10-K 1 v108407_10k.htm Unassociated Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2007

OR

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

For the transition period from ____________ to ____________

Commission file number: 333-105903

GENERAL STEEL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
 
NEVADA
 
412079252 
(State or other jurisdiction of  
incorporation or organization)
 
(I.R.S. Employer
 Identification No.) 
     
Kuntai International Mansion Building, Suite 2315 
Yi No. 12 Chaoyangmenwai Avenue, Chaoyang District,
Beijing, China
 
100020
(Address of principal executive offices)
 
(Zip Code)
     
 
Incorp Services Inc.
3155 East Patrick Lane
Suite 1, Las Vegas, Nevada, 89120-3481
Tel: (702) 866-2500
(Name, address and telephone number for Agent for Service)

+86 (10) 5879-7346

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: none

Securities registered pursuant to Section 12(g) of the Act:
 
Title of each class
Name of each exchange on which registered 
Common Stock, $ .001 par value per share 
Not applicable 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o  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 Exchange Act. Yes o 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 o

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. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o  Accelerated filer o  Non-accelerated filer x

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

As of March 25, 2008, the aggregate market value of the registrant's common stock held by non-affiliates of the registrant was $85,943,720 based on the $ 8.00 as reported on the NYSE Arca.

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
 
Class
Outstanding at March 31, 2008 
Common Stock, $ .001 par value per share 
 34,861,365 shares 
   
 DOCUMENTS INCORPORATED BY REFERENCE
   
Document 
Parts Into Which Incorporated 
None  
Not applicable 
 

 
TABLE OF CONTENT
 
PART I
     
ITEM 1
BUSINESS
1
ITEM 1A
RISK FACTORS
5
ITEM 1B
UNRESOLVED STAFF COMMENTS
13
ITEM 2
PROPERTIES
13
ITEM 3
LEGAL PROCEEDINGS.
14
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
14
     
PART II
     
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
15
ITEM 6
SELECTED FINANCIAL DATA
16
ITEM 7
MANAGEMENT DISCUSSION AND ANALYSIS
17
ITEM 7A
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
34
ITEM 8
FINANCIAL STATEMENTMENTS AND SUPPLEMENTARY DATA
34
ITEM 9
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES.
35
ITEM 9A(T)
CONTROLS AND PROCEDURES.
35
ITEM 9B
OTHER INFORMATION.
36
     
PART III
     
ITEM 10
DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
36
ITEM 11
EXECUTIVE COMPENSATION
39
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
41
ITEM 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
42
ITEM 14
PRINCIPAL ACCOUNTING FEES AND SERVICES
45
     
PART IV
     
ITEM
EXHIBITS
45
SIGNATURES
47
 

 
ITEM 1. BUSINESS

Overview
 
Our company was initially incorporated as “American Construction Company” (“ACC”) on August 5, 2002, in the State of Nevada.

On October 14, 2004, ACC, Northwest Steel Company, a wholly-owned Nevada subsidiary of ACC (“Merger Sub”), and General Steel Investment Co., Ltd., a British Virgin Islands company (“General Steel Investment”) entered into an Agreement and Plan of Merger pursuant to which ACC acquired General Steel Investment through a merger between Merger Sub and General Steel Investment and then merger of Merger Sub with ACC, and its 70% ownership in its subsidiary Tianjin Daqiuzhuang Metal Sheet Co., Ltd., a PRC company of limited liability (“Daqiuzhuang Metal”) in exchange for shares of ACC’s common stock.


On May 18, 2007, General Steel entered into a Purchase Agreement with Victory New Holdings Limited (“Victory New”), a British Virgin Islands registered company under the control of the Company’s Chairman, CEO and majority shareholder, Zuosheng Yu (aka Henry Yu), to acquire Victory New’s 30% interest in Daqiuzhuang Metal. General Steel agreed to issue to Victory New an aggregate of 3,092,899 shares of its Series A Preferred Stock with a fair value of $8,374,000, and these shares of Series A Preferred Stock carry a voting power of 30% of the combined voting power of General Steel’s common and preferred stock while outstanding. As a result of the acquisition, General Steel has increased its equity interest in Daqiuzhuang Metal from 70% to 100%, and Daqiuzhuang Metal is a wholly owned subsidiary of the Company.

On April 27, 2007, Daqiuzhuang Metal and Baotou Iron and Steel Group Co., Ltd. ("Baotou Steel") entered into an Amended and Restated Joint Venture Agreement (the "Agreement"), amending the Joint Venture Agreement entered into on September 28, 2005 ("Original Joint Venture Agreement"). The Agreement increased Daqiuzhuang Metal's ownership interest in the Joint Venture to 80%. The joint venture company’s name is Baotou Steel - General Steel Special Steel Pipe Joint Venture Company Limited a PRC company of limited liability (referred to as “Baotou Steel Pipe Joint Venture”). Baotou Steel Pipe Joint Venture obtained its business license from the PRC on May 25, 2007 and started its normal operation in July 2007.

On May 18, 2007, Daqiuzhuang Metal established Yangpu Shengtong Investment Co., Ltd. (“Yangpu Investment”) and injected registered capital totaling RMB100,000,000, or approximately $13,030,000, into the investment. The total registered capital of Yangpu Investment is RMB110,000,000, or approximately $14,333,000, and Daqiuzhuang Metal has a 99.3% ownership interest in Yangpu Investment.

Qiu Steel Investment Co., Ltd. (“Qiu Steel Investment”) was founded on June 1, 2006. In June 2007, Yangpu Investment agreed to invest RMB148,000,000, or approximately $19,284,400, through a capital injection and equity transfer with former shareholders. The total registered capital of Qiu Steel Investment is RMB150,000,000, or approximately $19,545,000. As a result of the above mentioned equity transaction, Yangpu Investment acquired 98.7% equity of Qiu Steel Investment making Qiu Steel Investment a subsidiary of Yangpu Investment and Daqiuzhuang Metal.

Yangpu Investment and Qiu Steel Investment are Chinese registered limited liability companies with a legal structure similar to a limited liability company organized under state laws in the United States of America. Those two companies were formed to acquire other businesses.

On June 15, 2007, General Steel and Shaanxi Longmen Iron and Steel (Group) Co., Ltd., a PRC company of limited liability (“Longmen Group”), signed an agreement to form Shaanxi Longmen Iron and Steel Co., Ltd. (“Longmen Joint Venture”). The parties agreed to make the effective date of the transaction June 1, 2007. General Steel contributed RMB300 million or approximately $39,450,000 through its subsidiaries, Daqiuzhuang Metal and Qiu Steel Investment., to the Longmen Joint Venture. General Steel and Longmen Group own a 60% and 40% ownership interest, respectively, in Longmen Joint Venture. The Longmen Joint Venture obtained its business license from the PRC on June 22, 2007. The total registered capital of Longmen Joint Venture is RMB500 million or approximately $65.8 million. Pursuant to the joint venture agreement, Longmen Group contributed land, buildings, iron making, steel making, and steel rolling facilities whereas General Steel contributed cash through its subsidiaries Daqiuzhuang Metal and Qiu Steel Investment to the Longmen Joint Venture. In the Longmen Joint Venture, Longmen Group has a 40% ownership interest, Daqiuzhuang Metal has a 32% ownership interest and Qiu Steel Investment has a 28% ownership interest, respectively. In total, General Steel controls approximately 60% of the Longmen Joint Venture through Daqiuzhuang Metal and Qiu Steel Investment.

On September 24, 2007, Longmen Joint Venture further acquired 74.92% ownership interest in Environmental Protection Industry Development Co., Ltd., a PRC company of limited liability (“EPID”), for RMB18,080,930, approximately $2,380,000, and a 36% equity interest in Hualong Fire Retardant Materials Co., Ltd., a PRC company of limited liability (“Hualong”), for RMB3,287,980, approximately $430,000. The parties agreed to make the effective date of the transaction July 1, 2007.
 
On December 12, 2007, Longmen Joint Venture entered into an investment agreement with Hancheng Tongxing Metallurgy Co., Ltd., a PRC company of limited liability (“Tongxing””), to contribute 217,478.47 square meters of land use rights at an appraised value of approximately RMB 30,227,333 or approximately $4.1million. Pursuant to the agreement, the land will be converted into shares valued at RMB 22,744,419 or approximately $3.1million, which will give Longmen Joint Venture a 22.76% stake in Tongxing.
 
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The following table reflects the Company’s current organization structure:
 

 
Our Operating Subsidiaries and Products

Daqiuzhuang Metal

Daqiuzhuang Metal started its operation in 1988 and was incorporated under its current form on August 18, 2000 in Jinghai county, Tianjin municipality, China. Daqiuzhuang Metal is a Sino-foreign joint venture with an operating term that will expire on June 24, 2024, at which point we expect to file a request for an extension of the term permitted under the then applicable laws.

Daqiuzhuang Metal’s core business is the manufacturing of high quality hot-rolled carbon and silicon steel sheets which are mainly used in the production of tractors, agricultural vehicles, shipping containers and in other specialty markets. Daqiuzhuang Metal uses a traditional rolling mill production sequence, such as heating, rolling, cutting, annealing, and flattening to process coil into steel sheets. The sheet sizes are approximately 2,000 mm (length) x 1,000 mm (width) x 0.75 to 2.0 mm (thickness). Limited size adjustments can be made to meet order requirements. “Qiu Steel” is the registered trademark under which we sell these products.
 
Daqiuzhuang Metal currently has ten steel sheet production lines processing approximately 400,000 tons of 0.75-2.0 mm hot-rolled carbon and silicon steel sheets per year, maintaining, by our estimates, an approximately 50% market share of all hot-rolled steel sheets used in the production of light agricultural vehicles in China, out of which 150,000 tons of production capacity were added since mid-March 2006. The raw materials we use to produce our hot-rolled sheets are hot-rolled steel coils which we purchase from a variety of local sources. There are many sources of hot-rolled steel coil in Tianjin and neighboring Hebei province. There is little seasonality in the demand for the products manufactured by Daqiuzhuang Metal; however, the first quarter typically shows the least amount of demand attributable to the Chinese New Year holiday. In 2005, to comply with a Daqiuzhuang County environmental clean-up campaign, we invested $94,000 to remodel our industrial water recycling system. We do not believe future costs to environmental compliance will be material to our financial position. To maintain our market share, we allow some customers to purchase on credit which contributes to our accounts receivable balance. For the hot-rolled steel coil which we purchase as the feedstock for our flat-rolled sheets, we generally pay in arrears. However, when based on our experience in the market we feel that feedstock prices are at a low point, we will pre-pay for a large amount to lock-in the low price. At Daqiuzhuang Metal, steel shipments for the year ended December 31, 2007, decreased 5.5% to 322,912 tons from 341,702 tons the prior year.
 
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Until 2007, Daqiuzhuang Metal was our only production facility and accounted for 100% of our operating revenue.

Baotou Steel

Baotou Steel Pipe Joint Venture is located at Kundulun District, Baotou city, Inner Mongolia province, China. It produces and sells spiral-weld steel pipes and primarily serves customers in the oil, gas and petrochemical markets. The raw materials used to produce the pipes are hot-rolled carbon and low alloy steel coils and strips. Pipes produced have a diameter ranging from 219-1240 mm; a wall thickness ranging from 6-13mm; and a length ranging from 6-12 m. The facility has four production lines with current annual production capacity of 100,000 tons. Production capacity will increase to 600,000 tons by the end of 2009. We believe there is only slight seasonality in the demand for products manufactured by Baotou Steel Pipe Joint Venture. We believe the first quarter will likely show the lightest demand owing to a slowing in construction projects due to weather impairments and the Chinese New Year holiday. At Baotou Steel Pipe Joint Venture, 13,489 tons of steel shipments were made during the period of July 2007 through December 31, 2007, Baotou Steel Pipe Joint Venture began sales efforts in July and this is the first year to include their revenue in our yearly financial results.

