UNITED STATES


SECURITIES AND EXCHANGE COMMISSION





WASHINGTON, D.C. 20549





FORM 20-F


(Mark One)





 ̈
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934





OR





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





For the fiscal year ended December 31, 2010





OR





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





OR





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




Date of event requiring this shell company report _________________________





For the transition period from ___________ to ___________.





Commission file number: 001-34532





CHINA GERUI ADVANCED MATERIALS GROUP LIMITED


(Exact name of Registrant as specified in its charter)





Not Applicable


(Translation of Registrant’s name into English)





British Virgin Islands


(Jurisdiction of incorporation or organization)





1 Shuanghu Development Zone


Xinzheng City


Zhengzhou, Henan Province


China, 451191


(Address of principal executive offices)





Mingwang Lu


1 Shuanghu Development Zone, Xinzheng City, Zhengzhou, Henan Province, China, 451191


Tel: 86-371-62568634, Fax: 86-371-67718787


Email: mingwang.lu@geruigroup.com


(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)





Securities registered or to be registered pursuant to Section 12(b) of the Act:




Title of each class

Name of each exchange on which registeredOrdinary Shares, no par value

NASDAQ Global Market





Securities registered or to be registered pursuant to Section 12(g) of the Act.


None(Title of Class)





Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.





None(Title of Class)





Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report (December 31, 2010): 46,139,053 ordinary shares (including ordinary shares included in public units outstanding as of this date)





Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.


Yes  ̈ No x





If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.


Yes  ̈ No x





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.


Yes x No  ̈





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).


Yes  ̈ No  ̈





Indicate by check mark 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.





Large Accelerated Filer  o

Accelerated Filer  o

Non-Accelerated Filer  x





Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:





U.S. GAAP  x

International Financial Reporting

Other   ̈Standards as issued by the InternationalAccounting Standards Board





If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.


 ̈ Item 17   ̈ Item 18





If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).




Yes  ̈ No x












CHINA GERUI ADVANCED MATERIALS GROUP LIMITED
  Annual Report on FORM 20-FFor the Fiscal Year Ended December 31, 2010


TABLE OF CONTENTS
 
 PagePART I

2ITEM 1.

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

2ITEM 2.

OFFER STATISTICS AND EXPECTED TIMETABLE

2ITEM 3.

KEY INFORMATION

2Selected Consolidated Financial Data

2Capitalization and Indebtedness

3Reasons for the Offer and Use of Proceeds

3RiskFactors

3ITEM 4.

INFORMATION ON THE COMPANY

22History and Development of the Company

22Business Overview

24Organizational Structure

30Property, Plant and Equipment

30ITEM 4A.

UNRESOLVED STAFF COMMENTS

31ITEM 5.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

31Operating Results

31Liquidity and Capital Resources

38Research and Development, Patents and Licenses, etc.

40Trend Information

41Off-Balance Sheet Arrangements

41Tabular Disclosure of Contractual Obligations

41ITEM 6.

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

41Directors and Senior Management

41Compensation

43Board Practices

44Employees

46Share Ownership

462010 Share Incentive Plan

49ITEM 7.

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

52Major Shareholders

52Related Party Transactions

52Interests of Experts and Counsel

53
  i
  ITEM 8.

FINANCIAL INFORMATION

53Consolidated Statements and Other Financial Information

53Significant Changes

53ITEM 9.

THE OFFER AND LISTING

53Offer and Listing Details

53Plan of Distribution

54Markets

54Selling Shareholders

54Dilution

54Expenses of the Issue

55ITEM 10.

ADDITIONAL INFORMATION

55Share Capital

55Memorandum and Articles of Association

55Material Contracts

60Exchange Controls

62Taxation

63Dividends and Paying Agents

68Statement by Experts

68Documents on Display

68ITEM 11.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

69ITEM 12.

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

69Debt Securities

69Warrants and Rights

69Other Securities

70American Depositary Shares

70PART II

70ITEM 13.

DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

70ITEM 14.

MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITIES HOLDERS AND USE OF PROCEEDS

70ITEM 15.

CONTROLS AND PROCEDURES

71Evaluation of Disclosure Controls and Procedures

71Management’s Annual Report on Internal Control Over Financial Reporting

71Changes in Internal Control Over Financial Reporting

71ITEM 16A.

AUDIT COMMITTEE FINANCIAL EXPERT

72ITEM 16B.

CODE OF ETHICS

72ITEM 16C.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

72Audit Committee Pre-Approval Policies and Procedures

72ITEM 16D.

EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

73ITEM 16E.

PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

73ITEM 16F.

CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

73
  ii
  ITEM 16G.

CORPORATE GOVERNANCE

73PART III

73ITEM 17.

FINANCIAL STATEMENTS

73ITEM 18.

FINANCIAL STATEMENTS

73ITEM 19.

EXHIBITS

73REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

F-1
  iii
  USE OF CERTAIN DEFINED TERMS
 
 Except as otherwise indicated by the context, references in this annual report to:
 
 ·
“China Gerui” “we,” “us,” or “our,” and the “Company,” are references to the combined business of China Gerui Advanced Materials Group Limited, a British Virgin Islands company, and its wholly-owned subsidiary, Wealth Rainbow Development Limited, or “Wealth Rainbow,” a Hong Kong company, and Wealth Rainbow’s wholly-owned PRC subsidiary, Henan Green Complex Materials Co., Ltd., or “Henan Green.”
 
 ·
“COAC,” are references to China Opportunity Acquisition Corp., a Delaware corporation that merged with and into China Gerui;
 
 ·
“China” and “PRC,” are references to the People’s Republic of China;
 
 ·
“BVI,” are references to the British Virgin Islands;
 
 ·
“Hong Kong,” are references to the Hong Kong Special Administrative Region of China;
 
 ·
“RMB,” are references to Renminbi, the legal currency of China;
 
 ·
“U.S. dollars,” “$” and “US$,” are references to the legal currency of the United States; and
 
 ·
“Securities Act,” are references to the Securities Act of 1933, as amended, and references to “Exchange Act” are references to the Securities Exchange Act of 1934, as amended.
 
 FORWARD-LOOKING INFORMATION
 
 This annual report contains forward-looking statements and information relating to us that are based on the current beliefs, expectations, assumptions, estimates and projections of our management regarding our company and industry.  When used in this annual report, the words “may”, “will”, “anticipate”, “believe”, “estimate”, “expect”, “intend”, “plan” and similar expressions, as they relate to us or our management, are intended to identify forward-looking statements.  These statements reflect management’s current view of us concerning future events and are subject to certain risks, uncertainties and assumptions, including among many others: our potential inability to achieve similar growth in future periods as we did historically, a decrease in the availability of our raw materials, the emergence of additional competing technologies, changes in domestic and foreign laws, regulations and taxes, changes in economic conditions, uncertainties related to China’s legal system and economic, political and social events in China, a general economic downturn, a downturn in the securities markets, and other risks and uncertainties which are generally set forth under Item 3, “Key information — Risk Factors” and elsewhere in this annual report.  Should any of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described as anticipated, estimated or expected in this annual report.
 
 All forward-looking statements included herein attributable to us or other parties or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Except to the extent required by applicable laws and regulations, we undertake no obligations to update these forward-looking statements to reflect events or circumstances after the date of this annual report or to reflect the occurrence of unanticipated events.
  1
  PART I
  ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
 
 Not applicable.
 
 ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE
 
 Not applicable.
 
 ITEM 3.
KEY INFORMATION
 
 Selected Consolidated Financial Data
  The following table presents selected financial data regarding our business.  It should be read in conjunction with our consolidated financial statements and related notes contained elsewhere in this annual report and the information under Item 5, “Operating and Financial Review and Prospects.”  The selected consolidated statement of income data for the fiscal years ended December 31, 2010, 2009, and 2008, and the selected consolidated balance sheet data as of December 31, 2009 and 2010 have been derived from our audited consolidated financial statements that are included in this annual report beginning on page F-1.  The selected balance sheet data as of December 31, 2008 have been derived from our audited consolidated financial statements that are not included in this annual report.  The selected statement of income data for the fiscal year ended December 31, 2007 and the balance sheet data as of December 31, 2007 have been derived from our audited financial statements that are not included in this annual report.  The selected statement of income data for the fiscal year ended December 31, 2006 and balance sheet data as of December 31, 2006 have been derived from the audited financial statements of Henan Green that are not included in this annual report.
 
 The consolidated financial statements for the years ended December 31, 2010, 2009 and 2008 are prepared and presented in accordance with generally accepted accounting principles in the United States, or U.S. GAAP.  The selected financial data information is only a summary and should be read in conjunction with the historical consolidated financial statements and related notes of China Gerui and Henan Green contained elsewhere herein.  The financial statements contained elsewhere fully represent our financial condition and operations; however, they are not indicative of our future performance.
 
 Fiscal Year Ended December 31,2010

(Consolidated,

audited)


2009

(Consolidated,

audited)


2008

(Consolidated,

audited)


2007

(Consolidated,

audited)


2006

(Henan

Green,

audited)(In thousands of U.S. Dollars, except number of shares and per share data)Statement of Income Data:Revenue

$
253,866


$
218,903


$
196,264


$
139,649


$
99,017Operating income


66,950



60,315



49,594



35,771



23,893Net income before income taxes and minority interest


63,021



58,200



47,375



35,072



23,649Net income before minority interest (1)


47,083



43,448



35,506



23,650



N/ANet income (1)(2)


47,083



43,448



21,585



13,012



15,879Weighted average ordinary common shares(3)(4)


43,891,670



33,751,844



30,000,000



30,000,000



N/AWeighted average number of diluted ordinary shares(3)(4)


46,655,721



37,675,479



30,000,000



30,000,000



N/ABasic earnings per share (1)(3)(4)

$
1.07


$
1.29


$
0.72


$
0.43


$
N/ADiluted earnings per share(1)(3)(4)

$
1.01


$
1.15


$
0.72


$
0.43


$
N/ABalance Sheet Data:Total current assets

$
227,915


$
146,638


$
94,019


$
74,654


$
68,822Total assets


329,004



184,350



115,376



91,817



85,782Total current liabilities


161,192



97,307



102,808



60,119



62,781Total liabilities


161,192



97,307



102,836



60,273



63,239Minority Interest(1)


0



0



0



14,188



N/AStockholders’ equity


167,812



87,043



12,540



17,356



22,543
  2
  (1)Henan Green was acquired by China Gerui on October 21, 2008 and for reporting purposes a 44.98% interest of Henan Green has been accounted for as a minority interest prior to the date of acquisition during the years ended December 31, 2007 and 2008.  Net income and per share data have been calculated after giving effect to the minority interest in such periods.  Minority Interest was not accounted for during the year ended December 31, 2006 in respect of Henan Green.
 
 (2)We have no discontinued operations, therefore net income and net income per share has been provided in lieu of income from continuing operations and income from continuing operations per share.
 
 (3)In anticipation of the merger transaction with China Acquisition Opportunity Corporation, China Gerui effectuated a recapitalization on March 13, 2009 pursuant to which 29,999,900 newly issued ordinary shares were issued to China Gerui’s then-current shareholders pro rata with their relative ownership percentages.  Consequently, the foregoing table presents ordinary shares outstanding (actual and diluted) and per share data (basic and diluted) on a pro forma basis assuming that the recapitalization had already occurred at all times during the periods presented.
 
 (4)Ordinary shares outstanding (actual and diluted) and per share data (basis and diluted) of Henan Green have been omitted for 2006 because of differences in the capital structures of China Gerui and Henan Green.  Presenting such data in this report is not particularly helpful and could be misleading to readers.
 
 Capitalization and Indebtedness
  Not applicable.
 
 Reasons for the Offer and Use of Proceeds
  Not applicable.
 
 Risk Factors
  Aninvestmentinourcapitalstockinvolvesahighdegreeofrisk.Youshouldcarefullyconsidertherisksdescribedbelow,togetherwithalloftheotherinformationincludedinthis annual report,beforemakinganinvestmentdecision.Ifanyofthefollowingrisksactuallyoccurs,ourbusiness,financial conditionorresultsofoperationscouldsuffer.Inthatcase,thetradingpriceofourcapital stockcoulddecline,andyoumayloseallorpartofyourinvestment.
 
 RISKS RELATED TO OUR BUSINESS
  If we become directly subject to the recent scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we may have to expend significant resources to investigate and resolve the matter which could harm our business operations, stock price and reputation and could result in a loss of your investment in our stock, especially if such matter cannot be addressed and resolved favorably.
  Recently, U.S. public companies that have substantially all of their operations in China have been the subject of intense scrutiny, criticism and negative publicity by investors, financial commentators and regulatory agencies, such as the United States Securities and Exchange Commission, or the SEC.  Much of the scrutiny, criticism and negative publicity has centered around financial and accounting irregularities and mistakes, a lack of effective internal controls over financial accounting, inadequate corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud.  As a result of the scrutiny, criticism and negative publicity, the publicly traded stock of many U.S. listed Chinese companies has sharply decreased in value and, in some cases, has become virtually worthless.  Many of these companies are now subject to shareholder lawsuits, SEC enforcement actions and are conducting internal and external investigations into the allegations.  It is not clear what effect this sector-wide scrutiny, criticism and negative publicity will have on our company, our business and our stock price.  If we become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, we will have to expend significant resources to investigate such allegations and/or defend our company.  This situation will be costly and time consuming and distract our management from growing our company.  If such allegations are not proven to be groundless, our company and business operations would be severely damaged and your investment in our stock could be rendered worthless.
  3
  Due to our rapid growth in recent years, our past results may not be indicative of our future performance so evaluating our business and prospects may be difficult.
 
 Our business has grown and evolved rapidly in recent years as demonstrated by our growth in sales revenue from approximately $196.3 million in 2008 to $253.9 million in 2010.  Our net income has grown from approximately $21.6 million in 2008 to approximately $47.1 million in 2010.  We may not be able to achieve similar growth in future periods.  Therefore, our historical operating results may not provide a meaningful basis for evaluating our business, financial performance and prospects in the future.  Moreover, our ability to achieve satisfactory operating results at higher production and sales volumes is unproven.  You should not rely on our past results or our historical rate of growth as an indication of our future performance.
 
 A large percentage of our revenues are derived from sales to a limited number of customers and our business will suffer if sales to these customers decline.
 
 We currently sell high precision steel products to more than 20 major customers in the Chinese domestic market.  For the fiscal years ended December 31, 2010 and 2009, sales revenues generated from our top 10 customers amounted to 33.4% and 36.9% of total sales revenues, respectively, and sales to our largest single customer for the same periods amounted to 8.5% and 8.4% of our total sales revenues, respectively.  We do not enter into long-term contracts with our customers and therefore cannot be certain that sales to these customers will continue. The loss of any of our largest customers would likely have a material negative impact on our sales revenues and business.
 
 Our customers operate in highly competitive markets, and they may be willing to accept substitutes in lieu of our products.
 
 Our customers and other users of cold-rolled steel products operate in highly competitive markets, which are becoming increasingly cost-conscious.  Cold-rolled precision steel competes with other materials, such as aluminum, plastics, composite materials and glass, among others, for industrial and commercial applications. Customers have demonstrated a willingness to substitute other materials for cold-rolled steel.  If our customers increasingly utilize substitutes for cold-rolled steel products in their operations, sales of our products will decline and our business and results of operations will suffer.
 
 We may be unable to fund the substantial ongoing capital and maintenance expenditures that our operations require.
 
 Our operations are capital intensive and our business strategy is likely to require additional substantial capital investment.  We completed an underwritten public offering in November 2009 and a private placement financing in June 2010 in which we raised total net proceeds of approximately $43 million.
 
 As of the end of the first quarter of 2011, we have used the net proceeds from the aforementioned financings to expand our cold-rolled steel processing capacity from 250,000 metric tons per annum to 400,000 metric tons per annum and to add 200,000 metric tons per annum of capacity to our 50,000-metric ton-per-annum chromium plating line so as to be capable of chromium-plating 250,000 tons of cold-rolled steel per annum. The estimated total capital expenditure for these expansion projects was approximately $42 million.We plan to expand our annual production capacity an additional 100,000 metric tons to 500,000 metric tons by the first quarter of 2012 in order to meet expected demand for our products. This additional expansion will require an estimated capital expenditure of $12 to $15 million.  We may also need additional capital to maintain the condition of our existing equipment and comply with environmental laws and regulation. Although we received $66.5 million in proceeds from warrant exercises in the first quarter of our fiscal year ended December 31, 2011 and plan to use such proceeds for our capital expansion program, our capital expenditure plans and estimates are subject to change as determined by our management and we may determine that we do not have sufficient cash on hand to fund our capital expansion program without seeking external capital funds.  Sourcing external capital funds for these purposes are key factors that have constrained and may in the future constrain our growth, production capability and profitability.  To the extent that we finance our capital expansion and maintenance projects with debt financing, we may become subject to financial covenants or operating covenants that restrict our ability to freely operate our business or take actions that are desired by shareholders, such as the payment of dividends.  If we elect to finance our capital expansion and maintenance plans through equity financing, our shareholders may experience dilution or may have their voting or economic rights as shareholders subordinated to a senior class of stock.  In either event, we may be unable to find external sources of financing on favorable terms or at all.  Our failure to obtain external financing for our capital expansion and maintenance projects can severely impede our growth plans and strategy and impair our revenue, earnings and overall financial performance.
  4
  If we have miscalculated the future demand for our products, we may wind up unnecessarily spending a significant amount of funds on the expansion of our manufacturing facilities.
 
 As described immediately above, we have spent almost all of the $43 million in total proceeds from our November 2009 underwritten public offering and June 2010 private placement to construct additional manufacturing facilities  Our future expansion plans will add an additional 100,000 metric tons per annum of manufacturing capacity at an estimated cost of $12-$15 million, allowing us to produce up to approximately 500,000 metric tons of our high precision, cold rolled steel products annually once construction is completed.  The scope and timing of our expansion plans has been based on our internal projections and estimated demand for our products.  If our projections are incorrect and the actual demand for our products is less than our projections, we may expend a significant amount of capital on an expansion project which ultimately may not have been needed.
 
 The recent global economic crisis could impair the steel industry thereby limiting demand for our products and affecting the overall availability and cost of external financing for our operations.
 
 The repetition, continuation or intensification of the recent global economic crisis and turmoil in the global financial markets may adversely impact our business, the businesses of our customers from whom we generate revenues and our potential sources of capital financing.  Our high precision, cold rolled steel products parts are primarily sold to customers who operate in the food and industrial packaging, construction and household decorations materials, electrical appliances, and telecommunications wires and cables industries.  The global economic crisis harmed most industries and has been particularly detrimental to the steel industry.  Since virtually all of our sales are made to end users in other industries, our sales and business operations are dependent on the financial health of both the steel industry and other industries in which our customers operate.  Therefore, our business could suffer if our customers experience, or continue to experience, difficulties in their respective industries or a downturn in their business.  Presently, it is unclear whether and to what extent the economic stimulus measures and other actions taken or contemplated by the Chinese government and other governments throughout the world will mitigate the effects of the crisis on the steel industry and other industries that affect our business.  Although these conditions have not presently impaired our ability to access credit markets and finance our operations, the impact of the current crisis on our ability to obtain capital financing in the future, and the cost and terms of same, is unclear.
 
 A downturn or negative changes in the highly volatile steel industry will harm our business and profitability.
 
 Steel consumption is highly cyclical and generally follows general economic and industrial conditions, both worldwide and in various smaller geographic areas. Pricing can be volatile as a result of general economic conditions, labor costs, competition, import duties, tariffs and currency exchange rates.  The steel industry has historically been characterized by excess world supply and wide fluctuations in results of operations both in China and globally.  This has led to substantial price decreases during periods of economic weakness, which have not been offset by commensurate price increases during periods of economic strength.  Substitute materials are increasingly available for many steel products, which may further reduce demand for steel.  Additional overcapacity or the use of alternative products could hurt our results of operations.
 
 We are subject to risks associated with changing technology and manufacturing techniques, which could place us at a competitive disadvantage.
 
 Our ability to implement our business plan and to achieve the results projected by management will depend on management's ability to anticipate technological advances in our industry and implement strategies to take advantage of technological change.  We may be unable to address technological advances or introduce new designs or products that may be necessary to remain competitive within the steel industry.
 
 We produce steel products that are characterized by stringent performance and specification requirements that mandate a high degree of manufacturing and engineering expertise.  We believe that our customers rigorously evaluate our services and products on the basis of a number of factors, including, but not limited to:
  5
  ●
quality,
 ●
price competitiveness,
 ●
technical expertise and development capability,
 ●
innovation,
 ●
reliability and timeliness of delivery,
 ●
product design capability,
 ●
operational flexibility,
 ●
customer service, and
 ●
overall management.
 
 Our success depends on our ability to continue to meet our customers’ changing requirements and specifications with respect to these and other criteria. There can be no assurance that we will be able to address technological advances or introduce new designs or products that may be necessary to remain competitive within the precision steel industry.
 
 Our revenues will decrease if there is less demand for the end product in which our products are installed.
 
 Our finished steel products mainly serve as key components in food and industrial packaging, construction and household decorations materials, electrical appliances, and telecommunications wires and cables.  Therefore, we are subject to the general changes in economic conditions affecting the food and industrial packaging, construction and household decorations materials, electrical appliance, and telecommunications wires and cables industries.  If our customers which operate in these industries experience a downturn in their business or if they utilize substitutes for our products in their manufacturing operations, demand for our products and our business results will suffer.
 
 Environmental compliance and remediation could result in substantially increased capital requirements and operating costs.
 
 Steel manufacturing and processing operations are subject to numerous Chinese provincial and local laws and regulations relating to the protection of the environment.  We are subject to regulations regarding emissions and waste disposal and management.  These laws continue to evolve and are becoming increasingly stringent. The ultimate impact of complying with such laws and regulations is not always clearly known or determinable because regulations under some of these laws have not yet been promulgated or are undergoing revision. Our business and operating results could suffer if we were required to increase our expenditures to comply with any new environmental regulations affecting our operations.
 
 Our level of indebtedness may make it more difficult for us to fulfill all of our debt obligations and may reduce the amount of cash available for maintaining and growing our operations, which could have an adverse effect on our revenues.
 
 Our total debt under existing bank loans and lines of credit to the Company as of December 31, 2010 was approximately $130.3 million. Although we had unrestricted cash of approximately $119.5 million as of December 31, 2010, and had received net proceeds of approximately $66.5 million from the proceeds of warrant exercises during the first quarter of our fiscal quarter ended March 31, 2011, we have elected to reserve the use of such cash and proceeds for our capital expansion program and have recently renewed all existing bank loans and lines of credit. This indebtedness and the incurrence of any new indebtedness could (i) make it more difficult for us to satisfy and pay our existing liabilities and obligations, which could in turn result in an event of default, (ii) require us to dedicate a substantial portion of our cash flow from operations to debt service payments, thereby reducing the availability of cash for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes, (iii) impair our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes, (iv) diminish our ability to withstand a downturn in our business, the industry in which we operate or the economy generally, (v) limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate, or (vi) place us at a competitive disadvantage compared to competitors that have proportionately less debt.  If we are unable to meet our debt service obligations, we could be forced to restructure or refinance our indebtedness, seek additional equity capital or sell assets. We may be unable to obtain financing or sell assets on satisfactory terms, or at all, which could cause us to default on our debt service obligations and be subject to foreclosure on such loans.  Additionally, we could incur additional indebtedness in the future and, if new debt is added to our current debt levels, the risks above could intensify.
  6
  We face significant competition from competitors with greater resources, and we may not have the resources necessary to successfully compete with them.
 
 The steel manufacturing and processing business is highly fragmented and competitive. We compete with a large number of other steel manufacturers and processors in China, on a region-by-region basis, and with foreign steel manufacturers, such as POSCO Steel, on a world wide basis.  Our competitors are of various sizes, some of which have more established brand names and relationships in certain markets than we do.  We are not in direct competition with China’s large state-owned steel companies because those companies concentrate on the production of hot-rolled steel.  As such, they are more often a raw material supplier to us, rather than a competitor.  We are one of a limited number of specialty precision cold-rolled steel producers in China.  Differences in the type and nature of the specialty precision steel products in China’s steel industry are relatively small and, coupled with intense competition from international and local suppliers and customer price sensitivity, competition can be fierce.  Our competitors may increase their market share through pricing strategies that damage our business.  Since our industry is capital-intensive, our competitors may be able to successfully compete with us if their financial resources, staff and facilities are substantially greater than ours, placing us at a competitive disadvantage to these larger companies.
 
 Any decrease in the availability, or increase in the cost, of raw materials could materially reduce our earnings.
 
 Our business operations depend heavily on the availability of various raw materials and energy resources, primarily steel coil, but also chromium, tin, zinc, oil paint and electricity.  Steel coil has historically accounted for approximately 90% of our total cost of sales.  The availability of raw materials and energy resources may decrease and their prices may fluctuate greatly.  We purchase a large portion of our raw materials from Zhengzhou Ganlian Trading Co. Ltd. and Zhengzhou Zhongchu Materials Distribution Center, but we currently do not have long-term supply contracts with any particular supplier to assure a continued supply of raw materials.  While we maintain good relationships with these suppliers, the supply of raw materials may nevertheless be interrupted on account of events outside our control, which will negatively impact our operations.  If these or any other important suppliers are unable or unwilling to provide us with raw materials on terms favorable to us, we may be unable to produce certain products.  This could result in a decrease in profit and damage to our reputation in our industry.  So far we have been able to pass most raw material cost increases on to our customers.  However, if our raw material and energy costs increase to such an extent that we cannot pass these higher costs on to our customers in full or at all, our margins will suffer.  Although we currently benefit from favorable pricing in some of these supply contracts, if market prices for these raw materials decline, we may not be able to take advantage of decreasing market prices, and our profit margins may suffer.
 
 We produce a limited number of products and may not be able to respond quickly to significant changes in the market or new market entrants.
 
 Cold-rolled specialty precision steel manufacturing is a relatively new industry in China.  Previously, our customers which manufacture durable goods have relied solely on imports from Japan, Korea, the European Union and the United States.  We believe the average quality and standards of products of China’s high precision steel industry lags behind international standards.  While we offer five series and over 20 types of high-precision steel products and believe we have developed a nationally recognizable brand, there are many other specialty precision steel products of similar nature in the market.  As of December 31, 2010, we have not yet penetrated the international market and have not developed an internationally recognizable brand for specialty steel products.  If there are significant changes in market demand and/or competitive forces, we may not be able to change our product mix or adapt our production equipment quickly enough to meet customers’ needs.  Under such circumstances, our narrow band of precision steel products and/or new market entrants may negatively impact our financial performance.
 
 Increased imports of steel products into China could negatively affect domestic steel demand and prices and reduce our profitability.
 
 While China’s steel production has increased rapidly in recent years, we believe that domestic production continues to be insufficient to meet demand for high-end steel products.   As a result, China is expected to continue to import a significant portion of its steel products. Foreign competitors may have lower labor costs, and are often owned, controlled or subsidized by their governments, which allows their production and pricing decisions to be influenced by political and economic policy considerations as well as prevailing market conditions.  Import levels may also be impacted by decisions of government agencies, under trade laws.  Increases in future levels of imported steel could negatively impact future market prices and demand levels for our precision steel products.
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  While virtually all of our operations, customers and sales are in China, some limited administrative matters are geographically dispersed so any deterioration of general business conditions in China may make it difficult or prohibitive to continue to operate or expand our business.
 
 Our manufacturing operations are located in China and some of our administrative matters are handled in Hong Kong and the BVI.  We have regulatory filing obligations in the United States.  The geographical distances between our facilities create a number of logistical and communications challenges, including time differences and differences in the cultures in each location, which makes communication and effective cooperation more difficult. In addition, because of the location of the manufacturing facilities in China, our operations could be affected by, among other things:
 
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economic and political instability in China, including problems related to labor unrest,
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lack of developed infrastructure,
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variances in payment cycles,
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currency fluctuations,
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overlapping taxes and multiple taxation issues,
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employment and severance taxes,
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compliance with local laws and regulatory requirements,
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greater difficulty in collecting accounts receivable, and
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the burdens of cost and compliance with a variety of foreign laws.
 
 Moreover, inadequate development or maintenance of infrastructure in China, including adequate power and water supplies, transportation, raw materials availability or the deterioration in the general political, economic or social environment could make it difficult, more expensive and possibly prohibitive to continue to operate or expand our facilities in China.
 
 Our rapid expansion could significantly strain our resources, management and operational infrastructure which could impair our ability to meet increased demand for our products and hurt our business results.
 
 To accommodate our anticipated growth, we will need to expend capital resources and dedicate personnel to implement and upgrade our accounting, operational and internal management systems and enhance our record keeping and contract tracking system.  Such measures will require us to dedicate additional financial resources and personnel to optimize our operational infrastructure and to recruit more personnel to train and manage our growing employee base.  If we cannot successfully implement these measures efficiently and cost-effectively, we will be unable to satisfy the demand for our products, which will impair our revenue growth and hurt our overall financial performance.
 
 Our production facilities are subject to risks of power shortages which may impair our ability to meet our customers’ needs.
 
 Our manufacturing processes are extremely specialized and depend on critical pieces of equipment and a constant availability of energy to power them.  Many cities and provinces in China have suffered serious power shortages in recent times, largely as a result of the growth and commercialization of formerly rural regions of China.  Many of the regional grids do not have sufficient power generating capacity to fully satisfy the increased demand for electricity driven by continual economic growth and persistent hot weather.
 
 In addition, China recently announced new guidelines aiming to reduce energy use and carbon emissions per unit of industrial value added output by 4 percent in 2011 compared to 2010 levels.  The target levels are slightly higher than those pledged by China in its recently released 12th Five Year Plan and are part of China's plan to cut energy consumption and carbon emissions per unit of gross domestic product by 18 percent over the next five years. In 2010, electricity supplies were cut back to many industrial producers around China.  Local governments have also occasionally required local factories to temporarily shut down their operations or reduce their daily operational hours in order to reduce local power consumption levels.
 
 While we have not experienced any severe or lengthy power outages in the past as a result of power outages or administrative measures, we do not have any back up power generation systems.  If we are affected by administrative measures or power outages in the future, we may experience material production disruption and delays in our delivery schedule. In such event, our business, results of operation and financial conditions could be damaged.
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  Unexpected equipment failures may damage our business due to production curtailments or shutdowns.
 
 Highly specialized machinery is used in our manufacturing processes which cannot be repaired or replaced without significant expense and time delay.  On occasion, our equipment may be out of service as a result of unanticipated failures which may result in plant shutdowns or periods of materially reduced production. Interruptions in production capabilities will inevitably increase production costs and reduce our sales and earnings.  In addition to equipment failures, our facilities are also subject to the risk of catastrophic loss due to unanticipated events such as fires, explosions or adverse weather conditions. Furthermore, any interruption in production capability may require us to make large capital expenditures to remedy the situation, which could have a negative effect on our profitability and cash flows.  We do not have business interruption insurance to cover losses as a result of equipment failures. In addition, longer-term business disruption could result in a loss of customers. If this were to occur, our future sales levels, and therefore our profitability, could decline.
 
 We might fail to adequately protect our intellectual property and third parties may claim that our products infringe upon their intellectual property.
 
 As part of our business strategy, we intend to accelerate our investment in new technologies in an effort to strengthen and differentiate our product portfolio and make our manufacturing processes more efficient.  Our primary focus will be to develop new and better technologies to allow us to manufacture higher valued-added products, such as chrome finished, zinc-plated and galvanized products.  As a result, we believe that the protection of our intellectual property will become increasingly important to our business.  We expect to rely on a combination of trade secrets, trademarks and copyrights to provide protection in this regard, but this protection might be inadequate.  For example, our  future patent applications might not be approved or, if allowed, they might not be of sufficient strength or scope.  Conversely, third parties might assert that our technologies infringe their proprietary rights.  In either case, litigation could result in substantial costs and diversion of our resources, and whether or not we are ultimately successful, the litigation could hurt our business and financial condition.
 
 We face risks associated with future investments or acquisitions.
 
 A component of our growth strategy is to invest in or acquire businesses complementary to ours that will enable us, among other things, to expand the products we offer to our existing target customer base, and that will provide opportunities to expand into new markets.  We may be unable to identify suitable investment or acquisition candidates or to make these investments or acquisitions on a commercially reasonable basis, if at all.  If we complete an investment or acquisition, we may not realize the anticipated benefits from the transaction.  Integrating an acquired company or technology is complex, distracting and time consuming, as well as a potentially expensive process.  The successful integration of an acquisition would require us to:
 
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integrate and retain key management, sales, research and development, and other personnel;
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incorporate the acquired products or capabilities into our offerings both from an engineering and sales and marketing perspective;
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coordinate research and development efforts;
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integrate and support pre-existing supplier, distribution and customer relationships; and
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consolidate duplicate facilities and functions and combine back office accounting, order processing and support functions.
 
 The geographic distance between the companies, the complexity of the technologies and operations being integrated and the disparate corporate cultures being combined may increase the difficulties of combining an acquired company or technology.  Acquired businesses are likely to have different standards, controls, contracts, procedures and policies, making it more difficult to implement and harmonize company-wide financial, accounting, billing, information and other systems.  Management’s focus on integrating operations may distract attention from our day-to-day business and may disrupt key research and development, marketing or sales efforts.
 
 Our acquisition strategy also depends on our ability to obtain necessary government approvals that may be required.  We may be unable to complete a business combination transaction efficiently or on favorable terms due to complicated merger and acquisition regulations implemented in China.
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We do not carry any business interruption insurance, product liability or recall insurance or third-party liability insurance.
 
 Operation of our business and facilities involves many risks, including equipment failures, natural disasters, industrial accidents, power outages, labor disturbances, business interruptions, property damage, product liability, personal injury and death.  We do not carry any business interruption insurance or third-party liability insurance for our business to cover claims in respect of product liability, personal injury or property or environmental damage arising from accidents on our property or relating to our operations.  Therefore, our existing insurance coverage may not be sufficient to cover all risks associated with our business.  As a result, we may be required to pay for financial and other losses, damages and liabilities, including those caused by natural disasters and other events beyond our control, out of our own funds, which could have a material adverse effect on our business, financial condition and results of operations.
 
 Henan Green’s business will suffer if it loses its land use rights.
  There is no private ownership of land in China and all land ownership is held by the government of China, its agencies, and collectives.  In the case of land used for business purposes, land use rights can be obtained from the government for a period up to 50 years, and are typically renewable.  Land use rights can be granted upon approval by the land administrative authorities of China (State Land Administration Bureau) upon payment of the required land granting fee, the entry into a land use agreement with a competent governmental authority and certain other ministerial procedures.  Henan Green holds land use rights for some of its occupied properties and leases the land and the building on which its main facilities are located from third parties that it reasonably believes have proper land use rights, but no assurance can be given that Henan Green’s land use rights will be renewed or that our lessors will maintain their land use rights. We have received land use certificates for certain parcels of land on which our properties reside, but we may not have followed all procedures required to obtain such certificates or paid all required fees.  If the Chinese administrative authorities determine that we have not fully complied with all procedures and requirements needed to hold a land use certificate, we may be forced by the Chinese administrative authorities to retroactively comply with such procedures and requirements, which may be burdensome and require us to make payments, or such Chinese administrative authorities may invalidate or revoke our land use certificate entirely. If the land use right certificates needed for our operations are determined by the government of China to be invalid or if they are not renewed, or if we are unable to renew the lease for our facilities when it expires in 2027, we may lose production facilities or employee accommodations that would be difficult or even impossible to replace.  Should we have to relocate, our workforce may be unable or unwilling to work in the new location and our business operations will be disrupted during the relocation. The relocation or loss of facilities could cause us to lose sales and/or increase its costs of production, which would negatively impact financial results.
  If we fail to maintain an effective system of internal control over financial reporting, our ability to accurately and timely report our financial results or prevent fraud may be adversely affected and investor confidence and the market price of our ordinary shares may be adversely impacted.
 
 As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted rules requiring public companies to include a report of management on the company’s internal controls over financial reporting in their annual reports, including Form 20-F.  Although our management concluded that our internal controls over our financial reporting were effective as of December 31, 2010, they may not do so in future annual reports.  Our independent registered public accounting firm may issue a report that is qualified if it is not satisfied with our controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us.  Any of these possible outcomes could result in an adverse reaction in the financial marketplace due to a loss of investor confidence in the reliability of our reporting processes, which could adversely impact the market price of our securities.
 
 We may face adverse claims from and may be liable for damages to some former shareholders of COAC based on an agreement we entered into with our original shareholders.
 
 On November 12, 2008, we entered into an Agreement of Merger and Plan of Reorganization, or the Merger Agreement, with COAC, Wealth Rainbow, Henan Green, and several of our original shareholders, Oasis Green Investments Limited, or Oasis, Plumpton Group Limited, or Plumpton, and Honest Joy Group Limited, or Honest Joy, or collectively the Original Shareholders.
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When the parties entered into the Merger Agreement, we and the Original Shareholders expected to succeed to COAC’s liabilities and obligations as a result of the merger, but also expected to receive, as partial consideration for the merger, a significant portion of COAC’s $41.5 million in cash and cash equivalents.  Additionally, in connection with the merger negotiations, the parties agreed to an earn-out arrangement whereby, upon our attainment of certain financial milestones and results, the Original Shareholders would be entitled to receive from us a total of 3,000,000 additional ordinary shares, or the Earn-Out Shares.  Under the Merger Agreement, the Earn-Out Shares were to be issued and paid in three equal annual installments and distributed among the Original Shareholders as specified in the Merger Agreement for each year that we met the respective performance threshold specified therein.  The parties also agreed upon customary conditions to closing, including the approval of the merger by the stockholders of COAC.  Prior to and in connection with the vote of COAC’s stockholders on the proposal to merge with and into China Gerui, COAC used a significant portion of the $41.5 million in cash and cash equivalents held in trust to satisfy obligations to its stockholders in respect of the vote on the merger.  Thereafter, persons holding a sufficient number of shares of COAC stock voted in favor of the merger.
 
 Notwithstanding the redemptions and the substantial depletion of funds held in COAC’s trust fund, we and the Original Shareholders consummated the merger with COAC on March 17, 2009.  All COAC securities were exchanged for our equivalent securities, and COAC merged with and into the Company which survived the merger and succeeded to the rights and obligations of COAC.
 
 Shortly after completion of the merger, we and the Original Shareholders initiated discussions regarding the proper treatment of the Earn-Out Shares given that the Original Shareholders agreed to complete the merger transaction even though the expected COAC cash assets were no longer available to us as originally envisioned by the parties.   As a result of the negotiations between the Original Shareholders and us regarding the appropriate treatment of the Earn-Out Shares, we and the Original Shareholders entered into an agreement dated September 15, 2009, or the Settlement Agreement, pursuant to which, we agreed to issue to the Original Shareholders an aggregate of 2,850,000 ordinary shares within ten days of entering into the agreement.  The 2,850,000 shares were to be divided among the Original Shareholders in the same proportion to the amounts of the Earn-Out Shares that they would have received under the terms of the Earn-Out in the Merger Agreement. In consideration of the issuance of the ordinary shares, we and the Original Shareholders agreed to a mutual release of all claims relating to the merger, the redemptions, and the Earn-Out Shares.
 
