10-Q 1 v114445_10q.htm
 


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2008

Commission File Number 333-105903
 
General Steel Holdings, Inc.
(Exact name of registrant as specified in its charter)
 
Nevada
(State or other Jurisdiction of
Incorporation or Organization)
 
412079252
(I.R.S. Employer Identification No.)
 
Room 2315, Kun Tai International Mansion Building, Yi No
12, Chao Yang Men Wai Ave.
Chao Yang District, Beijing, China 100020
(Address of Principal Executive Office, Including Zip Code)
 
+86(10)58797346
(Registrant's Telephone Number, Including Area Code)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ý No o
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act (Check one).
 
Large accelerated filer o
Accelerated filer o
Non-accelerated filer ý
Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o No ý 
 
As of May 15, 2008, 34,948,765 shares of common stock, par value $0.001 per share, were issued and outstanding.
 



Table of Contents
 
   
Page
Part I: FINANCIAL INFORMATION:
 
 
  
   
Item 1. Financial Statements.
 
2
  
   
Consolidated Balance Sheets as of March 31, 2008 (Unaudited) and December 31, 2007
 
2
  
   
Consolidated Statements of Income and Other Comprehensive Income (Unaudited) for the Three Months Ended March 31, 2008 and 2007
 
3
  
   
Consolidated Statements of Shareholders’ Equity (Unaudited) for the Three Months Ended March 31, 2008 and 2007
 
4
  
   
Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2008 and 2007
 
5
     
Notes to Consolidated Financial Statements (Unaudited)
 
6
  
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
38
 
 
 
Item 3. Quantitative and Qualitative Disclosures About Market Risks.
 
53
 
 
 
Item 4T. Controls and Procedures
 
53
 
 
 
Part II. OTHER INFORMATION
   
 
 
 
Item 1. Legal Proceedings.
 
54
     
Item 1A. Risk Factors
 
54
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
63
     
Item 3. Defaults Upon Senior Securities
 
64
     
Item 4. Submission of Matters to a Vote of Security Holders
 
64
     
Item 5. Other Information
 
64
     
Item 6—Exhibits
 
65
 
 
 
  Signatures
 
66




ITEM 1. FINANCIAL STATEMENTS

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2008 AND DECEMBER 31, 2007

ASSETS
 
   
March 31,
 
December 31,
 
 
 
2008
 
2007
 
   
(Unaudited)
     
CURRENT ASSETS:
         
Cash
 
$
13,247,096
 
$
43,713,346
 
Restricted cash
   
47,482,412
   
8,391,873
 
Accounts receivable, net of allowance for doubtful accounts of $270,235
             
and $148,224 as of March 31, 2008 and December 31, 2007, respectively 
   
13,079,339
   
11,225,678
 
Accounts receivable - related parties
   
14,682,192
   
565,631
 
Notes receivable
   
18,569,839
   
4,216,678
 
Notes receivable - restricted
   
4,359,863
   
12,514,659
 
Short term loan receivable - related parties
   
1,285,200
   
1,233,900
 
Other receivables
   
786,133
   
1,280,853
 
Other receivables - related parties
   
2,144,266
   
1,913,448
 
Dividend receivable
   
613,719
   
-
 
Inventories
   
100,804,450
   
77,928,925
 
Advances on inventory purchases
   
57,775,966
   
58,170,474
 
Advances on inventory purchases - related parties
   
37,496,745
   
9,944,012
 
Prepaid expenses - current
   
1,239,190
   
1,059,866
 
Prepaid expenses related party - current
   
51,408
   
49,356
 
Deferred tax assets
   
637,598
   
399,751
 
Deferred notes issuance cost
   
5,120,152
   
3,564,546
 
     
319,375,568
   
236,172,996
 
               
PLANT AND EQUIPMENT, net
   
255,879,989
   
218,263,367
 
               
OTHER ASSETS:
             
Advances on equipment purchases
   
347,848
   
742,061
 
Investment in unconsolidated subsidiaries
   
9,666,132
   
822,600
 
Prepaid expenses - non current
   
522,193
   
506,880
 
Prepaid expenses related party - non current
   
244,188
   
142,467
 
Intangible assets, net of accumulated amortization
   
22,575,599
   
21,756,709
 
Total other assets 
   
33,355,960
   
23,970,717
 
               
Total assets
 
$
608,611,517
 
$
478,407,080
 
               
LIABILITIES AND SHAREHOLDERS' EQUITY
               
CURRENT LIABILITIES:
             
Accounts payable
 
$
129,291,728
 
$
102,241,708
 
Accounts payable - related parties
   
7,795,581
   
14,302,738
 
Short term loans - bank
   
93,131,304
   
93,019,608
 
Short term loans - others
   
34,896,184
   
19,156,070
 
Short term loans - related parties
   
-
   
7,317,027
 
Short term notes payable
   
75,327,000
   
15,163,260
 
Employee loans
   
2,356,200
   
-
 
Other payables
   
3,754,540
   
3,343,684
 
Other payable - related parties
   
21,171
   
2,126,383
 
Accrued liabilities
   
7,164,386
   
5,248,863
 
Customer deposits
   
60,883,030
   
37,872,698
 
Customer deposits - related parties
   
-
   
9,211,736
 
Deposits due to sales representatives
   
2,734,620
   
3,068,298
 
Taxes payable
   
22,404,489
   
27,576,240
 
Investment payable
   
6,854,400
   
6,580,800
 
Distribution payable to minority shareholder
   
2,330,858
   
2,820,803
 
Total current liabilities 
   
448,945,491
   
349,049,916
 
               
NOTES PAYABLE, net of debt discount $33,861,956
   
6,138,044
   
5,440,416
 
               
DERIVATIVE LIABILITIES
   
25,812,545
   
28,483,308
 
               
MINORITY INTEREST
   
65,701,909
   
42,044,266
 
               
SHAREHOLDERS' EQUITY:
             
Preferred stock, $0.001 par value, 50,000,000 shares authorized, 3,092,899 shares
             
issued and outstanding  
   
3,093
   
3,093
 
Common Stock, $0.001 par value, 200,000,000 shares authorized, 34,861,365 and
             
34,634,765 shares (including 1,176,665 redeemable shares) issued and outstanding  
             
as of March 31, 2008 and December 31, 2007, respectively 
   
34,861
   
34,635
 
Paid-in-capital
   
25,541,882
   
23,429,153
 
Retained earnings
   
24,527,303
   
22,686,590
 
Statutory reserves
   
3,980,072
   
3,632,325
 
Contribution receivable
   
(959,700
)
 
(959,700
)
Accumulated other comprehensive income
   
8,886,017
   
4,563,078
 
Total shareholders' equity 
   
62,013,528
   
53,389,174
 
               
Total liabilities and shareholders' equity
 
$
608,611,517
 
$
478,407,080
 
 
The accompanying notes are an integral part of these consolidated financial statements.

