”) regarding measuring liabilities at fair value. This ASU provides
additional guidance clarifying the measurement of liabilities at fair value in
circumstances in which a quoted price in an active market for the identical
liability is not available; under those circumstances, a reporting entity is
required to measure fair value using one or more of valuation techniques, as
defined. This ASU is effective for the first reporting period, including interim
periods, beginning after the issuance of this ASU. We are currently evaluating
the impact of this ASU on our consolidated financial
statements.
 
 64
  In
October 2009, the Financial Accounting Standards Board issued an ASU regarding
accounting for own-share lending arrangements in contemplation of convertible
debt issuance or other financing.  This ASU requires that at the date
of issuance of the shares in a share-lending arrangement entered into in
contemplation of a convertible debt offering or other financing, the shares
issued shall be measured at fair value and be recognized as an issuance cost,
with an offset to additional paid-in capital. Further, loaned shares are
excluded from basic and diluted earnings per share unless default of the
share-lending arrangement occurs, at which time the loaned shares would be
included in the basic and diluted earnings-per-share
calculation.  This ASU is effective for fiscal years beginning on or
after December 15, 2009, and interim periods within those fiscal years for
arrangements outstanding as of the beginning of those fiscal years. We
are currently evaluating the impact of this ASU on our consolidated
financial statements.





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. We have
presented below 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 September 30, 2009 and the effect these
obligations are expected to have on our liquidity and cash flows in future
periods.




Payment
      due by periodLess
      thanContractual
      obligations
                        
                        Total
                        
                        
                        1
      year
                        
                        
                        1-3
      years
                        
                        
                        4-
      5 yearsDollars
      amounts in thousandsBank
      loans (1)
                        
                        $
                        151,050
                        
                        
                        $
                        151,050
                        
                        
                        $
                        
                        
                        
                        $Notes
      payable
                        
                        
                        280,134
                        
                        
                        
                        280,134Deposits
      due to sales representatives
                        
                        
                        39,286
                        
                        
                        
                        39,286Lease
      with Bao Gang
                        
                        
                        726
                        
                        
                        
                        264
                        
                        
                        
                        462Blast
      Furnace construction
                        
                        
                        19,278
                        
                        
                        
                        19,278Convertible
      notes ( Principal plus Interest )
                        
                        
                        4,225
                        
                        
                        
                        217
                        
                        
                        
                        639
                        
                        
                        
                        3,369Total
                        
                        $
                        494,699
                        
                        
                        $
                        490,229
                        
                        
                        $
                        1,101
                        
                        
                        $
                        3,369




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





ITEM
3. 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 an
assumed 2009 annual production capacity of 6.3 million metric tons, a $1 change
in the annual average price would change annual pre-tax profits by approximately
$6.3 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.


65




Foreign
Currency Exchange Rate Risk





Our
operating units, Daqiuzhuang Metal, Longmen Joint Ventures, Baotou Steel Pipe
Joint Venture and Maoming, are all located in China. They produce and sell all
of their products domestically in the P.R.C. They are subject to the
foreign currency exchange rate risks due to the effects of fluctuations in the
Chinese Renminbi 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 Renminbi exchange rate would
result in a $1.3 million decrease to income.





ITEM
4. CONTROLS AND PROCEDURES




Disclosure
Controls and Procedures




We
maintain disclosure controls and procedures designed to ensure that information
required to be disclosed in reports filed under the Securities Exchange Act of
1934, as amended, is recorded, processed, summarized and reported within the
specified time periods, and that such information is accumulated and
communicated to management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure.




Our
management, with the participation of our Chief Executive Officer and our Chief
Financial Officer, evaluated the effectiveness of our disclosure controls and
procedures (as defined in the Securities Exchange Act of 1934
Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by this
Quarterly Report on Form 10-Q. Based on that evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that, as of that date, our
disclosure controls and procedures were not effective at the reasonable
assurance level because of the identification of material weaknesses in our
internal control over financial reporting discussed below, which we view as an
integral part of our disclosure controls and procedures.




Internal
Control Over Financial Reporting




As
discussed in our Annual Report on Form 10-K for the fiscal year
ended December 31, 2008, we identified the following material
weaknesses in our internal controls over accounting:




Insufficient personnel with
appropriate accounting knowledge and training.We did not maintain a
sufficient complement of personnel with an appropriate level of accounting
knowledge, experience, and training in the application of generally accepted
accounting principles commensurate with financial reporting requirements and did
not implement adequate supervisory review to ensure the financial statements at
the subsidiary level were prepared in conformity with generally accepted
accounting principles in the United States of America.  This material
weakness resulted in audit adjustments that corrected interest capitalization,
raw material reserves and long term investment in the consolidated
financial statements for the year ended December 31, 2008.