 Some former shareholders of COAC, who are currently minority shareholders in our company, may believe that this treatment of the Earn-Out Shares and the related agreement are not in their best interests and may file adverse claims against us seeking monetary or injunctive relief.  Although we do not believe such claims would have merit, if such claims are successful, our agreement with the Original Stockholders may not be enforced and we may be exposed to monetary damages to such shareholders.  In addition, we may incur significant costs associated with the defense of such a lawsuit.
  Failure to comply with the U.S. Foreign Corrupt Practices Act and Chinese anti-corruption laws could subject us to penalties and other adverse consequences.
  Our executive officers, employees and other agents may violate applicable law in connection with the marketing or sale of our products, including China’s anti-corruption laws and the U.S. Foreign Corrupt Practices Act, or the FCPA, which generally prohibits United States companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business.  In addition, we are required to maintain records that accurately and fairly represent our transactions and have an adequate system of internal accounting controls.  Foreign companies, including some that may compete with us, are not subject to these prohibitions, and therefore may have a competitive advantage over us.  Our executive officers and employees have not been subject to the U.S. Foreign Corrupt Practices Act prior to the completion of our merger in March of 2009.  The PRC also strictly prohibits bribery of government officials.  However, corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time-to-time in the PRC.  While we intend to implement measures to ensure compliance with the FCPA and Chinese anti-corruption laws by all individuals involved with our company, our employees or other agents may engage in such conduct for which we might be held responsible.  If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations.  In addition, our brand and reputation, our sales activities or the price of our ordinary shares could be adversely affected if we become the target of any negative publicity as a result of actions taken by our employees or other agents.
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  We rely heavily on our key management personnel and the loss of their services could adversely affect our business.
 
 Our executive management team has a specialized knowledge of steel markets and works closely with our customers to provide products to exact specifications.  Our Chairman and founder, Mr. Lu, has twenty-four years experience in the steel industry in China.  In addition, the executive management team has an average of fifteen years of industry experience. Their long tenure with the company and the industry has enabled the management team to build close relationships with suppliers and customers.  The expertise of management and technical innovation of the company give it a strong competitive advantage.  We do not currently have employment agreements with our management team and we do not maintain key person insurance on these individuals.  The loss of Mr. Lu’s services or any of our other management poses a risk to our business.  We may not be able to attract or retain qualified management on acceptable terms in the future due to the intense competition for qualified personnel in our industry and as a result, our business could be adversely affected.
 
 RISKS RELATED TO DOING BUSINESS IN CHINA
 
 Substantially all of our operating assets are located in China and substantially all of our revenue is derived from our operations in China, so our business, results of operations and prospects are subject to the economic, political and legal policies, developments and conditions in China.
 
 The PRC’s economic, political and social conditions, as well as government policies, could impair our business.  The PRC economy differs from the economies of most developed countries in many respects.  China’s GDP has grown consistently since 1978 (National Bureau of Statistics of China).  However, we cannot assure you that such growth will be sustained in the future.  If, in the future, China’s economy experiences a downturn or grows at a slower rate than expected, there may be less demand for spending in certain industries. A decrease in demand for spending in certain industries could impair our ability to remain profitable.  The PRC’s economic growth has been uneven, both geographically and among various sectors of the economy.  The PRC government has implemented various measures to encourage economic growth and guide the allocation of resources.  Some of these measures benefit the overall PRC economy, but may have a negative effect on us.  For example, our financial condition and results of operations may be hindered by PRC government control over capital investments or changes in tax regulations.
 
 The PRC economy has been transitioning from a planned economy to a more market-oriented economy. Although in recent years the PRC government has implemented measures emphasizing the use 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 PRC government. In addition, the PRC government continues to play a significant role in regulating industry development by imposing industrial policies. It also exercises significant control over PRC 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.
 
 If the Ministry of Commerce, or MOFCOM, China Securities Regulatory Commission, or CSRC, or another PRC regulatory agency, determines that MOFCOM and CSRC approval of our recent merger was required or if other regulatory obligations are imposed upon us, we may incur sanctions, penalties or additional costs which would damage our business
 
 On August 8, 2006, six PRC regulatory agencies, including the MOFCOM and the CSRC, promulgated the Rules on Acquisition of Domestic Enterprises by Foreign Investors, or the M&A Rules, a new regulation with respect to the mergers and acquisitions of domestic enterprises by foreign investors that became effective on September 8, 2006 and was revised on June 22, 2009.  Article 11 of the M&A Rules requires PRC companies, enterprises or natural persons to obtain MOFCOM approval in order to effectuate mergers or acquisitions between PRC companies and foreign companies legally established or controlled by such PRC companies, enterprises or natural persons.  Article 40 of the M&A Rules requires that an offshore special purpose vehicle formed for overseas listing purposes and controlled directly or indirectly by PRC companies or individuals should obtain the approval of the CSRC prior to the listing and trading of such offshore special purpose vehicle’s securities on an overseas stock exchange, especially in the event that the offshore special purpose vehicle acquires shares of or equity interests in the PRC companies in exchange for the shares of offshore companies.  On September 21, 2006, the CSRC published on its official website procedures and filing requirements for offshore special purpose vehicles seeking CSRC approval of their overseas listings.
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On March 17, 2009, we completed a merger transaction with COAC, which resulted in our current ownership and corporate structure.  We believe, based on the opinion of our PRC legal counsel, Jingtian & Gongcheng, Attorneys at Law, that MOFCOM and CSRC approvals were not required for our merger transaction or for the listing and trading of our securities on a trading market because we are not an offshore special purpose vehicle that is directly or indirectly controlled by PRC companies or individuals.  Although the merger and acquisition regulations provide specific requirements and procedures, there are still many ambiguities in the meaning of many provisions.  Further regulations are anticipated in the future, but until there has been clarification either by pronouncements, regulation or practice, there is some uncertainty in the scope of the regulations and the regulators have wide latitude in the enforcement of the regulations and approval of transactions.  If the MOFCOM, CSRC or another PRC regulatory agency subsequently determines that the MOFCOM and CSRC approvals were required, we may face sanctions by the MOFCOM, CSRC or another PRC regulatory agency.  If this happens, these regulatory agencies may impose fines and penalties on our operations in China, limit our operating privileges in China, delay or restrict the repatriation of the proceeds from this offering into China, restrict or prohibit payment or remittance of dividends paid by Henan Green, or take other actions that could damage our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our securities.
 
 In 2008, Wealth Rainbow acquired 100% of the equity interest of Henan Green from 13 shareholders who are PRC nationals, following which Henan Green was changed from a domestic company into a wholly foreign owned enterprise.  The prior sole owner of Wealth Rainbow and former majority owner of China Gerui is the daughter of Mingwang Lu, one of the selling shareholders of Henan Green.  The M&A Regulations requires that when a foreign investor which is established or controlled by a domestic natural person acquires the equity interest of a domestic company that is related with such foreign investor, such acquisition shall be approved by the Ministry of Commerce, and the parties to the acquisition shall have the obligation to disclose the existence of any interested party relationship.  China Gerui believes, based on the opinion of its PRC legal counsel, Jingtian & Gongcheng, Attorneys at Law, that all the necessary approvals and registrations for Wealth Rainbow’s acquisition of the equity interest in Henan Green had been obtained.  However, there remains some uncertainty as to the interpretation and implementation of M&A Regulations with regard to the interested party relationship.  If a PRC regulatory agency, such as the Ministry of Commerce, subsequently determines that the approval from the Ministry of Commerce was required for the acquisition, China Gerui may face sanctions by such PRC regulatory agency. If this happens, these regulatory agencies may impose fines and penalties on our operations in China, limit our operating privileges in China, delay or restrict the repatriation of the proceeds from offerings into China, restrict or prohibit payment or remittance of dividends by Henan Green to us, or take other actions that could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our securities.  The PRC regulatory agency may also take actions requiring us, or making it advisable for us, to cancel this previous acquisition.
 
 The New M&A Regulations establish more complex procedures for some acquisitions of Chinese companies by foreign investors, which could make it more difficult for us to pursue growth through acquisition in China.
 
 The New M&A Regulations establish additional procedures and requirements that could make some acquisitions of PRC companies by foreign investors, such as ours, more time-consuming and complex, including requirements in some instances that the approval of the Ministry of Commerce shall be required for transactions involving the shares of an offshore listed company being used as the acquisition consideration by foreign investors.  In the future, we may grow our business in part by acquiring complementary businesses.  Complying with the requirements of the New M&A Regulations to complete such transactions could be time-consuming, and any required approval processes, including obtaining approval from the Ministry of Commerce, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.
 
 If the PRC imposes restrictions designed to reduce inflation, future economic growth in the PRC could be severely curtailed which could hurt our business and profitability.
 
 While the economy of the PRC has experienced rapid growth, this growth has been uneven among various sectors of the economy and in different geographical areas of the country.  Rapid economic growth often can lead to growth in the supply of money and rising inflation.  In order to control inflation in the past, the PRC has imposed controls on bank credits, limits on loans for fixed assets and restrictions on state bank lending.  Imposition of similar restrictions may lead to a slowing of economic growth, a decrease in demand for our steel products and generally damage our business and profitability.
 
 Fluctuations in exchange rates could harm our business and the value of our securities.
 
 The value of our securities will be indirectly affected by the foreign exchange rate between U.S. dollars and RMB and between those currencies and other currencies in which our sales may be denominated. Because substantially all of our earnings and cash assets are denominated in RMB and our financial results are reported in U.S. dollars, fluctuations in the exchange rate between the U.S. dollar and the RMB will affect our balance sheet and our earnings per share in U.S. dollars.  In addition, appreciation or depreciation in the value of the RMB relative to the U.S. dollar would affect our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations.  Fluctuations in the exchange rate will also affect the relative value of any dividend we issue that will be exchanged into U.S. dollars as well as earnings from, and the value of, any U.S. dollar-denominated investments we make in the future.  Since July 2005, the RMB has not been pegged to the U.S. dollar.  Although the People’s Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate significantly in value against the U.S. dollar in the medium to long term.  Moreover, it is possible that in the future PRC authorities may lift restrictions on fluctuations in the RMB exchange rate and lessen intervention in the foreign exchange market.
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  Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations.  To date, we have not entered into any hedging transactions.  While we may enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited, and we may not be able to successfully hedge our exposure at all. In addition, our foreign currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign currencies.
 
 Exchange controls that exist in the PRC may limit our ability to utilize our cash flow effectively.
 
 We are subject to the PRC’s rules and regulations on currency conversion.  In the PRC, the State Administration for Foreign Exchange, or SAFE, regulates the conversion between Renminbi and foreign currencies. Currently, foreign investment enterprises, or FIEs, are required to apply to the SAFE for “Foreign Exchange Registration Certificates for FIEs.” As a result of our ownership of Henan Green, Henan Green is a FIE.  With such registration certificates, which need to be renewed annually, FIEs are allowed to open foreign currency accounts including a “current account” and “capital account.” Currency conversion within the scope of the “current account,” such as remittance of foreign currencies for payment of dividends, can be effected without requiring the approval of the SAFE.  However, conversion of currency in the “capital account,” including capital items such as direct foreign investment, loans and securities, still require approval of the SAFE. Further, any capital contributions to Henan Green by its offshore shareholder must be approved by the Ministry of Commerce in China or its local counterpart. We cannot assure you that the PRC regulatory authorities will not impose further restrictions on the convertibility of the Renminbi. Any future restrictions on currency exchanges may limit our ability to use our cash flow for the distribution of dividends to our shareholders or to fund operations it may have outside of the PRC.
 
 In August 2008, SAFE promulgated Circular 142, a notice regulating the conversion by FIEs of foreign currency into Renminbi by restricting how the converted Renminbi may be used.  Circular 142 requires that Renminbi converted from the foreign currency-dominated capital of a FIE may only be used for purposes within the business scope approved by the applicable government authority and may not be used for equity investments within the PRC unless specifically provided for otherwise.  In addition, SAFE strengthened its oversight over the flow and use of Renminbi funds converted from the foreign currency-dominated capital of a FIE.  The use of such Renminbi may not be changed without approval from SAFE, and may not be used to repay Renminbi loans if the proceeds of such loans have not yet been used.  Violations of Circular 142 may result in severe penalties, including substantial fines as set forth in the SAFE rules.
 
 A failure by our shareholders or beneficial owners who are PRC citizens or residents in China to comply with certain PRC foreign exchange regulations could restrict our ability to distribute profits, restrict our overseas and cross-border investment activities or subject us to liability under PRC laws.
 
 Notice on Issues Relating to Administration of Foreign Exchange in Fund-raising and Reverse Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, or Notice 75, was issued on October 21, 2005 by SAFE (that replaced two previously issued regulations on January 24, 2005 and April 8, 2005, respectively).  Notice 75 requires PRC residents (including both corporate entities and natural persons) to register with SAFE or its competent local branch before establishing or controlling any company outside of China referred to as an “offshore special purpose company” for the purpose of raising funds from overseas to acquire assets of, or equity interests in, PRC companies. Under Notice 75, a “special purpose vehicle” refers to an offshore entity established or controlled, directly or indirectly, by PRC residents for the purpose of seeking offshore equity financing using assets or interests owned by such PRC residents in onshore companies.  In addition, any PRC resident that is the shareholder of an offshore special purpose company is required to amend his or her SAFE registration with the SAFE or its competent local branch, with respect to that offshore special purpose company in connection with any of its increase or decrease of capital, transfer of shares, merger, division, equity investment or creation of any security interest over any assets located in China. The SAFE regulations require retroactive approval and registration of direct or indirect investments previously made by PRC residents in offshore special purpose companies. To further clarify the implementation of Notice 75, SAFE issued Notice 106 in May, 2007. Under Notice 106, PRC subsidiaries of an offshore special purpose company are required to coordinate and supervise the filing of SAFE registrations by the offshore holding company’s shareholders who are PRC residents in a timely manner.  In the event that a PRC shareholder with a direct or indirect investment in an offshore parent company fails to obtain the required SAFE approval and make the required registration, the PRC subsidiaries of such offshore parent company may be prohibited from making distributions of profit to the offshore parent and from paying the offshore parent proceeds from any reduction in capital, share transfer or liquidation in respect of the PRC subsidiaries. Further, failure to comply with the various SAFE approval and registration requirements described above, as currently drafted, could result in liability under PRC law for foreign exchange evasion.
  14
  There still remain uncertainties as to how certain procedures and requirements under the aforesaid SAFE regulations will be enforced, and it remains unclear how these existing regulations, and any future legislation concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the relevant government authorities. We cannot assure that any of our shareholders or beneficial owners that are PRC citizens or residents have always complied with and will in the future make or obtain any applicable registrations or approvals required by Notice 75 or other related regulations.  Failure by such shareholders or beneficial owners to comply with SAFE Notice 75 and Notice 106 could subject us to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our subsidiary’s ability to make distributions or pay dividends or affect our ownership structure, which could adversely affect our business and prospects.
 
 Because we failed to make the payment of the transfer price of the acquisition of Henan Green’s equity interests on a timely basis pursuant to relevant PRC regulations, there is no guarantee that the PRC government will not challenge the validity of the acquisition in the future.
 
 On August 10, 2008, Wealth Rainbow entered into an equity transfer agreement with the then shareholders of Henan Green to acquire all of their equity interests in Henan Green for RMB 65.6 million (approximately $9.6 million).  On October 21, 2008, Henan Green obtained the Certificate of Approval for Establishment of Enterprises with Investment of Taiwan, Hong Kong, Macao and Overseas Chinese in the People’s Republic of China issued by Henan Provincial Government and a new business license was issued to Henan Green on October 30, 2008.  Article 16 of the M&A Rules requires that the equity interest transfer price be paid in full within three months commencing from the issuance of the new business license to Henan Green.  If the transfer price is not paid by this date, we may apply to the relevant PRC regulatory agency for an extension of up to one year from the date of the issuance of the license; provided, however, that 60% of the transfer price will be required to be paid within six months from such date, which was April 30, 2009.  On January 4, 2009, we obtained the approval from the relevant PRC regulatory agency allowing us to make the full payment of the transfer price by October 30, 2009.  Wealth Rainbow has fully paid the transfer price, making payments between July 2009 and September 16, 2009.  However, because it did not comply with the requirement to pay 60% of the transfer price by April 30, 2009, the relevant PRC regulatory agency may challenge the validity of the acquisition in the future.
 
 Any outbreak of the Swine Flu (H1N1), severe acute respiratory syndrome, or SARS, the Avian Flu, or another widespread public health problem in the PRC could adversely affect our operations.
 
 There have been recent outbreaks of the highly pathogenic Swine Flu, caused by the H1N1 virus, in certain regions of the world, including parts of China, where all of our manufacturing facilities are located and where all of our sales occur.  Our business is dependent upon our ability to continue to manufacture and distribute our products, and an outbreak of the Swine Flu, or a renewed outbreak of SARS, the Avian Flu, or another widespread public health problem in China, could have a negative effect on our operations.  Any such outbreak could have an impact on our operations as a result of:
 
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quarantines or closures of our manufacturing or distribution facilities, which would severely disrupt our operations,
 
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the sickness or death of our key officers and employees, and
 
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a general slowdown in the Chinese economy.
 
 Any of the foregoing events or other unforeseen consequences of public health problems could adversely affect our operations.
  15
  Because Chinese law governs many of our material agreements, we may not be able to enforce our rights within the PRC or elsewhere, which could result in a significant loss of business, business opportunities or capital.
 
 Chinese law governs many of our material agreements, some of which may be with Chinese governmental agencies. We cannot assure you that we will be able to enforce any of our material agreements or that remedies will be available outside of the PRC.  The system of laws and the enforcement of existing laws and contracts in the PRC may not be as certain in implementation and interpretation as in the United States.  The Chinese judiciary is relatively inexperienced in enforcing corporate and commercial law, leading to a higher than usual degree of uncertainty as to the outcome of any litigation. The inability to enforce or obtain a remedy under any of our future agreements could result in a significant loss of business, business opportunities or capital.
 
 Because our funds are held in banks in uninsured PRC bank accounts, the failure of any bank in which we deposit our funds could affect our ability to continue in business.
 
 Funds on deposit at banks and other financial institutions in the PRC are often uninsured.  A significant portion of our assets are in the form of cash deposited with banks in the PRC, and in the event of a bank failure, we may not have access to our funds on deposit.  Depending upon the amount of money we maintain in a bank that fails, our inability to have access to our cash could impair our operations, and, if we are not able to access funds to pay our suppliers, employees and other creditors, we may be unable to continue in business.
 
 Our management is continuing to become more familiar with United States securities laws and will have to continue to learn about such laws which could lead to various regulatory issues.
 
 Some members of our management team are not entirely familiar with United States securities laws and will have to expend time and resources becoming familiar with such laws.  This could be expensive and time-consuming and could lead to various regulatory issues and a diversion of management attention, which may harm our operations.
 
 The ability of our Chinese operating subsidiary to pay certain foreign currency obligations, including dividends, is subject to restrictions.
 
 Our ability to pay dividends may be restricted due to the foreign exchange control policies and availability of cash balances. Since substantially all of our operations are conducted in China and a majority of our revenues are generated in China, a significant portion of our revenue earned and currency received are denominated in Renminbi.  The Chinese government imposes controls on the convertibility of Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China.  Renminbi 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, if any, on our ordinary shares 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 the State Administration of Foreign Exchange, or SAFE, by complying with certain procedural requirements. However, approval from appropriate governmental authorities is required where Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of bank loans denominated in foreign currencies.  The Chinese government may also at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay certain of our expenses as they come due.  In addition, current regulations in China would permit Henan Green to pay dividends to us only out of Henan Green’s accumulated distributable profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, Henan Green will be required to set aside at least 10% (up to an aggregate amount equal to half of its registered capital) of its accumulated profits each year. Such reserve account may not be distributed as cash dividends.
 
 If any dividend is declared in the future and paid in a foreign currency, you may be taxed on a larger amount in U.S. dollars than the U.S. dollar amount that you will actually ultimately receive.
 
 If you are a U.S. holder, you will be taxed on the U.S. dollar value of your dividends at the time you receive them, even if you actually receive a smaller amount of U.S. dollars when the payment is in fact converted into U.S. dollars. Specifically, if a dividend is declared and paid in a foreign currency, the amount of the dividend distribution that you must include in your income as a U.S. holder will be the U.S. dollar value of the payments made in the foreign currency, determined at the conversion rate of the foreign currency to the U.S. dollar on the date the dividend distribution is includible in your income, regardless of whether the payment is in fact converted into U.S. dollars. Thus, if the value of the foreign currency decreases before you actually convert the currency into U.S. dollars, you will be taxed on a larger amount in U.S. dollars than the U.S. dollar amount that you will actually ultimately receive.
  16
  Our business could be severely harmed if the Chinese government changes its policies, laws, regulations, tax structure or its current interpretations of its laws, rules and regulations relating to our operations in China.
 
 Our manufacturing facility is located in Henan, China and virtually all of our assets are located in China.  We currently generate our sales revenue only from customers located in China.Our results of operations, financial state of affairs and future growth are, to a significant degree, subject to China’s economic, political and legal development and related uncertainties. Our operations and results could be materially affected by a number of factors, including, but not limited to
 
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Changes in policies by the Chinese government resulting in changes in laws or regulations or the interpretation of laws or regulations,
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changes in taxation,
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changes in employment restrictions,
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restrictions on imports and sources of supply,
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import duties, and
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currency revaluation.
 
 Over the past several years, the Chinese government has pursued economic reform policies including the encouragement of private economic activities and greater economic decentralization. If the Chinese government does not continue to pursue its present policies that encourage foreign investment and operations in China, or if these policies are either not successful or are significantly altered, then our business could be harmed.  Following the Chinese government’s policy of privatizing many state-owned enterprises, the Chinese government has attempted to augment its revenues through increased tax collection.  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.  Continued efforts to increase tax revenues could result in increased taxation expenses being incurred by us.  Economic development may be limited as well by the imposition of austerity measures intended to reduce inflation, the inadequate development of infrastructure and the potential unavailability of adequate power and water supplies, transportation and communications.  In addition, the Chinese government continues to play a significant role in regulating industry by imposing industrial policies.
 
 The Chinese laws and regulations which govern our current business operations are sometimes vague and uncertain and may be changed in a way that hurts our business.
 
 China’s legal system is a civil law system based on written statutes, in which system decided legal cases have little value as precedents, unlike the common law system prevalent in the United States. 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.  The Chinese government has been developing a comprehensive system of commercial laws, and considerable progress has been made in introducing laws and regulations dealing with economic matters such as foreign investment, corporate organization and governance, commerce, taxation and trade.  However, because these laws and regulations are relatively new, and because of the limited volume of published cases and judicial interpretation and their lack of force as precedents, interpretation and enforcement of these laws and regulations involve significant uncertainties. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively.   We are considered an FIE under Chinese laws, and as a result, we must comply with Chinese laws and regulations.  We cannot predict what effect the interpretation of existing or new Chinese laws or regulations may have on our business.  If the relevant authorities find us to be in violation of Chinese laws or regulations, they would have broad discretion in dealing with such a violation, including, without limitation: levying fines; revoking our business and other licenses; requiring that we restructure our ownership or operations; and requiring that we discontinue any portion or all of our business.
 
 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 Chinese economy which may affect demand for precision steel 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 harm our results of operations.
  17
  Controversies affecting China’s trade with the United States could depress the price of our securities.
 
 While China has been granted permanent most favored nation trade status in the United States through its entry into the World Trade Organization, controversies and trade disagreements between the United States and China may arise that depress the price of our securities.  Political or trade friction between the United States and China, whether or not actually affecting our business, could also materially and adversely affect the prevailing market price of our securities.
 
 Imposition of trade barriers and taxes may reduce our ability to do business internationally, and the resulting loss of revenue could harm our profitability.
 
 We may experience barriers to conducting business and trade in our targeted emerging markets in the form of delayed customs clearances, customs duties and tariffs. In addition, we may be subject to repatriation taxes levied upon the exchange of income from local currency into foreign currency, substantial taxes of profits, revenues, assets and payroll, as well as value-added tax. The markets in which we plan to operate may impose onerous and unpredictable duties, tariffs and taxes on our business and products, and there can be no assurance that this will not reduce the level of sales that we achieve in such markets, which would reduce our revenues and profits.
 
 There can be no guarantee that China will comply with the membership requirements of the World Trade Organization, which could leave us subject to retaliatory actions by other governments and reduce our ability to sell our products internationally.
 
 China has agreed that foreign companies will be allowed to import most products into any part of China. In the sensitive area of intellectual property rights, China has agreed to implement the trade-related intellectual property agreement of the Uruguay Round. There can be no assurances that China will implement any or all of the requirements of its membership in the World Trade Organization in a timely manner, if at all. If China does not fulfill its obligations as a member of the World Trade Organization, we may be subject to retaliatory actions by the governments of the countries into which we sell our products, which could render its products less attractive, thus reducing revenues and profits.
 
 The implementation of the new PRC employment contract law and increases in the labor costs in China may hurt our business and profitability.
 
 A new employment contract law became effective on January 1, 2008 in China. It imposes more stringent requirements on employers in relation to entry into fixed-term employment contracts, recruitment of temporary employees and dismissal of employees. In addition, under the Regulations on Paid Annual Leave for Employees, which also became effective on January 1, 2008, employees who have worked continuously for more than one year are entitled to paid vacation ranging from 5 to 15 days, depending on the length of the employee’s service. Employees who waive such vacation entitlements at the request of the employer will be compensated for three times their normal daily salaries for each vacation day so waived. As a result of the new law and regulations, our labor costs may increase. There is no assurance that disputes, work stoppages or strikes will not arise in the future. Increases in the labor costs or future disputes with our employees could damage our business, financial condition or operating results.
 
 The Chinese government has been adopting increasingly stringent environmental, health and safety protection requirements, which could hurt our business.
 
 The continuation of our operations depends upon compliance with the applicable environmental, health and safety, fire prevention and other regulations.  Any change in the scope or application of these laws and regulations may limit our production capacity or increase our cost of operation and could therefore have an adverse effect on our business operations, financial condition and operating results.  Our failure to comply with these laws and regulations could result in fines, penalties or legal proceedings. There can be no assurance that the Chinese government will not impose additional or stricter laws or regulations, compliance with which may cause us to incur significant capital expenditures, which it may not be able to pass on to our customers.
  18
  Under the New Enterprise Income Tax Law, we may be classified as a “resident enterprise” of China. Such classification will likely result in unfavorable tax consequences to us and our non-PRC shareholders.
 
 China passed a New Enterprise Income Tax Law, or the New EIT Law, and its implementing rules, both of which became effective on January 1, 2008. Under the New EIT Law, an enterprise established outside of China with “de facto management bodies” within China is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. The implementing rules of the New EIT Law define de facto management as “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise. In addition, a recent circular issued by the State Administration of Taxation on April 22, 2009 regarding the standards used to classify certain Chinese-invested enterprises controlled by Chinese enterprises or Chinese group enterprises and established outside of China as “resident enterprises” clarified that dividends and other income paid by such “resident enterprises” will be considered to be PRC source income, subject to PRC withholding tax, currently at a rate of 10%, when recognized by non-PRC enterprise shareholders. This recent circular also subjects such “resident enterprises” to various reporting requirements with the PRC tax authorities.
 
 In addition, the recent circular mentioned above sets out criteria for determining whether “de facto management bodies” are located in China or overseas incorporated, domestically controlled enterprises. However, as this circular only applies to enterprises established outside of China that are controlled by PRC enterprises or groups of PRC enterprises, it remains unclear how the tax authorities will determine the location of “de facto management bodies” for overseas incorporated enterprises that are controlled by individual PRC residents like us and some of our subsidiaries.
 
 Therefore, although substantially all of our management is currently located in the PRC, it remains unclear whether the PRC tax authorities would require or permit our overseas registered entities to be treated as PRC resident enterprises. We do not currently consider our company to be a PRC resident enterprise. However, if the PRC tax authorities determine that we are a “resident enterprise” for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First, we may be subject to the enterprise income tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations. In our case, this would mean that income such as interest on offering proceeds and non-China source income would be subject to PRC enterprise income tax at a rate of 25%. Second, although under the New EIT Law and its implementing rules dividends paid to us from our PRC subsidiaries would qualify as “tax-exempt income,” we cannot guarantee that such dividends will not be subject to a 10% withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax, have not yet issued guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise income tax purposes. Finally, it is possible that future guidance issued with respect to the new “resident enterprise” classification could result in a situation in which a 10% withholding tax is imposed on dividends we pay to our non-PRC stockholders and with respect to gains derived by our non-PRC stockholders from transferring our shares.
 
 In addition, under the New EIT law, the Notice of the State Administration of Taxation on Negotiated Reduction of Dividends and Interest Rates, or Notice 112, which was issued on January 29, 2008, the Arrangement between the PRC and the Hong Kong Special Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion, or the Double Taxation Arrangement (Hong Kong), which became effective on December 8, 2006,and the Notice of the State Administration of Taxation Regarding Interpretation and Recognition of Beneficial Owners under Tax Treaties, or Notice 601, which became effective on October 27, 2009, dividends from our PRC operating subsidiary paid to us through our Hong Kong subsidiary may be subject to a withholding tax at a rate of 10%, or at a rate of 5% if our Hong Kong subsidiary is considered a “beneficial owner” that is generally engaged insubstantial business activities and entitled to treaty benefits under the Double Taxation Arrangement (Hong Kong).Furthermore, the ultimate tax rate will be determined by treaty between the PRC and the tax residence of the holderof the PRC subsidiary. We are actively monitoring the proposed withholding tax and are evaluating appropriateorganizational changes to minimize the corresponding tax impact.
 
 Dividends declared and paid from pre-January 1, 2008 distributable profits are grandfathered under the New EIT Law and are not subject to withholding tax.
  19
  We face uncertainty from China’s Circular on Strengthening the Administration of Enterprise Income Tax on Non-Resident Enterprises' Share Transfer that was released in December 2009 with retroactive effect from January 1, 2008.
 
 The Chinese State Administration of Taxation, or SAT, released a circular on December 15, 2009 that addresses the transfer of shares by nonresident companies, generally referred to as Circular 698. Circular 698, which is effective retroactively to January 1, 2008, may have a significant impact on many companies that use offshore holding companies to invest in China. Circular 698, which provides parties with a short period of time to comply with its requirements, indirectly taxes foreign companies on gains derived from the indirect sale of a Chinese company. Where a foreign investor indirectly transfers equity interests in a Chinese resident enterprise by selling the shares in an offshore holding company, and the latter is located in a country or jurisdiction where the effective tax burden is less than 12.5% or where the offshore income of his, her, or its residents is not taxable, the foreign investor is required to provide the tax authority in charge of that Chinese resident enterprise with the relevant information within 30 days of the transfers. Moreover, where a foreign investor indirectly transfers equity interests in a Chinese resident enterprise through an abuse of form of organization and there are no reasonable commercial purposes such that the corporate income tax liability is avoided, the PRC tax authority will have the power to re-assess the nature of the equity transfer in accordance with PRC’s “substance-over-form” principle and deny the existence of the offshore holding company that is used for tax planning purposes. There is uncertainty as to the application of Circular 698. For example, while the term “indirectly transfer” is not defined, it is understood that the relevant PRC tax authorities have jurisdiction regarding requests for information over a wide range of foreign entities having no direct contact with China. Moreover, the relevant authority has not yet promulgated any formal provisions or formally declared or stated how to calculate the effective tax in the country or jurisdiction and to what extent and the process of the disclosure to the tax authority in charge of that Chinese resident enterprise. In addition, there are not any formal declarations with regard to how to decide “abuse of form of organization” and “reasonable commercial purpose,” which can be utilized by us to balance if our Company complies with the Circular 698. As a result, we may become at risk of being taxed under Circular 698 and we may be required to expend valuable resources to comply with Circular 698 or to establish that we should not be taxed under Circular 698, which could have a material adverse effect on our financial condition and results of operations.
 
 RISKS RELATED TO THE MARKET FOR OUR ORDINARY SHARES GENERALLY
 
 The market price for our ordinary shares may be volatile.
 
 The market price for our ordinary shares could be subject to wide fluctuations in response to a variety of factors, some of which may be beyond our control. During the fiscal year ended December 31, 2010, the high and low reported sales prices of our ordinary shares were $8.20 and $4.55, respectively. Factors affecting the trading price of our ordinary shares include:
 
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our earnings releases, actual or anticipated changes in our earnings, fluctuations in our operating results or our failure to meet the expectations of financial market analysts and investors;
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changes in financial estimates by us or by any securities analysts who might cover our stock;
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speculation about our business in the press or the investment community;
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significant developments relating to our relationships with our customers or suppliers;
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stock market price and volume fluctuations of other publicly traded companies and, in particular, those that are in the steel industry;
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customer demand for our products;
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investor perceptions of the steel industry in general and our company in particular;
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the operating and stock performance of comparable companies;
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general economic conditions and trends;
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major catastrophic events;
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announcements by us or our competitors of new products, significant acquisitions, strategic partnerships or divestitures;
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changes in accounting standards, policies, guidance, interpretation or principles;
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loss of external funding sources;
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sales of our stock, including sales by our directors, officers or significant shareholders; and
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additions or departures of key personnel.
 
 Securities class action litigation is often instituted against companies following periods of volatility in their stock price. This type of litigation could result in substantial costs to us and divert our management’s attention and resources.
 
 Moreover, securities markets may from time to time experience significant price and volume fluctuations for reasons unrelated to operating performance of particular companies. For example, from October 2008 until June 2009, securities markets in the United States, China and throughout the world experienced an historically large decline in share price. These market fluctuations may adversely affect the price of our ordinary shares and other interests in our company at a time when you want to sell your interest in us.
 
 Future sales or perceived sales of our ordinary shares could depress our stock price.
 
 Most of our ordinary shares held by our current shareholders are freely tradable.  If the holders of these shares were to attempt to sell a substantial amount of their holdings at once, the market price of our ordinary shares could decline. Moreover, the perceived risk of this potential dilution could cause shareholders to attempt to sell their shares and investors to short the ordinary shares, a practice in which an investor sells shares that he or she does not own at prevailing market prices, hoping to purchase shares later at a lower price to cover the sale. As each of these events would cause the number of our ordinary shares for sale to increase, our ordinary shares market price would likely further decline.
  20
  We do not intend to pay dividends on our ordinary shares for the foreseeable future.
 
 Prior to our March 2009 merger with COAC, our operating subsidiary, Henan Green, declared and paid dividends of $51.9 million and $42.3 million in 2008, respectively, and declared and paid dividends of $16.1 million in 2007.  We paid no dividends during the fiscal year ended December 31, 2010.  Notwithstanding Henan Green’s past history of making dividend payments, we intend to retain any future earnings to fund the operation and expansion of our business and, therefore, we do not anticipate paying cash dividends on our ordinary shares in the foreseeable future.
 
 We are a “foreign private issuer,” and have disclosure obligations that are different than those of U.S. domestic reporting companies, so you should not expect to receive the same information about us as a U.S. domestic reporting company may provide.
 
 We are a foreign private issuer and, as a result, we are not subject to certain of the requirements imposed upon U.S. domestic issuers by the SEC. For example, we are not required by the SEC or the federal securities laws to issue quarterly reports or file proxy statements with the SEC. We have also been allowed to file our annual report with the SEC within six months of our fiscal year end. Beginning with our annual report for our first fiscal year ending on or after December 15, 2011, we must file annual reports with the SEC within four months of our fiscal year end.  We are also not required to disclose certain detailed information regarding executive compensation that is required from U.S. domestic issuers.  Further, our directors and executive officers are not required to report equity holdings under Section 16 of the Securities Act.  As a foreign private issuer, we are also exempt from the requirements of Regulation FD (Fair Disclosure) which, generally, are meant to ensure that select groups of investors are not privy to specific information about an issuer before other investors. We are, however, still subject to the anti-fraud and anti-manipulation rules of the SEC, such as Rule 10b-5.  Since many of the disclosure obligations required of us as a foreign private issuer are different than those required by U.S. domestic reporting companies, our shareholders should not expect to receive all of the same types of information about us and at the same time as information is received from, or provided by, U.S. domestic reporting companies.  We are liable for violations of the rules and regulations of the SEC which do apply to us as a foreign private issuer.  Violations of these rules could affect our business, results of operations and financial condition.
 
 You may have difficulty enforcing judgments obtained against us.
 
 We are a BVI company and substantially all of our assets are located outside of the United States. Virtually all of our assets and a substantial portion of our current business operations are conducted in the PRC.  In addition, almost all of our directors and officers are nationals and residents of countries other than the United States.  A substantial portion of the assets of these persons are located outside the United States.  As a result, it may be difficult for you to effect service of process within the United States upon these persons.  It may also be difficult for you to enforce in U.S. courts judgments obtained in U.S. courts including judgments based on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors, many of whom are not residents in the United States and whose assets are located in significant part outside of the United States.  The courts of the BVI would recognize as a valid judgment, a final and conclusive judgment in personam obtained in the federal or state courts in the United States against the Company under which a sum of money is payable (other than a sum of money payable in respect of multiple damages, taxes or other charges of a like nature or in respect of a fine or other penalty) and would give a judgment based thereon provided that (a) such courts had proper jurisdiction over the parties subject to such judgment, (b) such courts did not contravene the rules of natural justice of the BVI, (c) such judgment was not obtained by fraud, (d) the enforcement of the judgment would not be contrary to the public policy of the BVI, (e) no new admissible evidence relevant to the action is submitted prior to the rendering of the judgment by the courts of the BVI and (f) there is due compliance with the correct procedures under the laws of the BVI.  In addition, there is uncertainty as to whether the courts of the BVI or the PRC, respectively, would recognize or enforce judgments of U.S. courts against us or such persons predicated upon the civil liability provisions of the securities laws of the United States or any state.  In addition, it is uncertain whether such BVI or PRC courts would entertain original actions brought in the courts of the BVI or the PRC, against us or such persons predicated upon the securities laws of the United States or any state.
  21
  Because we are incorporated under the laws of the BVI, it may be more difficult for our shareholders to protect their rights than it would be for a shareholder of a corporation incorporated in another jurisdiction.
 
 Our corporate affairs are governed by our Memorandum and Articles of Association, by the BVI Business Companies Act, 2004, and by the common law of the BVI.  Principles of law relating to such matters as the validity of corporate procedures, the fiduciary duties of management and the rights of our shareholders differ from those that would apply if we were incorporated in the United States or another jurisdiction.  The rights of shareholders under BVI law may not be as clearly established as are the rights of shareholders in the United States or other jurisdictions.  Under the laws of most jurisdictions in the United States, majority and controlling shareholders generally have certain fiduciary responsibilities to the minority shareholders.  Shareholder action must be taken in good faith, and actions by controlling shareholders which are obviously unreasonable may be declared null and void. BVI law protecting the interests of minority shareholders may not be as protective in all circumstances as the law protecting minority shareholders in US jurisdictions.  In addition, the circumstances in which a shareholder of a BVI company may sue the company derivatively, and the procedures and defenses that may be available to the company, may result in the rights of shareholders of a BVI company being more limited than those of shareholders of a company organized in the US.  Furthermore, our directors have the power to take certain actions without shareholder approval which would require shareholder approval under the laws of most US jurisdictions.  The directors of a BVI corporation, subject in certain cases to court approval but without shareholder approval, may implement a reorganization, merger or consolidation, the sale of any assets, property, part of the business, or securities of the corporation, subject to a limit of up to 50% of such assets.  The ability of our board of directors to create new classes or series of shares and the rights attached by amending our Memorandum of Association and Articles of Association without shareholder approval could have the effect of delaying, deterring or preventing a change in our control without any further action by the shareholders, including a tender offer to purchase our ordinary shares at a premium over then current market prices. Thus, our shareholders may have more difficulty protecting their interests in the face of actions by our board of directors or our controlling shareholders than they would have as shareholders of a corporation incorporated in another jurisdiction.
 