Longmen Joint Venture

Longmen Joint Venture is located in Hancheng city, Shaanxi province. Longmen Joint Venture is the largest integrated steel producer in Shaanxi province, China. It uses iron ore and coke as primary raw materials for steel production. Longmen Joint Venture has annual crude steel production capability of 2.5 million tons. It produces pig iron, crude steel, reinforced bars (rebar) and high-speed wires which are sold mostly in the domestic market. Approximately 90% of finished production is devoted to rebar. Rebar produced has a diameter range from 12-32mm and a length range of 6-12m. Overall, there is little seasonality in the demand for the products manufactured by Longmen Joint Venture. We follow the traditional industry pattern for demand of construction products, whereby the third quarter typically shows greatest amount of demand owing to favorable summer weather conditions for construction and the first quarter typically shows least amount of demand owing to a slowing in construction due to weather impairments and the Chinese New Year holiday. In 2005, our joint venture partner, the Longmen Group, received ISO 14001 certification for is overall environmental management system. We do not believe future costs to environmental compliance will be material to our financial position. At Longmen Joint Venture, 1,440,522 tons of steel shipments were made during the period from June 2007 through December 31, 2007. Longmen Joint Venture is also engaged in other business activities, most of which are related to steel manufacturing, such as the production of coke and iron ore pellets from taconite. Additional business activities include transportation services, real estate services and hotel operations. These operations are all located in Shaanxi province and primarily serve regional customers in the construction industry.

The purposes of the Longmen Joint Venture are, among others, to produce and sell construction steel and to improve our product quality, production capacity and competitiveness by adopting advanced technology in the production of steel products. The Longmen Joint Venture has an aggregate annual production capacity of 2.5 million tons of crude steel. Approximately 90% of production capacity is devoted to producing construction steel products including re-bars and round bars.

As is common practice in the construction steel products industry, most customers pay for products in advance. At Longmen Joint Venture, most customers pay approximately 2 weeks in advance. This allows us to maintain a low accounts receivable balance. Additionally, since we require our customers to place their orders at the beginning of each month and there is little unpredicted volume variance in these orders, we are able to keep a minimum amount of inventory for backlog. For the majority of our raw materials purchases, we generally pay in arrears.

Marketing and Customers 

We sell our products primarily to distributors. We typically collect 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. We believe that our enhanced product quality, delivery capabilities, and our emphasis on customer support and product planning are critical factors in our ability to serve this segment of the market.
 
3


Our products produced at Daqiuzhuang Metal including hot-rolled carbon and silicon sheets are primarily used by domestic manufacturers of light agricultural vehicles: small, motorized, 3-wheel vehicles with a payload from 1,650 to 4,400 lbs. (750 to 2,000 kgs), retailing between $1,200 and $1,800 (RMB10,000 to 15,000). These inexpensive agriculture vehicles are targeted to the low-income farming populations in the rural areas of China. International non-government organizations estimate that approximately 60%-80% of China’s population of 1.3 billion people is comprised of low-income rural farmers.

Based on the production and sales figures supplied by our customers producing economy agricultural vehicles, we estimate that we supply approximately 50% of the nationwide demand for hot-rolled steel sheets used in this niche market.

Our products produced at Baotou Steel Pipe Joint Venture are spiral-weld steel pipes used in the energy sector to transport natural gas, oil and stream. Pipes produced have a diameter ranging from 219-1240 mm; a wall thickness ranging from 6-13mm; and a length ranging from 6-12 m. China’s western region is a resource-rich area. Our products are used to transport oil and natural gas extracted from this region to the coastal metropolitan areas.

Our products produced at Longmen Joint Venture are mainly rebar and round bars used in the construction industry and infrastructure. Shaanxi province has been designated by the central government as the bridgehead point for development into China’s western region. Development of the western region is one of the top five economic priorities of the central government, as indicated by the national five-year economic plan. By our estimates, annual demand for steel in Shaanxi province is 8 million tons. The majority of demand comes from the southern part of the province centered around Xi’an, the province capital. This demand is principally driven by large construction and infrastructure projects, of which our products are key building components. Due to our close proximity to Xi’an (180 km) and lack of major a competitor within a 250 km radius, we estimate we have an approximate 70% market share in Xi’an and the surrounding area.

Competitors

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 eight major competitors of similar size, production capability and product line in the market place competing against our three 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.; and

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

Our revenue is dependent, in large part, on significant contracts from a limited number of customers. We have five major customers which represented approximately 59% and 30% of our total sales for the fiscal year ended December 31, 2007 and 2006, respectively, and accounted for 0% of total account receivables as of December 31, 2007. These customers are: Shaanxi Longmen Iron and Steel Group Co., Ltd., China Mine Metals Corporation, Shaanxi Haiyan Coking Co., Ltd., Shaanxi Longmen Iron and Steel Group Co., Ltd. Baoji Rolling Mill, Xi’an Wanlong Materials Trading Co., Ltd. We believe that revenue derived from current and future large customers will continue to represent a significant portion of our total revenue.

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.
 
4


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

“Yu Long” is the registered trademark under which we sell rebar and roundbar products. The trademark is registered under the ISO9001:2000 international quality standard.

Employees

As of December 31, 2007, we had 6,250 employees on a full time basis. As of December 31, 2006, we had 1,250 employees on a full time basis. The increase in the number of employees is due to the two joint ventures we consummated in 2007.
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;

· 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.
 
5


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 eight major competitors of similar size, production capability and product line in the market place competing against our three 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.; and

· 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.

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

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

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

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

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

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

· Maintain adequate control of our expenses;

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

· Anticipate mergers and acquisitions, technological developments and other significant competitive and market dynamics involving our competitors. Our business, business prospects and results of operations will be affected if we are not successful in addressing any or all of these risks and difficulties.

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;
 
6


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

· Conditions in relevant financial markets in the U.S., the PRC and elsewhere in the world.

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

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

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

Our revenue is dependent, in large part, on significant contracts with a limited number of large customers. For the fiscal year ended December 31, 2007, approximately 59% of our sales were to five customers and these customers accounted for 0% of total account receivables. 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 generally follows general economic and industrial conditions both worldwide and in regional markets. The steel industry has historically been characterized by excess world supply, which has led to substantial price decreases during periods of economic weakness. Future economic downturns could decrease the demand for our products. Substitute materials are increasingly available for many steel products, which further reduces demand for steel.

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

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

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

According to the survey conducted by the China Iron and Steel Association, there are more than 1,100 steel companies in China. Among those, only 15 companies have over 5 million tons of production capacity. Each steel company has its own production plan. The Chinese government posted this guidance on the steel industry to encourage consolidation within the fragmented steel sector to mitigate problems of low-end repetitive production and inefficient use of resources. The current situation of overproduction may not be solved by these measures posted by the Chinese government and result in consolidation within the fragmented steel sector. If the current state of overproduction continues, our product shipments could decline, our inventory could build up and eventually we may be required to decrease our sales price, which may eventually decrease our profitability.
 
Disruptions to our manufacturing processes could adversely affect our operations, customer service levels and financial results.
 
Steel manufacturing processes are dependent on critical steel-making equipment, such as furnaces, continuous casters, rolling mills and electrical equipment (such as transformers), and such equipment may incur downtime as a result of unanticipated failures 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 compensated for by unaffected facilities, such disruptions could have an adverse effect on our operations, customer service levels and financial results.
 
7


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 our subsidiaries.

We have no operations independent of those of Daqiuzhuang Metal, Baotou Steel Pipe Joint Venture and Longmen Joint Venture, 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 and Longmen Joint Venture and we will be subject to the financial, business and other factors affecting our subsidiaries 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, acquiring and 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 acquired businesses, 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 amounting to approximately US $142.1 million, of which all are due on demand or within one year. So far, we have not experienced any difficulties in repaying such financing facilities. However, we may in the future encounter difficulties to repay or refinance such loans on time and may face severe difficulties in our operations and financial position.

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

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

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

While we believe that we currently have adequate internal control procedures in place, we are still exposed to potential risks from legislation requiring companies to evaluate controls under Section 404 of the Sarbanes-Oxley Act of 2002. Under the supervision and with the participation of our management, we have evaluated our internal controls systems in order to allow management to report on, and our registered independent public accounting firm to attest to, our internal controls, as required by Section 404 of the Sarbanes-Oxley Act. We have performed the system and process evaluation and testing required in an effort to comply with the management certification and auditor attestation requirements of Section 404. As a result, we have incurred additional expenses and a diversion of management’s time. If we are not able to continue to meet the requirements of Section 404 in a timely manner or with adequate compliance, we might be subject to sanctions or investigation by regulatory authorities, such as the SEC or the NYSE Market. Any such action could adversely affect our financial results and the market price of our stock.
 
8


We do not presently maintain product liability insurance in the PRC, 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 the PRC. In the event of a significant product liability claim or other uninsured event, our financial results and the price of our common stock may be adversely affected.

Risks Related to Operating Our Business in China

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

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

The PRC 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 PRC laws and regulations may have a material and adverse effect on our business.
 
There are substantial uncertainties regarding the interpretation and application of PRC 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 PRC laws, and as a result, we are required to comply with PRC 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 PRC 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 PRC 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 effective or result in similar or other difficulties. As a result of these substantial uncertainties, there is a risk that we may be found in violation of any current or future PRC laws or regulations.
 
9


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

All of our operations are conducted in the PRC and all of our revenues are generated from sales to businesses operating in the PRC. Although the PRC 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 PRC economy which may affect demand for agricultural equipment. A slowdown in overall economic growth, an economic downturn or recession or other adverse economic developments in the PRC may materially reduce the demand for our products and in turn adversely effect our results of operations and our productivity.

Inflation in China could negatively affect our profitability and growth.

While the Chinese economy has experienced rapid growth, such growth has been uneven among various sectors of the economy and in different geographical areas of the country. Rapid economic growth can lead to growth in the money supply and rising inflation. If prices for our products rise at a rate that is insufficient to compensate for the rise in the costs of supplies, it may have an adverse effect on profitability. In order to control inflation in the past, the Chinese government has imposed controls on bank credits, limits on loans for fixed assets and restrictions on state bank lending. Such an austerity policy can lead to a slowing of economic growth. In October 2004, the People’s Bank of China, China’s central bank, raised interest rates for the first time in nearly a decade and indicated in a statement that the measure was prompted by inflationary concerns in the Chinese economy. Repeated increases in interest rates by the central bank will likely slow economic activity in China which could, in turn, materially increase our costs and also reduce demand for our products.

If relations between the United States and China deteriorate, our stock price may decrease and we may experience difficulties accessing the U.S. 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 U.S. 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 from time to time. Conducting our business might become more difficult or costly due to changes in policies, laws and regulations, or in their interpretation or the imposition of confiscatory taxation, restrictions on currency conversion, restrictions or prohibitions on dividend payments to stockholders, devaluations of currency or the nationalization or other expropriation of private enterprises. In addition, nationalization or expropriation could result in the total loss of our investments in China.

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

PRC State Administration of Foreign Exchange Regulations regarding offshore financing activities by PRC residents have 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, and a failure by our shareholders who are PRC 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 PRC resident shareholders to liability under PRC law.
 
