UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549








FORM
10-K


(Mark
One)
 x
              ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 For
the Fiscal Year Ended December 31, 2009
  OR
   ̈
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 Commission
file number: 001-33717
  General
Steel Holdings, Inc.
 (Exact
Name of Registrant as Specified in its Charter)
  Nevada
                    
                    41-2079252(State
      of Incorporation)
                    
                    (I.R.S.
      Employer
                      Identification
      Number)Kuntai
      International Mansion Building,
                      Suite
      2315
                      Yi
      No. 12 Chaoyangmenwai Avenue,
                      Chaoyang
      District,
                      Beijing,
      China
                    
                    100020(Address
      of Principal Executive Offices)
                    
                    (Zip
      Code)
  Registrant’s
telephone number: +86 (10) 5879-7346
  Securities
registered pursuant to Section 12(b) of the Act:
 Common
      Stock, $0.001 par value per share
                
                New
      York Stock Exchange(Title
      of each class)
                
                (Name
      of each exchange on which
registered)
  Securities
registered pursuant to Section 12(g) of the Act: None
  Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.    Yes   ̈    No  x
  Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the
Act.    Yes   ̈    No  x
  Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past
90 days.    Yes  x    No   ̈
  Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files).    Yes   ̈    No   ̈
  Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.    x
  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “accelerated filer”, “large
accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
  Large
      Accelerated Filer    ̈
              Accelerated
      Filer   x
              Non-accelerated
      Filer  ̈
                (Do
      not check if a smaller reporting company)
              Smaller
      reporting company  ̈
  Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).   Yes    ̈   No 
 x
  The
aggregate market value of the voting common equity held by non-affiliates as of
June 30, 2009, the last business day of the registrant’s most recently completed
second fiscal quarter, was approximately $85 million.  General Steel
has no non-voting common equity.
  The
number of shares outstanding of capital stock as of March 15, 2010 was
51,618,595.
  
 Documents
Incorporated by Reference:
  The
information called for by Part III is incorporated by reference to the
Definitive Proxy Statement for the 2010 Annual Meeting of Stockholders of the
Registrant which will be filed with the Securities and Exchange Commission not
later than April 30, 2010.








TABLE OF
CONTENTS




PART
      IITEM
      1.
                  BUSINESS.
                  3ITEM
      1A.
                  RISK
      FACTORS.
                  11ITEM
      1B.
                  UNRESOLVED
      STAFF COMMENTS.
                  24ITEM
      2.
                  PROPERTIES.
                  24ITEM
      3.
                  LEGAL
      PROCEEDINGS.
                  26ITEM
      4.
                  SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS.
                  26PART
      IIITEM
      5.
                  MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES.
                  26ITEM
      6.
                  SELECTED
      FINANCIAL DATA.
                  28ITEM
      7.
                  MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS.
                  29ITEM
      7A.
                  QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
                  54ITEM
      8.
                  FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA.
                  54ITEM
      9.
                  CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE.
                  93ITEM
      9A.
                  CONTROLS
      AND PROCEDURES.
                  93ITEM
      9B.
                  OTHER
      INFORMATION.
                  96PART
      IIIITEM
      10.
                  DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
                  96ITEM
      11.
                  EXECUTIVE
      COMPENSATION.
                  96ITEM
      12.
                  SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS.
                  96ITEM
      13.
                  CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE.
                  96ITEM
      14.
                  PRINCIPAL
      ACCOUNTING FEES AND SERVICES.
                  96PART
      IVITEM
      15.
                  EXHIBITS,
      FINANCIAL STATEMENT SCHEDULES.
                  97SIGNATURES
                  97


2





PART
I





ITEM
1. BUSINESS.





Overview




Our
company was incorporated on August 5, 2002, in the State of Nevada. We are
headquartered in Beijing, China and operate a diverse portfolio of Chinese
steel companies. Our companies serve various industries and produce a variety of
steel products including: reinforced bars (“rebar”), hot-rolled carbon and
silicon sheets, spiral-weld pipes and high-speed wire. Our aggregate annual
production capacity of steel products is 6.3 million metric tons, of which the
majority is rebar. Individual industry segments have unique demand drivers, such
as rural income, infrastructure construction and energy consumption. Domestic
economic conditions are an overall driver for all our products.





Our
vision is to become one of the largest and most profitable non-government owned
steel companies in China.





Our
mission is to acquire Chinese steel companies and increase their profitability
and efficiencies with the application of  western management practices
and advanced production technologies, and  the infusion of capital
resources.





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




Unless
the context indicates otherwise, as used herein the terms “General Steel”, the
“company”, “we”, “our” and “us” refer to General Steel Holdings, Inc.





Steel
Related Subsidiaries





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





·
            Tianjin Daqiuzhuang Metal Sheet
      Co., Ltd.;


·
            Baotou Steel - General Steel
      Special Steel Pipe Joint Venture Company
  Limited;


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


·
            Maoming Hengda Steel Group,
      Ltd.


3





•
Tianjin Daqiuzhuang Metal
Sheet Co., Ltd.





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




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





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





On May
14, 2009, Daqiuzhuang Metal changed its official name from “Tianjin Daqiuzhuang
Metal Sheet Co., Ltd.” to “General Steel (China) Co., Ltd.” to better reflect
its role as a merger and acquisition platform for steel company investments in
China.  In some instances, we retain the use of the name Daqiuzhuang
Metal for brand recognition purposes within the industry.





By the
end of March 2010, we expect to finalize the lease of our Daqiuzhuang facility
and operation to the facility’s current general manager.  Changing the
business model of this facility from a direct operations model to a leased
operations model will allow us to reduce overhead costs and provide a steady
revenue stream in the form of fixed monthly lease revenue.  We will
disclose specific terms of the lease agreement when we sign the definitive
agreement.





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





On April
27, 2007, Daqiuzhuang Metal and Baotou Iron and Steel Group Co., Ltd. (“Baotou
Steel”) entered into an Amended and Restated Joint Venture Agreement amending
the Joint Venture Agreement entered into on September 28, 2005 to increase
Daqiuzhuang Metal's ownership interest in the related joint venture to 80%. The
joint venture company’s name is Baotou Steel - General Steel Special Steel Pipe
Joint Venture Company Limited, a Chinese limited liability company (“Baotou
Steel Pipe Joint Venture”). Baotou Steel Pipe Joint Venture obtained its
business license from government authorities in China on May 25, 2007, and
started its normal operations in July 2007. Baotou Steel Pipe Joint Venture has
four production lines capable of producing 100,000 metric tons of double
spiral-weld pipes used mainly in the energy sector primarily to transport oil
and steam. These pipes have a diameter ranging from 219mm to 1240mm, a wall
thickness ranging from 6mm to 13mm, and a length ranging from 6m to 12m.
Presently, Baotou Steel Pipe Joint Venture sells its products using an internal
sales force to customers in the Inner Mongolia Autonomous Region and the
northwest region of China.





•
Shaanxi Longmen Iron and Steel
Co., Ltd.





Effective June
1, 2007, through two subsidiaries, Daqiuzhuang Metal and Tianjin Qiu Steel
Investment Co., Ltd., we entered into a Joint Venture Agreement with Shaanxi
Longmen Iron & Steel Group Co., Ltd. (“Long Steel Group”) to form Shaanxi
Longmen Iron and Steel Co., Ltd. (“Longmen Joint Venture”). Through our two
subsidiaries, we invested approximately $39 million cash and collectively hold
approximately 60% of the Longmen Joint Venture.


4





Longmen
Group, located in Hancheng city, Shaanxi province, in China’s central region,
was founded in 1958 and incorporated in 2002. Longmen Group operates as a
fully-integrated steel production facility.  Less than 10% of steel
companies in China have fully-integrated steel production
capabilities.





Currently,
the Longmen Joint Venture has four branch offices, six subsidiaries under direct
control and six entities in which it has a non-controlling
interest.  It employs approximately 6,317 full-time
workers.  In addition to steel production, the Longmen Joint Venture
operates transportation services through its Changlong Branch, located at
Hancheng city, Shaanxi province. Changlong Branch owns 154 vehicles and provides
transportation services exclusively to the Longmen Joint Venture.





Coke
Operation: Longmen Joint Venture owns 22.76% of Hancheng Tongxing Metallurgy
Co., Ltd. (“Tongxing”). Located in Hancheng city, Shaanxi province, Tongxing
produces second grade coke used as part the fuel for our blast
furnaces.  Its annualized coke production capacity is 200,000 metric
tons.  Tongxing sells all of its output to Longmen Joint
Venture.




Longmen
Joint Venture does not own iron pelletizing facilities.





Longmen
Joint Venture’s products are categorized within the steel industry as “longs”
(referencing their shape). Rebar is generally considered a regional product
because its weight and dimension make it ill-suited for cost-effective long-haul
ground transportation. By our estimates, the provincial market demand for rebar
is six to eight million metric tons per year. Slightly more than half of this
demand comes from Xi’an, the capital of Shaanxi province, located 180km from the
Longmen Joint Venture’s main steel production site. Currently, we estimate we
have an approximate 72% share of the Xi’an market for rebar.





An
established regional network of approximately 100 distributors and four sales
offices sell the Longmen Joint Venture’s products. All products sell under the
registered brand name of “Yulong,” which enjoys strong regional recognition and
awareness. Rebar and billet products carry ISO 9001 and 9002 certification and
many other products have won national quality awards. Products produced at the
facility have been used in the construction of the Yangtze River Three Gorges
Dam, Xi’an International Airport, the Xi’an city subway system and the Xi Luo Du
and the Xiang Jia Ba hydropower projects.





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


5




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





At the
same time, the Longmen Joint Venture also entered into a second equity transfer
agreement with the Longmen Group to acquire its 36% ownership interest in its
subsidiary, Hualong. The Longmen Joint Venture paid $430,000 (RMB3.3 million) in
exchange for the ownership interest and is the largest shareholder in Hualong.
The facility produces fire-retardant materials used in various steel making
processes.





On
January 11, 2008, the Longmen Joint Venture completed its acquisition of a
controlling interest in Hancheng Tongxing Metallurgy Co., Ltd. (“Tongxing”). The
Longmen Joint Venture contributed its land use right of 21.45 hectares
(approximately 53 acres) with an appraised value of approximately $4.1 million
(RMB30 million). Pursuant to the agreement, the land was exchanged for shares of
Tongxing valued at approximately $3.1 million (RMB22.7 million), giving the
Longmen Joint Venture a 22.76% ownership stake in Tongxing and making it
Tongxing’s largest shareholder. Tongxing has two operating areas: coking coal
production and rebar processing. Its coking coal operations have an annual
production capacity of 200,000 metric tons. Its rebar processing facility has an
annualized rolling capacity of 300,000 metric tons.





•  Maoming
Hengda Steel Group Limited





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





Maoming’s
core business is the production of high-speed wire and rebar products used in
the construction industry.  Located on 140 hectares (approximately 346
acres) in Maoming city, Guangdong province, the Maoming facility has two
production lines capable of producing 1.8 million metric tons of 5.5mm to 16mm
diameter high-speed wire and 12mm to 38mm diameter rebar annually. The products
are sold through nine distributors targeting customers in Guangxi province and
the western region of Guangdong province.  Previously, the Maoming
facility had been operating at approximately 10% of its capacity which we
believe was the result of the previous owners focus on matters unrelated to the
Maoming facility.




To take
advantage of stronger market demand in Shaanxi, in the second quarter of 2009,
we relocated the 800,000 metric ton capacity rebar production line from the
Maoming facility to the Longmen Joint Venture. In 2010, we intend to
relocate the 1,000,000 metric ton capacity high-speed wire production line from
the Maoming facility to the Longmen Joint Venture. We intend to install a new
400,000 metric ton capacity rebar line to operate in the Maoming
facility.


6





Operating
Information Summary by Subsidiaries





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





Marketing
and Customers





We sell
our products primarily to distributors, typically collecting payment from these
distributors in advance. Our marketing efforts are mainly directed toward those
customers who have exacting requirements for on-time delivery, customer support
and product quality and believe that these requirements as well as product
planning are critical factors in our ability to serve this segment of the
market.





Demand
for our products





Overall,
domestic economic growth is an important demand driver of our products,
especially construction and infrastructure projects, rural income growth and
energy demand.





At
Longmen Joint Venture, growth in regional construction and infrastructure
projects drives demand for our products. According to the 12th Five
Year National Economic and Social Development Plan (“NESDP”) (2011-2015),
development of China’s western region is one of the top-five economic priorities
of the nation. Shaanxi province, where Longmen Joint Venture is located, has
been designated as a focal point for development into the western region, and
Xi’an, the provincial capital, has been designated as a focal point for this
development. Our Longmen Joint Venture is 180 km from Xi’an and does not have a
major competitor within a 250 km radius. According to the information released
by the Shaanxi Provincial Development and Reform Commission, total fixed assets
investment for Shaanxi province was approximately RMB 113 billion for
the year ended December 31, 2009, a 71% increase over the same period last year.
There are 139 construction and infrastructure projects scheduled to begin in the
province in 2010. Some of the major projects include: nine new railways, one new
airport, expansion of the Xi’an airport, two new ring subway systems and 4 new
dams. We anticipate strong demand for our products driven by these and many
other construction and infrastructure projects. We believe there will be
sustained regional demand for several years as the government continues to drive
western region development efforts.


7





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





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





At
Maoming, infrastructure growth and business development in Maoming city, the
surrounding Guangdong cities and the western region of Guangxi province drive
demand for our construction steel products. As a second tier city, the
industrialization and urbanization of Maoming is one of the focal points of
economic development in the west Guangdong province.





Supply
of raw materials





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





Longmen
Joint Venture accounts for 4.8 million metric tons of our aggregate 6.3
million metric tons annual production capacity. At Longmen Joint Venture,
approximately 90% of production costs associated with is raw materials, with
iron ore being the largest component.





According
to the China Iron and Steel Association, approximately, 60% of the China
domestic steel industry demand for iron ore must be filled by imports. At
Longmen Joint Venture, we purchase iron ore from four primary sources: the
Mulonggou mine (owned by the Longmen Joint Venture), the Daxigou mine (owned by
Longmen Group, our partner in the Longmen Joint Venture), surrounding local
mines and from abroad. The Daxigou mine has 300 million metric tons of proven
iron ore reserves. According to the terms of our Longmen Joint Venture Agreement
with the Longmen Group, we have first rights of refusal for sales from the mine
and for its development. We presently purchase all of the production from this
mine.




Coke





Coke, produced from metallurgical coal
(also known as coking coal), is our second most consumed raw material, after
iron ore. It requires approximately 550kg to 600kg of coke to make one metric
ton of crude steel.


8





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





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




Longmen Joint
Venture





Name of the Major Supplier
                          
                          Raw Material
                            Purchased
                          
                          % of Total Raw
                            Material
                            Purchased
                          
                          
                          Relationship with
                            GSIShaanxi
      Longmen Iron & Steel Group Co., Ltd.
                          
                          Iron
      Ore
                          
                          
                          21.4
                          %
                          
                          Related
      partyShaanxi
      Haiyan Coal Chemical Industry Co., Ltd.
                          
                          Coke
                          
                          
                          11.1
                          %
                          
                          Related
      partyShaanxi
      Huanghe Material Co., Ltd.
                          
                          Coke
                          
                          
                          7.9
                          %
                          
                          OthersYunnan
      Jinliyuan Co., Ltd.
                          
                          Alloy
                          
                          
                          2.8
                          %
                          
                          OthersBeijing
      Daishang Co., Ltd.
                          
                          Iron
      Ore
                          
                          
                          2.4
                          %
                          
                          Related
      partyTotal
                          
                          
                          45.6
                          %





Daqiuzhuang
Metal





Name of the Major Supplier
                          
                          Raw Material
                            Purchased
                          
                          % of Total Raw
                            Material
                            Purchased
                          
                          
                          Relationship with
                            GSITianjin
      Hengying Trade Co., Ltd.
                          
                          Hot-roll
      coil
                          
                          
                          60.1
                          %
                          
                          Related
      partyGeneral
      Tongyong Qiu Steel Pipe Co., Ltd.
                          
                          Hot-roll
      coil
                          
                          
                          17.4
                          %
                          
                          Related
      partyTianjin
      Dazhan Industrial Co., Ltd.
                          
                          Hot-roll
      coil
                          
                          
                          12.4
                          %
                          
                          Related
      partyShenghua
      Xinyuan
                          
                          Hot-roll
      coil
                          
                          
                          4.9
                          %
                          
                          OthersTianjin
      Shengze Industrial Co., Ltd.
                          
                          Hot-roll
      coil
                          
                          
                          3.0
                          %
                          
                          OthersTotal
                          
                          
                          97.8
                          %





Baotou Steel Pipe Joint
Venture





Name of the Major Supplier
                          
                          Raw Material
                            Purchased
                          
                          % of Total Raw
                            Material
                            Purchased
                          
                          
                          Relationship with
                            GSIShaanxi
      Xinbang Trading Co., Ltd
                          
                          Steel
      coil
                          
                          
                          38.2
                          %
                          
                          OthersTianjin
      Jinchang I&E Co., Ltd.
                          
                          Steel
      coil
                          
                          
                          14.1
                          %
                          
                          OthersBaotou
      Weifengda Trading Co., Ltd
                          
                          Steel
      coil
                          
                          
                          10.5
                          %
                          
                          OthersTianjin
      Fulida Pipe Co., Ltd.
                          
                          Steel
      coil
                          
                          
                          9.9
                          %
                          
                          OthersTianjin
      Zhaoliang Trade Co., Ltd.
                          
                          Steel
      coil
                          
                          
                          8.7
                          %
                          
                          OthersTotal
                          
                          
                          81.4
                          %


9


Maoming





Name of the Major Supplier
                          
                          Raw Material
                            Purchased
                          
                          % of Total Raw
                            Material
                            Purchased
                          
                          
                          Relationship with
                            GSIMaoming
      Shengze Trading Co., Ltd.
                          
                          Billet
                          
                          
                          63.3
                          %
                          
                          Related
      partyChina
      Railway Material Commercial Corporation Tianjin Office
                          
                          Billet
                          
                          
                          22.4
                          %
                          
                          OthersGuangxi
      Shenglong Metallurgy Co., Ltd.
                          
                          Heavy
      oil
                          
                          
                          10.0
                          %
                          
                          OthersMaoming
      Dazhongmao Petrochem Co., Ltd.
                          
                          Billet
                          
                          
                          2.3
                          %
                          
                          OthersMaoming
      Zhengmao Develop Co., Ltd.
                          
                          Heavy
      oil
                          
                          
                          1.1
                          %
                          
                          OthersTotal
                          
                          
                          99.1
                          %





Industry
consolidation





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





Intellectual Property
Rights





“Qiu
Steel” is the registered trademark under which we sell hot-rolled carbon and
silicon steel sheets products produced at Daqiuzhuang Metal. The “Qiu Steel”
logo has been registered with the China National Trademark Bureau under No.
586433. “Qiu Steel” is registered under the GB 912-89 national quality standard,
and certified under the National Quality Assurance program.





“Baogang
Tongyong” is the trademark under which we sell spiral-weld steel pipes products
produced at Baotou Steel Pipe Joint Venture. This trademark is currently being
registered with China National Trademark Bureau.


10





“Yu Long”
is the registered trademark under which we sell rebar and high-speed wire
products produced in Longmen Joint Venture. The trademark is registered under
the ISO9001:2000 international quality standard.




“Heng Da”
is the registered trademark under which we sell high-speed wire and rebar
products produced at our Maoming facility. The trademark is registered under the
ISO9001:2000 international quality standard.





Employees





As of
December 31, 2009, we had approximately 7,067 full-time employees.





ITEM
1A. RISK FACTORS.




Our
business, financial condition and results of operations are subject to various
risks, including those discussed below, which may affect the value of our
securities.  The risks discussed below are those that we believe are
currently the most significant, although additional risks not presently known to
us or that we currently deem less significant may also impact our business,
financial condition and results of operations, perhaps materially.





Risks
Related to Our Business





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





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





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





•
            Quality;





•
            Price/cost
      competitiveness;





•
            System and product
      performance;





•
            Reliability and timeliness of
      delivery;


11





•
            New product and technology
      development capability;





•
            Excellence and flexibility in
      operations;





•
            Degree of global and local
      presence;





•
            Effectiveness of customer
      service; and





•
            Overall management
      capability.




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





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




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




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




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





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


12





Our
limited operating history may not serve as an adequate basis to judge our future
prospects and results of operations.





Our
limited operating history may not provide a meaningful basis on which to
evaluate our business. Although our revenues have grown rapidly since inception,
we might not be able to maintain our profitability or we may incur net losses in
the future. We expect that our operating expenses will increase as we expand.
Any significant failure to realize anticipated revenue growth could result in
significant operating losses. We will continue to encounter risks and
difficulties frequently experienced by companies at a similar stage of
development, including our potential failure to:





•
Implement our business model and strategy and adapt and modify them as
needed;





•
Increase awareness of our brands, protect our reputation and develop customer
loyalty;





• Manage
our expanding operations and service offerings, including the integration of any
future acquisitions;





•
Maintain adequate control of our expenses;





•
Anticipate and adapt to changing conditions in the markets in which we operate
as well as the impact of any changes in government regulation; and





•
Anticipate mergers and acquisitions involving our competitors, technological
developments and other significant competitive and market dynamics.





Our
inability to fund our capital expenditure requirements may adversely affect our
growth and profitability.





Our
continued growth is dependent upon our ability to raise additional capital from
outside sources. Our strategy is to grow through aggressive mergers, joint
ventures and acquisitions targeting SOE steel companies and selected entities
with outstanding potential. Our growth strategy will require us to obtain
additional financing through capital markets. In the future, we may be unable to
obtain the necessary financing on a timely basis and on favorable terms, and our
failure to do so may weaken our financial position, reduce our competitiveness,
limit our growth and reduce our profitability. Our ability to obtain acceptable
financing at any given time may depend on a number of factors,
including:





• Our
financial condition and results of operations;





• The
condition of the PRC economy and the industry sectors in which we operate;
and





• Conditions
in relevant financial markets in the United States, the PRC and elsewhere in the
world.


13





Disruptions
in world financial markets and the resulting governmental action of the United
States and other countries could have a material adverse impact on our ability
to obtain financing, our results of operations, financial condition and cash
flow and could cause the market price of our common shares to
decline.




The
current deep and potentially prolonged global recession that began in the United
States in December 2007 has, since the beginning of the third quarter of 2008,
had a material adverse effect on demand for our products and consequently the
results of our operations, financial condition and cash flows. In mid-February
2009, the Federal Reserve warned that the United States economy faces an
“unusually gradual and prolonged” period of recovery from this deep,
recessionary period.





The
credit markets worldwide and in the United States have experienced significant
contraction, de-leveraging and reduced liquidity, and the United States
government and foreign governments have either implemented or are considering a
broad variety of governmental action and/or new regulation of the financial
markets. Securities and futures markets and the credit markets are subject to
comprehensive statutes, regulations and other requirements.





The
uncertainty surrounding the future of the global credit markets has resulted in
reduced access to credit worldwide. Major market disruptions, the current
adverse changes in global market conditions, and the regulatory climate in the
United States and worldwide may adversely affect our business or impair our
ability to borrow funds as needed. The current market conditions may last longer
than we anticipate. These recent and developing economic and governmental
factors may have a material adverse effect on our results of operations,
financial condition or cash flows and could cause the price of our common stock
to decline significantly.





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




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




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





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


14





Our
business, revenues and profitability are dependent on a limited number of large
customers.





Our
revenue is dependent, in large part, on significant contracts with a limited
number of large customers.  As of December 31, 2009, approximately 29% of
our sales were to five customers. These customers accounted for 0% of total
account receivables as of December 31, 2009.  We believe that revenue
derived from our current and future large customers will continue to represent a
significant portion of our total revenue. Our inability to continue to secure
and maintain a sufficient number of large contracts or the loss of, or
significant reduction in purchases by, one or more of our major customers would
have the effect of reducing our revenues and profitability.





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





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





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





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





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





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





According
to the China Iron and Steel Association, there are approximately 1,100 steel
companies in China. Each steel company has its own production plan. The Chinese
government released new guidance on the steel industry to encourage
consolidation within the fragmented steel sector to mitigate problems of low-end
repetitive production and inefficient use of resources. The current
overproduction may not be solved by these measures enacted by the Chinese
government. If the current overproduction continues, our product shipments could
decline, our inventory could build up and eventually we may be required to
decrease our sales price, which may decrease our profitability.


15





Disruptions
to our manufacturing processes could adversely affect our operations, customer
service and financial results.




Steel
manufacturing processes are dependent on critical steel-making equipment, such
as furnaces, continuous casters, rolling mills and electrical equipment (such as
transformers), and such equipment may become temporarily inoperable as a result
of unanticipated malfunctions or other events, such as fires or furnace
breakdowns. Although our manufacturing plants have not experienced plant
shutdowns or periods of reduced production as a result of such equipment
failures or other events, we may experience such problems in the future. To the
extent that lost production as a result of such a disruption could not be
recovered by unaffected facilities, such disruptions could have an adverse
effect on our operations, customer service and financial results.





Because
we are a holding company with substantially all of our operations conducted
through our subsidiaries, our performance will be affected by the performance of
such subsidiaries.





We have
no operations other than Daqiuzhuang Metal, Baotou Steel Pipe Joint Venture,
Longmen Joint Venture and Maoming, and our principal assets are our investments
in these subsidiaries. As a result, we are dependent upon the performance of
Daqiuzhuang Metal, Baotou Steel Pipe Joint Venture, Longmen Joint Venture and
Maoming and we will be subject to the financial, business and other factors
affecting them as well as general economic and financial conditions. As
substantially all of our operations are and will be conducted through our
subsidiaries, we will be dependent on the cash flow of our subsidiaries to meet
our obligations.





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





We
depend on acquiring companies to fulfill our growth plan.





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





We
depend on bank financing for our working capital needs.





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


16





We
rely on Mr. Zuosheng Yu for important business leadership.





We
depend, to a large extent, on the abilities and operations of our current
management team. However, we have a particular reliance upon Mr. Zuosheng Yu,
our Chairman, Chief Executive Officer and significant shareholder, for the
direction of our business and leadership in our growth effort. The loss of the
services of Mr. Yu, for any reason, may have a material adverse effect on our
business and prospects. We cannot guarantee that Mr. Yu will continue to be
available to us, or that we will be able to find a suitable replacement for Mr.
Yu in a timely basis.




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





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




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





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





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


17





Risks
Related to Operating Our Business in China





We
face the risk that changes in the policies of the Chinese government could have
significant impact upon the business we may be able to conduct in China and the
profitability of such business.





The
economy of China is transitioning from a planned economy to a market oriented
economy, subject to five-year and annual plans adopted by the government that
set down national economic development goals. Policies of the Chinese government
can have significant effects on the economic conditions of China. The Chinese
government has confirmed that economic development will follow a model of a
market economy under socialism. Under this direction, we believe that China will
continue to strengthen its economic and trading relationships with foreign
countries and business development in China will follow market forces. While we
believe that this trend will continue, there can be no assurance that such will
be the case. A change in policies by the Chinese government could adversely
affect our interests through, among other factors: changes in laws; regulations
or the interpretation thereof; confiscatory taxation; restrictions on currency
conversion; imports or sources of supplies; or the expropriation or
nationalization of private enterprises. Although the Chinese government has been
pursuing economic reform policies for approximately two decades, the Chinese
government may significantly alter such policies, especially in the event of a
change in leadership, social or political disruption, or other circumstances
affecting China’s political, economic and social climate.





The
Chinese laws and regulations governing our current business operations and
contractual arrangements are uncertain, and if we are found to be in violation,
we could be subject to sanctions. In addition, any changes in such Chinese laws
and regulations may have a material and adverse effect on our
business.




There are
substantial uncertainties regarding the interpretation and application of
Chinese laws and regulations, including but not limited to the laws and
regulations governing our business, or the enforcement and performance of our
arrangements with customers in the event of the imposition of statutory liens,
death, bankruptcy and criminal proceedings. Along with our subsidiaries, we are
considered foreign persons or foreign funded enterprises under Chinese laws, and
as a result, we are required to comply with certain Chinese laws and
regulations. These laws and regulations are relatively new and may be subject to
future changes, and their official interpretation and enforcement may involve
substantial uncertainty. The effectiveness of newly enacted laws, regulations or
amendments may be delayed, resulting in detrimental reliance by foreign
investors. New laws and regulations that affect existing and proposed future
businesses may also be applied retroactively. In addition, the Chinese
authorities retain broad discretion in dealing with violations of laws and
regulations, including levying fines, revoking business licenses and requiring
actions necessary for compliance. In particular, licenses, permits and
beneficial treatment issued or granted to us by relevant governmental bodies may
be revoked at a later time under contrary findings of higher regulatory bodies.
We cannot predict what effect the interpretation of existing or new Chinese laws
or regulations may have on our businesses. We may be subject to sanctions,
including fines, and could be required to restructure our operations. Such
restructuring may not be deemed effective or may encounter similar or other
difficulties. As a result of these substantial uncertainties, there is a risk
that we may be found in violation of current or future Chinese laws or
regulations.


18





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





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




Inflation
in China could negatively affect our profitability and growth.





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





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





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





The
Chinese Government could change its policies toward private enterprises, which
could result in the total loss of our investments in China.





Our
business is subject to political and economic uncertainties in China and may be
adversely affected by its political, economic and social developments. Over the
past several years, the Chinese government has pursued economic reform policies
including the encouragement of private economic activity and greater economic
decentralization. The Chinese government may not continue to pursue these
policies or may alter them to our detriment. Conducting our business might
become more difficult or costly due to changes in policies, laws and
regulations, or in their interpretation or the imposition of confiscatory
taxation, restrictions on currency conversion, restrictions or prohibitions on
dividend payments to stockholders, devaluations of currency or the
nationalization or other expropriation of private enterprises. In addition,
nationalization or expropriation could result in the total loss of our
investments in China.


19


The
Chinese State Administration of Foreign Exchange, or SAFE, requires Chinese
residents to register with, or obtain approval from SAFE regarding their direct
or indirect offshore investment activities.




China’s
State Administration of Foreign Exchange Regulations regarding offshore
financing activities by Chinese residents has undertaken continuous changes
which may increase the administrative burden we face and create regulatory
uncertainties that could adversely affect the implementation of our acquisition
strategy. A failure by our shareholders who are Chinese residents to make any
required applications and filings pursuant to such regulations may prevent us
from being able to distribute profits and could expose us and our Chinese
resident shareholders to liability under Chinese law.




Our
business, results of operations and overall profitability are linked to the
economic, political and social conditions in China.





All of
our business, assets and operations are located in China. The economy of China
differs from the economies of most developed countries in many respects,
including government involvement, level of development, growth rate, control of
foreign exchange, and allocation of resources. The economy of China has been
transitioning from a planned economy to a more market-oriented economy. Although
the Chinese government has recently implemented measures emphasizing the
utilization of market forces for economic reform, the reduction of state
ownership of productive assets and the establishment of sound corporate
governance in business enterprises, a substantial portion of productive assets
in China is still owned by the Chinese government. In addition, the Chinese
government continues to play a significant role in regulating industry by
imposing industrial policies. It also exercises significant control over China’s
economic growth through the allocation of resources, controlling payment of
foreign currency denominated obligations, setting monetary policy and providing
preferential treatment to particular industries or companies. Therefore, the
Chinese government’s involvement in the economy may negatively affect our
business operations, results of operations and our financial
condition.





