UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| x | QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2014
or
| ¨ | TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to __________
Commission File Number 001-33717
General Steel Holdings, Inc.
(Exact name of registrant as specified in
its charter)
Nevada |
|
41-2079252 |
(State or other Jurisdiction of |
|
(I.R.S. Employer Identification No.) |
Incorporation or Organization) |
|
|
Level 21, Tower B, Jia Ming Center
No. 27 Dong San Huan North Road
Chaoyang District, Beijing, China 100020
(Address of Principal Executive Office,
Including Zip Code)
+86 (10) 5775 7691
(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 Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files). Yes
x No ¨
Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.
See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company”
in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ |
|
Accelerated filer ¨ |
|
Non-accelerated
filer ¨
(Do not check if a smaller reporting company) |
|
Smaller reporting company x |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
¨ No
x
As of August 1, 2014,
58,314,688 shares of common stock, par value $0.001 per share, were outstanding.
Table of Contents
PART I – FINANCIAL INFORMATION
ITEM 1. UNAUDITED FINANCIAL STATEMENTS
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands)
| |
June 30, | | |
December 31, | |
| |
2014 | | |
2013 | |
ASSETS |
| |
| | | |
| | |
CURRENT ASSETS: | |
| | | |
| | |
Cash | |
$ | 44,749 | | |
$ | 31,967 | |
Restricted cash | |
| 448,106 | | |
| 399,333 | |
Notes receivable | |
| 36,948 | | |
| 60,054 | |
Restricted notes receivable | |
| 106,873 | | |
| 395,589 | |
Loans receivable - related parties | |
| 4,540 | | |
| 4,540 | |
Accounts receivable, net | |
| 5,277 | | |
| 4,078 | |
Accounts receivable - related parties | |
| 5,788 | | |
| 2,942 | |
Other receivables, net | |
| 54,804 | | |
| 54,716 | |
Other receivables - related parties | |
| 57,983 | | |
| 54,106 | |
Inventories | |
| 208,971 | | |
| 212,921 | |
Advances on inventory purchase | |
| 58,503 | | |
| 44,897 | |
Advances on inventory purchase - related parties | |
| 119,279 | | |
| 83,003 | |
Prepaid expense and other | |
| 3,322 | | |
| 1,388 | |
Prepaid taxes | |
| 12,489 | | |
| 28,407 | |
Short-term investment | |
| 2,763 | | |
| 2,783 | |
TOTAL CURRENT ASSETS | |
| 1,170,395 | | |
| 1,380,724 | |
| |
| | | |
| | |
PLANT AND EQUIPMENT, net | |
| 1,253,351 | | |
| 1,271,907 | |
| |
| | | |
| | |
OTHER ASSETS: | |
| | | |
| | |
Advances on equipment purchase | |
| 92,133 | | |
| 6,409 | |
Investment in unconsolidated entities | |
| 16,710 | | |
| 16,943 | |
Long-term deferred expense | |
| 552 | | |
| 668 | |
Intangible assets, net of accumulated amortization | |
| 23,333 | | |
| 23,707 | |
TOTAL OTHER ASSETS | |
| 132,728 | | |
| 47,727 | |
| |
| | | |
| | |
TOTAL ASSETS | |
$ | 2,556,474 | | |
$ | 2,700,358 | |
| |
| | | |
| | |
LIABILITIES AND DEFICIENCY |
| |
| | | |
| | |
CURRENT LIABILITIES: | |
| | | |
| | |
Short term notes payable | |
$ | 875,479 | | |
$ | 1,017,830 | |
Accounts payable | |
| 418,468 | | |
| 434,979 | |
Accounts payable - related parties | |
| 262,103 | | |
| 235,692 | |
Short term loans - bank | |
| 201,673 | | |
| 301,917 | |
Short term loans - others | |
| 64,395 | | |
| 62,067 | |
Short term loans - related parties | |
| 153,996 | | |
| 126,693 | |
Current maturities of long-term loans - related party | |
| 62,374 | | |
| 53,013 | |
Other payables and accrued liabilities | |
| 48,343 | | |
| 45,653 | |
Other payable - related parties | |
| 98,209 | | |
| 94,079 | |
Customer deposits | |
| 136,288 | | |
| 87,860 | |
Customer deposits - related parties | |
| 142,888 | | |
| 64,881 | |
Deposit due to sales representatives | |
| 21,435 | | |
| 24,343 | |
Deposit due to sales representatives - related parties | |
| 1,658 | | |
| 1,997 | |
Taxes payable | |
| 4,181 | | |
| 4,628 | |
Deferred lease income, current | |
| 2,171 | | |
| 2,187 | |
Capital lease obligations, current | |
| 6,443 | | |
| 4,321 | |
TOTAL CURRENT LIABILITIES | |
| 2,500,104 | | |
| 2,562,140 | |
| |
| | | |
| | |
NON-CURRENT LIABILITIES: | |
| | | |
| | |
Long-term loans - related party | |
| 9,750 | | |
| 19,644 | |
Deferred lease income, noncurrent | |
| 73,620 | | |
| 75,257 | |
Capital lease obligations, noncurrent | |
| 384,830 | | |
| 375,019 | |
Profit sharing liability at fair value | |
| 164,067 | | |
| 162,295 | |
TOTAL NON-CURRENT LIABILITIES | |
| 632,267 | | |
| 632,215 | |
| |
| | | |
| | |
TOTAL LIABILITIES | |
| 3,132,371 | | |
| 3,194,355 | |
| |
| | | |
| | |
COMMITMENTS AND CONTINGENCIES | |
| | | |
| | |
| |
| | | |
| | |
DEFICIENCY: | |
| | | |
| | |
Preferred stock, $0.001 par value, 50,000,000 shares authorized, 3,092,899 shares issued and outstanding as of June 30, 2014 and December 31, 2013 | |
| 3 | | |
| 3 | |
Common stock, $0.001 par value, 200,000,000 shares authorized, 58,314,688 and 58,234,688 shares issued, 55,842,382 and 55,762,382 shares outstanding as of June 30, 2014 and December 31, 2013, respectively | |
| 58 | | |
| 58 | |
Treasury stock, at cost, 2,472,306 shares as of June 30, 2014 and December 31, 2013 | |
| (4,199 | ) | |
| (4,199 | ) |
Paid-in-capital | |
| 107,097 | | |
| 106,878 | |
Statutory reserves | |
| 6,408 | | |
| 6,243 | |
Accumulated deficits | |
| (469,381 | ) | |
| (414,798 | ) |
Accumulated other comprehensive income | |
| 3,016 | | |
| 729 | |
TOTAL GENERAL STEEL HOLDINGS, INC. DEFICIENCY | |
| (356,998 | ) | |
| (305,086 | ) |
| |
| | | |
| | |
NONCONTROLLING INTERESTS | |
| (218,899 | ) | |
| (188,911 | ) |
| |
| | | |
| | |
TOTAL DEFICIENCY | |
| (575,897 | ) | |
| (493,997 | ) |
| |
| | | |
| | |
TOTAL LIABILITIES AND DEFICIENCY | |
$ | 2,556,474 | | |
$ | 2,700,358 | |
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE (LOSS) INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE
30, 2014 AND 2013
(UNAUDITED)
(In thousands, except per share data)
| |
For the three months ended June 30, | | |
For the six months ended June 30, | |
| |
2014 | | |
2013 | | |
2014 | | |
2013 | |
| |
| | |
| | |
| | |
| |
SALES | |
$ | 508,637 | | |
$ | 517,350 | | |
$ | 1,020,642 | | |
$ | 1,019,781 | |
| |
| | | |
| | | |
| | | |
| | |
SALES - RELATED PARTIES | |
| 79,376 | | |
| 136,301 | | |
| 161,582 | | |
| 285,161 | |
TOTAL SALES | |
| 588,013 | | |
| 653,651 | | |
| 1,182,224 | | |
| 1,304,942 | |
| |
| | | |
| | | |
| | | |
| | |
COST OF GOODS SOLD | |
| 482,011 | | |
| 540,271 | | |
| 1,012,755 | | |
| 1,038,897 | |
| |
| | | |
| | | |
| | | |
| | |
COST OF GOODS SOLD - RELATED PARTIES | |
| 77,908 | | |
| 148,916 | | |
| 163,936 | | |
| 297,514 | |
TOTAL COST OF GOODS
SOLD | |
| 559,919 | | |
| 689,187 | | |
| 1,176,691 | | |
| 1,336,411 | |
| |
| | | |
| | | |
| | | |
| | |
GROSS PROFIT (LOSS) | |
| 28,094 | | |
| (35,536 | ) | |
| 5,533 | | |
| (31,469 | ) |
| |
| | | |
| | | |
| | | |
| | |
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES | |
| (18,849 | ) | |
| (20,848 | ) | |
| (39,902 | ) | |
| (39,803 | ) |
CHANGE IN FAIR VALUE OF PROFIT SHARING LIABILITY | |
| (2,920 | ) | |
| 9,494 | | |
| (2,969 | ) | |
| 56,273 | |
| |
| | | |
| | | |
| | | |
| | |
INCOME (LOSS) FROM OPERATIONS | |
| 6,325 | | |
| (46,890 | ) | |
| (37,338 | ) | |
| (14,999 | ) |
| |
| | | |
| | | |
| | | |
| | |
OTHER INCOME (EXPENSE) | |
| | | |
| | | |
| | | |
| | |
Interest income | |
| 4,066 | | |
| 3,383 | | |
| 7,258 | | |
| 5,822 | |
Finance/interest expense | |
| (26,619 | ) | |
| (21,216 | ) | |
| (55,314 | ) | |
| (46,073 | ) |
Gain (loss) on disposal of equipment and intangible assets | |
| (142 | ) | |
| (235 | ) | |
| (96 | ) | |
| 96 | |
Income from equity investments | |
| 54 | | |
| 132 | | |
| 67 | | |
| 90 | |
Foreign currency transaction gain | |
| (963 | ) | |
| 98 | | |
| (1,817 | ) | |
| 126 | |
Lease income | |
| 542 | | |
| 539 | | |
| 1,088 | | |
| 1,071 | |
Other non-operating (expense) income, net | |
| 302 | | |
| 521 | | |
| 126 | | |
| 790 | |
Other expense, net | |
| (22,760 | ) | |
| (16,778 | ) | |
| (48,688 | ) | |
| (38,078 | ) |
| |
| | | |
| | | |
| | | |
| | |
LOSS BEFORE PROVISION FOR INCOME TAXES AND
NONCONTROLLING INTEREST | |
| (16,435 | ) | |
| (63,668 | ) | |
| (86,026 | ) | |
| (53,077 | ) |
| |
| | | |
| | | |
| | | |
| | |
PROVISION FOR INCOME TAXES | |
| | | |
| | | |
| | | |
| | |
Current | |
| 107 | | |
| 105 | | |
| 112 | | |
| 176 | |
Deferred | |
| - | | |
| - | | |
| - | | |
| - | |
Provision for income
taxes | |
| 107 | | |
| 105 | | |
| 112 | | |
| 176 | |
| |
| | | |
| | | |
| | | |
| | |
NET LOSS | |
| (16,542 | ) | |
| (63,773 | ) | |
| (86,138 | ) | |
| (53,253 | ) |
| |
| | | |
| | | |
| | | |
| | |
Less: Net loss attributable to noncontrolling
interest | |
| (5,523 | ) | |
| (23,955 | ) | |
| (31,555 | ) | |
| (16,538 | ) |
| |
| | | |
| | | |
| | | |
| | |
NET LOSS ATTRIBUTABLE TO GENERAL STEEL HOLDINGS,
INC. | |
$ | (11,019 | ) | |
$ | (39,818 | ) | |
$ | (54,583 | ) | |
$ | (36,715 | ) |
| |
| | | |
| | | |
| | | |
| | |
NET LOSS | |
$ | (16,542 | ) | |
$ | (63,773 | ) | |
$ | (86,138 | ) | |
$ | (53,253 | ) |
| |
| | | |
| | | |
| | | |
| | |
OTHER COMPREHENSIVE LOSS | |
| | | |
| | | |
| | | |
| | |
Foreign currency translation
adjustments | |
| (929 | ) | |
| (7,210 | ) | |
| 3,741 | | |
| (9,736 | ) |
| |
| | | |
| | | |
| | | |
| | |
COMPREHENSIVE LOSS | |
| (17,471 | ) | |
| (70,983 | ) | |
| (82,397 | ) | |
| (62,989 | ) |
| |
| | | |
| | | |
| | | |
| | |
Less: Comprehensive loss attributable to noncontrolling
interest | |
| (5,875 | ) | |
| (26,745 | ) | |
| (30,101 | ) | |
| (20,290 | ) |
| |
| | | |
| | | |
| | | |
| | |
COMPREHENSIVE LOSS ATTRIBUTABLE TO GENERAL
STEEL HOLDINGS, INC. | |
$ | (11,596 | ) | |
$ | (44,238 | ) | |
$ | (52,296 | ) | |
$ | (42,699 | ) |
| |
| | | |
| | | |
| | | |
| | |
WEIGHTED AVERAGE NUMBER OF SHARES | |
| | | |
| | | |
| | | |
| | |
Basic and Diluted | |
| 55,842 | | |
| 54,980 | | |
| 55,828 | | |
| 54,893 | |
| |
| | | |
| | | |
| | | |
| | |
LOSS PER SHARE | |
| | | |
| | | |
| | | |
| | |
Basic and Diluted | |
$ | (0.20 | ) | |
$ | (0.72 | ) | |
$ | (0.98 | ) | |
$ | (0.67 | ) |
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
FOR THE SIX MONTHS ENDED JUNE
30, 2014 AND 2013
(UNAUDITED)
(In thousands)
| |
2014 | | |
2013 | |
| |
| | |
| |
CASH FLOWS FROM OPERATING ACTIVITIES: | |
| | | |
| | |
Net loss | |
$ | (86,138 | ) | |
$ | (53,253 | ) |
Adjustments to reconcile net loss to cash provided by (used in) operating activities: | |
| | | |
| | |
Depreciation, amortization and depletion | |
| 47,788 | | |
| 43,067 | |
Change in fair value of derivative liabilities - warrants | |
| - | | |
| (1 | ) |
Change in fair value of profit sharing liability | |
| 2,969 | | |
| (56,273 | ) |
(Gain) loss on disposal of equipment and intangible assets | |
| 96 | | |
| (96 | ) |
Provision for doubtful accounts | |
| (250 | ) | |
| (169 | ) |
Reservation of mine maintenance fee | |
| 278 | | |
| 215 | |
Stock issued for services and compensation | |
| 219 | | |
| 480 | |
Amortization of deferred financing cost on capital lease | |
| 9,253 | | |
| 10,217 | |
Income from equity investments | |
| (67 | ) | |
| (90 | ) |
Foreign currency transaction (gain) loss | |
| 1,817 | | |
| (126 | ) |
Deferred lease income | |
| (1,088 | ) | |
| (1,071 | ) |
Changes in operating assets and liabilities | |
| | | |
| | |
Notes receivable | |
| 45,931 | | |
| (64,424 | ) |
Accounts receivable | |
| (1,008 | ) | |
| (33,951 | ) |
Accounts receivable - related parties | |
| (2,875 | ) | |
| 8,969 | |
Other receivables | |
| (307 | ) | |
| (857 | ) |
Other receivables - related parties | |
| (4,275 | ) | |
| 10,275 | |
Inventories | |
| 1,286 | | |
| 38,014 | |
Advances on inventory purchases | |
| (13,968 | ) | |
| 23,215 | |
Advances on inventory purchases - related parties | |
| (36,971 | ) | |
| (48,019 | ) |
Prepaid expense and other | |
| (1,947 | ) | |
| (1,115 | ) |
Long-term deferred expense | |
| 111 | | |
| 317 | |
Prepaid taxes | |
| 15,747 | | |
| 2,742 | |
Accounts payable | |
| (18,050 | ) | |
| 43,122 | |
Accounts payable - related parties | |
| 28,204 | | |
| 55,227 | |
Other payables and accrued liabilities | |
| 2,637 | | |
| 5,002 | |
Other payables - related parties | |
| 4,824 | | |
| (16,987 | ) |
Customer deposits | |
| 49,187 | | |
| (6,103 | ) |
Customer deposits - related parties | |
| 78,667 | | |
| (14,502 | ) |
Taxes payable | |
| (413 | ) | |
| (6,639 | ) |
Other noncurrent liabilities | |
| - | | |
| 1,378 | |
Net cash provided by (used in) operating activities | |
| 121,657 | | |
| (61,436 | ) |
| |
| | | |
| | |
CASH FLOWS FROM INVESTING ACTIVITIES: | |
| | | |
| | |
Restricted cash | |
| (51,820 | ) | |
| (49,988 | ) |
Cash proceeds from short term investment | |
| - | | |
| 80 | |
Cash proceeds from sales of equipments and intangible assets | |
| 24 | | |
| 16 | |
Equipment purchase and intangible assets | |
| (112,713 | ) | |
| (52,350 | ) |
Net cash used in investing activities | |
| (164,509 | ) | |
| (102,242 | ) |
| |
| | | |
| | |
CASH FLOWS FINANCING ACTIVITIES: | |
| | | |
| | |
Restricted notes receivable | |
| 286,485 | | |
| 244,940 | |
Borrowings on short term notes payable | |
| 900,202 | | |
| 812,577 | |
Payments on short term notes payable | |
| (1,035,408 | ) | |
| (1,001,301 | ) |
Borrowings on short term loans - bank | |
| 185,023 | | |
| 141,484 | |
Payments on short term loans - bank | |
| (285,100 | ) | |
| (83,433 | ) |
Borrowings on short term loan - others | |
| 19,949 | | |
| 47,903 | |
Payments on short term loans - others | |
| (25,417 | ) | |
| (47,055 | ) |
Borrowings on short term loan - related parties | |
| 32,576 | | |
| 213,576 | |
Payments on short term loans - related parties | |
| (19,233 | ) | |
| (124,059 | ) |
Deposits due to sales representatives | |
| (2,736 | ) | |
| (3,734 | ) |
Deposit due to sales representatives - related parties | |
| (326 | ) | |
| 529 | |
Payments on long-term loans - related party | |
| - | | |
| (17,544 | ) |
Net cash provided by financing activities | |
| 56,015 | | |
| 183,883 | |
| |
| | | |
| | |
EFFECTS OF EXCHANGE RATE CHANGE IN CASH | |
| (381 | ) | |
| 1,199 | |
| |
| | | |
| | |
INCREASE IN CASH | |
| 12,782 | | |
| 21,404 | |
| |
| | | |
| | |
CASH, beginning of period | |
| 31,967 | | |
| 46,467 | |
| |
| | | |
| | |
CASH, end of period | |
$ | 44,749 | | |
$ | 67,871 | |
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
Note 1 – Organization and Operations
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 steel companies serving various industries in the People’s Republic of China (“PRC”). The Company’s
main operation is manufacturing and sales of steel products such as steel rebar, hot-rolled carbon and silicon sheets and spiral-weld
pipes. The Company, together with its subsidiaries, majority owned subsidiaries and variable interest entity, is referred to as
the “Group”.