Incomplete related party transaction
identification.We did not design and maintain effective controls to
identify related party and intercompany transactions, which resulted in material
adjustments for intercompany transactions and disclosures of related party
transactions in the consolidated financial statements for the year ended
December 31, 2008.




These
deficiencies could result in misstatements of the aforementioned accounts and
disclosures that would result in a material misstatement to the annual or
interim consolidated financial statements that would not be prevented or
detected. Accordingly, management has determined this control deficiency
constitutes a material weakness.





We are
continuing to build our accounting resources and implement related party
transaction review processes in response to the weaknesses. While we continue to
develop and implement new control processes and procedures to address these
weaknesses, we have determined that further improvements are required in
our accounting processes before we can consider the material weakness
remediated.


66





Changes
in Internal Control Over Financial Reporting





Other
than the remediation efforts described below, there have been no changes in our
internal control over financial reporting that have materially affected, or are
likely to materially affect, our internal control over financial
reporting.




We
continue to undertake steps to strengthen our controls over accounting,
including:


·
            Increasing
      preparation and review on related party
  transactions;


·
            Hiring
      more staff accountants who have appropriate knowledge about the U.S.
      financial reporting requirements;


·
            Enhancing
      job responsibilities and procedures for staff at all levels;
      and


·
            Strengthening
      communications between senior management and subsidiary level
      management.





Our
material weaknesses in controls over accounting will not be considered
remediated until new internal controls are operational for a period of time and
are tested, and management and our independent registered public accounting firm
conclude that these controls are operating effectively. Due to the nature of and
time necessary to effectively remediate the material weaknesses identified to
date, we have concluded that material weaknesses in our internal control over
reclassification and elimination of related party transactions continues to
exist as of September 30, 2009.





PART II – OTHER
INFORMATION





ITEM
1. 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
1A. RISK FACTORS





A restated description of the risk
factors associated with our business is set forth below. This description
includes any material changes to and supersedes the descriptions of the risk
factors associated with our business previously disclosed in Part II,
Item 1A of our Quarterly Report on Form 10-Q for our fiscal period ended
June 30, 2009.  The following factors should be reviewed carefully, in
conjunction with the other information contained in this Report and our
consolidated financial statements. These factors, among others, could cause
actual results to differ materially from those currently anticipated and
contained in forward-looking statements made in this Form 10-Q and presented
elsewhere by our management from time to time. See “Part I—Note Regarding
Forward Looking Statements.”





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.





Risks
Related to Our Business





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





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





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





•
            Quality;


67




•
            Price/cost
      competitiveness;




•
            System
      and product performance;





•
            Reliability
      and timeliness of delivery;




•
            New
      product and technology development
capability;





•
            Excellence
      and flexibility in operations;





•
            Degree
      of global and local presence;





•
            Effectiveness
      of customer service; and





•
            Overall
      management capability.




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





•  Competitors
of Daqiuzhuang Metal include: Tianjin No. 1 Rolling Steel Plant, Tianjin Yinze
Metal Sheet Plant and Tangshan Fengrun Metal Sheet Plant;




•
 Competitors of Longmen Joint Venture include: Shanxi Haixin Iron and Steel
Co., Ltd. and Gansu Jiuquan Iron and Steel Co., Ltd.;




•  Competitors
of Baotou Steel Pipe Joint Venture include: Tianjin Bo Ai Steel Pipe Co., Hebei
Cangzhou Zhong Yuan Steel Pipe Co., and Shanxi Taiyuan Guo Lian Steel Pipe Co.;
and




•  Competitors
of Maoming include: Guangdong Shao Guan Iron and Steel Group and Zhuhai Yue Yu
Feng Iron and Steel Co., Ltd.





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





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;




68




• 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
flows and could cause the market price of our common shares to
decline.




The
current deep and potentially prolonged global recession that officially 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 and
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 and 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.





69




We
have made and may continue to make acquisitions which could divert management's
attention, cause ownership dilution to our stockholders, or be difficult to
integrate, which may adversely affect our financial results.




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




We
may not be able to effectively control and manage our growth.





