Longhai Steel, Inc. (fka LGHS)

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Our management may have potential conflicts of interest with our related party, the Longhai Group, that could adversely affect our company.
Our chief executive officer and primary shareholder, Chaojun Wang, is also the controlling shareholder of Xingtai Longhai Steel Group Co., Ltd., or the Longhai Group. Prior to the reorganization of Longhai in preparation for the reverse merger and this offering, Longhai operated largely as a member of the Longhai Group. As a result, Longhai had a number of related party transactions with the Longhai Group. For example, Longhai purchased substantially all of its steel billets requirement from the Longhai Group and leases space from the Longhai Group for its facilities.
Although Longhai has taken steps to reduce the number of related party transactions with the Longhai Group and has implemented safeguards to reduce the potential for related party transactions to benefit the Longhai
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Group to the detriment of Longhai, any related party transactions between Longhai and the Longhai Group may present conflicts of interest for our management. For example, although Longhai’s facility lease agreement with the Longhai Group restricts the Longhai Group’s ability to unilaterally terminate or change the terms of the lease, Longhai’s management—who also manage the Longhai Group—could have an incentive to amend these provisions of the lease to remove these protections or to increase lease payments to the benefit of the Longhai Group. Similarly, although Longhai purchases its steel billet needs from third parties (which, in turn, purchase from the Longhai Group) rather than from the Longhai Group directly, the Longhai Group could take steps to increase the costs of such billet to Longhai’s detriment. In particular, the Longhai Group is able to supply steel to Longhai less expensively than competitors because, while the base price of steel billet is comparable across the region, (i) the Longhai Group’s cost of transporting steel to Longhai is lower given its proximity to Longhai and (ii) the Longhai Group can deliver hot steel billet given such proximity, which reduces Longhai’s energy costs and factors into Longhai’s calculation of its true steel billet costs. The Longhai Group could use this advantage to increase its price to a level that is higher than it would otherwise charge, knowing that the ultimate price to Longhai would remain comparable after factoring in such additional benefits. At the same time, the management of Longhai could cause Longhai to purchase steel from third parties that purchase from the Longhai Group, even where such purchases would not be in Longhai’s best economic interest.
While we have adopted a majority independent board of directors and have implemented a code of ethics to reduce the likelihood of such conflicts of interest, such potential conflicts of interest might occur from time to time, and the effect of any such conflict could be materially adverse to our company.
Because we buy steel billet from third party suppliers who buy from the Longhai Group, rather than from the Longhai Group directly, we may pay higher prices than would be possible if we bought steel billet from the Longhai Group itself.
Prior to 2009, Longhai purchased its steel billet from the Longhai Group, a related party. These purchases were made at prevailing market prices for the commodity in the region. Beginning in 2009, Longhai determined that, in the interest of reducing its related party transactions with the Longhai Group, it would stop purchasing steel billet from the Longhai Group and would instead purchase from third party trading companies. Because these third party also earn revenues by serving as middlemen in the indirect sale of steel billet from the Longhai Group to Longhai, there is a risk that Longhai will pay more for steel billet than it might otherwise be able to negotiate with the Longhai Group if Longhai were to buy directly from the Longhai Group. To date, Longhai has paid market prices for steel billet, whether it is purchasing from the Longhai Group or from these trading companies; however, (i) we cannot guarantee that Longhai will be able to purchase at such prices in the future and (ii) such prices may not represent the lowest possible price for steel billet that might be available in a direct sale from the Longhai Group.

http://www.sec.gov/Archives/edgar/data/1296286/000114420410067206/v205350_s1a.htm