On April 29, 2011, a 20-year Unified
Management Agreement (“the Agreement”) was entered into between the Company, the Company’s 60%-owned
subsidiary Shaanxi Longmen Iron and Steel Co., Ltd. (“Longmen Joint Venture”), Shaanxi Coal and Chemical Industry
Group Co., Ltd. (“Shaanxi Coal”) and Shaanxi Iron and Steel Group (“Shaanxi Steel”). Shaanxi Steel is
the controlling shareholder of Shaanxi Longmen Iron and Steel Group Co., Ltd (“Long Steel Group”) which is the
non-controlling interest holder in Longmen Joint Venture, and Shaanxi Coal, a state owned entity, is the parent company of
Shaanxi Steel. Under the terms of the Agreement, all manufacturing machinery and equipment of Longmen Joint Venture and the
$605.8 million (or approximately RMB 3.7 billion) of the constructed iron and steel making facilities owned by Shaanxi Steel,
which includes one 400 m2 sintering machine, two 1,280 m3 blast furnaces, two 120 ton converters and
some auxiliary systems, are managed collectively as a single virtual asset pool (“Asset Pool”). Longmen Joint
Venture manages the Asset Pool as the principal operating entity and is responsible for the daily operations of the new and
existing facilities. The Agreement leverages each of the parties’ operating strengths, allowing Longmen Joint Venture
to derive the greatest benefit from the cooperation and the newly constructed iron and steel making facilities. At the
designed efficiency level, the facilities contribute three million tons of crude steel production capacity per
year.
Longmen Joint Venture pays Shaanxi Steel
for the use of the constructed iron and steel making facilities an amount equaling the depreciation expense on the equipment constructed
by Shaanxi Steel as well as 40% of the pre-tax profit generated by the Asset Pool. The remaining 60% of the pre-tax profit is
allocated to Longmen Joint Venture. As a result, the Company’s economic interest in the profit or loss generated by Longmen
Joint Venture decreased from 60% to 36%. However, the overall capacity under the management of Longmen Joint Venture increased
by three million tons, or 75%. The Agreement improved Longmen Joint Venture’s cost structure through
sustainable and steady sourcing of key raw materials and reduced transportation costs. The distribution of profit is subject to
a prospective adjustment after the first two years based on each entity’s actual investment of time and resources into the
Asset Pool. There has been no adjustment to the Agreement from its inception to the present time nor intention to make future
adjustment by the Company and Shaanxi Steel.
The parties to the Agreement established
the Shaanxi Longmen Iron and Steel Unified Management Supervisory Committee ("Supervisory Committee") to ensure that
the facilities and related resources are operated and managed according to the stipulations set forth in the Agreement. The Board
of Directors of Longmen Joint Venture, of which the Company holds 4 out of 7 seats, requires a simple majority vote and remains
the controlling decision-making body of Longmen Joint Venture and the Asset Pool. See Note 2(c) “Consolidation of VIE.”
The Agreement constitutes an
arrangement that involves a lease which meets certain of the criteria of a capital lease and therefore the assets constructed
by Shaanxi Steel are accounted for by Longmen Joint Venture as a capital lease. The profit sharing liability portion of the
lease obligation, representing 40% of the pre-tax profit generated by the Asset Pool, is accounted for by Longmen Joint Venture
as a derivative financial instrument at fair value. See Notes 2 “Summary of significant accounting policies”, 15
“Capital lease obligations” and 16 “Profit sharing liability”.
Note 2 – Summary of significant
accounting policies
The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America
(“U.S. GAAP”) for interim financial information pursuant to the rules and regulations of the Securities and Exchange
Commission (“SEC”). The financial statements include the accounts of all directly, indirectly owned subsidiaries and
the variable interest entity listed below. All material intercompany transactions and balances have been eliminated in consolidation.
In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation
of the financial statements have been included. Interim results are not necessarily indicative of results to be expected for the
full year. The information included in this Form 10-Q should be read in conjunction with information included in the 2013
annual report on Form 10-K/A filed on August 19, 2014.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
|
(a) |
Basis
of presentation |
The consolidated financial statements
of the Company reflect the activities of the following major directly owned subsidiaries:
Subsidiary |
|
Percentage
of Ownership
|
General Steel Investment
Co., Ltd. |
British Virgin Islands |
|
|
100.0 |
% |
General Steel (China) Co., Ltd. (“General
Steel (China)”) |
PRC |
|
|
100.0 |
% |
Baotou Steel
– General Steel Special Steel Pipe Joint Venture Co., Ltd. |
PRC |
|
|
80.0 |
% |
Yangpu Shengtong Investment Co., Ltd.
(“Yangpu Shengtong”) |
PRC |
|
|
99.1 |
% |
Tianjin Qiu Steel Investment Co.,
Ltd. (“Qiu Steel”) |
PRC |
|
|
98.7 |
% |
Longmen Joint Venture |
PRC |
|
|
VIE/60.0 |
% |
Maoming Hengda Steel Company, Ltd.
(“Maoming Hengda”) |
PRC |
|
|
99.0 |
% |
Tianwu
Prior to November 19, 2013, the Company
held a 60.0% equity interest in Tianwu General Steel Material Trading Co., Ltd. (“Tianwu”). 32% interest was held
by General Steel (China) and 28% interest was held by Yangpu Shengtong. On November 19, 2013, the Company sold its 28% equity
interest of Tianwu held by Yangpu Shengtong to Tianjin Dazhan Industry Co., Ltd., a related party through indirect common ownership,
for $13.6 million (RMB 84.3 million) while retaining 32% interest held by General Steel (China). As a result of this transaction,
the Company met the criteria under ASC 810-10-40-4 to deconsolidate Tianwu at the disposal date and recognized a gain of $1.0
million in the fourth quarter of 2013 in accordance with ASC 810-10-40-5. At the same time, General Steel (China)’s remaining
32% interest is accounted for as an investment in unconsolidated subsidiaries using the equity method. See Note 2(t) - Investments
in unconsolidated entities for details.
|
(b) |
Principles
of consolidation – subsidiaries |
The accompanying consolidated financial
statements include the financial statements of the Company, its subsidiaries, its variable interest entity (“VIE”)
for which the Company is the ultimate primary beneficiary, and the VIE’s subsidiaries.
Subsidiaries are those entities in which
the Company, directly or indirectly, controls more than one half of the voting power; or has the power to govern the financial
and operating policies, to appoint or remove the majority of the members of the board of directors, or to cast a majority of votes
at the meeting of directors.
A VIE is an entity in which the Company,
or its subsidiary, through contractual arrangements, bears the risks of, and enjoys the rewards normally associated with ownership
of the entity, and therefore the Company or its subsidiary is the primary beneficiary of the entity.
All significant inter-company transactions and balances have
been eliminated upon consolidation.
Prior to entering into the Unified Management
Agreement on April 29, 2011, Longmen Joint Venture had been consolidated as the Company’s 60% direct owned subsidiary. Upon
entering into the Unified Management Agreement on April 29, 2011, Longmen Joint Venture was re-evaluated by the Company to determine
if Longmen Joint Venture is a VIE and if the Company is the primary beneficiary.
Longmen Joint Venture’s equity at
risk is considered insufficient to finance its activities and therefore Longmen Joint Venture is considered to be a VIE.
The Company would be considered the primary
beneficiary of the VIE if it has both of the following characteristics:
|
a. |
The
power to direct the activities of the VIE that most significantly impact the VIE’s economic performance; and |
|
b. |
The obligation
to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE
that could potentially be significant to the VIE. |
A Supervisory Committee was formed during
the negotiation of the Unified Management Agreement. Given there is both a Supervisory Committee and a Board of Directors with
respect to Longmen Joint Venture , the powers (rights and roles) of both bodies were considered to determine which party has the
power to direct the activities of Longmen Joint Venture, and by extension, whether the Company continues to have the power to
direct Longmen Joint Venture’s activities after this Supervisory Committee was formed and the significant investment in
plant and equipment by owners of the Longmen Joint Venture partner. The Supervisory Committee, in which the Company holds 2 out
of 4 seats, requires a ¾ majority vote, while the Board of Directors, on which the Company holds 4 out of 7 seats, requires
a simple majority vote. As the Supervisory Committee’s role is limited to supervising and monitoring management of Longmen
Joint Venture and in the event there is any disagreement between the Board and the Supervisory Committee, the Board prevails,
the Supervisory Committee is considered subordinate to the Board. Thus, the Board of Directors of Longmen Joint Venture continues
to be the controlling decision-making body with respect to Longmen Joint Venture. The Company, which controls 60% of the voting
rights of the Board of Directors, has control over the operations of Longmen Joint Venture and as such, has the power to direct
the activities of the VIE that most significantly impact Longmen Joint Venture’s economic performance.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
In connection with the Unified Management
Agreement, the Company, Shaanxi Coal and Shaanxi Steel may provide such support on a discretionary basis or as needed in the future.
See Note 2 item (d) Liquidity.
The Company has the obligation to absorb
losses and the rights to receive benefits based on the profit allocation as stipulated by the Unified Management Agreement that
are significant to the VIE. As both conditions are met, the Company is the primary beneficiary of Longmen Joint Venture and therefore,
continues to consolidate Longmen Joint Venture as a VIE.
The Company believes that the Unified
Management Agreement between Longmen Joint Venture and Shaanxi Coal is in compliance with PRC law and is legally enforceable.
However, PRC law and/or uncertainties in the PRC legal system could limit the Company’s ability to enforce the Unified Management
Agreement, which in turn, may lead to reconsideration of the VIE assessment and the potential for a different conclusion. If the
Unified Management Agreement cannot be enforced, the Company would not consolidate Longmen Joint Venture as a VIE. However, the
current PRC legal system has not limited the Company’s ability to enforce the Unified Management Agreement nor does the
Company believe it is likely to do so in the future. The Company makes an ongoing assessment to determine whether Longmen Joint
Venture is a VIE.
The carrying amount of the VIE and its
subsidiaries’ consolidated assets and liabilities are as follows:
| |
June 30, 2014 | |
December 31, 2013 |
| |
(in thousands) | |
(in thousands) |
Current assets | |
$ | 990,397 | | |
$ | 1,282,054 | |
Plant and equipment, net | |
| 1,245,144 | | |
| 1,262,144 | |
Other noncurrent assets | |
| 114,372 | | |
| 29,014 | |
Total assets | |
| 2,349,913 | | |
| 2,573,212 | |
Total liabilities | |
| (2,891,359 | ) | |
| (3,040,879 | ) |
Net liabilities | |
$ | (541,446 | ) | |
$ | (467,667 | ) |
VIE and its subsidiaries’ liabilities
consist of the following:
| |
June 30, 2014 | |
December 31, 2013 |
| |
(in thousands) | |
(in thousands) |
Current liabilities: | |
| | | |
| | |
Short term notes payable | |
$ | 864,104 | | |
$ | 988,364 | |
Accounts payable | |
| 409,550 | | |
| 393,816 | |
Accounts payable - related parties | |
| 261,437 | | |
| 235,116 | |
Short term loans - bank | |
| 149,348 | | |
| 267,688 | |
Short term loans - others | |
| 58,218 | | |
| 55,844 | |
Short term loans - related parties | |
| 152,550 | | |
| 125,236 | |
Current maturities of long-term loans – related party | |
| 62,374 | | |
| 56,614 | |
Other payables and accrued liabilities | |
| 39,685 | | |
| 37,
028 | |
Other payables - related parties | |
| 93,742 | | |
| 88,914 | |
Customer deposits | |
| 66,595 | | |
| 87,661 | |
Customer deposits - related parties | |
| 45,589 | | |
| 18,359 | |
Deposit due to sales representatives | |
| 21,435 | | |
| 24,343 | |
Deposit due to sales representatives – related parties | |
| 1,658 | | |
| 1,997 | |
Taxes payable | |
| 2,930 | | |
| 3,357 | |
Deferred lease income | |
| 2,171 | | |
| 2,187 | |
Capital lease obligations, current | |
| 6,443 | | |
| 4,321 | |
Intercompany payable to be eliminated | |
| 21,263 | | |
| 21,420 | |
Total current liabilities | |
| 2,259,092 | | |
| 2,412,265 | |
Non-current liabilities: | |
| | | |
| | |
Long term loans - related parties | |
| 9,750 | | |
| 16,043 | |
Deferred lease income - noncurrent | |
| 73,620 | | |
| 75,257 | |
Capital lease obligations, noncurrent | |
| 384,830 | | |
| 375,019 | |
Profit sharing liability at fair value | |
| 164,067 | | |
| 162,295 | |
Total non-current liabilities | |
| 632,267 | | |
| 628,614 | |
Total liabilities of consolidated VIE | |
$ | 2,891,359 | | |
$ | 3,040,879 | |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
| |
Three months ended
June 30, 2014 | |
Three months ended
June 30, 2013 |
| |
(in thousands) | |
(in thousands) |
Sales | |
$ | 587,314 | | |
$ | 650,741 | |
Gross profit (loss) | |
$ | 28,229 | | |
$ | (36,193 | ) |
Income (loss) from operations | |
$ | 8,128 | | |
$ | (44,684 | ) |
Net loss attributable to controlling interest | |
$ | (8,077 | ) | |
$ | (34,944 | ) |
| |
| | | |
| | |
| |
Six months ended June 30, 2014 | |
Six months ended June 30, 2013 |
| |
(in thousands) | |
(in thousands) |
Sales | |
$ | 1,181,328 | | |
$ | 1,297,489 | |
Gross profit (loss) | |
$ | 6,010 | | |
$ | (31,826 | ) |
Loss from operations | |
$ | (31,166 | ) | |
$ | (9,747 | ) |
Net loss attributable to controlling interest | |
$ | (46,111 | ) | |
$ | (26,619 | ) |
Longmen Joint Venture has two 100% owned
subsidiaries, Yuxin Trading Co., Ltd. (“Yuxin”) and Yuteng Trading Co., Ltd. (“Yuteng”). Longmen Joint
Venture also has two consolidated subsidiaries, Hualong and Huatianyulong, in which it does not hold a controlling interest. Hualong
and Huatianyulong are separate legal entities which were established in the PRC as limited liability companies and subsequently
invested in by Longmen Joint Venture in June 2007 and July 2008, respectively. However, these two entities do not meet the definition
of variable interest entities. Further consideration was given to whether consolidation was appropriate under the voting interest
model, specifically where the power of control may exist with a lesser percentage of ownership (i.e. less than 50%), for example,
by contract, lease, agreement with other stockholders or by court decree.
Hualong
Longmen Joint Venture, the single largest
shareholder, holds a 36.0% equity interest in Hualong. The other two shareholders, who own 34.67% and 29.33% respectively, assigned
their voting rights to Longmen Joint Venture in writing at the time of the acquisition of Hualong. The voting rights have been
assigned through the date Hualong ceases its business operations or the other two shareholders sell their interest in Hualong.
Hualong’s main business is to supply refractory. The assets, liabilities and the operating results of Hualong are immaterial
to the Company’s consolidated financial statements as of June 30, 2014 and December 31, 2013, respectively, and for the
three and six months ended June 30, 2014 and 2013, respectively.
Huatianyulong
Longmen Joint Venture holds a 50.0% equity
interest in Huatianyulong and the other unrelated shareholder holds the remaining 50.0%. The other shareholder assigned its voting
rights to Longmen Joint Venture in writing at the time of acquisition of Huatianyulong. The voting rights have been assigned through
the date Huatianyulong ceases its business operation or the other unrelated shareholder sells its interest in Huatianyulong. Huatianyulong
mainly sells imported iron ore. The assets, liabilities and the operating results of Huatianyulong are immaterial to the Company’s
consolidated financial statements as of June 30, 2014 and December 31, 2013, respectively, and for the three and six months ended
June 30, 2014 and 2013, respectively.
The Company has determined that it is
appropriate for Longmen Joint Venture to consolidate Hualong and Huatianyulong with appropriate recognition in the Company’s
financial statements of the non-controlling interests in each entity, beginning on the acquisition dates as these were also the
effective dates of the agreements with other stockholders granting majority voting rights in each entity, and thereby, the power
of control, to Longmen Joint Venture.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
The Company’s accounts have been
prepared under the going concern basis. The going concern basis assumes that assets are realized and liabilities are extinguished
in the ordinary course of business at amounts disclosed in the financial statements. The Company’s ability to continue as
a going concern depends upon aligning its sources of funding options (debt and equity) with the expenditure requirements of the
Company and repayment of the short-term debt facilities as and when they fall due.
The steel business is capital intensive
and as a normal industry practice in the PRC, the Company is highly leveraged. Debt financing in the form of short term bank loans,
loans from related parties, financing sales, bank acceptance notes, and capital leases have been utilized to finance the working
capital requirements and the capital expenditures of the Company. As a result, the Company’s debt to equity ratio as of
June 30, 2014 and December 31, 2013 were (5.4) and (6.5), respectively. As of June 30, 2014, the Company’s current liabilities
exceed current assets by $1.3 billion.
Longmen Joint Venture, as the most important
entity of the Company, accounted for a majority of the total sales of the Company. As such, the majority of the Company’s
working capital needs come from Longmen Joint Venture. The Company’s ability to continue as a going concern depends heavily
on Longmen Joint Venture’s operations, as well as its ability to obtain external financial supports, including but not limited
to lines of credit from banks and vendor financing. If Longmen Joint Venture does not maintain a sufficient level of financial
support by renewing its financing terms with existing financing sources or obtaining new sources of financial support, there may
be an immediate negative impact on the Company’s operations and its ability to continue as a going concern. Longmen Joint
Venture has obtained different types of financial support, which are listed below by category:
Lines of credit
The Company has lines of credit from the
listed major banks totaling $147.9 million with expiration dates ranging from June 16, 2015 to November 28, 2015.
Banks | |
Amount of Line of Credit (in millions) | |
Repayment Date |
China Minsheng Bank | |
| 97.5 | | |
November 28, 2015 |
China CITIC Bank | |
| 32.5 | | |
June 16, 2015 |
Bank of Communication | |
| 17.9 | | |
July 17, 2015 |
Total | |
$ | 147.9 | | |
|
Management expects the above lines
of credit will be extended after the repayment dates.
As of the date of this report, the Company
utilized $50.4 million of these lines of credit.
Vendor financing
Longmen Joint Venture signed additional
vendor financing agreements, which will provide liquidity to the Company in a total amount of $811.5 million with the following
companies:
Company |
|
Financing Period |
|
Financing Amount
(in millions) |
|
|
|
|
|
|
|
Company A – related
party |
|
July 30, 2014 –
July 30, 2019 |
|
$ |
243.8 |
|
Company B – third party |
|
January 22, 2014 – January 22,
2017 |
|
|
162.5 |
|
Company C – third party |
|
October 1, 2013 – March 31,
2016 |
|
|
487.5 |
|
Total |
|
|
|
$ |
893.8 |
|
Company A, a related party company and
Company B, a third party company, are both Longmen Joint Venture’s major coke suppliers. They have been doing business with
Longmen Joint Venture for many years. On July 30, 2014, Company A signed a five-year agreement with Longmen Joint Venture to finance
its coke purchases up to $243.8 million. Company B signed a three-year agreement with Longmen Joint Venture on January 22, 2014
to finance its coke purchases up to $162.5 million. According to the above signed agreements, both Company A and B will not demand
any cash payments during their respective financing periods. As of the date of this report, our payables to Company A and Company
B were approximately $68.2 million and $65.4 million, respectively.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
Company C is a Fortune 500 Company.