Governmental
control of currency conversion may cause the value of your investment in our
common stock to decrease.





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


20





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




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





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




Since
1994, China pegged the value of the Renminbi to the U.S. dollar. We do not
believe that this policy has affected our business. However, there have been
indications that the Chinese government may be reconsidering its monetary policy
in light of the overall devaluation of the U.S. dollar against the Euro and
other currencies during the last two years. In July 2005, the Chinese government
revalued the Renminbi by 2.1% against the U.S. dollar, moving from Renminbi 8.28
to Renminbi 8.11 per dollar. If the pegging of the Renminbi to the U.S. dollar
is loosened, we anticipate that the value of the Renminbi will appreciate
against the dollar with the consequences discussed above. As of December 31,
2009, the exchange rate of the Renminbi to the U.S. dollar was 6.82 yuan to
1 dollar.




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





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


21





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





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




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





The
Chinese legal system is based upon written statutes. Prior court decisions may
be cited for reference but are not binding on subsequent cases and have limited
value as precedent. Since 1979, China’s legislative bodies have promulgated laws
and regulations dealing with economic matters such as foreign investment,
corporate organization and governance, commerce, taxation and trade. However,
China has not developed a fully integrated legal system and the array of new
laws and regulations may not be sufficient to cover all aspects of economic
activities in China. In particular, because these laws and regulations are
relatively new, and because of the limited volume of published decisions and
their non-binding nature, the interpretation and enforcement of these laws and
regulations involves uncertainties. In addition, published government policies
and internal rules may have retroactive effects and, in some cases, the policies
and rules are not published at all. As a result, we may be unaware of our
violation of these policies and rules until some time later. The laws of China
govern our contractual arrangements with our affiliated entities and the
enforcement of these contracts and the interpretation of the laws governing
these relationships are subject to uncertainty.




Risks
Related to Our Common Stock





Our
officers, directors and affiliates control us through their positions and stock
ownership and their interests may differ from other stockholders.





Our
officers, directors and affiliates beneficially own approximately 41.3% of
our common stock. Mr. Zuosheng Yu, our major stockholder, beneficially owns
approximately 40.9% of our common stock. Mr. Yu can effectively control us and
his interests may differ from other stockholders.




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


22




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





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





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





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





Investors
may experience dilution from any conversion of the senior convertible notes or
exercise of warrants we issued in December 2007 and December
2009.





Shares of
our common stock are issuable upon conversion of senior convertible notes and
warrants to purchase common stock issued in a private placement that
closed  on December 13, 2007.  The senior convertible notes
were initially convertible into 4,170,009 shares of our common stock based on a
conversion price of $12.47 per share and applicable interest
rates.   Prior to the adjustments described below, upon the
exercise of the warrants, an additional aggregate amount of 1,154,958 shares of
our common stock were issuable based upon the then exercise price
of $13.51 per share.  The senior convertible notes have a five year
term through December 12, 2012, and the warrants are exercisable from May 13,
2008, to May 13, 2013.  The conversion price of the notes and the
exercise price of the warrants (and the number of shares issuable under the
warrants) are each subject to adjustment under certain customary circumstances,
including, among others, if the sale price of securities issued by us in
subsequent offerings is less than the conversion or exercise prices then in
effect.  The conversion price of the notes was adjusted and reset to
$4.2511, the market price (as defined in the notes) on May 7,
2009.  As of December 31, 2009, approximately $36.7 million of the
convertible notes had been converted, resulting in the issuance of 9,578,518
shares of our common stock.    As discussed below, the
warrants have been adjusted such that upon their exercise, an aggregate of
3,900,871 shares of our common stock  are now issuable based upon
the  current adjusted exercise price of $5.00 per
share.





In
addition to the notes and warrants issued in December 2007, we issued
5,555,556 shares of our common stock and warrants to purchase 2,777,778 shares
of our common stock in a registered direct offering that closed on December 30,
2009.  The warrants issued as part of the December 2009
transaction are exercisable beginning six months from the date of issuance for a
period of two years from the initial exercise date, and carry an initial
exercise price per share equal to $5.00. Certain anti-dilution adjustment
provisions contained in the warrants issued in 2007 may have been triggered
by the December 2009 transaction.  Rather than giving full effect to
the anti-dilution provisions, we entered into warrant reset agreements with
investors from our December 2007 financing whereby the aggregate number of
shares of common stock issuable upon exercise of the warrants issued in the
December 2007 transaction is increased from 1,154,958 shares to 3,900,871
shares, and the exercise price of the December 2007 Warrants was reduced from
$13.51 per share to $5.00 per share.


23


The
issuance of shares of our common stock upon conversion of the notes which
remain outstanding and exercise of any of our outstanding warrants (including
any increased amount of shares that may be issued in the future because of
reductions in exercise price and conversion price) will dilute our current
shareholders.





ITEM
1B. UNRESOLVED STAFF COMMENTS.





None.





ITEM
2. PROPERTIES.





Daqiuzhuang
Metal





The
properties of Daqiuzhuang Metal consist of manufacturing sites and office
buildings located in Jinghai county, about 20 miles (45 kilometers) southwest of
the Tianjin city center on a total of 17.81 acres (7.21 hectares) of land, which
includes 320,390 sq. ft. (29,667 sq. m.) of building space.





Under
Chinese law, all land in China is owned by the government, which grants a “land
use right” to an individual or entity after a purchase price for such “land use
right” is paid to the government. The land use right allows the holder the right
to use the land for a specified long-term period of time and enjoy all the
ownership incidents to the land. We are the registered owner of the land use
rights for the parcels of land identified in the chart below.





Registered Owner of
                                    Land use
                                    Right
                                  
                                  Location & Certificate of
                                    Land Use
                                    Right
                                  
                                  Usage
                                  
                                  Space
                                    (acres)
                                  
                                  Life of
                                    Land
                                    Use
                                    Right
                                  
                                  Remaining
                                    LifeTianjin
      Daqiuzhuang MetalSheet
      Co., Ltd.
                                  
                                  No.
      6 West Gangtuan Road, Daqiuzhuang, Jinghai Country,
Tianjin
                                  
                                  Industrial
      Use
                                  
                                  
                                  6.78
                                  
                                  50
      years
                                  
                                  42
      yearsTianjin
      Daqiuzhuang Metal Sheet Co., Ltd.
                                  
                                  No.
      35 Baiyi Road, Daqiuzhuang, Jinghai County, Tianjin
                                  
                                  Industrial
      Use
                                  
                                  
                                  9.89
                                  
                                  50
      years
                                  
                                  42
      yearsTianjin
      Daqiuzhuang Metal Sheet Co., Ltd.
                                  
                                  Ying
      Fong Road North, Daqiuzhuang, Jinghai country Tianjin
                                  
                                  Commercial
      Use
                                  
                                  
                                  1.14
                                  
                                  50
      years
                                  
                                  42
      years


24


Baotou Steel Pipe Joint
Venture





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





Longmen Joint
Venture





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





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





Registered Owner of
                                Landuse
                                Right
                              
                              Location & Certificate of
                                Land Use
                                Right
                              
                              Usage
                              
                              Space
                                (acres)
                              
                              Life of
                                Land
                                Use
                                Right
                              
                              Remaining
                                LifeShaanxi
      Longmen Iron andSteel
      Co., Ltd.
                              
                              North
      Huanyuan Road, Weiyang District, Xi'an, Shaanxi
                              
                              Industrial
      Use
                              
                              
                              19.1
                              
                              50
      Years
                              
                              36
      YearsShaanxi
      Longmen Iron and Steel Co., Ltd.
                              
                              Longmen
      Town, Hancheng, Shaanxi
                              
                              Industrial
      Use
                              
                              
                              173.2
                              
                              40-48
      Years
                              
                              36-40
      YearsShaanxi
      Longmen Iron and Steel Co., Ltd.
                              
                              Sanping
      Village, Shipo Town, Zhashui County, Shaanxi
                              
                              Industrial
      Use
                              
                              
                              103.2
                              
                              50
      Years
                              
                              44
      YearsShaanxi
      Longmen Iron and Steel Co., Ltd.
                              
                              Zhaikouhe
      Village, Xunjian Town, Zhashui County, Shaanxi
                              
                              Industrial
      Use
                              
                              
                              1.9
                              
                              50
      Years
                              
                              44
      YearsShaanxi
      Longmen Iron and Steel Co., Ltd.
                              
                              East
      Taishi Avenue, Xincheng District, Hancheng, Shaanxi
                              
                              Commercial
      Use
                              
                              
                              3.6
                              
                              40
      Years
                              
                              35
      Years


25


Maoming





The
properties of Maoming consist of our production and administrative sites located
in two separated sites inside Maoming city, Guangdong province, on land totaling
approximately 239.6 acres (96.9 hectares).





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





Registered Owner of Land
                                  use
                                  Right
                                
                                Location & Certificate of
                                  Land Use
                                  Right
                                
                                Usage
                                
                                Space
                                  (acres)
                                
                                Life
                                  of
                                  Land
                                  Use
                                  Right
                                
                                Remaining
                                  LifeMaoming
      Hengda Steel Co., Ltd.
                                
                                Diancheng
      Town, Dianbai County, Maoming City, Industrial Zone of Bohe Port,
      Guangdong
                                
                                Industrial
      Use
                                
                                
                                239.6
                                
                                50
      Years
                                
                                44
      Years





ITEM
3. LEGAL PROCEEDINGS.





None.





ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.





None.





PART
II





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





Beginning
October 3, 2007 through March 5, 2008, our common stock was listed on the
American Stock Exchange and from March 6, 2008 to August 7, 2008 our common
stock was traded on the NYSE Arca exchange.  On August 8, 2008, our
common stock began trading on the NYSE. Our ticker symbol is "GSI." The high and
low closing common stock price for each quarter of the last two years is as
follows:





HIGH AND LOW STOCK PRICES
                
                1ST QTR
                
                
                2ND QTR
                
                
                3RD QTR
                
                
                4TH QTR2009High
                
                $
                4.59
                
                
                $
                7.35
                
                
                $
                5.74
                
                
                $
                5.79Low
                
                $
                1.85
                
                
                $
                2.77
                
                
                $
                3.32
                
                
                $
                3.622008High
                
                $
                9.08
                
                
                $
                15.70
                
                
                $
                15.50
                
                
                $
                7.16Low
                
                $
                6.23
                
                
                $
                6.66
                
                
                $
                7.14
                
                
                $
                2.53


26


As
of March 5, 2010, there were approximately 10,000 holders of record of our
common stock.





Dividend
Policy





Our board
of directors currently does not intend to declare dividends or make any other
distributions to our shareholders. Any determination to pay dividends in the
future will be at our board’s discretion and will depend upon our results of
operations, financial condition and prospects as well as other factors deemed
relevant by our board of directors.





Recent
Sales of Unregistered Sale Securities





On
September 1, 2009, we granted Huamei 21st Century Limited, 170,000 shares of our
common stock at $3.60 per share for consulting services. The Company relied on
the exemption from the registration requirements of the Securities Act of 1933,
as amended (the “Securities Act”) provided under Section 4(2) of the Securities
Act in granting the shares to Huamei 21st Century
Limited.


27


ITEM
6. SELECTED FINANCIAL DATA.





SUMMARY
      OF OPERATIONS
                    
                    2009
                    
                    
                    2008
                    
                    
                    2007
                    
                    
                    2006
                    
                    
                    2005(USD
      and number of shares in thousands, except per share
    amounts)Revenues
                    
                    $
                    1,668,446
                    
                    
                    $
                    1,351,203
                    
                    
                    $
                    772,440
                    
                    
                    $
                    139,495
                    
                    
                    $
                    89,740Cost
      of Revenues
                    
                    $
                    1,579,892
                    
                    
                    $
                    1,343,275
                    
                    
                    $
                    715,751
                    
                    
                    $
                    135,324
                    
                    
                    $
                    81,166Selling,
      General, and Administrative Expenses
                    
                    $
                    41,074
                    
                    
                    $
                    36,942
                    
                    
                    $
                    16,164
                    
                    
                    $
                    2,421
                    
                    
                    $
                    2,781Income
      (Loss) from operations
                    
                    $
                    47,480
                    
                    
                    $
                    (29,014
                    )
                    
                    $
                    40,525
                    
                    
                    $
                    1,749
                    
                    
                    $
                    5,793Net
      Income(Loss)
      Attributable to Controlling Interest
                    
                    $
                    (25,244
                    )
                    
                    $
                    (11,323
                    )
                    
                    $
                    22,426
                    
                    
                    $
                    1,033
                    
                    
                    $
                    2,740(Loss)
      Earnings per Share, Basic
                    
                    $
                    (0.60
                    )
                    
                    $
                    (0.32
                    )
                    
                    $
                    0.69
                    
                    
                    $
                    0.03
                    
                    
                    $
                    0.09(Loss)
      Earnings per Share, Diluted
                    
                    $
                    (0.60
                    )
                    
                    $
                    (0.32
                    )
                    
                    $
                    0.69
                    
                    
                    $
                    0.03
                    
                    
                    $
                    0.09Basic
      Weighted Average Shares Outstanding
                    
                    
                    41,860
                    
                    
                    
                    35,381
                    
                    
                    
                    32,425
                    
                    
                    
                    31,250
                    
                    
                    
                    31,250Diluted
      Weighted Average Shares Outstanding
                    
                    
                    41,860
                    
                    
                    
                    35,381
                    
                    
                    
                    32,558
                    
                    
                    
                    31,250
                    
                    
                    
                    31,250LONG
      TERM OBLIGATIONSConvertible
      Notes Payables
                    
                    $
                    1,050
                    
                    
                    $
                    7,155
                    
                    
                    $
                    5,440Derivative
      Liabilities
                    
                    $
                    23,340
                    
                    
                    $
                    9,903
                    
                    
                    $
                    28,483




As of DECEMBER 31FINANCIAL
      DATA
                                                        
                                                        2009
                                                        
                                                        
                                                        2008
                                                        
                                                        
                                                        2007
                                                        
                                                        
                                                        2006
                                                        
                                                        
                                                        2005(USD
      in thousands, except the ratios)Total
      Assets
                                                        
                                                        $
                                                        1,228,064
                                                        
                                                        
                                                        $
                                                        865,714
                                                        
                                                        
                                                        $
                                                        478,407
                                                        
                                                        
                                                        $
                                                        73,822
                                                        
                                                        
                                                        $
                                                        58,993Depreciation
      and Amortization
                                                        
                                                        $
                                                        33,107
                                                        
                                                        
                                                        $
                                                        22,414
                                                        
                                                        
                                                        $
                                                        10,337
                                                        
                                                        
                                                        $
                                                        1,917
                                                        
                                                        
                                                        $
                                                        1,344Current
      Ratio
                                                        
                                                        
                                                        0.59
                                                        
                                                        
                                                        
                                                        0.43
                                                        
                                                        
                                                        
                                                        0.67
                                                        
                                                        
                                                        
                                                        0.87
                                                        
                                                        
                                                        
                                                        0.96


Three
      months ended December 31STATEMENT
      OF
                    
                    (Unaudited)OPERATIONAL
      DATA
                    
                    2009
                    
                    
                    2008
                    
                    
                    2007
                    
                    
                    2006
                    
                    
                    2005(USD
      in thousands, except share and per share amounts)Statement
      of Operations DataRevenues
                    
                    $
                    451,953
                    
                    
                    $
                    261,087
                    
                    
                    $
                    268,192
                    
                    
                    $
                    42,496
                    
                    
                    $
                    17,719Cost
      of Revenues
                    
                    $
                    438,554
                    
                    
                    $
                    282,662
                    
                    
                    $
                    247,239
                    
                    
                    $
                    42,838
                    
                    
                    $
                    17,509Gross
      Profit
                    
                    $
                    13,399
                    
                    
                    $
                    (21,575
                    )
                    
                    $
                    20,953
                    
                    
                    $
                    (342
                    )
                    
                    $
                    210Selling,
      General, and Administrative Expenses
                    
                    $
                    11,855
                    
                    
                    $
                    8,578
                    
                    
                    $
                    5,894
                    
                    
                    $
                    266
                    
                    
                    $
                    1,017Income
      (Loss) form Operations
                    
                    $
                    1,544
                    
                    
                    $
                    (30,153
                    )
                    
                    $
                    15,059
                    
                    
                    $
                    (607
                    )
                    
                    $
                    (808
                    )Net
      income (Loss) Attributable to Controlling Interest
                    
                    $
                    (11,085
                    )
                    
                    $
                    (9,705
                    )
                    
                    $
                    12,057
                    
                    
                    $
                    514
                    
                    
                    $
                    386(Loss)
      Earnings per shareBasic
                    
                    $
                    (0.26
                    )
                    
                    $
                    (0.27
                    )
                    
                    $
                    0.36
                    
                    
                    $
                    0.01
                    
                    
                    $
                    0.01Diluted
                    
                    $
                    (0.26
                    )
                    
                    $
                    (0.27
                    )
                    
                    $
                    0.36
                    
                    
                    $
                    0.01
                    
                    
                    $
                    0.01Balance
      Sheet DataCurrent
      Assets
                    
                    $
                    615,278
                    
                    
                    $
                    315,445
                    
                    
                    $
                    232,608
                    
                    
                    $
                    44,670
                    
                    
                    $
                    37,017Total
      Assets
                    
                    $
                    1,228,064
                    
                    
                    $
                    865,714
                    
                    
                    $
                    478,407
                    
                    
                    $
                    73,822
                    
                    
                    $
                    58,993Total
      Liabilities
                    
                    $
                    1,061,735
                    
                    
                    $
                    751,476
                    
                    
                    $
                    382,974
                    
                    
                    $
                    53,575
                    
                    
                    $
                    41,256Noncontrolling
      interest
                    
                    $
                    72,598
                    
                    
                    $
                    54,330
                    
                    
                    $
                    42,044
                    
                    
                    $
                    6,186
                    
                    
                    $
                    5,387


28


ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.





Forward-Looking
Statements:





The
following discussion of the financial condition and results of operations should
be read in conjunction with the consolidated financial statements and related
notes thereto. The following discussion contains forward-looking statements.
General Steel Holdings, Inc. is referred to herein as “we” or “our.” The words
or phrases “would be,” “will allow,” “expect to”, “intends to,” “will likely
result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” or
similar expressions are intended to identify forward-looking statements. Such
statements include those concerning our expected financial performance, our
corporate strategy and operational plans. Actual results could differ materially
from those projected in the forward-looking statements as a result of a number
of risks and uncertainties, including: (a) those risks and uncertainties related
to general economic conditions in China, including regulatory factors that may
affect such economic conditions; (b) whether we are able to manage our planned
growth efficiently and operate profitable operations, including whether our
management will be able to identify, hire, train, retain, motivate and manage
required personnel or that management will be able to successfully manage and
exploit existing and potential market opportunities; (c) whether we are able to
generate sufficient revenues or obtain financing to sustain and grow our
operations; and (d) whether we are able to successfully fulfill our primary
requirements for cash which are explained below under “Liquidity and Capital
Resources”. Unless otherwise required by applicable law, we do not undertake,
and we specifically disclaim any obligation, to update any forward-looking
statements to reflect occurrences, developments, unanticipated events or
circumstances after the date of such statement.





OVERVIEW





General
Steel was founded on the strategy to aggressively merge, partner with, and
acquire State-owned enterprises and private steel companies within China’s
highly fragmented steel industry.  As of December 31, 2009, we were
comprised of four operating subsidiaries of which the Longmen Joint Venture
is the largest.  Located in Shaanxi province, the Longmen Joint
Venture contributed approximately 92% of our total revenue for the 2009 fiscal
year.





Highlights
of 2009





Fiscal
year 2009 was highlighted by record revenue, shipment volume and income from
operations.





·
            Revenue
      in 2009 was the highest in our history, reaching $1.67 billion, a 23.5%
      increase over 2008.


·
            Shipment
      volume in 2009 was the highest in our history, reaching 3.8 million metric
      tons, a 66.1% increase over 2008.


·
            Gross
      margin increased from 0.59% in 2008 to 5.31%
  in 2009.


29





·
            Income
      from Operations in 2009 was the highest in our history, reaching $47.5
      million, compared to an operating loss of $29 million in
    2008.


·
            Non-GAAP
      EBITDA in 2009 was $93.2 million, a significant increase from $3.2 million
      in 2008 due primarily to implementation of cost cutting
      measures.


·
            We
      have been given an unqualified opinion by our auditors on our internal
      control system according to criteria established in the framework in Internal
      Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway
      Commission.  We have concluded that our internal control over
      financial reporting was effective as of December 31,
      2009.


·
            We
      brought the second of two new 1280 cubic meter blast furnaces on-line at
      the Longmen Joint Venture, effectively doubling the annualized total crude
      steel capacity at the facility to 4 million metric
  tons.


·
            We
      secured commitment for 70% of our 2010 estimated production at Longmen
      Joint Venture through signed contracts from established
      distributors.


·
            We were awarded two contracts to
      supply an aggregate of 240,000 metric tons of steel to support the Xi Luo
      Du and the Xiang Jia Ba hydropower projects, both located in western
      China.


·
            We
      completed a $25 million capital raise through the issuance of common stock
      and warrants.





The
record results reflect the strong demand for our construction steel products in
our principal markets of Shaanxi and western China. Our Longmen Joint Venture
continued to benefit from a large number of infrastructure projects in the
region fueled by the national stimulus plan and the national “Go West” economic
development initiative.





RESULTS
OF OPERATIONS





General





The first
three quarters of the year saw reduced raw material prices as the world
commodity markets regained their footing after suffering an abrupt collapse as
part of the financial crisis in late 2008.  During this time, demand
for our construction steel products in our principal market of Shaanxi and
western China grew rapidly as downstream infrastructure and construction
projects boomed as the national $586 billion national stimulus plan gained
traction.  As a result of this strong demand, in the third quarter,
the Shaanxi provincial GDP exceeded 18%.





In the
fourth quarter of 2009, unit cost of sales decreased 20.6% compared to the same
quarter last year. Additionally, during the fourth quarter of 2009 the average
selling price for rebar fell 30% due primarily to a weather-related slowdown in
overall construction as compared to the fourth quarter of
2008.


30


Fiscal
year ended December 31, 2009 compared with fiscal year ended December 31, 2008
and 2007





Income
Statement


Income
      Statement
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                Percentage ChangeUnit-thousands except share
      data
                                
                                2009
                                
                                
                                2008
                                
                                
                                2007
                                
                                
                                2009 VS 2008
                                
                                
                                2008 VS 2007Revenues
                                
                                $
                                1,668,446
                                
                                
                                $
                                1,351,203
                                
                                
                                $
                                772,440
                                
                                
                                
                                23
                                %
                                
                                
                                75
                                %Cost
      of Revenues
                                
                                $
                                1,579,892
                                
                                
                                $
                                1,343,275
                                
                                
                                $
                                715,751
                                
                                
                                
                                18
                                %
                                
                                
                                88
                                %Gross
      Profit
                                
                                $
                                88,554
                                
                                
                                $
                                7,928
                                
                                
                                $
                                56,689
                                
                                
                                
                                1017
                                %
                                
                                
                                -86
                                %Gross
      Profit Margin %
                                
                                
                                5.31
                                %
                                
                                
                                0.59
                                %
                                
                                
                                7.34
                                %Selling,
      General and Administrative Expenses
                                
                                $
                                41,074
                                
                                
                                $
                                36,492
                                
                                
                                $
                                16,164
                                
                                
                                
                                13
                                %
                                
                                
                                126
                                %Income
      (Loss) from Operations
                                
                                $
                                47,480
                                
                                
                                $
                                (29,014
                                )
                                
                                $
                                40,525Total
      Other Income (expense), net
                                
                                $
                                (45,008
                                )
                                
                                $
                                3,738
                                
                                
                                $
                                (1,262
                                )Income
      (Loss) Before Provision for Income Tax and Noncontrolling
      Interest
                                
                                $
                                2,472
                                
                                
                                $
                                (25,276
                                )
                                
                                $
                                39,263Total
      Provision (Benefit) for Income Taxes
                                
                                $
                                6,153
                                
                                
                                $
                                (5,411
                                )
                                
                                $
                                4,836Income
      (Loss) before the Noncontrolling Interest
                                
                                $
                                (3,681
                                )
                                
                                $
                                (19,865
                                )
                                
                                $
                                34,427Less:
      Net Income (loss) Attributable to the Noncontrolling
    Interest
                                
                                $
                                21,563
                                
                                
                                $
                                (8,542
                                )
                                
                                $
                                12,001Net
      Income (Loss) Attributable to Controlling Interest
                                
                                $
                                (25,244
                                )
                                
                                $
                                (11,323
                                )
                                
                                $
                                22,426(Loss)
      Earnings Per ShareBasic
                                
                                $
                                (0.603
                                )
                                
                                $
                                (0.320
                                )
                                
                                $
                                0.690Diluted
                                
                                $
                                (0.603
                                )
                                
                                $
                                (0.320
                                )
                                
                                $
                                0.690





Revenue





Revenue
in 2009 was the highest in our history, reaching $1.67 billion, a 23.5% increase
over 2008. This increase in revenue is attributed to an increase of 67.3% in
additional shipment volume at our Longmen Joint Venture. The shipment volume
increase was made possible by the new capacity of two 1280 cubic meter blast
furnaces brought on line in December 2008 and January 2009. The aggregate
revenue for 2009 also reflects a full twelve months of operations at our Maoming
facility, whereas 2008 reflected only six months of such consolidation. For
2009, our Longmen Joint Venture comprised 92% of total sales.




31


Three
months ended December 31, 2009 compared with Three months ended December 31,
2008





Three months ended December 31(Unaudited)Income
      Statement
                                
                                
                                
                                
                                
                                
                                
                                Percentage ChangeUnit-thousands
      except share data
                                
                                2009
      Q4
                                
                                
                                2008
      Q4
                                
                                
                                2009
      Q4 VS 2008 Q4Revenues
                                
                                $
                                451,953
                                
                                
                                $
                                261,087
                                
                                
                                
                                73
                                %Cost
      of Revenues
                                
                                $
                                438,554
                                
                                
                                $
                                282,662
                                
                                
                                
                                55
                                %Gross
      Profit (loss)
                                
                                $
                                13,399
                                
                                
                                $
                                (21,575
                                )Gross
      Profit Margin %
                                
                                
                                2.96
                                %
                                
                                
                                (8.26
                                )%Selling,
      General and Administrative Expenses
                                
                                $
                                11,855
                                
                                
                                $
                                8,578
                                
                                
                                
                                38
                                %Income
      (Loss) from Operations
                                
                                $
                                1,544
                                
                                
                                $
                                (30,153
                                )Total
      Other Income (expense), net
                                
                                $
                                (13,520
                                )
                                
                                $
                                6,926Loss
      Before Provision for Income Tax and Noncontrolling
Interest
                                
                                $
                                (11,976
                                )
                                
                                $
                                (23,227
                                )Total
      Benefit for Income Taxes
                                
                                $
                                (1,033
                                )
                                
                                $
                                (4,864
                                )Loss
      before the Noncontrolling Interest
                                
                                $
                                (10,943
                                )
                                
                                $
                                (18,363
                                )Less:
      Net Income (loss) Attributable to the Noncontrolling
    Interest
                                
                                $
                                142
                                
                                
                                $
                                (8,658
                                )Net
      Loss Attributable to Controlling Interest
                                
                                $
                                (11,085
                                )
                                
                                $
                                (9,705
                                )(Loss)
      Earnings Per ShareBasic
                                
                                $
                                (0.26
                                )
                                
                                $
                                (0.27
                                )Diluted
                                
                                $
                                (0.26
                                )
                                
                                $
                                (0.27
                                )





Production
and Revenue by Subsidiary and Product




Each
subsidiary produces one main product. Revenue and production volume by product
is seen by looking at the results of each subsidiary.





Fiscal
year ended December 31, 2009 compared with fiscal year ended December 31, 2008
and 2007




Production by Subsidiary and Product (in thousand
      metric tons)Subsidiary
                        Product
                        
                        2009
                        
                        
                        2008
                        
                        
                        2007Longmen
      Joint Venture
                        Rebar
                        
                        
                        3,395
                        
                        
                        
                        2,030
                        
                        
                        
                        1,441Daqiuzhuang
      Metal
                        Hot-Rolled
      Sheets
                        
                        
                        156
                        
                        
                        
                        196
                        
                        
                        
                        323Maoming
                        High-Speed
      Wire
                        
                        
                        254
                        
                        
                        
                        48Baotou
      Steel Pipe
                        Spiral-Welded
      Steel Pipes
                        
                        
                        29
                        
                        
                        
                        34
                        
                        
                        
                        13Total
      Production
                        
                        
                        3,834
                        
                        
                        
                        2,308
                        
                        
                        
                        1,777




Revenue
      by Subsidiary and Product (USD in thousands)Subsidiary
                                  Product
                                  
                                  2009
                                  
                                  
                                  2008
                                  
                                  
                                  2007Longmen
      Joint Venture
                                  Rebar
                                  
                                  
                                  1,534,696
                                  
                                  
                                  
                                  1,182,433
                                  
                                  
                                  
                                  618,315Daqiuzhuang
      Metal
                                  Hot-Rolled
      Sheets
                                  
                                  
                                  58,833
                                  
                                  
                                  
                                  132,458
                                  
                                  
                                  
                                  147,727Maoming
                                  High-Speed
      Wire
                                  
                                  
                                  62,487
                                  
                                  
                                  
                                  23,280Baotou
      Steel Pipe
                                  Spiral-Welded
      Steel Pipes
                                  
                                  
                                  12,430
                                  
                                  
                                  
                                  13,032
                                  
                                  
                                  
                                  6,397Total
      Revenue
                                  
                                  
                                  1,668,446
                                  
                                  
                                  
                                  1,351,203
                                  
                                  
                                  
                                  772,439





Revenue
at the Longmen Joint Venture increased 29.8% to $1.5 billion in 2009 up from
$1.2 billion in 2008. The increased production at the facility of nearly 1.4
million metric tons accounted for the increase and offset the overall drop in
selling price during the year. Revenue at the Maoming facility increased 168.4%
to $62.5 million in 2009 from $23.3 million in 2008, owing to a full year
consolidation of operating results in 2009. We acquired Maoming in July 2008 and
recorded only six months of the facility’s operations for 2008.