2


GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2008 AND 2007
(UNAUDITED)
 
   
2008
 
2007
 
           
REVENUES
 
$
178,492,167
 
$
37,607,971
 
               
REVENUES - RELATED PARTIES
   
113,073,832
   
-
 
               
TOTAL REVENUES
   
291,565,999
   
37,607,971
 
               
COST OF SALES
   
166,714,663
   
35,874,966
 
               
COST OF SALES - RELATED PARTIES
   
111,869,221
   
-
 
               
TOTAL COST OF SALES
   
278,583,884
   
35,874,966
 
               
GROSS PROFIT
   
12,982,115
   
1,733,005
 
               
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
   
6,532,821
   
630,200
 
               
INCOME FROM OPERATIONS
   
6,449,294
   
1,102,805
 
               
OTHER EXPENSE, NET
   
2,366,155
   
220,676
 
               
INCOME BEFORE PROVISION FOR INCOME TAXES
             
AND MINORITY INTEREST
   
4,083,139
   
882,129
 
               
PROVISION FOR INCOME TAXES
             
Current
   
666,356
   
127,270
 
Deferred
   
(216,533
)
 
-
 
Total provision for income taxes
   
449,823
   
127,270
 
               
NET INCOME BEFORE MINORITY INTEREST
   
3,633,316
   
754,859
 
 
             
LESS MINORITY INTEREST
   
1,444,856
   
279,994
 
               
NET INCOME
   
2,188,460
   
474,865
 
               
OTHER COMPREHENSIVE INCOME:
             
Foreign currency translation adjustments
   
4,322,939
   
223,551
 
               
COMPREHENSIVE INCOME
 
$
6,511,399
 
$
698,416
 
               
WEIGHTED AVERAGE NUMBER OF SHARES
             
Basic
   
34,836,394
   
31,320,251
 
Diluted
   
34,923,614
   
31,320,251
 
               
EARNING PER SHARE
             
Basic
 
$
0.063
 
$
0.015
 
Diluted
 
$
0.063
 
$
0.015
 
 
The accompanying notes are an integral part of the consolidated financial statements.

3


GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2008 AND 2007
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
Preferred stock
 
Common stock
 
 
 
Retained earnings
 
 
 
other
 
 
 
 
 
 
 
 
 
 
 
 
 
Paid-in
 
Statutory
 
 
 
Subscriptions
 
comprehensive
 
 
 
 
 
Shares
 
Par value
 
Shares
 
Par value
 
capital
 
reserves
 
Unrestricted
 
receivable
 
income
 
Totals
 
                                           
BALANCE, January 1, 2007
   
-
 
$
-
   
31,250,000
 
$
31,250
 
$
6,871,358
 
$
1,107,010
 
$
4,974,187
 
$
-
 
$
1,076,688
 
$
14,060,493
 
                                                               
Net income
                                       
474,865
               
474,865
 
Common stock issued for conversion of
                                                             
redeemable stock, $1.95/share 
               
176,665
   
177
   
344,328
                           
344,505
 
Common stock issued for service, $1.32/share
               
18,000
   
18
   
23,742
                           
23,760
 
Foreign currency translation adjustments
                                                   
223,551
   
223,551
 
                                                               
BALANCE, March 31, 2007, unaudited
   
-
 
$
-
   
31,444,665
 
$
31,445
 
$
7,239,428
 
$
1,107,010
 
$
5,449,052
 
$
-
 
$
1,300,239
 
$
15,127,174
 
                                                               
Net income
                                       
21,951,056
               
21,951,056
 
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 acquisition net of dividend
                                                         
-
 
distribution to Tianjin Victory New 
   
3,092,899
   
3,093
               
8,370,907
         
(2,188,203
)
             
6,185,797
 
Conversion of redeemable stock, $1.95
               
1,000,000
   
1,000
   
1,948,992
                           
1,949,992
 
Conversion of warrants, $2.50
               
2,120,000
   
2,120
   
5,297,880
                           
5,300,000
 
Common stock issued for compensation, $8.16
               
70,100
   
70
   
571,946
                           
572,016
 
Foreign currency translation gain
                                                   
3,262,839
   
3,262,839
 
                                                               
BALANCE, December 31, 2007
   
3,092,899
 
$
3,093
   
34,634,765
 
$
34,635
 
$
23,429,153
 
$
3,632,325
 
$
22,686,590
 
$
(959,700
)
$
4,563,078
 
$
53,389,174
 
                                                               
Net income
                                       
2,188,460
               
2,188,460
 
Adjustment to statutory reserve
                                 
347,747
   
(347,747
)
             
-
 
Common stock issued for compensation, $8.16
               
76,600
   
77
   
548,379
                           
548,456
 
Common stock issued for compensation, $10.43
               
150,000
   
150
   
1,564,350
                           
1,564,500
 
Foreign currency translation adjustments
                                                   
4,322,939
   
4,322,939
 
                                                               
BALANCE, March 31, 2008, unaudited
   
3,092,899
 
$
3,093
   
34,861,365
 
$
34,861
 
$
25,541,882
 
$
3,980,072
 
$
24,527,303
 
$
(959,700
)
$
8,886,017
 
$
62,013,528
 
 
The accompanying notes are an integral part of the consolidated financial statements.

4


GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2008 AND 2007
(UNAUDITED)
 
   
2008
 
2007
 
CASH FLOWS FROM OPERATING ACTIVITIES:
         
Net income
 
$
2,188,460
 
$
474,865
 
Adjustments to reconcile net income to cash
             
provided by (used in) operating activities:
             
Minority interest 
   
1,444,856
   
279,994
 
Depreciation 
   
4,499,873
   
561,709
 
Amortization 
   
205,146
   
76,524
 
Loss on disposal of equipment 
   
9,492
   
-
 
Stock issued for services and compensation 
   
548,456
   
23,760
 
Interest expense accrued on mandatory redeemable stock 
   
-
   
114,726
 
Amortization of deferred note issuance cost 
   
8,894
   
-
 
Amortization of discount on convertible notes 
   
697,628
   
-
 
Change in fair value of derivative instrument 
   
(2,670,763
)
 
-
 
Deferred tax assets 
   
(216,533
)
 
-
 
Changes in operating assets and liabilities
             
Accounts receivable 
   
(1,459,682
)
 
5,898,381
 
Accounts receivable - related parties 
   
7,631,355
   
-
 
Notes receivable  
   
(13,832,292
)
 
(1,517,176
)
Notes receivable- restricted 
   
8,491,027
   
-
 
Other receivables 
   
1,533,823
   
82,939
 
Other receivables - related parties 
   
(148,056
)
 
333,000
 
Inventories 
   
(17,647,149
)
 
(1,760,231
)
Advances on inventory purchases 
   
6,516,616
   
(11,340,142
)
Advances on inventory purchases - related parties 
   
(26,563,452
)
 
-
 
Prepaid expense - current 
   
(132,390
)
 
(123,161
)
Prepaid expense - non current 
   
5,639
   
-
 
Prepaid expense - non current - related parties 
   
(93,765
)
 
-
 
Accounts payable 
   
11,144,259
   
1,951,381
 
Accounts payable - related parties 
   
(6,951,111
)
 
-
 
Other payables 
   
(2,579,136
)
 
(275,480
)
Other payable - related parties 
   
(2,118,101
)
 
-
 
Accrued liabilities 
   
522,377
   
(41,648
)
Customer deposits 
   
20,885,570
   
1,631,391
 
Customer deposits - related parties 
   
(9,391,133
)
 
-
 
Taxes payable 
   
(9,585,924
)
 
783,398
 
Net cash used in operating activities
   
(27,056,016
)
 
(2,845,770
)
               
CASH FLOWS FROM INVESTING ACTIVITIES:
             
Cash acquired from subsidiary
   
702,237
   
-
 
Deposits due to sales representatives
   
(451,457
)
 
(411,542
)
Advance on equipment purchases
   
416,045
   
-
 
Equipment purchases
   
(28,097,609
)
 
(126,928
)
Intangible assets purchases
   
143,465
   
-
 
Net cash used in investing activities
   
(27,287,319
)
 
(538,470
)
               
CASH FLOWS FINANCING ACTIVITIES:
             
Restricted cash
   
(33,726,504
)
 
(2
)
Borrowings on short term loans - bank
   
24,893,037
   
8,785,581
 
Payments on short term loans - bank
   
(28,568,988
)
 
(7,495,481
)
Borrowings on short term loans - related parties
   
6,168,050
   
-
 
Payments on short term loans - related parties
   
(5,153,320
)
 
-
 
Borrowings on short term loan - others
   
23,147,344
   
-
 
Payments on short term loans - others
   
(16,733,731
)
 
-
 
Borrowings on short term notes payable
   
62,896,500
   
1,161,090
 
Payments on short term notes payable
   
(11,614,887
)
 
(1,161,090
)
Borrowings on employee loans
   
2,306,205
   
-
 
Payment to minority shareholders
   
(594,336
)
 
-
 
Net cash provided by financing activities
   
23,019,370
   
1,290,098
 
               
EFFECTS OF EXCHANGE RATE CHANGE IN CASH
   
857,715
   
60,407
 
               
DECREASE IN CASH
   
(30,466,250
)
 
(2,033,735
)
               
CASH, beginning of year
   
43,713,346
   
6,831,550
 
               
CASH, end of year
 
$
13,247,096
 
$
4,797,815
 
 
The accompanying notes are an integral part of the consolidated financial statements.