10


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

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

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

The PRC government imposes controls on the convertibility of Renminbi into foreign currencies and, in certain cases, the remittance of currency out of the PRC. 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 PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from the transaction, can be made in foreign currencies without prior approval from the PRC State Administration of Foreign Exchange by complying with certain procedural requirements. However, approval from appropriate governmental authorities is required where Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of bank loans denominated in foreign currencies.

The PRC 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 the PRC’s political and economic conditions. As we rely entirely on revenues earned in the PRC, 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.
 
11


Since 1994 the PRC has 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 PRC 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 PRC 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, 2007, the exchange rate of the RMB to the U.S. dollar was 7.3.

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

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

Our operating subsidiary 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 the PRC. 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 the PRC, 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 PRC legal system is based upon written statutes. Prior court decisions may be cited for reference but are not binding on subsequent cases and have limited value as precedents. Since 1979, the PRC legislative bodies have promulgated laws and regulations dealing with economic matters such as foreign investment, corporate organization and governance, commerce, taxation and trade. However, the PRC 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 the PRC. In particular, because these laws and regulations are relatively new, and because of the limited volume of published decisions and their non-binding nature, the interpretation and enforcement of these laws and regulations involve uncertainties. In addition, published government policies and internal rules may have retroactive effects and, in some cases, the policies and rules are not published at all. As a result, we may be unaware of our violation of these policies and rules until some time later. The laws of the PRC govern our contractual arrangements with our affiliated entities. The enforcement of these contracts and the interpretation of the laws governing these relationships are subject to uncertainty. For the above reasons, legal compliance in China may be more difficult or expensive.

Risks Related to Our Common Stock

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

Our officers, directors and affiliates beneficially own approximately 70% of our common stock. Mr. Zuosheng Yu our major shareholder, beneficially owns approximately 69% 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 U.S. and the PRC and, even if civil judgments are obtained in U.S. courts, such judgments may not be enforceable in PRC 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 the PRC would permit effective enforcement against us or our officers and directors of criminal penalties under the U.S. federal securities laws or otherwise.
 
12


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

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

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

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

Investors may experience dilution from any conversion of the senior convertible notes and the exercise of warrants we issued in December 2007.
 
We are registering the shares of our common stock issuable upon conversion approximately $40,000,000 worth of senior convertible notes convertible into 4,170,009 shares of our common stock assuming a conversion price of $12.47 per share and applicable interest rates and upon the exercise warrants to purchase an additional aggregate amount of 1,154,958 shares of our common stock at an exercise price of $13.51 per share that we issued in December 2007. The issuance of shares of our common stock upon conversion of the notes and exercise of the warrants will dilute current shareholders’ holdings in our company. 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.

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not Applicable

ITEM 2. PROPERTIES

Daqiuzhuang Metal

The properties of Daqiuzhuang Metal consist of manufacturing sites and office buildings located in the 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 the PRC 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
 
Life of Land Use Right
Tianjin Daqiuzhuang Metal Sheet Co., Ltd.
 
No. 6 West Gangtuan Road, Daqiuzhuang, Jinghai Country, Tianjin
 
Industrial Use
 
50 years
             
Tianjin Daqiuzhuang Metal Sheet Co., Ltd.
 
No. 35 Baiyi Road, Daqiuzhuang, Jinghai County, Tianjin
 
Industrial Use
 
50 years
             
Tianjin Daqiuzhuang Metal Sheet Co., Ltd.
 
Ying Fong Road North, Daqiuzhouang, Jinghai country Tianjin
 
Commercial Use
 
50 years
 
13

 
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 located in Baotou, Inner Mongolia Autonomous Region - a province in Northern China. The land is rented from Baotou Steel, 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 throughout the southern half of Shaanxi province on a land collectively which totals approximately 300.2 acres (121.5 hectares).

Under Chinese law, all land in the PRC 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
 
Life of Land Use Right
Shaanxi Longmen Iron and Steel Co., Ltd
 
North Huanyuan Road, Weiyang District, Xi'an, Shaanxi
 
Industrial Use
 
50 Years
             
Shaanxi Longmen Iron and Steel Co., Ltd
 
 Longmen Town, Hancheng, Shaanxi
 
Industrial Use
 
50 Years
             
Shaanxi Longmen Iron and Steel Co., Ltd
 
Sanping Village, Shipo Town, Zhashui County, Shaanxi
 
Industrial Use
 
50 Years
             
Shaanxi Longmen Iron and Steel Co., Ltd
 
Zhaikouhe Village, Xunjian Town, Zhashui County, Shaanxi
 
Industrial Use
 
50 Years
             
Shaanxi Longmen Iron and Steel Co., Ltd
 
East Taishi Avenue, Xincheng District, Hancheng, Shaanxi
 
Commercial Use
 
50 Years

ITEM 3. LEGAL PROCEEDINGS.

None.

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

None.
 
14


PART II


Prior to March 4, 2005, our common stock was listed on the OTC Bulletin Board under the name of American Construction Company and traded with the symbol “ACNS.” From March 4, 2005, through October 2, 2007, our common stock was listed on the OTC Bulletin Board under the name General Steel Holdings, Inc. and traded with the ticker symbol "GSHO." From October 3, 2007, through March 5, 2008, our common stock was listed on the American Stock Exchange under the name General Steel Holdings, Inc., and traded with the ticker symbol of “GSI.” On March 6, 2008, our common stock began trading on the NYSE Arca under the name General Steel Holdings, Inc., and trading with the ticker symbol “GSI.” Information regarding the high and low sales prices for the common stock for each quarter of the last two years is as follows:
  
 
1ST QTR 
 
2ND QTR 
 
3RD QTR 
 
4TH QTR 
 
2007
                     
High
 
$
5.80
 
$
4.09
 
$
9.00
 
$
19.20
 
Low
 
$
1.12
 
$
2.76
 
$
5.05
 
$
7.76
 
2006
                         
High
 
$
2.33
 
$
1.95
 
$
1.45
 
$
1.30
 
Low
 
$
1.30
 
$
1.05
 
$
1.10
 
$
0.90
 
 
As of February 29, 2008, there were approximately 3,700  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.

Unregistered Sale of Securities

On May 18, 2007, the board of directors of General Steel Holdings, Inc. (“the Company”) entered into a Purchase Agreement with Victory New Holdings Limited, a British Virgin Islands registered company (“the Victory New”), whereby Victory New agreed to sell to the Company and the Company agreed to acquire (the “Acquisition”) Victory New’s 30% minority interest in Tianjin Daqiuzhuang Metal Sheet Co., Ltd. (“Daqiuzhuang Metal”), a subsidiary of the Company. Pursuant to the Purchase Agreement, as consideration for the Acquisition, the Company agreed to issue Victory New an aggregate of 3,092,899 shares of the Company’s Series A Preferred Stock at a price of $2.00 per share, which have a voting power of 30% of the combined voting power of the Company’s common and preferred stocks for the entire life of the Company. The purchase price was based on the book value of $6,185,797 instead of the appraised value of $9,304,796. As a result of the Acquisition, the Company will increase its equity interest in Daqiuzhuang Metal from approximately 70% to 100% and Daqiuzhuang Metal will become a wholly owned subsidiary of the Company. Daqiuzhaung Metal is currently the only revenue generating subsidiary of the Company.
 
On December 13, 2007, we entered into a Securities Purchase Agreement (the “Agreement”) with certain institutional investors (the “Buyers”). Pursuant to the Agreement, we agreed to sell to the Buyers (i) senior convertible notes in the aggregate principal amount of $40,000,000 (“Notes”) and (ii) warrants to purchase an additional aggregate amount of 1,154,958 shares of our Common Stock (the “Warrants”).
 
The Notes bear initial interest at 3% per annum, which will be increased each year as specified in the Notes, payable semi-annually in cash or shares of our common stock, par value $0.001 per share (the “Common Stock”). The Notes have a five year term through December 12, 2012. They are convertible into shares of the Common Stock, subject to customary anti-dilution adjustments. The initial conversion price is $12.47. We may redeem the Notes at 100% of the principal amount, plus any accrued and unpaid interest, beginning December 13, 2008, provided the market price of the Common Stock is at least 150% of the then applicable conversion price for 30 consecutive trading days prior to the redemption. The Notes are secured by a first priority, perfected security interest in certain shares of Common Stock of Zuosheng Yu, as evidenced by the pledge agreement (the “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 of Common Stock, subject to customary anti-dilution adjustments. The Warrants may be exercised to purchase Common Stock at any time or times on or after May 13, 2008, but not after May 13, 2013, the expiration date of the Warrants.
 
In connection with this transaction, the Buyers and we entered into a registration rights agreement (the “Registration Rights Agreement”). Pursuant to the terms and conditions of the Registration Rights Agreement, we have agreed to register within 60 calendar days after closing shares of Common Stock issuable to the Buyers for resale on a Form S-3 Registration Statement to be effective by 90 calendar days or 120 days if the registration statement is subject to a full review by the U.S. Securities and Exchange Commission. We shall register an amount of Common Stock for resale that equals at least 120% of the sum of shares issuable upon conversion of the Notes, the exercise of the Warrants and the payment of interest accrued on the Notes. The registration rights granted under the Registration Rights Agreement are subject to customary exceptions and qualifications and compliance with certain registration procedures.
 
15


ITEM 6. SELECTED FINANCIAL DATA

(USD and number of shares in thousands, except per share amounts)

   
    Years ended December 31
 
 
 
2007
 
  2006
 
  2005
 
  2004
 
  2003
 
               
(Restated)
             
Total sales
 
$
772,439
 
$
139,495
 
$
89,740
 
$
87,832
 
$
57,306
 
Cost of sales
   
715,750
   
135,324
   
81,166
   
81,613
   
52,804
 
Selling, general, and administrative expenses
   
16,164
   
2,421
   
2,781
   
2,317
   
1,532
 
Income from operations
   
40,525
   
1,749
   
5,793
   
3,902
   
2,969
 
Net income
 
$
22,426
 
$
1,033
 
$
2,740
 
$
915
 
$
1,091
 
Net income per common share, basic and diluted
 
$
0.69
 
$
0.03
 
$
0.09
 
$
0.03
 
$
0.04
 
Basic weighted average shares outstanding
   
32,425
   
31,250
   
31,250
   
30,260
   
30,000
 
Diluted weighted average shares outstanding
   
32,558
   
31,250
   
31,250
   
30,260
   
30,000
 
  
(USD in thousands, except the ratio )
    
 
 
 As of December 31
 
 
 
2007
 
2006
 
2005
 
2004
 
2003
 
               
 (restated)
             
Total assets
 
$
478,407
 
$
73,822
 
$
58,993
 
$
52,969
 
$
37,432
 
Depreciation and amortization
 
$
10,337
 
$
1,917
 
$
1,344
 
$
1,255
 
$
1,013
 
Current Ratio
   
0.68
   
0.87
   
0.96
   
0.92
   
0.77
 
  
 
 
Three months ended December 31 (unaudited)
 
 
 
2007 
 
2006 
 
2005 
 
 
 
(In thousands, except share and per share amounts) 
 
Statement of Operations Data
 
  
 
  
 
  
 
Sales revenues
 
$
268,192
 
$
42,496
 
$
17,719
 
Cost of goods sold
   
 247,239
   
 42,838
   
 17,509
 
Gross profit
   
 20,953
   
 -342
   
 210
 
Selling, general, and administrative expenses
   
 5,894
   
 266
   
 1,017
 
Income from operations
   
15,059
   
-607
   
-808
 
Net income (loss)
 
$
12,057
 
$
514
 
$
386
 
Net income per share
   
 
   
 
   
 
 
Basic
 
$
0.36
 
$
0.01
 
$
0.01
 
Diluted
 
$
0.36
 
$
0.01
 
$
0.01
 
 
   
 
   
 
   
 
 
Balance Sheet Data
   
 
   
 
   
 
 
Current assets
 
$
236,173
 
$
44,670
 
$
37,017
 
Total assets
   
 478,407
   
 73,822
   
 58,993
 
Total liabilities
   
 382,974
   
 53,575
   
 41,256
 
Minority interest
   
 42,044
   
 6,186
   
 5,387
 
Total Stockholder’s equity
 
$
53,389
 
$
14,060
 
$
12,350
 

16

 
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS
 
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.