32





Three
months ended December 31, 2009 compared with three months ended December 31,
2008


Three
      months ended December 31(Unaudited)Production by Subsidiary and Product (in thousand
      metric tons)
                            
                            
                            
                            
                            
                            
                            
                            Percentage ChangeSubsidiary
                            Product
                            
                            2009
      Q4
                            
                            
                            2008
      Q4
                            
                            
                            2009
      Q4 VS 2008 Q4Longmen
      Joint Venture
                            Rebar
                            
                            
                            944
                            
                            
                            
                            507
                            
                            
                            
                            86
                            %Daqiuzhuang
      Metal
                            Hot-Rolled
      Sheets
                            
                            
                            74
                            
                            
                            
                            29
                            
                            
                            
                            155
                            %Maoming
                            High-Speed
      Wire
                            
                            
                            94
                            
                            
                            
                            26
                            
                            
                            
                            262
                            %Baotou
      Steel Pipe
                            Spiral-Welded
      Steel Pipes
                            
                            
                            12
                            
                            
                            
                            13
                            
                            
                            
                            -8
                            %Total
      Production
                            
                            
                            1,124
                            
                            
                            
                            575
                            
                            
                            
                            95
                            %





Three
      months ended December 31(Unaudited)Revenue
      by Subsidiary and Product (USD in thousands)
                              
                              
                              
                              
                              
                              
                              
                              Percentage
      ChangeSubsidiary
                              Product
                              
                              2009
      Q4
                              
                              
                              2008
      Q4
                              
                              
                              2009
      Q4 VS 2008 Q4Longmen
      Joint Venture
                              Rebar
                              
                              
                              422,165
                              
                              
                              
                              234,262
                              
                              
                              
                              80
                              %Daqiuzhuang
      Metal
                              Hot-Rolled
      Sheets
                              
                              
                              17,274
                              
                              
                              
                              14,461
                              
                              
                              
                              19
                              %Maoming
                              High-Speed
      Wire
                              
                              
                              8,480
                              
                              
                              
                              8,904
                              
                              
                              
                              -5
                              %Baotou
      Steel Pipe
                              Spiral-Welded Steel Pipes
                              
                              
                              4,034
                              
                              
                              
                              3,460
                              
                              
                              
                              17
                              %Total Revenue
                              
                              
                              451,953
                              
                              
                              
                              261,087
                              
                              
                              
                              73
                              %





Cost
of Revenues




Fiscal
year ended December 31, 2009 compared with fiscal years ended December 31, 2008
and 2007


(USD
      in thousand)
                      
                      2009
                      
                      
                      2008
                      
                      
                      2007Cost
      of Revenues
                      
                      $
                      1,139,630
                      
                      
                      $
                      999,318
                      
                      
                      $
                      389,615Cost
      of Revenues - Related Parties
                      
                      $
                      440,262
                      
                      
                      $
                      343,957
                      
                      
                      $
                      326,136Total
      Cost of Revenues
                      
                      $
                      1,579,892
                      
                      
                      $
                      1,343,275
                      
                      
                      $
                      715,751





Our
primary cost of revenues is the cost of raw material such iron ore, coke, alloy
and scrap steel. The cost of iron ore and coke accounts for approximately 75% of
our total cost of sales. As a result, the price of iron ore and coke are the
primary raw material cost drivers for our products. In 2009, we were able to
control our costs with the two new blast furnaces at Longmen Joint Venture which
are more efficient with lower coke usage in production. In addition, we
successfully increased our raw material inventory, especially iron ore, at
relatively low prices throughout the year which helped us to control our cost of
revenues.





Three
months ended December 31, 2009 compared with three months ended December 31,
2008





Gross
Profit




Fiscal
year ended December 31, 2009 compared with fiscal year ended December 31,
2008





(USD
      in thousand)
                    
                    2009
                    
                    
                    2008
                    
                    
                    2007Gross
      Profit
                    
                    $
                    88,554
                    
                    
                    $
                    7,928
                    
                    
                    $
                    56,689Gross
      Profit Margin
                    
                    
                    5.31
                    %
                    
                    
                    0.59
                    %
                    
                    
                    7.34
                    %





Gross
profit in 2009 was $88.6 million, compared to $7.9 million in 2008. The increase
was mainly due to our Longmen Joint Venture and its 67.3% increase in sales
volume in 2009.


33





Higher
gross profit in 2009 came not only from the overall lowering of raw material
costs following record highs in the first half of 2008, but also from improved
cost control in production, efficiencies in raw material usage with the new
blast furnaces at Longmen Joint Venture and an increase in raw material
inventory, especially iron ore, at relatively low prices through out the
year.





Three
months ended December 31, 2009 compared with fiscal year ended December 31,
2008


ThreemonthsendedDecember31(Unaudited)(USD in thousand)
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      Percentage Change2009 Q4
                                                      
                                                      
                                                      2008 Q4
                                                      
                                                      2009 Q4 VS 2008 Q4Gross Profit (loss)
                                                      
                                                      $
                                                      13,399
                                                      
                                                      
                                                      $
                                                      (21,575
                                                      )Gross Profit Margin
                                                      
                                                      
                                                      2.96
                                                      %
                                                      
                                                      
                                                      (8.26
                                                      )%





Selling,
General and Administrative Expenses




Fiscal
year ended December 31, 2009 compared with fiscal year ended December 31, 2008
and 2007


(USD in thousand)
                  
                  2009
                  
                  
                  2008
                  
                  
                  2007Selling,
      General and Administrative expenses
                  
                  $
                  41,074
                  
                  
                  $
                  36,942
                  
                  
                  $
                  16,164SG&A
      / Revenue %
                  
                  
                  2.46
                  %
                  
                  
                  2.73
                  %
                  
                  
                  2.09
                  %





Our
revenue grew by 23.5% while the dollar amount of our Selling, General and
Administrative Expenses (“SG&A”), which includes costs such as executive
compensation, office expense, legal and accounting charges, travel charges, and
various taxes, also increased 11.2% to $41.1 million in 2009 from $36.9 million
in 2008. SG&A as a percentage of revenue decreased to 2.5% in fiscal year
2009 from 2.7% in year 2008.





Three
months ended December 31, 2009 compared with three months ended December 31,
2008


ThreemonthsendedDecember31(Unaudited)(USD in thousand)
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      Percentage Change2009 Q4
                                      
                                      
                                      2008 Q4
                                      
                                      
                                      2009 Q4 VS 2008 Q4Selling, General and Administrative
      expenses
                                      
                                      $
                                      11,855
                                      
                                      
                                      $
                                      8,578
                                      
                                      
                                      
                                      38
                                      %SG&A/Revenue %
                                      
                                      
                                      2.62
                                      %
                                      
                                      
                                      3.29
                                      %





SG&A
as a percentage of revenue for the three months ended December 31 decreased to
2.6% in fiscal year 2009 from 3.3% in year 2008.





Income
(Loss) from Operations




Fiscal
year ended December 31, 2009 compared with fiscal year ended December 31, 2008
and 2007




(USD
      in thousand)
                    
                    2009
                    
                    
                    2008
                    
                    
                    2007Income
      (Loss) form Operations
                    
                    $
                    47,480
                    
                    
                    $
                    (29,014
                    )
                    
                    $
                    40,525




Income
from operations reached a record high of $47.5 million compared to an operating
loss in 2008 of $29.0 million.


34





Three
months ended December 31, 2009 compared with three months ended December 31,
2008


Three months ended December
    31(Unaudited)(USD in thousand)
                                        
                                        
                                        
                                        
                                        
                                        
                                        Percentage Change2009 Q4
                                        
                                        
                                        2008 Q4
                                        
                                        2009 Q4 VS 2008 Q4Income (Loss) from
    Operations
                                        
                                        $
                                        1,544
                                        
                                        
                                        $
                                        (30,153
                                        )


Total
Other Income (Expense), Net
  Fiscal
year ended December 31, 2009 compared with fiscal years ended December 31, 2008
and 2007


OTHER
      INCOME (EXPENSE), NET (USD in thousand)
                    
                    2009
                    
                    
                    2008
                    
                    
                    2007Interest
      Income
                    
                    $
                    3,334
                    
                    
                    $
                    4,251
                    
                    
                    $
                    871Finance/interest
      expense
                    
                    $
                    (27,843
                    )
                    
                    $
                    (23,166
                    )
                    
                    $
                    (9,297
                    )Change
      in Fair Value of Derivative Liabilities
                    
                    $
                    (33,159
                    )
                    
                    $
                    12,821
                    
                    
                    $
                    6,236Gain
      from Debt Extinguishment
                    
                    $
                    7,331
                    
                    
                    $
                    7,169Government
      Grant
                    
                    $
                    3,430Loss
      on Disposal of Fixed Assets
                    
                    $
                    (4,643
                    )Income
      from Investment
                    
                    $
                    4,730
                    
                    
                    $
                    1,896Other
      Non-operating Income (Expense), net
                    
                    $
                    1,812
                    
                    
                    $
                    767
                    
                    
                    $
                    928Total
      other income (expense), net
                    
                    $
                    (45,008
                    )
                    
                    $
                    3,738
                    
                    
                    $
                    (1,262
                    )




-
            Finance/interest
      expense: interest paid on bank loans, early redemption of Notes
      Receivables, convertible debt and various bank
  fees.


-
              Change
      in fair value of derivation liabilities: related to variation of warrant
      liability of our convertible debt. This is non-cash, non-operating item.
      According to GAAP, valuation of our December 2007 convertible promissory
      notes and common stock purchase warrants must be marked-to-market using a
      formula, which includes our stock price.The
      change in fair value of derivative liabilities for the year ended December
      31, 2009 was a loss of $33.2 million compared to a gain of $12.8 million
      for the same period last
year.




a)  The
global disruption in the financial markets in the third and fourth quarters of
2008 had a severe negative effect on stock prices worldwide. Because our stock
price dropped substantially, as of December 31, 2008, we recorded a $12.8
million gain in the fair value of derivative liabilities in 2008.


b)  We
recorded a $4.8 million gain in the fair value of derivative liabilities in 2009
due to the change in our stock price.


c)  $30.0
million of convertible notes was converted to 7,045,274 shares of common stock
at a conversion price of $4.2511 in 2009 and we recorded a $28.2 million
loss of derivative liability as a result.


d)  On
December 24, 2009, we issued 5,555,556 shares of common stock and warrants to
purchase 2,777,778 shares of common stock for fund raising. The 1,154,958
existing warrants issued in our December 2007 private placement were increased
by 2.3775 times to 3,900,871 shares, and the per share exercise price
was reduced from $13.51 to $5.00. We recorded a $9.7 million loss of fair value
of derivative liabilities as a result.





35




-
            Gain
      from debt extinguishment: debt waiver by Hengda Group, $7.3 million in
      2009.


-
            Government
      Grant: $3.4 million government compensation for blast furnaces
      replacement.


-
            Loss
      on disposal of fixed assets, $3.1 million associated with the disposal of
      old less efficient
      fixed assets at our Longmen Joint Venture after new blast furnaces were
      put in use.


-
            Income
      from investments: Entities in which we have neither controlling interest
      nor consolidated results as part of our
  statements.


-
            Other
      non-operating income (expense): $1.8 million rental generated by
      Daqiuzhuang Metal by leasing its storage
space.





Three
months ended December 31, 2009 compared with three months ended December 31,
2008


ThreemonthsendedDecember31(Unaudited)OTHER INCOME(EXPENSE), NET (USD in
      thousand)
                                                        
                                                        
                                                        
                                                        
                                                        Percentage Change2009 Q4
                                                        
                                                        
                                                        2008 Q4
                                                        
                                                        
                                                        2009 Q4 VS 2008 Q4Interest Income
                                                        
                                                        $
                                                        866
                                                        
                                                        
                                                        $
                                                        2,147
                                                        
                                                        
                                                        
                                                        -60
                                                        %Finance/interest Expense
                                                        
                                                        $
                                                        (9,421
                                                        )
                                                        
                                                        $
                                                        (4,017
                                                        )Change in Fair Value of Derivative
      Liabilities
                                                        
                                                        $
                                                        (9,931
                                                        )
                                                        
                                                        $
                                                        8,052Gain from Debt
    Extinguishment
                                                        
                                                        $
                                                        4,399
                                                        
                                                        
                                                        $
                                                        0Government GrantLoss on Disposal of Fixed
      AssetsIncome from Investment
                                                        
                                                        $
                                                        1,069
                                                        
                                                        
                                                        $
                                                        1,896
                                                        
                                                        
                                                        
                                                        -44
                                                        %Other Non-operating Expense,
      net
                                                        
                                                        $
                                                        (502
                                                        )
                                                        
                                                        $
                                                        (1,152
                                                        )Total Other Income
      (Expense), net
                                                        
                                                        $
                                                        (13,520
                                                        )
                                                        
                                                        $
                                                        6,926





Net
Income Attributable to Controlling Interest




Fiscal
year ended December 31, 2009 compared with fiscal year ended December 31, 2008
and 2007


(USD
      in thousand)
                  
                  2009
                  
                  
                  2008
                  
                  
                  2007Income
      (Loss) Before Provision Income Taxes and Noncontrolling
      Interest
                  
                  $
                  2,472
                  
                  
                  $
                  (25,276
                  )
                  
                  $
                  39,263LESS:
      Total Provision for Income Taxes
                  
                  $
                  6,153
                  
                  
                  $
                  (5,411
                  )
                  
                  $
                  4,836Net
      Income (Loss) Attributable to the Noncontrolling Interest
                  
                  $
                  21,563
                  
                  
                  $
                  (8,542
                  )
                  
                  $
                  12,001Net
      Income (Loss) attributable to Controlling Interest
                  
                  $
                  (25,244
                  )
                  
                  $
                  (11,323
                  )
                  
                  $
                  22,426





Three
months ended December 31, 2009 compared with three months ended December 31,
2008


ThreemonthsendedDecember31(Unaudited)(USD in thousand)
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  Percentage Change2009 Q4
                                                  
                                                  
                                                  2008 Q4
                                                  
                                                  2009 Q4 VS 2008 Q4Loss Before Provision Income Taxes and
      Noncontrolling Interest
                                                  
                                                  $
                                                  (11,976
                                                  )
                                                  
                                                  $
                                                  (23,227
                                                  )LESS: Total Benefit for Income
      Taxes
                                                  
                                                  $
                                                  (1,033
                                                  )
                                                  
                                                  $
                                                  (4,864
                                                  )Net
      Income (Loss) Attributable to the Noncontrolling
      Interest
                                                  
                                                  $
                                                  142
                                                  
                                                  
                                                  $
                                                  (8,658
                                                  )Net Loss Attributable to Controlling
      Interest
                                                  
                                                  $
                                                  (11,085
                                                  )
                                                  
                                                  $
                                                  (9,705
                                                  )


36


(Loss)
Earnings per Share


Fiscal
year ended December 31, 2009 compared with fiscal year ended December 31, 2008
and 2007


(USD in thousand, except EPS)
                  
                  2009
                  
                  
                  2008
                  
                  
                  2007Net
      Income (Loss) Attributable to Controlling Interest
                  
                  $
                  (25,244
                  )
                  
                  $
                  (11,323
                  )
                  
                  $
                  22,426Weighted
      Average Number of SharesBasic
                  
                  
                  41,860,238
                  
                  
                  
                  35,381,210
                  
                  
                  
                  32,424,652Diluted
                  
                  
                  41,860,238
                  
                  
                  
                  35,381,210
                  
                  
                  
                  32,558,350(Loss)
      Earnings Per ShareBasic
                  
                  $
                  (0.603
                  )
                  
                  $
                  (0.320
                  )
                  
                  $
                  0.692Diluted
                  
                  $
                  (0.603
                  )
                  
                  $
                  (0.320
                  )
                  
                  $
                  0.689





Three
months ended December 31, 2009 compared three months ended December 31,
2008


ThreemonthsendedDecember31(Unaudited)(USD in thousand, except
    EPS)
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            Percentage Change2009 Q4
                                                            
                                                            
                                                            2008 Q4
                                                            
                                                            
                                                            2009 Q4 VS 2008 Q4Net Loss Attributable to Controlling
      Interest
                                                            
                                                            $
                                                            (11,085
                                                            )
                                                            
                                                            $
                                                            (9,705
                                                            )Weighted Average Number of
      SharesBasic
                                                            
                                                            
                                                            41,860,238
                                                            
                                                            
                                                            
                                                            35,381,210
                                                            
                                                            
                                                            
                                                            18
                                                            %Diluted
                                                            
                                                            
                                                            41,860,238
                                                            
                                                            
                                                            
                                                            35,381,210
                                                            
                                                            
                                                            
                                                            18
                                                            %(Loss) Earnings Per ShareBasic
                                                            
                                                            $
                                                            (0.265
                                                            )
                                                            
                                                            $
                                                            (0.274
                                                            )





Adjusted
Earnings and Earnings per Share





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


37




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





Adjusted
Earnings and Earnings per share





Fiscal
year ended December 31, 2009 compared with fiscal year ended December 31, 2008
and 2007




Adjusted
      (Loss) Earnings and Adusted (Loss) Earnings per Share(USD in thousands)
                
                2009
                
                
                2008
                
                
                2007GAAP
      Net Income (Loss)
                
                $
                (25,244
                )
                
                $
                (11,323
                )
                
                $
                22,426Change
      in Fair Value of Derivative Liabilities
                
                $
                (33,159
                )
                
                $
                12,821
                
                
                $
                6,236Adjusted
      Net Income (Loss)
                
                $
                7,915
                
                
                $
                (24,144
                )
                
                $
                16,190Weighted
      Average Number of SharesBasic
                
                
                41,860,238
                
                
                
                35,381,210
                
                
                
                32,424,652Diluted
                
                
                41,860,238
                
                
                
                35,381,210
                
                
                
                32,558,350(Loss)
      Earnings Per ShareBasic
                
                $
                0.189
                
                
                $
                (0.682
                )
                
                $
                0.499Diluted
                
                $
                0.189
                
                
                $
                (0.682
                )
                
                $
                0.497





Three
months ended December 31, 2009 compared three months ended December 31,
2008


Three months ended December
    31(Unaudited)Adjusted (Loss) Earnings and Adusted (Loss)
      Earnings per Share
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      2009 Q4 VS(USD in thousands)
                                                                      
                                                                      2009
                                                                      
                                                                      
                                                                      2008
                                                                      
                                                                      
                                                                      2008 Q4GAAP Net Loss
                                                                      
                                                                      $
                                                                      (11,085
                                                                      )
                                                                      
                                                                      $
                                                                      (9,705
                                                                      )Change in Fair Value of Derivative
      Liabilities
                                                                      
                                                                      $
                                                                      (9,931
                                                                      )
                                                                      
                                                                      $
                                                                      8,052Adjusted Net Loss
                                                                      
                                                                      $
                                                                      (1,154
                                                                      )
                                                                      
                                                                      $
                                                                      (17,757
                                                                      )Weighted Average Number of
      SharesBasic
                                                                      
                                                                      
                                                                      41,860,238
                                                                      
                                                                      
                                                                      
                                                                      35,381,210
                                                                      
                                                                      
                                                                      
                                                                      18
                                                                      %Diluted
                                                                      
                                                                      
                                                                      41,860,238
                                                                      
                                                                      
                                                                      
                                                                      35,381,210
                                                                      
                                                                      
                                                                      
                                                                      18
                                                                      %Loss Per ShareBasic
                                                                      
                                                                      $
                                                                      (0.028
                                                                      )
                                                                      
                                                                      $
                                                                      (0.502
                                                                      )


38


Change
in fair value of derivative liabilities and converted make whole expenses
associated with the Notes





The
change in the fair market value of derivative liabilities and converted make
whole expenses associated with the Notes are non-cash items linked to our
December 2007 Notes and December 2007 Warrants. We used the proceeds
from the sale of the December 2007 Notes and the December 2007 Warrants to
finance the acquisition of our largest subsidiary, Longmen Joint
Venture.





On
December 30, 2009, we sold 5,555,556 shares of our common stock and warrants
(“December 2009 Warrants”) to purchase 2,777,778 shares of our common stock in a
registered direct offering.





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





Change
in fair value of derivative liabilities





According
to GAAP, our December 2007 Notes and the December 2007 Warrants are considered
derivatives and therefore must be “marked to market.”  Stock price is
one of the drivers used to calculate the value of this derivative. Changes in
our stock price causes gains or losses to this income statement
item.





The
change in the fair value of derivative liabilities in 2009 was a loss of $33.2
million compared to a gain of $12.8 million in 2008. The reasons for this
change are: we recorded a $4.8 million gain in fair value of derivative
liabilities in 2009 due to change in our the stock price; $30.0 million of
December 2007 Notes were converted to 7,045,274 shares of common stock at a
conversion price of $4.2511 in 2009; we recorded $28.2 million loss of
derivative liability; on December 24, 2009, we issued 5,555,556 shares of common
stock and 2,777,778 warrants to purchase common stock for fund raising; the
shares of common stock issuable upon exercise of existing warrants were
increased by 2.3775 times from 1,154,958 to 3,900,871 shares; and the exercise
price of the December 2007 Warrants was reduced from $13.51 to
$5.00.  We recorded a $9.7 million loss of fair value of derivative
liabilities.





Notes
converted make whole interest




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





As
of December 31, 2009, $36.7 million of our December 2007 Notes had been
converted into our common stock in advance of the note maturity date and
resulted in a make whole expense of $2.8 million in 2009. As of December 31,
2009, $3.3 million of the December 2007 Notes remained outstanding. This expense
will no longer be incurred once all the December 2007 Notes have been fully
converted.




39




Quarterly
Data





Year Ended December 31,
                      
                      First
                      
                      
                      Second
                      
                      
                      Third
                      
                      
                      Fourth(In thousands except per share
      data)
                      
                      Quarter
                      
                      
                      Quarter
                      
                      
                      Quarter
                      
                      
                      Quarter
                      
                      
                      Full YearUnaudited
                      
                      
                      Unaudited
                      
                      
                      Unaudited
                      
                      
                      Unaudited2009Revenues
                      
                      $
                      322,794
                      
                      
                      $
                      408,947
                      
                      
                      $
                      484,752
                      
                      
                      $
                      451,953
                      
                      
                      $
                      1,668,446Gross
      profit
                      
                      $
                      12,922
                      
                      
                      $
                      22,499
                      
                      
                      $
                      39,735
                      
                      
                      $
                      13,399
                      
                      
                      $
                      88,554Net
      income (Loss) Attributable to Controlling Interest
                      
                      $
                      7,335
                      
                      
                      $
                      (31,789)
                      
                      
                      $
                      10,295
                      
                      
                      $
                      (11,085)
                      
                      
                      $
                      (25,244)Basic
      Earnings per Share
                      
                      $
                      0.20
                      
                      
                      $
                      (0.80)
                      
                      
                      $
                      0.23
                      
                      
                      $
                      (0.26)
                      
                      
                      $
                      (0.60)Diluted
      Earnings per Share
                      
                      $
                      0.20
                      
                      
                      $
                      (0.80)
                      
                      
                      $
                      0.23
                      
                      
                      $
                      (0.26)
                      
                      
                      $
                      (0.60)2008Revenues
                      
                      $
                      291,566
                      
                      
                      $
                      387,029
                      
                      
                      $
                      411,521
                      
                      
                      $
                      261,087
                      
                      
                      $
                      1,351,203Gross
      profit
                      
                      $
                      12,982
                      
                      
                      $
                      22,869
                      
                      
                      $
                      (6,348)
                      
                      
                      $
                      (21,575)
                      
                      
                      $
                      7,928Net
      income (Loss) Attributable to Controlling Interest
                      
                      $
                      2,188
                      
                      
                      $
                      (24,270)
                      
                      
                      $
                      20,464
                      
                      
                      $
                      (9,705)
                      
                      
                      $
                      (11,323)Basic
      Earnings per Share
                      
                      $
                      0.06
                      
                      
                      $
                      (0.69)
                      
                      
                      $
                      0.57
                      
                      
                      $
                      (0.27)
                      
                      
                      $
                      (0.32)Diluted
      Earnings per Share
                      
                      $
                      0.06
                      
                      
                      $
                      (0.69)
                      
                      
                      $
                      0.57
                      
                      
                      $
                      (0.27)
                      
                      
                      $
                      (0.32)




Total
Revenue





The
revenue increase in 2009 is attributed to the new capacity of the two 1280 cubic
meter blast furnaces brought on line in our Longmen Joint Venture. The increased
production at the facility of nearly 1.4 million metric tons offset the overall
drop in selling price during the year.





The
aggregate revenue for 2009 also reflects a full twelve months of operations at
our Maoming facility, whereas 2008 reflected only six months of
consolidation.





Gross
Profit





Higher
gross profit in 2009 came not only from the overall lowering of raw material
costs following record highs in the first half of 2008, but also from improved
cost control in production, efficiencies in raw material usage with the blast
furnaces at Longmen Joint Venture and successfully increasing raw material
inventory, especially iron ore, at a relatively low prices throughout the
year.





Net
Income





Our
income from operations reached a record high in 2009, however our net loss was
greater than 2008 due to the loss in fair value of derivative liability and make
whole expense. The conversion and exercise prices of the December 2007 Warrants
were reset, and about $30 million of December 2007 Notes were converted as well,
which resulted in the make whole expense in 2009.


40





LIQUIDITY
AND CAPITAL RESOURCES
 
 As of
December 31, 2009, we had cash and cash equivalents aggregating $274.2
million.





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





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





Short-term
notes payable





As of
December 31, 2009, we had $254.6 million in short-term notes payables
liabilities, which are secured by restricted cash of $192.0 million and other
assets. These are lines of credit extended by banks for a maximum of 6 months
and used to finance working capital. The short-term notes payables must be paid
in full at maturity and credit availability is continued upon payment at
maturity. There are no additional significant financial covenants.





Short-term
notes payables are the lowest cost form of financing available in China. We pay
zero interest on this type of credit as this is a monetary tool used by China’s
central bank to inject liquidity into the Chinese monetary system.





Short-term
loans – banks





As of
December 31, 2009, we had $149.0 million in short-term bank loans. These are
bank loans with a one year term and must be paid in full upon maturity. There
are no additional significant financial covenants tied to these loans. Chinese
banks have not been impacted as heavily by the financial crisis as U.S. banks
and we believe our current creditors will renew their lending to us after our
loans mature as they have in the past.





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





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


41


Convertible
Notes





On
December 13, 2007, we entered into a Securities Purchase Agreement (the
“December 2007 Securities Purchase Agreement”) with certain institutional
investors (the “December 2007 Purchasers”) issuing convertible promissory notes
in the principal amount of $40 million (the December 2007 Notes, as defined
above), and warrants to purchase 1,154,958 shares of our common stock (the
December 2007 Warrants, as define above). The December 2007 Warrants can be
exercised to purchase common stock through May 13, 2013 and had an initial
exercise price of $13.51 per share, subject to customary anti-dilution
adjustments.  The exercise price of the December 2007 Warrants was
reduced to $5.00 per share as described in further detail below in “Registered
Private Offering and Warrant Reset Agreements.”





The
December 2007 Notes bear initial interest at 3% per annum, which is
increased each year as specified in the December 2007 Notes, payable
semi-annually in cash or shares of our common stock. The December 2007 Notes
have a five year term through December 12, 2012. They are convertible into
shares of our common stock, subject to customary anti-dilution adjustments. The
initial conversion price of the December 2007 Notes was $12.47 per
share.  We may redeem the December 2007 Notes at 100% of the principal
amount, plus any accrued and unpaid interest, beginning December 13, 2008,
provided the market price of the common stock is at least 150% of the then
applicable conversion price for 30 consecutive trading days prior to the
redemption.





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





The
December 2007 Warrants may be exercised at any time on or after May 13, 2008
until they expire on May 13, 2013.  We filed a Form S-1 registration
statement registering the resale by the December 2007 Purchasers of the shares
of common stock underlying the December 2007 Notes and the December 2007
Warrants. We were required to file the registration statement on February 11,
2008 but did not file the registration statement until February 13, 2008. We
reached an agreement with all December 2007 Purchasers to waive the related
penalty of $0.4 million provided for in the registration rights agreement
related to the December 2007 Securities Purchase Agreement.





In
connection with the December 2007 transaction, we entered into a voting
agreement with Zuosheng Yu, our Chief Executive Officer, and Victory New Holding
Limited whereby such shareholders agreed to vote in favor of the approval
of this transaction. Certain of our management members also entered into lock-up
agreements with us pursuant to which each of such management member agreed not
to sell or offer to sell the common stock held by such management member for one
year after the initial effective date of the resale Form S-1 Registration
Statement described above.





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


42




As
of December 31, 2009, $36.7 million of the December 2007 Notes has been
converted to common stock. Such conversion has reduced our debt and increased
our public float.
 
 The
proceeds from the sale of the December 2007 Notes and December 2007 Warrants
were used to purchase our controlling interest in the Longmen Joint Venture
(which provides approximately 92% of our total revenue), thus, this financing
played an important role in executing our growth strategy. The acquisition of
Longmen Joint Venture was transformational to our company.





Registered
Direct Offering and Warrant Reset Agreement





On
December 30, 2009, we sold 5,555,556 shares of our common stock and warrants to
purchase 2,777,778 shares of our common stock (the December 2009 Warrants, as
defined above) in a registered direct offering.





The
December 2009 Warrants represent the right to purchase an aggregate of up to
2,777,778 shares of common stock at an initial exercise price of $5.00 per
share. Each such warrant may be exercised at any time on or after six months and
one day following December 30, 2009. Because the December 2009 Warrants are
denominated in U.S. dollars and the Company’s functional currency is the
Renminbi, and the December 2009 Warrants permit the warrant holder to request
cash buy-back in the event of a Fundamental Transaction, which includes a
significant change in our structure and/or equity, these warrants do not meet
the requirements of accounting standards to be indexed only to our
stock.  Accordingly, the December 2009 Warrants are accounted for at
fair value as derivative liabilities and marked to market each fiscal
period.





On
December 24, 2009, the holders of the December 2007 Warrants entered into
Warrant Reset Agreements with us that resulted in the exercise price of the
warrants being reduced from $13.51 per share to $5.00 per share and the number
of shares of common stock issuable upon exercise of the warrants was increased
by 2.3775 times from 1,154,958 to 3,900,871. This loss of fair value as
derivative liabilities was booked in 2009 accordingly.





Cash-flow





Operating
activities





Due to
our unique geographic location and dominant market share, we enjoy favorable
terms from our customers and vendors; customers pay in advance and vendors give
us credit terms. As of December 31, 2009, customer deposits totaled $212.6
million and accounts payables totaled $206.3 million. Our primary source of
funds continued to be cash generated from operations (which includes customer
prepayments and vendor financing).


43


Net cash
provided by operating activities for the year ended December 31, 2009 was $6.5
million compared to cash provided by operating activities of $113.7 million for
the year ended December 31, 2008. This change was mainly due to the combination
of the following factors:





·
            Cash inflow after the adjustments
      of some non-cash items to the net income such as depreciation and
      amortization, (gain) loss from debt extinguishment, (gain) loss on
      disposal of equipment, stock issued for service and compensation,
      amortization of deferred note issuance cost, amortization of discount on
      convertible notes, change in fair value of derivative instrument, make
      whole expense on note conversion, income from investment and deferred tax
      assets, totaled of $58.9
million;





·
            Cash outflow resulting from
      accounts receivables-related parties, other payable-related parties,
      inventories, advances on inventory purchase-related parties, other
      payable-related parties, accrued liabilities, customer deposits-related
      parties and taxes payables, which was $284.6 million, compared to $83.4
      million for the same period last year. The increase is mainly due to
      inventory and other receivables-related parties;
  and





·
            Cash inflow due to the increase
      in accounts receivable, note receivables, other receivables, advances on
      inventories purchases, current prepaid expense, non-current prepaid
      expense, non-current prepaid expense-related parties, accounts payable,
      accounts payable-related parties, other payables, and customer deposits
      totaled $232.2 million compared to an inflow for the same period last year
      of $215.2 million. The increase is mainly due to increase in advances on
      inventory purchases.