5


GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
(UNAUDITED)
 
Note 1 - Background

General Steel Holdings, Inc. (the “Company”) was incorporated on August 5, 2002 in the state of Nevada. The Company through its 100% owned subsidiary, General Steel Investment operates a portfolio of Chinese steel companies serving various industries. The Company presently has three production subsidiaries: Daqiuzhuang Metal, Baotou Steel - General Steel Special Steel Pipe Joint Venture Co., Ltd., (“Baotou Steel Pipe Joint Venture”) and Shaanxi Longmen Iron and Steel Co., Ltd. (“Longmen Joint Venture”). The Company’s main products include rebar, hot-rolled carbon and silicon sheets and spiral-weld pipes.

The following table reflects the Company’s current organization structure:

  

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 September 28, 2005 Joint Venture Agreement ("Original Joint Venture Agreement") which established Baotou Steel Pipe Joint Venture, a PRC limited liability company. The Agreement increased Daqiuzhuang Metal's ownership interest in the Joint Venture to 80%. Baotou Steel Pipe Joint Venture obtained its business license from the PRC on May 25, 2007 and started its normal operation in July 2007. See more discussion in Note 19 - Business combinations.

Baotou Steel Pipe Joint Venture is located in Kundulun District, Baotou city, Inner Mongolia, China. It produces and sells spiral welded steel pipes and primarily serves customers in the oil, gas and petrochemical markets.
 
6

 
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
(UNAUDITED)
 
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 Tianjin Daqiuzhuang Metal Sheet Co. Ltd. (“Daqiuzhuang Metal”). General Steel agreed to issue to Victory New an aggregate of 3,092,899 shares of Series A preferred stock with a fair value of $8,374,000, and 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, Daqiuzhuang Metal is a wholly owned subsidiary of the Company. See details in Note 19 - Business combinations.

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 99.1% ownership interest in Yangpu Investment. The rest of Yangpu Investment is indirectly owned by Zuosheng Yu, our Chairman and CEO.

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. The rest of Qiu Steel Investment is indirectly owned by Zuosheng Yu, our Chairman and CEO.

Yangpu Investment and Qiu Steel Investment are Chinese registered limited liability companies formed to acquire other businesses.

On June 15, 2007, General Steel and Shaanxi Longmen Iron and Steel (Group) Co., Ltd., a PRC limited liability company (“Longmen Group”), formed Longmen Joint Venture effective 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. See more discussion in Note 19 - Business combinations.

Longmen Joint Venture is located in Hancheng city, Shaanxi province, China. Longmen Joint Venture is the largest integrated steel producer in Shaanxi province that uses iron ore and coke as primary raw materials for steel production. Longmen Joint Venture produces pig iron, crude steel, reinforced bars and high-speed wire. Longmen Joint Venture is also engaged in several other business activities, most of which are related to steel manufacturing. These include the production of coke and the production of iron ore pellets from taconite, transportation services and real estate and hotel operations. These operations are all located in Hancheng city and primarily serve regional customers in the construction industry.

On September 24, 2007, Longmen Joint Venture acquired 74.92% ownership interest in Environmental Protection Industry Development Co., Ltd., a PRC limited liability company (“EPID”) engaging in recycling steel production waste, for RMB18,080,930, approximately $2,380,000, and a 36% equity interest in Hualong Fire Retardant Materials Co., Ltd., a PRC limited liability company (“Hualong”) engaging in producing fire retardant material for steel production, for RMB3,287,980, approximately $430,000. The parties agreed to make the effective date of the transaction July 1, 2007.
 
7

 
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
(UNAUDITED)
 
On January 14, 2008, the Company through Longmen Joint Venture, completed its acquisition of a controlling interest in Hancheng Tongxing Metallurgy Co., Ltd. (“Tongxing”). The joint venture contributed its land use right of 217,487 square meters (approximately 53 acres) with appraised value of approximately $4.1 million (or RMB30,227,333). Pursuant to the agreement, the land will be converted into shares valued at approximately $3.1 million (RMB22,744,419), providing the Joint Venture stake of 22.76% ownership in Tongxing and making it Tongxing’s largest and controlling shareholder. The parties agreed to make the effective date of the transaction January 1, 2008. The acquisition is accounted for as acquisition under common control. See more detail in Note 19 - Business combinations.
 
Note 2 - Summary of significant accounting policies

Basis of presentation

The consolidated financial statements of the Company reflect the activities of the following directly and indirectly owned subsidiaries:

       
Percentage
 
Subsidiary
 
Of Ownership
 
General Steel Investment Co., Ltd.
   
British Virgin Islands
   
100.0
%
Tianjin Daqiuzhuang Metal Sheet Co., Ltd
   
P.R.C.
   
100.0
%
Baotou Steel - General Steel Special Steel Pipe Joint Venture Co., Ltd.
   
P.R.C.
   
80.0
%
Yangpu Shengtong Investment Co., Ltd.
   
P.R.C.
   
99.1
%
Qiu Steel Investment Co., Ltd.
   
P.R.C.
   
98.7
%
Shaanxi Longmen Iron and Steel Co. Ltd.
   
P.R.C.
   
60.0
%

The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements include the accounts of all directly and indirectly owned subsidiaries listed above. All material intercompany transactions and balances have been eliminated in the consolidation.

Management has included all normal recurring adjustments considered necessary to give a fair presentation of operating results for the periods presented. Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with information included in the 2007 annual report filed on Form 10-K.

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 the fair value of the conversion feature and warrants associated with the note payable. Actual results could differ from these estimates.
 
8

 
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
(UNAUDITED)
 
Concentration of risks

The Company's operations are carried out in the PRC. Accordingly, the Company's business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC's economy. The Company's operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in North America and Western Europe. The Company's results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

Cash includes cash on hand and demand deposits in accounts maintained with state owned banks within the People’s Republic of China and Hong Kong. Total cash (including restricted cash balances) in these banks on March 31, 2008 and December 31, 2007 amounted to $ 59,957,897 and $53,817,485, respectively, of which no deposits are covered by insurance. The Company has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts.
 
The Company had five major customers, which represented approximately 53%, and 26% of the Company’s total sales for the three months ended March 31, 2008 and 2007, respectively. Five customers accounted for 39% and 0% of total accounts receivable as of March 31, 2008, and December 31, 2007, respectively.

For the three months ended March 31, 2008, and 2007, the Company purchased approximately 40% and 93%, respectively, of their raw materials from five major suppliers. Five vendors accounted for 67% and 11% of total accounts payable as of March 31, 2008 and December 31, 2007, respectively.

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.

Foreign currency translation and other comprehensive income

The reporting currency of the Company is the US dollar. The Company uses the local currency, Renminbi (RMB), as its functional currency. Assets and liabilities are translated at the unified exchange rate as quoted by the People’s Bank of China at the end of the period. Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statement of shareholders’ equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.
 
9

 
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
(UNAUDITED)
 
Translation adjustments resulting from this process are included in accumulated other comprehensive income in the consolidated statement of shareholders' equity and amounted to $8,886,017 and $ $4,563,078 as of March 31, 2008 and December 31, 2007, respectively. The balance sheet amounts, with the exception of equity at March 31, 2008 and December 31, 2007 were translated at 7.01 RMB and 7.30 RMB to $1.00 USD, respectively. The equity accounts were stated at their historical rate. The average translation rates applied to income statement accounts for the three months ended March 31, 2008 and 2007 were 7.16 RMB, and 7.77 RMB, respectively. Cash flows are also translated at average translation rates for the period, therefore, amounts reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet.