On June 28, 2013, Company C signed an agreement with Longmen Joint Venture to finance Longmen Joint Venture’s purchase
of iron ore for an amount up to $487.5 million to commence on October 1, 2013 and end on March 31, 2015. On August 1, 2014,
Company C signed an extension agreement with the Company and extended the financing terms to March 31, 2016. Subject to the
terms of the agreement, Longmen Joint Venture is subject to a penalty of 0.05% of the daily outstanding balance owed to
Company C in an event of late payment. As of the date of this report, our payable to Company C is approximately $1.9
million.
Other financing
On February 20, 2014, March 5, 2014, April
22, 2014 and April 23, 2014 Longmen Joint Venture signed payment extension agreements with each company listed below. In total,
Longmen Joint Venture can obtain $362.0 million in financial support from two-year and three-year balancing payment extensions
granted by the following five companies:
Company |
|
Financing Period |
|
Financing Amount
(in millions) |
|
|
|
|
|
|
|
Company D – related
party |
|
April 22, 2014 –
April 22, 2017 |
|
$ |
81.3 |
|
Company E – related party |
|
April 23, 2014 – April 23, 2017 |
|
|
86.0 |
|
Company F – related party |
|
April 22, 2014 – April 22, 2017 |
|
|
81.3 |
|
Company G – related party |
|
March 5, 2014 – March 5, 2016 |
|
|
56.9 |
|
Company H –
related party |
|
March 5, 2014
– March 5, 2016 |
|
|
56.9 |
|
Total |
|
|
|
$ |
362.4 |
|
As of the date of this report, our payables
to Company D, Company E, Company F, Company G and Company H are approximately $16.3 million, $21.5 million, $19.0 million, $9.9
million and $1.0 million, respectively.
Amount due to sales representatives
Longmen Joint Venture entered into agreements
with various entities to act as the Company’s exclusive sales agents in specified geographic areas. 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 in 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 is terminated. As of June 30, 2014, Longmen
Joint Venture has collected a total amount of $23.1 million. Historically, this amount is quite stable and we do not expect a
big fluctuation in this amount for the next twelve months from June 30, 2014 onwards.
With the financial support from the banks and the companies
above, management is of the opinion that the Company has sufficient funds to meet its future operations, working capital requirements
and debt obligations until the end of June 30, 2015. The detailed breakdown of Longmen Joint Venture’s estimated cash flows
are listed below.
| |
Cash inflow (outflow) (in millions) | |
| |
For the twelve months ending June 30, 2015 | |
Current liabilities over current assets (excluding deferred lease income) as of June 30, 2014 (unaudited) | |
$ | (1,327.5 | ) |
Projected cash financing and outflows: | |
| | |
Cash provided by lines of credit from banks | |
| 147.9 | |
Cash provided by vendor financing | |
| 893.8 | |
Cash provided by other financing | |
| 362.4 | |
Cash provided by sales representatives | |
| 23.1 | |
Cash projected to be used in operations in the twelve months ending June 30, 2015 | |
| (28.8 | ) |
Cash projected to be used for financing costs in the twelve months ending June 30, 2015 | |
| (63.7 | ) |
Net projected change in cash for the twelve months ending June 30, 2015 | |
$ | 7.2 | |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
As a result, the consolidated financial
statements as of June 30, 2014 have been prepared on a going concern basis.
The preparation of financial statements
in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the accompanying
consolidated financial statements and footnotes. Significant accounting estimates reflected in the Company’s consolidated
financial statements include the fair value of the profit sharing liability, the useful lives of and impairment of property, plant
and equipment, potential losses on uncollectible receivables, the allowance for inventory valuation, the interest rate used in
the financing sales, the fair value of the assets recorded under capital leases and the present value of the net minimum lease
payments of the capital leases. Actual results could differ from these estimates.
|
(f) |
Concentration
of risks and uncertainties |
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.
The Company has significant exposure to
the price fluctuation of raw materials and energy prices as part of its normal operations. The Company does not utilize any open
commodity contracts to mitigate such risks.
Cash includes demand deposits in accounts
maintained with banks within the PRC, Hong Kong and the United States. Total cash (including restricted cash balances) in these
banks on June 30, 2014 and December 31, 2013 amounted to $ 492.9 million and $ 431.3 million, including $ 0.6 million and $ 2.0
million that were deposited in Shaanxi Coal and Chemical Industry Group Financial Co., Ltd., a related party, respectively. As
of June 30, 2014, $ 0.1 million cash in the bank was covered by insurance. The Company has not experienced any losses in its bank
accounts and deposits its cash in a number of different banks to minimize its exposure to credit risk.
The Company’s five major customers
are all distributors and collectively represented 31.8% and 24.4% of the Company’s total sales for the three and six months
ended June 30, 2014, respectively. None of the five major customers individually accounted for more than 10% of the total sales
for the three months or the six months ended June 30, 2014. The Company’s five major customers represented 27.8% and 23.3%
of the Company’s total sales for the three months and six months ended June 30, 2013, respectively. None of the five major
customers individually accounted for more than 10% of the total sales for the three months or the six months ended June 30, 2013.
None of the five major customers has accounts receivable, including related parties, with the Company as of June 30, 2014 and
December 31, 2013, respectively.
For the three and six months ended June
30, 2014, the Company purchased 47.4% and 43.8% of its raw materials from five major suppliers, respectively. None of the five
major suppliers individually accounted for more than 10% of the total purchases for the three months ended June 30, 2014 and one
of the five major suppliers individually accounted for 12.7% of the total purchases for the six months ended June 30, 2014. The
purchases from the five major suppliers represented 45.0% and 38.4% of the Company’s total purchases for the three months
and six months ended June 30, 2013, respectively. Two of the five major suppliers individually accounted for 15.6% and 10.7% of
the total purchases for the three months ended June 30, 2013, respectively, and one of the five major suppliers individually accounted
for 11.6% of the total purchases for the six months ended June 30, 2013. These five vendors accounted for 38.3% and 29.1%
of total accounts payable, including related parties, as of June 30, 2014 and December 31, 2013, respectively. None of the five
major suppliers individually accounted for more than 10% of total accounts payable as June 30, 2014 and and December 31, 2013.
|
(g) |
Foreign
currency translation and other comprehensive income |
The reporting currency of the Company
is the U.S. dollar. The Company’s subsidiaries and VIE in China use the local currency, Renminbi (“RMB”), as
their 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. The statements of operations are translated at the average translation rates and the equity
accounts are translated at historical rates. Translation adjustments resulting from this process are included in accumulated other
comprehensive income in the statement of 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.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
Translation adjustments included in accumulated
other comprehensive income amounted to $3.0 million and $0.7 million as of June 30, 2014 and December 31, 2013, respectively.
The balance sheet amounts, with the exception of equity, at June 30, 2014 and December 31, 2013 were translated at 6.15 RMB and
6.11 RMB to $1.00, respectively. The equity accounts were stated at their historical rate. The average translation rates applied
to the statements of operations for the three months ended June 30, 2014 and 2013 were 6.16 RMB and 6.20 RMB, respectively. The
average translation rates applied to the statements of operations for the six months ended June 30, 2014 and 2013 were 6.14 RMB
and 6.24 RMB, respectively. Cash flows are also translated at average translation rates for the periods; as a result,, amounts
reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances in the consolidated
balance sheet.
The PRC government imposes significant
exchange restrictions on fund transfers out of the PRC that are not related to business operations. These restrictions have not
had a material impact on the Company because it has not engaged in any significant transactions that are subject to the restrictions.
|
(h) |
Financial
instruments |
The accounting standard regarding fair
value of financial instruments and related fair value measurements defines financial instruments and requires disclosure of the
fair value of financial instruments held by the Company. The Company considers the carrying amount of cash, short term investments,
accounts receivable, other receivables, accounts payable and accrued liabilities, to approximate their fair values because of
the short period of time between the origination of such instruments and their expected realization. For short term loans and
notes payable, the Company concluded the carrying values are a reasonable estimate of fair values because of the short period
of time between the origination and repayment and as their stated interest rates approximate current rates available. The carrying
value of the long term loans-related party approximates its fair value as of the reporting date as their stated interest rates
approximate current rates available.
The accounting standards define fair value,
establish a three-level valuation hierarchy for disclosures of fair value measurement and enhance disclosure requirements for
fair value measures. The three levels are defined as follow:
|
· |
Level
1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
|
· |
Level 2 inputs
to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are
observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments. |
|
· |
Level 3 inputs
to the valuation methodology are unobservable and significant to the fair value. |
The Company analyzes all financial instruments
with features of both liabilities and equity, pursuant to which warrants previously issued by the Company were required to be
recorded as a liability at fair value and marked to market each reporting period. The warrants were accounted for as derivative
liabilities and recorded at their fair value, with the change in fair value charged or credited to income each period. The
warrants expired unexercised on May 13, 2013. Prior to their expiration, the fair value of the warrants was estimated using a
binomial lattice model, using level 3 inputs.
As described in Note 15 - Capital lease
obligations, payments related to the capital lease of the Asset Pool consist of two components: (1) a fixed monthly payment of
$2.3 million (RMB 14.6 million), based on Shaanxi Steel’s cost to construct the assets, to be paid for the 20 year term
of the Unified Management Agreement; and (2) 40% of any remaining pre-tax profits from the Asset Pool, which includes Longmen
Joint Venture and the constructed iron and steel making facilities. The aforementioned profit sharing component meets the definition
of a derivative instrument under ASC 815-10-15-83 and, accordingly, the profit sharing liability is accounted for separately as
a derivative liability. It was recognized initially at its estimated fair value at inception. The estimated fair value is adjusted
each reporting period, with changes in the estimated fair value of the profit sharing liability charged or credited to operating
income each period.
The Company determines the fair value
of the profit sharing liability using Level 3 inputs by considering the present value of Longmen Joint Venture’s projected
profits/losses, discounted based on our average borrowing rate, which is currently 7.3%.
The fair value of the profit sharing liability
will change each period as a result of (a) any changes in our estimate of Longmen Joint Venture’s projected profits/losses
over the remaining term of the Agreement, (b) any change in the discount rate used, based on changes in our current or expected
borrowing rate, (c) the change in fair value related to the passage of time and change in the number of future periods over which the present
value of future cash flows is estimated and (d) any
difference between the previously estimated operating results for the current period and actual results.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
Each period, the Company
considers whether the discount rate based on the Company’s average borrowing rate should be adjusted based upon the
current and expected future financial condition of the Company. To date, the Company
has not considered any adjustment to be
necessary based upon, but not limited to, the following assumptions:
| · | because the joint venture partner of Longmen Joint Venture is a state-owned enterprise
with
an excellent credit history, PRC banks grant similar credit treatment to Longmen Joint Venture in terms of credit
availability |
| · | the current average borrowing rate of
enterprises in the steel industry in the PRC is similar to this borrowing rate |
| · | the current new/renewal borrowing rates
of the Company’s bank loans are similar to prior periods |
| · | the People’s Bank of China has not
recently adjusted any borrowing rate |
| · | PRC bank interest rates are not industry specific. The downtrend in the steel industry
did not materially impact the bank borrowing rates for steel companies |
| · | the bank interest rates are assessed by each individual bank and governed by the Chinese
banking regulatory bodies. Reports from credit rating research firms are not commonly used by PRC banks |
The projected profits/losses in Longmen
Joint Venture are based upon, but not limited to, the following assumptions:
|
· |
projected selling
units and growth in the steel market |
|
· |
projected unit
selling price in the steel market |
|
· |
projected unit
purchase cost in the coal and iron ore markets |
|
· |
selling and general
and administrative expenses to be in line with the growth in the steel market |
|
· |
projected bank
borrowings |
|
· |
interest rate
index |
|
· |
gross national
product index |
|
· |
industry index |
|
· |
government policy |
From inception to December 31, 2012, the
assumptions underlying the estimated fair value did not change significantly. Beginning in the first quarter of 2013, the assumptions
related to unit selling prices and costs were revised, resulting in a reduction of the estimated profit sharing liability. These
assumptions were further revised during 2013. The above assumptions were again reviewed by the Company at June 30, 2014 but no
major change was deemed necessary to the assumptions used at December 31, 2013. For the six months ended June 30, 2014, the Company
recognized a loss on the change in the fair value of the profit sharing liability of $2.9 million due to a $5.7 million reduction
in the present value discount offset by a $2.8 million gain resulting from the Asset Pool’s operating results for the six
months ended June 30, 2014 being slightly less favorable than previously estimated as of December 31, 2013.
The estimated fair value of the profit
sharing liability at June 30, 2014 is $164.1 million. Changes in any of the assumptions used to estimate the fair value of the
profit sharing liability will change the liability accordingly. If we were to reduce the projected bank borrowing rate used to
discount the liability to a present value by 1.0% and other factors remained unchanged, our profit sharing liability as of June
30, 2014 would have been $187.3 million and we would increase the loss from the change in the fair value of the profit sharing
liability by $23.2 million. If we were to reduce the projected selling units and growth in the steel market rate by 1.0% and other
factors remained unchanged, our profit sharing liability as of June 30, 2014 would have been $162.2 million and we would decrease
the loss from the change in the fair value of the profit sharing liability by $1.9 million.
The following table sets forth by level
within the fair value hierarchy, the Company’s financial assets and liabilities that were accounted for at fair value on
a recurring basis as of June 30, 2014:
(in thousands) | |
Carrying Value as of June 30, 2014 | | |
Fair Value Measurements at June 30, 2014 Using Fair Value Hierarchy | |
| |
| | |
Level 1 | | |
Level 2 | | |
Level 3 | |
Profit sharing liability | |
$ | 164,067 | | |
$ | - | | |
$ | - | | |
$ | 164,067 | |
Total | |
$ | 164,067 | | |
$ | - | | |
$ | - | | |
$ | 164,067 | |
The following table sets forth by level
within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value on
a recurring basis as of December 31, 2013:
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
(in thousands) | |
Carrying Value as
of December 31, 2013 | | |
Fair Value Measurements at December 31,
2013 Using Fair Value Hierarchy | |
| |
| | |
Level 1 | | |
Level 2 | | |
Level 3 | |
Profit sharing liability | |
$ | 162,295 | | |
$ | - | | |
$ | - | | |
$ | 162,295 | |
Total | |
$ | 162,295 | | |
$ | - | | |
$ | - | | |
$ | 162,295 | |
The following is a reconciliation of the
beginning and ending balance of the assets and liabilities measured at fair value on a recurring basis for the six months ended
June 30, 2014 and for the year ended December 31, 2013:
| |
June 30, 2014 | | |
December 31, 2013 | |
| |
(in thousands) | | |
(in thousands) | |
Beginning balance | |
$ | 162,295 | | |
$ | 328,828 | |
Change in fair value of profit sharing liability: | |
| | | |
| | |
Change in estimate of future operating profits | |
| - | | |
| (174,821 | ) |
Change in discount rate | |
| - | | |
| - | |
Change in the number of future periods over which the present value of future cash flows is estimated | |
| 5,778 | | |
| 16,872 | |
Difference between the previously estimated operating results for the current period and actual results | |
| (2,809 | ) | |
| (16,620 | ) |
Change in derivative liabilities - warrants | |
| - | | |
| 1 | |
Exchange rate effect | |
| (1,197 | ) | |
| 8,035 | |
Ending balance | |
$ | 164,067 | | |
$ | 162,295 | |
| |
| | | |
| | |
Except for the derivative liabilities
related to the profit sharing liability and to the warrants issued by the Company, which expired on May 13, 2013, the Company
did not identify any other assets or liabilities that are required to be presented on the balance sheet at fair value.
Notes receivable represents trade accounts
receivable due from various customers where the customers’ banks have guaranteed the payment. The notes are non-interest
bearing and normally paid within three to six months. The Company has the ability to submit requests for payment to the customer’s
bank earlier than the scheduled payment date, but will incur an interest charge and a processing fee.
Restricted notes receivable represents
notes receivable pledged as collateral for short-term loans and short-term notes payable issued by banks.
Interest expense for early submission
requests for payment for the three months ended June 30, 2014 and 2013 amounted to $12.8 million and $6.5 million, respectively,
and amounted to $26.9 million and $17.3 million, respectively, for the six months ended June 30, 2014 and 2013.
|
(j) |
Plant
and equipment, net |
Plant and equipment are stated at cost
less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the
assets with a 3%-5% residual value. The depreciation expense on assets acquired under capital leases is included with depreciation
expense on owned assets. The estimated useful lives are as follows:
Buildings and improvements |
|
10-40 Years |
Machinery |
|
10-30 Years |
Machinery and equipment under capital lease |
|
10-20 Years |
Other equipment |
|
5 Years |
Transportation equipment |
|
5 Years |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
The Company assesses all significant leases
for purposes of classification as either operating or capital. At lease inception, if the lease meets any of the four following
criteria, the Company will classify it as a capital lease; otherwise it will be treated as an operating lease: a) transfer of
ownership to lessee at the end of the lease term, b) bargain purchase option, c) lease term is equal to 75% or more of the estimated
economic life of the leased property, d) the present value of the minimum lease payments is 90% or more of the fair value of the
leased asset.
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 betterments to buildings and equipment
are capitalized. Interest incurred during construction is capitalized into construction in progress. All other interest is expensed
as incurred.
Long lived assets, including buildings
and improvements, equipment and intangible assets, are reviewed if events and changes in circumstances indicate that their carrying
amount may not be recoverable, 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.
Finite lived intangible assets of the
Company are reviewed for impairment if events and circumstances require. The Company considers assets to be impaired if the carrying
value exceeds the future projected cash flows from related operations. The Company also re-evaluates the periods of amortization
to determine whether subsequent events and circumstances warrant revised estimates of useful lives. As of June 30,
2014, the Company expects these assets to be fully recoverable.
Land use rights
All land in the PRC is owned by the government.
However, the government grants “land use rights.” General Steel (China) acquired land use rights in 2001
for a total of $3.9 million (RMB 23.7 million). These land use rights are for 50 years and expire in 2050 and 2053. The Company
amortizes the land use rights over the twenty-year business term because its business license has a twenty-year term.
Long Steel Group contributed land use
rights for a total amount of $24.1 million (RMB 148.3 million) to the Longmen Joint Venture. The contributed land use rights are
for 50 years and expire in 2048 to 2052.
Maoming Hengda has land use rights amounting
to $2.7 million (RMB 16.6 million) for 50 years that expire in 2054.
Other than the land use rights that General
Steel (China) acquired in 2001, the Company amortizes the land use rights over their 50 year term.