Investing
activities





Net cash
used in investing activities was $65.4 million for the year ended December 31,
2009 compared to $206.6 million for the year ended December 31, 2008. This
decrease in cash outflow is mainly due to fewer equipment purchases related to
our two 1,280 cubic meter blast furnaces at Longmen Joint Venture.





Financing
activities





Net cash
provided by financing activities was $126.1 million for the year ended December
31, 2009 compared to $62.5 million for the year ended December 31,
2008.





Bank
Debt


As of
December 31, 2009, our short-term bank loans totaled $149.0 million compared to
$67.8 million as of December 31, 2008. Overall our bank borrowing increased
utilizing short-term notes payables. As of December 31, 2009, short-term notes
payables were $254.6 million which is collateralized by restricted cash of
$192.0 million.





Short-term
notes payable are lines of credit extended by the banks. When purchasing raw
materials, we often issue a short-term note payable to the vendor funded with
draw downs on the lines of credit. This short-term note payable is guaranteed by
the bank for its complete face value. The banks usually do not charge interest
on these notes but require us to deposit a certain amount of cash at the bank as
a guarantee deposit which is classified on the balance sheet as restricted
cash.


44


Non-Bank
Debt





As of
December 31, 2009, our short-term loans from non bank sources were $122.1
million, compared to $95.2 million as of December 31, 2008.





Some of
the loans from non-bank sources are related parties. For a complete description
of related parties, see Note 8 to our financial statements below.





Warrants




In
September 2008, 140,000 warrants were exercised in connection with redeemable
preferred stock at $5.00 per share for an aggregate exercise price of
$700,000.





Shelf
Registration SEC Form S-3





On
October 22, 2009, our shelf registration statement on Form S-3 was declared
effective by the Securities and Exchange Commission (SEC). From time to time we
may sell common stock, preferred stock, warrants, debt securities, rights and
units in one or more offerings, for an aggregate offering price of up to $60
million. We may sell the securities registered on the Form S-3 shelf
registration statement to or through underwriters, directly to investors,
through agents or any combination of the foregoing.




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





Registered
Direct Offering





On
December 30, 2009, we sold under our shelf registration statement, an aggregate
of 5,555,556 shares of common stock, and warrants to purchase an aggregate of
2,777,778 shares of common stock pursuant to a securities purchase
agreement.  The warrants are exercisable beginning six months from the
date of issuance for a period of two years from the initial exercise date, and
carry an initial exercise price per share equal to $5.00.  We raised
gross proceeds of $25,000,000. The net offering proceeds to us from the sale of
the securities, after deducting placement agents’ fees and other estimated
offering expenses payable by the us, was approximately $23.1
million.


45


Impact
of inflation




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





Compliance
with environmental laws and regulations





Longmen
Joint Venture:





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





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





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





Long
Steel Group also has several plants to further process solid waste generated
from the steel making process into useful products such as construction
materials, building blocks, porcelain tiles, curb tops, ornamental tiles, etc.
The plants are capable of processing 400,000 metric tons of solid waste and
generate revenue of more than $2.6 million (RMB20 million) each
year.





OFF-BALANCE
SHEET ARRANGEMENTS





There
were no off-balance sheet arrangements for the 2009 fiscal year.





CONTRACTUAL OBLIGATIONS AND
COMMERCIAL COMMITMENTS




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


46





The
following tables summarize our contractual obligations as of December 31, 2009
and the effect these obligations are expected to have on our liquidity and cash
flows in future periods.





Payment due by periodLess thanContractualobligations
                          
                          Total
                          
                          
                          1 year
                          
                          
                          1-3 years
                          
                          
                          4- 5 yearsUSD in thousandsBank
      loans (1)
                          
                          $
                          149
                          
                          
                          $
                          149
                          
                          
                          $
                          -
                          
                          
                          $
                          -Notes
      payable
                          
                          
                          255
                          
                          
                          
                          255
                          
                          
                          
                          -Deposits
      due to sales representatives
                          
                          
                          50
                          
                          
                          
                          50
                          
                          
                          
                          -
                          
                          
                          
                          -Lease
      with Bao Gang
                          
                          
                          660
                          
                          
                          
                          264
                          
                          
                          
                          396
                          
                          
                          
                          -Blast
      Furnace construction
                          
                          
                          14,550
                          
                          
                          
                          14,550
                          
                          
                          
                          -
                          
                          
                          
                          -Purchase
      of TRT system
                          
                          
                          4,973
                          
                          
                          
                          3,315
                          
                          
                          
                          1,658
                          
                          
                          
                          -Convertible
      notes ( Principal plus Interest )
                          
                          
                          5,992
                          
                          
                          
                          706
                          
                          
                          
                          5,286
                          
                          
                          
                          -Total
                          
                          $
                          26,629
                          
                          
                          $
                          19,289
                          
                          
                          $
                          7,340
                          
                          
                          $
                          -





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





As of
December 31, 2009, our guarantee of related parties and third parties bank
loans, including line of credit, amounted to $192.4 million.





Longmen
Joint Venture had $186.5 million guarantees as of December 31,
2009.





GuaranteeNature
      of
                                          
                                          amountguarantee
                                          
                                          In
      thousands
                                          
                                          Guaranty periodImportation
      L/C
                                          
                                          $
                                          17,604
                                          
                                          July
      2009 to July 2010Domestic
      L/C
                                          
                                          
                                          1,467
                                          
                                          July
      2009 to July 2010Bank
      loan
                                          
                                          
                                          156,382
                                          
                                          Various
      from March 2009 to December 2010Notes
      payable
                                          
                                          
                                          11,003
                                          
                                          Various
      from March 2009 to July 2010Total
                                          
                                          $
                                          186,456





Maoming
had $5.9 million guarantees as of December 31, 2009.


47





GuaranteeNature of
                      
                      amountguarantee
                      
                      In
      thousands
                      
                      Guaranty periodBank
      loan
                      
                      $
                      5,868
                      
                      Various
      from June 2009 to October
2010





Critical
Accounting Policies





Critical
Accounting Policies





Management’s
discussion and analysis of its financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
Our financial statements reflect the selection and application of accounting
policies which require management to make significant estimates and judgments.
See Note 2 to our consolidated financial statements, “Summary of Significant
Accounting Policies.” Management bases its estimates on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances. Actual results may differ from these estimates under different
assumptions or conditions.




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





Revenue
recognition




We follow
the generally accepted accounting principles of the United States regarding
revenue recognition. Sales revenue is recognized at the date of shipment to
customers when a formal arrangement exists, the price is fixed or determinable,
the delivery is completed, no other significant obligations of us exist and
collectability is reasonably assured. Payments received before all of the
relevant criteria for revenue recognition are recorded as customer deposits.
Sales revenue represents the invoiced value of goods, net of value-added tax
(VAT). All our products sold in the PRC are subject to a Chinese value-added tax
at a rate of 13% to 17% of the gross sales price. This VAT may be offset by VAT
paid by us on raw materials and other materials included in the cost of
producing the finished product.





Use of
estimates





The
preparation of financial statements in conformity with generally accepted
accounting principles of the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Significant accounting estimates reflected in our financial
statements include the useful lives of and impairment for property, plant and
equipment, potential losses on uncollectible receivables and convertible notes.
Actual results could differ from these estimates.


48


Derivative
Instruments





We
entered into the December 2007 Securities Purchase Agreement with the
December 2007 Purchasers on December 13, 2007. Pursuant to the December 2007
Securities Purchase, we agreed to sell to the December 2007 Purchasers (i) the
December 2007 Notes and (ii) the December 2007 Warrants. As a result of Warrant
Reset Agreements entered into with the 2007 Buyers on December 24, 2009, the
December 2007 Warrants are now exercisable for 3,900,871 shares of common
stock.  Both the December 2007 Warrants and the conversion option
embedded in the December 2007 Notes meet the definition of a derivative
instrument as per the accounting standard for derivative instruments and hedging
activities. Therefore these instruments are accounted for as derivative
liabilities and periodically marked-to-market. The change in the value of the
derivative liabilities is charged against or credited to income.





Financial
instruments





The
accounting standard regarding “Disclosures about fair value of financial
instruments” defines financial instruments and requires disclosure of the fair
value of financial instruments held by us. We consider the carrying amount of
cash, accounts receivable, other receivables, accounts payable and accrued
liabilities to approximate their fair values because of the short period of time
between the origination of such instruments and their expected realization. For
short-term loans and notes payable, we concluded the carrying values are a
reasonable estimate of fair value because of the short period of time between
the origination and repayment and their stated interest rate approximates
current rates available.





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





Fair value
measurements





The
accounting standards regarding fair value of financial instruments and related
fair value measurement define fair value, establish a three-level valuation
hierarchy for disclosures of fair value measurement and enhance disclosures
requirements for fair value measures. The three levels are defined as
follow:





Level
1:   inputs to the valuation methodology are quoted prices
(unadjusted) for identical assets or liabilities in active markets.





Level
2:   inputs to the valuation methodology include quoted prices
for similar assets and liabilities in active markets, and inputs that are
observable for the assets or liability, either directly or indirectly, for
substantially the full term of the financial instruments.


49


Level
3:   inputs to the valuation methodology are unobservable and
significant to the fair value.





Our
investment in unconsolidated subsidiaries amounted to $20.0 million as of
December 31, 2009. Since there is no quoted or observable market price for the
fair value of similar long term investment, we then used the level 3 inputs for
its valuation methodology. The determination of the fair value was based on the
capital investment that we contributed and income from investment. The carrying
value of the long term investments approximated the fair value as of December
31, 2009.





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





As of
December 31, 2009, the outstanding principal amounted to $3.3 million, and the
carrying value of the December 2007 Notes amounted to $1.1 million. We used
Level 3 inputs for our valuation methodology for the December 2007 Notes, and
their fair values are determined using cash flows discounted at relevant market
interest rates in effect at the period close since there is no observable market
price. The December 2007 Warrants and their conversion feature are valued by
using level 2 inputs to the Binomial Model and we determined that the fair value
amounted to approximately $4.9 million due to the decrease in our common stock
price.





Noncontrolling
interests





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





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





As a
result, we reclassified noncontrolling interests in the amounts of $72.6 million
and $54.3 million from the mezzanine section to equity on December 31, 2009 and
December 31, 2008 balance sheets, respectively.


50


Recent
Accounting Pronouncements





In June
2009, the Financial Accounting Standards Board issued an accounting standard
amending the accounting and disclosure requirements for transfers of financial
assets. This accounting standard requires greater transparency and additional
disclosures for transfers of financial assets and the entity’s continuing
involvement with them and changes the requirements for derecognizing financial
assets. In addition, it eliminates the concept of a qualifying special-purpose
entity (“QSPE”). This accounting standard is effective for financial statements
issued for fiscal years beginning after November 15, 2009. We adopted this
standard as of December 31, 2009, however, the standard does not have material
effect on our consolidated financial statements.





In June
2009, the Financial Accounting Standards Board also issued an accounting
standard amending the accounting and disclosure requirements for the
consolidation of variable interest entities (“VIEs”). The elimination of the
concept of a QSPE, as discussed above, removes the exception from applying the
consolidation guidance within this accounting standard. Further, this accounting
standard requires a company to perform a qualitative analysis when determining
whether or not it must consolidate a VIE. It also requires a company to
continuously reassess whether it must consolidate a VIE. Additionally, it
requires enhanced disclosures about a company’s involvement with VIEs and any
significant change in risk exposure due to that involvement, as well as how its
involvement with VIEs impacts the company’s financial statements. Finally, a
company will be required to disclose significant judgments and assumptions used
to determine whether or not to consolidate a VIE. This accounting standard is
effective for financial statements issued for fiscal years beginning after
November 15, 2009. We adopted this standard as of December 31, 2009;
however, the standard does not have material effect on our consolidated
financial statements.





In June
2009, the Financial Accounting Standards Board issued an accounting standard
which establishes the FASB Accounting Standards CodificationTM (the
“Codification”) as the source of authoritative accounting principles recognized
by the FASB to be applied by nongovernmental entities in the preparation of
financial statements in conformity with U.S. GAAP. The Codification does not
change current U.S. GAAP, but is intended to simplify user access to all
authoritative U.S. GAAP by providing all the authoritative literature related to
a particular topic in one place. The Codification is effective for interim
and annual periods ending after September 15, 2009, and as of the
effective date, all existing accounting standard documents will be
superseded. All current and subsequent public filings will reference
the Codification as the sole source of authoritative
literature.





In August
2009, the Financial Accounting Standards Board issued an Accounting Standards
Update (“ASU”) regarding measuring liabilities at fair value. This ASU provides
additional guidance clarifying the measurement of liabilities at fair value in
circumstances in which a quoted price in an active market for the identical
liability is not available; under those circumstances, a reporting entity is
required to measure fair value using one or more of valuation techniques, as
defined. This ASU is effective for the first reporting period, including interim
periods, beginning after the issuance of this ASU. We adopted this standard
and have determined the standard does not have material effect on our
consolidated financial statements.


51


In
October 2009, the Financial Accounting Standards Board issued an ASU regarding
accounting for own-share lending arrangements in contemplation of convertible
debt issuance or other financing.  This ASU requires that at the date
of issuance of the shares in a share-lending arrangement entered into in
contemplation of a convertible debt offering or other financing, the shares
issued shall be measured at fair value and be recognized as an issuance cost,
with an offset to additional paid-in capital. Further, loaned shares are
excluded from basic and diluted earnings per share unless default of the
share-lending arrangement occurs, at which time the loaned shares would be
included in the basic and diluted earnings-per-share
calculation.  This ASU is effective for fiscal years beginning on or
after December 15, 2009, and interim periods within those fiscal years for
arrangements outstanding as of the beginning of those fiscal years. We
adopted this standard and has determined the standard does not have material
effect on our consolidated financial statements.





In
December 2009, FASB issued ASU No. 2009-16, Accounting for Transfers of
Financial Assets. This Accounting Standards Update amends the FASB Accounting
Standards Codification for the issuance of FASB Statement No. 166, Accounting for Transfers of
Financial Assets—an amendment of FASB Statement No. 140.The amendments in
this Accounting Standards Update improve financial reporting by eliminating the
exceptions for qualifying special-purpose entities from the consolidation
guidance and the exception that permitted sale accounting for certain mortgage
securitizations when a transferor has not surrendered control over the
transferred financial assets. In addition, the amendments require enhanced
disclosures about the risks that a transferor continues to be exposed to because
of its continuing involvement in transferred financial assets. Comparability and
consistency in accounting for transferred financial assets will also be improved
through clarifications of the requirements for isolation and limitations on
portions of financial assets that are eligible for sale accounting. We do
not expect the adoption of this ASU to have a material impact on our
consolidated financial statements.




In
December, 2009, FASB issued ASU No. 2009-17, Improvements to Financial Reporting
by Enterprises Involved with Variable Interest Entities. This Accounting
Standards Update amends the FASB Accounting Standards Codification for the
issuance of FASB Statement No. 167, Amendments to FASB Interpretation
No. 46(R). The amendments in this Accounting Standards Update replace the
quantitative-based risks and rewards calculation for determining which reporting
entity, if any, has a controlling financial interest in a variable interest
entity with an approach focused on identifying which reporting entity has the
power to direct the activities of a variable interest entity that most
significantly impact the entity’s economic performance and (1) the obligation to
absorb losses of the entity or (2) the right to receive benefits from the
entity. An approach that is expected to be primarily qualitative will be more
effective for identifying which reporting entity has a controlling financial
interest in a variable interest entity. The amendments in this Update also
require additional disclosures about a reporting entity’s involvement in
variable interest entities, which will enhance the information provided to users
of financial statements. We do not expect the adoption of this ASU to have
a material impact on our consolidated financial statements.





In
January 2010, FASB issued ASU No. 2010-01- Accounting for Distributions to
Shareholders with Components of Stock and Cash. The amendments in this Update
clarify that the stock portion of a distribution to shareholders that allows
them to elect to receive cash or stock with a potential limitation on the total
amount of cash that all shareholders can elect to receive in the aggregate is
considered a share issuance that is reflected in EPS prospectively and is not a
stock dividend for purposes of applying Topics 505 and 260 (Equity and Earnings
Per Share). The amendments in this update are effective for interim and
annual periods ending on or after December 15, 2009, and should be applied on a
retrospective basis. We adopted this standard and have determined the
standard does not have material effect on our consolidated financial
statements..


52


In
January 2010, FASB issued ASU No. 2010-02 regarding accounting and reporting for
decreases in ownership of a subsidiary.  Under this guidance, an entity is
required to deconsolidate a subsidiary when the entity ceases to have a
controlling financial interest in the subsidiary.  Upon deconsolidation of
a subsidiary, and entity recognizes a gain or loss on the transaction and
measures any retained investment in the subsidiary at fair value.  In
contrast, an entity is required to account for a decrease in its ownership
interest of a subsidiary that does not result in a change of control of the
subsidiary as an equity transaction.  This ASU clarifies the scope of the
decrease in ownership provisions, and expands the disclosures about the
deconsolidation of a subsidiary or de-recognition of a group of assets.
 This ASU is effective for beginning in the first interim or annual
reporting period ending on or after December 31, 2009. The Company does not
expect the adoption of this ASU to have a material impact on its consolidated
financial statements In January 2010, FASB issued ASU No. 2010-02 –
Accounting and Reporting for Decreases in Ownership of a Subsidiary – a Scope
Clarification. The amendments in this Update affect accounting and reporting by
an entity that experiences a decrease in ownership in a subsidiary that is a
business or nonprofit activity. The amendments also affect accounting and
reporting by an entity that exchanges a group of assets that constitutes a
business or nonprofit activity for an equity interest in another entity. 
The amendments in this update are effective beginning in the period that an
entity adopts SFAS No. 160, “Non-controlling Interests in Consolidated Financial
Statements – An Amendment of ARB No. 51.” If an entity has previously adopted
SFAS No. 160 as of the date the amendments in this update are included in the
Accounting Standards Codification, the amendments in this update are effective
beginning in the first interim or annual reporting period ending on or after
December 15, 2009. The amendments in this update should be applied
retrospectively to the first period that an entity adopted SFAS No. 160. We
do not expect the adoption of this ASU to have a material impact on our
consolidated financial statements





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


53


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





Commodity
Price Risk and Related Risks





In the
normal course of our business, we are exposed to market risk or price
fluctuations related to the purchase, production or sale of steel products over
which we have little or no control. We do not use any derivative commodity
instruments to manage the price risk. Our market risk strategy has generally
been to obtain competitive prices for our products and allow operating results
to reflect market price movements dictated by supply and demand. Based upon an
assumed 2009 annual production capacity of 6.3 million metric tons, a $1 change
in the annual average price would change annual pre-tax profits by approximately
$6.3 million.





Interest
Rate Risk





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





Foreign
Currency Exchange Rate Risk





Our
operating units, Daqiuzhuang Metal, Longmen Joint Venture, Baotou Steel Pipe
Joint Venture and Maoming, are all located in China. They produce and sell all
of their products domestically in the P.R.C. They are subject to the
foreign currency exchange rate risks due to the effects of fluctuations in the
Chinese Renminbi on revenues and operating costs and existing assets or
liabilities. We have not generally used derivative instruments to manage this
risk. Generally, a ten percent (10%) decrease in Renminbi exchange rate would
result in a $1.3 million decrease to income.





ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.


REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  To the
Board of Directors and Stockholders of
 General
Steel Holdings, Inc.
  We have
audited the accompanying consolidated balance sheets of General Steel Holdings,
Inc. and subsidiaries as of December 31, 2009 and 2008, and the related
consolidated statements of operations and other comprehensive income, changes in
equity, and cash flows for each of the years in the three-year period ended
December 31, 2009. General Steel Holdings, Inc.’s management is responsible for
these consolidated financial statements. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
  We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
  In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of General Steel Holdings, Inc.
and subsidiaries as of December 31, 2009 and 2008, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 2009 in conformity with accounting principles generally
accepted in the United States of America.
  We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), General Steel Holdings, Inc. and subsidiaries’
internal control over financial reporting as of December 31, 2009, based on
criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), and our report dated March 16, 2010 expressed an
unqualified opinion.
  /s/
Frazer Frost, LLP (Successor Entity of Moore Stephens Wurth Frazer and Torbet,
LLP, see Form 8-K filed on January 7, 2010)
  Brea,
California
 March 16,
2010
  54
 
 GENERAL STEEL HOLDINGS INC. AND SUBSIDIARIES
 
 CONSOLIDATED
BALANCE SHEETS
 AS OF
DECEMBER 31, 2009 AND 2008
 (In
thousands, except per share data)
 
 2009
                  
                  
                  2008ASSETSCURRENT
      ASSETS:Cash
                  
                  $
                  82,118
                  
                  
                  $
                  14,895Restricted
      cash
                  
                  
                  192,041
                  
                  
                  
                  130,700Notes
      receivable
                  
                  
                  29,185
                  
                  
                  
                  38,207Accounts
      receivable, net of allowance for doubtful accounts of $490 and $401 as of
      December 31, 2009 and 2008, respectively
                  
                  
                  8,525
                  
                  
                  
                  8,329Other
      receivables, net of allowance for doubtful accounts of $14 and $685 as of
      December 31, 2009 and 2008, respectively
                  
                  
                  5,357
                  
                  
                  
                  5,101Other
      receivables - related parties
                  
                  
                  32,670
                  
                  
                  
                  523Dividend
      receivable
                  
                  
                  2,372
                  
                  
                  
                  631Inventories
                  
                  
                  208,087
                  
                  
                  
                  59,549Advances
      on inventory purchases
                  
                  
                  28,407
                  
                  
                  
                  47,154Advances
      on inventory purchases - related parties
                  
                  
                  2,995
                  
                  
                  
                  2,375Prepaid
      expense - current
                  
                  
                  692
                  
                  
                  
                  494Prepaid
      value added tax
                  
                  
                  19,488
                  
                  
                  
                  -Deferred
      tax assets
                  
                  
                  3,341
                  
                  
                  
                  7,487Total
      current assets
                  
                  
                  615,278
                  
                  
                  
                  315,445PLANT
      AND EQUIPMENT, net
                  
                  
                  555,111
                  
                  
                  
                  491,705OTHER
      ASSETS:Advances
      on equipment purchases
                  
                  
                  7,361
                  
                  
                  
                  8,965Investment
      in unconsolidated subsidiaries
                  
                  
                  20,022
                  
                  
                  
                  13,959Prepaid
      expense - non-current
                  
                  
                  900
                  
                  
                  
                  1,195Prepaid
      expense related parties - non-current
                  
                  
                  158
                  
                  
                  
                  211Long-term
      deferred expense
                  
                  
                  2,069
                  
                  
                  
                  -Long-term
      other receivable
                  
                  
                  -
                  
                  
                  
                  4,873Intangible
      assets, net of accumulated amortization
                  
                  
                  23,733
                  
                  
                  
                  24,556Note
      issuance cost
                  
                  
                  406
                  
                  
                  
                  4,218Equipment
      to be disposed
                  
                  
                  3,026
                  
                  
                  
                  587Total
      other assets
                  
                  
                  57,675
                  
                  
                  
                  58,564Total
      assets
                  
                  $
                  1,228,064
                  
                  
                  $
                  865,714LIABILITIES
      AND EQUITYCURRENT
      LIABILITIES:Short
      term notes payable
                  
                  $
                  254,608
                  
                  
                  $
                  206,040Accounts
      payable
                  
                  
                  158,126
                  
                  
                  
                  149,239Accounts
      payable - related parties
                  
                  
                  48,151
                  
                  
                  
                  15,327Short-term
      loans - bank
                  
                  
                  148,968
                  
                  
                  
                  67,840Short-term
      loans - others
                  
                  
                  110,358
                  
                  
                  
                  87,834Short-term
      loans - related parties
                  
                  
                  11,751
                  
                  
                  
                  7,350Other
      payables
                  
                  
                  5,627
                  
                  
                  
                  3,183Other
      payables - related parties
                  
                  
                  3,706
                  
                  
                  
                  677Accrued
      liabilities
                  
                  
                  10,595
                  
                  
                  
                  7,779Customer
      deposits
                  
                  
                  208,765
                  
                  
                  
                  141,102Customer
      deposits - related parties
                  
                  
                  3,791
                  
                  
                  
                  7,216Deposit
      due to sales representatives
                  
                  
                  49,544
                  
                  
                  
                  8,149Taxes
      payable
                  
                  
                  6,921
                  
                  
                  
                  13,917Distribution
      payable to former shareholders
                  
                  
                  16,434
                  
                  
                  
                  18,765Total
      current liabilities
                  
                  
                  1,037,345
                  
                  
                  
                  734,418CONVERTIBLE
      NOTES PAYABLE, net of debt discount of $2,250 and $26,095 as of December
      31, 2009 and 2008, respectively
                  
                  
                  1,050
                  
                  
                  
                  7,155DERIVATIVE
      LIABILITIES
                  
                  
                  23,340
                  
                  
                  
                  9,903Total
      liabilities
                  
                  
                  1,061,735
                  
                  
                  
                  751,476COMMITMENTS
      AND CONTINGENCIESEQUITY:Preferred
      stock, $0.001 par value, 50,000,000 shares authorized, 3,092,899 shares
      issued and outstanding as of December 31, 2009 and 2008,
      respectively
                  
                  
                  3
                  
                  
                  
                  3Common
      Stock, $0.001 par value, 200,000,000 shares authorized, 51,618,598 and
      36,128,833 shares issued and outstanding as of December 31, 2009 and 2008,
      respectively
                  
                  
                  52
                  
                  
                  
                  36Paid-in-capital
                  
                  
                  95,588
                  
                  
                  
                  37,128Statutory
      reserves
                  
                  
                  6,162
                  
                  
                  
                  4,902Retained
      (deficits) earnings
                  
                  
                  (16,410
                  )
                  
                  
                  10,094Contribution
      receivable
                  
                  
                  -
                  
                  
                  
                  (960
                  )Accumulated
      other comprehensive income
                  
                  
                  8,336
                  
                  
                  
                  8,705Total
      shareholders' equity
                  
                  
                  93,731
                  
                  
                  
                  59,908NONCONTROLLING
      INTERESTS
                  
                  
                  72,598
                  
                  
                  
                  54,330Total
      equity
                  
                  
                  166,329
                  
                  
                  
                  114,238Total
      liabilities and equity
                  
                  $
                  1,228,064
                  
                  
                  $
                  865,714
  The
accompanying notes are an integral part of these consolidated financial
statements.
  See
report of independent registered public accounting firm.
 55
 
 GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE (LOSS) INCOME
 (In
thousands, except per share data)
 
 FortheyearsendedDecember31,2009
                      
                      
                      2008
                      
                      
                      2007REVENUES
                      
                      $
                      1,202,708
                      
                      
                      $
                      1,004,848
                      
                      
                      $
                      416,901REVENUES
      - RELATED PARTIES
                      
                      
                      465,738
                      
                      
                      
                      346,355
                      
                      
                      
                      355,539TOTAL
      REVENUES
                      
                      
                      1,668,446
                      
                      
                      
                      1,351,203
                      
                      
                      
                      772,440COST
      OF REVENUES
                      
                      
                      1,139,630
                      
                      
                      
                      999,318
                      
                      
                      
                      389,615COST
      OF REVENUES - RELATED PARTIES
                      
                      
                      440,262
                      
                      
                      
                      343,957
                      
                      
                      
                      326,136TOTAL
      COST OF REVENUES
                      
                      
                      1,579,892
                      
                      
                      
                      1,343,275
                      
                      
                      
                      715,751GROSS
      PROFIT
                      
                      
                      88,554
                      
                      
                      
                      7,928
                      
                      
                      
                      56,689SELLING,
      GENERAL AND ADMINISTRATIVE EXPENSES
                      
                      
                      41,074
                      
                      
                      
                      36,942
                      
                      
                      
                      16,164INCOME
      (LOSS) FROM OPERATIONS
                      
                      
                      47,480
                      
                      
                      
                      (29,014
                      )
                      
                      
                      40,525OTHER
      INCOME (EXPENSE), NETInterest
      income
                      
                      
                      3,334
                      
                      
                      
                      4,251
                      
                      
                      
                      871Finance/interest
      expense
                      
                      
                      (27,843
                      )
                      
                      
                      (23,166
                      )
                      
                      
                      (9,297
                      )Change
      in fair value of derivative liabilities
                      
                      
                      (33,159
                      )
                      
                      
                      12,821
                      
                      
                      
                      6,236Gain
      from debt extinguishment
                      
                      
                      7,331
                      
                      
                      
                      7,169
                      
                      
                      
                      -Government
      grant
                      
                      
                      3,430
                      
                      
                      
                      -
                      
                      
                      
                      -Loss
      on disposal of fixed assets
                      
                      
                      (4,643
                      )
                      
                      
                      -
                      
                      
                      
                      -Income
      from equity investments
                      
                      
                      4,730
                      
                      
                      
                      1,896
                      
                      
                      
                      -Other
      non-operating income, net
                      
                      
                      1,812
                      
                      
                      
                      767
                      
                      
                      
                      928Total
      other (expense) income, net
                      
                      
                      (45,008
                      )
                      
                      
                      3,738
                      
                      
                      
                      (1,262
                      )INCOME
      (LOSS) BEFORE PROVISION FOR INCOME TAXES AND NONCONTROLLING
      INTEREST
                      
                      
                      2,472
                      
                      
                      
                      (25,276
                      )
                      
                      
                      39,263PROVISION
      (BENEFIT) FOR INCOME TAXESCurrent
                      
                      
                      2,155
                      
                      
                      
                      1,424
                      
                      
                      
                      5,225Deferred
                      
                      
                      3,998
                      
                      
                      
                      (6,835
                      )
                      
                      
                      (389
                      )Total
      provision (benefit) for income taxes
                      
                      
                      6,153
                      
                      
                      
                      (5,411
                      )
                      
                      
                      4,836NET
      (LOSS) INCOME BEFORE NONCONTROLLING INTEREST
                      
                      
                      (3,681
                      )
                      
                      
                      (19,865
                      )
                      
                      
                      34,427Less:
      Net income (loss) attributable to noncontrolling interest
                      
                      
                      21,563
                      
                      
                      
                      (8,542
                      )
                      
                      
                      12,001NET
      (LOSS) INCOME ATTRIBUTABLE TO CONTROLLING INTEREST
                      
                      
                      (25,244
                      )
                      
                      
                      (11,323
                      )
                      
                      
                      22,426OTHER
      COMPREHENSIVE INCOME (LOSS) :Foreign
      currency translation adjustments
                      
                      
                      (369
                      )
                      
                      
                      5,420
                      
                      
                      
                      1,656Comprehensive
      income (loss) attributable to noncontrolling interest
                      
                      
                      303
                      
                      
                      
                      3,654
                      
                      
                      
                      (978
                      )COMPREHENSIVE
      (LOSS) INCOME
                      
                      $
                      (25,310
                      )
                      
                      $
                      (2,249
                      )
                      
                      $
                      23,104WEIGHTED
      AVERAGE NUMBER OF SHARESBasic
                      
                      
                      41,860,238
                      
                      
                      
                      35,381,210
                      
                      
                      