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





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 three months ended September 30,
2009, approximately 27% of our sales were to five customers. For the nine
months ended September 30, 2009, approximately 20% of our sales were to five
customers. These customers accounted for 24% of total account receivables
as of September 30, 2009.  We believe that revenue derived from our current
and future large customers will continue to represent a significant portion of
our total revenue. Our inability to continue to secure and maintain a sufficient
number of large contracts or the loss of, or significant reduction in purchases
by, one or more of our major customers would have the effect of reducing our
revenues and profitability.





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





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





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





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





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


70





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





According
to the survey conducted by China Iron and Steel Association, there are more than
1,100 steel companies in China. Among those, only 25 companies have over 5
million metric tons of production capacity. Each steel company has its own
production plan. The Chinese government posted a 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 situation of overproduction may not be solved by these
measures posted by the Chinese government. If the current state of
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 eventually 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 incur downtime 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 independent of those of Daqiuzhuang Metal, Baotou Steel Pipe Joint
Venture, Longmen Joint Venture and Maoming, and our principal assets are our
investments in these subsidiaries. As a result, we are dependent upon the
performance of Daqiuzhuang Metal, Baotou Steel Pipe Joint Venture, Longmen Joint
Venture and Maoming and we will be subject to the financial, business and other
factors affecting them as well as general economic and financial conditions. As
substantially all of our operations are and will be conducted through our
subsidiaries, we will be dependent on the cash flow of our subsidiaries to meet
our obligations.





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





We
depend on acquiring companies to fulfill our growth plan





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





We
depend on bank financing for our working capital needs.





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


71





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 majority 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 legislation
requiring companies to evaluate controls under Section 404 of the Sarbanes-Oxley
Act of 2002.





While we
believe that we currently have adequate internal control procedures in place, we
are still exposed to potential risks from legislation requiring companies to
evaluate controls under Section 404 of the Sarbanes-Oxley Act of 2002. Under the
supervision and with the participation of our management, we have evaluated our
internal controls systems in order to allow management to report on, and our
registered independent public accounting firm to attest to, our internal
controls, as required by Section 404 of the Sarbanes-Oxley Act. We have
performed the system and process evaluation and testing required in an effort to
comply with the management certification and auditor attestation requirements of
Section 404. As a result, we have incurred additional expenses and a diversion
of management’s time. If we are not able to continue to meet the requirements of
Section 404 in a timely manner or with adequate compliance, we might be subject
to sanctions or investigation by regulatory authorities, such as the SEC or the
NYSE Market. Any such action could adversely affect our financial results and
the market price of our stock.




We
do not presently maintain product liability insurance in China, and our property
and equipment insurance does not cover the full value of our property and
equipment, which leaves us with exposure in the event of loss or damage to our
properties or claims filed against us.





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





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





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 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 life.


72




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 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 encounter similar or other difficulties. As a result of
these substantial uncertainties, there is a risk that we may be found in
violation of any 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.





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




Inflation
in China could negatively affect our profitability and growth.





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





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





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


73


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


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




The
fluctuation of the Renminbi may cause the value of your investment in our common
stock to decrease.





The value
of the Renminbi against the U.S. dollar and other currencies may fluctuate and
is affected by, among other things, changes in China’s political and economic
conditions. As we rely entirely on revenues earned in China, our cash flows,
revenues and financial condition will be affected by any significant revaluation
of the Renminbi. For example, to the extent that we need to convert U.S. dollars
we receive from an offering of our securities into Renminbi for our operations,
if the Renminbi appreciates against the U.S. dollar, the Renminbi equivalent of
the US dollar we convert would be reduced. Conversely, if we decide to convert
our Renminbi into U.S. dollars for the purpose of making payments for dividends
on our common shares or for other business purposes and the U.S. dollar
appreciates against the Renminbi, the U.S. dollar equivalent of the Renminbi we
convert would be reduced. To date, however, we have not engaged in transactions
of either type. In addition, the depreciation of significant U.S. dollar
denominated assets could result in a charge to our income statement and a
reduction in the value of these assets.




Since
1994, China pegged the value of the Renminbi to the U.S. dollar. We do not
believe that this policy has affected our business. However, there have been
indications that the Chinese government may be reconsidering its monetary policy
in light of the overall devaluation of the U.S. dollar against the Euro and
other currencies during the last two years. In July 2005, the Chinese government
revalued the Renminbi by 2.1% against the U.S. dollar, moving from Renminbi 8.28
to Renminbi 8.11 per dollar. If the pegging of the Renminbi to the U.S. dollar
is loosened, we anticipate that the value of the Renminbi will appreciate
against the dollar with the consequences discussed above. As of September 30,
2009, the exchange rate of the Renminbi to the U.S. dollar was 6.82 yuan to 1
dollar.