Entity |
|
Original
Cost |
|
|
Expires
in |
|
|
|
(in
thousands) |
|
|
|
|
General Steel (China) |
|
$ |
3,856 |
|
|
|
2050
& 2053 |
|
Longmen Joint Venture |
|
$ |
24,097 |
|
|
|
2048 & 2052 |
|
Maoming Hengda |
|
$ |
2,697 |
|
|
|
2054 |
|
Mining right
Mining rights are capitalized at cost
when acquired, including amounts associated with any value beyond proven and probable reserves, and amortized to operations as
depletion expense using the units-of-production method over the estimated proven and probable recoverable tons. Longmen Joint
Venture has iron ore mining rights amounting to $2.4 million (RMB 15.0 million), which is amortized over the estimated recoverable
reserve of 4.2 million tons.
|
(l) |
Investments
in unconsolidated entities |
Entities in which the Company has the
ability to exercise significant influence, but does not have a controlling interest, are accounted for using the equity method.
Significant influence is generally considered to exist when the Company has an ownership interest in the voting stock between
20% and 50%, and other factors, such as representation on the Board of Directors, voting rights and the impact of commercial arrangements,
are considered in determining whether the equity method of accounting is appropriate. The Company accounts for investments with
ownership less than 20% using the cost method.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
The table below summarizes Longmen Joint
Venture’s investment holdings as of June 30, 2014 and December 31, 2013.
Unconsolidated entities | |
Year acquired | | |
June 30, 2014 Net investment (In thousands) | | |
Owned % | | |
December 31, 2013 Net investment (In thousands) | | |
Owned % | |
Xi’an Delong Powder Engineering Materials Co., Ltd. | |
| 2007 | | |
$ | 1,098 | | |
| 24.1 | | |
$ | 1,215 | | |
| 24.1 | |
The table below summarizes General Steel
(China)’s investment holding (see Note 2(a) - Basis of presentation) as of June 30, 2014 and December 31, 2013.
Unconsolidated entities | |
Year acquired | | |
June 30, 2014 Net investment (In thousands) | | |
Owned % | | |
December 31, 2013 Net investment (In thousands) | | |
Owned % | |
Tianwu General Steel Material Trading Co., Ltd. | |
| 2010 | | |
$ | 15,612 | | |
| 32.0 | | |
$ | 15,728 | | |
| 32.0 | |
Total investment income (loss) in unconsolidated
subsidiaries amounted to $0.05 million and $0.13 million for the three months ended June 30, 2014 and 2013, respectively, and
$0.06 million and $0.09 million for the six months ended June 30, 2014 and 2013, respectively, which was included in “Income
from equity investments” in the condensed consolidated statements of operations and comprehensive (loss) income.
Sales are recognized at the date of shipment
to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, the Company has
no other significant obligations and collectability is reasonably assured. Payments received before all of the relevant criteria
for revenue recognition are met are recorded as customer deposits. Sales represent 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% or 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.
The Company infrequently engages in trading
transactions in which the Company acts as an agent between the suppliers and the customers. The trading arrangements are such
that the suppliers are the primary obligors, the Company does not have any general inventory risk, physical inventory loss risk
or credit risk, and the Company does not have latitude in establishing price. Sales and cost of goods sold from these trading
arrangements are recorded at the net amount retained in accordance with ASC 605-45.
|
(n) |
Recently
issued accounting pronouncements |
In April 2014, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-08, Presentation of Financial
Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals
of Components of an Entity. Under the new guidance, only disposals representing a strategic shift in operations should be
presented as discontinued operations. The new guidance also requires disclosure of the pre-tax income attributable to a disposal
of a significant part of an organization that does not qualify for discontinued operations reporting. The amendments in the ASU
are effective in the first quarter of 2015 for public organizations with calendar year ends. Early adoption is permitted. The
Company does not expect the adoption of this guidance will have a significant impact on the Company’s financial position
and results of operations.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers: Topic 606. This Update affects any entity that either enters into contracts with
customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets, unless those contracts
are within the scope of other standards. The guidance in this Update supersedes the revenue recognition requirements in Topic
605, Revenue Recognition and most industry-specific guidance. The core principle of the guidance is that an entity should
recognize revenue to illustrate the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services. The new guidance
also includes a cohesive set of disclosure requirements that will provide users of financial statements with comprehensive information
about the nature, amount, timing, and uncertainty of revenue and cash flows arising from a reporting organization’s contracts
with customers. This ASU is effective retrospectively for fiscal years, and interim periods within those years beginning
after December 15, 2016 for public companies and 2017 for non-public entities. Management is evaluating the effect, if any, on
the Company’s financial position and results of operations.
Certain prior year amounts have been reclassified
to conform to the current year presentation. These reclassifications have no effect on the accompanying condensed consolidated
statements of operations and cash flows.
Note 3 – Loans receivable –
related parties
Loans receivable – related parties
represents amounts the Company expects to collect from related parties upon maturity.
The Company had the following loans receivable
– related parties due within one year as of:
|
|
June
30, 2014 |
|
|
December
31, 2013 |
|
|
|
(in
thousands) |
|
|
(in
thousands) |
|
Loan to Teamlink Investment
Co., Ltd; due in June, July and December 2014; interest rate is 4.75% |
|
$ |
4,540 |
|
|
$ |
4,540 |
|
Total loans receivable – related
parties |
|
$ |
4,540 |
|
|
$ |
4,540 |
|
See Note 18 “Related party transactions and balances”
for the nature of the relationship of related parties.
Total interest income for the loans amounted
to $0.05 million and $0.07 million for the three months ended June 30, 2014 and 2013, respectively.
Total interest income for the loans amounted
to $0.1 million and $0.1 million for the six months ended June 30, 2014 and 2013, respectively.
Note 4 – Accounts receivable
(including related parties), net
Accounts receivable, including related
party receivables, net of allowance for doubtful accounts consists of the following:
|
|
June
30, 2014 |
|
|
December
31, 2013 |
|
|
|
(in
thousands) |
|
|
(in
thousands) |
|
Accounts receivable |
|
$ |
6,078 |
|
|
$ |
5,131 |
|
Less: allowance
for doubtful accounts |
|
|
(801 |
) |
|
|
(1,053 |
) |
Accounts
receivable – related parties |
|
|
5,788 |
|
|
|
2,942 |
|
Net
accounts receivable |
|
$ |
11,065 |
|
|
$ |
7,020 |
|
Changes in the allowance for doubtful accounts are as follows:
|
|
June
30, 2014 |
|
|
December
31, 2013 |
|
|
|
(in
thousands) |
|
|
(in
thousands) |
|
Beginning
balance |
|
$ |
1,053 |
|
|
$ |
1,367 |
|
Charge to
expense |
|
|
- |
|
|
|
96 |
|
Less: recovery |
|
|
(244 |
) |
|
|
(449 |
) |
Exchange
rate effect |
|
|
(8 |
) |
|
|
39 |
|
Ending
balance |
|
$ |
801 |
|
|
$ |
1,053 |
|
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
Note 5 – Inventories
Inventories consist of the following:
|
|
June
30, 2014 |
|
|
December 31,
2013 |
|
|
|
(in
thousands) |
|
|
(in
thousands) |
|
Supplies |
|
$ |
23,451 |
|
|
$ |
21,040 |
|
Raw materials |
|
|
147,780 |
|
|
|
164,301 |
|
Finished goods |
|
|
47,713 |
|
|
|
42,977 |
|
Less: allowance
for inventory valuation |
|
|
(9,973 |
) |
|
|
(15,397 |
) |
Total
inventories |
|
$ |
208,971 |
|
|
$ |
212,921 |
|
Raw materials consist primarily of iron
ore and coke at Longmen Joint Venture. The cost of finished goods includes direct costs of raw materials as well as direct labor
used in production. Indirect production costs at normal capacity such as utilities and indirect labor related to production such
as assembling, shipping and handling costs for purchasing are also included in the cost of inventory.
The Company values its inventory at the
lower of cost or market, determined on a weighted average method, or net realizable value. As of June 30, 2014 and December 31,
2013, the Company had provided allowance for inventory valuation in the amounts of $10.0 million and $15.4 million, respectively.
Changes in the allowance for inventory valuation are as follows:
|
|
June
30, 2014 |
|
|
December
31, 2013 |
|
|
|
(in
thousands) |
|
|
(in
thousands) |
|
Beginning balance |
|
$ |
15,397 |
|
|
$ |
9,585 |
|
Addition |
|
|
9,996 |
|
|
|
15,194 |
|
Less: write-off |
|
|
(15,319 |
) |
|
|
(9,757 |
) |
Exchange
rate effect |
|
|
(101 |
) |
|
|
375 |
|
Ending
balance |
|
$ |
9,973 |
|
|
$ |
15,397 |
|
Note 6 – Advances on inventory
purchases
Advances on inventory purchases are monies
deposited or advanced to outside vendors or related parties on future inventory purchases. Most of the Company’s vendors
require a certain amount of money to be deposited with them as a guarantee that the Company will complete its purchases on a timely
basis.
This amount is refundable and bears no
interest. The Company has legally binding contracts with its vendors, which require the deposit to be returned to the Company
or netted against accounts payable due to its vendors to the extent there are unpaid balances 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 $177.8 million and $127.9 million as of June 30, 2014 and December 31, 2013, respectively.
Note 7 – Plant and equipment,
net
Plant and equipment consist of the following:
|
|
June
30, 2014 |
|
|
December
31, 2013 |
|
|
|
(in
thousands) |
|
|
(in
thousands) |
|
Buildings and improvements |
|
$ |
280,272 |
|
|
$ |
274,402 |
|
Machinery |
|
|
658,159 |
|
|
|
667,093 |
|
Machinery
under capital lease |
|
|
625,196 |
|
|
|
623,895 |
|
Transportation
and other equipment |
|
|
23,322 |
|
|
|
22,991 |
|
Construction
in progress |
|
|
38,736 |
|
|
|
11,412 |
|
Subtotal |
|
|
1,625,685 |
|
|
|
1,599,793 |
|
Less: accumulated depreciation |
|
|
(372,334 |
) |
|
|
(327,886 |
) |
Total |
|
$ |
1,253,351 |
|
|
$ |
1,271,907 |
|
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
Construction in progress consisted of
the following as of June 30, 2014:
Construction in progress
description |
|
Value |
|
Completion |
|
|
Estimated
additional cost to
complete |
|
|
|
(In thousands) |
|
date |
|
|
(In thousands) |
|
Factory
wall remodel |
|
|
1,022 |
|
July
2014 |
|
|
77 |
|
Equipment
updates |
|
|
109 |
|
July
2014 |
|
|
3,206 |
|
Sintering
machine construction |
|
|
4,830 |
|
November
2014 |
|
|
140,122 |
|
#5 blast furnace
construction |
|
|
22,970 |
|
December
2014 |
|
|
150,155 |
|
Electrical
substation construction |
|
|
13 |
|
August
2014 |
|
|
24,419 |
|
Reconstruction
of miscellaneous factory buildings |
|
|
5,547 |
|
October
2014 |
|
|
4,337 |
|
Project materials |
|
|
2,133 |
|
|
|
|
- |
|
Others |
|
|
2,112 |
|
|
|
|
- |
|
Total |
|
$ |
38,736 |
|
|
|
$ |
326,316 |
|
The Company is obligated under a capital
lease for the iron and steel making facilities, including one sintering machine, two converters, two blast furnaces and some auxiliary
systems that expire on April 30, 2031. During 2013 and 2014, Longmen Joint Venture entered into a number of capital lease agreements
for energy-saving equipment installed throughout the steel production line. The Company is obligated under the capital lease for
the equipment upon the confirmation of the energy-saving rate between the Company and its vendors.
The carrying value of assets acquired
under the capital lease consists of the following:
|
|
June
30, 2014 |
|
|
December
31, 2013 |
|
|
|
(in
thousands) |
|
|
(in
thousands) |
|
Machinery |
|
$ |
625,196 |
|
|
$ |
623,895 |
|
Less:
accumulated depreciation |
|
|
(92,037 |
) |
|
|
(77,086 |
) |
Carrying
value of leased assets |
|
$ |
533,159 |
|
|
$ |
546,809 |
|
The Company assessed the recoverability
of all of its remaining long lived assets at June 30, 2014 and December 31, 2013, respectively, and such assessment did not result
in any impairment charges.
Depreciation expense for the three months
ended June 30, 2014 and 2013 amounted to $23.2 million and $21.4 million, respectively, and for the six months ended June 30,
2014 and 2013, amounted to $47.3 and $42.5 million, respectively. These amounts include depreciation of assets held under capital
leases for the three months ended June 30, 2014 and 2013, which amounted to $7.7 million and $7.1 million, respectively, and for
the six months ended June 30, 2014 and 2013, amounted to $15.6 and $14.1 million, respectively.
Note 8 – Intangible assets, net
Intangible assets consist of the following:
|
|
June
30, 2014 |
|
|
December
31, 2013 |
|
|
|
(in
thousands) |
|
|
(in
thousands) |
|
Land use rights |
|
$ |
30,650 |
|
|
$ |
30,884 |
|
Mining right |
|
|
2,441 |
|
|
|
2,459 |
|
Software |
|
|
1,049 |
|
|
|
743 |
|
Subtotal |
|
|
34,140 |
|
|
|
34,086 |
|
Less: |
|
|
|
|
|
|
|
|
Accumulated
amortization – land use rights |
|
|
(8,767 |
) |
|
|
(8,498 |
) |
Accumulated
amortization – mining right |
|
|
(1,363 |
) |
|
|
(1,320 |
) |
Accumulated
amortization – software |
|
|
(677 |
) |
|
|
(561 |
) |
Subtotal |
|
|
(10,807 |
) |
|
|
(10,379 |
) |
Intangible
assets, net |
|
$ |
23,333 |
|
|
$ |
23,707 |
|
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
The gross amount of the intangible assets
amounted to $34.1 million and $34.1 million as of June 30, 2014 and December 31, 2013, respectively. The remaining weighted average
amortization period is 33.1 years as of June 30, 2014.
Total amortization expense for the three
months ended June 30, 2014 and 2013 amounted to $0.3 million and $0.3 million, respectively, and for the six months ended June
30, 2014 and 2013, amounted to $0.5 million and $0.5 million, respectively.
Total depletion expense for the three
months ended June 30, 2014 and 2013 amounted to $0.04 million and $0.02 million, respectively, and for the six months ended June
30, 2014 and 2013, amounted to $0.05 million and $0.1 million, respectively.
The estimated aggregate amortization and
depletion expenses for each of the five succeeding years is as follows:
Year
ending |
|
Estimated
amortization and
depletion expenses |
|
|
Gross carrying
amount |
|
|
|
(in
thousands) |
|
|
(in
thousands) |
|
June
30, 2015 |
|
$ |
1,024 |
|
|
|
22,309 |
|
June 30, 2016 |
|
|
1,024 |
|
|
|
21,285 |
|
June 30, 2017 |
|
|
1,024 |
|
|
|
20,261 |
|
June 30, 2018 |
|
|
1,024 |
|
|
|
19,237 |
|
June 30, 2019 |
|
|
1,024 |
|
|
|
18,213 |
|
Thereafter |
|
|
18,213 |
|
|
|
- |
|
Total |
|
$ |
23,333 |
|
|
|
|
|
Note 9 – Debt
Short-term notes payable
Short-term notes payable are lines of
credit extended by banks. Banks in turn issue the Company a bank acceptance note, which can be endorsed and assigned to vendors
as payments for purchases. The notes payable are generally payable within three to six months. This short-term note payable is
guaranteed by the bank for its complete face value. The banks do not charge interest on these notes, but usually charge a transaction
fee of 0.05% of the notes value. In addition, the banks usually require the Company to deposit either a certain amount of cash
at the bank as a guarantee deposit, which is classified on the balance sheet as restricted cash, or provide notes receivable as
security, which are classified on the balance sheet as restricted notes receivable. Restricted cash as a guarantee for the notes
payable amounted to $430.2 million and $399.4 million as of June 30, 2014 and December 31, 2013, respectively. Restricted notes
receivable as a guarantee for the notes payable amounted to $51.0 million and $231.7 million as of June 30, 2014 and December
31, 2013, respectively.
The Company had the following short-term
notes payable as of:
| |
June 30, 2014 | | |
December 31, 2013 | |
| |
(in thousands) | | |
(in thousands) | |
General Steel (China): Notes payable to various banks in China, due various dates from July to December 2014. Restricted cash required of $11.4 million and $16.4 million as of June 30, 2014 and December 31, 2013, respectively; guaranteed by third parties. These notes payable were either repaid or renewed subsequently on the due dates. | |
$ | 11,375 | | |
$ | 29,466 | |
Longmen Joint Venture: Notes payable to various banks in China, due various dates from July to December 2014. $418.8 million restricted cash and $51.0 million notes receivable are secured for notes payable as of June 30, 2014, and comparatively $383.0 million restricted cash and $231.7 million notes receivable secured as of December 31, 2013, respectively; some notes are further guaranteed by third parties. These notes payable were either repaid or renewed subsequently on the due dates. | |
| 864,104 | | |
| 988,364 | |
Total short-term notes payable | |
$ | 875,479 | | |
$ | 1,017,830 | |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
Short-term loans
Short-term loans represent amounts due
to various banks, other companies and individuals, including related parties, normally due within one year. The principal of the
loans are due at maturity but can be renewed at the bank’s option. Accrued interest is due either monthly or quarterly.
Short term loans due to banks, related
parties and other parties consisted of the following as of:
Due to banks
|
|
June
30, 2014 |
|
|
December
31, 2013 |
|
|
|
(in
thousands) |
|
|
(in
thousands) |
|
General
Steel (China): Loans from various banks in China, due various dates from August 2014 to June 2015. Weighted average interest
rate was 7.1% per annum and 7.2% per annum as of June 30, 2014 and December 31, 2013, respectively; some are guaranteed by
third parties and related parties. $8.1 million and $0 restricted cash were secured for the loans as of June 30, 2014 and
December 31, 2013, respectively; These loans were either repaid or renewed subsequently on the due dates. |
|
$ |
52,325 |
|
|
$ |
34,229 |
|
Longmen Joint Venture: Loans from
various banks in China, due various dates from August 2014 to June 2015. Weighted average interest rate was 6.1% per annum
and 6.3% per annum as of June 30, 2014 and December 31, 2013, respectively; some are guaranteed by third parties, accounts
receivable, restricted cash or notes receivables. $56.1 million and $163.9 million restricted notes receivable were secured
for the loans as of June 30, 2014 and December 31, 2013, respectively; $5.9 million and $0 restricted cash were secured for
the loans as of June 30, 2014 and December 31, 2013, respectively; These loans were either repaid or renewed subsequently
on the due dates. |
|
|
149,348 |
|
|
|
267,688 |
|
Total short-term loans - bank |
|
$ |
201,673 |
|
|
$ |
301,917 |
|
As of June 30, 2014 and December 31, 2013,
the Company had not met its financial covenants stipulated by certain loan agreements related to the Company’s debt to asset
ratio. As of June 30, 2014, two of General Steel (China)’s bank loans contained financial covenants stipulating debt to
asset ratios below 20%. However, as of June 30, 2014, General Steel (China)’s debt to asset ratio was 95.4%. As of December
31, 2013, three of General Steel (China)’s bank loans contained financial covenants stipulating debt to asset ratios below
20% and 70%. However, as of December 31, 2013, General Steel (China)’s debt to asset ratio was 89.7%.