                      32,424,652Diluted
                      
                      
                      41,860,238
                      
                      
                      
                      35,381,210
                      
                      
                      
                      32,558,350(LOSS)
      EARNINGS PER SHAREBasic
                      
                      $
                      (0.60
                      )
                      
                      $
                      (0.32
                      )
                      
                      $
                      0.69Diluted
                      
                      $
                      (0.60
                      )
                      
                      $
                      (0.32
                      )
                      
                      $
                      0.69
  The
accompanying notes are an integral part of these consolidated financial
statements.
  See
report of independent registered public accounting firm.
  56
 
 GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENT OF CHANGES IN EQUITY
 (In
thousands, except per share data)
 
 AccumulatedPreferredstock
                    
                    
                    Commonstock
                    
                    
                    
                    
                    
                    Retainedearnings(deficits)
                    
                    
                    
                    
                    
                    otherPaid-in
                    
                    
                    Statutory
                    
                    
                    
                    
                    
                    Contribution
                    
                    
                    comprehensive
                    
                    
                    NoncontrollingShares
                    
                    
                    Parvalue
                    
                    
                    Shares
                    
                    
                    Parvalue
                    
                    
                    capital
                    
                    
                    reserves
                    
                    
                    Unrestricted
                    
                    
                    receivable
                    
                    
                    income
                    
                    
                    interests
                    
                    
                    TotalsBALANCE,
      January 1, 2008
                    
                    
                    3,092,899
                    
                    
                    $
                    3
                    
                    
                    
                    34,634,765
                    
                    
                    $
                    35
                    
                    
                    $
                    23,429
                    
                    
                    $
                    3,632
                    
                    
                    $
                    22,687
                    
                    
                    $
                    (960
                    )
                    
                    $
                    3,285
                    
                    
                    $
                    43,322
                    
                    
                    $
                    95,433Net
      loss
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (11,323
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (8,542
                    )
                    
                    
                    (19,865
                    )Adjustment
      to statutory reserve
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    1,270
                    
                    
                    
                    (1,270
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    -Common
      stock issued for compensation, $7.16
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    76,600
                    
                    
                    
                    0.08
                    
                    
                    
                    548
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    548Common
      stock issued for compensation, $10.43
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    150,000
                    
                    
                    
                    0.15
                    
                    
                    
                    1,564
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    1,564Common
      stock issued for compensation, $6.66
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    87,400
                    
                    
                    
                    0.09
                    
                    
                    
                    582
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    582Common
      stock issued for compensation, $10.29
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    90,254
                    
                    
                    
                    0.09
                    
                    
                    
                    929
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    929Common
      stock issued for consulting fee, $3.60
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    100,000
                    
                    
                    
                    0.10
                    
                    
                    
                    360
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    360Common
      stock issued for public relations, $3.60
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    25,000
                    
                    
                    
                    0.03
                    
                    
                    
                    90
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    90Common
      stock issued for compensation, $3.50
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    87,550
                    
                    
                    
                    0.09
                    
                    
                    
                    306
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    306Common
      stock transferred by CEO for compensation, $6.91
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    207
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    207Common
      stock issued at $5/share
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    140,000
                    
                    
                    
                    0.14
                    
                    
                    
                    700
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    700Acquired
      noncontrolling interest
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    15,896
                    
                    
                    
                    15,896Notes
      converted to common stock
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    541,299
                    
                    
                    
                    0.54
                    
                    
                    
                    6,103
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    6,104Make
      whole shares issued on notes conversion
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    195,965
                    
                    
                    
                    0.18
                    
                    
                    
                    2,310
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2,310Foreign
      currency translation adjustments
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    5,420
                    
                    
                    
                    3,654
                    
                    
                    
                    9,074BALANCE,
      December 31, 2008
                    
                    
                    3,092,899
                    
                    
                    $
                    3
                    
                    
                    
                    36,128,833
                    
                    
                    $
                    36
                    
                    
                    $
                    37,128
                    
                    
                    $
                    4,902
                    
                    
                    $
                    10,094
                    
                    
                    $
                    (960
                    )
                    
                    $
                    8,705
                    
                    
                    $
                    54,330
                    
                    
                    $
                    114,238Net
      loss attributable to controlling interest
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (25,244
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (25,244
                    )Net
      income attributable to noncontrolling interest
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    21,563
                    
                    
                    
                    21,563Disposal
      of subsidiaries
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (293
                    )
                    
                    
                    (293
                    )Distribution
      of dividend to noncontrolling shareholders
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (3,305
                    )
                    
                    
                    (3,305
                    )Adjustment
      to statutory reserve
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    1,260
                    
                    
                    
                    (1,260
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    -Common
      stock issued for compensation
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    596,650
                    
                    
                    
                    0.77
                    
                    
                    
                    1,875
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    1,876Common
      stock issued for interest payments
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    196,305
                    
                    
                    
                    0.20
                    
                    
                    
                    745
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    745Common
      stock issued for repayment of debt, $6.00
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    300,000
                    
                    
                    
                    0.30
                    
                    
                    
                    1,800
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    1,800Notes
      converted to common stock
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    7,045,274
                    
                    
                    
                    7.05
                    
                    
                    
                    32,072
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    32,079Make
      whole shares issued on notes conversion
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    1,795,977
                    
                    
                    
                    1.80
                    
                    
                    
                    7,085
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    7,087Common
      stock transferred by CEO for compensation, $6.91
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    276
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    276Reduction
      of registered capital
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    960
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    960Common
      stock issued for private placement
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    5,555,556
                    
                    
                    
                    5.56
                    
                    
                    
                    14,607
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    14,613Foreign
      currency translation adjustments
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (369
                    )
                    
                    
                    303
                    
                    
                    
                    (66
                    )BALANCE,
      December 31, 2009
                    
                    
                    3,092,899
                    
                    
                    $
                    3
                    
                    
                    
                    51,618,595
                    
                    
                    $
                    52
                    
                    
                    $
                    95,588
                    
                    
                    $
                    6,162
                    
                    
                    $
                    (16,410
                    )
                    
                    $
                    -
                    
                    
                    $
                    8,336
                    
                    
                    $
                    72,598
                    
                    
                    $
                    166,329
  The
accompanying notes are an integral part of these consolidated financial
statements.
  See
report of independent registered public accounting firm.
  57
 
 GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 FOR THE
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
 (In
thousands, except per share data)
 
 2009
                        
                        
                        2008
                        
                        
                        2007CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      (loss) income attributable to controlling interest
                        
                        $
                        (25,244
                        )
                        
                        $
                        (11,323
                        )
                        
                        $
                        22,426Net
      income (loss) attributable to noncontrolling interest
                        
                        
                        21,563
                        
                        
                        
                        (8,542
                        )
                        
                        
                        12,001Consolidated
      net (loss) income
                        
                        
                        (3,681
                        )
                        
                        
                        (19,865
                        )
                        
                        
                        34,427Adjustments
      to reconcile net (loss) income to cash provided by operating
      activities:Depreciation
                        
                        
                        32,102
                        
                        
                        
                        21,506
                        
                        
                        
                        9,740Amortization
                        
                        
                        1,005
                        
                        
                        
                        908
                        
                        
                        
                        597Gain
      on debt extinguishment
                        
                        
                        (7,331
                        )
                        
                        
                        (7,169
                        )
                        
                        
                        -Bad
      debt allowance (write-off)
                        
                        
                        (714
                        )
                        
                        
                        704
                        
                        
                        
                        2Inventory
      allowance
                        
                        
                        (1,533
                        )
                        
                        
                        2,204
                        
                        
                        
                        -Loss
      (gain) on disposal of equipment
                        
                        
                        1,213
                        
                        
                        
                        (598
                        )
                        
                        
                        10Stock
      issued for services and compensation
                        
                        
                        1,639
                        
                        
                        
                        2,723
                        
                        
                        
                        596Interest
      expense accrued on mandatory redeemable stock
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        114Make
      whole shares interest expense on notes conversion
                        
                        
                        2,892
                        
                        
                        
                        2,310
                        
                        
                        
                        -Income
      from investment
                        
                        
                        (4,730
                        )
                        
                        
                        (1,896
                        )
                        
                        
                        -Amortization
      of Professional Fee-Consulting Fee
                        
                        
                        424
                        
                        
                        
                        -
                        
                        
                        
                        -Amortizaiton
      of deferred notes issuance cost and discount on covertible
      notes.
                        
                        
                        60
                        
                        
                        
                        833
                        
                        
                        
                        189Change
      in fair value of derivative instrument
                        
                        
                        33,159
                        
                        
                        
                        (12,821
                        )
                        
                        
                        (6,236
                        )Change
      in deferred tax assets
                        
                        
                        4,403
                        
                        
                        
                        (6,937
                        )
                        
                        
                        (384
                        )Changes
      in operating assets and liabilities:Notes
      receivable
                        
                        
                        9,017
                        
                        
                        
                        (33,064
                        )
                        
                        
                        (9,492
                        )Accounts
      receivable
                        
                        
                        19,526
                        
                        
                        
                        2,091
                        
                        
                        
                        16,248Accounts
      receivable - related parties
                        
                        
                        (19,604
                        )
                        
                        
                        (18,275
                        )
                        
                        
                        (543
                        )Other
      receivables
                        
                        
                        5,253
                        
                        
                        
                        (4,124
                        )
                        
                        
                        (453
                        )Other
      receivables - related parties
                        
                        
                        (49,637
                        )
                        
                        
                        2,423
                        
                        
                        
                        (990
                        )Loan
      receivable
                        
                        
                        -
                        
                        
                        
                        1,297
                        
                        
                        
                        (1,185
                        )Inventories
                        
                        
                        (146,914
                        )
                        
                        
                        29,220
                        
                        
                        
                        (8,854
                        )Advances
      on inventory purchases
                        
                        
                        52,655
                        
                        
                        
                        19,916
                        
                        
                        
                        (45,013
                        )Advances
      on inventory purchases - related parties
                        
                        
                        (13,341
                        )
                        
                        
                        7,814
                        
                        
                        
                        (9,550
                        )Prepaid
      expense
                        
                        
                        393
                        
                        
                        
                        401
                        
                        
                        
                        (880
                        )Accounts
      payable
                        
                        
                        10,421
                        
                        
                        
                        11,975
                        
                        
                        
                        88,356Accounts
      payable - related parties
                        
                        
                        55,445
                        
                        
                        
                        44,725
                        
                        
                        
                        13,736Other
      payables
                        
                        
                        13,010
                        
                        
                        
                        (1,752
                        )
                        
                        
                        823Other
      payables - related parties
                        
                        
                        (13,346
                        )
                        
                        
                        (1,482
                        )
                        
                        
                        (76,864
                        )Accrued
      liabilities
                        
                        
                        (825
                        )
                        
                        
                        214
                        
                        
                        
                        2,440Customer
      deposits
                        
                        
                        66,465
                        
                        
                        
                        95,132
                        
                        
                        
                        2,560Customer
      deposits - related parties
                        
                        
                        (13,569
                        )
                        
                        
                        (2,287
                        )
                        
                        
                        8,847Taxes
      payable
                        
                        
                        (27,332
                        )
                        
                        
                        (22,443
                        )
                        
                        
                        20,800Net
      cash provided by operating activities
                        
                        
                        6,525
                        
                        
                        
                        113,683
                        
                        
                        
                        39,041CASH
      FLOWS FROM INVESTING ACTIVITIES:Increase
      in long term investment
                        
                        
                        (6,597
                        )
                        
                        
                        -
                        
                        
                        
                        (790
                        )Increase
      in investment payable
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        6,320Dividend
      receivable
                        
                        
                        (1,727
                        )
                        
                        
                        -
                        
                        
                        
                        -Cash
      proceeds from sale of subsidiaries
                        
                        
                        4,912
                        
                        
                        
                        2,782
                        
                        
                        
                        509Deposits
      due to sales representatives
                        
                        
                        41,370
                        
                        
                        
                        4,782
                        
                        
                        
                        840Advances
      on equipment purchases
                        
                        
                        1,604
                        
                        
                        
                        (8,029
                        )
                        
                        
                        (713
                        )Cash
      proceeds from sale of equipment
                        
                        
                        7,231
                        
                        
                        
                        598
                        
                        
                        
                        63Long
      term other receivable
                        
                        
                        -
                        
                        
                        
                        (4,788
                        )
                        
                        
                        -Equipment
      purchase
                        
                        
                        (112,011
                        )
                        
                        
                        (194,399
                        )
                        
                        
                        (21,524
                        )Intangible
      assets purchase
                        
                        
                        (183
                        )
                        
                        
                        (245
                        )
                        
                        
                        -Payment
      to the original shareholders
                        
                        
                        -
                        
                        
                        
                        (7,290
                        )
                        
                        
                        -Net
      cash used in investing activities
                        
                        
                        (65,401
                        )
                        
                        
                        (206,589
                        )
                        
                        
                        (15,295
                        )CASH
      FLOWS FINANCING ACTIVITIES:Restricted
      cash
                        
                        
                        (61,303
                        )
                        
                        
                        (87,121
                        )
                        
                        
                        237Notes
      receivable - restricted
                        
                        
                        -
                        
                        
                        
                        13,158
                        
                        
                        
                        -Dividend
      payable
                        
                        
                        (2,343
                        )
                        
                        
                        (815
                        )
                        
                        
                        -Borrowings
      on short term loans - bank
                        
                        
                        174,290
                        
                        
                        
                        71,057
                        
                        
                        
                        56,813Payments
      on short term loans - bank
                        
                        
                        (93,212
                        )
                        
                        
                        (103,641
                        )
                        
                        
                        (53,112
                        )Borrowings
      on short term loans - related parties
                        
                        
                        4,398
                        
                        
                        
                        7,222
                        
                        
                        
                        -Payments
      on short term loans - related parties
                        
                        
                        -
                        
                        
                        
                        (7,693
                        )
                        
                        
                        (17
                        )Borrowings
      on short term loans - others
                        
                        
                        159,296
                        
                        
                        
                        87,207
                        
                        
                        
                        5,230Payments
      on short term loans - others
                        
                        
                        (126,650
                        )
                        
                        
                        (53,031
                        )
                        
                        
                        (12,640
                        )Borrowings
      on short term notes payable
                        
                        
                        636,136
                        
                        
                        
                        335,870
                        
                        
                        
                        14,563Payments
      on short term notes payable
                        
                        
                        (587,598
                        )
                        
                        
                        (200,416
                        )
                        
                        
                        (38,211
                        )Cash
      received on stock issuance
                        
                        
                        23,090
                        
                        
                        
                        700
                        
                        
                        
                        -Cash
      received from issuance of convertible note
                        
                        
                        
                        
                        
                        
                        -
                        
                        
                        
                        36,856Cash
      contribution received from minority shareholders
                        
                        
                        
                        
                        
                        
                        -
                        
                        
                        
                        790Cash
      received from warrants conversion
                        
                        
                        
                        
                        
                        
                        -
                        
                        
                        
                        5,300Payment
      to minority shareholders
                        
                        
                        
                        
                        
                        
                        -
                        
                        
                        
                        (2,814
                        )Net
      cash provided by financing activities
                        
                        
                        126,104
                        
                        
                        
                        62,497
                        
                        
                        
                        12,995EFFECT
      OF EXCHANGE RATE CHANGE ON CASH
                        
                        
                        (5
                        )
                        
                        
                        1,591
                        
                        
                        
                        140INCREASE
      (DECREASE) IN CASH
                        
                        
                        67,223
                        
                        
                        
                        (28,818
                        )
                        
                        
                        36,881CASH,
      beginning of period
                        
                        
                        14,895
                        
                        
                        
                        43,713
                        
                        
                        
                        6,832CASH,
      end of period
                        
                        $
                        82,118
                        
                        
                        $
                        14,895
                        
                        
                        $
                        43,713
  The
accompanying notes are an integral part of these consolidated financial
statements.
  See
report of independent registered public accounting firm.
  58
 
 GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009
 
 Note
1 – Background
 
 General
Steel Holdings, Inc. (the “Company”) was incorporated on August 5, 2002 in the
state of Nevada. The Company through its 100% owned subsidiary, General Steel
Investment, operates a portfolio of steel companies serving various industries
in the People’s Republic of China (“PRC”). The Company presently has four
production subsidiaries: General Steel (China) Co. Ltd. (f/k/a Tianjin
Daqiuzhuang Metal Co. Ltd.) (“Daqiuzhuang Metal”), Baotou Steel – General Steel
Special Steel Pipe Joint Venture Co., Ltd., (“Baotou Steel Pipe Joint Venture”),
Shaanxi Longmen Iron and Steel Co., Ltd. (“Longmen Joint Venture”), and Maoming
Hengda Steel Group Co., Ltd. (“Maoming”). The Company’s main operation is
manufacturing and sales of steel products such as rebar, hot-rolled carbon and
silicon sheets and spiral-weld pipes.
 
 Note
2 – Summary of significant accounting policies
 
 Basis of
presentation
 
 The
consolidated financial statements of the Company reflect the activities of the
following directly and indirectly owned subsidiaries:
 PercentageSubsidiary
                    
                    ofOwnershipGeneral
      Steel Investment Co., Ltd.
                    British
      Virgin Islands
                    
                    
                    100.0
                    %General
      Steel (China) Co., Ltd.
                    PRC
                    
                    
                    100.0
                    %Baotou
      Steel – General Steel Special Steel Pipe Joint Venture Co.,
      Ltd.
                    PRC
                    
                    
                    80.0
                    %Yangpu
      Shengtong Investment Co., Ltd.
                    PRC
                    
                    
                    99.1
                    %Qiu
      Steel Investment Co., Ltd. (“Qiu Steel”)
                    PRC
                    
                    
                    98.7
                    %Shaanxi
      Longmen Iron and Steel Co. Ltd.
                    PRC
                    
                    
                    60.0
                    %Maoming
      Hengda Steel Group Co., Ltd.
                    PRC
                    
                    
                    99.0
                    %
 
 The
accompanying consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
and include the accounts of all directly and indirectly owned subsidiaries
listed above. All material intercompany transactions and balances have been
eliminated in consolidation.
 
 Use of
estimates
 
 The
preparation of financial statements in conformity with generally accepted
accounting principles of the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Significant accounting estimates reflected in the Company’s
financial statements include the fair value of financial instruments, the useful
lives of and impairment for property, plant and equipment, and potential losses
on uncollectible receivables. Actual results could differ from these
estimates.
 
 Concentration of
risks
 
 The
Company's operations are carried out in the PRC. Accordingly, the Company's
business, financial condition and results of operations may be influenced by the
political, economic and legal environment in the PRC, and by the general state
of the PRC's economy. The Company's operations in the PRC are subject to
specific considerations and significant risks not typically associated with
companies in North America and Western Europe. The Company's results may be
adversely affected by changes in governmental policies with respect to laws and
regulations, anti-inflationary measures, currency conversion and remittance
abroad, and rates and methods of taxation, among other things.
 
 See
report of independent registered public accounting firm.
  59
 
 GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009
 
 Cash
includes cash on hand and demand deposits in accounts maintained with banks
within PRC, Hong Kong and the United States. Total cash (including restricted
cash balances) in these banks on December 31, 2009 and 2008 amounted to
$274.2million and
$145.6 million, respectively. As of December 31, 2009, $22.5 million was covered
by insurance. The Company has not experienced any losses in such accounts and
believes it is not exposed to any risks on its cash in bank
accounts.
 
 The
Company had five major customers, which represented approximately 29%, 34% and
59% of the Company’s total sales for the years ended December 31, 2009, 2008 and
2007, respectively. Five customers accounted for 0%, 1% and 0% of total accounts
receivable as of December 31, 2009, 2008 and 2007, respectively.
 
 The
purchases of raw materials from five major suppliers represented approximately
42%, 30% and 40% of Company’s total purchases for the years
ended December 31, 2009, 2008 and 2007, respectively. Five vendors
accounted for 10%, 7% and 11% of total accounts payable as of December 31, 2009,
2008 and 2007, respectively.
 
 Revenue
recognition
 
 The
Company follows the generally accepted accounting principles in the United
States regarding revenue recognition. Sales revenue is recognized at the date of
shipment to customers when a formal arrangement exists, the price is fixed or
determinable, the delivery is completed, no other significant obligations of the
Company exist and collectability is reasonably assured. Payments received before
all of the relevant criteria for revenue recognition are recorded as customer
deposits. Sales revenue represents the invoiced value of goods, net of
value-added tax (VAT). All of the Company’s products sold in the PRC are subject
to a Chinese value-added tax at a rate of 17% of the gross sales price. This VAT
may be offset by VAT paid by the Company on raw materials and other materials
included in the cost of producing the finished product.
 
 Foreign currency translation
and other comprehensive income
 
 The
reporting currency of the Company is the US dollar. The Company uses the local
currency, Renminbi (RMB), as its functional currency. Assets and liabilities are
translated at the unified exchange rate as quoted by the People’s Bank of China
at the end of the period. Translation adjustments resulting from this process
are included in accumulated other comprehensive income in the statement of
changes in equity. Transaction gains and losses that arise from exchange rate
fluctuations on transactions denominated in a currency other than the functional
currency are included in the results of operations as incurred.
 
 Translation
adjustments included in accumulated other comprehensive income amounted to $8.3
million and $8.7 million as of December 31, 2009 and 2008, respectively. The
balance sheet amounts, with the exception of equity at December 31, 2009 and
2008 were translated at 6.82 RMB and 6.82 RMB to $1.00, respectively. The equity
accounts were stated at their historical rate. The average translation rates
applied to income statement accounts for the years ended December 31, 2009, 2008
and 2007 were 6.82 RMB, 7.07 RMB and 7.59 RMB, respectively. Cash flows are also
translated at average translation rates for the period, therefore, amounts
reported on the statement of cash flows will not necessarily agree with changes
in the corresponding balances on the consolidated balance sheet.
 
 See
report of independent registered public accounting firm.
  60
 
 GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009
 
 Financial
instruments
 
 The
accounting standards regarding fair value of financial instruments and related
fair value measurements defines financial instruments and requires disclosure of
the fair value of financial instruments held by the Company. The Company
considers the carrying amount of cash, accounts receivable, other receivables,
accounts payable and accrued liabilities, to approximate their fair values
because of the short period of time between the origination of such instruments
and their expected realization. For short term loans and notes payable, the
Company concluded the carrying values are a reasonable estimate of fair value
because of the short period of time between the origination and repayment and
their stated interest rate approximates current rates available.
 
 The
Company analyzes all financial instruments with features of both liabilities and
equity, pursuant to which the Company’s warrants were required to be
recorded as a liability at fair value and marked to market each reporting
period.
 
 The
accounting standards define fair value, establish a three-level valuation
hierarchy for disclosures of fair value measurement and enhance disclosure
requirements for fair value measures. The three levels are defined as
follow:
 
 ·
              Level
      1   inputs to the valuation methodology are quoted prices
      (unadjusted) for identical assets or liabilities in active
      markets.
 
 ·
              Level
      2   inputs to the valuation methodology include quoted prices
      for similar assets and liabilities in active markets, and inputs that are
      observable for the assets or liability, either directly or indirectly, for
      substantially the full term of the financial
  instruments.
 
 ·
              Level
      3   inputs to the valuation methodology are unobservable and
      significant to the fair value.
 
 The
Company’s investment in unconsolidated subsidiaries amounted to $20.0 million as
of December 31, 2009. Since there is no quoted or observable market price for
the fair value of similar long term investments, the Company then used the level
3 inputs for its valuation methodology. The determination of the fair value was
based on the capital investment that the Company contributed and income from
investment. The carrying value of the long term investments approximated
the fair value as of December 31, 2009.
 
 In
December 2007, the Company issued convertible notes totaling $40 million
(“Notes”) and 1,154,958 warrants. In December 2009, the Company issued 2,777,778
warrants in connection with a registered direct offering.  The
aforementioned warrants and the conversion option embedded in the Notes meet the
definition of a derivative instrument in the accounting standards. Therefore
these instruments are accounted for as derivative liabilities and
marked-to-market each reporting period. The change in the value of the
derivative liabilities is charged against or credited to income.  The fair
value was determined using the Cox Rubenstein Binomial Model, defined in the
accounting standard as level 2 inputs, and recorded the change in earnings. As a
result, the derivative liabilities are carried on the consolidated balance sheet
at their fair value.
 
 As of
December 31, 2009, the outstanding convertible note principal amounted to $3.3
million, and the carrying value of the convertible note amounted to
approximately $1.1 million. Company used Level 3 inputs for its valuation
methodology for the convertible note, and their fair values are determined using
cash flows discounted at relevant market interest rates in effect at the period
close since there is no observable market price.
 
 See
report of independent registered public accounting firm.
  61
 
 GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009
 
 (inthousands)
                      
                      CarryingValueasof
                        December31,2009
                      
                      FairValueMeasurementsatDecember31,
                        2009UsingFairValueHierarchyLevel
      1
                      
                      Level
      2
                      
                      
                      Level
      3Long
      term investments
                      
                      $
                      20,022
                      
                      
                      
                      
                      
                      
                      $
                      20,022Derivative
      liabilities
                      
                      $
                      23,340
                      
                      
                      
                      $
                      23,340Convertible
      notes payable
                      
                      $
                      1,050
                      
                      
                      
                      
                      
                      
                      
                      $
                      820
 
 Except
for the investments, convertible notes payable and derivative liabilities, the
Company did not identify any other assets or liabilities that are required to be
presented on the balance sheet at fair value in accordance with the accounting
standard.
 
 Level 3
Valuation Reconciliation:
  Longterm
                        Investment(inthousands)Balance,
      December 31, 2008
                      
                      $
                      13,959Current
      period additional investments
                      
                      
                      7,983Current
      period dispositions
                      
                      
                      (2,035
                      )Dividend
      entitled
                      
                      
                      (3,146
                      )Current
      period investment gain
                      
                      
                      3,261Balance,
      December 31, 2009
                      
                      $
                      20,022
  Convertible
                      Notes(inthousands)Balance,
      December 31, 2008
                    
                    $
                    7,155Current
      period effective interest charges on notes
                    
                    
                    2,273Current
      period share issuance made for principal and stated
    interest
                    
                    
                    (745
                    )Current
      period note converted carrying value
                    
                    
                    (7,633
                    )Balance,
      December 31, 2009
                    
                    $
                    1,050
 
 Cash
 
 Cash
includes cash on hand and demand deposits in banks with original maturities of
less than three months.
 
 Restricted
cash
 
 The
Company has notes payable outstanding with various banks and is required to keep
certain amounts on deposit that are subject to withdrawal restrictions. The
notes payable are generally short term in nature due to its short maturity
period of six to nine months, thus restricted cash is classified as a current
asset.
 
 Accounts receivable and
allowance for doubtful accounts
 
 Accounts
receivable include trade accounts due from customers and other receivables from
cash advances to employees, related parties or third parties. An allowance for
doubtful account is established and recorded based on managements’ assessment of
potential losses based on the credit history and relationships with the
customers. Management reviews its receivable on a regular basis to determine if
the bad debt allowance is adequate, and adjusts the allowance when necessary.
Delinquent account balances are written-off against allowance for doubtful
accounts after management has determined that the likelihood of collection is
not probable.
 
 See
report of independent registered public accounting firm.
  62
 
 GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009
 
 Notes
receivable
 
 Notes
receivable represents trade accounts receivable due from various customers where
the customers’ banks have guaranteed the payment of the receivables. The notes
are non-interest bearing and normally paid within three to six months. The
Company has the ability to submit request for payment to the customer’s bank
earlier than the scheduled payment date, but will incur an interest charge and a
processing fee.
 
 Inventories
 
 Inventories
are stated at the lower of cost or market using the weighted average method.
Management reviews inventories for obsolescence and cost in excess of net
realizable value at least annually and records a reserve against the inventory
and additional cost of goods sold when the carrying value exceeds net realizable
value.
 
 Shipping and
handling
 
 Shipping
and handling for raw materials purchased are included in cost of goods sold.
Shipping and handling cost incurred to ship finished products to customers are
included in selling expenses. Shipping and handling expenses for finished goods
for the years ended December 31, 2009, 2008 and 2007 amounted to $6.8 million,
$4.9 million and $2.8 million respectively.
 
 Intangible
assets
 
 All land
in the People’s Republic of China is owned by the government. However, the
government grants “land use rights”.   Daqiuzhuang Metal acquired land
use rights in 2001 for a total of $3.5 million. These land use rights are for 50
years and expire in 2050 and 2053. However, Daqiuzhuang Metal's initial business
license had a ten-year term. Therefore, management elected to amortize the land
use rights over the ten-year business term. Daqiuzhuang Metal became a
Sino-Foreign Joint Venture in 2004, and obtained a new business license for
twenty years; however, the Company decided to continue amortizing the land use
rights over the original ten-year business term.
 
 Longmen
Group contributed land use rights for a total amount of $21.8 million to the
Longmen Joint Venture. The land use rights are for 50 years and expire in 2048
to 2052.
 
 Maoming
has land use rights amounting to $2.2 million for 50 years and expires in
2054.
 
 Entity
                    
                    Original Cost
                    
                    Years of Expiration(in thousands)General
      Steel (China) Co., Ltd
                    
                    $
                    3,481
                    
                    2051Longmen
      Joint Venture
                    
                    $
                    21,803
                    
                    2045
      & 2054Maoming
      Hengda Steel Group Co., Ltd
                    
                    $
                    2,235
                    
                    2054
 
 Intangible
assets of the Company are reviewed at least annually, more often when
circumstances require, to determine whether their carrying value has become
impaired. The Company considers assets to be impaired if the carrying value
exceeds the future projected cash flows from related operations. The Company
also re-evaluates the periods of amortization to determine whether subsequent
events and circumstances warrant revised estimates of useful lives.  As of
December 31, 2009, the Company expects these assets to be fully
recoverable.
 
 See
report of independent registered public accounting firm.
  63
 
 GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009
 
 Plant and equipment,
net
 
 Plant and
equipment are stated at cost less accumulated depreciation. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets with a 3%-5% residual value.
 
 The
estimated useful lives are as follows:
 
 Buildings
      and Improvements
                  10-40
      YearsMachinery
                  10-30
      YearsOther
      equipment
                  5
      YearsTransportation
      Equipment
                  5
      Years
 
 Construction
in progress represents the costs incurred in connection with the construction of
buildings or new additions to the Company’s plant facilities. No depreciation is
provided for construction in progress until such time as the assets are
completed and are placed into service. Maintenance, repairs and minor renewals
are charged directly to expense as incurred. Major additions and betterment to
buildings and equipment are capitalized. Interest incurred during construction
is capitalized into construction in progress. All other interest is expensed as
incurred.
 
 Long
lived assets, including buildings and improvements, equipment and intangible
assets are reviewed annually or more often if necessary, to determine whether
their carrying value has become impaired. The Company considers assets to be
impaired if the carrying value exceeds the future projected cash flows from
related operations. The Company also re-evaluates the periods of depreciation
and amortization to determine whether subsequent events and circumstances
warrant revised estimates of useful lives. As of December 31, 2009, the Company
expects these assets to be fully recoverable.
 