Financial instruments

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.”

Derivative Instrument

In December 2007, the Company issued convertible notes totaling $40,000,000 (“Notes”) and 1,154,958 warrants. Both the warrants and the conversion option embedded in the Notes meet the definition of a derivative instrument in SFAS 133, “Accounting for Derivative Instruments and Hedging Activities.” Therefore these instruments are accounted for as derivative liabilities and marked-to-market each reporting period. The change in the value of the derivative liabilities is charged against or credited to income.
 
10

 
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
(UNAUDITED)
 
Fair value measurements

The Company adopted SFAS 157, “Fair Value Measurements” on January 1, 2008. SFAS 157 defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosures requirements for fair value measures. The three levels are defined as follow:

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

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

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

The Company’s investment in unconsolidated subsidiaries amounted to $9,666,132 as of March 31, 2008. Since there is no quoted or observable market price for the fair value of similar long term investment, the Company then used the level 3 inputs for its valuation methodology. The determination of the fair value was based on the capital investment that the Company contributed.The carrying value of the long term investments approximated the fair value as of March 31, 2008.

In 2007, the Company issued convertible notes in the aggregate principal amount of $40,000,000 and warrants to purchase 1,154,958 shares of common stock of the Company. Pursuant to SFAS 133 and EITF 00-19, the Company determined that both the warrants and the conversion option embedded in the Notes meet the definition of a derivative instrument and must be carried as a liability and marked to market for each reporting period. As of March 31, 2008, the Company reevaluated the derivative liabilities using Binomial Model, defined in SFAS 157 as level 3 inputs, and recorded the changes in earnings. As a result, the derivative liability is carried on the balance sheet at its fair value.

As of March 31, 2008, the carrying value of the convertible notes amounted to $6,138,044. The Company determined the fair value of the convertible notes using the level three inputs to the Binomial Model and determined that the fair value amounted to approximately $14 million due to the decrease in the Company’s common stock price.

   
Carrying Value as of
March 31, 2008
 
Fair Value Measurements at March 31, 2008
Using Fair Value Hierarchy
 
Assets
     
Level 1
 
Level 2
 
Level 3
 
                           
Long term investments
 
$
9,666,132
             
$
9,666,132
 
                           
Liabilities
                         
                           
Derivative liabilities
 
$
25,812,545
             
$
25,812,545
 
Convertible notes payable
 
$
6,138,044
             
$
14,187,455
 
 
Except for the derivative liabilities, the Company did not identify any other assets or liabilities that are required to be presented on the balance sheet at fair value in accordance with SFAS 157.
 
11

 
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
(UNAUDITED)
 
Cash and cash equivalents

Cash and cash equivalents include cash on hand and demand deposits in banks with maturities of less than three months.

Restricted cash

The Company has notes payable outstanding with various banks and is required to keep certain amounts on deposit that are subject to withdrawal restrictions.

Accounts receivable and allowance for doubtful accounts

The Company conducts its business operations in the People’s Republic of China. Accounts receivable include trade accounts due from the customers. An allowance for doubtful account is established and recorded based on managements’ assessment of the credit history and relationship with the customers. Management reviews its accounts receivable on a regular basis to determine if the bad debt allowance is adequate, and adjusts the allowance when necessary.

Notes receivable

Notes receivable represents trade accounts receivable due from various customers where the customers’ banks have guaranteed the payment of the receivables. This amount is non-interest bearing and is normally paid within three to six months. The Company has the ability to submit request for payment to the customer’s bank earlier than the scheduled payment date, but will incur an interest charge and a processing fee. The Company had $18,569,839 and $4,216,678 of notes receivable outstanding as of March 31, 2008 and December 31, 2007, respectively.

Restricted notes receivable represents notes pledged as collateral for short term loans from banks. As of March 31, 2008 and December 31, 2007, restricted notes receivable amounted to $4,359,863 and $12,514,659, respectively.

Inventories

Inventories are stated at the lower of cost or market using weighted average method.

Intangible assets

All land in the People’s Republic of China is owned by the government and. However, the government grants “land use right” to use the land.

Daqiuzhuang Metal acquired land use rights during the years ended 2000 and 2003 for a total of $3,167,483. These land use rights are for 50 years and expire in 2050 and 2053. However, Daqiuzhuang Metal's initial business license had a ten-year term. Therefore, management elected to amortize the land use rights over the ten-year business term. Daqiuzhuang Metal became a Sino-Foreign Joint Venture in 2004, and obtained a new business license for twenty years; however, the Company decided to continue amortizing the land use rights over the original ten-year business term.
 
12

 
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
(UNAUDITED)
 
Longmen Group contributed land use rights for a total amount of $19,823,885 to the Longmen Joint Venture. The land use rights are for 50 years and expire in 2048 to 2052.

Plant and equipment, net  

Plant and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets with 3%-5% residual value.

Construction in progress represents the costs incurred in connection with the construction of buildings or new additions to the Company’s plant facilities. No depreciation is provided for construction in progress until such time as the assets are completed and are placed into service. Maintenance, repairs and minor renewals are charged directly to expense as incurred. Major additions and betterment to buildings and equipment are capitalized. Interest incurred during construction is capitalized into construction in progress. All other interest is expensed as incurred.

Long lived assets

Long lived assets, including plant, equipment and intangible assets are reviewed annually or more often if necessary, to determine whether their carrying value has become impaired. The Company considers assets to be impaired if the carrying value exceeds the future projected cash flows from related operations. The Company also re-evaluates the periods of depreciation and amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives. As of March 31, 2008, the Company expects these assets to be fully recoverable.

Investments in unconsolidated subsidiaries

Investee companies over which the Company has the ability to exercise significant influence, but does not have a controlling interest is accounted for using the equity method. Significant influence is generally considered to exist when the Company has an ownership interest in the voting stock of the investee of between 20% and 50%, and other factors, such as representation on the investee's Board of Directors, voting rights and the impact of commercial arrangements, are considered in determining whether the equity method of accounting is appropriate. In December 2007, the Company acquired 27% of ownership interest in Xian Delong Powder Engineering Materials Co., Ltd., through its 74.92% owned subsidiary, Environmental Protection Industry Development Co., Ltd., for $822,600. This investment is accounted for by the equity method.

The Company’s newly acquired subsidiary, Hancheng Tongxing Metallurgy Co., Ltd. has invested in several companies from 2004- 2007 amounted to $8,809,332 as of March 31, 2008. Since Tongxing does not have the ability to exercise control or has significant influence of the investee companies and the investments have been recorded under the cost method.

13

 
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
(UNAUDITED)
 
Investees
 
Years invested
 
Amount invested
 
% owned
 
Shanxi Daxigou Mining Co.,Ltd
   
2004
   
714,000.00
   
11
 
Shanxi Xinglong Thermoelectric Co.,Ltd
   
2004-2007
   
4,729,536.00
   
37.6
 
Shanxi Longgang Group Baoji roll-forming steel Co.,Ltd
   
2005
   
599,760.00
   
23.81
 
Shanxi Longgang Group Xian steel Co.,Ltd
   
2005
   
142,800.00
   
10
 
Shanxi Longgang Group Co.,Ltd
   
2003-2004
   
1,849,260.00
   
3.8
 
Huashan Metallurgical Equipment Co. Ltd.
   
2003
   
71,400.00
   
25
 
Hejin Liyuan Washing Coal Co.Ltd.
   
2006
   
214,200.00
   
38
 
Hancheng Jinma Coking Co.Ltd.
   