Furthermore, the Company is a party to
a loan agreement with a cross default clause whereby any breach of loan covenants will automatically result in default of the
loan. The outstanding balance of the short term loans affected by the above breach of covenants and cross default as of June 30,
2014 and December 31, 2013 was $5.2 million and $6.4 million, respectively. According to the Company’s short term loan agreements,
the banks have the right to request more collateral or additional guarantees if the breach of covenant is not remedied or request
early repayment of the loan if the Company does not cure such breach within a certain period of time. As of the date of this report,
the Company has not received any notice from the banks to request more collateral, additional guarantees or early repayment of
the short term loans due to the breach of covenant.
Due to unrelated parties
|
|
June
30, 2014 |
|
|
December
31, 2013 |
|
|
|
(in
thousands) |
|
|
(in
thousands) |
|
Longmen
Joint Venture: Loans from various unrelated companies and individuals, due various dates from July to December 2014, and weighted
average interest rate was 5.6% per annum and 5.2% per annum as of June 30, 2014 and December 31, 2013, respectively. These
loans were either repaid or renewed subsequently on the due dates. |
|
$ |
17,099 |
|
|
$ |
22,720 |
|
Longmen Joint
Venture: Loans from financing sales. |
|
|
41,119 |
|
|
|
33,124 |
|
Maoming Hengda:
Loans from one unrelated party and one related party, due on demand, none interest bearing. |
|
|
6,177 |
|
|
|
6,223 |
|
Total short-term
loans – others |
|
$ |
64,395 |
|
|
$ |
62,067 |
|
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
The Company had various loans from unrelated
companies amounting to $64.4 million and $62.1 million as of June 30, 2014 and December 31, 2013, respectively. Of the $64.4 million,
$6.2 million of loans carry no interest, $41.1 million of financing sales are subject to interest rates ranging between 4.6% and
9.6%, and the remaining $17.1 million are subject to interest rates ranging from 5.0% to 5.8%. All short term loans from unrelated
companies are payable on demand and unsecured.
As part of its working capital management,
Longmen Joint Venture has entered into a number of sale and purchase back contracts ("contracts") with third party companies
and Longmen Joint Venture’s subsidiaries, Yuxin and Yuteng. According to the contracts, Longmen Joint Venture sells rebar
to the third party companies at a certain price, and within the same month, Yuxin and Yuteng will purchase back the rebar from
the third party companies at a price of 4.6% to 9.6% higher than the original selling price from Longmen Joint Venture. Based
on the contract terms, Longmen Joint Venture is paid in advance for the rebar sold to the third party companies and Yuxin and
Yuteng are given a credit period of several months to one year from the third party companies. There is no physical movement of
the inventory during the sale and purchase back arrangement. The margin of 4.6% to 9.6% is determined by reference to the bank
loan interest rates at the time when the contracts are entered into, plus an estimated premium based on the financing sale amount,
which represents the interest charged by the third party companies for financing Longmen Joint Venture through the above sale
and purchase back arrangement. The revenue and cost of goods sold arising from the above transactions are eliminated and the incremental
amounts paid by Yuxin and Yuteng to purchase back the goods are treated as financing costs in the consolidated financial statements.
Total financing sales for the three months
ended June 30, 2014 and 2013 amounted to $229.1 million and $188.1 million, respectively, and for the six months ended June 30,
2014 and 2013, amounted to $459.6 million and $353.3 million, respectively, which are eliminated in the Company’s consolidated
financial statements. The financial cost related to financing sales for the three months ended June 30, 2014 and 2013 amounted
to $0.8 million and $3.1 million, respectively, and for the six months ended June 30, 2014 and 2013, amounted to $1.7 million
and $3.1 million, respectively.
Short term loans due to related parties
|
|
June
30, 2014 |
|
|
December
31, 2013 |
|
|
|
(in
thousands) |
|
|
(in
thousands) |
|
General
Steel China: Loans from Yangpu Capital Automobile, due on demand, and interest rate is 10% per annum. |
|
$ |
1,446 |
|
|
$ |
1,458 |
|
Longmen
Joint Venture: Loan from Shaanxi Coal and Chemical Industry Group Co., Ltd., due on demand, and interest rate is 7.0% per
annum. |
|
|
8,822 |
|
|
|
28,216 |
|
Longmen
Joint Venture: Loan from Shaanxi Steel Group due on various dates from November 2014 to June 2015, and interest rate is 6.6%
per annum. |
|
|
81,250 |
|
|
|
49,110 |
|
Longmen
Joint Venture: Loans from financing sales. |
|
|
62,478 |
|
|
|
47,909 |
|
Total
short-term loans - related parties |
|
$ |
153,996 |
|
|
$ |
126,693 |
|
Long-term loans due to related party
|
|
June
30, 2014 |
|
|
December
31, 2013 |
|
|
|
(in
thousands) |
|
|
(in
thousands) |
|
Longmen
Joint Venture: Loans from Shaanxi Steel Group, due on various dates through November 2015 and interest rate is 5.6% per annum. |
|
$ |
72,124 |
|
|
$ |
72,657 |
|
Less: Current
maturities of long-term loans – related party |
|
|
(62,374 |
) |
|
|
(53,013 |
) |
Long-term
loans - related party |
|
$ |
9,750 |
|
|
$ |
19,644 |
|
Total interest expense, net of capitalized
interest, amounted to $8.2 million and $10.5 million for the three months ended June 30, 2014 and 2013, respectively.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
Total interest expense, net of capitalized
interest, amounted to $17.7 million and $18.5 million for the six months ended June 30, 2014 and 2013, respectively.
Capitalized interest included in construction
in progress amounted to $0.2 million and $0.6 million for the three months ended June 30, 2014 and 2013, respectively.
Capitalized interest included in construction
in progress amounted to $0.8 million and $0.8 million for the six months ended June 30, 2014 and 2013, respectively.
Note 10 – Customer deposits
Customer deposits represent amounts advanced
by customers on product orders. The product normally is shipped within one month after receipt of the advance payment, and the
related sale is recognized in accordance with the Company’s revenue recognition policy. As of June 30, 2014 and December
31 2013, customer deposits amounted to $279.2 million and $152.7 million, respectively, including deposits received from related
parties, which amounted to $142.9 million and $64.9 million, respectively.
Note 11 – Deposits due to sales
representatives
Longmen Joint Venture entered into agreements
with various entities to act as the Company’s exclusive sales agent in a specified geographic 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 in a specified area and at discounted prices on products they order. These deposits
bear no interest and are required to be returned to the sales agent once the agreement is terminated. The agreement is normally
entered/or renewed on an annual basis. Termination of the agreement can be mutually agreed to by both parties at any time. The
Company had $23.1 million and $26.3 million in deposits due to sales representatives, including deposits due to related parties,
as of June 30, 2014 and December 31, 2013, respectively.
Note 12 – Warrants
The Company previously had 3,900,871 common
stock warrants outstanding, which were issued in connection with $40 million of convertible notes issued by the Company in 2007.
The warrants, which were accounted for as a derivative liability at fair value, expired unexercised on May 13, 2013.
Note 13 - Supplemental disclosure of
cash flow information
Interest paid, net of amounts capitalized,
amounted to $12.4 million and $7.6 million for the six months ended June 30, 2014 and 2013, respectively.
The Company paid income taxes of $0.1 million
and $0.2 million during the six months ended June 30, 2014 and 2013, respectively.
During the six months ended June 30, 2014
and 2013, the Company had receivables of $(0.01) million and $1.0 million, respectively, as a result of the disposal of equipment
that have not been collected.
During the six months ended June 30, 2014
and 2013, the Company used $1.1 million and $19.0 million of inventory, respectively, in plant and equipment construction.
The Company had $2.3 million notes receivable
from financing sales loans to be converted to cash as of June 30, 2014.
During the six months ended June 30, 2014,
the Company incurred $4.7 million in accounts payable for the purchase of equipment and construction in progress.
During the six months ended June 30, 2014
and 2013, one of the Company’s unconsolidated entities declared a dividend and the Company is entitled to a dividend of
$0.2 million and $0.2 million, respectively, which has not yet been collected.
During the six months ended June 30, 2014,
the Company converted $(0.05) million of equipment into inventory production.
During the six months ended June 30, 2014,
the Company acquired $5.9 million of equipment through capital leases.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
Note 14 - Deferred lease income
To compensate the Company for costs and
economic losses incurred during construction of the iron and steel making facilities owned by Shaanxi Steel and which are leased
by the Longmen Joint Venture, Shaanxi Steel reimbursed Longmen Joint Venture $11.4 million (RMB 70.1 million) in the fourth quarter
of 2010 for the value of assets dismantled and rent under a 40-year property sub-lease that was entered into by the parties in
June 2009 (the "Longmen Sub-lease"), and $29.8 million (RMB 183.1 million) for the reduced production efficiency caused
by the construction. In addition, in 2010 and 2011, Shaanxi Steel reimbursed Longmen Joint Venture $14.6 million (RMB 89.5 million)
and $14.5 million (RMB 89.3 million), respectively, for trial production costs related to the new equipment.
During the period from June 2010 to March
2011, as construction progressed and certain of the assets came online, Longmen Joint Venture used the assets free of charge to
produce saleable units of steel products during this period. As such, the cost of using these assets and therefore the fair value
of the free rent received was imputed with reference to what the depreciation charge would have been on these assets had they been
owned or under capital lease to Longmen Joint Venture during the free use period. This cost of $7.1 million (RMB 43.9 million)
was deferred and is being recognized over the term of the land sub-lease similar to the other charges and credits related to the
construction of these assets.
The deferred lease income is amortized
to income over the remaining term of the 40-year land sub-lease. For the three months ended June 30, 2014 and 2013, the Company
recognized $0.5 million and $0.5 million, respectively. For the six months ended June 30, 2014 and 2013, the Company recognized
$1.1 million and $1.1 million, respectively. As of June 30, 2014 and December 31, 2013, the balance of deferred lease income amounted
to $75.8 million and $77.4 million, respectively, of which $2.2 million and $2.2 million represents amounts to be amortized within
one year. See Note 18 – Related party transactions and balances (m) – Deferred lease income for details.
Note 15 - Capital lease obligations
Iron and steel production facilities
On April 29, 2011, the
Company’s subsidiary, Longmen Joint Venture entered into a Unified Management Agreement with Shaanxi Steel and Shaanxi
Coal under which Longmen Joint Venture uses new iron and steel making facilities including one sintering machine, two
converters, two blast furnaces and other auxiliary systems constructed by Shaanxi Steel. As the 20-year term of the agreement
exceeds 75% of the assets’ useful lives, this arrangement is accounted for as a capital lease. The ongoing lease
payments are comprised of two elements: (1) a monthly payment of $2.3 million (RMB 14.6 million), based on Shaanxi
Steel’s cost to construct the assets, to be paid over the term of the Unified
Management Agreement of 20 years and (2) 40% of any remaining pre-tax profits from the Asset Pool which includes Longmen
Joint Venture and the newly constructed iron and steel making facilities. In February 2014, Shaanxi Steel agreed that it will
not demand capital lease payments from Longmen Joint Venture until February 2017. The profit sharing component does not
meet the definition of contingent rent because it is based on future revenue and was therefore considered part of the
financing for the capital leased assets. The initial fair value of the profit sharing liability was included in determining
the value of the leased assets at inception. The profit sharing liability is accounted for separately from the monthly lease
payments and is accounted for as a derivative liability at fair value, with changes in the fair value charged or credited to
income each period. See Note 2(h) – “Financial instruments” and Note 16 – “Profit sharing
liability”.
Energy-saving equipment
During 2013 and 2014, the Company’s
subsidiary, Longmen Joint Venture, entered into capital lease agreements for energy-saving equipment to be installed throughout
the production chain. Under these agreements, Longmen Joint Venture uses the energy-saving equipment for which the vendors are
responsible for the design, purchase, installation, and on-site testing, as well as the ownership rights to the equipment during
the lease periods. The lease periods, which vary between four to six years, begin upon the completion of the equipment installation,
testing, and the issuance of the energy-saving rate reports to be agreed upon by both the vendors and Longmen Joint Venture. As
the ownership rights of the equipment transfer to Longmen Joint Venture at the end of the lease periods, these agreements are accounted
for as capital leases.
The minimum lease payments are based on
the energy cost saved during the lease periods, which is determined by the estimated annual equipment operating hours per the lease
agreements. If the actual annual equipment operating hours are less than the estimated amount, the lease periods may be extended,
subject to further negotiation and agreement between the Company and the vendors. If the actual annual equipment operating hours
exceed the estimated amount, the Company is obligated to make additional lease payments based on the additional energy cost saved
during the lease period and will recognize the additional lease payments as contingent rent expense. For the three and six months
ended June 30, 2014 and 2013, no contingent rent expense was incurred under these lease agreements.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
Presented below is a schedule of estimated
minimum lease payments on the capital lease obligations for the next five years as of June 30, 2014:
Year ending June 30, | |
Capital Lease Obligations Minimum Lease Payments | |
| |
(in thousands) | |
2015 | |
$ | 7,567 | |
2016 | |
| 5,804 | |
2017 | |
| 181,884 | |
2018 | |
| 33,280 | |
2019 | |
| 30,108 | |
Thereafter | |
| 338,666 | |
Total minimum lease payments | |
| 597,309 | |
Less: amounts
representing interest | |
| (206,036 | ) |
Ending balance | |
$ | 391,273 | |
The above amounts do not include the profit
sharing liability, which is accounted for separately as a derivative instrument at fair value.
Interest expense for the three months ended
June 30, 2014 and 2013 on the capital lease obligations was $5.7 million and $5.1 million, respectively.
Interest expense for the six months ended
June 30, 2014 and 2013 on the capital lease obligations was $10.8 million and $10.2 million, respectively.
Note 16 – Profit sharing liability
The profit sharing liability component
of the capital lease obligation was recognized initially at its estimated fair value at the lease commencement date and included
in the initial measurement and recognition of the capital lease, in addition to the fixed payment component of the minimum lease
payments. The profit sharing liability is accounted for separately from the fixed portion of the capital lease obligation (see
Note 15 - “Capital lease obligation”) and is accounted for as a derivative instrument in accordance with ASC 815-10-15-83.
The estimated fair value of the profit sharing liability is reassessed at the end of each reporting period, with any change in
fair value charged or credited to income as “Change in Fair Value of Profit Sharing Liability”. See Note 2(h) –
“Financial instruments” for details.
Payments to Shaanxi Steel for the profit
sharing liability are not required until net cumulative profits are achieved. Based on the performance of the Asset Pool, no profit
sharing payment was made from inception to date.
Note 17 – Taxes
Income tax
Significant components of the provision for income taxes on
earnings and deferred taxes on net operating losses from operations for the three and six months ended June 30, 2014 and 2013 are
as follows:
(In thousands) | |
Three months ended June 30, 2014 | | |
Three months ended June 30, 2013 | |
Current | |
$ | 107 | | |
$ | 105 | |
Deferred | |
| - | | |
| - | |
Total provision for income taxes | |
$ | 107 | | |
$ | 105 | |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
(In thousands) | |
Six months ended June 30, 2014 | | |
Six months ended June 30, 2013 | |
Current | |
$ | 112 | | |
$ | 176 | |
Deferred | |
| - | | |
| - | |
Total provision for income taxes | |
$ | 112 | | |
$ | 176 | |
Under the Income Tax Laws of the PRC, General
Steel (China), Baotou Steel Pipe Joint Venture (located in Inner Mongolia province), Maoming Hengda (located in Guangdong province)
and Tianwu Joint Venture (located in Tianjin Port Free Trade Zone) are subject to income tax at a rate of 25%.
Longmen Joint Venture is located in the
Mid-West region of China and as such, qualifies for the “Go-West” tax rate of 15% promulgated by the government. In
2010, the Chinese government announced that the “Go-West” tax initiative would be extended for 10 years and thus the
preferential tax rate of 15% will be in effect until 2020. This special tax treatment for Longmen Joint Venture will be evaluated
on a year-to-year basis by the local tax bureau. The special tax treatment has not changed to date as a result of the evaluations
by the local tax bureau.
Deferred tax assets – China
According to Chinese tax regulations, net
operating losses can be carried forward to offset operating income for the next five years. The Group’s losses carried forward
of $536.8 million will begin to expire in 2015. The Chinese government recently announced several policies to curb the real estate
price increases across the country, which led to a slowdown in demand for construction steel products. Additionally due to the
continued global economic slowdown and the overcapacity issues in China's steel market, management expected there would be a sustained
increase in margin pressure in the next five years until all the existing but outdated steel capacity across the whole industry
is eliminated. Management took into consideration this potential negative impact on average selling price and gross margin of its
products, re-performed an operating forecast for the next five years and concluded that the beginning-of-the-year balance of deferred
tax assets mainly relating to the net operating loss carry forward may not be fully realizable due to the reduction in the projection
of income to be available in the next 5 years. Management therefore decided to provide a 100% valuation allowance for the deferred
tax assets. The valuation allowance as of June 30, 2014 and December 31, 2013 was $101.0 million and $97.6 million, respectively.
Management will review this valuation allowance periodically and make adjustments as warranted. Temporary differences represent
tax and book differences for various items, such as receivable allowances, inventory allowances, impairments on fixed assets and
deferred lease income.
Movement of valuation allowance:
| |
June 30, 2014 | | |
December 31, 2013 | |
| |
(in thousands) | | |
(in thousands) | |
Beginning balance | |
$ | 97,569 | | |
$ | 72,891 | |
Current period addition | |
| 4,194 | | |
| 23,293 | |
Current period reversal | |
| (55 | ) | |
| (1,206 | ) |
Exchange difference | |
| (726 | ) | |
| 2,591 | |
Ending balance | |
$ | 100,982 | | |
$ | 97,569 | |
Deferred tax assets – U.S.
General Steel Holdings, Inc. was incorporated
in the United States and has incurred net operating losses for income tax purposes for the six months ended June 30, 2014. The
net operating loss carry forwards for United States income taxes amounted to $2.4 million, which may be available to reduce future
years’ taxable income. These carry forwards will expire, if not utilized, starting from 2026 through 2033. Management believes
that the realization of the benefits from these losses appears uncertain due to the Company’s limited operating history and
continuing losses for United States income tax purposes. Accordingly, the Company has provided a 100% valuation allowance on the
deferred tax asset benefit to reduce the asset to zero. The valuation allowance as of June 30, 2014 was $0.8 million. The net change
in the valuation allowance for the six months ended June 30, 2014 was $0.1 million. Management will review this valuation allowance
periodically and make adjustments as warranted.
The Company has no cumulative proportionate
retained earnings from profitable subsidiaries as of June 30, 2014. Accordingly, no provision has been made for U.S. deferred taxes
related to future repatriation of these earnings, nor is it practicable to estimate the amount of income taxes that would have
to be provided if we concluded that such earnings will be remitted in the future.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
Value added tax
Enterprises or individuals who sell commodities,
engage in repair and maintenance or import and export goods in the PRC are subject to a value added tax in accordance with PRC
laws. The value added tax (“VAT”) standard rates are 13% to 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. As of June 30, 2014 and December 31, 2013, the Company had
$2.8 million and $3.5 million in value added tax credits which are available to offset future VAT payables, respectively.