Company Overview

General Steel Holdings, Inc. (“General Steel”), headquartered in Beijing China, operates a diverse portfolio of Chinese steel companies. Our companies serve various industries and produce a variety of steel products: reinforced bars (rebar), hot-rolled carbon and silicon sheets and spiral weld pipes. Our aggregate production capacity of steel products is 3 million 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 non-government owned steel companies in China.

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

Our strategy is to grow through aggressive mergers, joint ventures and acquisitions targeting state-owned enterprise steel companies and selected entities with outstanding potential. We have executed this strategy and consummated controlling interest positions in two joint ventures. We are actively pursuing a plan to acquire additional assets.
 
17


We presently have controlling interest in three steel subsidiary companies:

· Tianjin Daqiuzhuang Metal Sheet 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).

Steel Operating Companies

· Tianjin Daqiuzhuang Metal Sheet Co., Ltd. (“Daqiuzhuang Metal”)

Tianjin Daqiuzhuang Metal Sheet Co., Ltd. (“Daqiuzhuang Metal”), started its operation in 1988. Daqiuzhuang Metal’s core business is the manufacturing of high quality hot-rolled carbon and silicon steel sheets which are mainly used in the production of small agricultural vehicles and other specialty markets. In the niche market for metal sheets used in small agricultural vehicles, we estimate that Daqiuzhuang Metal currently maintains an approximate 50% market share.

Daqiuzhuang Metal has ten steel sheet production lines capable of processing approximately 400,000 tons of 0.75-2.0 mm hot-rolled carbon steel sheets per year, of which 150,000 tons has been added since mid-March 2006. Products are sold through a nation-wide network of 35 distributors and 3 regional sales offices.

Daqiuzhuang Metal uses a traditional rolling mill production sequence, such as heating, rolling, cutting, annealing, and flattening to process cut coil segments into steel sheets. The sheet sizes are approximately 2,000 mm (length) x 1,000 mm (width) x 0.75 to 2.0 mm (thickness). Limited size adjustments can be made to meet order requirements. Products sell under the registered “Qiu Steel” brand name.

On May 22, 2007, we filed a current report on Form 8-K announcing we agreed to acquire from Victory New Holdings, Ltd., a British Virgin Islands Company (“Victory New”), the remaining 30% outstanding shares of Daqiuzhuang Metal. The mother of Henry Yu, our Chairman and CEO, is the sole shareholder of Victory New. For the acquisition, we agreed to issue an aggregate of 3,092,899 shares of Series A Preferred Stock at $0.001 par value.

· Baotou Steel - General Steel Special Steel Pipe Joint Venture Co., Ltd. (“Baotou Steel Pipe Joint Venture”)

On April 27, 2007, Daqiuzhuang Metal and Baotou Iron and Steel Group Co., Ltd. ("Baotou Steel") entered into an Amended and Restated Joint Venture Agreement (the "Agreement"), amending the Joint Venture Agreement entered into on September 28, 2005 ("Original Joint Venture Agreement"). The Amended and Restated Joint Venture Agreement has increased Daqiuzhuang Metal's ownership interest in the Joint Venture to 80%. The joint venture company’s name is Baotou Steel - General Steel Special Steel Pipe Joint Venture Company Limited (“Baotou Steel Pipe Joint Venture”). Baotou Steel will initially contribute RMB 10,000,000, or approximately $1,270,000 taking 20% ownership interest in the Baotou Steel Pipe Joint Venture. Daqiuzhuang Metal will initially contribute RMB 40,000,000, or approximately $5,130,000 taking 80% ownership interest in the Baotou Steel Pipe Joint Venture.

We have invested $1.56 million cash into this joint venture with the rest of the required register capital to be invested within a year. The remainder of the investment will come from the operating cash flow from Daqiuzhuang Metal.

Baotou Steel Pipe Joint Venture received its business license approval on May 25, 2007. It has four production lines capable of producing 100,000 tons of double spiral-weld pipes. These pipes are used in the energy sector to transport natural gas, oil and steam. Pipes produced at the mill have a diameter ranging from 219-1240 mm; a wall thickness ranging from 6-13 mm; and a length ranging from 6-12 m. Final production capacity at the mill will reach 600,000 tons in 2009. Additional products may also be added. 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.
 
18


This joint venture started production and testing operations in the second quarter 2007 and began to generate revenue in the third quarter 2007.

· Shaanxi Longmen Iron and Steel Co., Ltd. (“Longmen Joint Venture”)

On June 15, 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 new joint venture.

Long Steel Group, located in Hancheng city, Shaanxi province, in China’s central region, was founded in 1958 and incorporated in 2002. In 2006, its reported sales revenue was 7.4 billion RMB (approximately $900 million). It is the largest steel company in the province. It has a total annual production capacity of 2.5 million tons. Last year, the Chinese National Statistics Bureau ranked it among the top 50 steel companies in China in terms of output.

Long Steel Group operates as a fully-integrated steel production facility, which means it is capable of taking iron-ore and other raw materials, processing them into crude steel and then processing the crude steel into finished steel products. Less than 10% of steel companies in China have fully-integrated steel production capacity.

Our joint venture, Longmen Joint Venture, assumes existing operating units of the Long Steel Group. The Long Steel Group contributed most of its working assets to the joint venture. Key units of the joint venture include:
 
· Shaanxi Longmen Iron and Steel Group Co., Ltd., (“Base Steel Operations”): Includes 8 blast furnaces (total volume 1749 cubic meters), 4 converters (total load 150 tons) and 1 continuous casting mill;
 
· Shaanxi Longmen Iron and Steel Group Co., Ltd., Xi’an Rolling Mill: Annual capacity is 700,000 tons of rebar - includes 1 semi-continuous mill line;
 
· Shaanxi Longmen Iron and Steel Group Co., Ltd., Mulonggou Mining Co.: An iron-ore mine with 150,000 tons annual capacity;
 
· Shaanxi Longmen Iron and Steel Group Co., Ltd., Changlong Transportation Co: A comprehensive transportation company combining railroad transportation, loading and discharging, maintenance as well as finished oil products and components - daily throughput capacity exceeds 5000 tons;
 
· Shaanxi Longmen Iron and Steel Group Co., Ltd., Hancheng Yulong Hotel: A 125 room hotel and recreation complex catering to the regional construction and steel support industries;
 
· Shaanxi Yuxin Commercial Trading Co., Ltd.; and
 
· Shaanxi Yuteng Commercial Trading Co., Ltd.

Longmen Joint Venture employs approximately 5,000 full-time and 2,000 part-time workers.

The annual capacity at Longmen Joint Venture is 2.5 million tons of crude steel. It is the largest steel producer in Shaanxi province. In 2006, Long Steel Group recorded a shipment volume of 2.2 million tons of finished product, of which 94% was reinforced bar steel (rebar - a commodity grade steel used in construction to reinforce concrete), with the remainder being roundbar, wire rod and related products. These products are primarily used in building and infrastructure construction.

Longmen Joint Venture’s products are categorized within the steel industry as “longs” (referencing their shape). They are generally considered regional products because their size, weight and dimension make them ill-suited for cost-effective long-haul ground transportation. By our estimates, the provincial market demand for rebar is 6 - 8 million tons. Slightly more than half of the province demand radiates from Xi’an, the province capital, located 180 km from the joint venture main site. We estimate in Xi’an we have a 72% market share.

An established regional network of 27 agents and 2 sales offices sell the joint venture’s products. Agents account for approximately 66% of sales. All products sell under the registered brand name of “Yulong” which enjoys strong regional recognition and awareness. Rebar and billet products carry ISO 9001 and 9002 certification and many other products have won national quality awards. Products produced at the facility have been used in the construction of the Yangtze River Three Gorges Dam, Xi’an International Airport, the Xi Han, Xi Tong and Xi Da provincial expressways, and are currently being used in the construction of the Xi’an city subway system.
 
19


On September 24, 2007, Longmen Joint Venture acquired controlling interest in two subsidiaries of the Long Steel Group.

The Longmen Joint Venture entered into an equity transfer agreement with Long Steel Group to acquire its 74.92% ownership interest in its subsidiary, Longmen Iron and Steel Group Co., Ltd. Environmental Protection Industry Development Co., Ltd. (“EPID”). The Joint Venture paid RMB 18,080,930 (approximately $2,380,000) in exchange for the ownership interest. The facility utilizes solid waste generated from the steel making process to produce products such as construction materials, building blocks, landscape tiles, curb tops, ornamental tiles, etc.

At the same time, the Longmen Joint Venture also entered into a second equity agreement with the Long Steel Group to acquire its 36% ownership interest in its subsidiary, Longmen Iron and Steel Group Co., Ltd. Hualong Fire Retardant Materials Co., Ltd. (“Hualong”). The Joint Venture paid RMB 3,287,980 (approximately $430,000) in exchange for the ownership interest. The Joint Venture is the largest shareholder in the company. The facility produces fire-retardant materials used in various processes in the production of steel.

Summary of Significant Growth and Change in 2007

   
As of December 31, 2006
 
As of December 31, 2007
Number of Main Subsidiaries
 
1
 
3
Production Capacity (ton)
 
400,000
 
3 million
Main Product Categories
 
1
 
3
Number of Sales Offices
 
3
 
6
Number of Full-time Employees
 
1,250
 
6,200
Exchange Listing
 
OTCBB
 
AMEX*

* On March 6, 2008, we migrated to the NYSE Arca

Stock listing

We obtained listing approval from American Stock Exchange (AMEX) on September 28, 2007. The stock officially started to trade on AMEX on October 3, 2007 under the ticker symbol, “GSI”. On March 6, 2008, we migrated from the AMEX to the NYSE Arca and officially started to trade under the same ticker symbol, “GSI”.

Factors affecting our operating results

Demand for our products

Overall, domestic economic growth is an important demand driver of our products. According to estimates by Deutsche Bank, China’s economy will grow by approximately 10% in 2008. Specifically, industry demand drivers for our products include construction and infrastructure projects, rural income growth and energy demand.

At Longmen JV, growth in regional construction and infrastructure projects drives demand for our products. According to the 11th Five Year National Economic Plan (2006-2010), development of China’s western region is one of the top-five economic priorities of the nation. Shaanxi, the province where Longmen JV is located, has been designated as the bridgehead for development into the western region, and Xi’an, the provincial capital has been designated as the focal point for this development. Our Longmen Joint Venture is 180 km from Xi’an and does not have another major competitor within a 250km radius. According to a Shaanxi provincial government report issued January 16, 2008, there are 150 construction and infrastructure projects scheduled to begin in 2008. Some of the major projects include: six new highways, one new airport, expansion of the Xi’an airport, a new ring subway system and 3 new dams. We see strong and 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 ahead as the government continues to drive western region development efforts.
 