 We may be classified as a passive foreign investment company, which could result in adverse U.S. federal income tax consequences to U.S. shareholders.
 
 We do not currently expect to be classified as a “passive foreign investment company,” or PFIC, for U.S. federal income tax purposes for our taxable year ending December 31, 2011. This expectation is based, in part, on our estimates of the fair market value of our assets (including goodwill). However, the PFIC test is an annual test that, as discussed below, depends upon the composition of our gross income for the year and the percentage, based on a quarterly average for the year, of our gross assets that constitute “passive” assets. Accordingly, it is not possible to determine whether we will not be classified as a PFIC for our tax year ending December 31, 2011 until after the year has ended. In addition, even if we are not classified as a PFIC for our taxable year ending December 31, 2011, because the PFIC test is annual, we cannot assure you that we will not be a PFIC for any following tax year. A non-U.S. corporation will be classified as a PFIC for the taxable year if (i) at least 75% of its gross income is passive income for such year or (ii) at least 50% of the fair market value of its assets (based on an average of the quarterly values of the assets during such year) is attributable to assets that produce or are held for the production of passive income. The fair market value of our assets may be determined to a large extent by the market price of our ordinary shares. If we are treated as a PFIC for any tax year during which U.S. shareholders hold ordinary shares, certain adverse U.S. federal income tax consequences could apply to such U.S. holders.  See “Taxation—U.S. Federal Income Taxation—Passive Foreign Investment Company Considerations.”  Our special U.S. counsel expresses no opinion with respect to our expectations contained in this paragraph.
 
 ITEM 4.
INFORMATION ON THE COMPANY
 
 History and Development of the Company
  We are a holding company and all of our active business operations are conducted by our indirect, operating subsidiary, Henan Green.
 
 China Gerui (formerly known as Golden Green Enterprises Limited) was incorporated as a BVI company on March 11, 2008 under the BVI Business Companies Act, 2004.  China Gerui was incorporated solely for the purpose of acquiring the issued share capital of Wealth Rainbow, which was organized in 2008 for the sole purpose of acquiring and holding all of the outstanding equity capital in Henan Green.  Neither China Gerui nor Wealth Rainbow has any active business operations other than their ownership of Henan Green.
 
 Henan Green is the direct wholly-owned subsidiary of Wealth Rainbow and the indirect, wholly-owned subsidiary of China Gerui.  Henan Green was formed in China in December 2000 by Zhengzhou No. 2 Iron and Steel Company Limited, or Zhengzhou Company, together with six individuals including Mr. Mingwang Lu and Mr. Baiwang Lu, the brother of Mr. Mingwang Lu.  Mr. Mingwang Lu has been actively involved in the operations and management of Henan Green. In December 2006, Zhengzhou Company transferred all its equity interest in Henan Green to 11 individuals including Mr. Mingwang Lu.  On October 21, 2008, the then shareholders of Henan Green transferred all their equity interest in Henan Green to Wealth Rainbow.
  22
  Henan Green was therefore acquired by China Gerui through Wealth Rainbow on October 21, 2008 and the acquisition was accounted for as a reorganization under common control with the purchase of a minority interest. For reporting purposes, a control group comprised of our Chairman and CEO, Mr. Lu and his two direct relatives (Mr. Lu’s son, Yi Lu and Mr. Lu’s brother, Baiwang Lu) held 55.02% of the shares of Henan Green on the date of acquisition.  Upon the acquisition, we were wholly owned by Wealth Rainbow, whose sole shareholder was Ms. Yuying Lu, the daughter of Mr. Lu.  Wealth Rainbow was acquired by China Gerui on November 28, 2008, and upon the acquisition, Henan Green was wholly owned by China Gerui, the majority shareholder of which was Oasis, whose sole shareholder was Ms. Yuying Lu, the daughter of Mr. Lu.  Therefore, under U.S. GAAP reporting rules the control group’s 55.02% interest of Henan Green that was acquired constitutes an exchange of equity interests between entities under common control, and the remaining 44.98% interest of Henan Green was accounted for as a minority interest prior to the date of acquisition.  As of March 17, 2009, the minority interest ceased to exist.
 
 On March 17, 2009, we completed a business combination transaction with COAC.  COAC was incorporated in Delaware on August 7, 2006 as a blank check company whose objective was to acquire an operating business with its principal operations located in China.  COAC completed its initial public offering in which it raised approximately $41.4 million on March 26, 2007.  All business activity conducted by COAC from its inception until our merger on March 17, 2009 related to its initial public offering and search for a business combination partner.  Upon completion of the merger transaction with COAC, we succeeded to foreign private issuer status under applicable securities laws and the individuals who currently comprise our Board of Directors were so appointed.
 
 The following chart reflects our organizational structure as of the date of this report:
 
 
 
 Office Location
 
 Our principal business office is located in China at 1 Shuanghu Development Zone, Xinzheng City, Zhengzhou, Henan Province, China, 451191. The telephone number at our executive offices is +86-371-62568634.  Our registered office is Palm Grove House, PO Box 438, Road Town, Tortola, British Virgin Islands and our registered agent is Equity Trust (BVI) Limited of Palm Grove House, PO Box 438, Road Town, Tortola, British Virgin Islands.  We maintain a website at www.geruigroup.com that contains information about our company, but that information is not part of this report.
  23
  Business Overview
  General
 
 We are a leading China-based, non-state-owned contract manufacturer of high precision cold-rolled narrow strip steel products.  We convert steel manufactured by third parties into thin steel sheets and strips according to our customers’ specifications.  We produce precision ultra-thin, high-strength cold-rolled steel products, with thicknesses starting from 0.05mm,width up to 600 mm and tolerance +/- 0.003mm.  We sell our products to domestic Chinese customers who primarily operate in the food and industrial packaging, construction and household decorations materials, electrical appliances, and telecommunications wires and cables industries.  The cold-rolled precision steel industry is relatively new in China. Manufacturers of products that use specialty precision steel products, including our customers, traditionally imported raw materials from Japan, South Korea, the European Union and the United States.
 
 Our revenue has increased from $196.3 million in 2008 to $218.9 million in 2009 and to $253.9 million in 2010, representing a compounded annual growth rate, or CAGR, of approximately 13.7% from 2008 to 2010.  Our net income before minority interest increased from $35.5 million in 2008 to $43.4 million in 2009 and to $47.1 million in 2010, representing a CAGR of 15.2% from 2008 to 2010.
 
 We believe that our significant growth reflects our success in increasing market penetration and improved utilization of existing production lines.  As a net importer of high-end precision products, China currently still lacks the capability to produce high-end precision steel products.  Our success in the past mainly came from being able to expand into products which replace expensive imported products and being able to manufacture these types of products at a cost-efficient level compared to other domestic Chinese manufacturers.  We believe our technology and product development capability has been a key factor in our success.
 
 Our PRC manufacturing facility is located in Zhengzhou, Henan Province.  We currently operate six sets of cold-rolled steel production lines with a current annual steel processing capacity of approximately 250,000 metric tons and two chromium-plating production lines with total annual processing capacity of approximately 250,000 metric tons.
 
 Prior to 2009, we produced and sold unplated steel sheets to manufacturers or distributors which then further treated or outsourced our products for tin or zinc plating to produce tinplate or zinc-plated steel, or for electrolytic chromic acid treatments to produce chromium plated steel, according to customer specifications.  We added chromium plating facilities in December 2008, and launched mass production of chromium plated steel products in February 2009.  We have used the net proceeds of our November 2009 public offering and June 2010 private placement, and plan to use the net proceeds from the exercise of outstanding warrants, to expand our cold-rolled steel processing capacity to 400,000 metric tons in 2011 and to 500,000 metric tons by the first quarter of 2012 and for general working capital purposes related to the expanded production capacity.  This expansion will increase our product offerings, which we believe will increase our profit margin.  Newly-added capacity to produce these types of high-end plated steel products will enable us to enhance our higher-margin product offering to meet the increasing demand in the China market for high-end cold-rolled steel products.
 
 Developments During the Last Fiscal Year
 
 Private Placement
 
 On June 4, 2010, we entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with certain purchasers (the “Purchasers”) and, pursuant to the Securities Purchase Agreement, effected the closing of the purchase and sale of 3,303,771 of the Company’s ordinary shares (the “Private Placement Shares”) at a price per share of $5.70, for a gross purchase price of $18,831,495.
 
 Pursuant to the Securities Purchase Agreement, we also entered into a Registration Rights Agreement (the “Registration Rights Agreement”) with the Purchasers, pursuant to which, among other things, we agreed to register the Private Placement Shares within a pre-defined period.  We agreed to registration delay payments in the amounts prescribed by the Registration Rights Agreement if we failed to file a registration statement to register the resale of the Private Placement Shares within 30 days of the closing date, cause it to become effective within 120 days of the closing date or maintain its effectiveness as required by the Registration Rights Agreement.  We filed the registration statement to register the resale of the Private Placement Shares with the SEC on June 28, 2010, and the registration statement was declared effective on August 4, 2010.
 
 The foregoing description does not purport to be a complete statement of the parties’ rights and obligations under the Securities Purchase Agreement and the Registration Rights Agreement, and is qualified in its entirety by reference to the provisions of such agreements attached to this report as Exhibits 4.12 and 4.11, respectively.
  24
  Maxim Group LLC, or Maxim Group, and Rodman & Renshaw, LLC, a wholly-owned subsidiary of Rodman & Renshaw Capital Group, Inc., acted as our placement agents (“Placement Agents”) in connection with the offering of the Private Placement Shares.  As compensation for their services, the Placement Agents received an aggregate cash fee equal to $353,259.82, representing 4% of the gross proceeds received from the offering from Purchasers introduced by the Placement Agents, before payments of legal fees and expenses of the Placement Agents and a certain Purchaser.
 
 The Private Placement Shares were issued pursuant to the exemption from registration provided by Section 4(2) of the Securities Act for the offer and sale of securities not involving a public offering and Rule 506 of Regulation D promulgated thereunder.  Each of the Purchasers agreed that (a) it had access to all of our information pertaining to the investment and was provided with the opportunity to ask questions and receive answers regarding the offering, (b) it was acquiring its portion of the Private Placement Shares for its own account for investment and not for the account of any other person and not with a view to or for any distribution within the meaning of the Securities Act and (c) it would not sell or otherwise transfer its purchased Private Placement Shares unless in compliance with state and federal securities laws.  Each of the Purchasers represented that it is an accredited investor as defined in Rule 501(a) under the Securities Act and that there was no general solicitation or advertising in connection with the offer and sale of the Private Placement Shares.
 
 2010 Share Incentive Plan
 
 On November 16, 2010, our Board of Directors and Compensation Committee adopted the China Gerui Advanced Materials Group Limited 2010 Share Incentive Plan (the “2010 Plan”).  The Plan became effective on the date of its adoption, subject to approval by our shareholders within 12 months.  At our annual shareholders meeting held on December 8, 2010, our shareholders approved the adoption of the 2010 Plan.  For a summary of the terms of the 2010 Plan, please refer to Item 6. “Directors, Senior Management and Employees — 2010 Share Incentive Plan — Summary of the 2010 Plan”.
 
 In connection with the adoption of the 2010 Plan, the Board of Directors and Compensation Committee also approved forms of Share Option Agreement for employees and directors (collectively, the “Forms of Option Agreement”) and form of Restricted Share Award Agreement (the “Form of Share Award Agreement”) that we will utilize to grant options and restricted shares under the 2010 Plan.
 
 The foregoing summary of the material terms and conditions of the 2010 Plan, the Forms of Option Agreement and the Form of Share Award Agreement does not purport to be complete and is qualified in its entirety by reference to those documents filed as Exhibits 4.13, 4.14, 4.15, and 4.16 respectively, to this report, which are incorporated by reference herein.
 
 Principal Capital Expenditures and Divestitures
 
 In fiscal years 2010, 2009 and 2008, the Company’s total capital expenditures were $65.1 million, $5.2 million and $6.6 million, respectively.  In 2008, we began construction of a 50,000-metric-ton cold-rolled steel plating facility which commenced full production in the fourth quarter of 2009. In 2009, we began our capacity expansion program using cash generated from operations. Capital expenditures in 2010 were primarily related to the first phase of our capacity expansion program.  The first phase involved the construction of two new cold-rolled, wide-strip steel production lines with 150,000 tons of total annual capacity and a chromium plating line capable of processing 200,000 tons of cold-rolled steel per annum.  The two new cold-rolled production lines are expected to launch normal production operations during the quarter ended June 30, 2011.
 
 We have used the net proceeds of our November 2009 public offering and June 2010 private placement, totaling approximately $43 million, to expand our cold-rolled steel processing capacity to 400,000 metric tons by the first quarter of 2011 at an estimated capital expenditure of approximately $42 million and to 500,000 metric tons by first quarter of 2012 at an estimated capital expenditure of $12 to $15 million, to accelerate the expansion of our chromium-plating production capacity by 200,000 metric tons, and for general working capital purposes related to the expanded production capacity . This expansion will increase our product offerings, which we believe will increase our profit margin.
 
 Our Products
 
 During 2008, we produced and sold unplated cold-rolled steel sheets.  We started to build a chromium plating facilities in December 2008, and launched mass production of chromium plated steel products in October 2009.
  25
  From February 2009 through the end of 2010, we converted hot-rolled coil steel manufactured by third parties into thin steel sheets and strips according to our customers’ specifications. We produced precision ultra-thin, high-strength cold-rolled steel products, with thicknesses starting from 0.05mm width up to 600 mm and tolerance +/- 0.003mm.
 
 During 2008, 2009, and 2010, we had five series and over 20 types of high precision strip steel products.  Our products were manufactured from steel substrate of cold-rolled or hot-rolled pickled coils.  We have had the flexibility to adjust our production specifications to meet changes in market demand.
  Our Pricing Strategy
 
 We price our products after reflecting raw material and production costs, selling expenses and profit margin.  Our product price is largely affected by the price of raw steel as well as the supply and demand dynamics of our products in the marketplace.
 
 The price of precision steel products varies depending on thickness, precision, and hardness.  Product quality is also a pricing factor, reflecting the technological leadership, engineering and operating efficiency of the manufacturers.
 
 The market for our principal raw material, hot rolled steel, is price sensitive.  We work with long-term suppliers, which are the large and mid-scale steel mills in China, as well as our customers to ensure quick reaction to the change of pricing directions in the market.  As steel prices drop, we endeavor to obtain price concessions from suppliers, and pass the cost-savings to our customers.  As steel prices rise, we negotiate with customers to pass on cost increases, and negotiate with suppliers to lock in lower steel costs.  We believe our ability to manage the price of raw materials and the price of final products, as well as our long-term relationships with our suppliers and customers are important factors in our success in this business.
 
 Raw Materials and Suppliers
 
 The principal raw material used in producing our products is hot rolled steel coil, which accounts for approximately 90% of our total production cost.  Our raw material procurement policy is to use only long-term suppliers who have demonstrated quality control and reliability.  We maintain multiple supply sources so that supply problems with any one supplier will not materially disrupt our operations.  We also believe that we have sufficient suppliers to meet our present and anticipated future needs.
 
 The prices of steel rolls can fluctuate and can be quite volatile.  To provide some protection from the pressure and volatility of the market, we make bulk purchases only when all purchases are supported by customers’ orders.  When executing sales orders with customers, we set pricing based on the currently prevailing price of steel coil thereby allowing us to pass incremental cost increases in raw materials to our customers.  In a market environment when the steel price declines, it is a general industry practice that steel mills will provide concessions for price protection and we generally will pass on the price concessions to our customers.
 
 However, our principal suppliers usually dedicate portions of their inventories as reserves to meet our manufacturing requirements.  Suppliers are generally provided a prepayment and are paid in full when the products are delivered.
 
 For the years ended December 31, 2010, 2009 and 2008, our three largest suppliers accounted for over 66%, 66% and 80%, respectively, of our total purchases.  For the fiscal years ended December 31, 2010, 2009 and 2008, our single largest supplier accounted for 29.7%, 28.2%, and 47.3% of our total purchases, respectively.
 
 Customers, Sales and Marketing
 
 We sell our products primarily in China either directly to manufacturers or through distributors.  We use our own sales staff and network which cover many Chinese provinces and regions, especially in the eastern coastal regions in China.  We have developed and strive to maintain a diversified sales network that allows us to effectively market products and services to our customers.
 
 Members of our sales team generate sales leads by contacting customers and customer prospects directly and by attending industry trade shows and exhibitions. Given our established status as one of China’s leading suppliers of cold-rolled precision steel products, our customers often contact us directly regarding new projects. Although most of our business is developed by direct personal contact and referrals from our customers, we have been marketing and promoting our products through the following means:
  26
  ●
Hosting annual product promotion meeting with current and potential customers, in which we introduce our products and new improvements to the market;
 
 ●
Attending various exhibitions to improve our name recognition; and
 
 ●
Visiting our customers and collecting information regarding their needs.
 
 Sales to customers in China account for virtually all of our revenue. We target our sales efforts primarily in the coastal provinces of Guangdong, Fujian, Zhejiang, Jiangsu and Shanghai areas, where the majority of our customers are located.  We have a sales staff of approximately 30 employees. We maintain nine sales offices in China, including three in Guangdong, three in Zhejiang, one in Fujian, one in Shandong, and one in Anhui.  We participate in industry expositions in which we showcase our products and services and from which we obtain new customers.
 
 Generally, an initial deposit (approximately 30% of the aggregate contracted sales amount) is pre-paid by a customer when the customer contract is signed.  The remainder of the customer’s payment is generally received in cash on delivery.  Management reviews its accounts receivable on a regular basis to determine if the allowance for doubtful accounts is adequate at each quarter-end.
 
 During the last three fiscal years, we produced on a contract basis for our customers and developed, processed and manufactured steel products tailored to customers’ specifications.  During 2008, we sold to manufacturers or distributors which then further treated or outsourced our products for tin or zinc plating to produce tinplate or zinc-plated steel, or for electrolytic chromic acid treatments to produce chromium plated steel, according to customer specifications.
 
 From December 2008 through December 2010, we sold our products to domestic Chinese customers primarily operating in the food and industrial packaging, construction and household decorations materials, electrical appliances, and telecommunications wires and cables industries.  Our high precision steel products are sold directly to the end users in various parts of China and our production was based on confirmed sales orders.
 
 The following table sets forth the percentages of our products by industry applications during each of the three years of 2010, 2009 and 2008:
 
 Year Ended December 31,Revenue by Industry Application

Thickness

Precision

2010

% of Sales


2009

% of Sales


2008

% of SalesFood and industrial packaging

0.1 - 1.3 mm

±0.0025 - 0.005


51.8
%


46.7
%


49.7
%Construction and household decorations materials

0.2 - 1.1 mm

±0.0025 - 0.005


33.7
%


34.7
%


21.7
%Electrical appliances

0.09-1.1 mm

±0.002 - 0.005


6.0
%


5.0
%


8.6
%Telecommunication wires and cables

0.1-0.24 mm

±0.0025 - 0.005


8.5
%


13.6
%


20.0
%Total






100
%


100
%


100
%
 
 During the last three fiscal years, we have sold our products to more than 200 customers  that were located in Shanghai, Zhejiang, Jiangsu, Shandong, Guangdong, Hebei, Tianjin, Guangxi, Fujian and Liaoning.  Our major customers for the year ended December 31, 2010 included:
 
 Customer Name

Quantity Sold (Metric Tons)


% of Total SalesHenan Jindan Enamel Products Co., Ltd


25,578.7



8.5
%Xian Concord Enamel Products Co. Ltd


12,131.6



4.2
%Wuxi Changmao Metal Products Co. Ltd


11,858.7



4.1
%Guochu Materials Center


11,814.5



3.6
%Jiangsu Suxun New Materials Technology Co. Ltd


7,770.7



2.6
%
 
 For each of the years ended December 31, 2010, 2009 and 2008, our five largest customers accounted for 22.9%, 25.2%, and 29.7% of total sales, respectively.  For the fiscal years ended December 31, 2010, 2009 and 2008, the single largest customer accounted for 8.5%, 8.4%, and 10.1% of our total sales, respectively.
  27
  Intellectual Property
 
 We protect our intellectual property primarily by maintaining strict control over the use of production processes.  All our employees, including key employees and engineers, have signed our standard form of labor contracts, pursuant to which they are obligated to hold in confidence all of our trade secrets, know-how or other confidential information and not to compete with us, both during the employment term and within five years after the termination of employment.  In addition, for each project, only the personnel associated with the project have access to the related intellectual property.  Access to proprietary data is limited to authorized personnel to prevent unintended disclosure or otherwise using our intellectual property without proper authorization.  We will continue to take steps to protect our intellectual property rights.
 
 In May, 2010, our utility model patent application was approved by the PRC government (application number: 200920089897.4), related to our production process technology, in particular, hydraulic pressured automatic thickness control system for four-roll reversible cold mill.  The application was made on April 28, 2009.
 
 We have registered the trademark for the logo  with the Trademark Office of the State Administration for Industry and Commerce of China.  We use our trademark for the sales and marketing of our products.  Our trademark expires on November 27, 2012 and may be continually renewed thereafter.
 
 Competition and Our Market Position
 
 Competition within the steel industry, both in China and worldwide, is intense.  There are many large state-owned enterprises and smaller private steel companies in China.  In addition, Chinese steel makers also face competition from international steel manufacturers.  For high precision cold-rolled narrow strip steel products, we are one of the leading manufacturers in China.
 
 The top five players, including us, accounted for approximately 36% of the total sales revenue in 2008 according to Freedonia, and the four largest players next to us were Hebei Iron and Steel Group, Hebei Dachang Jinming Accurate Cold-Rolling Steel Plate Co., Ltd., Jiangsu Huaxi Group Corp., and Hangzhou Metal Rolling.  The remaining 64% of the market was comprised of over 200 manufacturers which are mostly smaller private enterprises.
 
 In the cold-rolled narrow steel strip market in China, competitive advantages generally result from a number of factors, including the following:
 
 ●
Cost and pricing. A producer’s flexibility to control cost and pricing of products and the ability to use economies of scale to secure advantages in procurement, production and distribution;
 
 ●
Capacity.  A producer’s capacity to meet all current and potential demand;
 
 ●
Technology.  A producer’s ability to manufacture products efficiently, maximize raw material yield, and to achieve better production quality; and
 
 ●
Barriers to entry.  A producer’s technical knowledge, access to capital, local market knowledge and established relationships with suppliers and customers to support the development of commercially viable production facilities.
 
 Particularly with respect to domestic cold-rolled narrow steel strip manufacturers, we believe that we differentiate ourselves by being an early mover in the industry, and by offering high product quality, timely delivery and better value.  The following are attributes that we believe are important to our industry and we believe that we demonstrate each of them:
 
 ●
performance and cost effectiveness of products;
 
 ●
ability to manufacture and deliver products in required volumes, on a timely basis, and at competitive prices;
 
 ●
high quality and reliability of products;
 
 ●
flexibility to customize products to match customers’ end-use specifications;
  28
  ●
in-house production process;
 
 ●
after-sale support capabilities, from both an engineering and an operational perspective;
 
 ●
flexibility in operations;
 
 ●
cost-effective supply chain management and production;
 
 ●
access to financing for capital expenditures and working capital;
 
 ●
effectiveness of customer service and ability to send experienced operators and engineers as well as a seasoned sales force to assist customers; and
 
 ●
overall management capability.
 
 We believe that we are positioned to address competition with international manufacturers of cold-rolled narrow steel strip, which primarily relates to the following attributes:
 
 ●
ability to offer both a high quantity and a wide variety of customized, value-added products;
 
 ●
technical expertise to match or exceed the quality of foreign-made products; and
 
 ●
maintenance of lower transportation, labor, and other significant costs.
 
 Our capacity expansion program is one of the primary ways that we believe that we are maintaining or increasing our competitiveness as to all competitors with respect to many of the above factors.  As previously disclosed, our expansion plan is being implemented in two phases.  The first phase has involved the construction of two new cold-rolled, wide-strip steel production lines with 150,000 tons of total annual capacity and a chromium plating line capable of processing 200,000 tons of cold-rolled steel per annum, which started normal operations in March 2011.  The two new cold-rolled production lines are expected to launch normal production operations in the second quarter of fiscal year 2011.  The second phase of our expansion plan involves the construction of a third cold-rolled wide strip steel production line with 100,000 tons of capacity by the end of 2011.
 
 Regulation
 
 We are subject to numerous central, provincial and local laws and regulations, which may be changed from time to time in response to economic or political conditions and have a significant impact upon overall operations.  Changes in these regulations could require us to expend significant resources to comply with new laws or regulations or changes to current requirements and could have a material adverse effect on our company.
 
 Included among these laws and regulations are numerous central, provincial and local laws and regulations relating to the protection of the environment.  These laws continue to evolve and are becoming increasingly stringent.  The ultimate impact of complying with such laws and regulations is not always clearly known or determinable because regulations under some of these laws have not yet been promulgated or are undergoing revision.  The State Environmental Protection Administration Bureau is responsible for the supervision of environmental protection in, implementation of national standards for environmental quality and discharge of pollutants for and supervision of the environmental management system of the PRC.  Environmental protection bureaus at the county level or above are responsible for environmental protection within their jurisdictions
 
 Seasonality
 
 Our operating results and operating cash flows historically have not been subject to seasonal variations.  This pattern may change, however, as a result of new market opportunities or new product introductions.
  29


Organizational Structure
  The following diagram illustrates our corporate structure as of the date of this annual report.  We are a holding company with no operations of our own.  We conduct our operations in China through our Chinese operating company, Henan Green.
 
 
 
 Property, Plant and Equipment
  There is no private ownership of land in China and all land ownership is held by the government of China, its agencies, and collectives.  In the case of land used for business purposes, land use rights can be obtained from the government for a period up to 50 years, and are typically renewable.  Land use rights can be transferred upon approval by the land administrative authorities of China (State Land Administration Bureau) upon payment of the required land transfer fee.
 
 Our manufacturing facilities are located in Zhengzhou, Henan Province, China.  The total land area is approximately 1,194,000 square feet, which we lease from Zhengzhou Company (a related party).  Our facilities have a total area of approximately 264,000 square feet, of which 226,000 square feet is devoted to production facilities, 9,100 square feet is raw material warehouse space, 6,350 square feet is finished product warehouse space and 22,700 square feet is an office building.  The lease is for a 20-year term, which began on January 1, 2008 and terminates on December 31, 2027.  During 2008 and 2009, the annual rent under the lease was $8,781 for 2008 and 2009.  In 2010, the annual rent under the lease became subject to an annual 10% increase and was approximately $9,660 for that year.  The lessor has pledged the land and buildings to guarantee our obligations under certain of our short-term bank loans.
 
 As of December 31, 2010, our facilities had an annual cold rolling steel processing capacity of approximately 250,000 metric tons and an annual chromium coating capacity of approximately 50,000 metric tons.
 
 We also have obtained land use rights and permission to construct facilities on additional land of approximately 2,152,780 square feet, adjacent to our present facilities, from the Zhengzhou local government.
 
 We are presently constructing additional facilities to produce plated products and to expand our overall steel processing capacity.  We plan to expand our cold-rolled steel processing capacity to 400,000 metric tons and to accelerate the expansion of our chromium-plating production capacity by 200,000 metric tons by the first quarter of 2011 at an estimated capital expenditure of approximately $42 million and to 500,000 metric tons by the first quarter of 2012 at an estimated capital expenditure of between $12 to $15 million, and for general working capital purposes related to the expanded production capacity.  We have pledged the land use rights for this property to the lenders of certain of our short-term bank loans to secure our obligations under these loans.
 
 Our manufacturing facilities are subject to various pollution control regulations with respect to noise and air pollution and the disposal of waste and hazardous materials.  We are also subject to periodic inspections by local environmental protection authorities.  Our operating subsidiaries have received certifications from the relevant PRC government agencies indicating that their business operations are in material compliance with the relevant PRC environmental laws and regulations.  We are not currently subject to any pending actions alleging any violations of applicable PRC environmental laws.
  30
  ITEM 4A.
UNRESOLVED STAFF COMMENTS
 
 Not Applicable.
 
 ITEM 5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
 
 You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes included elsewhere in this annual report on Form 20-F.  This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties.  Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Item 3, Key Information — Risk Factors” or in other parts of this annual report on Form 20-F.
 
 Operating Results
  Overview
 
 Our revenue increased from $196.3 million in 2008 to $218.9 million in 2009 and to $253.9 million in 2010, representing a CAGR of approximately 13.7% from 2008 to 2010.   Our net income before minority interest increased from $35.5 million in 2008 to $43.4 million in 2009 and to $47.1 million in 2010, representing a CAGR of 15.2% from 2008 to 2010.  We believe that the growth which we have achieved reflects our success in addressing customer needs, improving on capacity utilization, optimizing product mix, increasing market penetration and enhancing the quality of our products.
 
 Our cold rolling steel processing production capacity as of December 31, 2010 was approximately 250,000 metric tons per annum and our chromium coating capacity was approximately 50,000 metric tons per annum. We plan to expand our overall steel processing manufacturing capacity to 500,000 metric tons by 2012. We also intend to add new production lines and higher value-added products, such as plated products to improve our profit margin.
 
 Important Factors Affecting our Results of Operations
 
 The most significant factors that affect our financial condition and results of operations are:
 
 Factors Specific to Our Business
 
 ●
Expansion of our production capacity and product mix.  We anticipate that our future growth will be further supported by the expected expanded production capacity and optimization of product mix for high-end higher-margin cold-rolled steel.  In August 2008, we accelerated our expansion plan by installing a new processing line producing chromium-plated steel products, which are higher-end, value-added products with a higher selling price and higher profit margin.  We completed pilot production of the chromium-plated steel products, and commenced mass production during the fourth quarter of 2009.  We are currently completing our capacity expansion program.  The first phase involved the construction of two new cold-rolled, wide-strip steel production lines with 150,000 tons of total annual capacity and a chromium plating line capable of processing 200,000 tons of cold-rolled steel per annum.  We plan to complete the second phase of our capacity expansion program in the first quarter of 2012, which would add 100,000 metric tons of cold-rolled steel production capacity.  By 2012, we expect to have increased our total annual steel processing capacity to 500,000 metric tons and to be capable of plating up to 50% of our steel products with chromium, tin, or zinc in accordance with customer specifications.
 
 ●
Growth in the Chinese Economy.  We operate our manufacturing facilities in China and derive almost all of our revenues from sales to customers in China. Economic conditions in China, therefore, affect virtually all aspects of our operations, including the demand for our products, the availability and prices of our raw materials and our other expenses. China is expected to experience continued growth in all areas of investment and consumption, even in the face of a global economic recession. However, China has been affected by the global economic slowdown since 2008 and is expecting a slowing of its growth rate.
  31


●
Supply and Demand for High-End Precision Cold-Rolled Steel.  While the overall Chinese crude steel industry has recently experienced a period of excess supply, there is an increasing shortage of high-end precision cold-rolled steel products, which has been primarily driven by the limited number of producers of precision thin steel products in China. We expect that the shortage of supply in this steel market will continue. In addition, due to the continuing improvement of the standard of living in China and the growth of China’s middle class, the demand for telecommunications cable and equipment, electrical household appliances and construction materials in which our products serve as components has risen in recent years, thereby increasing the demand for the high-end steel products that we produce. We expect this demand trend will continue for the foreseeable future.
  ●
Recent Economic Events.  Despite the recent global economic crisis and market turmoil, we have experienced continued growth during 2010, albeit at a less rapid pace than in recent years. Although some uncertainty can be expected in demand for 2011 due to the general slowdown in China’s economy, our customers have given no indication of a reduction in orders through the end of 2010. If we continue to produce innovative, high quality products that meet our customers’ demands, we believe that we will continue to experience strong demand over the next 12 months.
 
 ●
PRC Economic Stimulus Plans.In 2009, the PRC government issued a policy entitled “Central Government Policy On Stimulating Domestic Consumption To Counter The Damage Result From Export Business Of The Country.”  Under this policy, the PRC Central Government is dedicating approximately $580 billion to stimulate domestic consumption. Companies that are either directly or indirectly related to construction, building material, electrical household appliances and telecommunication are expected to benefit. An executive order has been announced that the PRC Central Government will improve the living standard in the country’s rural areas by subsidizing the purchase of any electric household appliance for every household in the rural area. In addition, the policy indicates a strong determination to improve telecommunication in all rural areas. We expect to continue benefiting from order growth due to this economic stimulus plan.
  Factors Specific to Our Industry
 
 ●
Cyclicality.The steel industry is highly cyclical and significantly affected by general economic conditions and other factors, such as worldwide production capacity, fluctuations in imports and exports, fluctuations in metal purchase prices and tariffs. Recently, the global steel markets have been experiencing larger and more pronounced cyclical fluctuations, primarily driven by slower global economic growth and the increase in Chinese production and consumption.  This trend, combined with the upward pressure on costs of key inputs, comprising mainly metals, energy and transportation and logistics costs, presents increasing uncertainty and challenge for steel producers on a worldwide basis. However, processed steel demand and prices for the precision steel products, like those we manufacture, are driven by and sensitive to other factors, such as product differentiation, customer service and cost reductions through improved efficiencies and economies of scale. Therefore we are comparatively less affected by cyclicality than other companies within our industry.
  32
  ●
Raw Materials Prices.  The market for our principal raw material, hot-rolled steel, is price sensitive and has experienced significant volatility since 2008 as a result of worldwide economic recession, an increase of iron ore cost, excess inventory build-up by Chinese crude steel producers, consolidation in the hot-rolled steel industry, and other factors.  Since 2010, due in part to the gradual recovery of the world economy, prices for this material have increased. Consequently, our cost of sales has also increased but we have passed the increase, for the most part, onto our customers.  While we frequently prepay suppliers for our raw materials in order to ensure an ample supply of raw materials, pricing of our orders is not established until the order and physical delivery are confirmed, at which time the price is confirmed at the then-current market price. We account for inventory at cost and any adjustment required to value inventory at the lower of cost or market is made at the year-end and not at interim periods. Because of the relatively short periods during which inventory is kept on hand, we believe that differences between cost and market are not significant. Other than hot-rolled steel, no other raw materials are significantly used in our manufacturing processes.
 
 ●
Steel prices.  Demand for steel in China has played a major role in the movement of international steel prices. The price of steel rose on a global basis from 2004 to June 2008 before declining sharply in the second half of 2008 in response to the global economic crisis. Steel prices appear to have been slowly rising since 2010, although they have remained significantly below their peak in 2008. Any fluctuations in the cost of hot-rolled steel affect our operating costs and the prices that we charge our customers. We generally pass onto our customers most of the cost increase of raw material hot-rolled steel. For this reason, our revenue and cost of sales are directly related to the market price, demand and supply of steel.
 
 ●
Product mix and effect on gross margin.Our gross margin is primarily affected by our product mix. For the years ended December 31, 2010, 2009 and 2008, our gross margins were 29.9%, 30.1%, and 27.4%, respectively. Fluctuations in our gross margin were primarily driven by changes in our product mix.  Our production costs are generally higher in early phases of product introduction due to higher start-up costs and low production yield rate. Over time we typically improve our manufacturing efficiency.  Furthermore, we have been able to price our finished products by using a cost-plus pricing strategy. Our value-add chromium plated products has a much higher gross margin than that of our unplated products and constituted about 20% of total output in 2010. We expect to generate a higher overall gross margin from the increase of our plating capacity to 50% of total output by 2012.
 
 ●
Inventory Revaluation.Inventory revaluation arises from a de-valuation of our inventory and results in (1) a write-down of the inventory as inventory is valued at lower of actual cost or market value; and (2) a charge to net income as a result of the write-down.  Under our procurement policy, we do not carry material amounts of raw material inventory without confirmed purchase orders with a predetermined sales price and delivery schedule. Thus, we were not negatively affected by the inventory revaluation as a result of the general decline in steel prices from late 2008 to 2010.
 
 ●
Consolidation in the Steel Industry.  There has been significant consolidation in the global steel industry and consolidation is also taking place in China.  The government of China has publicly stated that it expects consolidation of the Chinese steel industry and the top several producers in China to account for the majority of national production.  Cross border consolidation has also occurred with the aim of achieving greater efficiency and economies of scale, particularly in response to the effective consolidation undertaken by raw material suppliers and consumers of steel products.  Notwithstanding the general trend towards consolidation in the industry, China’s specialty steel sector, the sector in which we operate, is dominated by privately-owned enterprises and is still highly fragmented.  This fragmentation presents an opportunity for companies like ours to gain market share through acquisitions and internal expansion.
 
 Minority Interest
 
 Henan Green was acquired by China Gerui through Wealth Rainbow on October 21, 2008 and the acquisition was accounted for as a reorganization under common control with the purchase of a minority interest. For reporting purposes, a control group comprised of our Chairman and CEO, Mr. Lu and his two direct relatives (Mr. Lu’s son, Yi Lu and Mr. Lu’s brother, Baiwang Lu) held 55.02% of the shares of Henan Green on the date of acquisition. Upon the acquisition, we were wholly owned by Wealth Rainbow, whose sole shareholder was Ms. Yuying Lu, the daughter of Mr. Lu. Wealth Rainbow was acquired by China Gerui on November 28, 2008, and upon the acquisition, Henan Green was wholly owned by China Gerui, the majority shareholder of which was Oasis, whose sole shareholder was Ms. Yuying Lu, the daughter of Mr. Lu. Therefore, under U.S. GAAP reporting rules the control group’s 55.02% interest of Henan Green that was acquired constitutes an exchange of equity interests between entities under common control, and the remaining 44.98% interest of Henan Green was accounted for as a minority interest prior to the date of acquisition. As of March 17, 2009, the minority interest ceased to exist.
  33
  Gross Profit and Gross Margin
 
 For the years ended December 31, 2010, 2009 and 2008, our gross margin was 29.9%, 30.1%, and 27.4%, respectively.  Our direct costs of manufacturing are generally high when we first introduce a new product due to higher start-up costs and higher raw material consumption rate.  As production volumes increase, we typically improve our manufacturing efficiency and are able to strengthen our purchasing power by buying raw materials in greater quantities.
 
 Changes in our gross margin are primarily driven by changes in our product mix and other strategic operating decisions. Our high-end, value-added products generally tend to have higher profit margins and we have moved to emphasize these products in our mix.  Further, general economic conditions and our response to them, cost of raw materials as well as supply and demand of steel finishing fabrication products within our markets influence sales prices.
 
 To gain market penetration, we price our products at levels that we believe are competitive compared to imported products. Through our continuous efforts to improve manufacturing efficiency and reduce production costs, we believe that we are able to offer products of comparable quality to our Chinese state-owned competitors and international competitors at more competitive prices. Our sales prices are influenced by general economic conditions, cost of raw materials as well as supply and demand of steel finishing fabrication products within our markets. Our high-end, value-added products generally tend to have higher profit margin.
 
 Taxation
 
 BVI.  China Gerui is incorporated in the BVI. Under the current law of the BVI, China Gerui is not subject to income or capital gains tax. In addition, dividend payments are not subject to withholding tax in the BVI.
 