 Investments in
unconsolidated subsidiaries
 
 Subsidiaries
in which the Company has the ability to exercise significant influence, but does
not have a controlling interest are accounted for using the equity method.
Significant influence is generally considered to exist when the Company has an
ownership interest in the voting stock between 20% and 50%, and other factors,
such as representation on the Board of Directors, voting rights and the impact
of commercial arrangements, are considered in determining whether the equity
method of accounting is appropriate. The Company accounts for investments with
ownership less than 20% using the cost method.
 
 The
Company’s indirect subsidiaries, Hancheng Tongxing Metallurgy Co., Ltd. and
Environmental Protection Industry Company invested in several companies from
2004 to 2009.
 
 Unconsolidated subsidiary
                          
                          Year
                            acquired
                          
                          
                          Amount invested
                            (In thousands)
                          
                          
                          %
                            ownedShaanxi
      Daxigou Mining Co., Ltd
                          
                          2004
                          
                          
                          $
                          2,761
                          
                          
                          
                          22.0Shaanxi
      Xinglong Thermoelectric Co., Ltd
                          
                          2004-2007
                          
                          
                          
                          7,790
                          
                          
                          
                          20.7Shaanxi
      Longgang Group Xian steel Co., Ltd
                          
                          2005
                          
                          
                          
                          146
                          
                          
                          
                          10.0Huashan
      Metallurgical Equipment Co. Ltd.
                          
                          2003
                          
                          
                          
                          1,730
                          
                          
                          
                          25.0Shanxi
      Longmen Coal Chemical Industry Co., Ltd
                          
                          2009
                          
                          
                          
                          6,602
                          
                          
                          
                          15.0Xian
      Delong Powder Engineering Materials Co., Ltd.
                          
                          2006
                          
                          
                          
                          993
                          
                          
                          
                          27.0Total
                          
                          
                          $
                          20,022
 
 See
report of independent registered public accounting firm.
  64
 
 GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009
 
 Total
investment in unconsolidated subsidiaries amounted to $20.0 million and $14.0
million as of December 31, 2009 and 2008, respectively.
 
 Short-term notes
payable
 
 Short-term
notes payable are lines of credit extended by banks. The banks in-turn issue the
Company a bankers acceptance note, which can be endorsed and assigned to vendors
as payments for purchases. The notes payable are generally payable at a
determinable period, generally three to six months. This short-term note payable
bears no interest and is guaranteed by the bank for its complete face value and
usually matures within three to six-month period. The banks usually require the
Company to deposit a certain amount of cash at the bank as a guarantee deposit,
which is classified on the balance sheet as restricted cash.
 
 Earnings per
share
 
 The
Company has adopted the generally accepted accounting principles in the United
States regarding earnings per share (“EPS”) which requires presentation of basic
and diluted earnings per share in conjunction with the disclosure of the
methodology used in computing such earnings per share.
 
 Basic
earnings per share are computed by dividing income available to common
stockholders by the weighted average common shares outstanding during the
period. Diluted earnings per share takes into account the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised and converted into common stock.
 
 Income
taxes
 
 The
Company accounts for income taxes in accordance with the generally accepted
accounting principles in the United States for income taxes. Under the
asset and liability method as required by this accounting standard, the
recognition of deferred income tax liabilities and assets for the expected
future tax consequences of temporary differences between the income tax basis
and financial reporting basis of assets and liabilities. Provision for income
taxes consists of taxes currently due plus deferred taxes. The generally
accepted accounting principles in the United States for accounting for
uncertainty in income taxes clarify the accounting and disclosure for uncertain
tax positions.  A tax position is recognized as a benefit only if it is
“more likely than not” that the tax position would be sustained in a tax
examination, with a tax examination being presumed to occur. The amount
recognized is the largest amount of tax benefit that is greater than 50% likely
of being realized on examination. For tax positions not meeting the “more likely
than not” test, no tax benefit is recorded. The adoption had no effect on the
Company’s consolidated financial statements.
 
 The
charge for taxation is based on the results for the year as adjusted for items,
which are non-assessable or disallowed. It is calculated using tax rates that
have been enacted or substantively enacted by the balance sheet
date.
 
 See
report of independent registered public accounting firm.
  65
 
 GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009
 
 Deferred
tax is accounted for using the balance sheet liability method in respect of
temporary differences arising from differences between the carrying amount of
assets and liabilities in the consolidated financial statements and the
corresponding tax basis used in the computation of assessable tax profit. In
principle, deferred tax liabilities are recognized for all taxable temporary
differences. Deferred tax assets are recognized to the extent that it is
probable that taxable profit will be available against which deductible
temporary differences can be utilized. Deferred tax is calculated using tax
rates that are expected to apply to the period when the asset is realized or the
liability is settled. Deferred tax is charged or credited in the income
statement, except when it is related to items credited or charged directly to
equity, in which case the deferred tax is also dealt with in equity. Deferred
tax assets and liabilities are offset when they relate to income taxes levied by
the same taxation authority and the Company intends to settle its current tax
assets and liabilities on a net basis.
 
 Deferred
income taxes are recognized for temporary differences between the tax bases of
assets and liabilities and their reported amounts in the financial statements,
net operating loss carry forwards and credits, by applying enacted statutory tax
rates applicable to future years. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be realized. Current
income taxes are provided for in accordance with the laws of the relevant taxing
authorities.
 
 Share-based
compensation
 
 The
Company accounts for equity instruments issued in exchange for the receipt of
goods or services from other than employees in accordance with the accounting
standards regarding accounting for stock-based compensation and accounting for
equity instruments that are issued to other than employees for acquiring or in
conjunction with selling goods or services. Costs are measured at the estimated
fair market value of the consideration received or the estimated fair value of
the equity instruments issued, whichever is more reliably determinable. The
value of equity instruments issued for consideration other than employee
services is determined on the earlier of a performance commitment or completion
of performance by the provider of goods or services as defined by these
accounting standards. In the case of equity instruments issued to consultants,
the fair value of the equity instrument is recognized over the term of the
consulting agreement.
 
 Noncontrolling
interests
 
 Effective
January 1, 2009, the Company adopted generally accepted accounting
principles in the United States regarding noncontrolling interest in the
consolidated financial statements. Certain provisions of this statement are
required to be adopted retrospectively for all periods presented. Such
provisions include a requirement that the carrying value of noncontrolling
interests (previously referred to as minority interests) be removed from the
mezzanine section of the balance sheet and reclassified as equity.
 
 Further,
as a result of adopting this accounting standard, net income attributable to
noncontrolling interests is now excluded from the determination of consolidated
net income. In addition, the foreign currency translation adjustment is
allocated between controlling and noncontrolling interests.
 
 Recently issued accounting
pronouncements
 
 In June
2009, the Financial Accounting Standards Board issued an accounting standard
amending the accounting and disclosure requirements for transfers of financial
assets. This accounting standard requires greater transparency and additional
disclosures for transfers of financial assets and the entity’s continuing
involvement with them and changes the requirements for derecognizing financial
assets. In addition, it eliminates the concept of a qualifying special-purpose
entity (“QSPE”). This accounting standard is effective for financial statements
issued for fiscal years beginning after November 15, 2009. The Company adopted
this standard as of December 31, 2009; however, the standard does not have
material effect on the Company’s consolidated financial statements.
 
 See
report of independent registered public accounting firm.
  66
 
 GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009
 
 In June
2009, the Financial Accounting Standards Board also issued an accounting
standard amending the accounting and disclosure requirements for the
consolidation of variable interest entities (“VIEs”). The elimination of the
concept of a QSPE, as discussed above, removes the exception from applying the
consolidation guidance within this accounting standard. Further, this accounting
standard requires a company to perform a qualitative analysis when determining
whether or not it must consolidate a VIE. It also requires a company to
continuously reassess whether it must consolidate a VIE. Additionally, it
requires enhanced disclosures about a company’s involvement with VIEs and any
significant change in risk exposure due to that involvement, as well as how its
involvement with VIEs impacts the company’s financial statements. Finally, a
company will be required to disclose significant judgments and assumptions used
to determine whether or not to consolidate a VIE. This accounting standard is
effective for financial statements issued for fiscal years beginning after
November 15, 2009. The Company adopted this standard as of December 31, 2009;
however, the standard does not have material effect on the Company’s
consolidated financial statements.
 
 In June
2009, the Financial Accounting Standards Board issued an accounting standard
which establishes the FASB Accounting Standards CodificationTM (the
“Codification”) as the source of authoritative accounting principles recognized
by the FASB to be applied by nongovernmental entities in the preparation of
financial statements in conformity with U.S. GAAP. The Codification does not
change current U.S. GAAP, but is intended to simplify user access to all
authoritative U.S. GAAP by providing all the authoritative literature related to
a particular topic in one place. The Codification is effective for interim
and annual periods ending after September 15, 2009, and as of the
effective date, all existing accounting standard documents will be
superseded. All current and subsequent public filings will reference
the Codification as the sole source of authoritative
literature.
 
 In August
2009, the Financial Accounting Standards Board issued an Accounting Standards
Update (“ASU”) regarding measuring liabilities at fair value. This ASU provides
additional guidance clarifying the measurement of liabilities at fair value in
circumstances in which a quoted price in an active market for the identical
liability is not available; under those circumstances, a reporting entity is
required to measure fair value using one or more of valuation techniques, as
defined. This ASU is effective for the first reporting period, including interim
periods, beginning after the issuance of this ASU. The Company adopted this
standard and has determined the standard does not have material effect on the
Company’s consolidated financial statements.
 
 In
October 2009, the Financial Accounting Standards Board issued an ASU regarding
accounting for own-share lending arrangements in contemplation of convertible
debt issuance or other financing.  This ASU requires that at the date of
issuance of the shares in a share-lending arrangement entered into in
contemplation of a convertible debt offering or other financing, the shares
issued shall be measured at fair value and be recognized as an issuance cost,
with an offset to additional paid-in capital. Further, loaned shares are
excluded from basic and diluted earnings per share unless default of the
share-lending arrangement occurs, at which time the loaned shares would be
included in the basic and diluted earnings-per-share calculation.  This ASU
is effective for fiscal years beginning on or after December 15, 2009, and
interim periods within those fiscal years for arrangements outstanding as of the
beginning of those fiscal years. The Company adopted this standard and has
determined the standard does not have material effect on the Company’s
consolidated financial statements.
 
 See
report of independent registered public accounting firm.
  67
 
 GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009
 
 In
December 2009, FASB issued ASU No. 2009-16, Accounting for Transfers of
Financial Assets. This Accounting Standards Update amends the FASB Accounting
Standards Codification for the issuance of FASB Statement No. 166, Accounting for Transfers of
Financial Assets—an amendment of FASB Statement No. 140.The amendments in
this Accounting Standards Update improve financial reporting by eliminating the
exceptions for qualifying special-purpose entities from the consolidation
guidance and the exception that permitted sale accounting for certain mortgage
securitizations when a transferor has not surrendered control over the
transferred financial assets. In addition, the amendments require enhanced
disclosures about the risks that a transferor continues to be exposed to because
of its continuing involvement in transferred financial assets. Comparability and
consistency in accounting for transferred financial assets will also be improved
through clarifications of the requirements for isolation and limitations on
portions of financial assets that are eligible for sale accounting. The Company
does not expect the adoption of this ASU to have a material impact on its
consolidated financial
statements.
  In
December, 2009, FASB issued ASU No. 2009-17, Improvements to Financial Reporting
by Enterprises Involved with Variable Interest Entities. This Accounting
Standards Update amends the FASB Accounting Standards Codification for the
issuance of FASB Statement No. 167, Amendments to FASB Interpretation
No. 46(R). The amendments in this Accounting Standards Update replace the
quantitative-based risks and rewards calculation for determining which reporting
entity, if any, has a controlling financial interest in a variable interest
entity with an approach focused on identifying which reporting entity has the
power to direct the activities of a variable interest entity that most
significantly impact the entity’s economic performance and (1) the obligation to
absorb losses of the entity or (2) the right to receive benefits from the
entity. An approach that is expected to be primarily qualitative will be more
effective for identifying which reporting entity has a controlling financial
interest in a variable interest entity. The amendments in this Update also
require additional disclosures about a reporting entity’s involvement in
variable interest entities, which will enhance the information provided to users
of financial statements. The Company does not expect the adoption of this ASU to
have a material impact on its consolidated financial statements.
 
 In
January 2010, FASB issued ASU No. 2010-01- Accounting for Distributions to
Shareholders with Components of Stock and Cash. The amendments in this Update
clarify that the stock portion of a distribution to shareholders that allows
them to elect to receive cash or stock with a potential limitation on the total
amount of cash that all shareholders can elect to receive in the aggregate is
considered a share issuance that is reflected in EPS prospectively and is not a
stock dividend for purposes of applying Topics 505 and 260 (Equity and Earnings
Per Share). The amendments in this update are effective for interim and
annual periods ending on or after December 15, 2009, and should be applied on a
retrospective basis. The Company adopted this standard and has determined the
standard does not have material effect on the Company’s consolidated financial
statements.
 
 See
report of independent registered public accounting firm.
  68
 
 GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009
 
 In
January 2010, FASB issued ASU No. 2010-02 regarding accounting and reporting for
decreases in ownership of a subsidiary.  Under this guidance, an entity is
required to deconsolidate a subsidiary when the entity ceases to have a
controlling financial interest in the subsidiary.  Upon deconsolidation of
a subsidiary, and entity recognizes a gain or loss on the transaction and
measures any retained investment in the subsidiary at fair value.  In
contrast, an entity is required to account for a decrease in its ownership
interest of a subsidiary that does not result in a change of control of the
subsidiary as an equity transaction.  This ASU clarifies the scope of the
decrease in ownership provisions, and expands the disclosures about the
deconsolidation of a subsidiary or de-recognition of a group of assets.
 This ASU is effective for beginning in the first interim or annual
reporting period ending on or after December 31, 2009. The Company does not
expect the adoption of this ASU to have a material impact on its consolidated
financial statements In January 2010, FASB issued ASU No. 2010-02 –
Accounting and Reporting for Decreases in Ownership of a Subsidiary – a Scope
Clarification. The amendments in this Update affect accounting and reporting by
an entity that experiences a decrease in ownership in a subsidiary that is a
business or nonprofit activity. The amendments also affect accounting and
reporting by an entity that exchanges a group of assets that constitutes a
business or nonprofit activity for an equity interest in another entity. 
The amendments in this update are effective beginning in the period that an
entity adopts SFAS No. 160, “Non-controlling Interests in Consolidated Financial
Statements – An Amendment of ARB No. 51.” If an entity has previously adopted
SFAS No. 160 as of the date the amendments in this update are included in the
Accounting Standards Codification, the amendments in this update are effective
beginning in the first interim or annual reporting period ending on or after
December 15, 2009. The amendments in this update should be applied
retrospectively to the first period that an entity adopted SFAS No. 160. The
Company does not expect the adoption of this ASU to have a material impact on
its consolidated financial statements
 
 In
January 2010, FASB issued ASU No. 2010-06 – Improving Disclosures about Fair
Value Measurements. This update provides amendments to Subtopic 820-10 that
requires new disclosure as follows: 1) Transfers in and out of Levels 1 and
2. A reporting entity should disclose separately the amounts of significant
transfers in and out of Level 1 and Level 2 fair value measurements and describe
the reasons for the transfers.  2)  Activity in Level 3 fair value
measurements.  In the reconciliation for fair value measurements using
significant unobservable inputs (Level 3), a reporting entity should present
separately information about purchases, sales, issuances, and settlements (that
is, on a gross basis rather than as one net number).This update provides
amendments to Subtopic 820-10 that clarify existing disclosures as follows:
1) Level of disaggregation. A reporting entity should provide fair value
measurement disclosures for each class of assets and liabilities. A class is
often a subset of assets or liabilities within a line item in the statement of
financial position. A reporting entity needs to use judgment in determining the
appropriate classes of assets and liabilities. 2) Disclosures about inputs
and valuation techniques. A reporting entity should provide disclosures about
the valuation techniques and inputs used to measure fair value for both
recurring and nonrecurring fair value measurements. Those disclosures are
required for fair value measurements that fall in either Level 2 or Level 3.The
new disclosures and clarifications of existing disclosures are effective for
interim and annual reporting periods beginning after December 15, 2009, except
for the disclosures about purchases, sales, issuances, and settlements in the
roll forward of activity in Level 3 fair value measurements. Those disclosures
are effective for fiscal years beginning after December 15, 2010, and for
interim periods within those fiscal years. The Company does not expect the
adoption of this ASU to have a material impact on its consolidated financial
statements
 
 Reclassifications
 
 Certain
prior period amounts have been reclassified to conform to the current period
presentation. These classifications have no effect on net income.
 
 See
report of independent registered public accounting firm.
  69
 
 GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009
 
 Note
3 – Accounts receivable and allowance for doubtful accounts
 
 Accounts
receivable, including related party receivables, net of allowance for doubtful
accounts consists of the following:
 
 December31,
                    2009
                  
                  
                  December31,
                    2008(inthousands)
                  
                  
                  (inthousands)Accounts
      receivable
                  
                  $
                  9,015
                  
                  
                  $
                  8,730Less:
      allowance for doubtful accounts
                  
                  
                  (490
                  )
                  
                  
                  (401
                  )Net
      accounts receivable
                  
                  $
                  8,525
                  
                  
                  $
                  8,329
 
 Movement
of allowance for doubtful accounts is as follows:
 
 December31,
                    2009
                  
                  
                  December31,
                    2008(inthousands)
                  
                  
                  (inthousands)Beginning
      balance
                  
                  $
                  401
                  
                  
                  $
                  148Charge
      to expense
                  
                  
                  246
                  
                  
                  
                  124Addition
      from acquisition
                  
                  
                  -
                  
                  
                  
                  238Less
      Write-off
                  
                  
                  (157
                  )
                  
                  
                  (119
                  )Exchange
      rate effect
                  
                  
                  -
                  
                  
                  
                  10Ending
      balance
                  
                  $
                  490
                  
                  
                  $
                  401
 
 Note
4 – Inventories
 
 Inventories
consist of the following:
 December31,
                    2009
                  
                  
                  December31,
                    2008(inthousands)
                  
                  
                  (inthousands)Supplies
                  
                  $
                  1,025
                  
                  
                  $
                  1,884Raw
      materials
                  
                  
                  146,084
                  
                  
                  
                  41,418Finished
      goods
                  
                  
                  60,978
                  
                  
                  
                  16,247Total
      inventories
                  
                  $
                  208,087
                  
                  
                  $
                  59,549
 
 Raw
materials consist primarily of iron ore and coke at Longmen Joint Venture, steel
strip at Daqiuzhuang Metal and billet at Maoming. The cost of finished goods
includes direct costs of raw materials as well as direct labor used in
production. Indirect production costs such as utilities and indirect labor
related to production such as assembling, shipping and handling costs are also
included in the cost of inventory.
 
 The
Company values its inventory at the lower of cost or market, determined on a
weighted average method, or net realizable value. As of December 31, 2009 and
2008, management determined the carrying amount of inventory exceeded net
realizable value; therefore, $0.7 million and $2.2 million had been written down
and included in cost of goods sold, respectively.
 
 Note
5 – Advances on inventory purchase
 
 Advances
on inventory purchases are monies deposited or advanced to outside vendors or
related parties on future inventory purchases. Due to the high shortage of steel
in China, most of the Company’s vendors require a certain amount of money to be
deposited with them as a guarantee that the Company will complete its purchases
on a timely basis.
 
 This
amount is refundable and bears no interest. The Company has legally binding
contracts with its vendors, which required the deposit to be returned to the
Company when the contract ends. The inventory is normally delivered within one
month after the monies have been advanced. The total outstanding amount,
including advances to related parties, was $31.4 million and $49.5 million as of
December 31, 2009 and December 31, 2008, respectively.
 
 See
report of independent registered public accounting firm.
  70
 
 GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009
 
 Note 6 – Plant and equipment,
net
 
 Plant and
equipment consist of the following:
 December 31
                        2009
                      
                      
                      December31,
                        2008(inthousands)
                      
                      
                      (inthousands)Buildings
      and improvements
                      
                      $
                      121,837
                      
                      
                      $
                      118,144Machinery
                      
                      
                      467,547
                      
                      
                      
                      226,594Transportation
      equipment
                      
                      
                      4,759
                      
                      
                      
                      7,299Other
      equipment
                      
                      
                      3,901
                      
                      
                      
                      2,756Construction
      in progress
                      
                      
                      31,715
                      
                      
                      
                      199,818Totals
                      
                      
                      629,759
                      
                      
                      
                      554,611Less
      accumulated depreciation
                      
                      
                      (74,648
                      )
                      
                      
                      (62,906
                      )Totals
                      
                      $
                      555,111
                      
                      
                      $
                      491,705
 
 Construction
in progress consisted of the following as of December 31, 2009:
 
 Constructioninprogress
                    
                    Value
                    
                    Estimatedcompletion
                    
                    Estimatedadditional
                      costdescription
                    
                    Inthousands
                    
                    date
                    
                    InthousandsMolten
      iron mixer improvement
                    
                    $
                    1,206
                    
                    March,
      2010
                    
                    
                    -Longmen
      employees cafeteria
                    
                    
                    1,473
                    
                    May,
      2010
                    
                    
                    2,2603#
      lime stone grinding machine
                    
                    
                    1,797
                    
                    June,
      2010
                    
                    
                    366Iron
      making facility improvement
                    
                    
                    3,163
                    
                    April,
      2010
                    
                    
                    -4#
      continuous casting
                    
                    
                    4,062
                    
                    March,
      2010
                    
                    
                    880Rebar
      line
                    
                    
                    16,307
                    
                    September,
      2010
                    
                    
                    64,108Others
                    
                    
                    3,707
                    
                    by
      end of 2010
                    
                    
                    2,934Total
                    
                    $
                    31,715
 
 Longmen
Joint Venture constructed two blast furnaces and a sintering system.  All
costs related to the furnaces were capitalized as construction in progress and
amounted to $180.5 million as of December 31, 2008. The two blast furnaces and
its facilities cost $248.4 million to construct and had been transferred to
fixed assets as of December 31, 2009.
 
 Depreciation,
including amounts in cost of sales, for the years ended December 31, 2009, 2008
and 2007 amounted to $32.1 million, $21.5 million and $9.7 million,
respectively
 
 The
Company has fixed assets to be disposed amounting to $3.0 million and $0.6
million as of December 31, 2009 and December 31, 2008,
respectively.
 
 See
report of independent registered public accounting firm.
  71
 
 GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009
 
 Note
7 – Intangible assets, net
 
 Intangible
assets consist of the following:
 December31,
                      2009
                    
                    
                    December31,
                      2008(inthousands)
                    
                    
                    (inthousands)Land
      use rights
                    
                    $
                    27,519
                    
                    
                    $
                    27,467Software
                    
                    
                    424
                    
                    
                    
                    293Subtotal
                    
                    
                    27,943
                    
                    
                    
                    27,760Accumulated
      Amortization – Land use right
                    
                    
                    (4,143
                    )
                    
                    
                    (3,204
                    )Accumulated
      Amortization – software
                    
                    
                    (67
                    )
                    
                    
                    -Accumulated
      Amortization subtotal
                    
                    
                    (4,210
                    )
                    
                    
                    (3,204
                    )Intangible
      assets, net
                    
                    $
                    23,733
                    
                    
                    $
                    24,556
 
 The gross
amount of the intangible assets amounted to $27.9 million and $27.8 million as
of December 31, 2009 and 2008, respectively. The remaining weighted average
amortization period is 35.9 years.
 
 Total
amortization expense for the years ended December 31, 2009, 2008 and 2007,
amounted to $1 million, $0.9 million and $0.6 million,
respectively.
 
 The estimated
aggregate amortization expense for each of the five succeeding fiscal years is
as follows:
  Years
                        
                        EstimatedAmortization
                          Expense
                        
                        
                        Grosscarrying
                          Amount(inthousands)
                        
                        
                        (inthousands)2010
                        
                        $
                        1,000
                        
                        
                        $
                        22,7332011
                        
                        
                        1,000
                        
                        
                        
                        21,7332012
                        
                        
                        1,000
                        
                        
                        
                        20,7332013
                        
                        
                        1,000
                        
                        
                        
                        19,7332014
                        
                        
                        1,000
                        
                        
                        
                        18,733Thereafter
                        
                        
                        18,733
                        
                        
                        
                        -Total
                        
                        
                        23,733
 
 Note
8 – Debt
 
 Short-term notes
payable
 
 Short-term
notes payable are lines of credit extended by the banks. The banks in turn issue
the Company a bankers acceptance note, which can be endorsed and assigned to
vendors as payments for purchases. The notes payable are generally payable at a
determinable period, generally three to six months. This short-term note payable
is guaranteed by the bank for its complete face value. The banks usually do not
charge interest on these notes but require the Company to deposit a certain
amount of cash at the bank as a guarantee deposit which is classified on the
balance sheet as restricted cash. Restricted cash as a guarantee for the notes
payable amounted to $192.0 million and $130.7 million as of December 31, 2009
and December 31, 2008, respectively.
 
 See
report of independent registered public accounting firm.
  72
 
 GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009
 
 The
Company had the following short-term notes payable:
 
 December31,
                      2009
                    
                    
                    December31,
                      2008(inthousands)
                    
                    
                    (inthousands)Daqiuzhuang
      Metal: Notes payable from banks in China, due various dates from January
      2010 to April 2010. Restricted cash required of $4.0 million and $15.7
      million for December 31, 2009 and December 31, 2008, respectively;
      guaranteed by third parties.
                    
                    $
                    7,628
                    
                    
                    $
                    18,631Longmen
      Joint Venture: Notes payable from banks in China, due various dates from
      January 2010 to August 2010. Restricted cash of $162.3 million and $98.1
      million for December 31, 2009 and December 31, 2008, respectively; some
      notes are guaranteed by third parties while others are secured by
      equipment.
                    
                    
                    216,173
                    
                    
                    
                    159,536Bao
      Tou: Notes payable from banks in China, due June 2010.Restricted cash of
      $5.1 million and $5.1 million for December 31, 2009 and December 31, 2008,
      respectively; pledged by buildings.
                    
                    
                    10,269
                    
                    
                    
                    7,335Maoming:
      Notes payable from banks in China, due various dates from February 2010 to
      March 2010. Restricted cash of $20.6 million and $11.8 million for
      December 31, 2009 and December 31, 2008, respectively; pledged by
      buildings and equipment.
                    
                    
                    20,538
                    
                    
                    
                    20,538Total
      short-term notes payable
                    
                    $
                    254,608
                    
                    
                    $
                    206,040
 
 Short-term
loans
 
 Short-term
loans represent amounts due to various banks, other companies and individuals,
and related parties normally due within one year. The principles of loans are
due at maturity. However, the loans can be renewed with the banks, related
parties and other parties.
  See
report of independent registered public accounting firm.
  73
 GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009
 Short-term
loans due to banks, related parties and other parties consisted of the
following:
 
 December31,
                              2009
                            
                            
                            December31,
                              2008(in thousands)
                            
                            
                            (in thousands)Daqiuzhuang
      Metal: Loan from banks in China, due various dates on 2010. Weighted
      average interest rate 5.7% per annum; some are guaranteed by third parties
      while others are secured by equipment/inventory.
                            
                            $
                            25,476
                            
                            
                            $
                            27,383Longmen
      Joint Venture: Loan from banks in China, due various dates on 2010.
      Weighted average interest rate 6.1% per annum; some are guaranteed by
      third parties while others are secured by equipment/buildings/land use
      right.
                            
                            
                            123,492
                            
                            
                            
                            38,876Baotou
      Steel Pipe Joint Venture: Loan from banks in China, due March 2009. Annual
      interest rate of 12%, Guaranteed by third parties and secured by
      equipment.
                            
                            
                            -
                            
                            
                            
                            115Maoming:
      Loan from banks in China, due January 2009. Annual interest rate of 7.5%,
      guaranteed by third party.
                            
                            
                            -
                            
                            
                            
                            1,466Total
      – short-term loans - bank
                            
                            $
                            148,968
                            
                            
                            $
                            67,840
 
 December 31,
                      2009
                    
                    
                    December31,
                      2008(inthousands)
                    
                    
                    (inthousands)Longmen
      Joint Venture: Loans from various unrelated companies and individuals, due
      various dates in 2010, and interest rates up to 12% per
    annum.
                    
                    $
                    91,106
                    
                    
                    $
                    58,440Maoming:
      Loans from two unrelated parties, no due date, non interest
      bearing.
                    
                    
                    19,252
                    
                    
                    
                    29,394Total
      – short-term loans - others
                    
                    $
                    110,358
                    
                    
                    $
                    87,834
 
 December 31,
                    2009
                  
                  
                  December31,
                    2008(inthousands)
                  
                  
                  (inthousands)Longmen
      Joint Venture: Loans from Sheng An Da, due on 2010, and interest rates 12%
      per annum.
                  
                  $
                  4,401
                  
                  
                  $
                  -Qiu
      Steel: Related party loans from Tianjin Heng Ying and Tianjin Da
      Zhan, due June 2010. Annual interest rate of 5%.
                  
                  
                  7,350
                  
                  
                  
                  7,350Total
      – related party loans
                  
                  $
                  11,751
                  
                  
                  $
                  7,350
 
 See
report of independent registered public accounting firm.
  74
 
 GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009
 
 The
Company had various loans from unrelated companies and individuals. The balances
amounted to $110.4 million and $87.8 million as of December 31, 2009 and
December 31, 2008, respectively. Of the $110.4 million, $19.3 million loans
carry no interest and the remaining $91.1 million are subject to interest rates
ranging from 5% to 12%. All short term loans from unrelated companies and
individuals are due on demand and unsecured. The related parties’ loans are
discussed in Note 16.
 
 Total
interest expense, excluding capitalized interest, for the years ended December
31, 2009, 2008 and 2007 on the debt listed above amounted to $24.7 million,
$12.3 million and $6.6 million, respectively.
 
 Capitalized
interest amounted to $13.1 million, $10.6 million and $1.0 million for the years
ended December 31, 2009, 2008 and 2007, respectively.
 
 Note
9 – Customer deposits
 
 Customer
deposits represent amounts advanced by customers on product orders. The product
normally is shipped within one month after receipt of the advance payment, and
the related sale is recognized in accordance with the Company’s revenue
recognition policy. As of December 31, 2009 and December 31, 2008, customer
deposits amounted to $212.6 million and $148.3 million, including related
parties deposits of $3.8 and $7.2 million, respectively.
 
 Note
10 – Deposit due to sales representatives
 
 Daqiuzhuang
Metal and two of Longmen Joint Venture’s subsidiaries, Yuxin Trading and Yuteng
Trading, entered into agreements with various entities to act as the Company’s
exclusive sales agent in a specified area.  These exclusive sales agents
must meet certain criteria and are required to deposit a certain amount of money
with the Company. In return the sales agents receive exclusive sales rights to a
specified area and discounted prices on products they order. These deposits bear
no interest and are required to be returned to the sales agent once the
agreement has been terminated. The Company had $49.5 million and $8.1 million in
deposits due to sales representatives as of December 31, 2009 and December 31,
2008, respectively. In 2009 the Company received deposits amounted to $41.4
million from sales representatives to secure the sales quantity. These deposits
are refundable in one year based on volume fulfillment of which $22.8 million
bear interest at 3%-8% per annum.
 