20


At Daqiuzhuang Metal, rural income growth drives demand for our hot-rolled carbon sheets. According to the Asian Development Bank statistics, well over 60% of the nations’ 1.3 billion total population is comprised of low-income, rural farmers. Our steel sheets are used in the construction of light agricultural vehicles targeted for sale to low-income, rural farmers. We believe are sheets are lighter and of greater ductility than those of our competitors and are preferred by manufacturers of light agricultural vehicles. According to the 11th Five Year National Economic Plan (2006-2010), raising the level of rural income is a top economic and social goal for the country. Many government programs, including removing agricultural taxes and special local product taxes, designed to spur rural income development have been initiated. The government expects annual rural income to grow between 5% and 10% through 2010. Transportation asset growth only slightly lags the growth in rural net income, so we anticipate demand for light agricultural vehicles to grow between 4.7% and 9.6% through 2010.

At Baotou Steel Pipe Joint Venture, energy sector growth for the need to transport oil, natural gas and steam drive demand for spiral-weld steel pipe. The West-East pipeline that will bring oil and natural gas from the Xinjiang Uyghur Autonomous Region to large eastern seaboard cities will be the largest single demand driver for our pipes. This pipeline starts in China’s far western Xinjiang Uyghur Autonomous Region and stretches 4000km through ten regions, provinces and municipalities before its point of termination in Zhejiang province. This pipeline will commence construction in the first quarter of 2008. Presently, demand is fueled by smaller pipeline projects and municipal energy infrastructure projects.

Supply of raw materials

Our primary raw materials consist of iron-ore and hot-rolled steel coil. Longmen Joint Venture uses iron-ore as its main raw material; Daqiuzhuang Metal and Baotou Steel Pipe Joint Venture use hot-rolled steel coil as their main raw materials. Iron-ore is the main raw material used to produce hot-rolled steel coil, so the price of iron-ore is the primary raw material costs driver for our products.

Longmen Joint Venture produces 2.5 million tons of our aggregate 3 million tons annual production. At Longmen Joint Venture, 90% of production costs are raw materials, with iron-ore being the largest component.

Nationwide, over the course of 2007, there has been an upward trend in the price of iron-ore. From January to December, the average price per ton of iron-ore increased from approximately RMB 1,300 per ton to RMB 1,700. We expect the overall cost of iron-ore will continue to increase through the end of 2008.

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 Joint Venture), the Daxigou mine (owned by our joint venture partner), surrounding small local mines and from abroad. The Daxigou mine has 300 million tons of proven iron-ore reserves, of which only approximately 950,000 tons have been excavated. According to the terms of our Joint Venture agreement with the strategic partner, we have first rights of refusal for sales and development from this mine.

We source approximately 15% of our iron-ore from the Mulonggou and Daxigou mines, 70%-75% from local mines and only 10-15% of our iron-ore from abroad. Sourcing from the Mulonggou and Daxigou mines is approximately 50% cheaper than sourcing from the spot market. In 2008, we aim to increase the percentage of iron ore sourced from Mulonggou and Daxigou mines from approximately 15% to 30%. We anticipate this will increase our gross margin between 1.5% and 2.0%. We believe gaining greater direct control over our key raw material inputs is important for both margin protection and secured source protection.

Industry Consolidation

In 2007, the government held firm on its resolve to consolidate the highly fragmented domestic steel industry through coerced mergers and heightened operating requirements. In November 2007, the National Development and Reform Commission (NDRC), the nation’s top economic planner, reported that to date 29.4 million tons of outdated iron smelting capacity and 15.21 million tons of outdated steel smelting capacity had been eliminated. It also later announced obligation contracts with 18 provinces, autonomous regions and municipalities to eliminate 49.31 million tons of outdated iron smelting capacity and 36.1 million tons of outdated steel smelting capacity. The obligation letters involved 573 enterprises. It is the government’s goal to consolidate 50% of domestic production among the top 10 steel companies by 2010 with goal rising to 70% by 2020.
 
21


We believe the government will continue, and likely strengthen, its industry consolidation effort. As capacity from weaker market players is removed, capacity allotments are shifted to existing companies, such as our Longmen Joint Venture.

Operating Results

Sales Revenue and Gross Profit

Fiscal year ended December 31, 2007 compared with Fiscal year ended December 31, 2006

Overall, net sales for the year 2007 were approximately $772.4 million compared to $139.5 million in 2006, an increase of 454%. The sharp increase in net sales is a result of our acquiring controlling interest position in the Longmen Joint Venture in June, and to a lesser extent the starting of our Baotou Steel Pipe Joint Venture which began sales in July 2007.

At Daqiuzhuang Metal, shipments for the year 2007 decreased 5% to 322,912 tons from 341,702 tons last year. In the third quarter we shifted our product mix to produce a higher percentage of silicon sheets, which are higher value-added products and command a higher selling price than our carbon sheets. Producing silicon sheets requires a longer processing time than carbon sheets, thus resulting in a lower total volume of shipped product from 2007 compared to 2006. Average selling price per ton including sale of scrap for the year 2007 increased to $457 from $422 in 2006. The increase in average selling price was mainly due to higher selling price achievable from sales of silicon sheets compared to carbon sheets.

At our Baotou Steel Pipe Joint Venture, shipments representing July through December operations in 2007 were 13,489 tons. Average selling price per ton was $474.

At our Longmen Joint Venture, shipments representing June through December operations in the 2007 were 1,440,522 tons. Average selling price per ton was $429.

The following table displays sales and steel shipment data for General Steel by operating unit for the years 2007 and 2006, respectively.  
 
     
Year 2007
   
Year 2006
 
Operating Unit    
Shipment Volume
   
Sales Amount
   
Shipment Volume
   
Sales Amount
 
     
(in Tons)
         
(in Tons)
       
Daqiuzhuang Metal
   
322,912
 
$
147,727,340
   
 341,702
 
$
139,494,624
 
Baotou Steel Pipe Joint Venture
(e)
 
13,489
   
 6,397,364
   
 -
   
 -
 
Longmen Joint Venture
(f)
 
1,440,522
   
 618,314,461
   
 -
   
 -
 
 
       
 
   
 
   
 
 
Totals
   
1,776,923
 
$
772,439,165
   
 341,702
 
$
139,494,624
 
 
(e) Sales and shipment data from Baotou Steel Pipe Joint Venture are for the months from July through December only. Data reflects 100% of the Baotou Steel Pipe Joint Venture. General Steel, through its subsidiary, owns 80% of the Baotou Steel Pipe Joint Venture. The minority interest is removed after profits.

(f) Sales and shipment data from Longmen Joint Venture are for the months from June through December only. Data reflects 100% of the Longmen Joint Venture. General Steel, through its subsidiaries, owns 60% of the Longmen Joint Venture. The minority interest is removed after profits.
 
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Gross profit for the year 2007 was approximately $56.7 million, an increase of 1259% or $52.5 million from $4.2 million for last year. Gross profit margin increased to 7% for the year 2007 from 3% for 2006.

The following table displays gross profit and gross margin data for General Steel by operating unit for the years 2007 and 2006, respectively. 
 
         
Year 2007 
   
Year 2006
 
Operating Unit
     
 
Gross Profit 
 
 
Gross Margin 
 
 
Gross Profit 
 
 
Gross Margin 
 
Daqiuzhuang Metal
     
$
5,210,410
   
3.53
%
$
4,170,434
   
 2.99
%
Baotou Steel Pipe Joint Venture
 
(g)
 
 
386,249
   
6.04
%
 
-
   
 -
 
Longmen Joint Venture
 
(h)
 
 
51,092,102
   
8.26
%
 
-
   
 -
 
 
                   
 
 
Totals
     
$
56,688,761
   
7.34
%
$
4,170,434
   
 2.99
%

(g) Gross profit and gross margin data from Baotou Steel Pipe Joint Venture are for the months from July through December only. Data reflects 100% of Baotou Steel Pipe Joint Venture. General Steel, through its subsidiary, owns 80% of the Baotou Steel Pipe Joint Venture. The minority interest is removed after profits.

(h) Gross profit and gross margin data from Longmen Joint Venture are for the months from June through December only. Data reflects 100% of the Longmen Joint Venture. General Steel, through its subsidiaries, owns 60% of the Longmen Joint Venture. The minority interest is removed after profits.

Fiscal year ended December 31, 2006 compared to Fiscal year ended December 31, 2005

Net sales from operations increased from $89.7 million in 2005 to $139.5 million in 2006, a 55% increase.

Shipment volume increased from 203,422 tons in 2005 to 341,702 tons in 2006, a 68% increase. In addition to the reasons cited above, this rise is also attributable to the fact that we instituted in the second quarter a credit system for our best customers. This allowed them to more easily purchase large quantities of product at a single time. Have larger quantities of inventory on hand made it easier for them to sell larger quantities.

The following table displays sales and steel shipment data for General Steel by operating unit for the years 2006 and 2005, respectively. 
 
   
 
Year 2006 
 
 
Year 2005 
 
Operating Unit
 
 
Shipment Volume 
 
 
Sales Amount 
 
 
Shipment Volume 
 
 
Sales Amount 
 
     
(in Tons) 
 
 
 
 
 
(in Tons) 
       
Daqiuzhuang Metal
   
341,702
 
$
139,494,624
   
203,422
 
$
89,739,899
 
 
                 
Totals
   
341,702
 
$
139,494,624
   
203,422
 
$
89,739,899
 

Gross profit decreased from $8.6 million in 2005 to $4.2 million in 2006. In the same period gross profit margin decreased from 9.6% in 2005 to 3% in 2006, representing a 6% decrease.
 
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The following table displays gross profit and gross margin data for General Steel by operating unit for the years 2006 and 2005, respectively. 
 
     
Year 2006 
   
Year 2005 
 
Operating Unit    
Gross Profit 
 
 
Gross Margin 
 
 
Gross Profit 
 
 
Gross Margin 
 
Daqiuzhuang Metal
 
$
4,170,434
   
 2.99
%
$
8,574,049
   
 9.55
%
 
       
 
       
 
 
Totals
 
$
4,170,434
   
 2.99
%
$
8,574,049
   
 9.55
%

Cost of Sales

Fiscal year ended December 31, 2007 compared with Fiscal year ended December 31, 2006

Overall cost of sales increased to $715.8 million for the year 2007 from $135.3 million for the year 2006, an increase of 429%. The sharp increase in cost of sales reflects our acquiring controlling interest position in the Longmen Joint Venture in June, and to a lesser extent, the starting of our Baotou Steel Pipe Joint Venture which began sales operations in July 2007.

At Daqiuzhuang Metal, average cost per ton was $441 and $396, respectively for the years 2007 and 2006. Cost of sales went up mainly due to the price increase in raw materials. Overall, our raw material feedstock costs were driven up by an increase in iron-ore prices. Additionally, we shifted our product mix to include a higher percentage of silicon sheets which have higher feedstock and processing costs than carbon steel sheets.

At our Baotou Steel Pipe Joint Venture, average cost per ton was $446, representing July through December operations in the year 2007.

At our Longmen Joint Venture, average cost per ton was $394, representing June through December operations in the year 2007.

The following table displays cost of sales and steel shipment data for General Steel by operating unit for the years 2007 and 2006, respectively. 
 