Sales and purchases are recorded net of
VAT collected and paid as the Company acts as an agent for the government for VAT collection. VAT on sales and VAT on purchases
amounted to $178.6 million and $174.5 million, respectively, for the three months ended June 30, 2014 and $164.8 million and $154.4
million, respectively, for the three months ended June 30, 2013. VAT on sales and VAT on purchases amounted to $331.5 million
and $326.4 million, respectively, for the six months ended June 30, 2014 and $353.2 million and $338.2 million, respectively, for
the six months ended June 30, 2013.
Taxes payable consisted of the following:
| |
June 30, 2014 | | |
December 31, 2013 | |
| |
(in thousands) | | |
(in thousands) | |
VAT taxes payable | |
$ | 2,496 | | |
$ | 2,211 | |
Income taxes payable | |
| 185 | | |
| 173 | |
Other taxes | |
| 1,500 | | |
| 2,244 | |
Totals | |
$ | 4,181 | | |
$ | 4,628 | |
Note 18 – Related party transactions and balances
Related party transactions
a.
Capital lease
As disclosed in Note 15 – “Capital
lease obligations”, Longmen Joint Venture entered into a capital lease arrangement on April 29, 2011, with Shaanxi Coal and
Shaanxi Steel, which are related parties of the Group. The following is an analysis of the leased assets under the capital lease:
| |
June 30, 2014 | | |
December 31, 2013 | |
| |
(in thousands) | | |
(in thousands) | |
Machinery | |
$ | 601,398 | | |
$ | 605,839 | |
Less: accumulated
depreciation | |
| (90,460 | ) | |
| (76,740 | ) |
Carrying value of leased assets | |
$ | 510,938 | | |
$ | 529,099 | |
b. The following chart summarizes sales
to related parties for the three and six months ended June 30, 2014 and 2013.
Name
of related parties | |
Relationship | |
Three months
ended June 30, 2014 | | |
Three months
ended June 30, 2013 | |
| |
| |
(in thousands) | | |
(in thousands) | |
Long Steel Group | |
Noncontrolling shareholder of Longmen
Joint Venture | |
$ | 25,150 | | |
$ | 82,286 | |
Shaanxi Yuchang Trading Co., Ltd | |
Significant influence by Long Steel Group* | |
| - | | |
| 5,975 | |
Shaanxi Haiyan Trade Co., Ltd | |
Significant influence by Long Steel Group* | |
| 805 | | |
| 5,004 | |
Shaanxi Shenganda Trading Co., Ltd | |
Significant influence by Long Steel Group* | |
| 26,967 | | |
| 18,393 | |
Shaanxi Steel | |
Majority shareholder of Long Steel Group | |
| 626 | | |
| 448 | |
Shaanxi Coal and Chemical Industry Group Co.,
Ltd. | |
Shareholder of Shaanxi Steel | |
| 16,420 | | |
| 12,792 | |
Shaanxi Long Steel Group Baoji Steel Rolling
Co., Ltd | |
Subsidiary of Long Steel Group | |
| 5,117 | | |
| 114 | |
Shaanxi Junlong Rolling
Co., Ltd | |
Investee of Long Steel
Group | |
| 4,291 | | |
| 11,289 | |
Total | |
| |
$ | 79,376 | | |
$ | 136,301 | |
*Long Steel Group has the ability
to significantly influence the operating and financial decisions of the entity through equity ownership either directly or through
key employees, commercial contractual terms, or the ability to assign management personnel.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
Name
of related parties | |
Relationship | |
Six months
ended June 30, 2014 | | |
Six months
ended June 30, 2013 | |
| |
| |
(in thousands) | | |
(in thousands) | |
Long Steel Group | |
Noncontrolling shareholder of Longmen
Joint Venture | |
$ | 69,950 | | |
$ | 162,961 | |
Sichuan Yutai Trading Co., Ltd | |
Significant influence by Long Steel Group | |
| - | | |
| 72 | |
Shaanxi Yuchang Trading Co., Ltd | |
Significant influence by Long Steel Group | |
| - | | |
| 20,410 | |
Shaanxi Haiyan Trade Co., Ltd | |
Significant influence by Long Steel Group | |
| 820 | | |
| 15,596 | |
Shaanxi Shenganda Trading Co., Ltd | |
Significant influence by Long Steel Group | |
| 47,703 | | |
| 36,679 | |
Shaanxi Steel | |
Majority shareholder of Long Steel Group | |
| 1,097 | | |
| 1,411 | |
Shaanxi Coal and Chemical Industry Group Co.,
Ltd. | |
Shareholder of Shaanxi Steel | |
| 21,389 | | |
| 14,626 | |
Shaanxi Long Steel Group Baoji Steel Rolling
Co., Ltd | |
Subsidiary of Long Steel Group | |
| 11,735 | | |
| 2,113 | |
Shaanxi Junlong Rolling
Co., Ltd | |
Investee of Long Steel
Group | |
| 8,888 | | |
| 31,293 | |
Total | |
| |
$ | 161,582 | | |
$ | 285,161 | |
Sales to related parties in trading transactions,
which were netted against the corresponding cost of goods sold, amounted to $58.7 million and $91.9 million for the three and six
months ended June 30, 2014, respectively. See Note 2(m) Revenue Recognition for details.
c. The following charts summarize purchases from related
parties for the three and six months ended June 30, 2014 and 2013.
Name
of related parties | |
Relationship | |
Three months
ended June 30, 2014 | | |
Three months
ended June 30, 2013 | |
| |
| |
(in thousands) | | |
(in thousands) | |
Long Steel Group | |
Noncontrolling
shareholder of Longmen Joint Venture | |
$ | 100,504 | | |
$ | 170,005 | |
Hancheng Haiyan Coking Co.,
Ltd | |
Noncontrolling shareholder
of Long Steel Group | |
| 40,179 | | |
| 53,193 | |
Xi’an Pinghe
Metallurgical Raw Material Co., Ltd | |
Noncontrolling shareholder
of Long Steel Group | |
| 5,016 | | |
| 742 | |
Shaanxi Junlong Rolling
Co., Ltd | |
Investee of Long Steel Group | |
| - | | |
| 1 | |
Shaanxi Huafu New Energy
Co., Ltd | |
Significant influence
by the Long Steel Group | |
| 7,561 | | |
| 8,560 | |
Beijing Daishang Trading
Co., Ltd. | |
Noncontrolling shareholder
of Longmen Joint Venture’s subsidiary | |
| - | | |
| 1,432 | |
Tianwu General Steel Material
Trading Co., Ltd. | |
Investee of General Steel
(China) | |
| 73,940 | | |
| - | |
Tianjin General Quigang
Pipe Co., Ltd | |
Partially owned by CEO through
indirect shareholding** | |
| 4,253 | | |
| - | |
Tianjin Hengying Trading
Co., Ltd | |
Partially owned by CEO through
indirect shareholding** | |
| 17,721 | | |
| - | |
Others | |
Entities
either owned or have significant influence by our affiliates or management | |
| 1,037 | | |
| 166 | |
Total | |
| |
$ | 250,211 | | |
$ | 234,099 | |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
**The CEO referred to herein
is the chief executive officer of General Steel Holdings, Inc.
Name
of related parties | |
Relationship | |
Six months
ended June 30, 2014 | | |
Six months
ended June 30, 2013 | |
| |
| |
(in thousands) | | |
(in thousands) | |
Long Steel Group | |
Noncontrolling
shareholder of Longmen Joint Venture | |
$ | 252,276 | | |
$ | 274,498 | |
Hancheng Haiyan Coking Co.,
Ltd | |
Noncontrolling shareholder
of Long Steel Group | |
| 84,267 | | |
| 116,991 | |
Xi’an Pinghe Metallurgical
Raw Material Co., Ltd | |
Noncontrolling shareholder
of Long Steel Group | |
| 5,920 | | |
| 12,497 | |
Shaanxi Long Steel Group
Baoji Steel Rolling Co., Ltd | |
Subsidiary of Long Steel
Group | |
| - | | |
| 53 | |
Shaanxi Junlong Rolling
Co., Ltd | |
Investee of Long Steel Group | |
| - | | |
| 211 | |
Shaanxi Huafu New Energy
Co., Ltd | |
Significant influence by
the Long Steel Group | |
| 14,221 | | |
| 18,089 | |
Beijing Daishang Trading
Co., Ltd. | |
Noncontrolling shareholder
of Longmen Joint Venture’s subsidiary | |
| - | | |
| 4,909 | |
Tianwu General Steel
Material Trading Co., Ltd. | |
Investee of General Steel
(China) | |
| 97,279 | | |
| - | |
Tianjin General Quigang
Pipe Co., Ltd | |
Partially owned by CEO through
indirect shareholding | |
| 8,528 | | |
| - | |
Tianjin Hengying Trading
Co., Ltd | |
Partially owned by
CEO through indirect shareholding | |
| 45,640 | | |
| - | |
Others | |
Entities
either owned or have significant influence by our affiliates or management | |
| 1,084 | | |
| 236 | |
Total | |
| |
$ | 509,215 | | |
$ | 427,484 | |
Related party balances
| a. | Loans receivable – related parties: |
Name of related parties | |
Relationship | |
June 30, 2014 | | |
December 31, 2013 | |
| |
| |
(in thousands) | | |
(in thousands) | |
Teamlink Investment Co., Ltd | |
Partially owned by CEO through indirect shareholding | |
| 4,540 | | |
| 4,540 | |
Total | |
| |
$ | 4,540 | | |
$ | 4,540 | |
See Note 3 – loans receivable –
related parties for loan details.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
| b. | Accounts
receivables – related parties: |
Name
of related parties | |
Relationship | |
June 30, 2014 | | |
December 31, 2013 | |
| |
| |
(in thousands) | | |
(in thousands) | |
Long Steel Group | |
Noncontrolling shareholder of Longmen
Joint Venture | |
$ | 1,316 | | |
$ | 548 | |
Shaanxi Shenganda Trading
Co., Ltd
| |
Significant influence by Long Steel Group | |
| - | | |
| - | |
Tianjin Daqiuzhuang Steel
Plates | |
Partially owned by CEO through indirect shareholding | |
| 19 | | |
| 19 | |
Tianjin Hengying Trading Co., Ltd
| |
Partially owned by CEO through indirect shareholding | |
| 2,586 | | |
| - | |
Shaanxi Steel | |
Majority shareholder of Long Steel Group | |
| 1,866 | | |
| 1,741 | |
Others | |
| |
| 1 | | |
| 634 | |
Total | |
| |
$ | 5,788 | | |
$ | 2,942 | |
| c. | Other
receivables – related parties: |
Other receivables - related parties are
those nontrade receivables arising from transactions between the Company and its related parties, such as advances or payments
made on behalf of these related parties.
Name
of related parties | |
Relationship | |
June 30, 2014 | | |
December 31,
2013 | |
| |
| |
(in thousands) | | |
(in thousands) | |
Long Steel Group | |
Noncontrolling shareholder of Longmen
Joint Venture | |
$ | 379 | | |
$ | 406 | |
Shaanxi Steel | |
Majority shareholder of Long Steel Group | |
| 48,532 | | |
| 46,439 | |
Tianjin General Quigang Pipe Co., Ltd | |
Partially owned by CEO through indirect shareholding | |
| 1,238 | | |
| 1,247 | |
Tianjin Dazhan Industry Co, Ltd | |
Partially owned by CEO through indirect shareholding | |
| - | | |
| 491 | |
Beijing Shenhua Xinyuan Metal Materials Co.,
Ltd. | |
Partially owned by CEO through indirect shareholding | |
| 4,865 | | |
| 4,901 | |
Victory Energy Resource Co., Ltd | |
Partially owned by CEO through indirect shareholding | |
| 2,231 | | |
| - | |
Others | |
Entities either owned
or have significant influence by our affiliates or management | |
| 738 | | |
| 622 | |
Total | |
| |
$ | 57,983 | | |
$ | 54,106 | |
d. |
Advances on inventory purchase – related parties: |
Name
of related parties | |
Relationship | |
June 30, 2014 | | |
December 31, 2013 | |
| |
| |
(in thousands) | | |
(in thousands) | |
Long Steel Group | |
Noncontrolling shareholder of Longmen
Joint Venture | |
$ | - | | |
$ | 9,123 | |
Shaanxi Shenganda Trading Co., Ltd. | |
Significant influence by Long Steel Group | |
| 13,088 | | |
| 25,607 | |
Tianjin Dazhan Industry Co., Ltd | |
Partially owned by CEO through indirect shareholding | |
| 1,379 | | |
| 10,343 | |
Tianjin Hengying Trading Co., Ltd | |
Partially owned by CEO through indirect shareholding | |
| 61,440 | | |
| 16,158 | |
Tianjin General Qiugang Pipe Co., Ltd | |
Partially owned by CEO through indirect shareholding | |
| 202 | | |
| 555 | |
Maoming Shengze Trading Co., Ltd | |
Partially owned by CEO through indirect shareholding | |
| 43,137 | | |
| 21,197 | |
Others | |
Entities either owned
or have significant influence by our affiliates or management | |
| 33 | | |
| 20 | |
Total | |
| |
$ | 119,279 | | |
$ | 83,003 | |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
e. |
Accounts payable - related parties: |
Name
of related parties | |
Relationship | |
June 30, 2014 | | |
December 31,
2013 | |
| |
| |
(in thousands) | | |
(in thousands) | |
Hancheng Haiyan Coking Co., Ltd | |
Noncontrolling shareholder of Longmen
Joint Venture | |
$ | 62,890 | | |
$ | 58,163 | |
Long Steel Group | |
Noncontrolling shareholder of Longmen Joint
Venture | |
| 164,073 | | |
| 134,758 | |
Shaanxi Coal and Chemical Industry Group Co.,
Ltd. | |
Shareholder of Shaanxi Steel | |
| 3,507 | | |
| 29,990 | |
Tianjin Dazhan Industry Co., Ltd | |
Partially owned by CEO through indirect shareholding | |
| 972 | | |
| 958 | |
Xi’an Pinghe Metallurgical Raw Material
Co., Ltd | |
Noncontrolling shareholder of Long Steel Group | |
| 2,036 | | |
| 8,714 | |
Tianjin Hengying Trading Co., Ltd | |
Partially owned by CEO through indirect shareholding | |
| 9,862 | | |
| 1 | |
Henan Xinmi Kanghua Fire Refractory Co., Ltd | |
Noncontrolling shareholder of Longmen Joint
Venture’s subsidiary | |
| 702 | | |
| 716 | |
Beijing Daishang Trading Co., Ltd | |
Noncontrolling shareholder of Longmen Joint
Venture’s subsidiary | |
| 36 | | |
| 1,004 | |
Tianwu General Steel Material Trading Co.,
Ltd. | |
Investee of General Steel (China) | |
| 17,299 | | |
| 759 | |
Others | |
Entities either owned
or have significant influence by our affiliates or management | |
| 726 | | |
| 630 | |
Total | |
| |
$ | 262,103 | | |
$ | 235,692 | |
f. |
Short-term loans - related parties: |
Name
of related parties | |
Relationship | |
June 30, 2014 | | |
December 31,
2013 | |
| |
| |
(in thousands) | | |
(in thousands) | |
Shaanxi Steel | |
Majority shareholder of Long Steel
Group | |
$ | 81,250 | | |
$ | 49,110 | |
Shaanxi Coal and Chemical Industry Group Co.,
Ltd | |
Shareholder of Shaanxi Steel | |
| 71,287 | | |
| 28,216 | |
Long Steel Group | |
Noncontrolling shareholder of Longmen Joint
Venture | |
| - | | |
| 33,183 | |
Tianjin Hengying Trading Co., Ltd | |
Partially owned by CEO through indirect shareholding | |
| - | | |
| 8,178 | |
Tianjin Dazhan Industry Co., Ltd | |
Partially owned by CEO through indirect shareholding | |
| 13 | | |
| 6,548 | |
Yangpu Capital Automobile | |
Partially owned by CEO
through indirect shareholding | |
| 1,446 | | |
| 1,458 | |
Total | |
| |
$ | 153,996 | | |
$ | 126,693 | |
See Note 9 – Debt for the loan details.
g. | Current maturities of long-term loans – related
parties |
Name of related party | |
Relationship | |
June 30, 2014 | | |
December 31, 2013 | |
| |
| |
(in thousands) | | |
(in thousands) | |
Shaanxi Steel | |
Majority shareholder of Long Steel Group | |
$ | 62,374 | | |
$ | 53,013 | |
Total | |
| |
$ | 62,374 | | |
$ | 53,013 | |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
h. |
Other payables – related parties: |
Other payables – related parties
are those nontrade payables arising from transactions between the Company and its related parties, such as advances or payments
from these related parties on behalf of the Group.
Name of related parties | |
Relationship | |
June 30,
2014 | | |
December 31,
2013 | |
| |
| |
(in thousands) | | |
(in thousands) | |
Tianjin Hengying Trading Co, Ltd | |
Partially owned by CEO through
indirect shareholding | |
$ | 377 | | |
$ | 380 | |
Long Steel Group | |
Noncontrolling shareholder of Longmen Joint
Venture | |
| 44,730 | | |
| 43,636 | |
Shaanxi Steel | |
Majority shareholder of Long Steel Group | |
| 48,670 | | |
| 44,363 | |
Wendlar Investment & Management Group Co.,
Ltd | |
Common control under CEO | |
| 1,053 | | |
| 895 | |
Yangpu Capital Automobile | |
Partially owned by CEO through indirect shareholding | |
| 362 | | |
| 291 | |
Tianjin Dazhan Industry Co., Ltd | |
Partially owned by CEO through indirect shareholding | |
| 470 | | |
| 473 | |
Maoming Shengze Trading Co., Ltd | |
Partially owned by CEO through indirect shareholding | |
| 2,201 | | |
| 1,745 | |
Victory Energy Resource Co., Ltd | |
Partially owned by CEO through indirect shareholding | |
| - | | |
| 1,375 | |
Others | |
Entities either owned
or have significant influence by our affiliates or management | |
| 346 | | |
| 921 | |
Total | |
| |
$ | 98,209 | | |
$ | 94,079 | |
i. |
Customer deposits – related parties: |
Name
of related parties | |
Relationship | |
June 30, 2014 | | |
December 31,
2013 | |
| |
| |
(in thousands) | | |
(in thousands) | |
Shaanxi Yuchang Trading Co., Ltd | |
Significant
influence by Long Steel Group | |
$ | 10 | | |
$ | 10 | |
Shaanxi Coal and Chemical Industry Group Co.,
Ltd | |
Shareholder of Shaanxi Steel | |
| 13,749 | | |
| - | |
Long Steel Group | |
Noncontrolling shareholder
of Longmen Joint Venture | |
| 8,378 | | |
| 15,038 | |
Shaanxi Junlong Rolling Co., Ltd | |
Investee of Long Steel Group | |
| 16 | | |
| 2,748 | |
Shaanxi Shenganda Trading Co., Ltd | |
Significant influence by
Long Steel Group | |
| - | | |
| 275 | |
Tianwu General Steel Material Trading Co.,
Ltd. | |
Investee of General Steel
(China) | |
| 113,549 | | |
| 46,521 | |
Shaanxi Haiyan Trade Co., Ltd | |
Significant influence by
Long Steel Group | |
| 7,186 | | |
| - | |
Others | |
| |
| - | | |
| 289 | |
Total | |
| |
$ | 142,888 | | |
$ | 64,881 | |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
j. |
Deposits due to sales representatives – related parties |
Name
of related parties | |
Relationship | |
June 30, 2014 | | |
December 31, 2013 | |
| |
| |
(in thousands) | | |
(in thousands) | |
Gansu Yulong Trading Co., Ltd. | |
Significant influence by Long Steel
Group | |
$ | 1,073 | | |
$ | 1,408 | |
Shaanxi Yuchang Trading
Co., Ltd | |
Significant influence
by Long Steel Group | |
| 585 | | |
| 589 | |
Total | |
| |
$ | 1,658 | | |
$ | 1,997 | |
k. |
Long-term loans – related party: |
Name of related party | |
Relationship | |
June 30, 2014 | | |
December 31, 2013 | |
| |
| |
(in thousands) | | |
(in thousands) | |
Shaanxi Steel | |
Majority shareholder of Long Steel Group | |
$ | 9,750 | | |
$ | 19,644 | |
Total | |
| |
$ | 9,750 | | |
$ | 19,644 | |
The Company also provided guarantees on
related parties’ bank loans amounting to $201.7 million and $205.8 million as of June 30, 2014 and as of December 31, 2013,
respectively.
| |
June 30, 2014 | | |
December 31, 2013 | |
| |
(in thousands) | | |
(in thousands) | |
Beginning balance | |
$ | 77,444 | | |
$ | 77,199 | |
Less: Lease income realized | |
| (1,088 | ) | |
| (2,158 | ) |
Exchange rate effect | |
| (565 | ) | |
| 2,403 | |
Ending balance | |
| 75,791 | | |
| 77,444 | |
Current portion | |
| (2,171 | ) | |
| (2,187 | ) |
Noncurrent portion | |
$ | 73,620 | | |
$ | 75,257 | |
For the three months ended June 30, 2014
and 2013, the Company realized lease income from Shaanxi Steel, a related party, amounting to $0.5 million and $0.5 million, respectively.