We
are subject to environmental and safety regulations, which may increase our
compliance costs and reduce our overall profitability.





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





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





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


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Because
the Chinese legal system is not fully developed, our legal protections may be
limited.





The
Chinese legal system is based upon written statutes. Prior court decisions may
be cited for reference but are not binding on subsequent cases and have limited
value as precedents. 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 involve uncertainties. In addition, published government policies
and internal rules may have retroactive effects and, in some cases, the policies
and rules are not published at all. As a result, we may be unaware of our
violation of these policies and rules until some time later. The laws of China
govern our contractual arrangements with our affiliated entities. The
enforcement of these contracts and the interpretation of the laws governing
these relationships are subject to uncertainty. For the above reasons, legal
compliance in China may be more difficult or expensive.




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 46.3% of our
common stock. Mr. Zuosheng Yu, our major shareholder, beneficially owns
approximately 45.9% of our common stock. Mr. Yu can effectively control us and
his interests may differ from other stockholders.




All our
subsidiaries are located in China and substantially all of our assets are
located outside the United States. It may therefore be difficult for investors
in the United States to enforce their legal rights based on the civil liability
provisions of the U.S. federal securities laws against us in the courts of
either the United States and China and, even if civil judgments are obtained in
United States courts, such judgments may not be enforceable in Chinese courts.
All our directors and officers reside outside of the United States. It is
unclear if extradition treaties now in effect between the United States and
China would permit effective enforcement against us or our officers and
directors of criminal penalties under the U.S. federal securities laws or
otherwise.




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





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





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





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





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




Shares of our common stock are issuable
upon conversion of approximately $40 million worth of the senior convertible
notes and warrants to purchase common stock issued in connection with such
notes.  The notes and warrants were issued in December
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.  Upon the exercise of the
warrants, an additional aggregate amount of 1,154,958 shares of our common stock
is issuable based upon the current 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 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.  In accordance with
the terms of the notes, the conversion price was adjusted and reset to $4.2511,
being the market price on May 7, 2009.  This adjustment was required
if the conversion price exceeded the market price (as determined in accordance
with the notes) on May 7, 2009.   As of September 30, 2009,
approximately $36.7 million of the convertible notes had been converted,
resulting in the issuance of 9,578,518 shares of our common
stock.  The issuance of shares of our common stock
upon conversion of the notes and exercise of the warrants (including any
increased amount of shares following any reductions in conversion or exercise
prices) will dilute current shareholders’ holdings in our
company.


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ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS





Conversion of Senior
Convertible Notes





Since May 7, 2009, we have issued
8,841,250 shares of common stock to holders of our outstanding senior
convertible notes issued in the private placement in December 2007 (“December
2007 Notes”).  Such issuances have been made as a result of conversion
of approximately $29.95 million of the December 2007 Notes and related accrued
interest.  We did not otherwise receive any consideration or proceeds
as a result of such conversions.  6,504,354 of these shares of common
stock were issued as a result of conversions completed in the fiscal quarter
ended June 30, 2009 and the remaining 2,336,896 shares were issued as a result
of conversions completed in the fiscal quarter ended September 30,
2009.  As of September 30, 2009, approximately $3.3 million in
December 2007 Notes remained outstanding and subject to conversion. The
conversion rate for such conversions was $4.2511 per share. The foregoing
issuances were made in reliance upon an exemption from registration
requirements of the Securities Act afforded by Sections 3(a)(9) and
4(2) of the Securities Act for exchanges of securities and offers and sales of
securities that do not involve a public offering.





ITEM
6. EXHIBITS





(a)
            Exhibits





31.1
                
                Certification
      of the CEO pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section
      302 of the Sarbanes-Oxley Act of 2002, as filed
  herewith.31.2
                
                Certification
      of the CFO pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section
      302 of the Sarbanes-Oxley Act of 2002, as filed
  herewith.32.1
                
                Certification
      of the CEO pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section
      906 of the Sarbanes-Oxley Act of 2002, as filed
  herewith.32.2
                
                Certification
      of the CFO pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section
      906 of the Sarbanes-Oxley Act of 2002, as filed
  herewith.


77


SIGNATURES





Pursuant
to the requirements 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.Date:
      November 9, 2009
              By:
      /s/ Zuosheng YuZuosheng
      YuChief
      Executive Officer and ChairmanDate:
      November 9, 2009
              By:
      /s/ John ChenJohn
      ChenDirector
      and Chief Financial Officer




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