       
Year 2007 
 
 
Year 2006 
 
 
Operating Unit
 
 
 
Shipment Volume 
 
 
Cost of Sales 
 
 
Shipment Volume 
 
 
Cost of Sales 
 
       
(in Tons) 
         
(in Tons) 
       
Daqiuzhuang Metal
     
322,912
 
$
142,516,930
   
 341,702
 
$
135,324,190
 
Baotou Steel Pipe Joint Venture
 
(k)
 
13,489
   
 6,011,115
   
 -
   
 -
 
Longmen Joint Venture
 
(l)
 
1,440,522
   
 567,222,359
   
 -
   
 -
 
 
         
 
   
 
   
 
 
Totals
     
1,776,923
 
$
715,750,404
   
 341,702
 
$
135,324,190
 

(k) Cost of sales and shipment volume data from Baotou Steel Pipe Joint Venture are for the months from July through December only. Data reflects 100% of the Baotou Steel Pipe Joint Venture. General Steel, through its subsidiary, owns 80% of the Baotou Steel Pipe Joint Venture. The minority interest is removed after profits.

(l) Cost of sales and shipment volume data from Longmen Joint Venture are for the months from June through December only. Data reflects 100% of the Longmen Joint Venture. General Steel, through its subsidiaries, owns 60% of the Baotou Steel Pipe Joint Venture. The minority interest is removed after profits.
 
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Fiscal year ended December 31, 2006 compare to Fiscal year ended December 31, 2005

Cost of sales principally consists of the cost of raw materials, labor, utilities, manufacturing costs, manufacturing related depreciation and other fixed costs. Overall cost of sales increased to $135.3 million in 2006, from $81.2 million in 2005, a 67% increase. Cost of sales as a percentage of sales increased from 90% in 2005 to 97% in 2006, a 7% increase. The increase mainly due to the price increase in raw materials. Overall, our raw material feedstock costs were driven up by an increase in iron-ore prices.
 
The following table displays cost of sales and steel shipment data for General Steel by operating unit for the years 2006 and 2005, respectively. 
 
 
 
 
Year 2006 
 
 
Year 2005 
 
Operating Unit
 
 
Shipment Volume 
 
 
Cost of Sales 
   
Shipment Volume 
   
Cost of Sales 
 
     
(in Tons) 
         
(in Tons) 
       
Daqiuzhuang Metal
   
 341,702
 
$
135,324,190
   
 203,422
 
$
81,165,850
 
 
   
 
       
 
   
 
 
Totals
   
 341,702
 
$
135,324,190
   
 203,422
 
$
81,165,850
 

Selling, General and Administrative Expenses

Fiscal year ended December 31, 2007 compared with Fiscal year ended December 31, 2006

Selling, general and administrative expenses were $16.2 million for the year 2007, compared to $2.4 million for 2006. This increase is largely attributable to the operations of the Longmen Joint Venture, which began in June, and alone accounted for approximately $11.7 million in SG&A expense since June 2007.

Fiscal year ended December 31, 2006 compared with Fiscal year ended December 31, 2005

Selling, general and administrative expenses were $2.4 million for 2006, compared to $2.8 million for the same period of 2005, a 13% decrease. A large component of the decrease was due to the reclassification of packaging expense back to cost of sales.

Other income (expense)

Fiscal year ended December 31, 2007 compared with Fiscal year ended December 31, 2006

Finance and interest expenses were $9.3 million for the year 2007, a 296% increase from $2.4 million for 2006. The increase is traced to an increase in short term borrowings largely associated with the Longmen Joint Venture operations.

Income from derivative instrument was $6.2 million for the year 2007, there was no derivative instrument for the year 2006. See more detail information in our footnote, Note 14 - Convertible notes.

Fiscal year ended December 31, 2006 compared with Fiscal year ended December 31, 2005

Finance and interest expense was $2.4 million for the fiscal year ended December 31, 2006, a 23% increase compared to $1.9 million in 2005. This increase was because the outstanding bank loans increased to $30.3 million from $27.1 million as of December 31, 2006 and 2005, respectively. This increase in debt borrowing was mainly used for financing our bulk purchases of raw materials and our credit program to our main customers.

Net income

Fiscal year ended December 31, 2007 compared with Fiscal year ended December 31, 2006

Net income was $22.4 million for the year 2007 compared to $1.0 million for the same period of 2006, an increase of 2,071%. The sharp increase is largely attributable to the contributions from the Longmen Joint Venture which began in June 2007 and the income of $6.2 million recorded for the change in fair value of the derivative instrument in connection with the issuance of the convertible notes in 2007.
 
25


Earnings per share

Earnings per share was $0.69 for the year 2007. Earnings per share are calculated as follows:

   
 
2007
 
 
2006
 
Income attributable to holders of common shares
 
$
22,425,921
 
$
1,033,208
 
Basic weighted average number of common shares outstanding
   
32,424,652
   
31,250,000
 
Add: dilution effect of warrants
   
133,698
   
-
 
Diluted weighted average number of common shares outstanding
   
32,558,350
   
31,250,000
 
               
Earnings per share
             
Basic
 
$
0.69
 
$
0.03
 
Diluted
 
$
0.69
 
$
0.03
 

Fiscal year ended December 31, 2006 compared with Fiscal year ended December 31, 2005

Net income was $1.0 million for the year 2006 compared to $2.7 million for the same period of 2005, a decrease of 62%.

Earnings per share are calculated as follows:

 
 
2006
 
2005
 
Net income
 
$
1,033,208
 
$
2,740,219
 
 
   
 
   
 
 
Weighted-average of common stock o/s
   
 31,250,000
   
 31,250,000
 
 
   
 
   
 
 
Earnings per share
 
$
0.03
 
$
0.09
 

Income taxes

Fiscal year ended December 31, 2007 compared with Fiscal year ended December 31, 2006

The Company did not carry on any business and did not maintain any branch office in the United States during the year 2007 and 2006. Therefore, no provision for withholding or U.S. federal income taxes or tax benefits on the undistributed earnings and/or losses of the Company has been made.

Pursuant to the relevant laws and regulations in the People's Republic of China, Daqiuzhuang Metal, as a foreign owned enterprise in the People's Republic of China, is entitled to an exemption from the PRC enterprise income tax for two years commencing from its first profitable year. Daqiuzhuang Metal has been approved for this tax benefit and will be exempt from income tax for the years ended December 31, 2005 and 2006 and 50% income tax reduction for the years ended December 31, 2007, 2008 and 2009. The current effective income tax rate is 12%.
 
26


The effective income tax rate at our Baotou Steel Pipe Joint Venture is 33%.

Our Longmen Joint Venture is located in the mid-west region of China. The National Development and Reform Commission (NDRC) granted it qualification approval to attain the “Go West” special tax treatment. This national tax treatment rewards companies contributing to the economic development of the Western Region by lowering their effective corporate tax rate from 33 percent to 15 percent. This change is effective July first and is reflected from our year-end financial results.

For the year 2007, we had a tax expense of $4.8 million.

Fiscal year ended December 31, 2006 compared with Fiscal year ended December 31, 2005

We did not carry on any business and did not maintain any branch office in the United States during the years ended December 31, 2006 and 2005. Therefore, no provision for withholding or U.S. federal income taxes or tax benefits on our undistributed earnings and/or losses has been made.

Pursuant to the relevant laws and regulations in the People’s Republic of China, Daqiuzhuang Metal, as a Sino-foreign joint venture in the People’s Republic of China, is entitled to an exemption from the PRC enterprise income tax for two years commencing from its first profitable year. We are approved for this tax benefit and are exempt from income tax for the years ended December 31, 2005 and 2006. We are entitled to a 50% income tax reduction for the years ended December 31, 2007, 2008 and 2009.

Minority Interest

Minority interest mainly represents Long Steel Group’s 40% interest in Longmen Joint Venture and Baotou Iron and Steel Group’s 20% interest in Baotou Steel Pipe Joint Venture, both of which we control.

Accounts Receivable

Fiscal year ended December 31, 2007 compared with Fiscal year ended December 31, 2006

Accounts receivable and accounts receivable-related party were $11.8 million as of December 31, 2007 compared to $17.1 million on December 31, 2006.

We recognize the revenue when we ship out products and pass the titles of the products to our customers and distributors. At Daqiuzhuang Metal, we extended short-term credit to our customers and distributors with good reputations and long-term business relationships. We have not experienced any bad debt in these accounts. Also we review our accounts receivable on a regular basis to determine if the bad debt allowance is adequate and adjust the allowance amount if needed. We believe the accounts receivable amount is collectible. Never-the-less, to be conservative and prudent in our management practice, as of December 31, 2007, we reserved $148,224 for bad debt allowance based on our reasonable estimate.

Fiscal year ended December 31, 2006 compared with Fiscal year ended December 31, 2005

Accounts receivable were $17.1 million as of December 31, 2006 compared to $993,417 at December 31, 2005. This increase in accounts receivable is mainly due to a change in the company’s collection approach. Starting in the second quarter of 2006, we have gone with a different collection methodology. We implemented a credit sales program for our main customers with whom we have a long-standing business relationship. We now have four new production lines in operation. The management is now taking measures to secure the existing customer base and attract new customers. One of the approaches is to extend credit sales to our major customers and distributors as incentives for buying our products. Extending credit to our major customers and distributors is also in line with a growing industrial trend in this competitive market.

We recognize the revenue when we ship out products and passed the titles of the products to our customers and distributors.  We have increased production capacity since April this year. To enhance sales, we extended short-term credit to our customers and distributors with good reputations and long-term business relationships. We have not experienced any bad debt in these accounts. Also we review our accounts receivable on a regular basis to determine if the bad debt allowance is adequate and we adjust the allowance amount if needed. We believe the accounts receivable are collectible. Never-the-less, to be conservative and prudent in our management practice, as of December 31, 2006, we have decided to reserve $137,132 for bad debts based on our reasonable estimate.
 
27


Liquidity and capital resources

Fiscal year ended December 31, 2007 compared with Fiscal year ended December 31, 2006

Due to the strong market demand for our products and our new Longmen Joint Venture, we plan to maintain a higher-than-average debt to equity ratio to better position ourselves in this fast growing market. The bank loans are considered short term for the purpose of the preparation of the financial statements though they are renewable with the banks every year. Cash balance including restricted cash amounted to $52.1 million and $11.1 million as of December 31, 2007 and December 31, 2006, respectively.

Fiscal year ended December 31, 2006 compared with Fiscal year ended December 31, 2005

Due to the strong market demand for our products, we increased production capacity by adding four new production lines. We plan to maintain a higher-than-average debt to equity ratio to better position itself in this fast growing market. The bank loans are considered short term for the purpose of the preparation of the financial statements because they are renewable with the banks every year. Due to the recent joint venture agreement with Baotou Iron and Steel (Group) Co., Ltd., we are reserving cash for the first 30% of its capital contribution, approximately $3.7 million, which needs to be paid when the business license for the joint venture is issued. Cash balance including restricted cash amounted to $11.1 million and $11.4 million as of December 31, 2006 and 2005.

Operating activities

Fiscal year ended December 31, 2007 compared with Fiscal year ended December 31, 2006

Net cash provided by operating activities for the year 2007 was $39.0 million compared to $0.9 million used in 2006. This change was mainly due to the combination of the following factors:

Net cash generated in 2007 was primarily attributable to net income of $22.4 million adjusted by depreciation and amortization, minority interest and gain on derivative instrument, total of $16.1 million. Cash collected from accounts receivable and accounts receivable-related party was $16.2 million in 2007 compared a negative amount of $15.9 million in 2006. Notes receivable and other receivable in total had a cash outflow of $12.1 million in 2007 compared to $1.5 million in 2006. Increase in inventory and advances on inventory purchases resulted in a cash outflow of $63.4 million compared to an inflow of $7.2 million in 2006.

Accounts payable, other payables, accrued liabilities, customer deposits and tax payable went up by $60.7 million compared to $4.9 million in 2006.

Changes in these accounts were mainly resulted from the acquisitions of the Boutou Steel Pipe Joint Venture and Longmen Joint Venture. The increased operating capacity helped the company generate positive cash flows from operating activities.