 Note
11 – Convertible notes
 
 On
December 13, 2007, the Company entered into a Securities Purchase Agreement (the
“Agreement”) with certain institutional investors (the “Buyers”) issuing $40.0
million in promissory notes (“Notes”) and 1,154,958 warrants. The warrants can
be converted to common stock through May 13, 2013 at an initial exercise price
of $13.51 per share, subject to customary anti-dilution adjustments. On December
24, 2009, the warrant exercise price was reset to $5.00 per share.
 
 The Notes
bear initial interest at 3% per annum, which will be increased each year as
specified in the Agreement, payable semi-annually in cash or shares of the
Company’s common stock. The Notes have a five year term through December 12,
2012. They are convertible into shares of the Company’s common stock, subject to
customary anti-dilution adjustments. The initial conversion price is $12.47,
which was reset to $4.25 on May 7, 2009. The Company may redeem the Notes at
100% of the principal amount, plus any accrued and unpaid interest, beginning
December 13, 2008, provided the market price of the common stock is at least
150% of the then applicable conversion price for 30 consecutive trading days
prior to the redemption.
 
 See
report of independent registered public accounting firm.
  75
 
 GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009
 
 The Notes
are secured by a first priority, perfected security interest in certain shares
of common stock of Zuosheng Yu, as evidenced by the pledge agreement. The Notes
are subject to events of default customary for convertible securities and for a
secured financing.
 
 The
Warrants grant the Buyers the right to acquire shares of common stock at $13.51
per share, subject to customary anti-dilution adjustments.  The Warrants
may be exercised at any time on or after May 13, 2008, but not after May 13,
2013, the expiration date of the Warrants.
 
 Pursuant
to the generally accepted accounting standards of the United States for
convertible debt and debt issued with stock purchase warrants, the Company
discounted the Notes equal to the fair value of the warrants. The Notes were
further discounted for the fair value of the conversion option. The combined
discount is being amortized to interest expense over the life of the Notes using
the effective interest method.
 
 The fair
value of conversion option and the warrants were initially calculated using the
Cox Rubenstein Binomial model based on the following variables:
 
 ·
              Expected
      volatility of 125%
 ·
              Expected
      dividend yield of 0%
 ·
              Risk-free
      interest rate of 1.27%
 ·
              Expected
      lives of five years
 ·
              Market
      price at issuance date of $10.43
 ·
              Strike
      price of $12.47 and $13.51, for the conversion option and the warrants,
      respectively
 
 Pursuant
to generally accepted accounting principles of the United States, the Company
determined that both the warrants and the conversion option embedded in the
Notes meet the definition of a derivative instrument and must be carried as a
liability and marked to market each reporting period.
 
 On
December 13, 2007, the Company recorded $34.7 million as derivative liability,
including $9.3 million for the fair value of the warrants and $25.4 million for
fair value of the conversion option. The initial carrying value of the Notes was
$5.3 million. The financing cost of $5.2 million was recorded as note issuance
cost and is being amortized to interest expense over the term of the Notes using
the effective interest method.
 
 In July
2008, $6.8 million of notes were converted to 541,299 shares of common
stock at a conversion price of $12.47. Pursuant to generally accepted accounting
principles in the United States, the Company valued the conversion option on the
note conversion date. A total of $6.1 million of carrying value and
derivative liability had been reclassified into equity. In addition, 195,965
shares of common stock were issued as make whole interest expense of $2.3
million.
 
 Reset of
Conversion Price
 
 Paragraph
7(f) of the Convertible Notes (which were issued on December 13, 2007) provides
for adjustment of the conversion price of the Notes, as follows: Adjustment if
on the earlier of the (i) one (1) year anniversary of the Initial Effective Date
(as defined in the Registration Rights Agreement) and (ii) two (2) year
anniversary of the Closing Date (the "Adjustment Date"), the
Conversion Price in effect exceeds the Market Price as of the Adjustment Date
(the "Adjusted Conversion
Price"), the Conversion Price hereunder shall be reset to the Adjusted
Conversion Price as of the Adjustment Date. For the avoidance of doubt, the
Adjusted Conversion Price, if any, shall not apply to any Conversion Amount
converted into Common Stock prior to the Adjustment Date.
 
 See
report of independent registered public accounting firm.
  76
 
 GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009
 
 The
“Market Price” is defined in paragraph 30(v) of the Senior Convertible Notes as:
“Market Price” means, for any given date, the lower of (x) the arithmetic
average of the Weighted Average Price of the Common Stock for the thirty (30)
consecutive Trading Day period ending on the Trading Day immediately preceding
such date and (y) the Weighted Average Price of the Common Stock on the Trading
Day immediately preceding such date.
 
 The
Initial Registration Statement became effective on May 7, 2008 and thus the
Adjustment Date was May 7, 2009. The Weighted Average Price of the Common Stock
for the 30 consecutive Trading Day period ended on May 6, 2009 was $4.2511 and,
accordingly, the conversion price was adjusted on May 7, 2009 to
$4.2511.
 
 The
derivative liability related to the embedded conversion option was adjusted as
of May 7, 2009, based on the revised conversion price. As a result of the
reduced conversion price, the derivative liability increased as of May 7, 2009
by $27.1 million, which amount is included in the change in the value of the
derivative liability in the consolidated statement of operations and other
comprehensive income (loss).
 
 From May
7 to September 30 2009, $30.0 million of notes was converted to 7,045,274 shares
of common stock at a conversion price of $4.2511. Pursuant to generally accepted
accounting principles of the United States, the Company valued the conversion
option on the note conversion date. A total of $32.1 million of the
carrying value and derivative liability had been reclassified into equity.
According to the convertible note agreement, the Company incurred the make whole
interest expense of $8.8 million.
 
 Securities
Purchase
 
 On
December 24, 2009, The Company sold  5,555,556 shares of our common
stock and warrants to purchase up to 2,777,778 shares of our common stock in a
registered direct offering. The common stock and warrants were sold in
units, with each unit consisting of one share of common stock and a warrant to
purchase 0.50 shares of common stock at an exercise price of $5.00 per share of
common stock. Each unit was sold at a negotiated price of $4.50 per unit.
The shares of common stock and warrants were issued separately but can only
be purchased together in this offering.
 
 The
Warrants represent the right to purchase an aggregate of up to 2,777,778 shares
of common stock at an initial exercise price of $5.00 per share. Each Warrant
may be exercised at $5.00 per share at any time and from time to time on or
after six months and one day following the closing.
 
 Reset of Warrants Exercise
Price
 
 On
December 24, 2009, the holders of the existing warrants 1,154,958 shares of our
common stock (refer Notes in Note 11) entered into warrant reset aggrements
whereby the exercise price was reset from $13.51 to $5 per share. And the
number of shares of common stock issuable upon exercise of warrants was
increased by 2.3775 times from 1,154,958 to 3,900,871. The company booked $10.1
million derivative loss in 2009 for this reset accordingly.
 
 As of
December 31 2009, in accordance with generally accepted accounting principles of
the United States, the fair value of derivative liabilities described above was
recalculated and increased by $5.3 million during the period, including $9.6
million for the increase in fair value of the warrants and $4.3 million for the
decrease in fair value of the conversion option.
 
 See
report of independent registered public accounting firm.
  77
 
 GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009
 
 As of
December 31 2009, the balance of derivative liabilities, including 2009 issued
warrants (see Note 18), was $23.3 million, which consisted of $20.8 million for
the warrants and $2.5 million for the conversion option.
 
 The
carrying value of the notes was $1.1 million as of December 31, 2009. The
effective interest charges on notes totaled $2.3 million, $3.6 million and $0.2
million for the years ended December 31, 2009, 2008 and 2007,
respectively.
 
 Note
issuance cost was amortized to interest expense for the years ended December 31,
2009, 2008 and 2007 amounted to $0.06 million, $0.05 million and $0.03 million,
respectively.
 
 Note
12 – Supplemental disclosure of cash flow information
 
 Interest
paid amounted to $14.5 million, $12.0 million and $8.4 million for the years
ended December 31 2009, 2008 and 2007, respectively.
 
 Income
tax payments amounted to $3.0 million, $6.6 million and $0.2 million for
the years ended December 31 2009, 2008 and 2007, respectively.
 
 Make
whole Interest of $6.0 million has been capitalized into construction in
progress and subsequently transferred to fixed assets for the years ended
December 31, 2009.
 
 Note
13 - Gain from debt extinguishment and Government grant
 
 Debt
extinguishment
 
 For the
year ended December 31, 2009, the Company recorded gain from debt extinguishment
totaling $7.3 million. In 2009, Maoming, a subsidiary entered into a Debt Waiver
Agreement with Guangzhou Hengda, pursuant to which Guangzhou Hengda agreed to
waive $7.3 million (RMB 50.0 million) of debt that Maoming Hengda owes to
Guangzhou Hengda. The Company determined that the subsequent debt settlement
does not constitute a contingency at the date of purchase as defined in the
accounting standard - business Combinations and thus should not result in a
reallocation of the purchase price. The waiver is irrevocable.
 
 Government
grant
 
 Due to an
increasing emphasis the government puts on energy savings and pollution emission
controls, the Shaanxi Province Development and Reform Commission provided
incentives for local companies to eliminate outdated iron and steel production
machineries and equipment. The Company’s subsidiary, Longmen Joint Venture,
received $4.3 million (RMB 29.2 million) in government grants for compliance in
dismantling two blast furnaces for the year ended December 31, 2009. The Company
wrote off the residual book value of the furnaces dismantled totaling $0.9
million (RMB 5.8 million), and recorded other income of $3.4 million for the
year ended December 31, 2009.
 
 Note
14 – Taxes
 
 Income
tax
 
 On
January 1, 2008, the new Enterprise Income Tax (“EIT”) law replaced the existing
laws for Domestic Enterprises (“DES”) and Foreign Invested Enterprises (“FIEs”).
The new standard EIT rate of 25% has replaced the 33% rate currently applicable
to both DES and FIEs. The two-year tax exemption and three-year 50% tax
reduction tax holiday for production-oriented FIEs will not be eliminated for
certain entities incorporated on or before March 16, 2007.
 
 See
report of independent registered public accounting firm.
  78
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009
 
 Significant
components of the provision for income taxes on earnings and deferred taxes on
net operating losses from operation for the years ended December 31, 2009, 2008
and 2007 are as follows:
 December31,
                    2009
                  
                  
                  December31,
                    2008
                  
                  
                  December31,
                    2007Current
                  
                  $
                  2,155
                  
                  
                  $
                  1,424
                  
                  
                  $
                  5,225Deferred
                  
                  
                  3,998
                  
                  
                  
                  (6,835
                  )
                  
                  
                  (389
                  )Total
      provision (benefit) for income taxes
                  
                  $
                  6,153
                  
                  
                  $
                  (5,411
                  )
                  
                  $
                  4,836
 
 According
to Chinese tax regulations, the net operating loss can be carried forward to
offset with operating income for the next five years. Management believes the
deferred tax asset is fully realizable.
 
 The
principal component of the deferred income tax assets is as
follows:
 
 December31,
                      2009
                    
                    
                    December31,
                      2008(in
      thousands)
                    
                    
                    (in
      thousands)Beginning
      balance
                    
                    $
                    7,487
                    
                    
                    $
                    400Xi’an
      Rolling Mill’s ,YuXin, YuTeng, HuaLong, TongXing and BaoTouNet
      operating loss carry-forward
                    
                    
                    (864
                    )
                    
                    
                    4,945Effective
      tax rate
                    
                    
                    25
                    %
                    
                    
                    25
                    %Deferred
      tax asset
                    
                    $
                    (216
                    )
                    
                    $
                    1,225Long
      Gang Headquarter’s
                      Net
      operating loss carry-forward
                    
                    
                    (26,193
                    )
                    
                    
                    36,809Effective
      tax rate
                    
                    
                    15
                    %
                    
                    
                    15.2
                    %Deferred
      tax asset
                    
                    $
                    (3,929
                    )
                    
                    $
                    5,610Exchange
      difference
                    
                    
                    (1
                    )
                    
                    
                    252Totals
                    
                    $
                    3,341
                    
                    
                    $
                    7,487
 
 Under the
Income Tax Laws of the PRC, the Company’s subsidiary, Daqiuzhuang Metal, is
generally subject to an income tax at an effective rate of 25% on income
reported in the statutory financial statements after appropriate tax
adjustments, unless the enterprise is located in a specially designated region
where it allows foreign enterprises a two-year income tax exemption and a 50%
income tax reduction for the following three years. Daqiuzhuang Metal became a
Chinese Sino-foreign joint venture at the time of the merger on October 14, 2004
and it became eligible for the tax benefit. Daqiuzhuang Metal is located in
Tianjin Costal Economic Development Zone and under the Income Tax Laws of
Tianjin City of the PRC; it is eligible for an income tax rate of 24%.
Therefore, Daqiuzhuang Metal is exempt from income taxes for the years ended
December 31, 2005 and 2006 and is entitled to a 50% income tax reduction of the
special income tax rate of 24%, which is a rate of 12% for the years ended
December 31, 2007, 2008 and 2009.
 
 See
report of independent registered public accounting firm.
  79
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009
  The
Company’s subsidiary, Longmen Joint Venture, is located in the mid-west region
of China. It qualifies for the “Go-West” tax rebate of 15% tax rate promulgated
by the government; therefore, income tax is calculated at 15%.
 
 Baotou
Steel Pipe Joint Venture is located in Inner Mongolia and is subject to an
income tax at an effective rate of 25%.
 
 Maoming
is located in Guangdong province and is subject to an income tax at an effective
rate of 25%.
 
 The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the years ended December 31 2009, 2008 and 2007 as
follows:
 
 December31,
                    2009
                  
                  
                  December31,
                    2008
                  
                  
                  December31,
                    2007U.S.
      Statutory rates
                  
                  
                  34.0
                  %
                  
                  
                  34.0
                  %
                  
                  
                  34.00
                  %Foreign
      income not recognized in the US
                  
                  
                  (34.0
                  )%
                  
                  
                  (34.0
                  )%
                  
                  
                  (34.0
                  )%China
      income taxes
                  
                  
                  25.0
                  %
                  
                  
                  25.0
                  %
                  
                  
                  33.0
                  %Tax
      effect of income not taxable for tax purposes (1)
                  
                  
                  (1.8
                  )%
                  
                  
                  (4.3
                  )%
                  
                  
                  (3.4
                  )%Effect
      of different tax rate of subsidiaries operating in other
      jurisdictions
                  
                  
                  (4.9
                  )%
                  
                  
                  (12.0
                  )%
                  
                  
                  (17.3
                  )%Total
      provision for income taxes
                  
                  
                  18.3
                  %
                  
                  
                  8.7
                  %
                  
                  
                  12.3
                  %
 
 (1)
              This
      represents derivative expenses (income) and stock compensation expenses
      incurred by GSI that are not deductible/taxable in the PRC for the years
      ended December 31, 2009, 2008 and
2007.
 
 The
Company has cumulative undistributed earnings of foreign subsidiaries of
approximately $26.7 million as of December 31, 2009, and is included in
consolidated retained earnings and will continue to be indefinitely reinvested
in international operations. Accordingly, no provision has been made for U.S.
deferred taxes related to future repatriation of these earnings, nor is it
practicable to estimate the amount of income taxes that would have to be
provided if we concluded that such earnings will be remitted in the
future.
 
 See
report of independent registered public accounting firm.
  80
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009
 
 General
Steel Holdings, Inc. was incorporated in the United States and has incurred net
operating losses for income tax purposes for the years ended December
31, 2009, 2008 and 2007, respectively. The net operating loss carry
forwards for United States income taxes amounted to $5.3 million which may be
available to reduce future years’ taxable income. These carry forwards will
expire, if not utilized, through 2029. Management believes that the realization
of the benefits from these losses appears uncertain due to the Company’s limited
operating history and continuing losses for United States income tax purposes.
Accordingly, the Company has provided a 100% valuation allowance on the deferred
tax asset benefit to reduce the asset to zero. The valuation allowance at
December 31, 2009 was $1.8 million. The net change in the valuation allowance
for the year ended December 31, 2009 and December 31, 2008 was an increase of
$0.9 million and $0.6 million, respectively. Management will review this
valuation allowance periodically and make adjustments as warranted.
 
 Value
added tax
 
 Enterprises
or individuals who sell commodities, engage in repair and maintenance or import
and export goods in the PRC are subject to a value added tax in accordance with
PRC laws. The value added tax standard rate is 17% of the gross sales price. A
credit is available whereby VAT paid on the purchases of semi-finished products
or raw materials used in the production of the Company’s finished products can
be used to offset the VAT due on sales of the finished product.
 
 VAT on
sales and VAT on purchases amounted to $435.1 million and $409.8 million for the
year ended December 31, 2009, $341.5 million and $308.5 million for the year
ended December 31, 2008, $189.8 million and $159.1 million for the year ended
December 31, 2007, respectively. Sales and purchases are recorded net of VAT
collected and paid as the Company acts as an agent for the government. VAT taxes
are not impacted by the income tax holiday.
 
 As of
December 31, 2009, the Company had prepaid VAT credits of $19.5 million which
can be applied to offset with subsequent year’s VAT on sales.
 
 Taxes
payable consisted of the following:
 December31,
                      2009
                    
                    
                    December31,
                      2008(in thousands)
                    
                    
                    (in thousands)VAT
      taxes payable
                    
                    $
                    3,861
                    
                    
                    $
                    8,985Income
      taxes payable
                    
                    
                    1,633
                    
                    
                    
                    2,510Misc
      taxes
                    
                    
                    1,427
                    
                    
                    
                    2,422Totals
                    
                    $
                    6,921
                    
                    
                    $
                    13,917
 
 Note
15 – Earnings per share
 
 The
calculation of earnings per share is as follows:
 
 2009
                    
                    
                    2008
                    
                    
                    2007(inthousandsexceptpersharedata)(Loss)
      Income attributable to holders of common shares
                    
                    $
                    (25,244
                    )
                    
                    $
                    (11,323
                    )
                    
                    $
                    22,426Basic
      weighted average number of common shares outstanding
                    
                    
                    41,860,238
                    
                    
                    
                    35,381,210
                    
                    
                    
                    32,424,652Diluted
      weighted average number of common shares outstanding
                    
                    
                    41,860,238
                    
                    
                    
                    35,381,210
                    
                    
                    
                    32,558,350Earnings
      per shareBasic
                    
                    $
                    (0.60
                    )
                    
                    $
                    (0.32
                    )
                    
                    $
                    0.69Diluted
                    
                    $
                    (0.60
                    )
                    
                    $
                    (0.32
                    )
                    
                    $
                    0.69
 
 See
report of independent registered public accounting firm.
  81
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009
 
 For the
years ended December 31, 2009 and 2008, the Company incurred a net
loss; therefore there is no dilutive effect for its earnings per
share.
 
 For the
year ended December 31, 2007, the Company has 1,176,665 shares of mandatory
redeemable shares which are excluded from the calculation of basic and diluted
EPS pursuant to accounting standards. All outstanding warrants issued in
connection with the redeemable shares were excluded from the diluted earnings
per share calculation as they are anti-dilutive.
 
 Note
16 – Related party balances and transactions
 
 The
Company subleased a portion of its land use rights to Tianjin Jing Qiu Steel
Market Company, a related party under common control. The Company’s Chairman,
CEO and major shareholder, Zuosheng Yu (aka Henry Yu), is the chairman and the
largest shareholder of Jing Qiu Steel Market Company. The lease term is one year
and is renewed annually. The income generated from the rental amounted to the
following for the year-ended:
 
 2009
                    
                    
                    2008
                    
                    
                    2007in
      thousandsRental
      Income
                    
                    $
                    1,780
                    
                    
                    $
                    1,737
                    
                    
                    $
                    1,588
 
 Tianjin
Dazhan Industry Co., Ltd. (“Dazhan”) and Tianjin Hengying Trading Co., Ltd.
(“Hengying”) are steel trading companies controlled by the Company’s Chairman,
CEO and major shareholder, Zuosheng Yu. Dazhan and Hengying acted as trading
agents of the Company to make purchases and sales for the Company.  The
purchase and sales from the aforementioned related parties amounted to the
following for the year-ended:
 
 Through
      Hengying& Dazhan
                    
                    2009
                    
                    
                    2008
                    
                    
                    2007(in
      thousands)Purchase
      from Hengying and Dazhan
                    
                    $
                    45,296
                    
                    
                    $
                    76,434
                    
                    
                    $
                    92,584Sales
      to Hengying and Dazhan
                    
                    $
                    2,334
                    
                    
                    $
                    33,413
                    
                    
                    $
                    32,743
 
 All
transactions with related parties are short-term in nature. Settlements for the
balances are usually in cash. The following charts summarize the related party
transactions as of December 31, 2009 and December 31, 2008.
 
 a.
              Other
      receivables - related parties:
 
 Nameofrelatedparties
                      
                      Relationship
                      
                      
                      December31
                        2009
                      
                      
                      December31,
                        2008(in
      thousands)
                      
                      
                      (in
      thousands)Beijing
      Wendlar
                      
                      Common
      control under CEO
                      
                      
                      $
                      
                      
                      
                      $
                      376Shanxi
      Longmen Steel Group
                      
                      General
      Steel’s joint venture partner
                      
                      
                      
                      19,226
                      
                      
                      
                      -Mao
      Ming Sheng Zhe
                      
                      Common
      control under CEO
                      
                      
                      
                      3,021
                      
                      
                      
                      -Tianjin
      Dazhan Industry Co, Ltd
                      
                      Common
      control under CEO
                      
                      
                      
                      10,268
                      
                      
                      
                      -Tianjin
      Jin Qiu Steel Market
                      
                      Common
      control under CEO
                      
                      
                      
                      147
                      
                      
                      
                      147Tianjing
      General Steel Management Service Co., Ltd
                      
                      Common
      control under CEO
                      
                      
                      
                      8
                      
                      
                      
                      -Total
                      
                      
                      
                      
                      $
                      32,670
                      
                      
                      $
                      523
 
 See
report of independent registered public accounting firm.
  82
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009
 
 b.
              Advances
      on inventory purchases – related
parties:
 
 Nameofrelatedparties
                      
                      Relationship
                      
                      December31,
                        2009
                      
                      
                      December31,
                        2008(in
      thousands)
                      
                      
                      (in
      thousands)Li
      Yuan Xi Mei
                      
                      Longmen
      JV’s subsidiary
                      
                      $
                      
                      
                      
                      $
                      502Tianjin
      Jin Qiu Steel Market
                      
                      Common
      control under CEO
                      
                      
                      2,995
                      
                      
                      
                      -Baogang
      Jianan
                      
                      noncontrolling
      shareholders of one subsidiary
                      
                      
                      -
                      
                      
                      
                      1,873Total
                      
                      
                      
                      $
                      2,995
                      
                      
                      $
                      2,375
 
 c.
              Accounts
      payable due to related parties:
 
 Nameofrelated
                          parties
                        
                        Relationship
                        
                        December31,
                          2009
                        
                        
                        December
                          31,2008(in
      thousands)
                        
                        
                        (in
      thousands)Tianjin
      Hengying Trading Co., Ltd
                        
                        Common
      control under CEO
                        
                        $
                        17,256
                        
                        
                        $
                        10,630Tianjin
      Dazhan Industry Co., Ltd
                        
                        Common
      control under CEO
                        
                        
                        6,047
                        
                        
                        
                        -Henan
      Xinmi Kanghua
                        
                        Longmen
      JV’s subsidiary’s joint venture partner
                        
                        
                        960
                        
                        
                        
                        1,501Zhengzhou
      Shenglong
                        
                        Longmen
      JV’s subsidiary’s joint venture partner
                        
                        
                        91
                        
                        
                        
                        -Baotou
      Shengda Steel Pipe
                        
                        Common
      control under CEO
                        
                        
                        -
                        
                        
                        
                        1,558ShanXi
      Fangxin
                        
                        Longmen
      JV’s subsidiary’s joint venture partner
                        
                        
                        373
                        
                        
                        
                        1,451Baogang
      Jianan
                        
                        Noncontrolling
      shareholders of one subsidiary
                        
                        
                        38
                        
                        
                        
                        187Jingma
      Jiaohua
                        
                        Longmen
      JV’s subsidiary (unconsolidated)
                        
                        
                        1,360
                        
                        
                        
                        -Huashan
      metallurgy
                        
                        Longmen
      JV’s subsidiary
                        
                        
                        601
                        
                        
                        
                        -Beijing
      Daishang Trading Co., Ltd
                        
                        Noncontrolling
      shareholder of one subsidiary of Longmen Joint Venture
                        
                        
                        1,315
                        
                        
                        
                        -Shanxi Hong
      guang Steel Logistics
                        
                        Owned
      by noncontrolling shareholder of one subsidiary
                        
                        
                        329
                        
                        
                        
                        -Shanxi
      Longmen Steel Group Xian Steel
                        
                        Longmen
      JV’s subsidiary (unconsolidated)
                        
                        
                        14,905
                        
                        
                        
                        -Shanxi
      Xian International Yulong Hotel
                        
                        Owned
      by noncontrolling shareholder of one subsidiary
                        
                        
                        76
                        
                        
                        
                        -Tianjin
      Tongyong Qiugang Pipe
                        
                        Common
      control under CEO
                        
                        
                        4,800
                        
                        
                        
                        -Total
                        
                        
                        
                        $
                        48,151
                        
                        
                        $
                        15,327
 
 See
report of independent registered public accounting firm.
  83
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009
 
 d.
              Short-term
      loans due to related parties:
 
 Nameofrelated
                                    parties
                                  
                                  Relationship
                                  
                                  December31,
                                    2009
                                  
                                  
                                  December31,
                                    2008(in
                                    thousands)
                                  
                                  
                                  (in
                                    thousands)Tianjin
      Dazhan Industry Co., Ltd
                                  
                                  Common
      control under CEO
                                  
                                  $
                                  3,946
                                  
                                  
                                  $
                                  3,946Tianjin
      Hengying Trading Co., Ltd
                                  
                                  Common
      control under CEO
                                  
                                  
                                  3,404
                                  
                                  
                                  
                                  3,404Shaanxi
      Shenganda Trading Co., Ltd
                                  
                                  Owned
      by noncontrolling shareholder of one subsidiary
                                  
                                  
                                  4,401
                                  
                                  
                                  
                                  -Total
                                  
                                  
                                  
                                  $
                                  11,751
                                  
                                  
                                  $
                                  7,350
 
 e.
              Other
      payables due to related parties:
 
 Nameofrelated
                        parties
                      
                      Relationship
                      
                      December31,
                        2009
                      
                      
                      December31,
                        2008(in
      thousands)
                      
                      
                      (in
      thousands)Golden
      Glister
                      
                      Chairman
      of General Steel Holdings, Inc. owns more than 5% in this
      company
                      
                      $
                      -
                      
                      
                      $
                      600Tianjin
      Hengying Trading Co, Ltd
                      
                      Common
      control under CEO
                      
                      
                      2,415
                      
                      
                      
                      -Beijing
      Wendlar
                      
                      Common
      control under CEO
                      
                      
                      704
                      
                      
                      
                      -Yangpu
      Capital Automobile
                      
                      Common
      control under CEO
                      
                      
                      587
                      
                      
                      
                      -Baotou
      Shengda Steel Pipe
                      
                      Common
      control under CEO
                      
                      
                      -
                      
                      
                      
                      77Total
                      
                      
                      
                      $
                      3,706
                      
                      
                      $
                      677
 
 See
report of independent registered public accounting firm.
  84
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009
 
 f.
              Customer
      deposits – related parties:
 
 Name
      of related parties
                      
                      Relationship
                      
                      December
      31,
                        2009
                      
                      
                      December
      31,
                        2008(in
      thousands)
                      
                      
                      (in
      thousands)Tianjin
      Dazhan Industry Co., Ltd
                      
                      Common
      control under CEO
                      
                      $
                      1,544
                      
                      
                      $
                      2,760Tianjin
      Hengying Trading Co., Ltd
                      
                      Common
      control under CEO
                      
                      
                      203
                      
                      
                      
                      -Haiyan
                      
                      Longmen
      JV’s subsidiary (unconsolidated)
                      
                      
                      1,316
                      
                      
                      1,522Beijing
      Daishang Trading Co., Ltd
                      
                      Noncontrolling
      shareholder of one subsidiary of Longmen Joint Venture
                      
                      
                      728
                      
                      
                      
                      -Maoming
      Heng Da Materials
                      
                      Common
      control under CEO
                      
                      
                      -
                      
                      
                      
                      2,934Total
                      
                      
                      
                      $
                      3,791
                      
                      
                      $
                      7,216
 
 The
Company also guaranteed bank loans of related parties amounting to $93.6 million
as of December 31, 2009.
 
 Note
17 – Business combination
 
 On
January 14, 2008, the Company through Longmen Joint Venture completed its
acquisition of a controlling interest in Hancheng Tongxing Metallurgy Co., Ltd.
(“Tongxing”). Longmen Joint Venture contributed its land use right of
approximately 53 acres (217,487 square meters) with an appraised value of
approximately $4.1 million (RMB 30 million). Pursuant to the agreement, the land
will be converted into shares valued at approximately $3.1 million (RMB 23
million), providing the Joint Venture stake of 22.76% ownership in Tongxing and
making it Tongxing’s largest controlling shareholder. The parties agreed to make
the effective date of the transaction January 1, 2008. The acquisition is
accounted for as an acquisition under common control.
 
 AssumedbyTongxing
                    
                    BookValue
                    
                    
                    LongmenJointVenture
                      (22.76%)(in
      thousands)
                    
                    
                    (in
      thousands)Current
      assets
                    
                    $
                    55,505
                    
                    
                    $
                    12,633Noncurrent
      assets
                    
                    
                    8,088
                    
                    
                    
                    1,841Total
      assets
                    
                    
                    63,593
                    
                    
                    
                    14,474Total
      liabilities
                    
                    
                    50,782
                    
                    
                    
                    11,558Net
      assets
                    
                    $
                    12,811
                    
                    
                    $
                    2,916
 
 On August
11, 2008, the Company through its subsidiary, Longmen Joint Venture, completed
its acquisition of a controlling interest in Beijing Hua Tian Yu Long
International Steel Trade Co., Ltd. The Longmen Joint Venture paid $0.1 million
(RMB 0.9 million) for 50% equity based on the appraisal value on December 31,
2008.
 
 On June
25, 2008, the Company through Qiu Steel Investment entered an into equity
purchase agreement with the shareholders of Maoming to acquire a 99% equity of
Maoming. The total purchase price for the acquisition is $7.3 million (RMB 50
million). The fair value of Maoming was $10.1 million (RMB 69 million) as of
December 31 2008.  Pursuant to generally accepted accounting principles of
the United States, the excess of total fair value acquired over purchase price
should be allocated as a pro rata reduction of non-current assets. Subsequently,
the Company recorded the difference as a reduction of fixed assets
acquired.
 
 See
report of independent registered public accounting firm.
  85
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009
  The joint
venture’s name is Maoming Heng Da Steel Group Co. Ltd., a company formed under
the laws of the PRC. It is located in Maoming city, Guangdong province in China.
It produces and sells high speed wire.
 