 Hong Kong. We did not have any assessable profits subject to the Hong Kong profits tax from 2008 to 2010. We do not anticipate having any income subject to income taxes in Hong Kong in the foreseeable future.
 
 PRC.  In 2007, the PRC government promulgated the New EIT Law and the relevant implementation rules, which became effective on January 1, 2008.  Under the New EIT Law and its implementation rules, all domestic and foreign investment companies became subject to a uniform enterprise income tax at the rate of 25%, effective January 1, 2008.  As a result, our PRC subsidiary, Henan Green, was subject to an enterprise income tax at the rate of 25% in 2008, 2009, and 2010.  Under the New EIT Law, dividends from PRC subsidiaries to their non-PRC shareholders became subject to a withholding tax at a rate of 20%, which is further reduced to 10% by the implementation rules, if the non-PRC shareholder is considered to be a non-PRC tax resident enterprise without any establishment or place within China or if the dividends payable has no connection with the non-PRC shareholder’s establishment or place within China, unless any such non-PRC shareholder’s jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement. In addition, pursuant to the New EIT Law, enterprises established under the laws of non-PRC jurisdictions, but whose “de facto management body” is located in the PRC, should be treated as resident enterprises for PRC tax purposes. However, it is currently uncertain whether we may be deemed a resident enterprise, or how to interpret whether any income or gain is derived from sources within China. See Item 3, “Key information — Risk Factors — Under the New Enterprise Income Tax Law, we may be classified as a ‘resident enterprise’ of China. Such classification will likely result in unfavorable tax consequences to us and our non-PRC shareholders.” If we, as a BVI company with substantially all of our management located in China, were treated as a resident enterprise for PRC tax purposes, we will be subject to PRC tax on our worldwide income at the 25% uniform tax rate, which would have an impact on our effective tax rate.
 
 Critical Accounting Policies
 
 We prepare financial statements in conformity with U.S. GAAP, which requires us to make estimates and assumptions that affect the amounts reported in our combined and consolidated financial statements and related notes.  We periodically evaluate these estimates and assumptions based on the most recently available information, our own historical experience and various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates.  Some of our accounting policies require higher degrees of judgment than others in their application.  We believe the following accounting policies involve the most significant judgments and estimates used in the preparation of our financial statements.
  34
  Revenue Recognition
 
 We primarily generate revenue from cold-rolled steel products or chrome-plated steel products sales to our customers. We consider revenue from the sale of our finished cold-rolled and chrome-plated steel products realized or realizable and earned upon meeting all of the following criteria: persuasive evidence of a sale arrangement exists, delivery has occurred, the price to the customer is fixed or determinable, and collectibility of payment is reasonably assured. These criteria are met at the time of shipment when the risk of loss passes to the distributor.
 
 Revenue represents the invoiced value of sold goods, net of VAT.  Our products, all of which are sold in China, are subject to a Chinese VAT at a rate of 17% of the gross sales price or at a rate approved by the Chinese local government.  This VAT may be offset by VAT we paid on raw materials and other materials included in the cost of producing the finished product.  The VAT amounts paid and available for offset are maintained in our current liabilities.
 
 Accounts Receivables
 
 Most of our sales were conducted on pre-payment or COD basis.  However, during the normal course of business, we extend to some of our customers interest-free unsecured credit for a term of 30 days depending on a customer’s credit history, as well as local market practices.  We reviewed our accounts receivables quarterly and determined the amount of allowances, if any, necessary for doubtful accounts. Historically, we have not had any bad debt write-offs and, as such, we do not provide an arbitrary reserve amount for possible bad debts based upon a percentage of sales or accounts receivable balances.  Rather, we review our accounts receivable balances to determine whether specific reserves are required due to such issues as disputed balances with distributors, declines in distributors’ credit worthiness, or unpaid balances exceeding agreed-upon terms.  Based upon the results of these reviews, we determine whether a specific provision should be made to provide a reserve for possible bad debt write-offs.  We have provided 2% allowances for doubtful accounts in  2008, 2009, and 2010.  As of December 31, 2010, we communicate with our distributors each month to identify any potential issues and reassess our credit limits and terms with some of them based on their prior payment history and practice. We also plan to continue building upon our existing relationships and history with each of our customers to assist us in the full and timely collection of outstanding payments.
 
 As of December 31, 2010 and December 31, 2009, we had outstanding accounts receivable totaling $4.1 million and $4.8 million, respectively.  We believe that these outstanding amounts will be collected pursuant to the terms, conditions, and within the time frames agreed upon with our customers.  During the reported periods, we did not experience any material problems relating to distributor payments and had no bad debt write-offs. In terms of our liquidity, we reflect the extended interest-free unsecured credit in our cash flows for the reported periods. Therefore, we anticipate no changes from past cash flow patterns.
 
 Inventories
 
 We value inventories, consisting of work in process and raw materials, at the lower of cost or market.  Cost of material is determined on the weighted average cost method. Cost of work in progress includes direct materials, direct production cost and an allocated portion of production overhead.  We evaluate inventory periodically for possible obsolescence of our raw materials to determine if a provision for obsolescence is necessary.  Due to the durable nature of our raw materials which primarily consist of hot-rolled steel sheet, we had no reserve obsolescence at December 31, 2010.  Our estimates for determining the provision for obsolescence may be affected by technological changes and developments to our product offerings and changes in governmental regulations.
 
 As of December 31, 2010 and December 31, 2009, we had an inventory balance of $7.0 million and $6.0 million, respectively.
 
 Recently Issued Accounting Standards
 
 We describe below recent pronouncements that have had or may have a significant effect on our financial statements.  We do not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to our financial condition, results of operations, or disclosures.
  35
  In March 2010, FASB issued authoritative guidance regarding the effect of denominating the exercise price of a share-based payment awards in the currency of the market in which the underlying equity securities trades and that currency is different from (1) entity’s functional currency, (2) functional currency of the foreign operation for which the employee provides services, and (3) payroll currency of the employee.  The guidance clarifies that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should be considered an equity award assuming all other criteria for equity classification are met.  The guidance will be effective for interim and annual periods beginning on or after December 15, 2010, and will be applied prospectively.  Affected entities will be required to record a cumulative catch-up adjustment for all awards outstanding as of the beginning of the annual period in which the guidance is adopted.  This adoption of the authoritative guidance is not expected to have a material impact on the Group’s financial statements.
  Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying financial statements.
  Results of Operations
 
 The following table sets forth key components of our results of operations for the periods indicated, in dollars and as a percentage of revenue.
 
 (All amounts in thousands of U.S. dollars, except for the percentages)
  Years Ended December 31,2010


2009


2008USD


% of

Revenue


USD


% of

Revenue


USD


% of

RevenueRevenue

$
253,866



100.0


$
218,903



100.0


$
196,265



100.0Raw material


(163,304
)


-64.3



(140,601
)


-64.2



(131,805
)


-67.2Labor


(3,666
)


-1.5



(2,585
)


-1.2



(1,665
)


-0.8Cost of production


(10,900
)


-4.3



(9,909
)


-4.5



(8,938
)


-4.6Total cost of revenue


(177,870
)


-70.1



(153,095
)


-69.9



(142,408
)


-72.6Gross profit


75,997



29.9



65,807



30.1



53,857



27.4General and administrative expenses


7,796



-3.1



(4,574
)


-2.1



(3,432
)


-1.7Selling and marketing expenses


1.3



-0.5



(919
)


-0.3



(831
)


-0.4Operating income


66,950



26.4



60,315



27.6



49,594



25.3Other income and (expense)Interest income


1.1



0.4



829



0.3



1,395



0.7Interest expenses


(5,287
)


-2.1



(3,238
)


-1.5



(3,769
)


-1.9Sundry income


270



0.1



294



0.1



156



0.1Income before income taxes


63,020



24.8



58,200



26.6



47,375



24.1Income tax expense


(15,937
)


-6.3



(14,752
)


-6.7



(11,870
)


-6.0Net income before Minority interests


47,083



18.5



43,448



19.8



35,506



18.1Minority interests


0



0



0



0



(13,921
)


-7.2Net Income


47,083



18.5



43,448



19.8



21,585



11.0
 
 Comparison of Fiscal Years Ended December 31, 2010 and 2009
 
 Revenue.  Our revenue is generated from sales of our cold-rolled steel products. Our revenue increased $35.0 million, or 16.0%, to $253.9 million in 2010 from $218.9 million in 2009.  During the year ended December 31, 2010, our sales volume was up by 20.0% to 299.8 metric tons from 249.9 metric tons last year.  However, our average selling price was down from $876 per metric ton during 2009 to $847 per metric ton during 2010 as a result of our strategic decision to increase capacity utilization and sales volume to generate greater revenue growth in 2010, which was partially offset by overall price reductions based on product and market demand.
  36


Cost of Revenue.  Our cost of revenue includes the direct costs of our raw materials, primarily steel coil, as well as the cost of labor and overhead. Our cost of revenue increased approximately $24.8 million, or 16.2%, to approximately $177.9 million in 2010 from approximately $153.1 million in 2009.  The increases were primarily due to (i) higher costs associated with the overall increase in the volume of products sold including raw materials, labor, energy and other costs, which we believe were in line with our increased sales and (ii) other production capacity-related factors such as additional depreciation resulting from newly acquired equipment and direct labor input which contributed to the increased level of manufacturing overhead.
 
 Gross Profit.  Our gross profit is equal to the difference between our revenue and our cost of revenue. Our gross profit increased approximately $10.2 million to approximately $76.0 million in 2010 from approximately $65.8 million in 2009.  Gross profit as a percentage of revenue (gross margin) was 29.9% in 2010, reflecting almost no change in 2010 compared to 30.1% in 2009.
 
 General and Administrative Expenses.  General and administrative expenses consist primarily of compensation and benefits to our general management, finance and administrative staff, professional service fees, bad debts reserve and other expenses incurred in connection with general operations. Our general and administrative expenses increased by approximately $3.2 million to approximately $7.8 million in 2010 from $4.6 million in 2009.  As a percentage of revenue, general and administrative expenses were 3.1% of revenue in 2010 as compared to 2.1% in 2009.  The increase was primarily attributable to additional salary and training expenses from employee hiring in anticipation of the opening of our new production facility and additional expenses incurred in 2010 related to being a public company, such as legal and other professional service fees.
 
 Selling Expenses.  Our selling expenses consist primarily of compensation and benefits to our sales and marketing staff, sales commission, cost of advertising, promotion, business travel, after-sale support, transportation costs and other sales related costs.  Our selling expenses increased approximately $0.3 million, or 36.1%, to approximately $1.3 million in 2010 from $0.9 million in 2009.  As a percentage of revenue, our selling expenses were 0.5% in 2010, as compared to 0.3% in 2009.  The increase was mostly attributable to increased sales staff traveling expenses and other costs relating to selling activities.
 
 Interest and Other Income. Interest and other income is mainly interest income generated from the restricted cash balance.  Our interest and other income increased $0.3 million, or 31.1% to $1.1 million in 2010 from $0.8 million in 2009.  The increase was attributable to interest earned on a higher average balance of restricted cash, which was deposited with local banks as a cash guarantee for the notes payable that these banks issued to our raw material suppliers, as well as higher average bank account balances in 2010 as compared to 2009.
 
 Interest Expense.  Interest expense is primarily interest expense on notes payable and short term loans related to our daily business operations.  Our interest expense increased  $2.0 million, or 63.3%, to $5.3 million  in 2010 from $3.2 million in 2009.  The increase was attributable to the increased bank facilities we secured in 2010 in anticipation of our increased working capital needs relating to our expected expansion of production line capacity.
 
 Provision for Income Taxes.  We incurred income tax expense of $15.9 million and $14.8 million in 2010 and 2009, respectively.  The effective EIT rates were 25% and 25% respectively in the two aforesaid years.
 
 Net Income.  Our net income, increased approximately $3.6 million, or 8.4%, to $47.1 million in 2010 from approximately $43.4 million in 2009, as a result of the factors described above.
 
 Comparison of Fiscal Years Ended December 31, 2009 and 2008
 
 Revenue.  Our revenue is mainly generated from sales of our cold-rolled steel products. Our revenue increased $22.6 million, or 11.5%, to $218.9 million in 2009 from $196.3 million in 2008.  During the year ended December 31, 2009, our sales volume increased by 23.8% to 249.9 metric tons from 201.9 metric tons last year.  However, our average selling price was down from $972.1 per metric ton during 2008 to $875.8 per metric ton during 2009 as a result of an industry wide reduction in the selling price of steel products.
 
 Cost of Revenue.  Our cost of revenue includes the direct costs of our raw materials, primarily steel coil, as well as the cost of labor and overhead. Our cost of revenue increased approximately $10.7 million, or 7.5%, to approximately $153.1 million in 2009 from approximately $142.4 million in 2008.  The increases were primarily due to (i) costs associated with the overall increase in the volume of products sold including raw materials, labor, energy and other costs, which we believe were in line with our increased sales and (ii) other factors such as additional depreciation resulting from newly acquired equipment and direct labor input which contributed to the increased level of manufacturing overhead.
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  Gross Profit.  Our gross profit is equal to the difference between our revenue and our cost of revenue. Our gross profit increased approximately $11.9 million to approximately $65.8 million in 2009 from approximately $53.9 million in 2008.  Gross profit as a percentage of revenue (gross margin) was 30.1% in 2009, as compared to 27.4% in 2008.  The increase was primarily attributable to a larger decrease in raw material prices, on a percentage basis, as compared to the decrease in our average selling price.
 
 General and Administrative Expenses.  General and administrative expenses consist primarily of compensation and benefits to our general management, finance and administrative staff, professional advisor fees, bad debts reserve and other expenses incurred in connection with general operations. Our general and administrative expenses increased by approximately $1.2 million to approximately $4.6 million in 2009 from $3.4 million in 2008.  As a percentage of revenue, general and administrative expenses were 2.1% of revenue in 2009 as compared to 1.7% in 2008.  The increase was primarily attributable to professional expenses incurred in connection with the merger between us and COAC in March 2009 and subsequent expenses associated with becoming a US public reporting company.
 
 Selling Expenses.  Our selling expenses consist primarily of compensation and benefits to our sales and marketing staff, sales commission, cost of advertising, promotion, business travel, after-sale support, transportation costs and other sales related costs. Our selling expenses increased approximately $0.1 million, or 10.6%, to approximately $0.9 million in 2009 from $0.8 million in 2008. As a percentage of revenue, our selling expenses were 0.3% in 2009, as compared to 0.4% in 2008 which was attributable to our increased sales revenue.
 
 Interest and Other Income. Interest and other income is mainly interest income generated from the restricted cash balance.  Our interest and other income decreased $0.6 million, or 40.6% to $0.8 million in 2009 from $1.4 million in 2008.  The decrease was attributable to relatively low average bank account balances and a decrease in interest rates paid by the banks throughout 2009 as compared to 2008.
 
 Interest Expense.  Interest expense is primarily interest expense on notes payable and short term loans related to our daily business operations.  Our interest expense decreased $0.6 million, or 14.1%, to $3.2 in 2009 from $3.8 million in 2008.  The decrease was attributable to the lower weighted average interest rate from the lending institutions in 2009 as compared to 2008.
 
 Provision for Income Taxes.  We incurred income tax expense of $14.8 million and $11.9 million in 2009 and 2008, respectively.  The effective EIT rates were 25% and 25% respectively in the two aforesaid years.
 
 Net Income.   Our net income, after accounting for minority interests of $0 million and $13.9 million in 2009 and 2008, respectively, increased approximately $21.8 million, or 101.3%, to $43.4 million in 2009 from approximately $21.6 million in 2008, as a result of the factors described above.
 
 Liquidity and Capital Resources
  The following table sets forth a summary of our net cash flow information for the periods indicated:
 
 (All amounts in thousands of U.S. dollars)
 
 Year Ended December 31,2010


2009


2008Net cash provided by operating activities

$
36,478


$
33,788


$
50,467Net cash provided by (used in) investing activities


(84,119
)


(31,350
)


13,068Net cash provided by (used in) financing activities


84,004



34,514



(22,690
)Net cash inflow


36,363



36,952



40,846
 
 Operating Activities
 
 Net cash provided by operating activities was approximately $36.5 million in 2010, as compared to approximately $33.8 million net cash provided by operating activities in 2009, an increase of 8.0%.  The increase primarily resulted from reduced inventory of raw materials and work-in-progress, improved credit management resulting in declining accounts receivable balance, reduced customer deposits as a result of revenue recognition, and reduction of accrued liabilities and other payables, which was partially offset by an increase in prepaid expenses  and accounts payable balance.
  38
  Net cash provided by operating activities was approximately $33.8 million in 2009, as compared to approximately $50.0 million net cash provided by operating activities in 2008, a decrease of 33.0%.  The decrease primarily resulted from increased inventory and prepayment to suppliers in preparation for scheduled production to contracts in the subsequent quarter, reduced customer deposits as a result of revenue recognition, and reduction of accrued liabilities and other payables, which was partially offset by a decrease in accounts receivable and an increase in accounts payable balance.
 
 We strategically manage our cash resources as a means to optimize our available cash flows in the following manner:
 
 ●
We have not experienced any deterioration in the collection of our receivables and we are unaware of any trends that pose collections problems.  We intend to extend credit to certain customers prospectively as part of our growth strategy but will apply stringent and prudent criteria for determining qualification for such credit, including securing us with underlying assets and required cash minimums.
 
 ●
We manage the year-end accounts payable and accrued liabilities to improve cash flow.
 
 ●
Our operating cash flow can also be affected by timing of prepayments made to suppliers for raw materials procurement and the corresponding receipt of advances from customers.  There is no material effect on cash flow as a result of this practice over time but interim and annual period-end balances can be distributed unevenly.  On a rolling twelve-month basis, our prepayments and inventory growth are expected to be consistent with our backlog of customer orders and sales growth.
 
 Investing Activities
 
 Cash used in investing activities mainly consists of capital expenditures, shareholders' borrowings, and increases in restricted cash.
 
 Net cash used in investing activities was approximately $84.1 million in 2010, as compared to approximately $31.3 million net cash provided by investing activities in 2009.  The change mainly resulted from (1) increased capital expenditures from the newly completed 50,000-metric-ton chromium-plating line as well as other expenditures relating to our capacity expansion program; (2) increased restricted cash levels as a result of our increased use of bank financing in 2010 and (3) payment for the land use rights related to the additional land purchased and reserved for our capacity expansion program.
 
 Net cash used in investing activities was approximately $31.3 million in 2009, as compared to approximately $13.0 million net cash provided by investing activities in 2008.  The change mainly resulted from (1) increased capital expenditures, (2) increased restricted cash levels as a result of a higher level of notes payable financing that the Company obtained in 2009 and (3) zero proceeds from former owners since certain borrowings by our former shareholders were fully repaid in 2008.
 
 We paid $65.1 million in 2010, $5.2 million in 2009 and $6.6 million in 2008 to acquire capital equipment.  Restricted cash had an increase of $29.0 million in 2010, an increase of $12.8 million in 2009, and an increase of $5.5 million in 2008.
 
 Financing Activities
 
 Cash used in financing activities mainly consists of dividends paid, distributions to shareholders, repayment of bank loans, withdrawal and repayment of borrowings from related parties.
 
 We paid dividends of $0 in 2010, $9.6 million in 2009, and $42.3 million in 2008.
 
 Net cash provided by financing activities was approximately $84.0 million in 2010, as compared to approximately $34.5 million net cash used in financing activities in 2009.  The increase in cash provided by financing activities was primarily due to the proceeds from additional bank loans that we secured from local banks, proceeds from our private placement of ordinary shares in June 2010 and increased notes receivable financing.
 
 Net cash provided by financing activities was approximately $34.5 million in 2009, as compared to approximately $22.7 million net cash used in financing activities in 2008.  The increase in cash provided by financing activities was primarily due to the proceeds from our November 2009 ordinary shares offering and increased notes receivable financing.
  39
  We repaid short-term loans of $46.0 million in 2010, $37.3 million in 2009, and $26.7 million in 2008, while incurring new short-term borrowings of $56.1 million in 2010, $40.6 million in 2009, and $40.0 million in 2008.  We increased our notes receivable financing by $45.2 million in 2010, $14.1 million in 2009, and $6.4 million in 2008.
 
 Capital Expenditures
 
 We believe that our future capital expenditures will be incurred primarily in connection with (i) purchases of property, plant and equipment and construction of our facilities, (ii) leasehold improvements, (iii) investment in equipment, technology and operating systems, and (iv) capitalized interest.  Our planned capital expenditures for 2011 and 2012 are for (i) the second phase of our capacity expansion program, in which 100,000 metric tons of processing capacity will be added by the first quarter of 2012, resulting in total capacity of 500,000 metric tons of cold-rolled steel processing, out of which 50% can be further plated with chromium, zinc or tin; (ii) upgrade our existing narrow strip acid pickling line for acid regeneration and environment control; and (iii) potential acquisitions or strategic partnership initiatives.  We expect to finance these capital expenditures from cash on hand, future internal cash flows, short-term bank borrowings, and funds raised from capital markets.
 
 Loan Facilities
 
 We believe that we currently maintain a good business relationship with many banks.  As of December 31, 2010, our outstanding bank loans were as follows:
 
 (All Amounts in U.S. Dollars)
 
 Commercial Bank of Zhengzhou

$
7,575,758Shanghai Pu Dong Development Bank


10,606,061China Merchants Bank


9,090,909China Citic Bank


1,515,152Bank of Xuchang


3,939,393Zhengzhou City Rural Credit Cooperative


757,576Bank of Luoyang Branch


9,090,909Bank of Communications


1,515,151Total

$
44,090,909
 
 All of the above term loans are of fixed term with a period of 12 months or less.  For those loan facilities obtained from banks, all these term loans are either guaranteed and secured by our fixed assets, including its machinery and land use right, or guaranteed by third parties.
 
 We believe that our currently available working capital, including anticipated cash flow from operations and available credit facilities referred to above are adequate to finance our operations at current levels through at least the next twelve months.  In this regard, we are not experiencing any difficulties in the acquisition and rollover of our short term credit facilities that fund our daily operations.  We anticipate rollovers of all current facilities coming due in the 2011 operating year and do not foresee a squeeze on the availability of credit to fund our operations and meet our growth objectives.
 
 Research and Development, Patents and Licenses, etc.
  We protect our intellectual property primarily by maintaining strict control over the use of production processes.  All our employees, including key employees and engineers, have signed our standard form of labor contracts, pursuant to which they are obligated to hold in confidence any of our trade secrets, know-how or other confidential information and not to compete with us, both during the employment term and within five years after the termination of employment.  In addition, for each project, only the personnel associated with the project have access to the related intellectual property.  Access to proprietary data is limited to authorized personnel to prevent unintended disclosure or otherwise using our intellectual property without proper authorization.  We will continue to take steps to protect our intellectual property rights.
 
 As of the date of this annual report, one utility model patent application had been approved by the government (Patent number: ZL 200920089897.4), on May 12, 2010. This patent is related to our production process technology, in particular, hydraulic pressured automatic thickness control system for four-roll reversible cold mill.  The application was made on April 28, 2009. The patent expires in May 2020.
  40
  We have registered the trademark for the logo  with the Trademark Office of the State Administration for Industry and Commerce of China.  We use our trademark for the sales and marketing of our products.  Our trademark expires on November 27, 2012 and may be continually renewed thereafter.
 
 Trend Information
  Other than as disclosed in the foregoing disclosures and elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for the period from January 1, 2011 to December 31, 2011 that are reasonably likely to have a material adverse effect on our net revenues, income, profitability, liquidity or capital resources, or that would cause our disclosed financial information to be not necessarily indicative of future operating results or financial conditions.
 
 Off-Balance Sheet Arrangements
  We have not entered into, nor do we expect to enter into, any off-balance sheet arrangements.  We also have not entered into any financial guarantees or other commitments to guarantee the payment obligations of third parties.  In addition, we have not entered into any derivative contracts that are indexed to our equity interests and classified as shareholders’ equity.  Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity.  We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or that engages in leasing, hedging or research and development services with us.
 
 Tabular Disclosure of Contractual Obligations
  The following table sets forth our contractual obligations in respect of operating leases as of December 31, 2010.
 
 Payments Due By PeriodTotal


Less than 1

year


1-3 years


3-5 years


More than5

yearsOperating Lease Obligations*

$
573,898


$
26,317


$
56,096


$
61,512


$
429,973Total

$
573,898


$
26,317


$
56,096


$
61,512


$
429,973
 
 * Our operating lease obligations result from the land use rights associated with the land, including a state-owned reservoir on the premises that the company acquired for planned capacity expansion.
 
 Safe Harbor
 
 See the section headed “Forward-Looking Information.”
 
 ITEM 6.
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
 
 Directors and Senior Management
  The following table sets forth certain information regarding our directors and senior management as of the date of this annual report.
 
 NAME

AGE

POSITIONMingwang Lu

59

Chairman of the Board and Chief Executive OfficerEdward Meng

44

Chief Financial OfficerYi Lu

36

General Manager and DirectorHarry Edelson

77

DirectorJ.P. Huang

51

DirectorKwok Keung Wong

62

DirectorYunlong Wang

49

DirectorMaotong Xu

72

Director
  41
  Mingwang Lubecame our chairman of the board and chief executive officer on March 17, 2009 and has served as Henan Green’s general manager since 2000.  He was previously senior economist and engineer of Henan Green.  Mr. Lu has been in the steel industry since 1985, with expertise in managing and marketing cold-rolled steel construction, technologies, production and marketing.  Mr. Lu was elected as a member of the 9th, 10th and 11th National People’s Congress in Henan Province.  He has been awarded numerous honors including the “Wuyi Labor Medal,” “Excellent Director/Manager in Henan Province,” “National Excellent Township Entrepreneur” and “Expert in Steel Industry of Henan Province.”
 
 Edward Menghas been our Chief Financial Officer since October 19, 2009.  Prior to that Mr. Meng was our Director of Investor Relations since April 2009.  From July 2007 to October 2008, Mr. Meng served as the part-time and then full-time Chief Financial Officer of A-Power Energy Generation Systems (Nasdaq GS: APWR), an alternative energy company.  From 2007 to 2008, Mr. Meng served as an independent director and chairman of the audit committee of China Housing and Land Development Limited (Nasdaq CM: CHLN), a Chinese real estate development company and Huiheng Medical Inc. (OTCBB: HHGM), a Chinese company which, through its subsidiaries, designs, develops, and markets radiation therapy systems used for the treatment of cancer in the PRC.  Mr. Meng also previously served as Vice President of Finance/Chief Financial Officer of Terex Corporation, Beijing Representative Office from 2007 to 2008, which is a diversified global manufacturer of a broad range of equipment for use in various industries, including the construction, infrastructure, quarrying, surface mining, shipping, transportation, refining and utility.  In 2007, Mr. Meng served briefly as the part-time Chief Financial Officer and a director of Navstar Media Holdings, Inc., a public U.S. holding company with PRC operating subsidiaries specializing in media content production and distribution.  Mr. Meng was a Senior Financial Consultant to Shell (China) Limited from 2006 to 2007 and was the Chief Financial Officer of Koch Materials (China) Co., from 2003 to 2006. Prior to that, he served in executive and senior managerial positions at Intelsat, Inc. from 1997 to 2003 and Schenker International AG (China) from 1992 to 1995. A Certified Public Accountant, Mr. Meng is experienced in both PRC and U.S. GAAP accounting.  Mr. Meng received his MBA from Georgetown University and a Bachelor’s degree in English from Sichuan International Studies University in China.  He is fluent in both Mandarin and English.
 
 Yi Lubecame our director on March 17, 2009 and has served as the deputy general manager of Henan Green since May 2008.  From July 2003 to May 2008, he served as general manager of Henan Green. While with Henan Green, Mr. Lu helped develop 5 series as well as over 20 types of high precision strip steel products.  Prior to joining Henan Green, Mr. Lu served as the recording department director of Zhengzhou Television Station.  He has been honored as one of the sixth top ten excellent youth of Xinzheng City in June 2005, and elected into the second Union of Youth Committee in April 2006.  Mr. Lu graduated from Northwest College in business administration.
 
 Harry Edelsonbecame our director on March 17, 2009 and served as COAC’s chairman of the board and chief executive officer from its inception to its merger with us in March 2009.  Since August 1984, he has been the managing partner of Edelson Technology Partners, which manages a series of four venture capital technology funds (the “Edelson Funds”) for ten multinational corporations (AT&T, Viacom, Ford Motor, Cincinnati Bell, Colgate Palmolive, Reed Elsevier, Imation, Asea Brown Boveri and UPS) and two large pension funds. Mr. Edelson previously worked for Merrill Lynch, Drexel Burnham Lambert and CS First Boston.  Mr. Edelson is a former president of the Analyst Club, the oldest club on Wall Street, founded in 1925, and is President and a founding member of the China Investment Group LLC, an organization formed to provide a forum to update and exchange its members’ knowledge of China. He has been a member of the Juilliard Council since 2001. The Julliard Council is one of the world’s leading schools in the fields of music, dance and acting. Mr. Edelson was honored in the Knesset by receiving the Israel 50th Anniversary Award from the Prime Minister of Israel.  Mr. Edelson is a member of The Chinese Business lawyers Association, The Asia Society and the China Cultural Foundation. He is also an advisor to the China Cultural Foundation. He has given numerous speeches in Hong Kong, China and the United States on investing in China.  Mr. Edelson received a B.S. from Brooklyn College and an MBA from New York University Graduate School of Business.
 
 Dr. J.P. Huangbecame our director on March 17, 2009 and has been Founder, Chairman Emeritus and Chief Strategic Adviser of Jpigroup Inc. since 1988.  Under Dr. Huang’s advisory guidance, Jpigroup has been one of China’s major private investment and development companies that has invested and advised in the areas of regional development, land development, real estate, infrastructure, manufacturing, human capital development, technologies and financial services.  From 1985 and prior to founding Jpigroup, Dr. Huang worked for the Government of China in the former Ministry of Foreign Economic Relations and Trade and during that time, he was very active and instrumental in helping formulating some of China’s first open door strategies and reform plans, especially in the area of international investment and trade. Dr. Huang holds a Ph.D. in economics from University of International Business and Economics in Beijing, where he now concurrently holds a Professorship in Finance. Dr. Huang acted as a consultant to COAC in connection with our merger with COAC.
  42


Kwok Keung Wongbecame our director on March 17, 2009.  Mr. Wong has in-depth and practical business working experience in dealing with Chinese companies and the Chinese government and assisting foreign investors in doing investments in China for more than twenty years. Since 2000, he has been the Senior Consultant of Thundercap Investments Consultant Limited, a consulting company that advises Chinese clients regarding the raising of funds through Sino-foreign joint ventures, private investment and overseas initial public offerings. Since 1986, Mr. Wong has been a private consultant providing services in the areas of marketing, manufacturing, production, financing and management to more than twenty Chinese enterprises. From 2000 to 2007, he provided consultation services and successfully assisted three Chinese companies in completing initial public offerings in Singapore.
 
 Yunlong Wang became our director on March 17, 2009 and has been the Head and Chief Engineer of Biotech Research Center of Henan Province in China since 2000.  Professor Wang specializes in human cell research and has published over twenty theses in that and related fields.  He has been admitted and recognized as a member Specialist in Bio-engineering by the State Council of China.  He also served as a Professor at the Henan Vocational Institute since 2005.
 
 Maotong Xubecame our director on March 17, 2009 and has been the secretary of the board of directors of Henan Green since 2000.  Prior to joining Henan Green, Mr. Xu had served with Henan Luoyang Steel Group from 1966 to 1997 as technician, engineer, vice general engineer and vice factory director.  Mr. Xu received a Bachelor’s degree from Beijing Steel College.
 
 In connection with the business combination with COAC, the then shareholders of China Gerui – Oasis, Honest Joy, and Plumpton – and Mr. Edelson entered into a voting agreement with China Gerui, dated March 19, 2009, or the Voting Agreement, pursuant to which each of the shareholders of China Gerui and Mr. Edelson agreed to vote their China Gerui ordinary shares in favor of the election of Mingwang Lu, Yi Lu, Wong Kwok Keung, Maotong Xu, Yunlong Wang, Harry Edelson, and J.P. Huang as directors of China Gerui in specified classes in all elections through the annual meeting of China Gerui that will be held in 2012.  Except as otherwise disclosed above, there is no arrangement or understanding with any major shareholders, customers, suppliers or others, pursuant to which any of our directors or executive officers was selected as a director or member of senior management.
 
 No family relationship exists between any of our directors and executive officers, except that Mr. Yi Lu is the son of our Chairman and CEO, Mingwang Lu.
 
 Compensation
  Compensation of Directors and Senior Management
 
 In 2010, we paid an aggregate of $861,000 in cash compensation to our directors and senior management as a group.  We do not set aside or accrue any amounts for pension, retirement or other benefits for our directors and senior management.  However, we reimburse our directors for out-of-pocket expenses incurred in connection with their services in such capacity.
 
 We plan to enter into a contract with each of our independent directors, in which the compensation to each independent director for his or her service as a director will be determined.
 
 Employment Agreements
 
 As required by local Chinese labor law, our indirect subsidiary Henan Green has entered into employment agreements with each member of our senior management, which have substantially similar terms.   Under these agreements, each of our executive officers is employed for a specified time period, but Henan Green may terminate his or her employment for cause, at any time, without notice or remuneration, for certain acts, including but not limited to, his or her conviction of crimes, his or her breach of material corporate policy and his or her failure to perform his or her duties to our material detriment.  Furthermore, either we or an executive officer may terminate his or her employment at any time without cause upon advance written notice to the other party.  If we terminate an executive officer’s employment without cause, we will pay the executive officer severance pay in accordance with applicable law. We do not have other arrangements with any executive officers for special termination benefits.
 
 Each executive officer has agreed to hold, both during the employment term and after employment terminates, in confidence any of our trade secrets, know-how or financial, trading or other confidential information.  In addition, each executive officer has agreed to be bound by non-competition restrictions set forth in his or her employment agreement and is prohibited from providing services to our competitors or operating businesses that compete against us for a period of five years following termination or expiration of his or her employment agreement.
  43
  Board Practices
  Terms of Directors and Executive Officers
 
 Our board consists of seven members, who were elected as our directors in connection with the business combination with COAC on March 17, 2009.  Our board is a classified board consisting of three classes of directors.  The Class I directors shall be elected for a three year term of office, the Class II directors shall be elected for a two year term of office and the Class III directors shall be elected for a one year term of office.  The current board members are classified as follows:
 
 ●
in the class to stand for reelection in 2011: Kwok Keung Wong and Harry Edelson;
 
 ●
in the class to stand for reelection in 2012: Mingwang Lu, Yi Lu and Yunlong Wang; and
 
 ●
in the class to stand for reelection in 2013: Maotong Xu and J.P. Huang.
 
 At a general meeting in each year, successors to the class of directors whose term expires in that year shall be elected for a three year term.  A majority of votes cast at the relevant meeting shall be sufficient to elect directors.  The directors may appoint one or more directors to fill a vacancy on the Board.
 
 Our executive officers are appointed by our board.  The executive officers shall hold office until their successors are duly elected and qualified, but any officer elected or appointed by the directors may be removed at any time, with or without cause, by resolution of directors.  Any vacancy occurring in any office may be filled by resolution of directors.
 
 Director Agreements
 
 We plan to enter into an agreement with each of our directors that governs their rights and duties as directors. These agreements do not provide for benefits upon termination of directorships.
 
 Independence of Directors
 
 We have elected to follow the rules of NASDAQ to determine whether a director is independent.  Our board will also consult with counsel to ensure that our board’s determinations are consistent with those rules and all relevant securities and other laws and regulations regarding the independence of directors.  Rule 5605(a)(2) of Listing Rules of The Nasdaq Stock Market, Inc., or the Nasdaq Listing Rules, defines an “independent director” generally as a person, other than an officer of the Company, who does not have a relationship with the Company that would interfere with the director’s exercise of independent judgment.  Consistent with these considerations, our board has affirmatively determined that, Yunlong Wang, Maotong Xu, Kwok Keung Wong and J.P. Huang are our independent directors.
 
 Board Committees
 
 Audit Committee
 
 Our audit committee consists of Messrs. Maotong Xu, Kwok Keung Wong and J.P. Huang, with Maotong Xu serving as chairman.  Our board has also determined that J.P. Huang possesses the accounting or related financial management experience that qualifies him as financially sophisticated within the meaning of Rule 5605(c)(2)(A) of the Nasdaq Listing Rules and that he is an “audit committee financial expert” as defined by the rules and regulations of the SEC.
 
 The audit committee is mainly responsible for, among other things:
 
 ●
selecting our independent auditors and pre-approving all auditing and non-auditing services permitted to be performed by our independent auditors;
 
 ●
reviewing with our independent auditors any audit problems or difficulties and management’s response;
  44


●
reviewing and approving all proposed related party transactions, as defined in Item 404 of Regulation S-K under the Securities Act;
 
 ●
discussing the annual audited financial statements with management and our independent auditors;
 
 ●
monitoring the independence of the independent auditor;
 
 ●
verifying the rotation of the audit partners having primary responsibility for the audit and the audit partner responsible for reviewing the audit as required by law;
 
 ●
inquiring and discussing with management the Company’s compliance with applicable laws and regulations;
 
 ●
determining the compensation and oversight of the work of the independent auditor (including resolution of disagreements between management and the independent auditor regarding financial reporting) for the purpose of preparing or issuing an audit report or related work; and
 
 ●
establishing procedures for the receipt, retention and treatment of complaints received by the Company regarding accounting internal accounting controls or reports which raise material issues regarding the Company’s financial statements or accounting policies.
 
 Compensation Committee
 
 Our compensation committee consists of Messrs. Maotong Xu, Kwok Keung Wong and J.P. Huang, with Maotong Xu serving as chairman.  Our compensation committee reviews and approves compensation paid to our officers and directors and to administer our Plan and any other incentive compensation plans, should any such plans be adopted in the future, including authority to make and modify awards under such plans.
 
 The Compensation Committee is mainly responsible for, among other things:
 
 ●
approving and overseeing the compensation for our executive officers;
 
 ●
reviewing and approving corporate goals and objectives relevant to the compensation of our chief executive officer, evaluating the performance of our chief executive officer in light of those goals and objectives, and setting the compensation level of our chief executive officer based on this evaluation; and
 
 ●
reviewing periodically and making recommendations to the board regarding any long-term incentive compensation or equity plans, programs or similar arrangements, annual bonuses, employee pension and welfare benefit plans; and reviewing and making recommendations to the board regarding succession plans for the chief executive officer and other senior officers.
 
 Nominating and Corporate Governance Committee
 
 Our nominating and corporate governance committee consists of Messrs. Maotong Xu, Kwok Keung Wong and J.P. Huang, with Maotong Xu serving as chairman.  The corporate governance and nominating committee assists the board of directors in identifying individuals qualified to become our directors and in determining the composition of the board and its committees.
 
 The nominating and corporate governance committee is mainly responsible for, among other things:
 
 ●
selecting or recommending to the board the nominees for election as directors or for appointment to fill any vacancy;
 
 ●
selecting or recommending to the board the directors to be appointed to each committee of the board;
 
 ●
overseeing the board in the board’s annual review of its performance and making appropriate recommendations to improve performance; and
  45




●
performing any other duties or responsibilities expressly delegated to the committee by the board from time to time relating to the nomination of board and committee members.