For the six months ended June 30, 2014
and 2013, the Company realized lease income from Shaanxi Steel, a related party, amounting to $1.1 million and $1.1 million, respectively.
On November 19, 2013, the Company sold
its 28% equity interest in Tianwu, held by Yangpu Shengtong, to Tianjin Dazhan Industry Co., Ltd., a related party through indirect
common ownership by the CEO, for $13.6 million (RMB 84.3 million) while retaining the 32% interest held by General Steel (China).
As a result of this transaction, the Company met the criteria under ASC 810-10-40-4 to deconsolidate Tianwu as of the ownership
disposal date and recognize a gain, which amounted to $1.0 million. After the deconsolidation of Tianwu, General Steel (China)’s
32% interest in Tianwu is accounted for as an equity method investment, which amounted to $15.6 million and $15.8 million as of
June 30, 2014 and December 31, 2013, respectively.
Note 19 – Equity
2014 Equity Transactions
On February 3, 2014, the Company granted
80,000 shares of common stock for investor relations consulting services under two service agreements dated January 14, 2014.
The shares were valued at $1.01 per share, the quoted market price at the time the services were provided.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
Note 20 – Retirement plan
Regulations in the PRC require the Company
to contribute to a defined contribution retirement plan for all employees. All the employees of the Company’s entities in
China are entitled to a retirement pension amount calculated based upon their salary at their date of retirement and their length
of service in accordance with a government managed pension plan. The PRC government is responsible for the pension liability to
the retired staff. The Company’s entities in China are required to contribute based on the higher of 20% of the employees’
monthly base salary or 12% of the minimum social average salary of the city where the facilities are located. Employees are required
to contribute 8% of their base salary to the plan. The minimum social average salary is announced by the local Social Security
bureau and updated annually. Total pension expense incurred by the Company for the three months ended June 30, 2014 and 2013 amounted
to $3.0 million and $1.9 million, respectively, and for the six months ended June 30, 2014 and 2013 amounted to $5.8 million and
$4.1 million, respectively.
Note 21 – Commitment and contingencies
Operating Lease Commitments
Total operating lease commitments for rental
of offices, buildings, equipment and land use rights of the Company’s PRC subsidiaries as of June 30, 2014 is as follows:
Year ending June 30, | |
Minimum lease payment | |
| |
(in thousands) | |
2015 | |
$ | 1,055 | |
2016 | |
| 566 | |
2017 | |
| 566 | |
2018 | |
| 566 | |
2019 | |
| 566 | |
Years after | |
| 19,849 | |
Total minimum payments required | |
$ | 23,168 | |
Total rental expense was $0.6 million and
$0.8 million for the three months ended June 30, 2014 and 2013, respectively, and $1.5 million and $1.6 million for the six months
ended June 30, 2014 and 2013, respectively.
Contractual Commitments
Longmen Joint Venture has $326.3 million
contractual obligations related to construction projects as of June 30, 2014 estimated to be fulfilled between May and December
2014.
Contingencies
As of June 30, 2014, Longmen Joint Venture
provided guarantees to related parties’ and third parties’ bank loans, including lines of credit and others, amounting
to $265.4 million.
Nature of guarantee | |
Guarantee amount | | |
Guaranty Due Date |
| |
(In thousands) | | |
|
Line of credit | |
$ | 153,563 | | |
Various from July 2014 to August 2015 |
Three-party financing agreements | |
| 19,500 | | |
Various from July 2014 to May 2015 |
Confirming storage | |
| 52,975 | | |
Various from August 2014 to April 2015 |
Financing by the rights of goods delivery in future | |
| 39,406 | | |
Various from July to October 2014
|
Total | |
$ | 265,444 | | |
|
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
Name of parties being guaranteed | |
Guarantee
amount | | |
Guaranty Due Date |
| |
(In thousands) | | |
|
Long Steel Group | |
$ | 82,875 | | |
Various from September 2014 to August 2015 |
Hancheng Haiyan Coking Co., Ltd | |
| 39,975 | | |
Various from August 2014 to April 2015 |
Chengdu Zhongyi Steel Co., Ltd | |
| 8,125 | | |
March 2015 |
Shaanxi Tianyi Metal Materials Co., Ltd | |
| 6,500 | | |
December 2014 |
Xi’an Laisheng Logistics Co., Ltd | |
| 11,781 | | |
Various from August 2014 to May 2015 |
Xi'an Kaiyuan Steel Sales Co., Ltd | |
| 6,500 | | |
January 2015 |
Shaanxi Longan Industry Co., Ltd. | |
| 8,125 | | |
December 2014 |
Hancheng Sanli Furnace Burden Co., Ltd. | |
| 16,250 | | |
March 2015 |
Tianjin Dazhan Industry Co., Ltd | |
| 38,188 | | |
Various from June 2014 to March 2015 |
Tianjin Hengying Trading Co., Ltd | |
| 40,625 | | |
Various from July 2014 to January 2015 |
Jinmen Desheng Metallurgy Co., Ltd | |
| 6,500 | | |
September 2014 |
Total | |
$ | 265,444 | | |
|
As of June 30, 2014, the Company did not
accrue any liability for the amounts the Group has guaranteed for third parties and related parties because those parties are current
in their payment obligations and the Company has not experienced any losses from providing guarantees. The Company has evaluated
the debt guarantees and concluded that the likelihood of having to make payments under the guarantees is remote and that the fair
value of the stand-ready obligation under these commitments is not material.
Note 22 – Segments
The Company’s chief operating decision
maker evaluates performance and determines resource allocations based on a number of factors, the primary measure being income
from operations of the Group’s four regional divisions in the PRC: Longmen Joint Venture in Shaanxi province, Maoming Hengda
in Guangdong province, Baotou Steel Pipe Joint Venture in Inner Mongolia province and General Steel (China) & Tianwu Joint
Venture in Tianjin City.
The Group operates in one business segment
that includes four different divisions. These reportable divisions are consistent with the way the Company manages its business,
each division operates under separate management groups and produces discrete financial information. The accounting principles
applied at the operating division level in determining income from operations is generally the same as those applied at the consolidated
financial statement level.
The following represents the results of
division operations for the three months ended June 30, 2014 and 2013:
(In thousands) | |
| |
Sales: | |
2014 | | |
2013 | |
Longmen Joint Venture | |
$ | 587,314 | | |
$ | 650,741 | |
Maoming Hengda | |
| 215 | | |
| 1,349 | |
Baotou Steel Pipe Joint Venture | |
| 483 | | |
| 972 | |
General Steel (China) & Tianwu Joint Venture | |
| - | | |
| 5,454 | |
Total sales | |
| 588,012 | | |
| 658,516 | |
Interdivision sales | |
| 1 | | |
| (4,865 | ) |
Consolidated sales | |
$ | 588,013 | | |
$ | 653,651 | |
Gross profit (loss): | |
2014 | | |
2013 | |
Longmen Joint Venture | |
$ | 28,229 | | |
$ | (36,193 | ) |
Maoming Hengda | |
| 21 | | |
| 473 | |
Baotou Steel | |
| 3 | | |
| 167 | |
General Steel (China) & Tianwu Joint Venture | |
| (159 | ) | |
| 17 | |
Total gross profit (loss) | |
| 28,094 | | |
| (35,536 | ) |
Interdivision gross profit | |
| - | | |
| - | |
Consolidated gross profit (loss) | |
$ | 28,094 | | |
$ | (35,536 | ) |
Income (loss) from operations: | |
2014 | | |
2013 | |
Longmen Joint Venture | |
$ | 8,128 | | |
$ | (44,684 | ) |
Maoming Hengda | |
| (54 | ) | |
| (225 | ) |
Baotou Steel | |
| (133 | ) | |
| 55 | |
General Steel (China) & Tianwu Joint Venture | |
| (720 | ) | |
| (790 | ) |
Total income (loss) from operations | |
| 7,221 | | |
| (45,644 | ) |
Interdivision income (loss) from operations | |
| - | | |
| - | |
Reconciling item (1) | |
| (896 | ) | |
| (1,246 | ) |
Consolidated income (loss) from operations | |
$ | 6,325 | | |
$ | (46,890 | ) |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
Net income (loss) attributable to General Steel Holdings, Inc.: | |
2014 | | |
2013 | |
Longmen Joint Venture | |
$ | (8,077 | ) | |
$ | (34,944 | ) |
Maoming Hengda | |
| (123 | ) | |
| (216 | ) |
Baotou Steel | |
| (106 | ) | |
| 46 | |
General Steel (China) & Tianwu Joint Venture | |
| (1,870 | ) | |
| (3,528 | ) |
Total net loss attributable to General Steel Holdings, Inc. | |
| (10,176 | ) | |
| (38,642 | ) |
Interdivision net income | |
| - | | |
| - | |
Reconciling item (1) | |
| (843 | ) | |
| (1,176 | ) |
Consolidated net loss attributable to General Steel Holdings, Inc. | |
$ | (11,019 | ) | |
$ | (39,818 | ) |
Depreciation, amortization and depletion: | |
2014 | | |
2013 | |
Longmen Joint Venture | |
$ | 22,778 | | |
$ | 20,850 | |
Maoming Hengda | |
| 158 | | |
| 315 | |
Baotou Steel | |
| 59 | | |
| 26 | |
General Steel (China) & Tianwu Joint Venture | |
| 447 | | |
| 518 | |
Consolidated depreciation, amortization and depletion | |
$ | 23,442 | | |
$ | 21,709 | |
Finance/interest expenses: | |
2014 | | |
2013 | |
Longmen Joint Venture | |
$ | 25,131 | | |
$ | 18,243 | |
Maoming Hengda | |
| - | | |
| - | |
Baotou Steel | |
| (1 | ) | |
| - | |
General Steel (China) & Tianwu Joint Venture | |
| 1,488 | | |
| 2,972 | |
Interdivision interest expenses | |
| - | | |
| - | |
Reconciling item (1) | |
| 1 | | |
| 1 | |
Consolidated interest expenses | |
$ | 26,619 | | |
$ | 21,216 | |
Capital expenditures: | |
2014 | | |
2013 | |
Longmen Joint Venture | |
$ | 55,852 | | |
$ | 27,922 | |
Maoming Hengda | |
| - | | |
| - | |
Baotou Steel | |
| - | | |
| 1 | |
General Steel (China) & Tianwu Joint Venture | |
| - | | |
| 2 | |
Reconciling item (1) | |
| - | | |
| - | |
Consolidated capital expenditures | |
$ | 55,852 | | |
$ | 27,925 | |
The following represents the results of division operations
for the six months ended June 30, 2014 and 2013:
(In thousands) | |
| |
Sales: | |
2014 | | |
2013 | |
Longmen Joint Venture | |
$ | 1,181,328 | | |
$ | 1,297,489 | |
Maoming Hengda | |
| 251 | | |
| 2,872 | |
Baotou Steel Pipe Joint Venture | |
| 645 | | |
| 981 | |
General Steel (China) & Tianwu Joint Venture | |
| 53 | | |
| 54,180 | |
Total sales | |
| 1,182,277 | | |
| 1,355,522 | |
Interdivision sales | |
| (53 | ) | |
| (50,580 | ) |
Consolidated sales | |
$ | 1,182,224 | | |
$ | 1,304,942 | |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
Gross profit (loss): | |
2014 | | |
2013 | |
Longmen Joint Venture | |
$ | 6,010 | | |
$ | (31,826 | ) |
Maoming Hengda | |
| 45 | | |
| 245 | |
Baotou Steel | |
| (20 | ) | |
| 89 | |
General Steel (China) & Tianwu Joint Venture | |
| (502 | ) | |
| 23 | |
Total gross profit (loss) | |
| 5,533 | | |
| (31,469 | ) |
Interdivision gross profit | |
| - | | |
| - | |
Consolidated gross profit (loss) | |
$ | 5,533 | | |
$ | (31,469 | ) |
Loss from operations: | |
2014 | | |
2013 | |
Longmen Joint Venture | |
$ | (31,166 | ) | |
$ | (9,747 | ) |
Maoming Hengda | |
| (576 | ) | |
| (1,022 | ) |
Baotou Steel | |
| (177 | ) | |
| (305 | ) |
General Steel (China) & Tianwu Joint Venture | |
| (3,286 | ) | |
| (1,598 | ) |
Total loss from operations | |
| (35,205 | ) | |
| (12,672 | ) |
Interdivision loss from operations | |
| - | | |
| - | |
Reconciling item (1) | |
| (2,133 | ) | |
| (2,327 | ) |
Consolidated loss from operations | |
$ | (37,338 | ) | |
$ | (14,999 | ) |
Net loss attributable to General Steel Holdings, Inc.: | |
2014 | | |
2013 | |
Longmen Joint Venture | |
$ | (46,111 | ) | |
$ | (26,619 | ) |
Maoming Hengda | |
| (660 | ) | |
| (987 | ) |
Baotou Steel | |
| (141 | ) | |
| (243 | ) |
General Steel (China) & Tianwu Joint Venture | |
| (5,713 | ) | |
| (6,684 | ) |
Total net loss attributable to General Steel Holdings, Inc. | |
| (52,625 | ) | |
| (34,533 | ) |
Interdivision net income (loss) | |
| - | | |
| - | |
Reconciling item (1) | |
| (1,958 | ) | |
| (2,182 | ) |
Consolidated net loss attributable to General Steel Holdings, Inc. | |
$ | (54,583 | ) | |
$ | (36,715 | ) |
Depreciation, amortization and depletion: | |
2014 | | |
2013 | |
Longmen Joint Venture | |
$ | 46,308 | | |
$ | 41,281 | |
Maoming Hengda | |
| 462 | | |
| 626 | |
Baotou Steel | |
| 121 | | |
| 123 | |
General Steel (China) & Tianwu Joint Venture | |
| 897 | | |
| 1,037 | |
Consolidated depreciation, amortization and depletion | |
$ | 47,788 | | |
$ | 43,067 | |
Finance/interest expenses: | |
2014 | | |
2013 | |
Longmen Joint Venture | |
$ | 52,121 | | |
$ | 40,393 | |
Maoming Hengda | |
| - | | |
| - | |
Baotou Steel | |
| - | | |
| - | |
General Steel (China) & Tianwu Joint Venture | |
| 3,097 | | |
| 5,678 | |
Interdivision interest expenses | |
| - | | |
| - | |
Reconciling item (1) | |
| 96 | | |
| 2 | |
Consolidated interest expenses | |
$ | 55,314 | | |
$ | 46,073 | |
Capital expenditures: | |
2014 | | |
2013 | |
Longmen Joint Venture | |
$ | 112,599 | | |
$ | 44,006 | |
Maoming Hengda | |
| 32 | | |
| 2 | |
Baotou Steel | |
| - | | |
| 8 | |
General Steel (China) & Tianwu Joint Venture | |
| 82 | | |
| 3 | |
Reconciling item (1) | |
| - | | |
| - | |
Consolidated capital expenditures | |
$ | 112,713 | | |
$ | 44,019 | |
Total Assets as of: | |
June 30, 2014 | | |
December 31, 2013 | |
Longmen Joint Venture | |
$ | 2,349,913 | | |
$ | 2,573,212 | |
Maoming Hengda | |
| 27,786 | | |
| 29,211 | |
Baotou Steel Pipe Joint Venture | |
| 3,290 | | |
| 4,448 | |
General Steel (China) & Tianwu Joint Venture | |
| 200,665 | | |
| 121,883 | |
Interdivision assets | |
| (33,208 | ) | |
| (34,213 | ) |
Reconciling item (2) | |
| 8,028 | | |
| 5,817 | |
Total Assets | |
$ | 2,556,474 | | |
$ | 2,700,358 | |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
|
(1) |
Reconciling item represents the unallocated income or expenses of the Company, arising from General Steel Investment Co., Ltd, Yangpu Shengtong Investment Co., Ltd and Qiu Steel for the three and six months ended June 30, 2014 and 2013. |
|
(2) |
Reconciling item represents assets held at General Steel Holdings, Inc., General Steel Investment Co., Ltd, Yangpu Shengtong Investment Co., Ltd and Qiu Steel as of June 30, 2014 and December 31, 2013. |
Note 23 – Subsequent events
On July 14, 2014, the Company entered into
a Subscription Agreement (the "Subscription Agreement") with Zuosheng Yu, the Company's Chief Executive Officer and a
member of the Company's Board of Directors, relating to a private placement of the Company's common stock, par value $0.001 per
share. Pursuant to the Subscription Agreement, the Company agreed to sell to Zuosheng Yu 5,000,000 shares of common stock at a
purchase price of $1.50 per share (the "Purchase Price"), for an aggregate amount of $7,500,000, subject to closing conditions
set forth in the Subscription Agreement. The Purchase Price represents a 23% premium to the volume weighted average closing price
of the Common Stock from March 5, 2014 to July 11, 2014, which ranged from $0.90 to $1.47 per share of common stock during the
period. Upon completion of this transaction, Zuosheng Yu would own 21.7% of the Company’s common stock.