2006
   
488,376.00
   
40
 
Total
 
8,809,332.00
     

Total investment in unconsolidated subsidiaries amounted to $9,666,132 and $822,600 as of March 31, 2008 and December 31, 2007, respectively.

Short-term notes payable

Short-term notes payable are lines of credit extended by banks. When purchasing raw materials, the Company often issues a short-term note payable to the vendor. This short-term note payable is guaranteed by the bank for its complete face value. The banks usually require the Company to deposit a certain amount of cash at the bank as a guarantee deposit, which is classified on the balance sheet as restricted cash. The total outstanding amounts of short-term notes payable were $75,327,000 and $15,163,260 as of March 31, 2008 and December 31, 2007, respectively.

Shares subject to mandatory redemption

The Company adopted SFAS 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. SFAS 150 established classification and measurement standards for three types of freestanding financial instruments that have characteristics of both liabilities and equity. Instruments within the scope of SFAS 150 must be classified as liabilities within the Company’s Consolidated Financial Statements and be reported at settlement date value. The Company issued redeemable stock in September 2005. The amount was presented as a liability on the balance sheet at the fair market value on the date of issuance plus accrued interest at the balance sheet date. As of December 31, 2007, redemption feature on all the shares issued was expired and subsequently the shares were reclassified from liability to equity. See note 13 for details.

Earnings per share

The Company reports earnings per share in accordance with the provisions of SFAS 128, "Earnings Per Share." SFAS 128 requires presentation of basic and diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings per share.

Basic earnings per share are computed by dividing income available to common stockholders by the weighted average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock.
 
14

 
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
(UNAUDITED)
 
Income taxes

Deferred income taxes are recognized for temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements, net operating loss carry forwards and credits, by applying enacted statutory tax rates applicable to future years. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Current income taxes are provided for in accordance with the laws of the relevant taxing authorities.

The Company adopted SFAS 109, “Accounting for Income Taxes”. SFAS 109 requires the recognition of deferred income tax liabilities and assets for the expected future tax consequences of temporary differences between income tax basis and financial reporting basis of assets and liabilities. Provision for income taxes consists of taxes currently due plus deferred taxes. The Company adopted FASB Interpretation 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), as of January 1, 2007. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The adoption had no effect on the Company’s financial statements.

The charge for taxation is based on the results for the year as adjusted for items, which are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences. Deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which deductible temporary differences can be utilized. Deferred tax is calculated using tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it is related to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis.

Share-based compensation

The Company records stock-based compensation pursuant to SFAS 123R, "Share-Based Payments," which established standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. This statement requires companies to measure the cost of services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The cost will be recognized over the period of services rendered.
 
15

 
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
(UNAUDITED)
 
Shipping and handling

Shipping and handling for raw materials purchased are included in cost of goods sold. Shipping and handling cost incurred for shipping of finished products to customers are included in selling expenses. Shipping and handling expenses for purchases of material and sales of finished goods for the three months ended March 31, 2008 and 2007 amounted to $703,072 and $19,825, respectively.

Minority interest

Minority interest consists of the interest of minority shareholders in the subsidiaries of the Company. As of March 31, 2008 and December 31, 2007, minority interest amounted to $65,701,909 and $42,044,266, respectively.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications have no effect on net income or cash flows.

Recently issued accounting pronouncements

In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities—including an amendment of FASB Statement No. 115 (“FAS 159”). SFAS 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 SFAS 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. SFAS 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 chose not to elect the option to measure the fair value of eligible financial assets and liabilities

In December 2007, the FASB issued SFAS 160, “Noncontrolling Interests in Consolidated Financial Statements - an amendment of Accounting Research Bulletin No. 51”, 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 141(R), Business Combinations, was issued. SFAS 141R replaces SFAS 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.
 
16

 
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
(UNAUDITED)
 
In March 2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133”, 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.

Note 3 - Accounts receivable and allowance for doubtful accounts

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

   
March 31, 2008
(Unaudited)
 
December 31, 2007
 
           
Accounts receivable
 
$
28,031,766
 
$
11,939,533
 
Less: allowance for doubtful accounts
   
270,235
   
148,224
 
Net accounts receivable
 
$
27,761,531
 
$
11,791,309
 

Movement of allowance for doubtful accounts is as follows:

   
March 31, 2008
(Unaudited)
 
December 31, 2007
 
Beginning balance
 
$
148,224
 
$
137,132
 
Charge to expense
   
   
751
 
Balance from acquisition of Tongxing
   
118,680
   
-
 
Exchange rate effect
   
3,331
   
10,341
 
Ending balance
 
$
270,235
 
$
148,224
 
 
17

 
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
(UNAUDITED)
 
Note 4 - Inventory

Inventory consists of the following:

   
March 31, 2008
(Unaudited)
 
December 31, 2007
 
Supplies
 
$
2,248,911
 
$
1,829,551
 
Raw materials
   
52,202,026
   
42,919,783
 
Work in process
   
21,946
   
82,439
 
Finished goods
   
46,331,567
   
33,097,152
 
Total
 
$
100,804,450
 
$
77,928,925
 
 
Raw materials consist primarily of iron ore and coke at Long Men Joint Venture and steel strip at Daqiuzhuang Metal. Work in process primarily consists of pig iron and other semi-finished products. The cost of finished goods includes direct costs of raw materials as well as direct labor used in production. Indirect production costs such as utilities and indirect labor related to production such as assembling, shipping and handling costs are also included in the cost of inventory. The Company reviews its inventory periodically for possible obsolete goods and to determine if any reserves are necessary for potential obsolescence. As of March 31, 2008 and December 31, 2007, the Company believes no reserves are necessary.

Note 5 - Advances on inventory purchases

Advances on inventory purchases are monies deposited or advanced to outside vendors or related parties on future inventory purchases. Due to the high shortage of steel in China, most of the Company’s vendors require a certain amount of money to be deposited with them as a guarantee that the Company will receive its purchases on a timely basis.

This amount is refundable and bears no interest. The Company has legally binding contracts with its vendors, which required the deposit to be returned to the Company when the contract ends. The inventory is normally delivered within one month after the monies have been advanced. The total outstanding amount, including advances to related parties, was $95,272,711 and $68,114,486 as of March 31, 2008 and December 31, 2007, respectively.

Note 6 - Plant and equipment, net  

Plant and equipment consist of the following:

   
March 31, 2008
 
 December 31, 2007
 
   
(Unaudited)
         
Buildings and improvements
 
$
83,617,658
 
$
71,265,004
 
Machinery
   
144,236,255
   
134,716,437
 
Transportation equipment
   
5,304,733
   
4,232,556
 
Other equipment
   
1,406,789
   
1,310,489
 
Construction in process
   
52,170,402
   
24,574,027
 
Totals
   
286,735,837
   
236,098,513
 
Less accumulated depreciation
   
(30,855,848
)
 
(17,835,146
)
Totals
 
$
255,879,989
 
$
218,263,367
 
 
18

 
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
(UNAUDITED)
 
Depreciation, including amounts in cost of sales, for the three months ended March 31, 2008 and 2007 amounted to $ 4,499,873 and $561,709, respectively.

Note 7 - Intangible assets

The Company’s intangible assets are as follows:

   
March 31, 2008
 
December 31, 2007
 
   
(Unaudited)
 
 
 
Land use right
 
$
24,611,449
 
$
23,629,059
 
Software
   
211,116
   
71,978
 
Accumulated Amortization
   
(2,246,966
)
 
(1,944,328
)
Total
 
$
22,575,599
 
$
21,756,709
 

Total amortization expense for the three months ended March 31, 2008 and 2007, amounted to $205,146 and $76,524, respectively.

Note 8 - Debt

Short term loans

Short term loans represent amounts due to various banks, other companies and individuals, normally due within one year. The loans due to banks can be renewed with the banks. The Company had short term loans from related parties totaling $7,317,027 as of December 31, 2007. No short term loans from related parties were outstanding as of March 31, 2008.