Fiscal year ended December 31, 2006 compared with Fiscal year ended December 31, 2005

Net cash used in operating activities for the fiscal year ended December 31, 2006 was $0.9 million compared to $10.0 million provided by operating activities in 2005. This change was mainly due to an increase in accounts receivable and offset by a decrease in advances on inventory purchases. Accounts receivable increased by $15.9 million compared to December 31, 2005. The increase is due to the credit sales we extended to our major customers and distributors as incentives starting from the second quarter of 2006. As the new production lines are now in full operation, approximately 13,000 tons of additional products are now being produced monthly.
 
28


Investing activities

Fiscal year ended December 31, 2007 compared with Fiscal year ended December 31, 2006

Net cash used by investing activities was $15.1 million for the year 2007 compared to $5.9 million used in 2006. This increase in cash used in investing activities mainly resulted from a $21.5 million on equipment purchase.

Fiscal year ended December 31, 2006 compared with Fiscal year ended December 31, 2005

  Net cash used in investing activities was $5.9 million for the fiscal year ended December 31, 2006 compared to $7.9 million used in investing activities in the previous year. The cash has been spent on the construction of the new plant.

Financing activities

Fiscal year ended December 31, 2007 compared with Fiscal year ended December 31, 2006

Net cash provided by financing activities was $12.8 million for the year 2007 compared to $4.7 million in 2006. This was mainly due to $40 million in convertible notes issued in 2007 offset by payoffs of various short term loans and notes payable.
 
Fiscal year ended December 31, 2006 compared with Fiscal year ended December 31, 2005

Net cash provided by financing activities was $4.7 million for the year ended December 31, 2006 compared to $0.8 million provided by investing activities of the previous year. We signed a borrowing agreement with Shenzhen Development Bank to borrow $5,1 in the first quarter. The proceeds were mainly used to pay for inventory purchases and the construction of the new plant.

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 driven by the overall economic conditions in China. We manage our price risks through productivity improvements and cost-containment measures. We do not believe that inflation risk is material to our business or our financial position, results of operations or cash flows.
 
Compliance with environmental laws and regulations

Longmen Joint Venture:

Since 2002, our joint venture partner, Long Steel Group, has invested RMB 580 million (approximate $76 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 RMB 33 million (approximately $4.3 million) on a comprehensive waste water recycling and water treatment system. The 2,000m3/h treatment capacity system was implemented at the end of 2005. In 2007, new water consumption per ton of steel produced was 0.7 ton.

Long Steel Group has built one 10,000m3 coke-oven gas tank and one 50,000m3 blast furnace coal gas tank to collect the residual coal gas produced from its own facility and that of surrounding enterprises. Long Steel Group also built a thermal power plant with two 25 KW dynamos that uses the residual coal gas from the blast furnaces and converters as fuel to generate power.
 
29


Long Steel Group also has built 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 tons of solid waste and generate revenue of more than RMB20 million (approximately $2.6 million) each year.

Daqiuzhuang Metal:

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

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

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

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

Off-balance sheet arrangements
 
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 entered into an agreement with Tongxing to contribute its own land of 217,487 square meters (approximately 53 acres) at the appraised value of RMB 30,227,333 (approximately $4.1 million). Pursuant to the agreement, the land will be converted into shares valued at approximately RMB 22,744,419 (approximately $3.1 million), providing Longmen Joint Venture with a stake of 22.76% in Tongxing and making it Tongxing’s largest and controlling shareholder.

The business license of Tongxing was obtained on December 27,.


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

Revenue recognition

The Company's revenue recognition policies are in compliance with Staff Accounting Bulletin (“SAB”) 104. Sales revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are recorded as customer deposits. Sales revenue represents the invoiced value of goods, net of value-added tax (VAT). All of the Company’s products sold in the PRC are subject to a Chinese value-added tax at a rate of 13% to 17% of the gross sales price. This VAT may be offset by VAT paid by the Company on raw materials and other materials included in the cost of producing the finished product.
 
30


Use of estimates

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

Derivative Instrument

The Company entered into a Securities Purchase Agreement (the “Agreement”) with certain institutional investors (the “Buyers”). Pursuant to the Agreement, the Company agreed to sell to the Buyers (i) senior convertible notes in the aggregate principal amount of $40,000,000 (“Notes”) and (ii) warrants to purchase an additional aggregate amount of 1,154,958 shares of Common Stock of the Company (the “Warrants”). Both the Warrants and the conversion option embedded in the Notes meet the definition of a derivative instrument in SFAS 133, Accounting for Derivative Instruments and Hedging Activities. Therefore these instruments are accounted for as derivative liabilities and periodically marked-to-market. The change in the value of the derivative liabilities is charged against or credited to income.

Financial instruments

Statement of Financial Accounting Standards No. 107 (SFAS 107), “Disclosures about Fair Value of Financial Instruments” requires disclosure of the fair value of financial instruments held by the Company. SFAS 107 defines the fair value of financial instruments as the amount at which the instrument could be exchanged in a current transaction between willing parties.

The Company considers the carrying amount of cash, accounts receivable, other receivables, accounts payable, accrued liabilities, and long term debts to approximate their fair values because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest.

The Company also analyzes all financial instruments with features of both liabilities and equity under SFAS 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity,” SFAS No 133, “Accounting for Derivative Instruments and Hedging Activities” and EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.” The convertible preferred shares issued in 2005 and the convertible note issued in 2007 did not require bifurcation or result in liability accounting. Additionally, the Company analyzes registration rights agreements associated with any equity instruments issued to determine if penalties triggered for late filing should be accrued under FSP EITF 00-19-2, “Accounting for Registration Payment Arrangements.”


In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value under accounting principles generally accepted in the United States (GAAP) and expands disclosures about fair value measurements. Fair value is defined under SFAS 157 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS 157 also establishes a fair value hierarchy which requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The effective date of this pronouncement is for all full fiscal and interim periods beginning after November 15, 2008. The Company does not expect the adoption of SFAS 157 to have a material impact on the Company’s financial position or results of operations.
 
31


In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—including an amendment of FASB Statement No. 115 (“FAS 159”). FAS 159 permits companies to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The objective of FAS 159 is to provide opportunities to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply hedge accounting provisions. FAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 will be effective in the first quarter of fiscal 2009. The Company is evaluating the impact that this statement will have on its consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements - an amendment of Accounting Research Bulletin No. 51” (“SFAS 160”), which establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest and the valuation of retained non-controlling equity investments when a subsidiary is deconsolidated. The Statement also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners. SFAS 160 is effective for fiscal years beginning after December 15, 2008. The Company has not determined the effect that the application of SFAS 160 will have on its consolidated financial statements.

In December 2007, Statement of Financial Accounting Standards No. 141(R), Business Combinations, was issued. SFAS No. 141R replaces SFAS No. 141, Business Combinations. SFAS 141R retains the fundamental requirements in SFAS 141 that the acquisition method of accounting (which SFAS 141 called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. SFAS 141R requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions. This replaces SFAS 141’s cost-allocation process, which required the cost of an acquisition to be allocated to the individual assets acquired and liabilities assumed based on their estimated fair values. SFAS 141R also requires the acquirer in a business combination achieved in stages (sometimes referred to as a step acquisition) to recognize the identifiable assets and liabilities, as well as the noncontrolling interest in the acquiree, at the full amounts of their fair values (or other amounts determined in accordance with SFAS 141R). SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. An entity may not apply it before that date. The Company is currently evaluating the impact that adopting SFAS No. 141R will have on its financial statements.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133” (“SFAS 161”), which changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company has not determined the effect that the application of SFAS 161 will have on its consolidated financial statements.

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Our management, including our chief executive officer, or CEO, and our principal financial officer, or CFO, are responsible for establishing and maintaining our disclosure controls and procedures (within the meaning of Rule 13a-15(e) of the Exchange Act). These controls and procedures were designed to ensure that information required to be disclosed in the reports that 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 SEC and that such information was accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. We evaluated these disclosure controls and procedures under the supervision of our CEO and CFO as of December 31, 2007. Based upon that evaluation, our management, including our CEO and CFO, concluded that our disclosure controls and procedures are effective.
 
32

 
MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

We performed an evaluation of the effectiveness of our internal control over financial reporting that is designed by, or under the supervision of, our principal executive and principal financial officers, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:
 
· 
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
 
· 
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with 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
 
· 
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. 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.
 
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2007. Based on such evaluation, our management, including the CEO and CFO, has concluded that the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, as amended) as of December 31, 2007 is effective. Notwithstanding the foregoing, there can be no assurance that the Company’s internal control over financial reporting will detect or uncover all failures of persons within the Company to comply with these procedures.
 
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management’s report in this annual report.
 
There were no changes in the Company’s internal control over financial reporting that occurred during the year ended December 31, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Contractual obligations and commercial commitments
 
We have certain fixed contractual obligations and commitments that include future estimated payments. Changes in our business needs, cancellation provisions, changing interest rates, and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of payments. We have presented below a summary of the most significant assumptions used in our determination of amounts presented in the tables, in order to assist in the review of this information within the context of our consolidated financial position, results of operations, and cash flows.
 
33


The following tables summarize our contractual obligations as of December 31, 2007, and the effect these obligations are expected to have on our liquidity and cash flows in future periods.

 
 
Payment due by period       
 
Contractual obligations
 
  Total
 
 Less than 1 year
 
  1-3 years
 
  3-5 years
 
 
 
Dollars amounts in thousands 
 
Bank loans (1)
 
$
119,493
 
$
119,493
       
$
$ 
 
Notes payable
   
 15,163
   
 15,163
   
 
   
 
 
Deposits due to customers and sales representatives
   
 47,084
   
 47,084
   
 
   
 
 
Convertible notes ( Principal plus Interest )
   
54,000
   
1,200
   
4,800
   
48,000
 
Total
 
$
235,740
 
$
182,940
 
$
4,800
 
$
48,000
 
 
(1) Bank loans in China are due on demand or normally within one year. These loans can be renewed with the banks. This amount includes estimated interest payments as well as debt maturities.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

  
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 2007, annual production capacity of 2 million tons of steel, a $1 change in the annual average price would change annual pre-tax profits by approximately $2 million.
  
Interest Rate Risk
  
We are subject to interest rate risk since our outstanding debts are short-term and bear interest at variable interest rates. The future interest expense would fluctuate in case of any change in the borrowing rates. We do not use swaps or other interest rate protection agreements to hedge this risk. We believe our exposure to interest rate risk is not material.
 
Foreign Currency Exchange Rate Risk
  
Our operating units, Daqiuzhuang Metal, Longmen Joint Venture and Baotou Steel Pipe Joint Venture, 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. A ten percent (10%) decrease in the 2007 average Renminbi exchange rate would result in a $1,800,000 charge to income.

ITEM 8. FINANCIAL STATEMENTMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements of General Steel Holdings, Inc., including consolidated balance sheets as of December 31, 2007 and 2006, and consolidated statements of income and other comprehensive income, stockholders’ equity and cash flows for the years ended December 31, 2007, 2006 and 2005 and notes to the consolidated financial statements, together with a report thereon of Moore Stephens Wurth Frazer and Torbet, LLP, dated March 31, 2008, are attached hereto as pages F-1 through F-34. 
 
34


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, 2007 and 2006, and the related consolidated statements of income and other comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2007. General Steel Holdings, Inc.’s management is responsible for these financial statements. Our responsibility is to express an opinion on these 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. The company is not required to have, nor were we engaged to perform, an audit of their internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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, 2007 and 2006, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2007 in conformity with accounting principles generally accepted in the United States of America.
 