Employees




We had 840, 627, and 588 full-time employees as of December 31, 2010, 2009 and 2008, respectively. The following table sets forth the number of our employees for each of our areas of operations as of December 31, 2010 and 2009:





Category

Number of Employees

as of December 31, 2010


Number of

Employees as of

December 31, 2009Manufacturing


717



518Sales and Marketing


29



29General Administration, Purchasing and Logistics


68



59Technology and Research & Development


26



21Total


840



627





From time to time, we also employ third-party consultants for R&D of our products.  We believe that we maintain a satisfactory working relationship with our employees and we have not experienced any significant labor disputes or any difficulty in recruiting staff for our operations.





As required by applicable Chinese law, through Henan Green, we have entered into employment contracts with all of our officers, managers and employees.  It is required by Chinese law to make several mandatory contributions for our employees, including social pension, medical insurance, unemployment insurance, work-related injury insurance and maternity insurance.  As of the date of this report, we are in compliance with the applicable PRC employee law and regulations and have made the contributions required by the applicable laws.





Share Ownership




The following table sets forth information with respect to the beneficial ownership of our ordinary shares as of March 29, 2011 by (i) each person who is known by us to beneficially own more than 5% of our ordinary shares; (ii) by each of our executive officers and directors; and (iii) by all of our officers and directors as a group.





Name of Beneficial Owner

Office, if any

Title of Class

Amount and

Nature of

Beneficial

Ownership(1)


% of

Class(2)Officers and DirectorsMingwang Lu

Chairman and CEO

Ordinary Shares


15,438,637
(3)


26.0
%Edward Meng

Chief Financial Officer

Ordinary Shares


0



*Yi Lu

General Manager and Director

Ordinary Shares


3,022,200
(4)


5.1
%Harry Edelson

Director

Ordinary Shares


9,341,221
(5)


15.7
%J.P. Huang

Director

Ordinary Shares


0



*Kwok Keung Wong

Director

Ordinary Shares


9,360,913
(6)


15.8
%Yunlong Wang

Director

Ordinary Shares


0



*Maotong Xu

Director

Ordinary Shares


0



*All officers and directors as a group (8 persons named above)



Ordinary Shares


27,821,750
(3)(4)(5)(6)


46.8
%5% Security HoldersMingwang Lu



Ordinary Shares


15,438,637
(3)


26.0
%Meg Champ Limited



Ordinary Shares


12,088,800
(3)


20.3
%Victor Trait Limited



Ordinary Shares


3,349,837
(3)


5.6
%Yi Lu



Ordinary Shares


3,022,200
(4)


5.1
%Lok Tai Limited



Ordinary Shares


3,022,200
(4)


5.1
%Harry Edelson



Ordinary Shares


9,341,221
(5)


15.7
%Kwok Keung Wong



Ordinary Shares


9,360,913
(6)


15.8
%Honest Joy Group Limited



Ordinary Shares


9,341,221
(6)


15.7
%Yuying Lu



Ordinary Shares


9,341,221
(7)


15.7
%Oasis Green Investments Limited



Ordinary Shares


9,341,221
(7)


15.7
%Plumpton Group Limited



Ordinary Shares


9,341,221
(8)


15.7
%Wenxian Li



Ordinary Shares


4,212,523
(9)


7.1
%All persons named above as a group



Ordinary Shares


32,034,273
(3)(4)(5)(6)(7)(8)


53.9
%




46




* Less than 1%.





(1)
Beneficial Ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities.  Except as otherwise indicated, each of the beneficial owners listed above has direct ownership of and sole voting power and investment power with respect to our ordinary shares.





(2)
A total of 59,433,828 ordinary shares as of March 29, 2011 are outstanding pursuant to SEC Rule 13d-3(d)(1).  Ordinary shares that may be acquired by an individual or group within 60 days of March 29, 2011, pursuant to the exercise of warrants or options, are deemed to be outstanding for the purpose of computing the percentage ownership of such individual or group, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person shown in the above table.





(3)
Includes 12,088,800 ordinary shares held by Meg Champ Limited, or Meg Champ, and 3,349,837 ordinary shares held by Victor Trait Limited, or Victor Trait, both of which are wholly-owned by Mr. Mingwang Lu.  Mr. Mingwang Lu may be deemed to be a beneficial owner of the ordinary shares held by each of Meg Champ and Victor Trait.  Meg Champ, Victor Trait, and Mr. Mingwang Lu’s percentage of beneficial ownership of our ordinary shares all changed from 0% to 20.3%, 5.6% and 26.0%, respectively as a result of the receipt of 12,088,800 of our ordinary shares by Meg Champ and 3,349,837 ordinary shares by Victor Trait from a transfer for no consideration by Oasis in March 2011.





(4)
Includes 3,022,200 ordinary shares held by Lok Tai Limited, or Lok Tai, which is wholly-owned by Mr. Yi Lu.  Mr. Yi Lu may be deemed to be a beneficial owner of the ordinary shares held by Lok Tai.  Lok Tai and Mr. Yi Lu’s percentage of beneficial ownership of our ordinary shares both changed from 0% to 5.1% as a result of the receipt of 3,022,200 of our ordinary shares by Lok Tai in March 2011. Mr. Yi Lu is the son of our Chairman and CEO, Mr. Mingwang Lu, but does not live in the same household.





(5)
Includes 3,086,581 ordinary shares held by Mr. Edelson, 3,626,640 ordinary shares held by Oasis, 985,500 ordinary shares held by Honest Joy, and 1,642,500 ordinary shares held by Plumpton, pursuant to the Voting Agreement.  Mr. Edelson’s percentage of beneficial ownership of our ordinary shares was 0% prior to March 2009.  In March 2009, Mr. Edelson acquired 1,609,621 ordinary shares and 1,666,667 warrants to purchase ordinary shares pursuant to the Merger Agreement; as a result of Mr. Edelson’s entry into the Voting Agreement, Mr. Edelson may also be deemed to have acquired beneficial ownership of 27,600,000 ordinary shares held by Oasis, 1,500,000 ordinary shares held by Plumpton, and 900,000 ordinary shares held by Honest Joy.  As a result, in March 2009, Mr. Edelson’s percentage of beneficial ownership of our ordinary shares increased to 103.2% based on 32,245,723 ordinary shares outstanding as of March 17, 2009, including ordinary shares contained in our outstanding public units. This percentage was greater than 100.0% due to the Mr. Edelson’s beneficial ownership of 1,666,667 ordinary shares underlying warrants.  In October 2009, we issued an aggregate of 2,850,000 ordinary shares to Oasis, Honest Joy and Plumpton, pursuant to the Settlement Agreement, resulting in an increase of Mr. Edelson’s beneficial ownership to 36,126,288 ordinary shares.  As of December 31, 2009, Mr. Edelson’s percentage of beneficial ownership of our ordinary shares was 88.8%, based on 40,692,323 ordinary shares outstanding (including ordinary shares included in our public units), reflecting the transactions described above as well as increases in the number of outstanding ordinary shares due to other issuances.  As of December 31, 2010, Mr. Edelson’s percentage ownership of our ordinary shares was 78.3%, based on 46,139,053 ordinary shares outstanding (including ordinary shares included in our ordinary shares).  As of March 29, 2011, Mr. Edelson’s percentage ownership of our ordinary shares was 15.7% based on 59,433,828 ordinary shares outstanding, reflecting Oasis’s transfer of an aggregate of 26,595,360 ordinary shares to persons that were not parties to the Voting Agreement on such date, Mr. Edelson’s exercise of 1,476,960 warrants for the same number of ordinary shares and sale of 189,707 warrants in March 2011, as well as increases in the number of outstanding ordinary shares.




47





(6)
Includes 19,692 ordinary shares held by Mr. Wong, 985,500 ordinary shares held by Honest Joy, 3,086,581 ordinary shares held by Mr. Edelson, 3,626,640 ordinary shares held by Oasis, and 1,642,500 ordinary shares held by Plumpton.  Mr. Wong may be deemed to be a beneficial owner of the ordinary shares beneficially held by Honest Joy, which is wholly-owned by Mr. Wong, including the ordinary shares held by each of Oasis, Plumpton and Mr. Edelson as a result of the Voting Agreement.  In September 2008, we granted Honest Joy 3 ordinary shares.  As a result, Honest Joy and Mr. Wong may be deemed to have beneficially owned 3.0% of our ordinary shares, based on 100 ordinary shares then outstanding.  In March 2009 and prior to the Merger, Honest Joy received 899,997 ordinary shares as result of a 300,000-for-1 stock split of our ordinary shares, resulting in its holding 900,000 of our ordinary shares.  In March 2009, as a result of Honest Joy’s entry into the Voting Agreement, Honest Joy may be deemed to have acquired beneficial ownership of 27,600,000 ordinary shares held by Oasis, 1,500,000 ordinary shares held by Plumpton, and 1,609,621 ordinary shares and 1,666,667 warrants to purchase ordinary shares held by Mr. Edelson.  After such acquisitions, each of Honest Joy and Mr. Wong may be deemed to have had beneficial ownership of 103.2% based on 32,245,723 ordinary shares outstanding as of March 17, 2009, including ordinary shares contained in our outstanding public units.  In October 2009, we issued an aggregate of 2,850,000 ordinary shares to Oasis, Honest Joy and Plumpton in October 2009, including 85,500 to Honest Joy, pursuant to the Settlement Agreement, resulting in an increase of each of Mr. Wong and Honest Joy’s beneficial ownership to 36,126,288 ordinary shares.  As of December 31, 2009, each of Honest Joy and Mr. Wong’s percentage of beneficial ownership of our ordinary shares was 88.8%, based on 40,692,323 ordinary shares outstanding (including ordinary shares included in our public units), reflecting the transactions described above as well as increases in the number of outstanding ordinary shares due to other issuances.  As of December 31, 2010, each of Honest Joy and Mr. Wong’s percentage ownership of our ordinary shares was 78.3%, based on 46,139,053 ordinary shares outstanding (including ordinary shares included in our ordinary shares).  As of March 29, 2011, Honest Joy and Mr. Wong’s percentage ownership of our ordinary shares was 15.7% and 15.8%, respectively, based on 59,433,828 ordinary shares outstanding, reflecting Oasis’s transfer of an aggregate of 26,595,360 ordinary shares to persons that were not parties to the Voting Agreement on such date, a net acquisition of 19,692 ordinary shares by Mr. Wong in March 2011, as well as increases in the number of outstanding ordinary shares.





(7)
Includes 3,626,640 ordinary shares held by Oasis, 985,500 ordinary shares held by Honest Joy, 3,086,581 ordinary shares held by Mr. Edelson, and 1,642,500 ordinary shares held by Plumpton.  Ms. Lu may be deemed to be a beneficial owner of the ordinary shares beneficially held by Oasis, which is wholly-owned by Ms. Lu, including the ordinary shares held by each of Honest Joy, Plumpton and Mr. Edelson as a result of the Voting Agreement.Ms. Lu is the daughter of our Chairman and CEO, Mr. Mingwang Lu, but does not live in the same household.   In August 2008, Ms. Lu was granted 100% ownership of our ordinary shares by our issuance to her of our only outstanding ordinary share.  In September 2008, Ms. Lu transferred this ordinary share to Oasis.  At the same time, we granted Oasis 91 ordinary shares and an aggregate of 8 ordinary shares to other shareholders.  As a result, as of September 2008, Oasis and Ms. Lu each beneficially owned 91.0% of a total of 100 outstanding ordinary shares.  In March 2009 and prior to the Merger, Oasis received 27,599,908 ordinary shares as result of a 300,000-for-1 stock split of our ordinary shares, resulting in its holding 27,600,000 of our ordinary shares.  In March 2009, as a result of Oasis’s entry into the Voting Agreement, Oasis may be deemed to have acquired beneficial ownership of 1,500,000 ordinary shares held by Plumpton, 900,000 ordinary shares held by Honest Joy, and 1,609,621 ordinary shares and 1,666,667 warrants to purchase ordinary shares held by Mr. Edelson.  After such acquisitions, each of Oasis and Ms. Lu may be deemed to have had beneficial ownership of 103.2% based on 32,245,723 ordinary shares outstanding as of March 17, 2009, including ordinary shares contained in our outstanding public units.  In October 2009, we issued an aggregate of 2,850,000 ordinary shares to Oasis, Honest Joy and Plumpton in October 2009, including 2,622,000 to Oasis, pursuant to the Settlement Agreement, resulting in an increase of each of Oasis and Ms. Lu’s beneficial ownership to 36,126,288 ordinary shares.  As of December 31, 2009, each of Oasis and Ms. Lu’s percentage of beneficial ownership of our ordinary shares was 88.8%, based on 40,692,323 ordinary shares outstanding (including ordinary shares included in our public units), reflecting the transactions described above as well as increases in the number of outstanding ordinary shares due to other issuances.  As of December 31, 2010, each of Oasis and Ms. Lu’s percentage ownership of our ordinary shares was 78.3%, based on 46,139,053 ordinary shares outstanding (including ordinary shares included in our ordinary shares).  As of March 29, 2011, Oasis and Ms. Lu’s percentage ownership of our ordinary shares was 15.7%, based on 59,433,828 ordinary shares outstanding, reflecting Oasis’s transfer of an aggregate of 26,595,360 ordinary shares to persons that were not parties to the Voting Agreement on such date as well as increases in the number of outstanding ordinary shares.




48




(8)
Includes 1,642,500 ordinary shares held by Plumpton, 3,626,640 ordinary shares held by Oasis, 985,500 ordinary shares held by Honest Joy, and 3,086,581 ordinary shares held by Mr. Edelson.  Plumpton’s three members own or control 47.5%, 47.5%, and 5% of the shares of Plumpton, respectively.  Plumpton’s three members collectively control Plumpton in proportion to their share ownership.  In September 2008, we granted Plumpton 5 ordinary shares. In March 2009 and prior to the Merger, Plumpton received 1,499,995 ordinary shares as result of a 300,000-for-1 stock split of our ordinary shares.  As a result, as of September 2008, Plumpton beneficially owned 5.0% of a total of 100 outstanding ordinary shares; as a result of Plumpton’s entry into the Voting Agreement, Plumpton may be deemed to have acquired beneficial ownership of 900,000 ordinary shares held by Honest Joy, 1,609,621 ordinary shares and 1,666,667 warrants to purchase ordinary shares held by Mr. Edelson, and 27,600,000 ordinary shares held by Oasis.  After such acquisitions, Plumpton may be deemed to have had beneficial ownership of 103.2% based on 32,245,723 ordinary shares outstanding as of March 17, 2009, including ordinary shares contained in our outstanding public units.  In October 2009, we issued an aggregate of 2,850,000 ordinary shares to Oasis, Honest Joy and Plumpton in October 2009, including 142,500 to Plumpton, pursuant to the Settlement Agreement, resulting in an increase of Plumpton’s beneficial ownership to 36,126,288 ordinary shares.  As of December 31, 2009, Plumpton’s percentage of beneficial ownership of our ordinary shares was 88.8%, based on 40,692,323 ordinary shares outstanding (including ordinary shares included in our public units), reflecting the transactions described above as well as increases in the number of outstanding ordinary shares due to other issuances.  As of December 31, 2010, Plumpton’s percentage ownership of our ordinary shares was 78.3%, based on 46,139,053 ordinary shares outstanding (including ordinary shares included in our ordinary shares).  As of March 29, 2011, Plumpton’s percentage ownership of our ordinary shares was 15.7%, based on 59,433,828 ordinary shares outstanding, reflecting Oasis’s transfer of an aggregate of 26,595,360 ordinary shares to persons that were not parties to the Voting Agreement on such date as well as increases in the number of outstanding ordinary shares.





(9)
Mr. Wenxian Li holds 4,212,523 ordinary shares.  Mr. Li received these ordinary shares in March  2011.  Previously, Mr. Li owns 0% of outstanding ordinary shares.





None of our major shareholders have different voting rights from other shareholders.  We are not aware of any arrangement that may, at a subsequent date, result in a change of control of our company.





Each of the foregoing beneficial owners of over five percent of our outstanding ordinary shares may be considered to own or control us.





2010 Share Incentive Plan




On November 16, 2010, our Board of Directors and its Compensation Committee adopted the 2010 Plan. The 2010 Plan became effective on the date of its adoption, subject to approval by our shareholders within 12 months.  At our annual shareholders meeting held on December 8, 2010, our shareholders approved the adoption of the 2010 Plan.  Unless otherwise defined, capitalized terms in the following summary have the same meanings as provided in the 2010 Plan.





Summary of the 2010 Plan





Purpose.The purpose of the 2010 Plan is promote the best interests of the Company and its shareholders by (i) assisting the Company and its Affiliates in the recruitment and retention of persons with ability and initiative, (ii) providing an incentive to such persons to contribute to the growth and success of the Company’s businesses by affording such persons equity participation in the Company and (iii) associating the interests of such persons with those of the Company and its affiliates and shareholders.  The Plan permits the grant of Nonqualified Share Options and Restricted Share Awards to such Eligible Persons, and subject to such terms and conditions, not inconsistent with the terms of the 2010 Plan, as the 2010 Plan administrator may determine in its discretion.





Administration.  The Plan may be administered by our Board of Directors or a committee appointed by the Board of Directors to administer the Plan. The Plan is currently being administered by our Compensation Committee. The administrator has the authority to determine the Eligible Persons who shall receive grants of Awards under the 2010 Plan and the specific terms and conditions of all Awards granted under the 2010 Plan, including, without limitation, the number of Shares subject to each Award, the price to be paid for the Shares, the applicable vesting criteria, the Company’s repurchase rights in connection with the ordinary shares issued in connection with the exercise of an Award and any other restrictions or limitations applicable to Awards or the ordinary shares issued thereunder. The administrator has discretion to make all other determinations necessary or advisable for the administration of the 2010 Plan.





Eligibility.  Nonqualified Share Options and Restricted Share Awards may be granted to employees, Directors or Consultants either alone or in combination with any other Awards.





49


Effect of Termination of Employment, Etc.  Except for in connection with a termination on account of a participant’s death or Disability or a termination for Cause (or a voluntary termination at any time after an event which would be grounds for termination of the Participant’s Continuous Service for Cause), unless otherwise provided in the applicable Share Award Agreement or Share Option Agreement, if the Participant’s Continuous Service ends for any reason, (a) any outstanding Options of the Participant shall cease to be exercisable in any respect not later than three (3) months following that event and, for the period it remains exercisable following that event, shall be exercisable only to the extent exercisable at the date of that event, and (b) any Restricted Share Award of the Participant shall be forfeited or otherwise subject to return to or repurchase by the Company on the terms specified in the award agreement. If the Participant’s termination is on account of the Participant’s death or Disability, unless otherwise provided in the applicable Share Option Agreement, any outstanding Options of the Participant shall cease to be exercisable not later than twelve (12) months following that event and, for the period it remains exercisable following that event, and shall be exercisable by the Participant (or, in the event of the Participant’s death, by the Participant’s heirs, legatees or legal representatives) only to the extent exercisable at the date of such death or Disability.  If the Participant’s termination of Continuous Service is for Cause or is a voluntary termination at any time after an event which would be grounds for termination of the Participant’s Continuous Service for Cause, the right to exercise the Option shall expire, unless otherwise specified in the Share Option Agreement, as of the date of the Participant’s termination of Continuous Service. The Committee shall determine whether Continuous Service shall be considered interrupted in the case of any leave of absence approved by the Corporation, including sick leave, military leave or any other personal leave.





Shares Available for Issuance Under the 2010 Plan.  Subject to adjustment as described below, the maximum aggregate number of ordinary shares that may be issued under the 2010 Plan is 3,500,000 ordinary shares. Ordinary shares issued under the 2010 Plan may be either authorized and unissued ordinary shares or previously issued ordinary shares that have been reacquired by the Company and cancelled or maintained as treasury shares.   The number and class of shares available under the 2010 Plan are subject to adjustment in the event of certain reorganizations, mergers, combinations, recapitalizations, share splits, share dividends, or other similar events which change the number or kind of shares outstanding.





Vesting and Option Periods.  The administrator, in its sole discretion, may impose vesting schedules, limitations on transferability and forfeiture conditions on any Award granted under the 2010 Plan as it may deem advisable or appropriate, on the basis of such conditions, including but not limited to, achievement of Company-wide, business unit, or individual goals (including, but not limited to, continued status as an Eligible Person), or any other basis the 2010 Plan administrator may determine in its discretion.  The administrator, in its discretion, may accelerate the time at which any such restrictions will lapse or be removed.  The administrator may, in its discretion, also provide for such complete or partial exceptions to an employment or service restriction as it deems equitable. Unless terminated sooner in accordance with the 2010 Plan, each Option shall expire either ten (10) years after the grant date, or after a shorter term as may be fixed in the Share Option Agreement.





Option Grants.  An Option is the right to purchase our ordinary shares at a future date at a specified price. Options granted under the 2010 Plan may only be Nonqualified Share Options (i.e., options not intended to qualify as incentive stock options within the meaning of section 422 of the Internal Revenue Code of 1986, as amended). The administrator shall determine the terms of each Option at the time of grant, including the number of ordinary shares covered by, the exercise price of, and the conditions and limitations applicable to the exercise of each Option (including vesting criteria and maximum Option period, which may not be more than ten (10) years from the date of grant).  The exercise price of an Option may not be less than the par value of an Ordinary Share on the grant date and it may also not be less than the Fair Market Value of an Ordinary Share, unless the 2010 Plan administrator determines that a grant with an exercise price less than Fair Market Value is either (i) awarded to a Participant who is not subject to Section 409A or 457A of the Code or (ii) if the Participant is subject to Section 409A or 457A of the Code, the terms of such Option will comply with Section 409A of the Code and will not result in taxation by reason of Section 457A(a) of the Code, and provided that the term of an Option may not exceed ten years.





The Plan permits the following forms of payment of the exercise price of Options, unless as provided for in the Share Option Agreement:





●
cash or check;





●
such other method as may be provided for in the Share Option Agreement; or




50




●
with the consent of the 2010 Plan administrator, other ordinary shares that have been held for at least six (6) months prior to the date of exercise, or if the ordinary shares are traded on an established securities market, the 2010 Plan administrator may approve a “cashless exercise” by payment of the exercise price by a broker-dealer or by the Option holder with cash advanced by the broker-dealer if the exercise notice is accompanied by the Option holder's written irrevocable instructions to deliver the ordinary shares acquired upon exercise of the Option to the broker-dealer or by delivery of the ordinary shares to the broker-dealer with an irrevocable commitment by the broker-dealer to forward the exercise price to the Corporation, provided that if ordinary shares are used to pay all or part of the exercise price, the sum of the cash or cash equivalent and the Fair Market Value (determined as of the date of exercise) of the shares surrendered must not be less than the Option price of the ordinary shares for which the Option is being exercised.





Restricted Share Awards. The administrator may, in its discretion, grant Restricted Share Awards to Eligible Persons and may determine the number of ordinary shares underlying a Restricted Share Award and the terms and conditions (including vesting criteria) of, and the amount of payment (which may not be less than par value per Ordinary Share) to be made by the recipient for such Restricted Share Awards. During the period during which the Restricted Share Awards are subject to repurchase or reacquisition, or the period of restriction, Restricted Share Awards shall be subject to vesting or repurchase by the Company (including a right of the Company to repurchase ordinary shares under a Restricted Share Award at less than the then Fair Market Value per Share) arising on the basis of such conditions as the 2010 Plan administrator may determine in its sole discretion.  Any such risk of repurchase by the Company may be waived or terminated, or the period of restriction shortened, at any time by the 2010 Plan administrator on such basis as it deems appropriate.  During the period of restriction, Eligible Persons holding Restricted Share Awards may exercise full voting rights with respect to the ordinary shares underlying those Restricted Share Awards and will be entitled to receive all dividends and other distributions paid with respect to such ordinary shares. If any such dividends or distributions are paid in ordinary shares, the ordinary shares will be subject to the same restrictions on transferability and repurchase rights by the Company as the Restricted Share Awards with respect to which they were paid.  Except as provided in the 2010 Plan, Restricted Share Awards may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated until the end of the applicable period of restriction.





Adjustments, Dissolution, Liquidation, Merger or Change in Control. In the event that any dividend or other distribution (whether in the form of cash, ordinary shares, other securities, or other property), recapitalization, share split, reverse share split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, or exchange of ordinary shares or other securities of the Company, or other change in the corporate structure of the Company, affecting the ordinary shares occurs, the 2010 Plan administrator, in order to prevent diminution or enlargement of the benefits or potential benefits intended under the 2010 Plan, shall adjust the number and kind of ordinary shares that may be delivered under the 2010 Plan and/or the number, class, and price of ordinary shares covered by each outstanding Award.





If the Company is merged or consolidated with another entity or sells or otherwise disposes of substantially all of its assets to another company while Options or Share Awards remain outstanding under the 2010 Plan, unless provisions are made in connection with such transaction for the continuance of the 2010 Plan and/or the assumption or substitution of such Options or Share Awards with new options or share awards covering the shares of the successor company, or parent or subsidiary thereof, with appropriate adjustments as to the number and kind of shares and prices, then all outstanding Options and Share Awards which have not been continued, assumed or for which a substituted award has not been granted shall, whether or not vested or then exercisable, unless otherwise specified in the applicable Share Option Agreement or Share Award Agreement, terminate immediately as of the effective date of any such merger, consolidation or sale.





Transferability. Unless otherwise provided in the applicable Share Option Agreement or Share Award Agreement, or otherwise determined by the 2010 Plan administrator in accordance with the 2010 Plan, an Award may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Participant, only by the Participant.





Repricing; Exchange and Buyout of Awards. The repricing or termination and subsequent repricing of Options at a lower purchase price per Share than the original grant is not permitted without prior shareholder approval. The administrator may authorize the Company to issue new Options in exchange for the surrender and cancellation of any or all outstanding Awards, subject to the consent of the Participant whose rights would be impaired.  The administrator may at any time repurchase Options with payment in cash, Shares or other consideration, based on such terms and conditions as the 2010 Plan administrator and the Participant shall agree.




51





Termination of, or Amendments to, the 2010 Plan. The Board may amend or terminate the 2010 Plan from time to time; provided, however, shareholder approval shall be required for any amendment that (i) increases the aggregate number of ordinary shares that may be issued under the 2010 Plan, except for adjustments described above, or (ii) shareholder approval is required by the terms of any applicable law, regulation or rule, including the rules of any market on which the Company’s shares are traded or exchanged on which the Company’s shares are listed.  Except as specifically permitted by the 2010 Plan, Share Option Agreement or Share Award Agreement or as required to comply with applicable law, regulation or rule, no amendment shall, without a Participant’s consent, adversely affect any rights of such Participant under any Option or Share Award outstanding at the time such amendment is made.  Any amendment requiring shareholder approval shall be approved by the shareholders of the Corporation within twelve (12) months of the date such amendment is adopted by the Board.





ITEM 7.
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS





Major Shareholders




Please refer to Item 6, “Directors, Senior Management and Employees — Share Ownership.”





Related Party Transactions




The following includes a summary of transactions since the beginning of the 2010 fiscal year between us and certain related persons.  We believe the terms obtained or consideration that we paid or received, as applicable, in connection with the transactions described below were comparable to terms available or the amounts that would be paid or received, as applicable, in arm’s-length transactions.





·
Oasis is wholly owned by Ms. Yuying Lu, an Australian citizen.  Ms. Lu is the daughter of our Chairman and CEO, Mingwang Lu, but does not live in the same household.  Ms. Lu may be deemed to be a beneficial owner of the shares held by Oasis.As a result of Oasis’s majority ownership of our ordinary shares, it may be considered to own or control us.  Oasis’s percentage ownership of our outstanding ordinary shares declined from 74.2% as of January 1, 2010 to 65.5% as of December 31, 2010.





·
In connection with our merger with COAC, Oasis, previously our majority shareholder, agreed to deposit 3,000,000 of the ordinary shares it owns in escrow, pursuant to the Escrow Agreement among us, Oasis and Continental Stock Transfer & Trust Company, as escrow agent, to secure Oasis’s obligations under the Merger Agreement to indemnify the surviving entity of the merger for damages arising out of the merger until the later of (i) 30 days after the date on which we have filed this annual report on Form 20-F for our 2009 fiscal year or (ii) one year after the closing of the merger, subject to the joint approval of Mr. Mingwang Lu and Mr. Harry Edelson.  On November 16, 2010, the Board, including Mr. Lu and Mr. Edelson, unanimously approved the release of the shares from escrow.





·
Since January 2010, we have paid Mr. Edelson a monthly fee of $10,000 in return for his verbal agreement to perform certain services.  These services have included or may include the following: (a) helping to promote awareness of the Company within the investment community through introductions to investors, investment banks, and research analysts; (b) participation in future deal or non-deal road shows and financing activities of the Company upon request and at the discretion of the Company and the Board of Directors; (c) assistance in investor conference presentations, whether or not management of the Company is able to be present; (d) providing occasional office use and communication facilities where required by the Company; (e) monitoring and providing capital market feedback on the Company; and (f) such other activities as may be requested of him, from time to time, by the Board or executive management team of the Company.





·
Before 2007, Zhengzhou Company was one of the owners of Henan Green with 76.93% of the total ownership.  In December 2006, Zhengzhou Company sold all of its ownership to our Chairman and CEO, Mingwang Lu and others, whereby Mr. Lu became a major owner holding 40% of the total ownership.  In 2008, the holders transferred their ownership interests in Henan Green to China Gerui.  Mingwang Lu was a common owner of Henan Green and Zhengzhou Company. Zhengzhou Company engaged in the same type of industry as Henan Green but ceased its processing and selling of steel operation in 2003 and its principal business activity after the cessation of its steel operations is receiving rental income from its investments.  In 2004, we entered into a rental agreement for land use rights with Zhengzhou Company with the term from January 1, 2005 to December 30, 2014.  In December 2008, we entered into a new lease with the related party lessor, which replaces the 2004 rental agreement.  The new lease term commenced on January 1, 2008 and terminates on December 31, 2027.  Rent paid to Zhengzhou Company for the fiscal year ended December 31, 2010 was $9,909.  Rent payable under the lease will increase by 10% annually starting from  2010.  Zhengzhou Company also guarantees our obligations under short term bank loans.  We do not pay any consideration to this related guarantor for guaranteeing our obligations.





52




·
Zhengzhou Company owns a land use right with total 24.94 acres (151.4 Chinese mu); we currently lease a part of the land use right for 6.69 acres (40.60 Chinese mu) from Zhengzhou Company. Our existing production lines and warehouses are located on this parcel of land. For operation risk mitigation purpose, we have started the process of title transfer of the existing land use right to 24.94 acres (151.4 Chinese mu) from Zhengzhou Company. To facilitate Zhengzhou Company’s negotiation with local regulatory authorities on the transfer and in anticipation of the upfront payments associated with the transaction, we prepaid as of December 31, 2010 $2,143,939 to Zhengzhou Company. The final transfer price is to be further determined based on market-based valuation of the land value and calculation of associated value-added tax.


Interests of Experts and Counsel




Not applicable.





ITEM 8.
FINANCIAL INFORMATION





Consolidated Statements and Other Financial Information




Financial Statements





We have appended consolidated financial statements filed as part of this annual report. See Item 18, “Financial Statements.”





Legal Proceedings





We may be subject to legal proceedings, investigations and claims incidental to the conduct of our business from time to time.  We are currently not a party to any litigation or other legal proceedings brought against us.  We are also not aware of any legal proceeding, investigation or claim, or other legal exposure that has a more than remote possibility of having a material adverse effect on our business, financial condition or results of operations.





Dividend Policy





Our operating subsidiary, Henan Green, paid dividends of $42.3 million and $16.1 million in 2008 and 2007, respectively, prior to our 2009 merger with COAC.  For the foreseeable future, we intend to retain any future earnings to fund the operation and expansion of our business and do not anticipate paying cash dividends on our ordinary shares.  The payment of any dividends in the future will be within the discretion of our board of directors, subject to the relevant provision of BVI law.





Significant Changes




No significant change has occurred since the date of our consolidated financial statements filed as part of this annual report.





ITEM 9.
THE OFFER AND LISTING





Offer and Listing Details




The common stock, warrants and units of COAC were quoted on the Over-the-Counter Bulletin Board maintained by the Financial Industry Regulatory Authority, Inc., or FINRA, under the symbols of CHNQ, CHNQW and CHNQU, respectively.  COAC units commenced public trading on March 22, 2007 and common stock and warrants commenced public trading on April 18, 2007.





On March 17, 2009, COAC merged with and into us.  As a result of the merger, COAC’s outstanding shares of common stock, warrants and units were converted into like securities of us on a one-to-one basis.  Our ordinary shares, warrants and units were quoted on the Over-the-Counter Bulletin Board under the symbols of GGEEF, GGENF and GGETF, respectively, effective April 27, 2009.





Effective November 10, 2009, our ordinary shares, warrants and units began trading on the Nasdaq Global Market under the symbols “CHOP”, “CHOPW”, and “CHOPU”, respectively.





On March 2, 2011, we notified our transfer agent that we had elected to extend the expiration date of our warrants from Saturday, March 19, 2011 to Monday, March 21, 2011, the next business day.  In connection with their expiration, as of March 21, 2011, the Nasdaq Stock Market had suspended trading in our warrants.





53


In anticipation of our warrants’ expiration, we instructed our transfer agent to implement the mandatory separation of our outstanding units into their component securities.  In connection with their mandatory separation, as of March 21, 2011, the Nasdaq Stock Market had suspended trading in our units.





The following table provides the high and low reported sales prices of our ordinary shares, units and warrants and the historical prices for COAC’s common stock, warrants and units prior to the merger, for the periods indicated below.  The over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily reflect actual transactions.





OrdinaryShares/

CommonStock*


Warrants


UnitsHigh


Low


High


Low


High


LowAnnual Market PricesYear 2008

$
5.86


$
5.30


$
.99


$
0.01


$
7.75


$
5.40Year 2009


10.00



3.01



1.80



0.10



6.34



5.95Year 2010


8.20



4.55



***



***



***



***Year 2011 (through April 18, 2011)


6.33



4.35



***



***



***



***Quarterly Market PricesFirst Quarter 2009


6.00



3.01



0.45



0.10



6.34



5.95Second Quarter 2009**


10.00



5.55



0.75



0.15



***



***Third Quarter 2009**


9.00



6.00



1.25



0.35



***



***Fourth Quarter 2009**


9.75



4.99



1.80



0.70



***



***First Quarter 2010**


8.20



5.55



***



***



***



***Second Quarter 2010**


7.92



5.18



***



***



***



***Third Quarter 2010**


6.09



4.55



***



***



***



***Fourth Quarter 2010**


6.46



5.34



***



***



***



***Monthly Market PricesJanuary 2011**


6.33



5.80



***



***



***



***February 2011**


5.94



5.38



***



***



***



***March 2011**


5.85



4.55



***



***



***



***





*The above table sets forth the range of high and low reported sales prices of our ordinary shares as reported by Yahoo! Finance for the periods indicated.  The reported sales prices of our warrants and units in the above table were previously reported by www.quotemedia.com for the periods indicated.




**Reflects the price range of our ordinary shares after the completion of our business combination transaction with COAC in March 2009.





***Market data is unavailable.





Plan of Distribution




Not applicable.





Markets




See our disclosures above under “Offer and Listing Details.”





Selling Shareholders




Not applicable.





Dilution




Not applicable.





54





Expenses of the Issue




Not applicable.





ITEM 10.
ADDITIONAL INFORMATION





Share Capital




Not applicable.





Memorandum and Articles of Association




The following represents a summary of certain key provisions of the Company’s amended and restated memorandum and articles of association.  The summary does not purport to be a summary of all of the provisions of our memorandum and articles of association and of all relevant provisions of BVI law governing the management and regulation of BVI companies.





Register





We were incorporated in the BVI on March 11, 2008 under the BVI Business Companies Act, 2004, or the Act.  The Registrar of Corporate Affairs of the British Virgin Islands issued a Certificate of Change of Name confirming the change of our name from Golden Green Enterprises Limited to China Gerui Advanced Materials Group Limited on December 14, 2009.  Our amended and restated memorandum of association authorizes the issuance of up to 100,000,000 shares without par value.





Objects and Purposes





Our amended and restated memorandum of association grants us full power and capacity to carry on or undertake any business or activity and do any act or enter into any transaction not prohibited by the Act or any other BVI legislation.





Directors





We have a classified board of directors consisting of three classes of directors, Class I, Class II and Class III.  At the first general meeting held after the date of the adoption of our amended and restated articles of association, the Class I directors shall be elected for a three year term of office, the Class II directors shall be elected for a two year term of office and the Class III directors shall be elected for a one year term of office.  At a general meeting in each year, successors to the class of directors whose term expires in that year shall be elected for a three year term.  A majority of votes cast at the relevant meeting shall be sufficient to elect directors.  The directors may appoint one or more directors to fill a vacancy on the Board.  A director shall not require a share qualification, and may be an individual or a company. Directors may serve at any age and may retire at any time.





Directors have the powers necessary for managing, and for directing and supervising our business and affairs, including general powers to borrow on behalf of the Company.  Directors may engage in transactions with us and vote on such transactions, provided the nature of the interest is disclosed to the entire board of directors.  With the prior or subsequent approval by an ordinary resolution of members (i.e., shareholders), the directors may, by a resolution of directors, fix the emoluments of directors with respect to services to be rendered in any capacity to us.  The board of directors shall obtain our approval in a general meeting before making any payment to any director or past director of us by way of compensation for loss of office, or as consideration for or in connection with his retirement from office (other than a payment to which the director is contractually entitled).  The above requirements shall apply regardless of whether a quorum consisting solely of non-interested or independent directors is present at the meeting at which the pertinent resolution of directors is adopted.




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Rights and Obligations of Shareholders





Dividends





Subject to the Act, the directors may, by resolution of directors, authorize a distribution (including a dividend) by us to members (i.e., shareholders) at such time and of such an amount as they think fit if they are satisfied, on reasonable grounds, that immediately after the distribution, the value of our assets exceeds our liabilities and we are able to pay our debts as they fall due.  Any distribution payable in respect of a share which has remained unclaimed for three years from the date when it became due for payment shall, if the board of the directors so resolves, be forfeited and cease to remain owing by us.  The directors may, before authorizing any distribution, set aside out of our profits such sum as they think proper as a reserve fund, and may invest the sum so set apart as a reserve fund upon such securities as they may select.





The holder of each ordinary share has the right to an equal share in any distribution paid by us.





Voting Rights





Each ordinary share confers on the shareholder the right to one vote at a meeting of the members or on any resolution of members on all matters before our shareholders.





Rights in the event of winding up





The holder of each ordinary share is entitled to an equal share in the distribution of the surplus assets of us on a winding up.





Redemption





We may purchase, redeem or otherwise acquire and hold our own shares. We may not purchase, redeem or otherwise acquire shares without the consent of members whose shares are to be purchased, redeemed or otherwise acquired unless we are permitted by the Act or any provision of the amended and restated memorandum of association or the amended and restated articles of association to purchase, redeem or otherwise acquire the shares without their consent. We may only offer to acquire shares if at the relevant time the directors determine by resolution of directors that immediately after the acquisition the value of our assets exceeds our liabilities and we are able to pay our debts as they fall due.





The directors may make an offer to purchase, redeem or otherwise acquire shares issued by us if the offer is (i) an offer to all members that would, if accepted, leave the relative voting and distribution rights of the members unaffected and affords each member a reasonable opportunity to accept the offer; or (ii) an offer to one or more members which either (1) all members have consented to in writing or (2) the directors have passed a resolution of directors stating that, in their opinion (a) the purchase, redemption or other acquisition is to the benefit of the remaining members and (b) that the terms of the offer and the consideration offered for the shares are fair and reasonable to us and to the remaining members, and setting out the reasons for their opinion.





We may purchase, redeem or otherwise acquire our shares at a price lower than the fair value if permitted by, and then only in accordance with, the terms of the amended and restated memorandum and articles of association or a written agreement for the subscription for the shares to be purchased, redeemed or otherwise acquired.





Changes in the rights of shareholders





The rights attached to any class or series of shares (unless otherwise provided by the terms of issue of the shares of that class or series), whether or not we are being wound-up, must be varied with the consent in writing of all the holders of the issued shares of that class or series or with the sanction of a resolution passed by a majority of the votes cast at a separate meeting of the holders of the shares of the class or series.





Meetings





An annual meeting of members must be held at least once in each calendar year at such date and time as may be determined by the directors.  The directors shall call a meeting of the members if requested in writing to do so by members entitled to exercise at least 30% of the voting rights in respect of the matter for which the meeting is being held.  No less than ten days and not more than sixty days notice of meetings is required to be given to members.





A meeting of members is properly constituted if at the commencement of the meeting there are two (2) members present in person or by proxy or (in the case of a member being a corporation) by its duly authorized representative representing not less than one third of the votes of the shares or class or series of shares entitled to vote on resolutions of members to be considered at the meeting.





A member shall be deemed to be present at the meeting if he participates by telephone or other electronic means and all members participating in the meeting are able to hear each other.





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An ordinary resolution of members is a resolution approved at a duly constituted meeting of members by the affirmative vote of a simple majority of the votes cast by such members entitled to vote and voting on the resolution.  A special resolution of members is a resolution passed by a majority of not less than two-thirds of votes cast by such members as, being entitled so to do, vote in person or, in the case of such members as are corporations, by their respective duly authorized representative or, where proxies are allowed, by proxy at a general meeting of which not less than ten (10) clear days’ notice, specifying the intention to propose the resolution as a special resolution, has been duly given, provided that, except in the case of an annual general meeting, if it is so agreed by a majority in number of the members having the right to attend and vote at any such meeting, being a majority together holding not less than ninety-five (95) per cent in nominal value of the shares giving that right and in the case of an annual general meeting, if it is so agreed by all members entitled to attend and vote thereat, a resolution may be proposed and passed as a special resolution at a meeting of which less than ten (10) clear days’ notice has been given.





The inadvertent failure of the directors to give notice of a meeting to a member, or the fact that a member has not received notice, does not invalidate the meeting.





A member may be represented at a meeting of members by a proxy (who need not be a member) who may speak and vote on behalf of the member.  A written instrument giving the proxy such authority must be produced at the place appointed for such purpose not less than 48 hours before the time for holding the meeting.





Limitations on Ownership of Securities





There are no limitations on the right of non-residents or foreign persons to own our securities imposed by BVI law or by our amended and restated memorandum and articles of association.





Change in Control of Company





A special resolution of members is required for us to issue our shares or securities convertible into our shares resulting in our change of control, unless the transaction is approved by the securities exchange on which our shares are then listed, the delay in obtaining a resolution of the members would seriously jeopardize our financial viability, our Audit Committee has approved not seeking a special resolution of members, and we have given to all members not later than ten days before issuance of our shares or securities convertible into our shares notice that we do not intend to seek the resolution of members that would otherwise be required and indicating that the Audit Committee has expressly approved proceeding without obtaining a resolution of members.  Additionally, the board of directors is empowered to issue preferred shares with such rights attaching to them as they decide and such power could be used in a manner that would delay, defer or prevent a change of control of our company.





Ownership Threshold





There are no provisions governing the ownership threshold above which shareholder ownership must be disclosed imposed by BVI law or by our amended and restated memorandum and articles of association.





Changes in Capital





Subject to the provisions of the amended and restated memorandum and articles of association, the Act and the rules of the Designated Stock Exchange, our unissued shares shall be at the disposal of the directors who may, without prejudice to any rights previously conferred on the holders of any existing shares or class or series of shares, offer, allot, grant options over or otherwise dispose of the shares to such persons, at such times and upon such terms and conditions as we may by resolution of directors determine.





Subject to the provisions of the memorandum of association relating to changes in the rights of shareholders and the powers of directors in relation to preferred shareholders, we may, by a special resolution of members, amend our memorandum of association to increase or decrease the number of ordinary shares authorized to be issued.




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Differences in Corporate Law





The companies law of the BVI differs from laws applicable to U.S. corporations and their shareholders.  Set forth below is a summary of the significant differences between the provisions of the companies law applicable to us and the laws applicable to companies incorporated in the United States and their shareholders.





Protection for minority shareholders





Under the laws of most U.S. jurisdictions, majority and controlling shareholders of a company generally have certain “fiduciary” responsibilities to the minority shareholders.  Corporate actions taken by majority and controlling shareholders which are unreasonable and materially detrimental to the interests of minority shareholders may be declared null and void.  Minority shareholders may have less protection for their rights under BVI law than they would have under U.S. law.





Powers of directors





Unlike most U.S. jurisdictions, the directors of a BVI company, subject in certain cases to court approval but without shareholders’ approval, may implement the sale, transfer, exchange or disposition of any Company asset, property, part of the business, or securities, with the exception that shareholder approval is required for the disposition of over 50% in the value of our total assets.





Conflict of interests





Similar to the laws of most U.S. jurisdictions, when a director becomes aware of the fact that he has an interest in a transaction which we are to enter into, he must disclose it to our board.  However, with sufficient disclosure of interest in relation to that transaction, the director who is interested in a transaction entered into or to be entered into by us may (i) vote on a matter relating to the transaction; (ii) attend a meeting of directors at which a matter relating to the transaction arises and be included in the quorum; and (iii) sign a document on behalf of us, or do any other thing in his capacity as a director, that relates to the transaction.





Written consent and cumulative voting





Similar to the laws of most U.S. jurisdictions, under BVI law, shareholders are permitted to approve matters by way of written resolution in place of a formal meeting.  BVI law does not make a specific reference to cumulative voting, and our current Memorandum and Articles of Association have no provisions authorizing cumulative voting.





Independent directors





There is no requirement for a majority of our directors to be independent as a matter of BVI law.





Redemption





Our ordinary shares are not redeemable at a shareholder’s option.  We may redeem our shares only with the consent of the shareholders whose shares are to be redeemed, except that the consent from the shareholders whose shares are being redeemed is not needed when (i) they are subject to compulsory redemption by us following our receipt of a written request by a shareholder or shareholders holding 90% of the votes of the outstanding ordinary shares entitled to vote that such shares be redeemed or (ii) if the directors make an offer to purchase, redeem or otherwise acquire shares that we have issued and such offer is an offer to one or more members which either (1) all members have consented to in writing or (2) the directors have passed a resolution of directors stating that, in their opinion (a) the purchase, redemption or other acquisition is to the benefit of the remaining members and (b) that the terms of the offer and the consideration offered for the shares are fair and reasonable to us and to the remaining members, and setting out the reasons for their opinion..





Takeover provisions





Some provisions of our amended and restated memorandum and articles of association may discourage, delay or prevent a change in control of our company or management that shareholders may consider favorable.  For instance, our directors are empowered to amend the relevant provisions of the memorandum of association for the purposes of creating new classes or series of shares and the rights attached thereto and may amend the articles of association to take into account any ancillary changes required, provided that the directors do not, however, have the power to amend the memorandum and articles of association to (a) restrict the rights or powers of the members to amend the memorandum or articles of association, (b) to change the percentage of members required to pass a resolution to amend the memorandum and articles of association, or (c) in circumstances where the memorandum or articles of association cannot be amended by the members.





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Shareholder’s access to corporate records





Pursuant to the Act, a shareholder is entitled, on giving written notice to us, to inspect our (i) memorandum and articles of association; (ii) register of members; (iii) register of directors; and (iv) minutes of meetings and resolutions of members and of those classes of members of which the shareholder is a member.





The directors may, if they are satisfied that it would be contrary to our interests to allow a member to inspect any document listed above (or any part thereof), deny or limit the inspection of the document.





Indemnification





We shall indemnify against all expenses, including legal fees, and against all judgments, fines and amounts paid in settlement and reasonably incurred in connection with legal, administrative or investigative proceedings any person who (i) is or was a party or is threatened to be made a party to any threatened, pending or completed proceedings, whether civil, criminal, administrative or investigative, by reason of the fact that the person is or was a director, an officer or a liquidator of us; or (ii) is or was, at our request, serving as a director, officer or liquidator of, or in any other capacity is or was acting for, another body corporate or a partnership, joint venture, trust or other enterprise.  To be entitled to indemnification, these persons must have acted honestly and in good faith and in what they believe to be our best interest, and in the case of criminal proceedings, they must have had no reasonable cause to believe their conduct was unlawful.





Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling us under the foregoing provisions, we have been advised that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.





Mergers and similar arrangements





Under the laws of the BVI, two or more companies may merge or consolidate in accordance with Section 170 of the Act.  A merger means the merging of two or more constituent companies into one of the constituent companies, and a consolidation means the uniting of two or more constituent companies into a new company.  In order to merge or consolidate, the directors of each constituent company must approve a written plan of merger or consolidation which must be authorized by a resolution of shareholders.





While a director may vote on the plan even if he has a financial interest in the plan of merger of consolidation, in order for the resolution to be valid, the interest must have been disclosed to our board forthwith upon him becoming aware of such interest.





Shareholders not otherwise entitled to vote on the merger or consolidation may still acquire the right to vote if the plan of merger or consolidation contains any provision which, if proposed as an amendment to the memorandum or articles of association, would entitle them to vote as a class or series on the proposed amendment.  In any event, all shareholders must be given a copy of the plan of merger or consolidation irrespective of whether they are entitled to vote at the meeting or consent to the written resolution to approve the plan of merger or consolidation.





The shareholders of the constituent companies are not required to receive shares of the surviving or consolidated company, but may receive debt obligations or other securities of the surviving or consolidated company, or other assets, or a combination thereof.  Furthermore, some or all of the shares of a class or series may be converted into a kind of asset while the other shares of the same class or series may receive a different kind of asset.  As such, not all the shares of a class or series must receive the same kind of consideration.





After the plan of merger or consolidation has been approved by the directors and authorized by a resolution of the shareholders, articles of merger or consolidation are executed by each company and filed with the Registrar of Corporate Affairs in the BVI.





Dissenter Rights





A shareholder may dissent from a mandatory redemption of his shares, an arrangement (if permitted by the court), a merger (unless the shareholder was a shareholder of the surviving company prior to the merger and continues to hold the same or similar shares after the merger) and a consolidation.  A shareholder properly exercising his dissent rights is entitled to payment of the fair value of their shares.





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A shareholder dissenting from a merger or consolidation must object in writing to the merger or consolidation before the vote by the shareholders on the merger or consolidation, unless notice of the meeting was not given to the shareholder.  If the merger or consolidation is approved by the shareholders, we must within 20 days give notice of this fact to each shareholder who gave written objection, and to each shareholder who did not receive notice of the meeting.  Such shareholders then have 20 days to give us their written election in the form specified by the BVI Business Companies Act to dissent from the merger or consolidation, provided that in the case of a merger, the 20 days starts when the plan of merger is delivered to the shareholder.





Upon giving notice of his election to dissent, a shareholder ceases to have any rights of a shareholder except the right to be paid the fair value of his shares.  As such, the merger or consolidation may proceed in the ordinary course notwithstanding the dissent.





Within seven days of the later of the delivery of the notice of election to dissent and the effective date of the merger or consolidation, we must make a written offer to each dissenting shareholder to purchase his shares at a specified price that the company determines to be their fair value.  We and the shareholders then have 30 days to agree upon the price.  If we and a shareholder fail to agree on the price within the 30 days, then we and the shareholder shall each designate an appraiser and these two appraisers shall designate a third appraiser.  These three appraisers shall fix the fair value of the shares as of the close of business on the day before the shareholders approved the transaction without taking into account any change in value as a result of the transaction.





Shareholders’ suits





Similar to the laws of most U.S. jurisdictions, BVI law permits derivative actions against its directors.  However, the circumstances under which such actions may be brought, and the procedures and defenses available may result in the rights of shareholders of a BVI company being more limited than those of shareholders of a company incorporated and/or existing in the United States.





The court of the BVI may, on the application of a shareholder of a company, grant leave to that shareholder to bring proceedings in the name and on behalf of that company, or intervene in proceedings to which the company is a party for the purpose of continuing, defending or discontinuing the proceedings on behalf of the company.  In determining whether to grant leave, the High Court of the BVI must take into account (i) whether the shareholder is acting in good faith; (ii) whether the derivative action is in the interests of the company taking account of the views of the company’s directors on commercial matters; (iii) whether the proceedings are likely to succeed; (iv) the costs of the proceedings in relation to the relief likely to be obtained; and (v) whether an alternative remedy to the derivative claim is available.





Leave to bring or intervene in proceedings may be granted only if the High Court of the BVI is satisfied that (i) we do not intend to bring, diligently continue or defend, or discontinue the proceedings, as the case may be; or (ii) it is in our interests that the conduct of the proceedings should not be left to the directors or to the determination of the shareholders as a whole.





Material Contracts




Except for the following, we have not entered into any material contracts other than in the ordinary course of business in the two years preceding publication of this annual report and other than those described in Item 4, “Information on the Company — Business Overview — Developments During the Last Fiscal Year,” Item 5, “Operating and Financial Review and Prospects — Liquidity and Capital Resources — Loan Facilities,”Item 5, “Operating and Financial Review and Prospects — Tabular Disclosure ofContractual Obligations,” Item 6, “Directors, Senior Management and Employees—Compensation—Employment Agreements,” Item 6, “Directors, Senior Management and Employees — Board Practices,”  Item 6, “Directors, Senior Management and Employees — Employees,” Item 6, “Directors, Senior Management and Employees — Board Practices,”  Item 6, “Directors, Senior Management and Employees — 2010 Share Incentive Plan,” or Item 7, “Major Shareholders and Related Party Transactions — Related Party Transactions”.





Public Offering





On November 9, 2009, we entered into an underwriting agreement, or the Underwriting Agreement, with Maxim Group, acting as the sole book-running manager and sole representative of the underwriters in an underwritten offering of our ordinary shares.  Under the Underwriting Agreement, the underwriters agreed to purchase, and we agreed to sell, an aggregate 4,800,000 ordinary shares at the public offering price of $5.00 per share, less an underwriter discount of $0.35 per share and a corporate finance fee of 1% of gross proceeds, or $0.05 per share.  Pursuant to the Underwriting Agreement, the Company received net proceeds of $22,080,000 before expenses.  The underwriters also received an over-allotment option to purchase up to an additional 720,000 ordinary shares for 45 days following the date of the final prospectus relating to this offering.  The underwriters exercised their over-allotment option in full.  We received net proceeds of $3,312,000, before expenses, from the over-allotment exercise.




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In connection with the Underwriting Agreement, we also agreed to issue to Maxim Group a warrant, or the Underwriter Representative Warrant, to purchase 144,000 ordinary shares (equal to an aggregate of three (3%) percent of the ordinary shares sold in the offering).  The Underwriter Representative Warrant has an exercise price equal to 120% of the offering price of the ordinary shares sold in the offering, or $6.00.  The Underwriter Representative Warrant is exercisable commencing nine (9) months after the effective date of the registration statement related to the offering, and is exercisable for five (5) years after the effective date of the registration statement.  The Underwriter Representative Warrant is not redeemable by us.  The Underwriter Representative Warrant also provides for one demand registration payable by us, one demand registration payable by the warrant holder and unlimited “piggyback” registration rights at our expense with respect to the underlying ordinary shares during the five (5) year period commencing on the effective date of the registration statement relating to the offering with respect to such demand registrations and the five (5) year period commencing six (6) months after the effective date of the registration statement relating to the offering with respect to such “piggy back” registration rights.  Pursuant to the rules of FINRA, and in particular Rule 5110, the Underwriter Representative Warrant (and underlying shares) issued to Maxim Group may not be sold, transferred, assigned, pledged, or hypothecated, or be the subject of any hedging, short sale, derivative, put or call transaction that would result in the effective disposition of the securities by any person for a period of 180 days immediately following the date of delivery and payment for the shares offered; provided, however, that the Underwriter Representative Warrant (and underlying shares) may be transferred to officers or partners of Maxim Group and members of the underwriting syndicate and their officers or partners as long as the Underwriter Representative Warrant (and underlying shares) remain subject to the lockup.  Maxim Group has assigned the Underwriter Representative Warrant and its rights thereunder to Maxim Partners LLC, or Maxim Partners.





In addition, in connection with the Underwriting Agreement, we and each of our directors, executive officers and certain of our principal shareholders entered into lock-up agreements with the underwriters. Under these agreements, subject to certain exceptions, those subject to lock-up agreements may not, directly or indirectly, offer, sell, contract to sell, pledge, grant any option for the sale of, or otherwise dispose of any ordinary shares, securities convertible into or exchangeable for ordinary shares, options or rights to acquire ordinary shares or publicly announce the intention to do any of the foregoing, without the prior written consent of Maxim Group, for a period of 270 days from the date of the prospectus relating to the offering, or the initial lock-up period.  In addition, if (1) during the last 17 days of the initial lock-up period, we release earnings results or publicly announce material news or a material event relating to us or (2) prior to the expiration of the initial lock-up period, we announce that we will release earnings results during the 16-day period beginning on the last day of the initial lock-up period, then in each case the initial lock-up period will be extended until the expiration of the 18-day period beginning on the date of release of the earnings results or the occurrence of the material news or material event, as applicable, unless Maxim Group, on behalf of the underwriters, waives, in writing, such extension.  The initial lock-up period, as so extended, is referred to as the lock-up period.  Maxim Group may agree at its discretion and at any time or from time to time, without notice, to release all or any portion of the shares subject to the lock-up agreements described above.





We also agreed that, upon successful completion of this offering, for a period of fifteen (15) months from the closing of this offering, to grant Maxim Group the right of participation to act as lead managing underwriter and book runner or minimally as a co-lead manager and co-book runner and/or co-lead placement agent with at least 50.0% of the economics; or, in the case of a three-handed deal 33.0% of the economics, for any and all subsequent equity offerings as well as any convertible debt offerings undertaken during this period by us or any of our subsidiaries, excluding any financing transaction (whether debt, equity or otherwise) that occurs on an exchange in China, Hong Kong and/or Singapore.





The Underwriting Agreement also provided for indemnification by and among us and the underwriters against specified liabilities, including liabilities under the Securities Act, and for contribution by us and the underwriters to payments that may be required to be made with respect to those liabilities.  We have been advised that, in the opinion of the SEC, indemnification of liabilities under the Securities Act is against public policy as expressed in the Securities Act, and is therefore, unenforceable.





The above description of the Underwriting Agreement and Underwriter Representative Warrant does not purport to be complete and is qualified in its entirety by reference to the Underwriting Agreement and Underwriter Representative Warrant, which are filed as Exhibits 4.10 and 2.2 hereto and are incorporated herein by reference.




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Settlement Agreement





On September 15, 2009, we entered into the Settlement Agreement, pursuant to which we agreed to issue a total of 2,850,000 ordinary shares to the Original Shareholders.  Each of the Original Shareholders agreed to receive a number of ordinary shares that was proportional to the amount of shares that it would have received under the terms of the Merger Agreement upon the attainment of certain financial milestones after the consummation of the merger thereunder. In consideration of the issuance of the ordinary shares, we and the Original Shareholders agreed to a mutual release of certain claims relating to the merger.





The above description of the Settlement Agreement does not purport to be complete and is qualified in its entirety by reference to the Settlement Agreement, the form of which is filed as Exhibit 4.9 hereto and is incorporated herein by reference.





Voting Agreement





In connection with the business combination with COAC, the then shareholders of China Gerui – Oasis, Honest Joy, and Plumpton – and Mr. Edelson entered into the Voting Agreement with us, pursuant to which each of the shareholders of China Gerui and Mr. Edelson agreed to vote their China Gerui ordinary shares in favor of the election of Mingwang Lu, Yi Lu, Wong Kwok Keung, Maotong Xu, Yunlong Wang, Harry Edelson, and J.P. Huang as directors of China Gerui in specified classes in all elections through the annual meeting of China Gerui that will be held in 2012.





The above description of the Voting Agreement does not purport to be complete and is qualified in its entirety by reference to the Voting Agreement, the form of which is filed as Exhibit 4.1 hereto and is incorporated herein by reference.





Exchange Controls




BVI Exchange Controls





There are no material exchange controls restrictions on payment of dividends, interest or other payments to the holders of our ordinary or preferred shares or on the conduct of our operations in the BVI, where we were incorporated.  There are no material BVI laws that impose any material exchange controls on us or that affect the payment of dividends, interest or other payments to nonresident holders of our ordinary or preferred shares.  BVI law and our amended and restated memorandum and articles of association do not impose any material limitations on the right of non-residents or foreign owners to hold or vote our ordinary or preferred shares.





Exchange Controls in China





Under the Foreign Currency Administration Rules promulgated in 1996 and revised in 1997, and various regulations issued by SAFE and other relevant PRC government authorities, RMB is convertible into other currencies without prior approval from SAFE only to the extent of current account items, such as trade related receipts and payments, interest and dividends and after complying with certain procedural requirements.  The conversion of RMB into other currencies and remittance of the converted foreign currency outside PRC for the purpose of capital account items, such as direct equity investments, loans and repatriation of investment, requires the prior approval from SAFE or its local office.  Payments for transactions that take place within China must be made in RMB.  Unless otherwise approved, PRC companies must repatriate foreign currency payments received from abroad.  Foreign-invested enterprises may retain foreign exchange in accounts with designated foreign exchange banks subject to a cap set by SAFE or its local office.  Unless otherwise approved, domestic enterprises must convert all of their foreign currency proceeds into RMB.





On October 21, 2005, SAFE issued the Notice on Issues Relating to the Administration of Foreign Exchange in Fund-raising and Reverse Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, which became effective as of November 1, 2005.  According to the notice, a special purpose company, or SPV, refers to an offshore company established or indirectly controlled by PRC residents for the special purpose of carrying out financing of their assets or equity interest in PRC domestic enterprises.  Prior to establishing or assuming control of an SPV, each PRC resident, whether a natural or legal person, must complete the overseas investment foreign exchange registration procedures with the relevant local SAFE branch.  The notice applies retroactively.  As a result, PRC residents who have established or acquired control of these SPVs that previously made onshore investments in China were required to complete the relevant overseas investment foreign exchange registration procedures by March 31, 2006.  These PRC residents must also amend the registration with the relevant SAFE branch in the following circumstances: (i) the PRC residents have completed the injection of equity investment or assets of a domestic company into the SPV; (ii) the overseas funding of the SPV has been completed; (iii) there is a material change in the capital of the SPV.  Under the rules, failure to comply with the foreign exchange registration procedures may result in restrictions being imposed on the foreign exchange activities of the violator, including restrictions on the payment of dividends and other distributions to its offshore parent company, and may also subject the violators to penalties under the PRC foreign exchange administration regulations.





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On August 29, 2008, SAFE promulgated Notice 142 which regulates the conversion by a foreign-funded enterprise of foreign currency into Renminbi by restricting how the converted Renminbi may be used. Notice 142 requires that the Renminbi funds converted from the foreign currency capital of a foreign-funded enterprise may only be used for purposes within the business scope approved by the applicable governmental authority and may not be used for equity investments within the PRC unless specifically provided for otherwise. In addition, SAFE strengthened its supervision over the flow and use of the Renminbi funds converted from the foreign currency capital of a foreign-funded enterprise. The use of such Renminbi capital may not be changed without SAFE‘s approval, and may not, in any case, be used to repay or prepay Renminbi loans if such loans are outstanding. Violations of Notice 142 will result in severe penalties, such as heavy fines as set out in the relevant foreign exchange control regulations.





Taxation




The following is a general summary of certain materialBVIand U.S. federal income tax considerations.  The discussion is not intended to be, nor should it be construed as, legal or tax advice to any particular shareholder or prospective shareholder.  The discussion is based on laws and relevant interpretations thereof in effect as of the date hereof, all of which aresubject to change or different interpretations, possibly with retroactive effect.





BVI Taxation





The BVI does not impose a withholding tax on dividends paid by us to holders of our ordinary shares, nor does the BVI levy any capital gains or income taxes on us.  Further, a holder of our ordinary shares who is not a resident of the BVI is exempt from the BVI income tax on dividends paid with respect to the ordinary shares.  Holders of ordinary shares are not subject to the BVI income tax on gains realized on the sale or disposition of the ordinary shares.





Our ordinary shares are not subject to transfer taxes, stamp duties or similar charges in the BVI.  However, as a business company, we are required to pay the BVI government an annual license fee based on the number of shares we are authorized to issue.





There is no income tax treaty or convention currently in effect between the United States and the BVI.





Taxation in China





In 2007, the PRC government promulgated the New EIT Law and the relevant implementation rules, which became effective on January 1, 2008. Under the New EIT Law and its implementation rules, all domestic and foreign investment companies will be subject to a uniform enterprise income tax at the rate of 25% and dividends from PRC subsidiaries to their non-PRC shareholders will be subject to a withholding tax at a rate of 20%, which is further reduced to 10% by the implementation rules, if the non-PRC shareholder is considered to be a non-PRC tax resident enterprise without any establishment or place within China or if the dividends payable has no connection with the non-PRC shareholder’s establishment or place within China, unless any such non-PRC shareholder’s jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement. In addition, pursuant to the New EIT Law, enterprises established under the laws of non-PRC jurisdictions, but whose “de facto management body” is located in the PRC, should be treated as resident enterprises for PRC tax purposes. However, it is currently uncertain whether we may be deemed a resident enterprise, or how to interpret whether any income or gain is derived from sources within China.  See Item 3, “Key information — Risk Factors — Under the New Enterprise Income Tax Law, we may be classified as a ‘resident enterprise’ of China. Such classification will likely result in unfavorable tax consequences to us and our non-PRC shareholders.”  If we, as a BVI company with substantially all of our management located in China, were treated as a resident enterprise for PRC tax purposes, we will be subject to PRC tax on our worldwide income at the 25% uniform tax rate, which would have an impact on our effective tax rate.




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In addition, under the New EIT law, the Notice of the State Administration of Taxation on Negotiated Reduction of Dividends and Interest Rates, or Notice 112, which was issued on January 29, 2008, the Arrangement between the PRC and the Hong Kong Special Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion, or the Double Taxation Arrangement (Hong Kong), which became effective on December 8, 2006,and the Notice of the State Administration of Taxation Regarding Interpretation and Recognition of Beneficial Owners under Tax Treaties, or Notice 601, which became effective on October 27, 2009, dividends from our PRC operating subsidiary paid to us through our Hong Kong subsidiary may be subject to a withholding tax at a rate of 10%, or at a rate of 5% if our Hong Kong subsidiary is considered a “beneficial owner” that is generally engaged insubstantial business activities and entitled to treaty benefits under the Double Taxation Arrangement (Hong Kong).Furthermore, the ultimate tax rate will be determined by treaty between the PRC and the tax residence of the holderof the PRC subsidiary. We are actively monitoring the proposed withholding tax and are evaluating appropriateorganizational changes to minimize the corresponding tax impact.





Dividends declared and paid from pre-January 1, 2008 distributable profits are grandfathered under the New EIT Law and are not subject to withholding tax.





U.S. Federal Income Taxation





The following is a discussion of certain material U.S. federal income tax consequences of the acquisition, ownership and disposition of our ordinary shares by U.S. Holders (as defined below).  It does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a particular person’s situation.  The discussion applies only to U.S. Holders that hold their ordinary shares as capital assets (generally property held for investment) within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended, or the Code. This discussion is based on the Code, income tax regulations promulgated thereunder, judicial positions, published positions of the Internal Revenue Service, or the IRS, and other applicable authorities, all as in effect as of the date hereof and all of which are subject to change, possibly with retroactive effect. This discussion is general in nature and is not exhaustive of all possible tax considerations, nor does the discussion address any state, local or foreign tax considerations or any U.S. tax considerations (e.g., estate or gift tax) other than U.S. federal income tax considerations, that may be applicable to particular holders. This discussion does not purport to deal with all aspects of U.S. federal income taxation that may be relevant to a prospective investor in light of its particular circumstances or to certain types of shareholders subject to special treatment under the U.S. federal income tax laws, such as:





●
financial institutions;





●
brokers;





●
dealers in securities and commodities;





●
insurance companies;





●
certain former U.S. citizens or long-term residents;





●
regulated investment companies or real estate investment trusts;





●
tax-exempt organizations;





●
persons that are not U.S. persons for U.S. federal income tax purposes;





●
persons that directly, indirectly or constructively own 10% or more of the equity of the Company;





●
persons that acquire their shares in connection with employment or other performance of personal services;





●
persons subject to the alternative minimum tax;





●
persons that are, or that hold their shares through, partnerships or other pass-through entities;





●
U.S. persons whose functional currency is not the U.S. dollar, or





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●
persons that hold shares as part of a straddle, hedge, conversion, synthetic security or constructive sale transaction for U.S. federal income tax purposes.





We have not requested and will not request a ruling from the IRS with respect to any of the federal income tax issues discussed below.





PROSPECTIVE INVESTORS SHOULD CONSULT THEIR TAX ADVISORS ABOUT THE APPLICATION OF THE U.S. FEDERAL TAX RULES TO THEIR PARTICULAR CIRCUMSTANCES AS WELL AS THE STATE, LOCAL AND FOREIGN TAX CONSEQUENCES TO THEM OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF ORDINARY SHARES.





For purposes of this discussion, a “U.S. Holder” means a beneficial owner of ordinary shares in the Company that, for U.S. federal income tax purposes, is:





●
a citizen or resident of the United States;





●
a corporation (including an entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States, any of its states or the District of Columbia;





●
an estate the income of which is subject to U.S. federal income taxation, regardless of its source; or





●
a trust if (A) a U.S. court is able to exercise primary supervision over the administration of such trust and one or more U.S. persons have the authority to control all substantial decisions of the trust, or (B) the trust has a valid election in effect to be treated as a U.S. person.





If a partnership, including an entity or arrangement that is treated as a partnership for U.S. federal income tax purposes, is a beneficial owner of ordinary shares, the treatment of a partner in the partnership will generally depend on the status of the partner and the activities of the partnership. Holders that are partnerships holding ordinary shares (and partners in such partnerships) should consult their tax advisors.





Taxation ofDistributions





The discussion below assumes that we are not, and will not become, a passive foreign investment company, or PFIC, for U.S. federal income tax purposes.





If we make distributions on our ordinary shares, the gross amount of any such distributions, other than certain pro rata distributions of stock, generally will be treated as dividend income for U.S. federal income tax purposes if the distributions are made from our current or accumulated earnings and profits, calculated according to U.S. federal income tax principles. Dividends will be included in a U.S. Holder’s income on the date of such U.S. Holder’s receipt of the dividend. Corporate U.S. Holders will not be entitled to claim a dividends-received deduction with respect to distributions paid by us.





If you are a non-corporate U.S. Holder, subject to applicable limitations (including certain holding period requirements), you may be eligible to be taxed at a maximum rate of 15% in respect of dividends received in taxable years beginning before January 1, 2013 provided our ordinary shares are readily tradable on the Nasdaq Global Market or other established securities market in the United States.  Dividends received by a non-corporate U.S. Holder in taxable years beginning after December 31, 2012 will be subject to tax at the holder’s regular tax rates applicable to ordinary income. You should consult your tax advisors to determine whether you are subject to any special rules that limit your ability to be taxed at this favorable rate.





To the extent, if any, that the amount of any distribution by us on ordinary shares exceeds our current and accumulated earnings and profits as determined under U.S. federal income tax principles, it will be treated first as a tax-free return of the U.S. Holder’s adjusted tax basis in its ordinary shares and thereafter as gain from the sale or exchange of such shares (see “— Taxation of Dispositions” below).  However, we do not intend to calculate our earnings and profits according to U.S. federal income tax principles.  Accordingly, distributions on our ordinary shares, if any, will be reported to you as dividend distributions for U.S. income tax purposes.




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If we make distributions on the ordinary shares in a foreign currency, you will generally be required, for purposes of applying the foregoing rules, to translate the foreign currency into U.S. dollars at the spot rate on the date the distribution is included in income (which is generally the date of receipt), whether or not you actually convert the foreign currency into U.S. dollars on such date. To the extent you convert such foreign currency into U.S. dollars at an exchange rate that differs from such spot rate, you may realize foreign currency gain or loss. Any such foreign currency gain or loss generally will be treated as U.S. source ordinary income or loss. U.S. Holders should consult their own tax advisors on the U.S. federal income tax issues relating to the receipt and disposition of non-functional currency.





Any dividends that we pay will generally be treated as foreign source income for foreign tax credit purposes.  In the event that we are deemed to be a Chinese “resident enterprise” under PRC tax law, you may be subject to PRC withholding taxes on distributions paid to you with respect to the ordinary shares.  Subject to certain conditions and limitations, a U.S. Holder may be able to claim a foreign tax credit in respect of any such PRC withholding taxes. Alternatively, a U.S. Holder generally will be entitled to claim a deduction in computing its U.S. federal taxable income. If a U.S. Holder elects to claim a deduction rather than a foreign tax credit, for a particular taxable year, such election will apply to all foreign taxes paid by or on behalf of the U.S. Holder in the particular year. The rules governing the foreign tax credit are complex.  You should consult your tax advisors regarding the availability of the foreign tax credit in light of your particular circumstances.





It should be noted that we do not anticipate paying cash dividends on our ordinary shares for the foreseeable future.  See “—Dividend Policy.”





Taxation of Dispositions





The discussion below assumes that we are not, and will not become, a PFIC.





Upon a sale, exchange or other taxable disposition of ordinary shares, a U.S. Holder will generally recognize capital gain or loss for U.S. federal income tax purposes in an amount equal to the difference between such holder’s adjusted tax basis in the shares sold or disposed of and the amount realized on such sale, exchange or other taxable disposition.  Such gain or loss will generally be long-term capital gain or loss if the U.S. Holder has held the shares for more than one year at the time of the sale, exchange or other taxable disposition. Long-term capital gain of non-corporate U.S. Holders is currently subject to a preferential rate of federal income tax. The ability of corporate and non-corporate taxpayers to offset ordinary income with capital losses is subject to limitations. Subject to the discussion in the following paragraph, such gain or loss generally will be U.S. source gain or loss for foreign tax credit purposes.





If we are deemed to be a Chinese “resident enterprise” under PRC tax law, gains on disposal may be subject to PRC tax.  In that event, a U.S. Holder that is eligible for the benefits of the income tax treaty between the United States and the PRC may, subject to certain conditions and limitations, be able to treat such gain as PRC source income and claim a foreign tax credit in respect of any such PRC tax. Alternatively, a U.S. Holder generally will be entitled to claim a deduction in computing its U.S. federal taxable income. If a U.S. Holder elects to claim a deduction rather than a foreign tax credit, for a particular taxable year, such election will apply to all foreign taxes paid by or on behalf of the U.S. Holder in the particular year. The rules governing the foreign tax credit are complex. You should consult your tax advisors regarding the tax consequences if a foreign tax is imposed on gain on a sale, exchange or other taxable disposition of the ordinary shares, including the availability of the foreign tax credit in light of your particular circumstances.





Passive Foreign Investment Company Considerations





We believe that we were not a PFIC for U.S. federal income tax purposes for our taxable year ended December 31, 2010.





We do not currently expect to be classified as a PFIC for U.S. federal income tax purposes for our taxable year ending December 31, 2011. This expectation is based, in part, on our estimates of the fair market value of our assets (including goodwill), in part, as determined by the market price of our ordinary shares during 2010 as reported by the Nasdaq Global Market. However, the PFIC test is an annual test that, as discussed below, depends upon the composition of our gross income for the year and the percentage, based on a quarterly average for the year, of our gross assets that constitutes “passive” assets. Accordingly, it is not possible to determine whether we will not be classified as a PFIC for our tax year ending December 31, 2011 until after the year has ended. In addition, even if we are not classified as a PFIC for our taxable year ending December 31, 2011, because the PFIC test is annual, we cannot assure you that we will not be a PFIC for any following tax year. Our special U.S. counsel expresses no opinion with respect to our expectations contained in this paragraph.





A non-U.S. corporation is considered to be a PFIC for any taxable year if either:





66




●
at least 75% of its gross income is passive income, or;





●
at least 50% of the value of its assets (based on an average of the quarterly values of the assets during the taxable year) is attributable to assets that produce or are held for the production of passive income.





We will be treated as owning our proportionate share of the gross assets and earning our proportionate share of the gross income of any other corporation in which we own, directly or indirectly, at least 25% (by value) of the stock. Subject to various exceptions, passive income generally includes dividends, interest, rents, royalties and gains from the disposition of assets that produce or are held for the production of passive income.





If we are a PFIC for any year during which you hold ordinary shares or any other equity interest in the Company, then you generally will continue to be treated as owning ordinary shares in a PFIC for all succeeding years during which you hold ordinary shares even if we do not satisfy the PFIC income or assets test for any particular succeeding taxable year. However, if we cease to satisfy the PFIC income and assets test for a particular succeeding taxable year, you may be able to avoid some of the adverse effects of the PFIC regime by making a “purging” election with respect to the ordinary shares.





If we are a PFIC for any taxable year during which you hold ordinary shares, dividends paid by us to you that year and the following year will not be eligible for the reduced rate of taxation applicable to non-corporate U.S. Holders, including individuals.  See “— Taxation of Distributions” above. Dividends that you receive that do not constitute qualified dividend income are not eligible for taxation at the 15% maximum rate applicable to qualified dividend income. Instead, you must include the gross amount of any such dividend paid by us out of our current or accumulated earnings and profits (as determined for U.S. federal income tax purposes) in your gross income, and it will be subject to tax at rates applicable to ordinary income.  Additionally, you will be subject to special tax rules with respect to any “excess distributions” that you receive and any gain you realize from a sale, exchange or other taxable disposition (including a pledge) of the ordinary shares, unless a “mark-to-market” election is timely made, as discussed below. Special rules apply for purposes of determining whether a disposition of shares in a PFIC constitutes a taxable disposition. Distributions you receive in a taxable year that are greater than 125% of the average annual distributions you received during the shorter of the three preceding taxable years or your holding period for the ordinary shares and any gain from a sale or other disposition (including certain pledges) will generally be treated as an excess distribution. Under these special tax rules:





●
the excess distribution will be allocated ratably over your holding period for the ordinary shares,





●
the amount allocated to the current taxable year, and any taxable year prior to the first taxable year in your holding period in which we became a PFIC, will be treated as ordinary income, and





●
the amount allocated to each other year will be subject to the highest applicable tax rate in effect for that year and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year.





The tax liability for amounts allocated to years prior to the year of disposition or “excess distribution” cannot be offset by any net operating losses for such years, and gains (but not losses) realized on the sale of the ordinary shares cannot be treated as capital gains, even if you hold the ordinary shares as capital assets.





If we are a PFIC, you may be subject to the adverse tax consequences described above with respect to the shares of any of our subsidiaries that are also PFICs. You should consult your tax advisors regarding the application of the PFIC rules to any of our subsidiaries.





If the Company is classified as a PFIC, a U.S. Holder may generally elect out of the treatment described above by making a timely mark-to-market election if our ordinary shares meet certain regular trading requirements. However, it should be noted that in such a case, because a mark-to-market election cannot be made for equity interests in lower-tier PFICs that we may be treated as owning, a U.S. Holder may continue to be subject to the PFIC rules with respect to its indirect interest in any investments held by us that are treated as equity interests in a PFIC for U.S. federal income tax purposes. U.S. Holders should consult their tax advisors on the availability and advisability of a mark-to-market election in the event that we are classified as a PFIC. It should be noted that we do not currently intend to prepare or provide the information that would enable you to make a “qualified electing fund” election in the event that we were classified as a PFIC.




67





If you hold ordinary shares in any year in which we are a PFIC, you will be required to file U.S. IRS Form 8621 regarding distributions received on the ordinary shares and any gain realized on the disposition of the ordinary shares and in order to make a mark-to-market election. U.S. shareholders of PFICs may also be required to furnish certain information to be specified by the IRS on an annual basis even in the absence of any such distributions, dispositions or elections.





You should consult your tax advisor with respect to the application of the PFIC rules to your investment in our ordinary shares.





Information Reporting and Backup Withholding





Payment of dividends and sales proceeds that are made within the United States or through certain U.S.-related financial intermediaries generally are subject to information reporting and to backup withholding unless (i) the U.S. Holder is a corporation or other exempt recipient or (ii) in the case of backup withholding, the U.S. Holder provides a correct taxpayer identification number and certifies that backup withholding does not apply.





Backup withholding is not an additional tax.  The amount of any backup withholding from a payment to a U.S. Holder will be allowed as a credit against the U.S. Holder’s U.S. federal income tax liability and may entitle the U.S. Holder to a refund, provided that the required information is timely furnished to the IRS.





New Legislation Regarding Reporting Obligations





Holders should consult their tax advisors regarding potential reporting obligations under the Hiring Incentives to Restore Employment Act, which provides rules relating to ownership of foreign financial assets or ownership of securities issued by a foreign issuer.





New Legislation Regarding Medicare Tax





For taxable years beginning after December 31, 2012, certain U.S. Holders that are individuals, estates or trusts will be subject to a 3.8% tax on all or a portion of their "net investment income," which may include all or a portion of their dividends and net gains from the sale or other disposition of ordinary shares. If you are a U.S. Holder that is an individual, estate or trust, you should consult your tax advisors regarding the applicability of the Medicare tax to your income and gains in respect of your investment in our ordinary shares.





Dividends and Paying Agents




Not applicable.





Statement by Experts




Not applicable.





Documents on Display




We have filed this Annual Report on Form 20-F with the SEC under the Exchange Act.  Statements made in this Annual Report as to the contents of any document referred to are not necessarily complete.  With respect to each such document filed as an exhibit to this Annual Report, reference is made to the exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference.





We are subject to the informational requirements of the Exchange Act as a foreign private issuer and file reports and other information with the SEC.  Reports and other information filed by us with the SEC, including this Annual Report on Form 20-F, may be inspected and copied at the public reference room of the SEC at 100 F Street, N.E., Washington D.C. 20549.  You can also obtain copies of this Annual Report on Form 20-F by mail from the Public Reference Section of the SEC, 100 F. Street, N.E., Washington D.C. 20549, at prescribed rates.  Additionally, copies of this material may be obtained from the SEC’s Internet site at http://www.sec.gov.  The SEC’s telephone number is 1-800-SEC-0330.





As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of quarterly reports and proxy statements, and officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act.




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Subsidiary Information





Not applicable.





ITEM 11.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Interest Rate Risk





We are exposed to interest rate risk primarily with respect to our short-term bank loans.  Although the interest rates, which are based on the banks’ prime rates with respect to our short-term loans are fixed for the terms of the loans, the terms are typically three to twelve months for short-term bank loans and interest rates are subject to change upon renewal.  There were no material changes in interest rates for short-term bank loans renewed during the fiscal year ended December 31, 2010.





A hypothetical 1.0% increase in the annual interest rates for all of our credit facilities under which we had outstanding borrowings as of December 31, 2010, would decrease net income before provision for income taxes by approximately $7.4 million for the fiscal year ended December 31, 2010.  Management monitors the banks’ prime rates in conjunction with our cash requirements to determine the appropriate level of debt balances relative to other sources of funds.  We have not entered into any hedging transactions in an effort to reduce our exposure to interest rate risk.





Foreign Exchange Risk





While our reporting currency is the U.S. Dollar, substantially all of our consolidated revenues and consolidated costs and expenses are denominated in RMB.  All of our assets are denominated in RMB except for cash.  As a result, we are exposed to foreign exchange risk as our revenues and results of operations may be affected by fluctuations in the exchange rate between U.S. Dollars and RMB.  If the RMB depreciates against the U.S. Dollar, the value of our RMB revenues, earnings and assets as expressed in our U.S. Dollar financial statements will decline.  Assets and liabilities are translated at exchange rates at the balance sheet dates and revenue and expenses are translated at the average exchange rates and shareholders’ equity is translated at historical exchange rates.  Any resulting translation adjustments are not included in determining net income but are included in determining other comprehensive income, a component of shareholders’ equity.  An average appreciation (depreciation) of the RMB against the U.S. dollar of 5% would increase (decrease) our comprehensive income by $2.6 million based on our outstanding revenues, costs and expenses, assets, and liabilities denominated in RMB as of December 31, 2010.  We have not entered into any hedging transactions in an effort to reduce our exposure to foreign exchange risk.





Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations.  To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited, and we may not be able to successfully hedge our exposure at all. In addition, our foreign currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign currencies.





Inflation





Inflationary factors such as increases in the cost of our product and overhead costs may adversely affect our operating results.  Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of net revenues if the selling prices of our products do not increase with these increased costs.





ITEM 12.
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES





Debt Securities




Not applicable.





Warrants and Rights




Not applicable.




69




Other Securities




Not applicable.





American Depositary Shares




The Company does not have any American Depositary Receipts.





PART II




ITEM 13.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES





None.





ITEM 14.
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITIES HOLDERS AND USE OF PROCEEDS





Use of Proceeds





On November 9, 2009, we entered into the Underwriting Agreement pursuant to which we commenced an underwritten offering of 4,800,000 ordinary shares at a public offering price of $5.00 per ordinary share in which Maxim Group acted as sole book-running manager and sole representative of the underwriters in the offering, for an aggregate offering price of $24,000,000.  The offering closed on November 16, 2009. On December 2, 2009, Maxim Group, as representative of the underwriters, exercised the underwriters’ over-allotment option in full for an additional 720,000 ordinary shares at the same public offering price, for an aggregate offering price of $3,600,000. The over-allotment offering closed on December 7, 2009. As a result, we issued and sold an aggregate of 5,520,000 ordinary shares in this offering, for an aggregate offering price of $27,600,000. We also issued the Underwriter Representative Warrant to purchase up to 144,000 of our ordinary shares to Maxim Group at an exercise price of $6.00 per share, which subsequently assigned the Underwriter Representative Warrant to Maxim Partners.  The Underwriter Representative Warrant has not been exercised as of the date of this report.  The Underwriter Representative Warrant also provides for one demand registration payable by us, one demand registration payable by the holder and unlimited “piggyback” registration rights at our expense with respect to the underlying ordinary shares during the five (5) year period commencing on the effective date of the registration statement relating to the offering with respect to such demand registrations and the five (5) year period commencing six (6) months after the effective date of the registration statement relating to the offering with respect to such “piggy back” registration rights. The offer and sale of the public ordinary shares, Underwriter Representative Warrant and ordinary shares underlying the Underwriter Representative Warrant was registered pursuant to a registration statement on Form F-1, Registration No. 333-161924, with effective date November 9, 2009 pursuant to a notice of effectiveness posted by the SEC, and a registration statement on Form F-1 with Registration No. 333-163013, with effective date November 10, 2009 upon its filing on this date by us pursuant to Rule 462(b) under the Securities Act. For further information regarding the terms of the Underwriting Agreement and Underwriter Representative Warrant, please refer to Item 10. Additional Information, “Material Contracts — Public Offering.”





As of December 31, 2010, we had received aggregate net proceeds from this offering of approximately $25.1 million, after deducting underwriter discounts and fees and other expenses.  As of December 31, 2010, we had incurred expenses in connection with the issuance and distribution of the securities in this offering of approximately $2.5 million.  This amount consisted of approximately $1.8 million in underwriter fees and expenses after deducting underwriter discounts and fees of $2.1 million, legal fees an expenses of approximately $246,000, and auditor fees of approximately $146,000.  To our knowledge, no direct or indirect payments were made in connection with this offering to our directors, officers, their associates, to persons owning 10% or more of our ordinary shares, to any of our affiliates, or to any others.





In 2010, we used the net proceeds from this offering for the first phase of our capacity expansion program, which involved the construction of two new cold-rolled, wide-strip steel production lines with 150,000 tons of total annual capacity and a chromium plating line capable of processing 200,000 tons of cold-rolled steel per annum.




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ITEM 15.
CONTROLS AND PROCEDURES





Evaluation of Disclosure Controls and Procedures




We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) that are designed to ensure that information that would be required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including to our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.





As required by Rule 13a-15 under the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2010.  Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of December 31, 2010, and as of the date that the evaluation of the effectiveness of our disclosure controls and procedures was completed, our disclosure controls and procedures were effective to satisfy the objectives for which they are intended.





Management’s Annual Report on Internal Control Over Financial Reporting




Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Exchange Act defines internal control over financial reporting as a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America and includes those policies and procedures that:





●
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;





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





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





All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.





In April, 2010, we retained Ernst & Young (China) Advisory Limited, or Ernst & Young, to assist us in the establishment and maintenance of our internal control system and recommend any additional controls and procedures so as to enhance our internal controls.





Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2010. In making this assessment, management used the framework set forth in the report entitled Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO. The COSO framework summarizes each of the components of a company’s internal control system, including (i) the control environment, (ii) risk assessment, (iii) control activities, (iv) information and communication, and (v) monitoring. Based on our assessment we determined that, as of December 31, 2010, our internal control over financial reporting is effective based on those criteria.





Changes in Internal Control Over Financial Reporting




There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the year ended December 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.




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ITEM 16A.
AUDIT COMMITTEE FINANCIAL EXPERT




Our board of directors established an audit committee on March 17, 2009.  Our audit committee consists of three members: Maotong Xu, Kwok Keung Wong and Dr. J.P. Huang, with Maotong Xu serving as chairman.  Each of the audit committee members is “independent” as that term is defined under the Nasdaq Listing Rules.  Our audit committee oversees our accounting and financial reporting processes and the audits of the financial statements of our company.  Our board of directors has determined that Dr. Huang meets the criteria for an “audit committee financial expert,” as established by the SEC.





Dr. Huang will not be deemed an “expert” for any other purpose, including, without limitation, for purposes of Section 11 of the Securities Act, as a result of being designated or identified as an audit committee financial expert.  The designation or identification of Dr. Huang as an audit committee financial expert does not impose on him any duties, obligations or liability that are greater than the duties, obligations and liability imposed on him as a member of our Audit Committee and board of directors in the absence of such designation or identification.





ITEM 16B.
CODE OF ETHICS




On July 10, 2009, our board of directors adopted a code of ethics that applies to all of our directors, officers and employees, including our principal executive officer, principal financial officer, and principal accounting officer or controller, or persons performing similar functions.  The code of ethics addresses, among other things, ethical conduct, conflicts of interest, compliance with laws, regulations and policies, including disclosure requirements under the federal securities laws, confidentiality, trading on inside information, and reporting of violations of the code.  A copy of the code of ethics has been attached as Exhibit 14.1 to our Annual Report on Form 20-F, filed with the SEC on July 15, 2009.  We have also posted our code of ethics on our Internet website at http://www.geruigroup.com/Code%20of%20Ethics.html.





ITEM 16C.
PRINCIPAL ACCOUNTANT FEES AND SERVICES




The following table sets forth the aggregate fees by the categories specified below in connection with certain professional services rendered by UHY Vocation HK CPA Limited, our independent registered public accounting firm, for the fiscal years ended December 31, 2010 and 2009:





Fiscal Year Ended December 31,2010


2009Audit Fees (1)

$
125,400


$
121,800Audit-Related Fees (2)


16,000



15,000Tax Fees


-



0All Other Fees (3)


-



146,100TOTAL

$
141,400


$
282,900





(1)
Consists of fees billed for each of the fiscal years ended December 31, 2010 and 2009 for professional services rendered by the principal accountant for the audit of our annual financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for the fiscal years ended December 31, 2010 and 2009.





(2)
Consists of fees billed for each of the fiscal years ended December 31, 2010 and 2009 for professional services rendered in connection with the review of our regulatory filings.





(3)
Consists of fees billed for the fiscal year ended December 31, 2009 for professional services rendered in connection with the audit conducted in connection with our November 2009 public offering.





Audit Committee Pre-Approval Policies and Procedures




Our Audit Committee pre-approves all auditing services and permitted non-audit services to be performed for us by UHY Vocation HK CPA Limited, our independent registered public accounting firm, including the fees and terms thereof (subject to the de minimis exceptions for non-audit services described in Section 10A(i)(l)(B) of the Exchange Act that are approved by our Audit Committee prior to the completion of the audit).  The percentage of services provided for which we paid audit-related fees, tax fees, or other fees that were approved by our Audit Committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X promulgated by the SEC was 0%.




72




ITEM 16D.
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES





We have not asked for nor have we been granted an exemption from the applicable listing standards for our audit committee.





ITEM 16E.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS





There were no purchases of equity securities by us or by any of our affiliates during the period covered by this Annual Report.





ITEM 16F.
CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT





None.





ITEM 16G.
CORPORATE GOVERNANCE





Nasdaq Marketplace Rule 5615(a)(3) permits foreign private issuers like us to follow “home country practice” with respect to certain corporate governance matters.  We have not elected to follow any “home country practice” in lieu of any requirement of the Nasdaq Marketplace Rules.  We intend to satisfy our requirement under Nasdaq Marketplace Rule 5250(d)(1) to distribute to shareholders copies of our annual report by posting our annual reports on Form 20-F on our company website at: http://www.geruigroup.com, providing a hard copy of our annual report free of charge to shareholders upon request with a reasonable period following such request, and posting a prominent undertaking to this effect on our Internet website.  Simultaneous with such posting, we intend to issue a press release containing this and certain other information required by Nasdaq to distribute annual reports to shareholders in this manner.  Domestic company issuers listed on Nasdaq may satisfy this requirement by furnishing a copy of their annual report to shareholders in the manner provided by Rule 14a-16 under the Exchange Act.  As a foreign private issuer, we are not subject to the requirements of Rule 14a-16.  We have determined that this requirement under the Nasdaq Marketplace Rules would be most efficiently addressed in the manner described above.





PART III




ITEM 17.
FINANCIAL STATEMENTS





We have elected to provide financial statements pursuant to Item 18.





ITEM 18.
FINANCIAL STATEMENTS





The full text of our audited consolidated financial statements for the years ended December 31, 2010, 2009 and 2008 begins on page F-1 of this annual report.





ITEM 19.
EXHIBITS






Exhibit No.

Description1.1

Amended and Restated Memorandum and Articles of Association, adopted on March 17, 2009 [incorporated by reference to Exhibit 3.1 to the registrant’s Amendment No. 1 to Form 20-F filed on March 23, 2009]2.1

Specimen Ordinary Share Certificate [incorporated by reference to Exhibit 4.7 to the registrant’s Registration Statement on Form S-4/A filed on February 17, 2009  in commission file number 333-155312-01]2.2

Form of Underwriter Representative Warrant [incorporated by reference to Exhibit 4.4 of Amendment No. 3 to the registrant’s Registration Statement on Form F-1 (File No. 333-161924) filed on November 5, 2009]4.1

Form of Voting Agreement [incorporated by reference to Exhibit 10.15 to the registrant’s Registration Statement on Form S-4 filed on November 12, 2008 in commission file number 333-155312-01]4.2

English Translation of Renminbi Loan Agreement, dated July 16, 2008, between Zhengzhou Branch of China CITIC Bank and Henan Green Complex Materials Co., Ltd [incorporated by reference to Exhibit 10.17.3 to the registrant’s Amendment No. 2 to Registration Statement on Form S-4 filed on January 29, 2009 in commission file number 333-155312-01]




73




Exhibit No.

Description4.3

English Translation of Real Estate Maximum Mortgage Agreement, dated March 26, 2007, between Zhengzhou Branch of Shanghai Pudong Development Bank and Henan Green Complex Materials Co., Ltd [incorporated by reference to Exhibit 10.17.5 to the registrant’s Amendment No. 2 to Registration Statement on Form S-4 filed on January 29, 2009 in commission file number 333-155312-01]4.4

English Translation of Maximum Mortgage Agreement, dated April 21, 2008, between Xiangyang Credit Union of Zhengzhou Rural Credit Cooperatives and Henan Green Complex Materials Co., Ltd [incorporated by reference to Exhibit 10.17.6 to the registrant’s Amendment No. 2 to Registration Statement on Form S-4 filed on January 29, 2009 in commission file number 333-155312-01]4.5

English Translation of Credit Granting Agreement, valid from July 21, 2008, between Guangdong Development Bank Zhengzhou Huanghe Road Sub-branch and Henan Green Complex Materials Co., Ltd [incorporated by reference to Exhibit 10.17.7 to the registrant’s Amendment No. 2 to Registration Statement on Form S-4 filed on January 29, 2009 in commission file number 333-155312-01]4.6

English Translation of Agreement, dated September 16, 2003, between Xinzheng City Longhu Town People’s Government and Henan Green Complex Materials Co., Ltd [incorporated by reference to Exhibit 10.17.8 to the registrant’s Amendment No. 2 to Registration Statement on Form S-4 filed on January 29, 2009 in commission file number 333-155312-01]4.7

English Translation of Lease Agreement for Land Use Right and Buildings, dated November 10, 2008, between Zhengzhou the Second Iron & Steel Co., Ltd. and Henan Green Complex Materials Co., Ltd [incorporated by reference to Exhibit 10.17.9 to the registrant’s Amendment No. 2 to Registration Statement on Form S-4 filed on January 29, 2009 in commission file number 333-155312-01]4.8

English Translation of Form of Labor Contract for all employees of Henan Green, including executive officers [incorporated by reference to Exhibit 4.15 to the registrant’s Annual Report on Form 20-F filed on July 15, 2009]4.9

Form of Agreement, dated as of September 15, 2009, by and among the registrant, Oasis Green Investments Limited, Plumpton Group Limited, and Honest Joy Group Limited.[incorporated by reference to Exhibit 10.16 to the registrant’s Registration Statement on Form F-1 filed on September 15, 2009 in commission file number 333-161924]4.10

Underwriting Agreement, dated November 9, 2009 [incorporated by reference to Exhibit 1.1 to the registrant’s Report on Form 6-K/A filed on November 10, 2009]4.11

Form of Registration Rights Agreement, by and among the registrant and the purchasers named therein, dated June 4, 2010 [incorporated by reference to Exhibit 4.1 to the registrant’s Report on Form 6-K filed on June 7, 2010]4.12

Form of Securities Purchase Agreement, by and among the registrant and the purchasers named therein, dated June 4, 2010 [incorporated by reference to Exhibit 10.1 to the registrant’s Report on Form 6-K filed on June 7, 2010]4.13

China Gerui Advanced Materials Group Limited 2010 Share Incentive Plan [incorporated by reference to Exhibit 10.1 to the registrant’s Report on Form 6-K filed on November 16, 2010]4.14

Form of Share Option Agreement for Employees relating to China Gerui Advanced Materials Group Limited 2010 Share Incentive Plan [incorporated by reference to Exhibit 10.2 to the registrant’s Report on Form 6-K filed on November 16, 2010]4.15

Form of Share Option Agreement for Directors relating to China Gerui Advanced Materials Group Limited 2010 Share Incentive Plan [incorporated by reference to Exhibit 10.3 to the registrant’s Report on Form 6-K filed on November 16, 2010]4.16

Form of Restricted Share Award Agreement relating to China Gerui Advanced Materials Group Limited 2010 Share Incentive Plan [incorporated by reference to Exhibit 10.4 to the registrant’s Report on Form 6-K filed on November 16, 2010]8.1

List of the registrant’s subsidiaries [incorporated by reference to Exhibit 8.1 to the registrant’s Annual Report on Form 20-F filed on July 15, 2009]




74


Exhibit No.

Description11.1

Code of Ethics [incorporated by reference to Exhibit 14.1 to the registrant’s Annual Report on Form 20-F filed on July 15, 2009]12.1

CEO Certification Pursuant to Rule 13a-14(a) (17 CFR 240.13a-14(a)) (17 CFR 240.13a-14(a)) or Rule 15d-1(a) (17 CFR 240.15d-14(a))12.2

CFO Certification Pursuant to Rule 13a-14(a) (17 CFR 240.13a-14(a)) or Rule 15d-1(a) (17 CFR 240.15d-14(a))13.1

CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 200213.2

CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002




75




SIGNATURE





The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.





CHINA GERUI ADVANCED MATERIALS GROUP

LIMITED/s/ Mingwang LuMingwang LuApril 19, 2011
Chief Executive Officer




76




REPORT OF INDEPENDENT REGISTERED


PUBLIC ACCOUNTING FIRM





TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF


CHINA GERUI ADVANCED MATERIALS GROUP LIMITED




We have audited the accompanying consolidated balance sheets of China Gerui Advanced Materials Group Limited (the “Company”) as of December 31, 2010, and 2009, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2010. These consolidated financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.





We conducted our audits in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.





In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of China Gerui Advanced Materials Group Limited as of December 31, 2010 and 2009, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America.





UHY VOCATION HK CPA LIMITED


Certified Public Accountants


Hong Kong, the People’s Republic of China,


April 19, 2011




F-1




CHINA GERUI ADVANCED MATERIALS GROUP LIMITED


CONSOLIDATED FINANCIAL STATEMENTS


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





CONTENTS
PagesReport of Independent Registered Public Accounting Firm
F-1Consolidated Balance Sheets
F-3Consolidated Statements of Income
F-4Consolidated Statements of Changes in Stockholders’ Equity
F-5Consolidated Statements of Cash Flows
F-6Notes to the Consolidated Financial Statements
F-7




F-2




CHINA GERUI ADVANCED MATERIALS GROUP LIMITED


CONSOLIDATED BALANCE SHEETS


(IN US DOLLARS)





December 31, 2010


December 31, 2009AssetsCurrent assetsCash

$
119,477,298


$
79,607,369Restricted cash


66,530,303



37,498,169Accounts receivable, net


4,087,086



4,808,184Inventories


7,002,277



5,958,880Prepaid expenses and other deposits


28,749,680



16,473,710Other receivables


2,068,082



2,292,133Total current assets


227,914,726



146,638,445Non-current assetsProperty, plant and equipment, net


85,489,849



22,338,210Prepaid machinery deposits


-



13,973,966Land use right, net


15,599,157



1,399,026Total non-current assets


101,089,006



37,711,202Total assets

$
329,003,732


$
184,349,647Liabilities and stockholders' equityCurrent LiabilitiesAccounts payable

$
2,650,689


$
7,617,953Notes payable


86,227,272



41,013,622Term loans


44,090,909



33,982,715Land use right payable


10,203,404



-Income tax payable


4,151,665



3,817,304Customers deposits


9,686,444



8,146,611Accrued liabilities and other payables


4,181,347



2,728,585Total current liabilities


161,191,730



97,306,790Total liabilities


161,191,730



97,306,790Stockholders' equityCommon stock,Common stock, 100,000,000 shares authorized with no par value; 46,139,053 and 40,692,323 shares outstanding as of December 31, 2010 and December 31, 2009, respectively


73,944,243



45,261,630Additional paid-in capital


6,930,944



6,930,944Retained earnings


79,522,406



32,438,982Accumulated other comprehensive income


7,414,409



2,411,301Total stockholders' equity


167,812,002



87,042,857Total liabilities and stockholders' equity

$
329,003,732


$
184,349,647





See notes to financial statements.




F-3




CHINA GERUI ADVANCED MATERIALS GROUP LIMITED


CONSOLIDATED STATEMENTS OF INCOME


(IN US DOLLARS)




For the Year EndedDecember 31,2010


2009


2008Revenue

$
253,866,337


$
218,902,632


$
196,264,731Cost of revenue


(177,869,648
)


(153,095,354
)


(142,407,995
)Gross Profit


75,996,689



65,807,278



53,856,736Operating expenses:General and administrative expenses


(7,795,722
)


(4,573,512
)


(3,431,745
)Selling and marketing expenses


(1,251,091
)


(919,049
)


(831,108
)Total operating expenses


(9,046,813
)


(5,492,561
)


(4,262,853
)Operating income


66,949,876



60,314,717



49,593,883Other income and (expense):Interest income


1,087,178



829,056



1,395,121Interest expenses


(5,286,727
)


(3,237,757
)


(3,769,423
)Sundry income


270,240



293,831



155,687Income before income taxes


63,020,567



58,199,847



47,375,268Income tax expense


(15,937,143
)


(14,751,569
)


(11,869,735
)Income before minority interest


47,083,424



43,448,278



35,505,533Net income attributable to minority interest


-



-



(13,920,944
)Net income attributable to common stockholders

$
47,083,424


$
43,448,278


$
21,584,589Earnings per share- Basic

$
1.07


$
1.29


$
0.72- Diluted

$
1.01


$
1.15


$
0.72Weighted average common shares outstanding- Basic


43,891,670



33,751,844



30,000,000- Diluted


46,655,721



37,675,479



30,000,000





See notes to financial statements.




F-4




CHINA GERUI ADVANCED MATERIALS GROUP LIMITED


CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY


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


(IN US DOLLARS)





Common Stock, with no Par Value


Additional





Accumulated OtherNumber of





Paid-in


Subscription


Comprehensive


Retained


Total


ComprehensiveShares


Amount


Capital


receivable


Income


Earnings


Equity


IncomeBalance, December 31, 2007


30,000,000


$
300


$
1,834,940


$
-


$
1,057,886


$
14,462,559


$
17,355,685


$
-Net income


-



-



-



-



-



21,584,589



21,584,589



21,584,589Foreign currency translation gain


-



-



-



-



1,345,661



-



1,345,661



1,345,661Subscription for ordinary shares


-



-



4,310,087



-



-



-



4,310,087Subscription receivable


-



-



-



(4,310,087
)


-



-



(4,310,087
)Contribution to capital on purchase of minority interest


-



-



785,917



-



-



-



785,917Dividend declared


-



-



-



-



-



(51,856,496
)


(51,856,496
)Dividend allocated to minority interest


-



-



-



-



-



23,325,052



23,325,052Balance, December 31, 2008


30,000,000


$
300


$
6,930,944


$
(4,310,087
)

$
2,403,547


$
7,515,704


$
12,540,408


$
22,930,250Net income


-



-



-



-



-



43,448,278



43,448,278



43,448,278Foreign currency translation gain


-



-



-



-



7,754



-



7,754



7,754Subscription receivable settlement


-



-



-



4,310,087



-



-



4,310,087



-Issuance of shares in connection with earn-out share agreement accounted for as a dividend


2,850,000



18,525,000



-



-



-



(18,525,000
)


-



-Issuance of shares for offering (net of expenses amounting to $2,914,056)


4,800,000



21,085,944



-



-



-



-



21,085,944



-Issuance of over allotment shares (net of expenses amounting to $288,000)


720,000



3,312,000



-



-



-



-



3,312,000



-Shares issuance for warrant conversion


76,600



383,000



-



-



-



-



383,000



-Balance at December 31, 2009


40,692,323


$
45,261,630


$
6,930,944


$
-


$
2,411,301


$
32,438,982


$
87,042,857


$
43,456,032Net income


-



-



-



-



-



47,083,424



47,083,424



47,083,424Foreign currency translation gain


-



-



-



-



5,003,108



-



5,003,108



5,003,108Shares issued for warrant conversion


2,142,959



10,714,795



-



-



-



-



10,714,795



-Shares issued in private placement net of offering fees of $863,676


3,303,771



17,967,818



-



-



-



-



17,967,818



-Balance at December 31, 2010


46,139,053


$
73,944,243


$
6,930,944


$
-


$
7,414,409


$
79,522,406


$
167,812,002


$
52,086,532





See notes to financial statements




F-5




CHINA GERUI ADVANCED MATERIALS GROUP LIMITED


CONSOLIDATED STATEMENTS OF CASH FLOWS


(IN US DOLLARS)


For the Year ended December 312010


2009


2008Cash flows from operating activities:Net income

$
47,083,424


$
43,448,278


$
21,584,589Add: Net income attributable to minority interest


-



-



13,920,94447,083,424



43,448,278



35,505,533Adjustments to reconcile net income to netcash provided by operating activities:Depreciation of property, plant and equipment


3,149,314



2,792,547



2,447,626Amortization of land use right


259,438



30,827



30,280Changes in assets and liabilities:Accounts receivable, net


721,098



5,496,540



(128,270
)Inventories


(1,043,397
)


(2,404,567
)


5,106,310Prepaid expenses and other deposits


(12,275,970
)


(5,552,655
)


(949,445
)Other receivables


224,051



(1,026,036
)


(630,379
)Accounts payable


(4,967,264
)


2,278,603



(547,173
)Income tax payable


334,361



1,628,627



(408,010
)Customers deposit


1,539,833



(9,338,097
)


9,035,743Accrued liabilities and other payables


1,452,762



(3,565,821
)


1,005,235Net cash provided by operating activities


36,477,650



33,788,246



50,467,450Cash flows from investing activities:Capital expenditures for addition of property, plant and equipment


(65,063,864
)


(5,213,329
)


(6,572,185
)Payment of purchases of land use right


(3,996,727
)


(14,648
)


-Changes in restricted cash


(29,032,134
)


(12,785,820
)


(5,485,798
)Changes in prepaid machinery deposits


13,973,966



(13,336,084
)


25,126,394Net cash (used in)/provided by investing activities


(84,118,759
)


(31,349,881
)


13,068,411Cash flows from financing activities:Repayment of term loans


(45,984,848
)


(37,269,379
)


(26,662,742
)Proceeds from term loans


56,093,042



40,574,191



39,985,342Proceeds received from common stock issued and warrant conversion, net


28,682,613



26,736,329



-Proceeds from notes payable


45,213,650



14,102,666



6,430,053Repayment of subscription receivable


-



4,310,087



-Land use right payable


-



(28,521
)


(125,604
)Due to former minority shareholders


-



(4,310,087
)


-Due to former owner


-



-



(61,688
)Dividends paid


-



(9,601,549
)


(42,254,947
)Net cash provided by/(used in) financing activities


84,004,457



34,513,737



(22,689,586
)Net increase in cash


36,363,348



36,952,102



40,846,275Effect on change of exchange rates


3,506,581



32,862



1,557,778Cash as of January 1


79,607,369



42,622,404



218,351Cash as of December 31

$
119,477,298


$
79,607,369


$
42,622,404Supplemental disclosures of cash flow information:Cash paid during the year for:Interest paid

$
3,927,906


$
3,27,757


$
3,769,423Income tax paid

$
15,738,892


$
13,122,287


$
12,277,745Non-cash paid during the year for:Dividend paid

$
-


$
18,525,000


$
-Transfer of prepayments and other deposits to property, plant and equipment

$
-


$
-


$
2,288,337Acquisition of minority interest with subscription receivable

$
-


$
-


$
4,310,087




See notes to financial statements.




F-6




CHINA GERUI ADVANCED MATERIALS GROUP LIMITED


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


(IN US DOLLARS)





1.
DESCRIPTION OF BUSINESS AND ORGANIZATION





On November 30, 2009, the Board of Directors of Golden Green Enterprises Limited (“Golden Green”) authorized the Company's corporate name change to China Gerui Advanced Materials Group Limited ("the Company" or "China Gerui"), effective as of December 14, 2009.





The Company was established in the British Virgin Islands ("BVI") on March 11, 2008 as a limited liability Company, for the purpose of effectuating a reorganization and merger with Wealth Rainbow Development Limited (“Wealth Rainbow”) and Henan Green Complex Materials Co., Ltd (“Henan Green”) as discussed in Note 2.





China Gerui's holdings are comprised of Wealth Rainbow, also a holding company and Henan Green, an operating company and a leading China-based specialty precision cold-rolled steel producer.  Through its investment in these entities, the Company manufactures and sells specialty, high-end, high precision, ultra thin, high strength, cold-rolled, narrow strip steel products that are characterized by stringent performance and specification requirements that mandate a high degree of manufacturing and engineering expertise, and are extensively used in the manufacturing industry throughout mainland China. The Company's products are not standardized commodity products, but are tailored to customers' requirements and then incorporated into products they and end-users make for various applications. The Company sells its products to its customers in the People's Republic of China (PRC) in a diverse range of industries, including the food packaging, telecommunication, electrical appliance, and construction materials industries.





Wealth Rainbow was formed on March 1, 2007 by Lu Mingwang's family as the Company. On October 21, 2008, Wealth Rainbow acquired 100% of the outstanding shares of Henan Green pursuant to a stock transfer agreement. Subsequent to the stock transfer, Wealth Rainbow became the sole shareholder of Henan Green. The change of ownership was approved by the Chinese Government on October 21, 2008. The principal activity of Wealth Rainbow is to hold its interest in Henan Green.





On June 12, 2010, the Company's directors approved a resolution to increase the registered capital of the operating entity, Henan Green, in amount of RMB138,000,000 ($20,349,780). Henan Green received the full amount in July 2010.




F-7




CHINA GERUI ADVANCED MATERIALS GROUP LIMITED


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


(IN US DOLLARS)





1.
DESCRIPTION OF BUSINESS AND ORGANIZATION (.../Cont’d)





The consolidated financial statements include the financial statements of China Gerui and its subsidiaries (together referred to as the "Group"). The Company owns 100% equity interests directly and indirectly, in two subsidiaries, namely Wealth Rainbow and Henan Green. The organization chart of the Group is as follows:











2.
REORGANIZATION AND ACQUISITION OF NON-CONTROLLING INTEREST





On October 21, 2008, Wealth Rainbow acquired the non-controlling interest in Henan Green for $4,310,087 with the issuance of a promissory note to the minority stockholders. This amount represented the fair value of Henan Green as determined by an independent valuation which was performed during August 2008. On the effective acquisition date, October 21, 2008, the fair value of Henan Green exceeded the agreed purchase price by $785,917. Such amount has been recorded as a contribution of capital by Henan Green during 2008.





The net assets of Henan Green were recorded by Wealth Rainbow at historical cost to the extent of the common control group’s 55.02% ownership of Henan Green. The remaining 44.98% of Henan Green shares acquired were accounted for as a purchase (fair value) of the non-controlling interest.





The common control group comprised of three direct relatives of the Lu's family which held approximately 55.02% of the shares of Henan Green on the date it was acquired by Wealth Rainbow. Wealth Rainbow was wholly owned by another direct relative of the Lu's family. Under the common control reporting rules, the control group’s 55.02% interest of Henan Green that was acquired by Wealth Rainbow constitutes an exchange of equity interests between entities under the common control.





Subsequent to the Henan Green acquisition, Wealth Rainbow entered into a reorganization and capitalization agreement with the Company during November 2008 in which all of the shares of Wealth Rainbow were exchanged with shares of the Company. As a result of these transactions, Wealth Rainbow and Henan Green became wholly owned subsidiaries of the Company. These transactions have been accounted for as a reorganization under common control with the purchase of a minority interest. On September 9, 2009, the Company fully settled the amount of $4,310,087 which was recorded as amount due to former minority shareholders.




F-8




CHINA GERUI ADVANCED MATERIALS GROUP LIMITED


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


(IN US DOLLARS)





2.
REORGANIZATION AND ACQUISITION OF NON-CONTROLLING INTEREST (.../Cont’d)





The consolidated financial statements of the Company have been prepared as if the existing corporate structure had been in existence throughout the periods presented and as if the reorganization had occurred as of the beginning of the earliest period presented.





During March 2009, the Company amended its memorandum of association by increasing its authorized number of ordinary shares from 50,000 with a $1 par value to 100,000,000 with no par value.  Simultaneously with the amendment, the Company effected a stock split by an additional 29,999,900 shares to the current shareholders.  Accordingly, immediately after the amendment and prior to the merger with China Opportunity Acquisition Corp. (“COAC”), the Company had 30,000,000 ordinary shares outstanding. On March 17, 2009, the Company consummated a merger with COAC.





In connection with the merger, the Company issued 2,245,723 shares of its ordinary shares in exchange for all the outstanding shares of COAC. The Company also granted, in connection with the merger, 17,266,667 of warrants in exchange for all the outstanding warrants of COAC. The Company is deemed to be the surviving entity and registered its shares pursuant to a registration statement filed with the U.S. Securities and Exchange Commission.  Accordingly, after the merger, the former shareholders of COAC own approximately 6.5% of the Company’s ordinary shares. As of December 31, 2010, there were 2,219,559 warrants exercised.





On June 4, 2010, the Company completed a private placement in which the Company sold to certain investors 3,303,771 ordinary shares at a price per share of $5.70, for an aggregate purchase price of $18,831,495, pursuant to a securities purchase agreement dated the same date. The foregoing issuance was made in reliance upon exemptions provided by Section 4(2) of the Securities Act for the offer and sale of securities not involving a public offering and Regulation D promulgated thereunder.





3.
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





(a)
Basis of presentation





The accompanying audited consolidated financial statements and related notes have been prepared in conformity with accounting principles generally accepted in the United States of America (US GAAP). The preparation of the consolidated financial statements in accordance with US GAAP requires management of the Group to make a number of estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported  amounts of   revenues  and   expenses  during  the  reporting year. Significant items subject  to  such estimates and assumptions include the recoverability of the carrying amount and the estimated useful lives of long-lived assets; valuation allowances for receivables, realizable values for inventories. Actual results could differ from those estimates.





The consolidated financial statements include all accounts of the Company and its wholly-owned subsidiaries.  All material inter-company balances and transactions have been eliminated.




F-9




CHINA GERUI ADVANCED MATERIALS GROUP LIMITED


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


(IN US DOLLARS)





3.
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (.../Cont’d)





(b)
Foreign currency translation





Assets and liabilities of foreign operation are translated at the rate of exchange in effect on the balance sheet date; income and expenses are translated at the average rate of exchange prevailing during the year. The year-end rates for December 31, 2010, 2009 and 2008 of Renminbi to one US dollar were 6.6000, 6.8270 and 6.8225 respectively; average rates for the year-end December 31, 2010, 2009 and 2008 were 6.7604, 6.8303 and 6.9351 respectively. The related translation adjustments are reflected in "Accumulated other comprehensive income" in the stockholder's equity section of the balance sheet. As of December 31, 2010, 2009 and 2008, the accumulated foreign currency translation gain was $7,414,409, $2,411,301 and $2,403,547 respectively.  Foreign currency gains and losses resulting from transactions are included in earnings.





The year-end rates for December 31, 2010, 2009 and 2008 of Hong Kong dollar to one US dollar were 7.7810, 7.7543 and 7.7499 respectively; average rates for the year-end December 31, 2010, 2009 and 2008 were 7.7700, 7.7515 and 7.7818 respectively.





(c)
Cash





Cash represents cash in banks and cash on hand.





The Group considers all highly liquid investments with original maturities of three months or less to be cash. The Group maintains bank accounts in the PRC.




F-10




CHINA GERUI ADVANCED MATERIALS GROUP LIMITED


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


(IN US DOLLARS)





3.
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (.../Cont’d)





(d)
Accounts receivable





Accounts receivable are recorded at the invoiced amount, net of allowances for doubtful accounts sales returns and trade discounts.  The allowance for doubtful accounts is the Group’s best estimate of the amount of probable credit losses in the Group’s existing accounts receivable.  Management determines the allowance based on historical write-off experience, customer specific facts and economic conditions.  The Group has historically been able to collect all of its receivable balances, and accordingly, 2% allowance has been provided for doubtful accounts.





Outstanding account balances are reviewed individually for collectability. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Group does not have any off-balance-sheet credit exposure to its customers.





(e)
Inventories





Inventories are stated at the lower of cost or market and consist primarily of flat rolled steel. Cost is determined using the weighted average cost method.  In the case of work in process and finished goods, such costs comprise of direct materials, direct labor and an appropriate proportion of overheads.





(f)
Property, plant and equipment





Property, plant and equipment are recorded at cost less accumulated depreciation.  Expenditures for major additions and betterments are capitalized. Maintenance and repairs are charged to general and administrative expenses as incurred. Depreciation of property, plant and equipment is computed by the straight-line method over the assets estimated useful lives ranging from five to fifty years. Building improvements, if any, are amortized on a straight-line basis over the estimated useful life.





Upon sale or retirement of property, plant and equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in operations.





Construction in progress represents the costs of property, plant and equipment under construction or installation. Depreciation commences when the asset is placed in service. The accumulated costs are reclassified as property, plant and equipment when installation or construction is completed. Government subsidies received reduce the cost of construction.





The estimated useful lives of the assets are as follows:


Estimated LifeLand use right
43 - 50Leasehold land improvement
46.5Buildings
10 - 20Machinery and equipment
5 - 20Vehicles
5Furniture fixtures and office equipment
5





Expenditures for repairs and maintenance, which do not extend the useful life of the assets, are expensed as incurred.




F-11




CHINA GERUI ADVANCED MATERIALS GROUP LIMITED


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


(IN US DOLLARS)





3.
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (.../Cont’d)





(g)
Land use right





Land use right is recorded at cost less accumulated amortization. Under FASB ASC Topic 350, “Intangible, Goodwill and Other", land use right classified as definite lived intangible assets and are amortized over its useful life.  According to the laws of the PRC, the government owns all of the land in the PRC. Companies or individuals are authorized to possess and use the land only through land use rights granted by the PRC government.  Land use right is amortized using the straight-line method over the lease term of 43 to 50 years.





(h)
Impairment of long-lived assets





In accordance with FASB ASC Topic 360, Property Plant and Equipment, the Company tests long-lived assets or asset groups for recoverability when events or changes in circumstances indicate that their carrying amount may not be recoverable. Circumstances which could trigger a review include, but are not limited to: significant decreases in the market price of the asset; significant adverse changes in the business climate or legal factors; accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset; and current expectation that the asset will more likely than not be sold or disposed significantly before the end of its estimated useful life. Recoverability is assessed based on the carrying amount of the asset and its fair value which is generally determined based on the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset, as well as specific appraisal in certain instances. An impairment loss is recognized when the carrying amount is not recoverable and exceeds fair value. If long-lived assets are to be disposed, depreciation is discontinued, if applicable, and the assets are reclassified as held for sale at the lower of their carrying amounts or fair values less costs to sell.





Based on the Group’s assessment, no impairment was recognized as of December 31, 2010, 2009 and 2008.





(i)
Fair value measurements





FASB ASC Topic 820, “Fair Value Measurement and Disclosures” defines fair value, the methods used to measure fair value and the expanded disclosures about fair value measurements.  Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between the buyer and the seller at the measurement date.  In determining fair value, the valuation techniques consistent with the market approach, income approach and cost approach shall be used to measure fair value FASB ASC Topic 820 establishes a fair value hierarchy for inputs, which represent the assumptions used by the buyer and seller in pricing the asset or liability.  These inputs are further defined as observable and unobservable inputs.  Observable inputs are those that buyer and seller would use in pricing the asset or liability based on market data obtained from sources independent of the Company.  Unobservable inputs reflect the Company’s assumptions about the inputs that the buyer and seller would use in pricing the asset or liability developed based on the best information available in the circumstances.




F-12




CHINA GERUI ADVANCED MATERIALS GROUP LIMITED


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


(IN US DOLLARS)





3.
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (.../Cont’d)





(i)
Fair value measurements (.../Cont’d)





The fair value hierarchy is categorized into three levels based on the inputs as follows:




Level 1-
Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.  Valuation adjustments and block discounts are not being applied.  Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these securities does not entail a significant degree of judgment.





Level 2-
Valuations based on (i) quoted prices in active markets for similar assets and liabilities, (ii) quoted prices in markets that are not active for identical or similar assets, (iii) inputs other than quoted prices for the assets or liabilities, or (iv) inputs that are derived principally from or corroborated by market through correlation or other means.





Level 3-
Valuations based on inputs that are unobservable and significant to the overall fair value measurement.





For certain of the Company’s financial instruments, none of which are held for trading purposes, including cash, accounts receivable, accounts payable and accrued expenses, the carrying amounts approximate fair value due to their short maturities.




(j)
Revenue recognition





The Group generates revenue primarily from sales of steel mill flat-rolled products.





Revenue is recognized when products have been delivered to the buyer and title and risk of ownership has passed to the buyer, the sales price is fixed and determinable and collectability is reasonably assured.





In the PRC, value added tax (“VAT”) of 17% on the invoice amount is collected in respect of the sales of goods on behalf of tax authorities. The VAT collected is not revenue of the Group; instead, the amount is recorded as a liability on the balance sheet until such VAT is paid.





(k)
Income taxes





The Group accounts for income taxes under FASB ASC Topic 740 "Income Taxes". Deferred income tax assets and liabilities are determined based upon differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be effective when the differences are expected to reverse.





Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statements of income in the period that includes the enactment date.




F-13




CHINA GERUI ADVANCED MATERIALS GROUP LIMITED


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


(IN US DOLLARS)





3.
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (.../Cont’d)





(k)
Income taxes (.../Cont’d)





The Group adopted FASB ASC Topic 740, "Income Taxes", which prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken in the tax return. This interpretation also provides guidance on de-recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods and income tax disclosures.





(l)
Commitments and contingencies





In the normal course of business, the Group is subject to contingencies, including legal proceedings and claims arising out of the normal course of businesses that relate to a wide range of matters, including among others, product liability. The Group records accruals for such contingencies based upon the assessment of the probability of occurrence and, where determinable, an estimate of the liability. Management may consider many factors in making these assessments including past history, scientific evidence and the specifics of each matter. As management has not become aware of any product liability claims arising from any incident over the year, the Group has not recognized a liability for product liability claims.





(m)
Earnings per share





Basic earnings per share are computed on the basis of the weighted-average number of shares of our common stock outstanding during the period. Diluted earnings per share is computed on the basis of the weighted-average number of shares of our common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury method. As of December 31, 2010, the Company had a total of 15,191,108 warrants outstanding which included 144,000 warrants granted to the underwriter which may be exercised on or after August 9, 2010 and until November 9, 2014, and 1,200,000 warrants to be exercised from one unit purchase option which were exercisable until March 19, 2011.





The following table sets forth the computation of basic and diluted net income per common share:





For the Year ended2010


2009


2008Net income

$
47,083,424


$
43,448,278


$
21,584,589Weighted average outstanding shares of common stock


43,891,670



33,751,844



30,000,000Dilutive effect of Warrants


2,584,713



3,659,717



-Dilutive effect of Unit PurchaseOption granted to underwriters


179,338



263,918



-Diluted weighted average outstanding shares


46,655,721



37,675,479



30,000,000Earnings per common stock:Basic

$
1.07


$
1.29


$
0.72Diluted

$
1.01


$
1.15


$
0.72




F-14




CHINA GERUI ADVANCED MATERIALS GROUP LIMITED


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


(IN US DOLLARS)





3.
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (.../Cont’d)





(n)
Segment information





FASB ASC Topic 280 "Segment reporting" establishes standards for reporting information on operating segments in interim and annual financial statements.  The Group has only one segment, all of the Group's operations and customers are in the PRC and all income are derived from the sales of steel mill flat-rolled products. Accordingly, no geographic information is presented.





(o)
Economic and political risks





The Group's operations are conducted in the PRC. Accordingly, the Group'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 economy.





The Group's operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Group's results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances aboard, and rates and methods of taxation, among other things.





(p)
Recently issued accounting standards not yet adopted





We describe below recent pronouncements that have had or may have a significant effect on our financial statements. We do not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to our financial condition, results of operations, or disclosures.





In March 2010, FASB issued authoritative guidance regarding the effect of denominating the exercise price of a share-based payment awards in the currency of the market in which the underlying equity securities trades and that currency is different from (1) entity’s functional currency, (2) functional currency of the foreign operation for which the employee provides services, and (3) payroll currency of the employee. The guidance clarifies that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should be considered an equity award assuming all other criteria for equity classification are met. The guidance will be effective for interim and annual periods beginning on or after December 15, 2010, and will be applied prospectively. Affected entities will be required to record a cumulative catch-up adjustment for all awards outstanding as of the beginning of the annual period in which the guidance is adopted. This adoption of the authoritative guidance is not expected to have a material impact on the Group’s financial statements.




F-15




CHINA GERUI ADVANCED MATERIALS GROUP LIMITED


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


(IN US DOLLARS)





4.
CASH





Cash represents cash in bank and cash on hand. Cash as of December 31, 2010 and 2009 consists of the following:





2010


2009Bank balances and cash

$
186,007,601


$
117,105,538Less: Restricted cash


(66,530,303
)


(37,498,169
)$
119,477,298


$
79,607,369





Renminbi is not a freely convertible currency and the remittance of funds out of the PRC is subject to the exchange restrictions imposed by the PRC government.





As at December 31, 2010, and 2009 the Group's cash amounting to $66,530,303 and $37,498,169 respectively, were restricted and deposited in certain banks as guarantee deposits as security for notes payable granted by the banks.





The restricted cash guaranteed $86,227,272 and $41,013,622 of notes payable as of December 31, 2010 and 2009 respectively. It can only be released at the expiration date of corresponding notes payable.




5.
ACCOUNTS RECEIVABLE





The Group performs ongoing credit evaluations of its customers' financial conditions. The Group generally encourages its customers to use its products and settle the outstanding balance within credit terms. As of December 31, 2010 and 2009, the provision on accumulated allowance for doubtful accounts was $32,528 and $31,446 respectively.




6.
INVENTORIES





Inventories as of December 31, 2010 and 2009 consist of the following:





2010


2009Raw materials

$
3,395,097


$
2,152,547Work-in-process


1,404,362



1,345,715Finished goods


2,202,818



2,460,618$
7,002,277


$
5,958,880




F-16




CHINA GERUI ADVANCED MATERIALS GROUP LIMITED


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


(IN US DOLLARS)





7.
PREPAID EXPENSES AND OTHER DEPOSITS





Prepaid expenses and other deposits as of December 31, 2010 and 2009 consist of the following:





2010


2009Prepaid purchases

$
27,772,852


$
16,411,723Prepaid general expenses


976,828



61,987$
28,749,680


$
16,473,710





Prepaid purchases represent amounts prepaid to suppliers for the purchases of raw materials and accessories.





8.
OTHER RECEIVABLES





Other receivables as of December 31, 2010 and 2009 consist of the following:





2010


2009Advances to staff

$
18,916


$
265,402Loan to customer


106,060



478,248Standby guarantee fund


213,876



1,349,453Warrant consideration receivable


1,352,180



-Others


377,050



199,030$
2,068,082


$
2,292,133





Other receivables represent advances to staff, cash retained by the Company’s warrant agent for warrants exercised and petty cash to department staff for daily expenditures. These amounts are interest free and with no fixed repayment terms.





Included in other receivables are $213,876 and $1,349,453 of funds in 2010 and 2009 held by unrelated third parties to provide a standby guarantee for Henan Green to obtain additional bank loans. There was no agreement signed with the third parties and no interest income was received.





As of December 31, 2010, other receivables include cash retained by the Company’s warrant agent in the amount of $1,352,180 for 270,436 warrants exercised.




F-17




CHINA GERUI ADVANCED MATERIALS GROUP LIMITED


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


(IN US DOLLARS)





9.
PROPERTY, PLANT AND EQUIPMENT





Property, plant and equipment as of December 31, 2010 and 2009 consist of the following:





2010


2009Buildings

$
7,902,125


$
4,996,924Leasehold land improvement


20,864



20,170Plant machinery and equipment


42,367,394



23,518,194Vehicles


2,574,278



2,306,841Office equipment


205,479



148,652Construction in progress


49,199,036



4,977,442102,269,176



35,968,223Less: Accumulated depreciation


(16,779,327
)


(13,630,013
)$
85,489,849


$
22,338,210





Depreciation expense for the years ended December 31, 2010, 2009 and 2008 was $3,149,314, $2,792,547 and $2,447,626 respectively.





Construction in progress consists of the construction of a plant and production lines on 300 acres of land. The total construction in progress as at December 31, 2010 and 2009 was $49,199,036 and $4,977,442 respectively.





Estimated costBalance at


to complete as of

December 31,

Estimated time2010


2010

to completeProduction lines

$
40,857,868


$
19,748,192

Before May, 2011Plant


8,341,168



143,680

Before May, 2011$
49,199,036


$
19,891,872





No depreciation has been provided for construction in progress.





10.
PREPAID MACHINERY DEPOSITS





Prepaid machinery deposits as of December 31, 2010 and 2009 consist of the following:





2010


2009Prepaid machinery deposits

$
-


$
13,973,966





Prepaid machinery deposit represents part of cost of machinery prepaid before delivery. The Group paid deposits for the acquisition of equipment and machinery which will be used for the expansion of production, which, according to the Company's capacity expansion planning, will double its existing production capacity of 250,000 metric tons to 500,000 metric tons by the end of 2011. As of December 31, 2010, the total prepaid machinery deposits amounted $19,240,885 were transferred to construction in progress.




F-18




CHINA GERUI ADVANCED MATERIALS GROUP LIMITED


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


(IN US DOLLARS)





11.
LAND USE RIGHT





Land use right as of December 31, 2010 and 2009 consist of the following:





2010


2009Land use right, net

$
13,455,218


$
1,399,026Prepaid expenses on land use right


2,143,939



-$
15,599,157


$
1,399,026





Land use right represents the value of land approved to the Company for industrial production purpose by the local government in Zhengzhou, People's Republic of China.  The right will expire between June 30, 2053 to June 30, 2054 for the land with 58.6 acres (351.61 Chinese mu) and 50 acres (300 Chinese mu) respectively.  Land use right payable for the 58.6 acres as of December 31, 2010 was $10,203,404.





Buildings of staff accommodation and the R & D center are located on the land with 50 acres (300 Chinese mu).  Payment of the land use right for the 50 acres was fully settled in 2009.





The Company had obtained the approval to acquire the land use right of 58.6 acres (351.61 Chinese mu) in February 2010. Although there is no payment schedule to settle the outstanding amount of $10,203,404 until the Company receives notification from the local government, the Company expects to fully settle the outstanding amount within 12 months. Use of the land is planned for the Company's expansion capacity throughout 2011.





The Company’s related party, Zhengzhou No. 2 Iron and Steel Company Limited ("Zhengzhou Company") owns a land use right with total 24.94 acres (151.4 Chinese mu), the Company currently leases a part of the land use rights for 6.69 acres (40.60 Chinese mu) from Zhengzhou Company which was the former owner of Henan Green. The Company's existing production lines and warehouses are located on this parcel of land. For operation risk mitigation purpose, the Company has started the process of transferring the title of the land use right to the extent 24.94 acres (151.4 Chinese mu) from Zhengzhou Company. To facilitate Zhengzhou Company's negotiation with local regulatory authorities on the transfer and in anticipation of the upfront payments associated with the transaction, the Company prepaid as of December 31, 2010 $2,143,939 to Zhengzhou Company. Final transfer price is to be further determined based on market-based valuation of the land value and calculation of associated value-added tax.





Land use right is amortized using the straight-line method over the lease term of 43 to 50 years. The amortization expense for the years ended December 31, 2010, 2009 and 2008 were $259,438, $30,827 and $30,280 respectively. The total future amortization is as follows:





December 31,2011

$
305,0462012


305,0462013


305,0462014


305,0462015


305,046Over 5 years


11,929,988$
13,455,218




F-19




CHINA GERUI ADVANCED MATERIALS GROUP LIMITED


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


(IN US DOLLARS)




12.
NOTES PAYABLE





Notes payable as of December 31, 2010 and 2009 consist of the following:





2010


2009Classified by financial institutions:China Citic Bank

$
19,696,970


$
7,470,338Commercial Bank of Zhengzhou


3,030,303



6,957,668Minsheng Bank of China


6,030,303



6,152,043Guangdong Development Bank


12,121,212



2,343,636Shanghai Pudong Development Bank


18,939,394



13,402,666Shanghai Pudong Development Bank


-



1,904,204China Merchants Bank


6,060,606



2,783,067China Everbright Bank


13,636,364



-Bank of Luoyang


5,166,666



-Bank of Xuchang


1,545,454



-$
86,227,272


$
41,013,622Additional information:Maximum balance outstanding during the year

$
102,298,541


$
48,879,449Finance cost

$
2,510,056


$
941,644Finance charge per contract


0.050
%


0.050
%Weighted average interest rate


1.43
%


2.41
%





All the above notes payable are secured by either 50% or 100% corresponding restricted cash.  As at December 31, 2010 and 2009, the Group's cash of $66,530,303 and $37,498,169 respectively were restricted for such purpose. All the notes payable have terms of six months. Commercial Bank of Zhengzhou had imposed covenant on the Company’s subsidiary, Henan Green, that not more than 10% of the net profit could be distributed as dividend. Shanghai Pudong Development Bank imposed covenant on the Company’s subsidiary, Henan Green, that they should be notified for any transaction which is over 10% of Henan Green’s net assets.  The Company was in compliance with the financial covenants at balance sheet date in the 2010.




F-20




CHINA GERUI ADVANCED MATERIALS GROUP LIMITED


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


(IN US DOLLARS)





13.
TERM LOANS





In order to provide working capital for operations, the Group entered into the following short term loan agreements as of December 31, 2010 and 2009:





2010


2009Classified by financial institutions:China Citic Bank

$
1,515,152


$
3,661,930China Merchants Bank


9,090,909



4,394,317Commercial Bank of Zhengzhou


7,575,758



7,323,861Guangdong Development Bank


-



2,929,544Minsheng Bank of China Branch


-



2,783,067Shanghai Pudong Development Bank


10,606,061



5,859,089Zhengzhou City Rural Credit Cooperative


757,576



1,171,818Bank of Communications


1,515,151



1,464,772Bank of Luoyang


9,090,909



4,394,317Bank of Xuchang


3,939,393



-$
44,090,909


$
33,982,715Additional information:Maximum balance outstanding during the period/year

$
49,812,171


$
37,791,123Interest paid during the period/year

$
2,434,768


$
2,266,504Range of interest rate


0.425-0.84
%


0.531 - 0.965
%Weighted average interest rate


3.02
%


3.46
%





All of the above terms loans are fixed term loans with a period of 12 months or less.  Commercial Bank of Zhengzhou had imposed covenant on the Company’s subsidiary, Henan Green, that not more than 10% of the net profit could be distributed as dividend. Shanghai Pudong Development Bank imposed covenant on the Company’s subsidiary, Henan Green, that any transaction which is over 10% of Henan Green’s net assets they must be approved by the Bank.  For those loan facilities obtained from banks, all these terms loans are either guaranteed and secured by Henan Green's fixed assets, including its machinery and land use right, or guaranteed and secured by a related party, Zhengzhou Company’s land and plant properties, or guaranteed by Henan Green’s former owners or other third parties.





14.
ACCRUED LIABILITIES AND OTHER PAYABLES





Accrued liabilities and other payables as of December 31, 2010 and 2009 consist of the following:





2010


2009Accrued expenses

$
2,963,644


$
1,713,874Other payables


361,548



499,046Other tax payables


856,155



515,665$
4,181,347


$
2,728,585





Other tax payables represent payables other than income tax which consist of value added tax and city maintenance and construction tax.




F-21




CHINA GERUI ADVANCED MATERIALS GROUP LIMITED


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


(IN US DOLLARS)





15.
STOCKHOLDERS’ EQUITY





(a)
Capital





The Company was established in the British Virgin Islands ("BVI") on March 11, 2008 as a limited liability company. Authorized common stock of the Company included 50,000 ordinary shares with a $1.00 par value. Prior to the stock split described below, the Company had 100 shares outstanding. During March 2009, the Company amended its memorandum of association by effecting a stock split resulting in the issuance of 29,999,999 shares and increasing the total authorized shares from 50,000 to 100,000,000.  Accordingly, immediately after this amendment of its memorandum of association, the Company had 30,000,000 shares outstanding.





In connection with the merger of COAC, on March 17, 2009, the Company issued 2,245,723 ordinary shares.





In connection with the merger between the Company and COAC, the Company is the surviving entity, up to 17,866,667 ordinary shares of the Company were reserved for issuance upon exercise of the warrants to subscribe for ordinary shares of the Company at $5.00 per share. A unit purchase option to purchase 600,000 units, each at $6.60 consisting of one share of common stock and two warrants see the table included in this note.  The unit purchase option was not exercised and expired on March 21, 2011.





During the year ended December 2009, 76,600 warrants were exercised, for which the Company received proceeds of $383,000.





During the year ended of December 31, 2010, 2,142,959 warrants were exercised, for which the Company received proceeds of $10,714,795.





The Company and Oasis Green Investments Limited, Plumpton Group Limited and Honest Joy Group Limited (collectively, the “Original Shareholders”) entered into an agreement dated September 15, 2009, pursuant to which, the Company agreed to issue to the Original Shareholders an aggregate of 2,850,000 ordinary shares within ten days of entering into the agreement. The 2,850,000 shares were to be divided among the Original Shareholders in the same proportion to the amounts of the ordinary shares that they would have received under the terms of the earn-out provision of the Merger Agreement. In consideration of the issuance of the ordinary shares, the Company and the Original Shareholders agreed to a mutual release of all claims relating to the merger, the redemptions, and the earn-out provision.  The issuance of such shares was recorded as a dividend since the merger was deemed to be a recapitalization.





On November 9, 2009, the Company entered into an Underwriting Agreement (the “Underwriting Agreement”) with Maxim Group LLC (the “Underwriter Representative”) to sell in a public offering 4,800,000 ordinary shares of the Company at a price of $5.00 per share for aggregate proceeds of $24,000,000. The Company netted proceeds amounting to $21,085,944 after commissions, fees and other expenses amounting to $2,914,056.





In addition, the Company granted the underwriters an option to purchase up to 720,000 additional ordinary shares to cover over-allotments and the option was exercised in full during December 2009. The gross proceeds for the over allotment were $3,600,000 which yielded $3,312,000 additional proceeds to the Company after deducting the underwriter commissions, discounts and other fees amounting $288,000.




F-22




CHINA GERUI ADVANCED MATERIALS GROUP LIMITED


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


(IN US DOLLARS)





15.
STOCKHOLDERS’ EQUITY (.../Cont’d)





(a)
Capital (.../Cont’d)





On June 4, 2010, the Company completed a private placement in which the Company sold to certain investors 3,303,771 ordinary shares at a price per share of $5.70, for an aggregate purchase price of $18,831,494, pursuant to a securities purchase agreement dated the same date. The foregoing issuance was made in reliance upon exemptions provided by Section 4(2) of the Securities Act for the offer and sale of securities not involving a public offering and Regulation D promulgated thereunder. The Company netted proceeds amounting to $17,967,818, offering fees and other fees amounted to $863,676.





The Board of Directors and the Compensation Committee of the Company adopted the China Gerui Advanced Materials Group Limited 2010 Share Incentive Plan (the "Plan") on November 16, 2010.  The Plan became effective on the date of its adoption, subject to approval by the Company’s shareholders within 12 months. At the Company’s annual shareholders meeting hold on December 8, 2010, the Company’s shareholders approved the adoption of the 2010 Plan.





Up to 3,500,000 of the Company’s ordinary shares may be issued under the Plan (subject to adjustment as described in the Plan). The Plan permits the grant of Nonqualified Share Options and Restricted Share Awards to employees, directors, and consultants of the Company and its affiliates.





In connection with the adoption of the Plan, the Board of Directors and Compensation Committee also approved forms of Share Option Agreement for employees and directors (collectively, the “-Forms of Option Agreement-”) and form of Restricted Share Award Agreement (the “-Form of Share Award Agreement-”) that will be utilized by the Company to grant options and restricted shares under the Plan.





No Options were exercisable, and no Share Awards or ordinary shares were issuable under the Plan unless and until the Plan was approved by the shareholders of the Company. In the event that the shareholders of the Company had not approved the Plan within such 12 months period, the Plan and any previously granted Option would have terminated.





The Company also granted in connection with its November 2009 public offering the Underwriter Representative (and its designees) a warrant (the “Underwriter Representative Warrant”) for the purchase of an aggregate of 144,000 ordinary shares (the “Warrant Shares”) for an aggregate purchase price of $100.00.  The Underwriter Representative Warrant may be exercised in full or part to purchase Warrant Shares at an initial exercise price of $6.00 per share.  The Underwriter Representative Warrant is exercisable beginning on August 9, 2010 and until November 9, 2014.




F-23




CHINA GERUI ADVANCED MATERIALS GROUP LIMITED


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


(IN US DOLLARS)





15.
STOCKHOLDERS’ EQUITY (.../Cont’d)





(a)
Capital (.../Cont’d)





A summary of all warrants outstanding as of December 31, 2010 and December 2009 and actions relating thereto during the years then ended is presented below:





Warrants


Exercise Price

TermsIssued on March 17, 2009


17,266,667


$
5.00

2 yearsGranted


144,000



6.00

41⁄4 yearsExercised


(76,000
)


5.00

2 yearsOutstanding as of December 31, 2009


17,334,067





-Exercised


(2,142,959
)


5.00

-Outstanding as of December 31, 2010


15,191,108





2,218,559 warrants were exercised in 2010 and 2009 at $5.00 each for proceeds to the Company of $11.1 million.  As at December 31, 2010, 144,000 warrants granted on November 9, 2009 were still outstanding and may be exercised at $6.00 each on or after August 9, 2010 and until November 9, 2014.





(b)
Retained Earnings





Retained earnings as of December 31, 2010 and December 31, 2009 consist of the following





2010


2009Retained earnings

$
77,939,504


$
30,856,080Statutory surplus reserves


1,582,902



1,582,902$
79,522,406


$
32,438,982





In accordance with PRC Company Law, the Group is required to allocate at least 10% profit to the statutory surplus reserve.  Appropriation to the statutory surplus reserve by the Group is based on profit arrived under PRC accounting standards for business enterprises for each year.





The profit arrived at must be set off against any accumulated losses sustained by the Group in prior years, before allocation is made to the statutory surplus reserve.  Appropriation to the statutory surplus reserve must be made before distribution of dividends to shareholders.  The appropriation is required until the statutory surplus reserve reaches 50% of the stockholder's equity.  This statutory surplus reserve is not distributable in the form of cash dividends.





As the statutory surplus reserve has reached 50% of the stockholder's equity in 2005, the Group ceased to allocate.




F-24




CHINA GERUI ADVANCED MATERIALS GROUP LIMITED


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


(IN US DOLLARS)





16.
INCOME TAXES





All of the Company's income is generated in the PRC.





For the Year ended2010


2009


2008Current income tax expense

$
15,937,143


$
14,751,569


$
11,869,735





The Group's income tax provision in respect of operations in PRC is calculated at the applicable tax rates on the estimated assessable profits for the year based on existing legislation, interpretations and practices in respect thereof. The standard tax rate applicable to the Group changed from 33% to 25%, effective on January 1, 2008.





A reconciliation of the expected income tax expense to the actual income tax expense for the years ended December 31, 2010, 2009 and 2008 are as follows:


For the Year ended2010


2009


2008Income before tax

$
63,020,567


$
58,199,847


$
47,375,268Expected PRC income tax expense at statutory tax rate of 25%


15,755,141



14,549,961



11,843,817Income not subject to PRC tax


56,949



-



77,518Effect on exchange rate


125,053



201,608



(51,600
)Actual income tax expense

$
15,937,143


$
14,751,569


$
11,869,735





The PRC tax system is subject to substantial uncertainties and has been subject to recently enacted changes, the interpretation and enforcement of which are also uncertain. There can be no assurance that changes in PRC tax laws or their interpretation or their application will not subject the Group to substantial PRC taxes in future.





No deferred tax liability has been provided as the amount involved is immaterial. The Group has analyzed the tax positions taken or expected to be taken in its tax filings and has concluded it has no material liability related to uncertain tax positions.




F-25




CHINA GERUI ADVANCED MATERIALS GROUP LIMITED


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


(IN US DOLLARS)





17.
SUNDRY INCOME





Sundry income for the years ended December 31, 2010, 2009 and 2008 consists of the following:





For the Year ended2010


2009


2008Local government subsidies

$
227,797


$
87,844


$
79,365Transferred from receipts inadvance and accounts payable


542



83,772



71,605Subcontracting income


-



69,567



-Others


41,901



52,648



4,717$
270,240


$
293,831


$
155,687





During the years ended December 31, 2010, 2009 and 2008 the Group received special one time subsidies from local government of Zhengzhou, China amounting to $227,797, $87,844 and $79,365 for its advance technology in manufacturing precision steel mill flat-rolled products. The subsidy is not a continuing nature and depends on the local government's policy announced within a valid period.





18.
RELATED PARTY TRANSACTIONS





In 2004, the Company’s subsidiary, Henan Green, entered into a rental agreement for land use right with Zhengzhou Company, the former owner of Henan Green, from January 1, 2005 to December 31, 2027. Rental paid to Zhengzhou Company for the years ended December 31, 2010, 2009 and 2008 was $9,909, $8,916 and $8,781 respectively.





The Company’s related party, Zhengzhou Company owns a land use right with total 24.94 acres (151.4 Chinese mu), the Company currently leases a part of the land use right for 6.69 acres (40.60 Chinese mu) from Zhengzhou Company. The Company's existing production lines and warehouses are located on this parcel of land. For operation risk mitigation purpose, the Company has started the process of title transfer of the existing land use right to 24.94 acres (151.4 Chinese mu) from Zhengzhou Company. To facilitate Zhengzhou Company's negotiation with local regulatory authorities on the transfer and in anticipation of the upfront payments associated with the transaction, the Company prepaid as of December 31, 2010 $2,143,939 to Zhengzhou Company. The final transfer price is to be further determined based on market-based valuation of the land value and calculation of associated value-added tax.




F-26




CHINA GERUI ADVANCED MATERIALS GROUP LIMITED


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


(IN US DOLLARS)





19.
SIGNIFICANT CONCENTRATIONS





Our credit risk is somewhat limited due to a relatively large customer base and its dispersion across geographic areas of the PRC. During the years ended December 31, 2010, 2009 and 2008 the Company had no customer which accounted for 10% or more of total revenue. As of December 31, 2010, the Company had one customer which accounted for approximately 81% of total accounts receivable. As of December 31, 2009, the Company had two customers which accounted for approximately 66% and 11%, respectively, of total accounts receivable.





All of the Group's suppliers are located in the PRC. During the year ended December 31, 2010, the Company had three suppliers which each accounted for approximately 30%, 24% and 12% of total purchases, respectively. During the year ended December 31, 2009, the Company had four suppliers which each accounted for approximately 28%, 20%, 17% and 11% of total purchases, respectively. During the year ended December 31, 2008, the Company had three suppliers which each accounted for approximately 12%, 22% and 47% of total purchases, respectively. As of December 31, 2010, the Company had two suppliers which accounted for approximately 19% and 16% respectively of total accounts payable. As of December 31, 2009, the Company had three suppliers which accounted for approximately 37%, 33% and 15%, respectively of total accounts payable.





20.
FOREIGN OPERATIONS





Operations





All of the Group’s operations are carried out and all of its assets are located in the PRC. Accordingly, the Group’s business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC. The Group’s business may be influenced by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency fluctuation and remittances and methods of taxation, among other things.





Dividends and reserves





Under laws of the PRC, net income after taxation can only be distributed as dividends after appropriation has been made for the following: (i) cumulative prior years' losses, if any; (ii) allocations to the "Statutory Surplus Reserve" of at least 10% of net income after tax, as determined under PRC accounting rules and regulations, until the fund amounts to 50% of the equity of the Company’s subsidiary, Henan Green; (iii) allocations of 5-10% of income after tax, as determined under PRC accounting rules and regulations, to Henan Green's "Statutory Common Welfare Fund", which is established for the purpose of providing employee facilities and other collective benefits to employees in China; and (iv) allocations to any discretionary surplus reserve, if approved by equity stockholders.




F-27




CHINA GERUI ADVANCED MATERIALS GROUP LIMITED


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


(IN US DOLLARS)





21.
OPERATING LEASE COMMITMENTS





Rental expense for obligations under operating leases was $24,701 (MB166,990), $23,556 (RMB160,900) and $nil for the years ended December 31, 2010, 2009 and 2008 respectively. The total future minimum lease payments under non-cancellable operating leases with respect to premises as of December 31, 2010 are payable as follows:





Years ended

December 31,

Leasehold


Reservoir rental


Total2011

$
11,165


$
15,152


$
26,3172012


12,282



15,152



27,4342013


13,510



15,152



28,6622014


14,861



15,152



30,0132015


16,347



15,152



31,499Over five years


384,517



45,456



429,973$
452,682


$
121,216


$
573,898





Land use right is granted by Zhengzhou Company, who sub-lets a part of its land with 6.69 acres (40.60 Chinese mu) to Henan Green. The rental period is from January 1, 2005 to December 31, 2027. Annual rental paid for the land use right is $8,781 (RMB 60,900) for the period of January 1, 2005 to December 31, 2009. The rental payment will increase by 10% annually from 2010 onwards (i.e RMB 66,990). Such related party commitments are included in the above table.





22.
COMMITMENTS





The Group had the following capital commitments as of December 31, 2010:





Contracted, but not provided for:-Acquisition of machinery and equipment

$
5,560,330





According to the purchase contracts, the Company should pay 50% deposit within 10 days after the purchase contracts are signed, all the machinery and equipment are estimated to be delivered and completed installation before May 2011.  The Group estimates the machinery and equipment will be placed in service in May 2011.





23.
SUBSEQUENT EVENTS





In March 2011, the Company extended the expiration date of its public warrants from Saturday, March 19, 2011 to Monday, March 21, 2011, to account for the original expiration date falling on a non-business day.  The Company also implemented a three-business day protect for warrant exercises.





During 2011, 13,294,775 warrants were exercised for gross proceeds of $66,473,875 and 552,333 warrants expired.  Also, together with a unit purchase option to purchase 600,000 units, each at $6.60 consisting of one share of common stock and two warrants, the unit purchase option was not exercised and expired on March 21, 2011.




F-28




CHINA GERUI ADVANCED MATERIALS GROUP LIMITED


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


(IN US DOLLARS)





24.
CONDENSED PARENT COMPANY FINANCIAL INFORMATION





The Company records its investment in subsidiaries under the equity method of accounting as prescribed in FASB ASC Topic 323, “Investments - Equity Method and Joint Ventures”. Such investment and long-term loans to subsidiaries are presented on the balance sheet as “Investments in subsidiaries” and the income of the subsidiaries is presented as “Equity in income of subsidiaries” on the statement of income.





These supplemental condensed parent company financial statements should be read in conjunction with the notes to the Company’s Consolidated Financial Statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted.





As of December 31, 2010, there were no material contingencies, significant provisions for long-term obligations, or guarantees of the Company, except as separately disclosed in the Company’s Consolidated Financial Statements, if any.





CONDENSED BALANCE SHEETSDecember 31,2010


2009AssetsCash

$
5,552,387


$
5,881,689Prepayment


100,000



-Other receivables


1,352,180



-Investments in subsidiaries


160,813,883



81,167,616Total assets

$
167,818,450


$
87,049,305Liabilities and Stockholders' EquityCurrent liabilitiesAccrued liabilities and other payables

$
6,448


$
6,448Total liabilities


6,448



6,448Stockholders' EquityCommon stock


73,944,243



45,261,630Additional paid in capital


6,930,944



6,930,944Retained earnings


79,522,406



32,438,982Subscriptions receivable


-



-Accumulated other comprehensive income


7,414,409



2,411,301Total stockholders' equity


167,812,002



87,042,857Total liabilities and stockholders' equity

$
167,818,450


$
87,049,305




F-29




CHINA GERUI ADVANCED MATERIALS GROUP LIMITED


(IN US DOLLARS)




25.
CONDENSED PARENT COMPANY FINANCIAL INFORMATION (.../Cont’d)





CONDENSED STATEMENT OF INCOMEFor the Year ended

December 31,2010


2009


2008General and administrative expenses

$
(2,059,737
)

$
(861,388
)

$
-Equity income of subsidiaries


49,143,161



44,309,666



21,584,589Net income

$
47,083,424


$
43,448,278


$
21,584,589CONDENSED STATEMENT OF CASH FLOWSFor the Year ended

December 31,2010


2009


2008Net cash used in operating activities

$
(3,511,915
)

$
(854,941
)

$
-Net cash provided by investing activities


(25,500,000
)


(20,000,000
)


-Net cash provided by financing activities


28,682,613



26,736,630



-Cash as of January 1


5,881,689



-



-Cash as of December 31

$
5,552,387


$
5,881,689


$
-




F-30




CHINA GERUI ADVANCED MATERIALS GROUP LIMITED


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


(IN US DOLLARS)





23.
QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)





2010March 31


June 30


September 30


December 31Revenue:Steel mill flat-rolled products

$
61,821,352


$
64,040,727


$
61,862,286


$
66,141,972Cost of revenue


(43,156,824
)


(44,911,879
)


(43,299,966
)


(46,500,979
)Gross profits


18,664,528



19,128,848



18,562,320



19,640,995Operating expensesGeneral and administrative expenses


(1,976,110
)


(1,531,098
)


(1,866,067
)


(2,422,447
)Selling and marketing expenses


(395,256
)


(240,295
)


(245,156
)


(370,384
)Total operating expenses


(2,371,366
)


(1,771,393
)


(2,111,223
)


(2,792,831
)Operating income


16,293,162



17,357,455



16,451,097



16,848,162Other income (expenses)Interest income


277,474



102,007



274,446



433,251Interest expenses


(1,084,894
)


(1,292,889
)


(1,087,227
)


(1,821,717
)Sundry income


84,907



91



183,728



1,514Income tax expense


(4,042,829
)


(4,089,356
)


(3,685,197
)


(4,119,761
)Net income attributable to common stockholders

$
11,527,820


$
12,077,308


$
12,136,847


$
11,341,449Net income per shareBasic

$
0.28


$
0.28


$
0.27


$
0.25Diluted

$
0.25


$
0.26


$
0.25


$
0.23




F-31