The loans due to banks consisted of the following:

DAQIUZHUANG METAL
         
   
March 31, 2008
(Unaudited)
 
December 31, 2007
 
Loan from China Bank, JingHai Branch, due
         
September 2008. Quarterly interest only payment at
 
 
     
7.29% per annum, secured by equipment
 
$
999,600.
 
$
959,700
 
 
             
Loans from Agriculture Bank, DaQiuZhuang Branch, due
             
various dates from September 2008 to February 2009.
             
Quarterly interest only payments ranging from
             
8.424% to 8.964% per annum, guaranteed by an
             
related third party and secured by equipment
   
10,721,424
   
10,293,468
 
               
Loan from Construction Bank of China, JinHai Branch, due
             
August 2008. Monthly interest only payment at 8.55%
             
per annum, guaranteed by an unrelated third party and
secured by equipment
   
1,570,800
   
1,508,100
 
               
Loans from ShangHai PuFa Bank, due various dates from
             
July 2008 to March 2009. Quarterly interest only payments
             
ranging from 7.22% to 8.964% per annum, guaranteed
             
by an unrelated third party
   
4,284,000
   
4,113,000
 
               
Loan from China Merchants Bank, due
             
November 2008. Quarterly interest only payments
             
at floating interest rate,105% of People's Bank base rate
             
of 7.29% to 7.85%, guaranteed by an unrelated third party.
   
8,568,000
   
8,226,000
 
               
Loan from ShenZhen Development Bank, due
             
dates in January 2009. Monthly interest only payment
             
at 7.47% per annum, secured by
           
inventory and guaranteed by CEO of the Company.
   
7,140,000
   
6,855,000
 
                         
Total Daqiuzhuang Metal
 
$
33,283,824
 
$
31,955,268
 
 
19

 
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
(UNAUDITED)
 
LONG MEN JOINT VENTURE
         
   
March 31, 2008
(Unaudited)
 
December 31, 2007
 
Loans from Construction Bank, due various
dates from May to October 2008.Monthly interest only
payments ranging from 7.22% to 8.424% per annum,
guaranteed by equipment and Bankers’ Acceptance Bill.
 
$
13,851,600
 
$
20,633,550
 
               
Loans from Agriculture Bank, due various dates
in May 2008. Monthly interest only payments at 7.12%
guaranteed by Bankers’ Acceptance Bill.
   
2,441,880
   
3,989,610
 
             
Loans from Bank of China,HanCheng Branch, due various
dates from May 2008 to July 2008. Monthly interest
payments ranging from 6.71% to 6.90% per annum,
guaranteed by unrelated third parties .
   
9,996,000
   
9,597,000
 
               
Loans from Credit Cooperatives, due various dates
from July 2008 to February 2009. Monthly interest
payments by 11.02% per annum, guaranteed
by an related third party.
   
2,856,000
   
2,742,000
 
               
Loans from HuaXia Bank, due various dates in
November 2008. Monthly interest payment
at 8.74% per annum, guaranteed by equipment.
   
5,712,000
   
13,819,680
 
 
             
Loan from Communication Bank, due October 2008, Quarterly
interest only payments, annual interest rate of 8.02%,
guaranteed by equipment.
   
3,570,000
   
3,427,500
 
 
             
Loan from China Merchants Bank, due September 2008,
Monthly interest payments, annual interest rate of 9.13%,
guaranteed by an related third party and secured by land
use rights and buildings.
   
7,140,000
   
6,855,000
 
               
Loan from China Minsheng Bank,due February 2009,
Quarterly interest payments, annual interest rate of
7.47%, guaranteed by a related third party and secured
by equipment.
   
14,280,000
       
                      
Total Longmen Joint Venture
 
$
59,847,480
 
$
61,064,340
 
 
             
Grand totals
 
$
93,131,304
 
$
93,019,608
 
 
20

 
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
(UNAUDITED)
 
Long Men Joint Venture also has various loans from unrelated companies and individuals which are due within one year. The loans are unsecured with annual interest rates ranging from 8% to 12%. As of March 31, 2008 and December 31, 2007, these loans outstanding amounted to $34,896,184 and $19,156,070, respectively.

Short term notes payable

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

The Company had the following short term notes payable:

DAQIUZHUANG METAL
         
   
March 31, 2008
 
December 31, 2007
 
   
(Unaudited)
     
China Bank, Jing Hai Branch, due March 2008,
             
restricted cash required of 50%
             
of loan amount, guaranteed by the Company
 
$
-
 
$
1,588,040
 
               
Agricultural Bank of China, various amounts, due March
2008, restricted cash required of 60% of loan amount,
             
guaranteed by the Company and an unrelated third party
   
-
   
1,232,100
 
               
ShangHai PuFa Bank, various amounts,
             
due date ranging between April and May 2008,
             
restricted cash required of 50% of loan balance,
             
guaranteed by an unrelated third party
   
5,712,000
   
5,488,120
 
               
Total Daqiuzhuang Metal
 
$
5,712,000
 
$
8,308,260
 
 
21

 
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
(UNAUDITED)

LONGMEN JOINT VENTURE
         
   
March 31, 2008
 
December 31, 2007
 
   
(Unaudited)
        
Agricultural Bank of China, various amounts, due August
2008, restricted cash required of 100% of loan amount.
   
4,998,000
   
-
 
               
China Bank, various amounts, due July 2008,
restricted cash required of 100% of loan amount.
   
714,000
   
-
 
               
Credit Cooperatives, due August 2008,
restricted cash required of 100% of loan amount.
   
1,428,000
   
-
 
               
ShangHai Pudong Development Bank, various amounts, due dates
             
ranging between January to May 2008,
             
restricted cash required of 60% of loan amount,
             
guaranteed by equipment.
   
7,140,000
   
6,855,000
 
               
China Minsheng Bank, various amounts, due dates
             
ranging between June to September 2008,
             
restricted cash required of 60% of loan amount,
             
guaranteed by equipment and related third parties..
   
28,560,000
   
-
 
               
China Minsheng Bank, various amounts, due dates in August 2008,
             
restricted cash required of 100% of loan amount.
   
7,140,000
   
-
 
               
ShangHai PuFa Bank, various amounts, due dates
             
ranging between April to September 2008,
             
restricted cash required of 60% of loan amount.
             
guaranteed by equipment and related third parties.
   
19,635,000
   
-
 
Total Longmen Joint Venture
   
69,615,000
   
6,855,000
 
               
 Grand totals
 
$
75,327,000
 
$
15,163,260
 
 
Total interest expense for the three months ended March 31, 2008 and 2007 on the debt listed above amounted to $2,872,865 and $623,155, respectively. Capitalized interest amounted to $811,505 and $0 for the three months ended March 31, 2008, and 2007, respectively.
 
22

 
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
(UNAUDITED)
 
Note 9 - Customer deposits

Customer deposits represent amounts advanced by customers on product orders. The product normally is shipped within six months after receipt of the advance payment, and the related sale is recognized in accordance with the Company’s revenue recognition policy. As of March 31, 2008 and December 31, 2007, customer deposits amounted to $60,883,030 and $47,084,434, including related parties deposits $0, and $9,211,736, respectively.

Note 10 - Deposits due to sales representatives

Daqiuzhuang Metal and one of Longmen Joint Venture’s subsidiaries, Yuxin Trading, entered into agreements with various entities to act as the Company’s exclusive sales agent in a specified area. These exclusive sales agents must meet certain criteria and are required to deposit a certain amount of money with the Company. In return the sales agents receive exclusive sales rights to a specified area and discounted prices on products they order. These deposits bear no interest and are required to be returned to the sales agent once the agreement has been terminated. The Company had $2,734,620 and $3,068,298 in deposits due to sales representatives outstanding as of March 31, 2008 and December 31, 2007, respectively.

Note 11 - Investment payable

In June 2007, Yangpu Investment and the former shareholders of Qiu Steel Investment entered into an agreement. Pursuant to this agreement, Yangpu Investment received 98.7% of the total equity of Qiu Steel Investment for RMB148,000,000 or approximately $19,284,400. As of March 31, 2008, Yangpu Investment had payable amounted to RMB48,000,000 or approximately $6,854,400.

Note 12 - Distribution payable to minority shareholder

Distribution payable represents dividends owed to the minority owners of EPID and Hualong for retained earnings prior to the acquisition date. As of March 31, 2008 and December 31, 2007, Distribution payable amounted to $2,330,858 and $2,820,803, respectively.

Note 13 - Private offering of redeemable stock

On September 18, 2005, the Company entered into a subscription agreement with certain investors to sell a total of 1,176,665 shares of common stock at $1.50 per share for gross proceeds of $1,765,000, commissions totaled $158,849, leaving net proceeds of $1,606,151. In addition, two warrants are attached to each share of common stock giving the warrant holders the right to purchase 2,353,330 shares of common stock. The warrants can be exercised on the second anniversary of the subscription date at $2.50 per share and through the third anniversary date at $5.00 per share. At the option of the holder, the Company may be required to repurchase the 1,176,665 shares of common stock 18 months after the closing date at a per share price of $1.95.

In accordance with SFAS 150, The Company recorded the stock as a liability due to the mandatory redemption provision. The shares were recorded at fair value on the date of issuance, which was the net cash proceeds, plus any accrued interest up to March 31, 2007. The difference between the net proceeds, $1,606,151, and the redemption amount, $2,294,497, totaling $688,346, was accrued and amortized as interest expense.
 
23

 
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
(UNAUDITED)
 
As of December 31, 2007, the put option on all the redeemable shares had expired and all the shares were reclassified into equity.

Note 14 - Convertible notes

On December 13, 2007, 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 totaling $40,000,000 (“Notes”) and (ii) warrants to purchase 1,154,958 shares of 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 the Company’s common stock. The Notes have a five year term through December 12, 2012. They are convertible into shares of the common stock, subject to customary anti-dilution adjustments. The initial conversion price is $12.47. The Company may redeem the Notes at 100% of the principal amount, plus any accrued and unpaid interest, beginning December 13, 2008, provided the market price of the common stock is at least 150% of the then applicable conversion price for 30 consecutive trading days prior to the redemption.

The Notes are secured by a first priority, perfected security interest in certain shares of common stock of Zuo Sheng Yu, as evidenced by the pledge agreement. The Notes are subject to events of default customary for convertible securities and for a secured financing.
 
The Warrants grant the Buyers the right to acquire shares of common stock at $13.51 per share, subject to customary anti-dilution adjustments. The Warrants may be exercised May 13, 2008 through May 13, 2013.
 
In connection with this transaction, the Company and the Buyers entered into a registration rights agreement (the “Registration Rights Agreement”). Pursuant to the terms and conditions of the Registration Rights Agreement, the Company agreed to register within 60 calendar days common stock issuable to the Buyers for resale on a registration statement to be effective by 90 calendar days or 120 days if the registration statement is subject to a full review by the U.S. Securities and Exchange Commission. The Company is required to register 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.
 
In addition, certain management members of the Company also entered into a lock-up agreement with the Company pursuant to which each person agreed not to sell any personally owned shares one year after the initial effective date of the resale registration statement described above.

Pursuant to the Registration Rights Agreement, the Company was required to file the registration statement on February 11, 2008. The Company filed the registration statement on February 13, 2008, which was two days after the required filing date. As of the date of this report, the Company reached an agreement with all note holders to waive the related penalty of $427,000.
 
24

 
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
(UNAUDITED)
 
Pursuant to APB 14, Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants, the Company discounted the Notes equal to the fair value of the warrants. The Notes were further discounted for the fair value of the conversion option. The combined discount is being amortized to interest expense over the life of the Notes using the effective interest method.

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

 
·
Expected volatility of 105% calculated using the Company’s historical price of its common stock
 
·
Expected dividend yield of 0%
 
·
Risk-free interest rate of 2.46% for the conversion option and the warrants
 
·
Expected lives of five years
 
·
Market price at issuance date of $10.43
 
·
Strike price of $12.47 and $13.51, for the conversion option and the warrants, respectively

Pursuant to SFAS 133 and EITF 00-19, the Company determined that both the warrants and the conversion option embedded in the Notes meet the definition of a derivative instrument and must be carried as a liability and marked to market each reporting period.

On December 13, 2007, the Company recorded $34,719,062 as derivative liability, including $9,298,044 for the fair value of the warrants and $25,421,018 for fair value of the conversion option. The initial carrying value of the Notes was $5,280,938. The financing cost of $3,594,500 was recorded as deferred note issuance cost and is being amortized to interest expense over the term of the Notes using the effective interest method.

On March 31, 2008, in accordance with SFAS 133, the fair value of derivative liabilities was recalculated and decreased by $2,670,764 during the period, including $719,580 for the decrease in fair value of the warrants and $1,951,184 for the decrease in fair value of the conversion option. The decrease was recorded as a gain and included in other income.

As of March 31, 2008, the balance of derivative liabilities was $25,812,545, which consisted of $6,918,882 for the warrants and $18,893,663 for the conversion option, and the carrying value of the Notes was $6,138,044. Amortization of the debt discount totaled $804,295 and was recorded as interest expense for the period ended March 31, 2008. As of March 31, 2008, the unamortized financing cost was $5,120,152, including $1,564,500 for additional issuance of 150,000 shares of the common stock to the placement agent in January 2008. For the period ended March 31, 2008, $8,894 of deferred note issuance cost was amortized to interest expense for the period using the effective interest method.
 
25

 
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
(UNAUDITED)
 
Note 15 -Other expenses and income, net

Other income and expense consist of the following:

   
March 31, 2008
(Unaudited)
 
March 31, 2007
(Unaudited)
 
           
Finance/interest expense
 
$
(5,986,507
)
$
(640,857
)
Interest income
   
580,318
   
31,654
 
Change in fair value of derivative liabilities
   
2,670,764
   
-
 
Other non-operating income
    432,050    
388,527
 
Other non-operating expense
   
(62,780
)
 
-
 
Total other (expense) income
 
$
(2,366,155
)
$
(220,676
)

Note 16 - Taxes

Income tax

Beginning January 1, 2008, the new Enterprise Income Tax (“EIT”) law has replaced the existing laws for Domestic Enterprises (“DES”) and Foreign Invested Enterprises (“FIEs”). The new standard EIT rate of 25% has replaced the 33% rate currently applicable to both DES and FIEs. The two-year tax exemption and three-year 50% tax reduction tax holiday for production-oriented FIEs will not be eliminated for certain entities incorporated on or after March 16, 2007.

Significant components of the provision for income taxes on earnings from operation for the three months ended March 31, 2008 and 2007 are as follows:

   
March 31, 2008
(Unaudited)
 
March 31, 2007
(Unaudited)
 
           
Current
 
$
666,357
 
$
-
 
Deferred
   
(216,534
)
 
-
 
Total provision for income taxes
 
$
449,823
 
$
-
 

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

   
March 31, 2008
(Unaudited)
 
December 31, 2007
 
Net operating loss carry-forward
 
$
2,483,130
 
$
1,599,004
 
Effective tax rate
   
25.00
%
 
25.0
%
Deferred tax asset
 
$
637,598
 
$
399,751
 

According to Chinese tax regulations, the net operating loss can be carried forward to offset with operating income for the next five years. Management believes the deferred tax asset is fully realizable.
 
26

 
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
(UNAUDITED)
 
The following table reconciles the U.S. statutory rates to the Company’s effective tax rate:

   
March 31, 2008
(Unaudited)
 
March 31, 2007
(Unaudited)
 
U.S. Statutory rates
   
34.00
%
 
34
%
Foreign income not recognized in USA
   
(34.00
%)
 
(34
%)
China income taxes
   
25.00
%
 
-
 
Tax effect of income not taxable for tax purpose
   
(3.86
%)
 
-
 
Effect of different tax rate of subsidiaries operating in other jurisdictions
   
(10.12
%)
 
-
 
Total provision for income taxes
   
11.02
%
 
-
 

Under the Income Tax Laws of PRC, the Company’s subsidiary, Daqiuzhuang Metal, is generally subject to an income tax at an effective rate of 33% (30% state income taxes plus 3% local income taxes) on income reported in the statutory financial statements after appropriate tax adjustments, unless the enterprise is located in a specially designated region where it allows foreign enterprises a two-year income tax exemption and a 50% income tax reduction for the following three years. The Company’s subsidiary, Daqiuzhuang Metal, became a Chinese Sino-foreign joint venture at the time of the merger on October 14, 2004 and it became eligible for the tax benefit. Daqiuzhuang Metal is located in Tianjin Costal Economic Development Zone and under the Income Tax Laws of Tianjin City of PRC, it is eligible for an income tax rate of 24%. Therefore, Daqiuzhuang Metal is exempt from income taxes for the years ended December 31, 2005 and 2006 and is entitled to 50% income tax reduction of the special income tax rate of 24%, which is a rate of 12% for the years ended December 31, 2007, 2008 and 2009.

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

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

Value added Tax

Enterprises or individuals who sell commodities, engage in repair and maintenance or import and export goods in the PRC are subject to a value added tax in accordance with Chinese laws. The value added tax standard rate is 17% of the gross sales price. A credit is available whereby VAT paid on the purchases of semi-finished products or raw materials used in the production of the Company’s finished products can be used to offset the VAT due on sales of the finished product.

VAT on sales and VAT on purchases amounted to $70,973,599 and $65,859,199 for the three months ended March 31, 2008, $5,830,751 and $5,574,487 for the three months ended March 31, 2007, respectively. Sales and purchases are recorded net of VAT collected and paid as the Company acts as an agent for the government. VAT taxes are not impacted by the income tax holiday.
 
27

 
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
(UNAUDITED)
 
Taxes payable consisted of the following:

   
March 31, 2008
(Unaudited)
 
December 31, 2007
 
VAT taxes payable
 
$
13,529,046
 
$
20,320,241
 
Income taxes payable
   
6,843,222
   
5,112,876
 
Misc taxes
   
2,032,221
   
2,143,123
 
Totals
 
$
22,404,489
 
$
27,576,240
 
 
Note 17 - Earnings per share

The calculation of earnings per share is as follows:

   
March 31, 2008
(Unaudited)
 
 March 31, 2007
(Unaudited)
 
Income attributable to holders of common shares
 
$
2,188,460
 
$
474,865
 
Basic weighted average number of common shares outstanding
   
34,836,394
   
31,320,251
 
Add: dilution effect of warrants
   
87,220
   
-
 
Diluted weighted average number of common shares outstanding
   
34,923,614
   
31,320,251
 
               
Net income per share
             
Basic
 
$
0.063
 
$
0.015
 
Diluted
 
$
0.063
 
$
0.015
 

Under SFAS 128 "Earnings per Share", paragraph 24, mandatory redeemable shares are excluded from the shares outstanding for both basic and diluted earnings per share. Thus, the 1,176,665 shares described in Note 13 have been excluded from the earnings per share calculation for the basic and diluted EPS for the period ended March 31,2007. In connection to the redeemable preferred stocks, the Company issued 2,353,330 warrants to the shareholders. As of December 31, 2007, the number of unexercised warrants was 233,330, which the dilution effect was calculated to be 87,220 shares by using the treasury method.

As described in Note 1, the Company issued Victory New an aggregate of 3,092,899 shares of the Company’s Series A Preferred Stock to purchase 30% minority ownership of Daqiuzhuang Metal. The preferred stock can not be converted to common stock. Thus, the 3,092,899 shares of Series A Preferred Stock have been excluded from the earnings per share calculation.

On December 13, 2007, the Company issued $40 million of convertible notes, convertible into 3,207,698 shares of common stock, and warrants to purchase 1,154,958 shares of common stock. Since the note conversion price of $12.47 and the warrant exercise price of $13.51 were higher than $7.98, the average market price of the common stock for the period from the issuance date to March 31, 2008, the convertible notes and warrants were determined to be anti dilutive, and thus have been excluded from the earnings per share calculation.
 
28

 
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
(UNAUDITED)
 
Note 18 - Related party balances and transactions

The Company subleased a portion of its land use rights to Tianjin Jing Qiu Steel Market Company, a related party under common control. The Company’s Chairman, CEO and majority shareholder, Yu Zuo Sheng (aka Henry Yu), is the chairman and the largest shareholder of Jing Qiu Steel Market Company. Total rental income for the three months ended March 31, 2008 and 2007 was $419,310 and $387,030, respectively.

The Company’s short term loan of $7,140,000 from Shenzhen Development Bank is personally guaranteed by the Company’s Chairman, CEO, and majority shareholder Yu Zuo Sheng (aka Henry Yu).

Tianjin Dazhan Industry Co., Ltd. (“Dazhan”) and Tianjin Hengying Trading Co., Ltd. (“Hengying”) are steel trading companies controlled by the Company’s Chairman, CEO and majority shareholder, Yu Zuo Sheng (aka Henry Yu). Dazhan and Hengying acted as trading agents of the Company to make purchases and sales for the Company. For the three months ended March 31, 2008 and 2007, through Dazhan and Hengying, the Company purchased total of $28,434,046 and $19,589,989 of material from these entities, and sold $1,279,813.27 and $7,840,501 of finished products to these entities, respectively.

The Longmen Joint Venture did not obtain the VAT invoices from the local tax bureau until late July 2007. Before obtaining VAT invoices, all the sales and purchases made by the joint venture were carried out through the Company’s joint venture partner, Long Men Group. In addition to the VAT status issue, the Longmen Joint Venture also made sales through Long Men Group for outstanding sales contracts signed before June 2007. Also some sales through Long Men Group were made due to the established market share and its long term relationship with the customers. All the sales proceeds and purchase payments were recorded as receivables from or payables to Long Men Group. Total related party sales amounted to $113,073,832 for the three months ended March 31, 2008.

All transactions with related parties are for normal business activities and are short term in nature. Settlements for the balances are usually in cash. The following charts summarize the related party transactions as of the three months ended March 31, 2008 and the year ended December 31, 2007:

a.
Accounts receivable -related parties
 
Name of related parties
 
March 31, 2008
(Unaudited)
 
December 31, 2007
 
Long Men Group
 
$
14,493,163
 
$
565,631
 
Jin Qui     189,029     -  
Total
 
$
14,682,192  
$
565,631  

b.
Short term loan receivable - related parties

As of March 31, 2008, the Company had a short term loan receivable from Tianjin Jing Qiu amounted to $1,285,200. This loan was made for short term cash flow needs and will be repaid upon request.
 
29

 
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
(UNAUDITED)
 
c.
Other receivables - related parties

Name of related parties
 
March 31, 2008
(Unaudited)
 
December 31, 2007
 
Beijing Wendlar
 
$
182,641
 
$
1,033,713
 
Yang Pu Capital Automobile
   
-
   
616,950
 
Tianjin Jin Qiu Steel Market
   
-
   
137,100
 
Tong Xin Ye Jin
   
-
   
48,830
 
Yang Pu Sheng Xin
   
-
   
74,113
 
Officers of Hua Long
   
48,362
   
-
 
Yang Pu Sheng Hua
   
-
   
2,742
 
Long Men Group
   
1,913,263
   
-
 
   
$
2,144,266
 
$
1,913,448
 

d.
Advances on inventory purchases - related parties