 Maoming
                    
                    
                    
                    
                    Assumedby(inthousands)
                    
                    FairValue
                    
                    
                    TheCompany(99%)Current
      assets
                    
                    $
                    45,314
                    
                    
                    $
                    44,861Non-current
      assets
                    
                    
                    81,780
                    
                    
                    
                    78,291Total
      assets
                    
                    
                    127,094
                    
                    
                    
                    123,152Total
      liabilities
                    
                    
                    117,027
                    
                    
                    
                    115,857Net
      assets
                    
                    $
                    10,067
                    
                    
                    $
                    7,295
 
 Distribution
payable to former shareholders for the above acquisitions amount to $16.4
million and $18.8 million as of December 31, 2009 and December 31, 2008,
respectively.
 
 Note
18 - Equity
 
 2008
Equity Transactions
 
 Stock issuance for
compensation and services
 
 On
February 5, 2008, the Company issued senior management and directors 76,600
shares of common stock at $7.16 per share, as compensation. The shares were
valued at the quoted market price on the date granted. The Company recorded
compensation expense of $0.5 million for the year ended December 31,
2008.
 
 On April
14, 2008, the Company, Mr., Zuosheng Yu, (CEO of the Company) and Mr. Zhang Dan
Li (member of the Board of Directors of the Company and of Long Men Joint
Venture) entered into a compensation agreement in which Mr. ZuoSheng Yu agreed
to transfer 600,000 shares to Mr. Zhang Dan Li in exchange for 15 years of
service in the Company. Pursuant to Generally accepted accounting principles in
the United States regarding (Share-Based Payment) share-based payments awarded
to an employee of the reporting entity by a related party or other holder of an
economic interest in the entity is treated as compensation as if the shareholder
has made a capital contribution. The shares are valued at $6.91 on the grant
date for a total of $4.1 million and will be amortized over the life agreement.
A total of $0.2 million of compensation expense and additional paid in capital
has been recorded in 2008.
 
 On April
15, 2008, the Company granted senior management and directors 87,400 shares of
common stock at $6.66 per share, as compensation. The shares were valued at the
quoted market price on the date granted. The Company recorded compensation
expense of $0.6 million for the year ended December 31, 2008.
 
 On July
3, 2008, the Company granted senior management and directors 90,254 shares of
common stock at $10.29 per share, as compensation. The shares were valued at the
market price on the date granted. The Company recorded compensation expense of
$0.9 million for the year ended December 31, 2008.
 
 See
report of independent registered public accounting firm.
  86
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009
 
 On
October 28, 2008, the company granted Teamlink Investment Limited, 100,000
shares of commons stock at $3.6 per share as consulting service expense $0.4
million. According to the period of service provided, $0.1 million was recorded
as expense in 2008 and $0.3 million will be amortized within 10 months. $0.3
million of public relationship expense had been recorded for the nine months
ended December 31, 2009.
 
 On
November 24, 2008, the Company granted senior management and directors 87,550
shares of common stock at $3.50 per share, as compensation. The shares were
valued at the market price on the date granted. The Company recorded
compensation expense of $0.3 million for the year ended December 31,
2008.
 
 Convertible notes
conversion
 
 On
January 8, 2008 the Company issued 150,000 shares of common stock at $10.43 per
share as additional note issuance cost totaled $1.6 million. The shares price is
determined as the quoted market price on the date granted.
 
 In July
2008, 541,299 shares of common stock were issued upon conversion of notes with a
carrying value of $6.8 million at a conversion price of $12.48. In addition
195,965 shares of common stock were issued as make whole interest expense of
$2.3 million.
 
 Exercise of
warrants
 
 In
September 2008, 140,000 warrants, issued in connection with the redeemable
preferred stock, were exercised at $5.00 per share.
 
 2009
Equity Transactions
 
 Stock issuance for debt
repayment
 
 On May 8,
2009, the Company issued 300,000 shares of common stock to Maoming’s debtor,
Guangzhou Hengda at $6 per share, as cash payments made for settling other short
term loan.
 
 Stock
issuance for compensation and services
 
 On
March 9, 2009, the Company granted senior management and directors 109,250
shares of common stock at $1.85 per share, as compensation. The shares were
valued at the quoted market price on the date granted. The Company recorded
compensation expense of $0.2 million.
 
 On
April 7, 2009, the Company granted senior management and directors 106,750
shares of common stock at $2.77 per share, as compensation. The shares were
valued at the quoted market price on the date granted. The Company recorded
compensation expense of $0.3 million.
 
 On
September 1, 2009, the Company granted Huamei 21st Century Limited, 170,000
shares of common stock at $3.60 per share as consulting service expense totaling
$0.6 million. According to the period of service provided, $0.1 million was
recorded as expense in 2009 and $0.5 million will be amortized within 20
months.
 
 On
September 2, 2009, the Company granted senior management and directors 107,050
shares of common stock at $3.62 per share, as compensation. The shares were
valued at the quoted market price on the date granted. The Company recorded
compensation expense of $0.4 million.
 
 See
report of independent registered public accounting firm.
  87
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009
 
 On
November 2, 2009, the Company granted senior management and directors 103,600
shares of common stock at $3.62 per share, as compensation. The shares were
valued at the quoted market price on the date granted. The Company recorded
compensation expense of $0.4 million.
 
 Convertible notes
conversion
 
 On
January 15, 2009, the Company granted convertible notes holders 152,240 shares
of common stock at $3.66 per share, as share payments for interest. The shares
were computed as 90% of the arithmetic average of the Weighted Average Price of
the Common Shares on each for the ten consecutive Trading Days immediately
preceding the applicable Interest Date.
 
 On July
15 and Aug 21, 2009 the Company granted convertible notes holders 44,065 shares
of common stock at price of $4.2511 as cash payments made for
interest.
 
 From May
7 to December 31, 2009, $30.0 million of notes was converted to 7,045,274 shares
of common stock at Conversion Price, $4.2511. According to the convertible bond
agreement, the Company incurred the make whole interest expense of $8.8 million.
As of December 31, 2009, 1,795,977 shares of common stock had been issued. See
note 11 for details.
 
 On
December 24, 2009, in connection with the financing described below, the
existing warrants, strike price reduced from $13.51 to $5 and number of shares
increased by 2.3775 from 1,154,958 to 3,900,871. The initial value of the
revised warrants was determined using the Cox-Ross-Rubinstein binomial model
based on the following variables:
 
 ·
              Expected
      volatility of 125%
 ·
              Expected
      dividend yield of 0%
 ·
              Risk-free
      interest rate of 1.76%
 ·
              Expected
      lives of five years
 ·
              Market
      price at issuance date of $4.57
 ·
              Strike
      price of $5.00
 
 The
warrants were re-valued at $13.3 million when the warranty terms were amended on
December 24, 2009. At December 31, 2009, the estimated fair value of the
warrants was $12.7 million, resulting in a total loss of $9.7 million, which was
recorded in the Company’s consolidated statements of operations and other
comprehensive income (loss).
 
 2009
financing
 
 On
December 24, 2009, the Company entered into a Securities Purchase Agreement with
certain institutional investors issuing 5,555,556 shares and 2,777,778 warrants
(the “2009 Warrants”). The warrants can be converted to common stock from June
24, 2010 to June 23, 2013 at $5 per share. The warrants have a strike price
equal to $5.00 and a term of two and a half years. Because the warrants are
denominated in U.S. dollars and the Company’s functional currency is the
Renminbi, and the warrants permit holder to request cash buy-back in the
event of a Fundamental Transaction, which is significant changes in the Company
structure and/or equity, these warrants do not meet the requirements of the
accounting standards to be indexed only to the Company’s stock. 
Accordingly, they are accounted for at fair value as derivative liabilities and
marked to market each period.
 
 The
initial value of the warrants was determined using the Cox-Ross-Rubinstein
binomial model using the following assumptions:
 
 See
report of independent registered public accounting firm.
  88
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009
 
 ·
              Expected
      volatility of 125%
 ·
              Expected
      dividend yield of 0%
 ·
              Risk-free
      interest rate of 1.28%
 ·
              Expected
      lives of two and a half years
 ·
              Market
      price at issuance date of $4.57
 ·
              Strike
      price of $5.00
 
 The newly
issued warrants were valued at $8.5 million when they were issued on December
24, 2009. At December 31, 2009, the estimated fair value of the warrants was
$8.1 million, resulting in a gain of $0.4 million, which was recorded in the
Company’s consolidated statement of operations and other comprehensive income
(loss).
 
 The
volatility of the Company’s common stock was based on the Company’s historical
stock prices, the risk free interest rate was based on Treasury Constant
Maturity Rates published by the U.S. Federal Reserve for periods applicable to
the life of the warrants, the dividend yield was based on the Company’s current
and expected dividend policy and the expected term is equal to the contractual
life of the warrants.  The value of the warrants was based on the Company’s
common stock price on the date the warrants were issued.
 
 The
Company has the following warrants outstanding:
 
 Outstanding
      as of January 1, 2008
                        
                        
                        1,388,292Granted
                        
                        
                        -Forfeited
                        
                        
                        (93,334
                        )Exercised
                        
                        
                        (140,000
                        )Outstanding
      As of December 31, 2008
                        
                        
                        1,154,958Granted
                        
                        
                        5,523,691Forfeited
                        
                        
                        -Exercised
                        
                        
                        -Outstanding
      As of December 31, 2009
                        
                        
                        6,678,649
 
 OutstandingWarrants
                    
                    
                    ExercisableWarrantsExercise
                      Price
                    
                    Number
                    
                    
                    Average
                      Remaining
                      Contractual
                      Life
                    
                    
                    Average
                      Exercise
                      Price
                    
                    
                    Number
                    
                    
                    Average
                      Remaining
                      ContractualLife$
                    5
                    
                    
                    6,678,649
                    
                    
                    
                    3.0
                    
                    
                    $
                    5
                    
                    
                    
                    3,900,871
                    
                    
                    
                    3.36
 
 Note
19 – Retirement plan
 
 Regulations
in the PRC require the Company to contribute to a defined contribution
retirement plan for all employees. All Joint Venture employees are entitled to a
retirement pension amount calculated based upon their salary at their date of
retirement and their length of service in accordance with a government managed
pension plan. The PRC government is responsible for the pension liability to the
retired staff. The Company is required to contribute 20% of the employees’
monthly base salary. Employees are required to contribute 8% of their base
salary to the plan. Total pension expense incurred by the Company amounted to
$3.8 million, $3.0 million and $1.6 million for the years ended December 31,
2009, 2008 and 2007, respectively.
 
 See
report of independent registered public accounting firm.
  89
 
 GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009
 
 Note 20–Statutory reserves
 
 The laws
and regulations of the People’s Republic of China require that before an
enterprise distributes profits to its partners, it must first satisfy all tax
liabilities, provide for losses in previous years, and make allocations, in
proportions determined at the discretion of the board of directors, to the
statutory reserves. The statutory reserves include the surplus reserve funds and
the enterprise fund and these statutory reserves represent restricted retained
earnings.
 
 Surplus reserve
fund
 
 The
Company is required to transfer 10% of its net income, as determined in
accordance with the PRC accounting rules and regulations, to a statutory surplus
reserve fund until such reserve balance reaches 50% of the Company’s registered
capital.
 
 The
transfer to this reserve must be made before distribution of any dividend to
shareholders. The surplus reserve fund is non-distributable other than during
liquidation and can be used to fund previous years’ losses, if any, and may be
utilized for business expansion or converted into share capital by issuing new
shares to existing shareholders in proportion to their shareholding or by
increasing the par value of the shares currently held by them, provided that the
remaining reserve balance after such issue is not less than 25% of the
registered capital.
 
 Note
21 – Commitment and contingencies
 
 Commitments
 
 Daqiuzhuang
Metal provides dormitory facilities for its employees under a 10 year rental
contract. The agreement began January 2006 and required full prepayment for the
10 year period totaling $0.5 million.
 
 Daqiuzhuang
Metal rented land for 50 years starting September 2005. Total amount of the rent
over the 50 years period is approximately $1.0 million (or RMB 8
million).
 
 Baotou
Steel Pipe Joint Venture has 5 years rental agreement with Bao Gang Jian An for
buildings. The agreement began June 2007 for $0.3 million (or RMB1.8 million)
per year.
 
 As of
December 31, 2009, total future minimum lease payments for the unpaid portion
under an operating lease were as follows:
 
 YearendedDecember31,
                      
                      Amount(inthousands)2010
                      
                      $
                      2642011
                      
                      
                      2642012
                      
                      
                      1322013
                      
                      
                      -2014
                      
                      
                      -Thereafter
                      
                      
                      661Total
                      
                      $
                      1,321
 
 See
report of independent registered public accounting firm.
  90
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009
 
 Total
rental expense amounted to $0.3 million, $0.3 million and $0.2 million for the
years ended December 31 2009, 2008 and 2007, respectively.
 
 Hancheng
Tongxing Metallurgy Co., Ltd., one subsidiary of Longmen Joint Venture, is
obligated to contribute $33.0 million (RMB 225 million), as registered capital
to Shaanxi Longmen Coal and Chemical Co., Ltd by the end of 2010. Tongxing had
contributed $6.6 million as of December 31, 2009.
 
 Long Men
Joint Venture has a $14.6 million contractual obligation in its construction
project as of December 31 2009.
 
 The
Company entered an agreement to build a TRT Electricity Generator inside the
subsidiary, Longmen Joint Venture’s production plant. The Company makes payments
for the cost via scheduled payments after the TRT was put into use in April
2009. The future payment schedule associated with the arrangement is as
follow:
 
 YearendedDecember31,
                        
                        Amount(in
      thousands)2010
                        
                        $
                        3,3152011
                        
                        
                        1,658Thereafter
                        
                        
                        -Total
                        
                        $
                        4,973
 
 Contingencies
 
 As of
December 31, 2009 the Company guaranteed bank loans for related parties and
third parties bank loans, including line of credit, amounting to $192.4
million.
 
 Longmen
Joint Venture had $186.5 million guarantees as of December 31,
2009.
 
 Natureof
                          
                          Guaranteeguarantee
                          
                          amount
                          
                          Guaranty period(In
      thousands)Importation
      L/C
                          
                          $
                          17,604
                          
                          July
      2009 to July 2010Domestic
      L/C
                          
                          
                          1,467
                          
                          July
      2009 to July 2010Bank
      loan
                          
                          
                          156,382
                          
                          Various
      from March 2009 to December 2010Notes
      payable
                          
                          
                          11,003
                          
                          Various
      from March 2009 to July 2010Total
                          
                          $
                          186,456
 
 Maoming
had $5.9 million in guarantees as of December 31, 2009.
 
 Nature
      of
                          
                          Guaranteeguarantee
                          
                          amount
                          
                          Guaranty
      period(In
      thousands)Bank
      loan
                          
                          $
                          5,868
                          
                          Various
      from June 2009 to October
2010
 
 See
report of independent registered public accounting firm.
  91
  GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009
 
 The
Company has evaluated the guarantee and concluded that the likelihood of having
to make payments under the guarantee is remote.
 
 Note
22 – Segments
 
 The
Company sells steel which is used by customers in various industries.  The
Company’s chief operating decision-makers (i.e. chief executive officer and his
direct reports) review financial information presented on a consolidated basis,
accompanied by disaggregated information about revenues by product lines for
purposes of allocating resources and evaluating financial performance. There are
no segment managers who are held accountable for operations, operating results
and plans for levels or components below the consolidated unit level. 
Based on qualitative and quantitative criteria established by the accounting
standards, the Company considers itself to be operating within one reportable
segment.
 
 The
Company does not have long-lived assets located in foreign countries. In
accordance with the enterprise-wide disclosure requirements of the accounting
standard, the Company's net revenue from external customers by main product
lines is as follows:
 
 December31,
                            2009
                          
                          
                          December31,
                            2008
                          
                          
                          December31,
                            2007(inthousands)
                          
                          
                          (inthousands)
                          
                          
                          (inthousands)ProductsRe-bar
                          
                          $
                          1,534,696
                          
                          
                          $
                          1,182,433
                          
                          
                          $
                          618,315Hot-Rolled
      Sheets
                          
                          
                          58,833
                          
                          
                          
                          132,458
                          
                          
                          
                          147,727High
      Speed Wire
                          
                          
                          62,487
                          
                          
                          
                          23,280
                          
                          
                          
                          -Spiral-Welded
      Steel Pipe
                          
                          
                          12,430
                          
                          
                          
                          13,032
                          
                          
                          
                          6,398Total
      sales revenue
                          
                          $
                          1,668,446
                          
                          
                          $
                          1,351,203
                          
                          
                          $
                          772,440
 
 Note
23 – Subsequent Event
 
 The
Company expects to finalize the lease of Daqiuzhuang facility and operation by
the facility’s current general manager.  Changing the business model of
this facility from a direct operations model to a leased operations model will
allow us to reduce overhead costs and provide a steady revenue stream in the
form of fixed monthly lease revenue.  The Company will disclose
specific terms of the lease agreement when the definitive agreement is finalized
approximately at the end of March 2010.
  The
Company evaluated subsequent events through the date these consolidated
financial statements were issued.
 See
report of independent registered public accounting firm.
  92




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





None.


ITEM
9A. CONTROLS AND PROCEDURES.





a)
            Disclosure
      Controls and Procedures




As required by Rules 13a-15 and
15d-15 under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), management has evaluated, with the participation of our Chief Executive
Officer and Chief Financial Officer, the effectiveness of our disclosure
controls and procedures as of the end of the period covered by this
report.




Disclosure controls and procedures
refer to controls and other procedures designed to ensure that information
required to be disclosed in the reports we file or submit under the Exchange Act
is recorded, processed, summarized and reported, within the time periods
specified in the rules and forms of the Securities and Exchange Commission.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by us in
our reports that we file or submit under the Exchange Act is accumulated and
communicated to management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding our
required disclosure. In designing and evaluating our disclosure controls and
procedures, management recognizes that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management was required to apply
its judgment in evaluating and implementing possible controls and
procedures.




Based upon our evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that, as of
December 31, 2009, the end of the period covered by this report, the
disclosure controls and procedures were effective at a reasonable assurance
level to provide information required to be disclosed in the reports we file and
submit under the Exchange Act is recorded, processed, summarized and reported as
and when required.




b)
            Management’s
      Annual Report on Internal Control over Financial
  Reporting




Management is responsible for
establishing and maintaining adequate internal control over financial reporting
as defined in Rule 13a-15(f) under the Exchange Act.




Internal control over financial
reporting refers to a process designed by, or under the supervision of, our
Chief Executive Officer and Chief Financial Officer 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 generally accepted
accounting principles of the United States 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 our
assets;


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




93




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




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




Management conducted the
above-referenced assessment of the effectiveness of our internal control over
financial reporting as of December 31, 2009 using the framework set forth
in the report entitled, “Internal Control—Integrated
Framework,” issued by the Committee of Sponsoring Organizations of the
Treadway Commission, or the COSO Report. Based on management’s
evaluation and the criteria set forth in the COSO Report, management concluded
that our internal control over financial reporting was effective as of
December 31, 2009.




The
effectiveness of our company’s internal control over financial reporting as of
December 31, 2009 has been audited by Frazer Frost, LLP, our company’s
independent registered public accountants, as stated in its report attached
hereto.





c)
            Changes
      in Internal Control over Financial
Reporting




As
reported in our 2008 Form 10-K, management had identified related party
transaction identification and accounting personnel competence as material
weaknesses as of December 31, 2008. Our efforts to remediate the weaknesses in
our internal controls included:
  ·
                Identifying
      and hiring additional accounting personnel with U.S. GAAP and SEC
      reporting experience;
 ·
                Providing
      training to our finance personnel to improve their knowledge of U.S. GAAP
      and SEC reporting
requirements;
 ·
                Engaging
      PriceWaterhouseCoopers to consult on our internal audit function as
      well as other internal control
practices;
 ·
                Developing
      specific procedures and controls on related party identification as
      below:
 o
                Develop
      an accounting manual in defining related
parties
 o
                Develop
      a checklist for identifying new customers and
  vendors
 o
                Coordinate
      with administrative and sales departments to identify unusual
      transactions
 o
                Reevaluate
      all major customers and vendors according to our accounting
      manual
 o
                Develop
      a new function of accounting software to automate manual processes
      especially in the area of related party transaction
      identification.
  During
the year ended December 31, 2009, there were no significant changes other than
those described above in our internal control over financial reporting that have
materially affected or are reasonably likely to materially affect our internal
control over financial reporting.


94


REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  To the
Board of Directors and Stockholders of
 General
Steel Holdings Inc. and Subsidiaries
  We have
audited General Steel Holdings Inc. and subsidiaries’ (the “Company”) internal
control over financial reporting as of December 31, 2009 based on criteria
established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company’s management is
responsible for maintaining effective internal control over financial reporting,
and for its assertion of the effectiveness of internal control over financial
reporting, included in the accompanying “Management’s Report on Internal Control
Over Financial Reporting”. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our
audit.
  We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating
the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
  A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
  Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
  In our
opinion, the Company maintained effective internal control over financial
reporting as of December 31, 2009, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
  We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets and the related
consolidated statements of operation and other comprehensive income,
consolidated statements of changes in equity, and consolidated statements of
cash flows of the Company and our report dated March 16, 2010 expressed
an unqualified opinion.
 
 /s/ Frazer Frost, LLP (Successor
Entity of Moore Stephens Wurth Frazer and Torbet, LLP, see Form 8-K filed on
January 7, 2010)
 
 Brea,
California
  March 16,
2010
  95





ITEM
9B. OTHER INFORMATION.





None.


PART
III





ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.




The
information to be included in the sections entitled, “Election of Directors” and
“Our Executive Officers,” respectively, in the Definitive Proxy Statement for
the Annual Meeting of Stockholders to be filed by us with the Securities and
Exchange Commission no later than 120 days after December 31, 2009 (the
“2010 Proxy Statement”) is incorporated herein by reference.




The
information to be included in the section entitled “Section 16(a)
Beneficial Ownership Reporting Compliance” in the 2010 Proxy Statement is
incorporated herein by reference.




The
information to be included in the section entitled “Code of Business Conduct and
Ethics” in the 2010 Proxy Statement is incorporated herein by
reference.




We have
filed, as exhibits to this annual report, the certifications of our Principal
Executive Officer and Principal Financial Officer required pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.





ITEM
11. EXECUTIVE COMPENSATION.





The
information to be included in the sections entitled “Executive Compensation” and
“Directors’ Compensation” in the 2010 Proxy Statement is incorporated herein by
reference.





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





The
information to be included in the section entitled “Security Ownership of
Certain Beneficial Owners and Management” in the 2010 Proxy Statement is
incorporated herein by reference.





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





The
information to be included in the sections entitled “Certain Relationships and
Related Transactions,” “Board Independence,” and “Compensation Committee
Interlocks and Insider Participation” in the 2010 Proxy Statement is
incorporated herein by reference.





ITEM
14. PRINCIPAL ACCOUNTING FEES AND SERVICES.




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





The
information to be included in the section entitled “Independent Registered
Public Accountants” in the 2010 Proxy Statement is incorporated herein by
reference.


96


PART
IV





ITEM
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES




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




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




•
              Report of Independent Registered
      Public Accounting
Firm





•
            Consolidated Balance
      Sheets—December 31, 2009 and
  2008





•
            Consolidated Statements
      of Operations and Other Comprehensive (Loss) Income for the
      years ended December 31, 2009, 2008, and
      2007


•
              Consolidated Statements of
      Changes in Equity for the years ended December 31, 2009, 2008, and
      2007


•
            Consolidated Statements of Cash
      Flows for the years ended December 31, 2009, 2008, and
      2007




•
            Notes to Consolidated Financial
      Statements




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





(3) –
LIST OF
EXHIBITS





Exhibit
                Number
              Description





1.1
            Baotou
      Steel - GSHI Special Steel Joint Venture Agreement dated as of September
      28, 2005 by and between Baotou Iron & Steel (Group) Co., Ltd., General
      Steel Investment Co., Ltd. and Daqiuzhuang Metal Sheet Co., Ltd. (included
      as Exhibit 10.1 to the Form 8-K filed with the Commission on October 31,
      2005 and incorporated herein by
reference).





1.2
            Placement
      Agent Agreement dated December 24, 2009, by and between FT Global Capital,
      Inc., Rodman & Renshaw, LLC, and General Steel Holdings, Inc.
      (included as Exhibit 1.1 to the Form 8-K with the Commission on December
      24, 2009 and incorporated herein by
reference).


97


2.1
            Agreement
      and Plan of Merger dated as of October 14, 2004 by and among American
      Construction Company, General Steel Investment Co., Ltd. and Northwest
      Steel Company, a Nevada corporation (included as Exhibit 2.1 to the Form
      8-K/A filed with the Commission on October 19, 2004 and incorporated
      herein by reference).





3.1
            Articles
      of Incorporation of General Steel Holdings, Inc. (included as Exhibit 3.1
      to the Form SB-2 filed with the Commission on June 6, 2003 and
      incorporated herein by reference).





3.2
            Amendment
      to the Articles of Incorporation dated February 22, 2005 (filed
      herewith).





3.3
            Amendment
      to the Articles of Incorporation dated November 14, 2007 (filed
      herewith).





3.4
            Certificate
      of Designation of Series A Preferred Stock of the registrant (included as
      Exhibit 10.6 to the Form 10-K filed March 31, 2008 and incorporated herein
      by reference).





3.5
            Bylaws
      of General Steel Holdings, Inc. (filed
  herewith).





4.1
            Subscription
      Agreement (included as Exhibit 4.1 to the Form SB-2/A, filed with the
      Commission on September 12, 2003 and incorporated herein by
      reference).





4.2
            Form
      of Warrant (included as Exhibit 99.3 to the Form 8-K/A, filed with the
      Commission on December 14, 2007 and incorporated herein by
      reference).





4.3
            Form
      of Convertible Note (included as Exhibit 99.2 to the Form 8-K, filed with
      the Commission on December 14, 2007 and incorporated herein by
      reference).





4.4
            Form
      of Common Stock Purchase Warrant (included as Exhibit 4.1 to the Form 8-K
      filed on December 24, 2009 and incorporated herein by
      reference).


4.5
              Form
      of Warrant Reset Agreement by and between General Steel Holdings, Inc. and
      Hudson Bay Fund, LP (included as Exhibit 10.3 to the Form 8-K filed on
      December 24, 2009 and incorporated herein by
  reference).
 
 4.6
              Form
      of Warrant Reset Agreement by and between General Steel Holdings, Inc. and
      the holders of the December 2007 Warrants (not including Hudson Bay Fund,
      LP) (included as Exhibit 10.4 to the Form 8-K filed on December 24, 2009
      and incorporated herein by
reference).


10.1
            Investment
      Agreement, dated December 12, 2007, by and between Shaanxi Longmen Iron
      and Steel Co., Ltd. and certain shareholders of Hancheng Tongxing
      Metallurgy Co., Ltd. (included as Exhibit 99.1 to the Form 8-K filed on
      January 11, 2008 and incorporated herein by
  reference).





10.2
            Equity
      Purchase Agreement, dated June 25, 2008, by and between the Company and
      Tianjin Qiu Steel Investment Limited with Maoming Hengda Steel Group
      Limited, Beijing Tianchenghengli Investments Limited and Mr. Chen Chao
      (included as Exhibit 99.1 to the Form 8-K filed on June 30, 2008 and
      incorporated herein by
reference).


98


10.3
            Letter
      of Intent, dated as of September 1, 2008 between the Company and Yantai
      Steel Pipe Co., Ltd. of Laiwu Iron & Steel Group (included as Exhibit
      10.1 to the Form 8-K filed on September 4, 2008 and incorporated herein by
      reference).





10.4
            Debt
      Waive Agreement, dated September 27, 2008, by and between the Maoming
      Hengda Steel Group Limited and Guangzhou Hengda Industrial Group Limited
      (included as Exhibit 99.1 to the Form 8-K filed on September 29, 2008 and
      incorporated herein by reference).





10.5
            Form
      of Securities Purchase Agreement (included as Exhibit 99.1 to the Form
      8-K/A, filed with the Commission on December 14, 2007 and incorporated
      herein by reference).





10.6
            Form
      of Registration Rights Agreement (included as Exhibit 99.5 to the Form
      8-K/A, filed with the Commission on December 14, 2007 and incorporated
      herein by reference).





10.7
            Certificate
      of Designation dated August 15, 2007 (included as Exhibit 10.6 to the Form
      10-K, filed with the Commission on March 31, 2008 and incorporated herein
      by reference).


10.8
              General
      Steel Holdings, Inc. 2008 Equity Incentive Plan (included as Appendix A to
      the Schedule 14A filed June 20, 2008 and incorporated herein by
      reference).


10.9
            Service
      Agreement, dated February 25, 2009, by and between General Steel Holdings,
      Inc. and James Hu thereto (included as Exhibit 10.1 to the February 27,
      2009 and incorporated herein by
reference).





10.10
            Form
      of Securities Purchase Agreement, dated as of December 24, 2009, by and
      between General Steel Holdings, Inc. and each purchaser signatory thereto
      (included as Exhibit 10.1 to the December 24, 2009 and incorporated herein
      by reference).





10.11
            Form
      of Voting Agreement (included as Exhibit 10.2 to the Form 8-K filed on
      December 24, 2009 and incorporated herein by
  reference).




99


10.12
            Amendment
      to the Securities Purchase Agreement dated October 5, 2009 to the
      Securities Purchase Agreement, December 13, 2007 by and among General
      Steel Holdings, Inc. and the Buyers set forth therein (filed
      herewith).





21
            Subsidiaries
      of the registrant.




23
            Consent
      of Frazer
      Frost, LLP (filed
herewith).


31.1
            Certification
      of Chief Executive Officer.





31.2
            Certification
      of Chief Financial Officer.





32.1
            Certification
      of Chief Executive Officer and Chief Financial
  Officer.


100


SIGNATURES





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





GENERAL
      STEEL HOLDINGS, INCBy:
                    /s/ Zuosheng YuName:
      Zuosheng Yu
                      Title:
      Chief Executive Officer and Chairman
                      Date:
      March 16,
2010




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




SIGNATURE
                  
                  TITLE
                  
                  DATE/s/ Zuosheng Yu
                  
                  Chairman
      and Chief Executive Officer
                  
                  March
      16, 2010YU,
      Zuosheng
                  
                  (Principal
      Executive Officer)/s/ John Chen
                  
                  Director
      and Chief Financial Officer
                  
                  March
      16, 2010CHEN,
      John
                  
                  (Principal
      Accounting and FinancialOfficer)/s/ Ross Warner
                  
                  Director
                  
                  March
      16, 2010WARNER,
      Ross/s/ Dan Li Zhang
                  
                  Director
      and
                  
                  March
      16, 2010ZHANG,
      Dan Li
                  
                  General
      Manager of Longmen JointVenture/s/ John Wong
                  
                  Independent
      Director
                  
                  March
      16, 2010WONG,
      John/s/ Qing Hai Du
                  
                  Independent
      Director
                  
                  March
      16, 2010DU,
      Qing Hai/s/ Zhong Kui Cao
                  
                  Independent
      Director
                  
                  March
      16, 2010CAO,
      Zhong Kui/s/ Chris Wang
                  
                  Independent
      Director
                  
                  March
      16, 2010WANG,
      Chris/s/ James Hu
                  
                  Independent
      Director
                  
                  March
      16, 2010HU,
      James


101