 
/S/ MOORE STEPHENS WURTH FRAZER AND TORBET, LLP
Walnut, California
March 28, 2008

F-1

 
GENERAL STEEL HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2007 AND 2006

 
 
2007
 
2006
 
           
   ASSETS
         
CURRENT ASSETS:
         
Cash
 
$
43,713,346
 
$
6,831,549
 
Restricted cash
   
8,391,873
   
4,231,523
 
Accounts receivable, net of allowance for doubtful accounts of $148,224
             
and $137,132 as of December 31, 2007 and December 31, 2006, respectively 
   
11,225,678
   
17,095,718
 
Accounts receivable - related parties
   
565,631
   
-
 
Notes receivable
   
4,216,678
   
537,946
 
Notes receivable - Restricted
   
12,514,659
   
-
 
Short term loan receivable - Related Party
   
1,233,900
   
-
 
Other receivables
   
1,280,853
   
268,784
 
Other receivables - related parties
   
1,913,448
   
850,400
 
Inventories
   
77,928,925
   
12,489,290
 
Advances on inventory purchases
   
58,170,474
   
2,318,344
 
Advances on inventory purchases - related parties
   
9,944,012
   
-
 
Prepaid expenses - current
   
1,059,866
   
46,152
 
Prepaid expenses related party - current
   
49,356
   
-
 
Deferred tax assets
   
399,751
   
-
 
Deferred notes issuance cost
   
3,564,546
   
-
 
Total current assets 
   
236,172,996
   
44,669,706
 
               
PLANT AND EQUIPMENT, net
   
218,263,367
   
26,606,594
 
               
OTHER ASSETS:
             
Advances on equipment purchases
   
742,061
   
-
 
Long term investment
   
822,600
   
-
 
Prepaid expenses - non current
   
506,880
   
740,868
 
Prepaid expenses related party - non current
   
142,467
   
-
 
Intangible assets, net of accumulated amortization
   
21,756,709
   
1,804,440
 
Total other assets 
   
23,970,717
   
2,545,308
 
               
 Total assets
 
$
478,407,080
 
$
73,821,608
 
               
LIABILITIES AND SHAREHOLDERS' EQUITY
             
               
CURRENT LIABILITIES:
             
Accounts payable
 
$
102,241,708
 
$
3,001,775
 
Accounts payable - related parties
   
14,302,738
   
-
 
Short term loans - bank
   
93,019,608
   
30,284,686
 
Short term loans - others
   
19,156,070
   
-
 
Short term loans - related parties
   
7,317,027
   
-
 
Short term notes payable
   
15,163,260
   
8,153,520
 
Other payables
   
3,343,684
   
355,142
 
Other payable - related parties
   
2,126,383
   
-
 
Accrued liabilities
   
5,248,863
   
1,064,012
 
Customer deposits
   
37,872,698
   
1,093,602
 
Customer deposits - related parties
   
9,211,736
   
-
 
Deposits due to sales representatives
   
3,068,298
   
2,051,200
 
Taxes payable
   
27,576,240
   
5,391,602
 
Investment payable
   
6,580,800
   
-
 
Distribution payable to minority shareholder
   
2,820,803
   
-
 
Shares subject to mandatory redemption
   
-
   
2,179,779
 
Total current liabilities 
   
349,049,916
   
53,575,318
 
               
NOTES PAYABLE, net of debt discount $34,559,584
   
5,440,416
   
-
 
               
DERIVATIVE LIABILITIES
   
28,483,308
   
-
 
               
 Total liabilities
   
382,973,640
   
53,575,318
 
               
MINORITY INTEREST
   
42,044,266
   
6,185,797
 
               
SHAREHOLDERS' EQUITY:
             
Preferred stock, $0.001 par value, 50,000,000 shares authorized, 3,092,899 and 0 shares
             
issued and outstanding as of December 31, 2007 and December 31, 2006, respectively 
   
3,093
   
-
 
Common Stock, $0.001 par value, 200,000,000 shares authorized, 34,634,765 and
             
32,426,665 shares (including 1,176,665 redeemable shares) issued and outstanding  
             
as of December 31, 2007 and December 31, 2006, respectively 
   
34,635
   
31,250
 
Paid-in-capital
   
23,429,153
   
6,871,358
 
Retained earnings
   
22,686,590
   
4,974,187
 
Statutory reserves
   
3,632,325
   
1,107,010
 
Contribution receivable
   
(959,700
)
 
-
 
Accumulated other comprehensive income
   
4,563,078
   
1,076,688
 
Total shareholders' equity 
   
53,389,174
   
14,060,493
 
               
 Total liabilities and shareholders' equity
 
$
478,407,080
 
$
73,821,608
 
 
See report of independent registered public accounting firm.
 
The accompanying notes are an integral part of these statements.
 
F-2

 
GENERAL STEEL HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005

 
 
2007
 
2006
 
2005
 
           
Restated
 
               
REVENUES
 
$
416,900,597
 
$
139,494,624
 
$
89,739,899
 
                     
REVENUES - RELATED PARTIES
   
355,538,568
   
-
   
-
 
                     
TOTAL REVENUES
   
772,439,165
   
139,494,624
   
89,739,899
 
                     
COST OF SALES
   
389,614,876
   
135,324,190
   
81,165,850
 
                     
COST OF SALES - RELATED PARTIES
   
326,135,528
   
-
   
-
 
                     
TOTAL COST OF SALES
   
715,750,404
   
135,324,190
   
81,165,850
 
                     
GROSS PROFIT
   
56,688,761
   
4,170,434
   
8,574,049
 
                     
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
   
16,163,956
   
2,421,285
   
2,781,070
 
                     
INCOME FROM OPERATIONS
   
40,524,805
   
1,749,149
   
5,792,979
 
                     
OTHER INCOME (EXPENSE), NET
   
(1,261,817
)
 
82,830
   
(1,680,842
)
                     
INCOME BEFORE PROVISION FOR INCOME TAXES
   
39,262,988
   
1,831,979
   
4,112,137
 
AND MINORITY INTEREST
                   
                     
PROVISION (BENEFIT) FOR INCOME TAXES
                   
Current
   
5,224,722
   
-
   
-
 
Deferred
   
(388,525
)
 
-
   
-
 
Total provision for income taxes
   
4,836,197
   
-
   
-
 
                     
INCOME BEFORE MINORITY INTEREST
   
34,426,791
   
1,831,979
   
4,112,137
 
 
                   
LESS MINORITY INTEREST
   
12,000,870
   
798,771
   
1,371,918
 
                     
NET INCOME
   
22,425,921
   
1,033,208
   
2,740,219
 
                     
FOREIGN CURRENCY TRANSLATION GAIN
   
3,486,390
   
677,500
   
399,188
 
                     
COMPREHENSIVE INCOME
 
$
25,912,311
 
$
1,710,708
 
$
3,139,407
 
                     
WEIGHTED AVERAGE NUMBER OF SHARES
                   
Basic
   
32,424,652
   
31,250,000
   
31,250,000
 
Diluted
   
32,558,350
   
31,250,000
   
31,250,000
 
                     
EARNINGS PER SHARE
                   
Basic
 
$
0.69
 
$
0.03
 
$
0.09
 
Diluted
 
$
0.69
 
$
0.03
 
$
0.09
 
 
See report of independent registered public accounting firm.
 
The accompanying notes are an integral part of these statements.
 
F-3

 
GENERAL STEEL HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
 
   
Preferred stock
 
Common Stock
     
   
Number
 
Par
 
Number
 
Par
 
Paid-in
 
   
of shares
 
Value
 
of shares
 
Value
 
capital
 
                       
BALANCE, January 1, 2005 (restated)
   
-
 
$
-
   
31,250,000
 
$
31,250
 
$
6,871,358
 
                                 
Net income
                               
Adjustment to statutory reserve
                               
Foreign currency translation gain
                               
                                 
BALANCE, December 31, 2005 (restated)
   
-
 
$
-
   
31,250,000
 
$
31,250
 
$
6,871,358
 
                                 
Net income
                               
Adjustment to statutory reserve
                               
Foreign currency translation gain
                               
                                 
BALANCE, December 31, 2006
   
-
 
$
-
   
31,250,000
 
$
31,250
 
$
6,871,358
 
                                 
Net income
                               
Adjustment to statutory reserve
                               
Registered Capital to be received from
                               
Baotou Steel by 05/21/09 
                               
Common stock issued for service, $1.32
               
18,000
   
18
   
23,742
 
Preferred stock issued for acquisition net of dividend distribution to Tianjin Victory New 
   
3,092,899
   
3,093
               
8,370,907
 
Conversion of redeemable stock, $1.95
               
1,176,665
   
1,177
   
2,293,320
 
Conversion of warrants, $2.50
               
2,120,000
   
2,120
   
5,297,880
 
Common stock issued for compensation, $8.16
               
70,100
   
70
   
571,946
 
Foreign currency translation gain
                               
                                 
BALANCE, December 31, 2007
   
3,092,899
 
$
3,093
   
34,634,765
 
$
34,635
 
$
23,429,153
 

   
Retained Earnings
     
Accumulated other
     
   
Statutory
     
Subscriptions
 
comprehensive
     
   
reserves
 
Unrestricted
 
receivable
 
income
 
Totals
 
                       
BALANCE, January 1, 2005 (restated)
 
$
154,794
 
$
2,152,976
 
$
-
 
$
-
 
$
9,210,378
 
                                 
Net income
         
2,740,219
               
2,740,219
 
Adjustment to statutory reserve
   
685,959
   
(685,959
)
             
-
 
Foreign currency translation gain
                     
399,188
   
399,188
 
                                 
BALANCE, December 31, 2005 (restated)
 
$
840,753
 
$
4,207,236
 
$
-
 
$
399,188
 
$
12,349,785
 
                                 
Net income
         
1,033,208
               
1,033,208
 
Adjustment to statutory reserve
   
266,257
   
(266,257
)
             
-
 
Foreign currency translation gain
                     
677,500
   
677,500
 
                                 
BALANCE, December 31, 2006
 
$
1,107,010
 
$
4,974,187
 
$
-
 
$
1,076,688
 
$
14,060,493
 
                                 
Net income
         
22,425,921
               
22,425,921
 
Adjustment to statutory reserve
   
2,525,315
   
(2,525,315
)
             
-
 
Registered Capital to be received from Baotou Steel by 05/21/09 
               
(959,700
)
       
(959,700
)
Common stock issued for service, $1.32
                           
23,760
 
Preferred stock issued for acquisition net of dividend distribution to Tianjin Victory New 
         
(2,188,203
)
             
6,185,797
 
Conversion of redeemable stock, $1.95
                           
2,294,497
 
Conversion of warrants, $2.50
                           
5,300,000
 
Common stock issued for compensation, $8.16
                           
572,016
 
Foreign currency translation gain
                     
3,486,390
   
3,486,390
 
 
                                         
BALANCE, December 31, 2007
 
$
3,632,325
 
$
22,686,590
 
$
(959,700
)
$
4,563,078
 
$
53,389,174
 

See report of independent registered public accounting firm.
 
The accompanying notes are an integral part of these statements.
 
F-4

 
GENERAL STEEL HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005

   
2007
 
2006
 
2005
 
           
(Restated)
 
CASH FLOWS FROM OPERATING ACTIVITIES:
             
Net income
 
$
22,425,921
 
$
1,033,208
 
$
2,740,219
 
Adjustments to reconcile net income to cash
                   
provided by (used in) operating activities: