Longhai Steel (OTC BB:ACTN)

This prospectus relates to 2,560,006 shares of common stock that may be sold from time to time by the selling stockholders named in this prospectus, which includes:

• 1,600,003 shares of common stock; and
• 960,003 shares of common stock issuable to the selling stockholders upon the exercise of warrants.

We will not receive any proceeds from the sales by the selling stockholders, but we will receive funds from the exercise of warrants held by the selling stockholders, if exercised for cash.

Our common stock is quoted on the OTC Bulletin Board maintained by the Financial Industry Regulatory Authority, Inc. under the symbol “LGHS.” The closing bid price for our common stock on September 14, 2012 was $1.02 per share, as reported on the OTC Bulletin Board.

Any participating broker-dealers and any selling stockholders who are affiliates of broker-dealers may be deemed to be “underwriters” within the meaning of the Securities Act of 1933, as amended, or the Securities Act, and any commissions or discounts given to any such broker-dealer or affiliates of a broker-dealer may be regarded as underwriting commissions or discounts under the Securities Act. The selling stockholders have informed us that they do not have any agreement or understanding, directly or indirectly, with any person to distribute their common stock.

ACTN completes private placement above current market price of $0.42:

On May 11, 2012, Longhai Steel Inc. (the “Company”) entered into a securities purchase agreement (the “Securities Purchase Agreement”) with certain accredited investors (the “Investors”) pursuant to which the Company agreed to sell to the Investors 1,600,000 units for $0.75 per unit, for total proceeds of $1.2 million.

• Each unit entitles the Investors to purchase one share of the Company’s common stock at $0.75 per share and
• a three-year warrant to purchase one-half of one share of common stock at the exercise price of $1.00 per share (the “Warrants”).

The total shares issued to the Investors were 1,600,000 (the “Shares”), representing approximately 13.3% of the issued and outstanding capital stock of the Company on a fully-diluted basis as of and immediately after consummation of the transactions contemplated by the Securities Purchase Agreement. The closing of the transactions occurred on June 6, 2012 upon the fulfillment of closing conditions contained in the Securities Purchase Agreement.

GeoTeam® Note: 2010 vs. 2009 Fourth Quarter EPS was $0.65 vs. $0.47

Net Revenues. Net revenues consist of revenue from the sale of steel wire and scrap metal. Roughly 99% of revenues are derived from wire. Our net revenues increased to $608 million in the year ended December 31, 2011 from $475 million in the same period in 2010, representing a 28% increase. This increase was due to a 16% increase in our revenue per ton of wire sold as a result of an increase in average wire prices. In addition, increased demand for our products increased our sales volume from 906,836MT to 995,755MT, representing period over period growth of 9.7% .

ITEM 4.01   Changes in Registrant’s Certifying Accounts.

On January 19, 2012, the Audit Committee of Longhai Steel Inc. (the “Company”) dismissed MaloneBailey LLP (“MaloneBailey”) as its independent registered public accounting firm. The dismissal did not result from any dissatisfaction with the quality of professional services rendered by MaloneBailey.

The Company engaged MaloneBailey from March 26, 2010 through January 18, 2012 (the “Engagement Period”). MaloneBailey’s reports on our financial statements for the fiscal year ended December 31, 2010 did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope, or accounting principles. In connection with the audits of the fiscal year ended December 31, 2010, and the subsequent interim period through January 18, 2012, the Company did not have any disagreements with MaloneBailey on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to MaloneBailey’s satisfaction, would have caused them to make reference to the subject matter of the disagreement(s) in connection with their report as described in Item 304 (a)(1)(iv) of Regulation S-K. There have been no reportable events as provided in Item 304(a)(1)(v) of Regulation S-K during the Engagement Period.

On January 19, 2012, the Company’s Audit Committee engaged Marcum Bernstein & Pinchuk LLP (“MBP”) as its new independent registered public accounting firm. Neither the Company, nor anyone on its behalf, consulted MBP during the Company’s two most recent fiscal years and any subsequent interim period prior to the Company’s engagement of MBP regarding any of the matters set forth in Items 304(a)(2)(i) and (ii) of Regulation S-K.

We furnished MaloneBailey with a copy of this disclosure on January 19, 2012, providing MaloneBailey with the opportunity to furnish us with a letter addressed to the Securities and Exchange Commission stating whether it agrees with the statement made by us herein in response to Item 304(a) of Regulation S-K and, if not, stating the respect in which it does not agree. A letter from MaloneBailey, dated January 23, 2012 is filed as Exhibit 16 to this report.

Cost of Sales. Our cost of sales increased $24.1 million, or 26.3%, to $115.9 million in the three months ended September 30, 2011, from $91.8 million in the same period in 2010. The cost of sales as a percentage of revenues increased from 95.5% to 97.6% between the periods. Our cost of sales is largely dictated by fluctuations in steel billet prices as billet typically represents more than 95% of our cost of goods sold. Cost of goods sold per ton of wire sold increased 20.5% period over period.

Gross Profit and Gross Margin. Our gross profit decreased $1.4 million to $2.9 million in the three months ended September 30, 2011 from $4.3 million in the same period in 2010. Gross margin declined from 4.5% for the three months ended September 30, 2010 to 2.4% for the three months ended September 30, 2011. The decrease in gross margin was primarily due to the narrowing of the spread between billet purchase prices and wire sales prices discussed above, as billet prices increased more than wire prices. While growth in infrastructure and construction remained robust, the steel wire market was softer in comparison to billet market due to stronger than expected local supply of wire during the summer of 2011. We expect increased wire and billet spreads in the remaining months of 2011 as the wire sales prices may increase as a result of restricted productions in some steel companies.

We believe that our cash on hand and cash flows from operations will meet our present cash needs, but we may require additional cash resources to implement our expansion through the acquisition of additional facilities. If our own financial resources are insufficient to satisfy our capital requirements, we may seek to sell additional equity or debt securities or obtain additional credit facilities.

Our cash flows from operating activities changed significantly because we took measures to eliminate loans to related parties. We had previously passed prepayments from our wholesale customers straight to the Longhai Steel Group to provide liquidity to the Longhai Steel Group for iron ore purchases. In consideration of those prepayments, these wholesale customers would receive a discount on our steel wire, and Longhai Steel Group would reimburse us for these discounts by way of a reduced purchase price for steel billet. This was treated as a loan to a related party, and the reimbursement for the discounts granted to wholesale customers were recorded as financing income. The passed-through prepayments were recorded as cash used in investing activities.

Management determined to eliminate this type of related party transactions and instead conduct business with the Longhai Steel Group on an arms-length basis as of the second quarter of 2010. This action required that the loan granted to Longhai Steel Group be repaid. This resulted in a reduction of approximately $43 million in operating cash that was accompanied by a matching increase in cash from investing activities.

Year 2010 preliminary unaudited highlights

• Net revenues were $475.0 million, up 27.1% from 2009.
• Gross profit was $18.6 million, up 10.4% from 2009.
• Net income was $11.5 million, down 2.0% from 2009.
• Basic and diluted earnings per share were $1.15, down 3.4% to $1.19 from 2009.
• Weighted average shares outstanding increased 1.2% in 2010 to 9,965,068 shares.

GeoTeam® Note: 2010 vs 2009 Fourth Quarter EPS were: $0.48 vs. $0.38

Mr. Chaojun Wang, Chairman and Chief Executive Officer of Longhai Steel, said, "We are pleased with our operating performance for 2010 and expect to continue our good growth in 2011. Our fourth quarter 2011 was especially good, with revenues up 60.7% and net income up 28.5% from the fourth quarter 2009. During the summer of 2010, we reduced wire prices to respond to competitive pressures from a larger-than-expected local supply of wire. Since that situation appeared to be temporary, we believe that the spreads between billet costs and wire prices have returned to more normal relationships for 2011. As we did in 2010, we expect to benefit for the next several years from the growing demand for steel wire used for construction and infrastructure as China continues its dramatic urbanization and modernization

During the third quarter of 2010, we continued to see strong demand for our products and growth in our revenues. The following are some financial highlights for the third quarter of 2010:

• Sales revenue increased $2.2 million, or 2.3%, to $96.1 million for the third quarter of 2010 from $93.9 million for the same period of last year.

• Gross profit increased by 14.4% to $4.28 million for the third quarter of 2010, compared with $3.74 million for the same period in 2009.

• Net income increased $0.02 million, or 0.8%, to $2.59 million for the third quarter of 2010, from $2.57 million for the same period of last year.

• Basic and fully diluted earnings per share was $0.26 for the third quarter of 2010, compared with $0.26 for the same period last year.

On March 26, 2010, we entered into and closed a share exchange agreement with Kalington, the shareholders of Kalington, Goodwin Ventures, Inc. and Longhai, pursuant to which we acquired 100% of the issued and outstanding capital stock of Kalington in exchange for 10,000 shares of our Series A Convertible Preferred Stock, which constituted 98.5% of our issued and outstanding capital stock on an as-converted to common stock basis as of and immediately after the consummation of the transactions contemplated by the Share Exchange Agreement.

Business Snapshot:

• The production of steel wire ranging from 6mm to 10mm in diameter.
• We currently operate two wire production lines which have a combined annual capacity of approximately nine hundred thousand tons per year.
• Our products are sold to a number of distributors who transport the wire to nearby wire processing facilities.
• Our wire is then further processed by third party wire refiners into a variety of products such as nails, screws, and wire mesh for use in reinforced concrete and fencing.

Industry Snapshot: 

• Steel consumption in the PRC is highly correlated with nominal fixed asset investment. Construction is the largest driver of steel usage in China. The following table details steel consumption by economic sector, construction a consumes the most steel by a wide margin

• Construction growth has been strong and has rebounded from the financial downturn in late 2008 robustly. We expect to continue to benefit from the housing and commercial needs created by urbanization trends and infrastructure trends in the furture
  
• Steel wire prices, along with the majority of other commodities, had a strong run up in prices leading to a large collapse in 2008. Throughout the rapid increase and decline in commodity prices, we were able to maintain positive gross and net margins. We believe steel wire prices have stabilized and we expect them to rise over 2010 as demand increases due to new and ongoing construction projects.

• We believe that the market for high quality steel wire will continue to grow in the PRC. The PRC has placed a temporary moratorium on new steel wire plant construction in an effort to encourage consolidation, therefore our expansion plan is to build capacity through the acquisition of facilities at attractive prices from competitors who lack our management experience and efficient labor force. We plan to continue to improve margins through increased efficiencies in our production process.

Financial Snapshot:

• Revenues increased from $238,644,939 in fiscal year 2007 to $511,487,983 in fiscal year 2008, representing a growth rate of approximately 114%.
• While our revenues dropped in 2009 to $373,660,461 due to a sharp decline in the price of steel wire, our gross margins improved markedly as we improved our operational efficiency.
• We had no change in operating capacity year over year, and we operated at nearly full capacity for both 2008 and 2009. (This could indicate that the company may have to tap the equity markets).

Post Merger Share Calculation:

•      150,000: Pre reverse merger outstanding shares, post 1-for-125 reverse split
•   9.850,000: Newly issued shares of Common Stock

GeoTeam® best effort calculation of total post reverse merger outstanding shares assuming full conversions:  10,000,000

Notes:

• We located a site that indicates their are 11.3 million shares outstanding
• The price of the common stock has not been adjusted for the 1 for 125 reverse spilt.

We believe that our cash on hand and cash flow from operations will meet part of our present cash needs and we will require additional cash resources, to meet our expected capital expenditure and working capital for the next 12 months.