ITEM 2. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Note Regarding Forward-Looking Statements
The following discussion
of the financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial
statements and related notes thereto. The following discussion contains forward-looking statements. General Steel Holdings, Inc.
is referred to herein as “we,” “our,” “us” and “the Company.” The words or phrases
“would be,” “will allow,” “expect to,” “intends to,” “will likely result,”
“are expected to,” “will continue,” “is anticipated,” “estimate,” or similar expressions
are intended to identify forward-looking statements. Such statements include those concerning our expected financial performance,
our corporate strategy and operational plans. Actual results could differ materially from those projected in the forward-looking
statements as a result of a number of risks and uncertainties, including: (a) those risks and uncertainties related to general
economic conditions in the People’s Republic of China, including regulatory factors that may affect such economic conditions;
(b) whether we are able to manage our planned growth efficiently and operate profitable operations, including whether our management
will be able to identify, hire, train, retain, motivate and manage required personnel or that management will be able to successfully
manage and exploit existing and potential market opportunities; (c) whether we are able to generate sufficient revenues or obtain
financing to sustain and grow our operations; and (d) whether we are able to successfully fulfill our primary requirements for
cash which are explained below under “Liquidity and Capital Resources.” Unless otherwise required by applicable law,
we do not undertake, and we specifically disclaim any obligation, to update any forward-looking statements to reflect occurrences,
developments, unanticipated events or circumstances after the date of such statement. Additional information regarding certain
factors which could cause actual results to differ from such forward-looking statements include, but are not limited to, those
described in Item 1A, “Risk Factors”, in our Annual Report on Form 10-K/A for the fiscal year ended December 31, 2013
filed with the SEC on August 19, 2014.
Second Quarter Highlights
The second quarter
of 2014 was highlighted with the following:
| · | Sales
in the second quarter of 2014 decreased by 10.0% to $588.0 million, from $653.7 million in the second quarter of 2013, due to
the decrease in both the average selling price and the sales volume of our products. For the second quarter of 2014, sales volume
of rebar in Shaanxi Longmen Iron and Steel Co., Ltd. (“Longmen Joint Venture”) totaled 1.31 million metric tons, a
decrease of 3.2%, compared with 1.35 million metric tons in the second quarter of 2013, with an average selling price of $450.0
per ton, as compared with $482.7 per ton in the second quarter of 2013. |
|
· |
Gross profit in the second quarter of 2014 was $28.1 million, or 4.8% of total revenue, compared with a gross loss of $35.5 million, or (5.4)% of total revenue in the second quarter of 2013. |
|
|
|
|
· |
Total finance expense in the second quarter of 2014 was $26.6 million, as compared with $21.2 million for the same period in 2013. Finance expenses mainly consisted of interest expense on capital leases, which was $5.7 million and $5.1 million in the second quarter of 2014 and 2013, respectively, and interest expense on bank borrowings and discounted notes receivable, which was $20.9 million and $16.1 million in the second quarter of 2014 and 2013, respectively. |
|
· |
Loss per share were $(0.20) and $(0.72) in the second quarter of 2014 and 2013, respectively. The decrease in the loss in 2014 was mainly due to the average cost of rebar decreasing more than the average selling price, leading to an increase in gross profit. |
OVERVIEW
We were incorporated
on August 5, 2002, in the State of Nevada. We are headquartered in Beijing, China and operate a portfolio of Chinese steel companies.
We serve various industries and produce a variety of steel products including, but not limited to: reinforced bars (“rebar”),
hot-rolled carbon, spiral-weld pipes and high-speed wire. Our current aggregate annual production capacity of crude steel products,
consisting mainly of steel rebar, is 7 million metric tons. Our rebar products have a variety of demand drivers, such as rural
income, infrastructure construction and energy consumption. Domestic economic conditions are also an overall demand driver for
all our products.
Our vision is to become
one of the largest and most profitable non-government controlled steel companies in the People’s Republic of China (“PRC”).
Our mission is to grow our business organically, and through the acquisition of Chinese steel companies, increase profitability
and efficiency by utilizing western management practices and advanced production technologies, and the infusion of capital resources.
Our two-pronged growth strategy focuses on
a combination of capacity expansion, as well as optimizing operating efficiencies and leverage.
| · | We aim to grow revenue by increasing capacity and through continual
cooperation and partnerships with leading state-owned enterprises (SOEs). |
| · | We aim to drive profitability through improved operational efficiencies
and optimization of our cost structure. |
Unless the context indicates otherwise,
as used herein the terms “General Steel”, the “Company”, “we”, “our” and “us”
all refer to General Steel Holdings, Inc.
Steel-Related Subsidiaries and Raw Material Trading Company
We presently have controlling interests in
four steel-related subsidiaries:
|
· |
General Steel (China) Co., Ltd. (“General Steel (China)”); |
|
· |
Baotou Steel - General Steel Special Steel Pipe Joint Venture Company Limited (“Baotou Steel Pipe Joint Venture”); |
|
· |
Shaanxi Longmen Iron and Steel Co., Ltd. (“Longmen Joint Venture”); |
|
· |
Maoming Hengda Steel Co., Ltd. (“Maoming Hengda”). |
Our Company, together with our subsidiaries,
majority owned subsidiaries and variable interest entity, are referred to as the Group.
General Steel (China) Co., Ltd
General Steel (China),
formerly known as “Tianjin Daqiuzhuang Metal Sheet Co., Ltd.” started operations in 1988.
On May 14, 2009, General
Steel (China) changed its official name from “Tianjin Daqiuzhuang Metal Sheet Co., Ltd.” to better reflect its role
as a merger and acquisition platform for steel company investments in China. In some instances, General Steel (China) retains
the use of the name “Daqiuzhuang Metal” for brand recognition purposes within the industry.
On May 1, 2011 General
Steel (China) entered into a lease agreement with Tianjin Shuangjie Liansheng Rolled Steel Co., Ltd. (the “Lessee”),
whereby General Steel (China) leased parts of the facilities its facility located at No. 1, Tonga Street, Daqiuzhuang Town, Jinghai
County, Tianjin City to the Lessee for a monthly payment of $0.1 million (RMB 0.5 million). The lease expires in May 2021. Management
evaluates the fair value of its long-term assets on an annual basis, or upon a triggering event which would require an assessment
sooner, and is of the opinion that the fair value of the property, plant and equipment as supported by the operating lease approximates
its current carrying value
Baotou Steel - General Steel Special
Steel Pipe Joint Venture Company Limited
On April 27, 2007, General
Steel (China) and Baotou Iron and Steel Group Co., Ltd. (“Baotou Steel”) entered into an Amended and Restated Joint
Venture Agreement, amending the Joint Venture Agreement entered into on September 28, 2005, to increase General Steel (China)’s
ownership interest in the related joint venture to 80%. The joint venture’s name is Baotou Steel - General Steel Special
Steel Pipe Joint Venture Company Limited, a Chinese limited liability company (“Baotou Steel Pipe Joint Venture”).
Baotou Steel Pipe Joint Venture obtained its business license from governmental authorities in the PRC on May 25, 2007,
and commenced operations in July 2007. Baotou Steel Pipe Joint Venture has four production lines capable of producing 100,000 metric
tons of double spiral-weld pipes primarily used in the energy sector to transport oil and steam. These pipes have a diameter ranging
from 219mm to 1240mm, a wall thickness ranging from 6mm to 13mm, and a length ranging from 6m to 12m. Presently, Baotou Steel Pipe
Joint Venture sells its products using an internal sales force to customers in the Inner Mongolia Autonomous Region and the northwest
region of the PRC.
Shaanxi Longmen Iron and Steel Co., Ltd
Effective June
1, 2007, through General Steel (China) and Tianjin Qiu Steel Investment Co., Ltd. (“Qiu Steel”), a 99% owned subsidiary
of General Steel (China), we entered into a Joint Venture Agreement with Shaanxi Longmen Iron & Steel Group Co., Ltd. (“Long
Steel Group”) to form Shaanxi Longmen Iron and Steel Co., Ltd. (“Longmen Joint Venture”). Through General Steel
(China) and Qiu Steel, we invested approximately $39.3 million in cash and collectively held a 60% ownership interest in Longmen
Joint Venture until April 29, 2011, when a 20-year Unified Management Agreement (the “Unified Management Agreement”)
was entered into between our Company, Longmen Joint Venture, Shaanxi Coal and Shaanxi Steel. Longmen Joint Venture was determined
to be a Variable Interest Entity (“VIE”) and we are the primary beneficiary.
Long Steel Group, located
in Hancheng city, Shaanxi Province, in China’s Western region, was founded in 1958 and incorporated in 2002, and is owned
by a state owned entity through Shaanxi Steel. Long Steel Group holds the remaining 40% ownership interest in Longmen Joint Venture
and operates as a fully-integrated steel production facility. Fewer than 10% of steel companies in China have fully-integrated
steel production capabilities.
Currently, Longmen Joint
Venture has five branch offices, four consolidated subsidiaries/VIE and five entities in which it has a noncontrolling interest. It
employs approximately 8,700 full-time workers. In addition to steel production, Longmen Joint Venture operates transportation
services through its Changlong Branch, located in Hancheng city, Shaanxi Province. Changlong Branch owns 177 vehicles and provides
transportation services exclusively to Longmen Joint Venture.
Longmen Joint Venture’s
rebar products are categorized within the steel industry as “longs” (in reference to their shape). Rebar is generally
considered a regional product because its weight and dimension make it ill-suited for cost-effective long-haul ground transportation.
By our estimates, the market demand for rebar in Shaanxi Province is six to eight million metric tons per year. Slightly more than
half of this demand comes from Xi’an, the capital of Shaanxi Province, located 180km from Longmen Joint Venture’s main
steel production site. Currently, we estimate that we have approximately a 72% share of the Xi’an market for rebar.
An established regional
network of one hundred twenty-eight distributors, together with smaller distributors and three sales offices sell Longmen Joint
Venture’s products. All products are sold under the registered brand name of “Yulong”, which has strong regional
recognition and awareness. Rebar and billet products carry ISO 9001 and 9002 certification and other Longmen Joint Venture’s
products have won national quality awards. Products produced at the facility have been used in the construction of the Yangtze
River Three Gorges Dam, the Xi’an International Airport, the Xi’an city subway system and the Xi Luo Du and Xiang Jia
Ba hydropower projects.
From June 2009 to March
2011, we worked with Shaanxi Steel to build new iron and steel making facilities, including two 1,280 cubic meter blast furnaces,
two 120 metric ton converters, one 400 square meter sintering machine and some auxiliary systems. As a result, Longmen Joint
Venture incurred certain costs of construction as well as economic losses on suspended production of certain small furnaces and
other equipment to accommodate the construction of the new equipment, on behalf of Shaanxi Steel. See Note 14 - “Deferred
lease income” of the Notes to Condensed Consolidated Financial Statements included herein
On April 29, 2011, a 20-year Unified
Management Agreement (“the Agreement”) was entered into between the Company, the Company’s 60%-owned
subsidiary Shaanxi Longmen Iron and Steel Co., Ltd. (“Longmen Joint Venture”), Shaanxi Coal and Chemical Industry
Group Co., Ltd. (“Shaanxi Coal”) and Shaanxi Iron and Steel Group (“Shaanxi Steel”). Shaanxi Steel is
the controlling shareholder of Shaanxi Longmen Iron and Steel Group Co., Ltd (“Long Steel Group”) which is the
non-controlling interest holder in Longmen Joint Venture, and Shaanxi Coal, a state owned entity, is the parent company of
Shaanxi Steel. Under the terms of the Agreement, all manufacturing machinery and equipment of Longmen Joint Venture and the
$605.8 million (or approximately RMB 3.7 billion) of the constructed iron and steel making facilities owned by Shaanxi Steel,
which includes one 400 m2 sintering machine, two 1,280 m3 blast furnaces, two 120 ton converters and
some auxiliary systems, are managed collectively as a single virtual asset pool (“Asset Pool”). Longmen Joint
Venture manages the Asset Pool as the principal operating entity and is responsible for the daily operations of the new and
existing facilities. The Agreement leverages each of the parties’ operating strengths, allowing Longmen Joint Venture
to derive the greatest benefit from the cooperation and the newly constructed iron and steel making facilities. At the
designed efficiency level, the facilities contribute three million tons of crude steel production capacity per
year.
Longmen Joint Venture pays Shaanxi Steel
for the use of the constructed iron and steel making facilities an amount equaling the depreciation expense on the equipment constructed
by Shaanxi Steel as well as 40% of the pre-tax profit generated by the Asset Pool. The remaining 60% of the pre-tax profit is
allocated to Longmen Joint Venture. As a result, the Company’s economic interest in the profit or loss generated by Longmen
Joint Venture decreased from 60% to 36%. However, the overall capacity under the management of Longmen Joint Venture increased
by three million tons, or 75%. The Agreement improved Longmen Joint Venture’s cost structure through
sustainable and steady sourcing of key raw materials and reduced transportation costs. The distribution of profit is subject to
a prospective adjustment after the first two years based on each entity’s actual investment of time and resources into the
Asset Pool. There has been no adjustment to the Agreement from its inception to the present time nor intention to make future
adjustment by the Company and Shaanxi Steel.
The parties to the Agreement established
the Shaanxi Longmen Iron and Steel Unified Management Supervisory Committee ("Supervisory Committee") to ensure that
the facilities and related resources are operated and managed according to the stipulations set forth in the Agreement. The Board
of Directors of Longmen Joint Venture, of which the Company holds 4 out of 7 seats, requires a simple majority vote and remains
the controlling decision-making body of Longmen Joint Venture and the Asset Pool. See Note 2(c) “Consolidation of VIE.”
The Agreement constitutes an arrangement
that involves a lease which meets certain of the criteria of a capital lease and therefore the assets constructed by Shaanxi Steel
are accounted for by Longmen Joint Venture as a capital lease. The profit sharing liability portion of the
lease obligation, representing 40% of the pre-tax profit generated by the Asset Pool, is accounted for by Longmen Joint Venture
as a derivative financial instrument at fair value. See Notes 2 “Summary
of significant accounting policies”, 15 “Capital lease obligations” and 16 “Profit sharing liability”.
In
November 2010, we brought online a 1,200,000 metric ton capacity rebar production line, which was renovated based on an existing
800,000 metric ton capacity rebar production line. In July 2011, we brought online a 1,000,000 metric ton capacity high speed wire
production line. These two newly installed production lines were both relocated from the Maoming Hengda (as defined below) facility
and consume less energy when running at maximum efficiency compared to our previous production line.
Maoming Hengda Steel Co., Ltd
On June 25, 2008, through
our subsidiary Qiu Steel, we paid approximately $7.1 million (RMB 50 million) in cash to purchase 99% of Maoming Hengda Steel Group,
Ltd. (“Maoming Hengda”). The total registered capital of Maoming Hengda is approximately $77.8 million (RMB 544.6
million).
Maoming Hengda’s
core business was the production of rebar products used in the construction industry. Located on 140 hectares (approximately
346 acres) in Maoming city, Guangdong Province, the Maoming Hengda facility previously had two production lines capable of annual
production capacities of 1.8 million metric tons of 5.5mm to 16mm diameter high-speed wire and 12mm to 38mm diameter rebar. The
products were sold through nine distributors which targeted customers in Guangxi Province and the western region of Guangdong.
On December 15, 2013,
Maoming Hengda entered into a lease agreement with Zhongshan Baohua Rebar Factory, with which Maoming Hengda leased the 400,000
ton capacity rebar production line and various other buildings and equipment to Zhongshan Baohua Rebar Factory, for an annual payment
of $1.2 million (RMB 7.2 million) for eight years between March 2014 and February 2022.
Production Capacity Information Summary by Subsidiary
Annual Production Capacity (metric tons) |
|
General Steel
(China) (1) |
|
|
Baotou Steel Pipe
Joint Venture |
|
Longmen Joint
Venture |
|
Maoming
Hengda (1) |
|
Crude Steel |
|
- |
|
|
- |
|
7 million |
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
Processing |
|
400,000 |
|
|
100,000 |
|
4.3 million |
|
400,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Main Products |
|
Hot-rolled sheet |
|
|
Spiral-weld pipe |
|
Rebar/High-speed wire |
|
Rebar |
|
|
|
|
|
|
|
|
|
|
|
|
Main Application |
|
Light Agricultural vehicles |
|
|
Energy transport |
|
Infrastructure and construction |
|
Infrastructure and construction |
|
| (1) | The production facilities of General Steel (China) and Maoming Hengda currently are leased to unrelated parties. |
Marketing and Customers
We sell our products
primarily to distributors, and we typically collect payment from these distributors in advance. Our marketing efforts are
mainly directed toward those customers who have demanding requirements for on-time delivery, timeliness of customer services, and
product quality. We believe that these requirements, as well as product planning, are critical factors in our ability to
serve this segment of the market.
Our revenue is dependent,
in large part, on significant contracts with a limited number of large customers. For the three and six months ended June 30, 2014,
31.8% and 24.4% of our sales were to five customers, respectively. We believe that revenue derived from our current and future
large customers will continue to represent a significant portion of our total revenue.
Moreover, our success
will depend in part upon our ability to obtain orders from new customers, as well as the financial condition and success of our
customers and general economic conditions in China.
Demand for our Products
For the three months ended June 30, 2014
and 2013, rebar, our major product, comprised more than 99.9% and 99.6% of our sales, respectively. For the six months ended June
30, 2014 and 2013, rebar, our major product, comprised more than 99.9% and 99.4% of our sales, respectively. Overall, domestic
economic growth is an important driver of demand for our major product, especially from construction and infrastructure projects.
At Longmen Joint
Venture, growth in regional construction and infrastructure projects drives demand for our products. According to the 12th Five
Year National Economic and Social Development Plan (“NESDP”) (2011-2015), development of China’s western region
is one of China’s top five economic priorities. Shaanxi Province, where Longmen Joint Venture is located, has been designated
as a focal point for development in the Western region, and Xi’an, the provincial capital, has been designated as a focal
point for this development in China. Longmen Joint Venture is 180 kilometers from Xi’an and it does not have a major
competitor within a 250 km radius.
The Western region
of China, where our major sales market is located, has experienced a higher rate of growth than other Chinese regions in recent
years. Compared to an increase of 7.7% for the national GDP, a GDP increase of 11% was reported by Shaanxi Province in 2013 over
the previous year. Additionally, according to Accounting and Corporate Finance Production Statistics in China, Sichuan Province
also reported a GDP increase of 10%. We have a sales office in Chengdu City, Sichuan Province to meet the increasing demand for
the production of steel.
According to the
Shaanxi provincial government, the total fixed asset investment for the Shaanxi Province was $257.4 billion (RMB 1.59 trillion)
for the year ended December 31, 2013, an increase of 24.1% over the same period in 2012.
At the end of June
2009, the State Council Office announced that it approved the Guanzhong-Tianshui Economic Zone development program. This program
covers the development of two western provinces and seven cities from 2009 to 2020.
In addition, the Guanzhong-Tianshui
Economic Zone will concentrate on the development of the Xi’an area. The metropolitan area construction program focuses on
the cities of Xi’an, Xianyang, and their surrounding areas, covering up to 12,000 square kilometers, including the construction
of railways, highways, subways, airport expansion and newly developed areas. Under this program, the Shaanxi provincial government
has announced that it will build approximately 4,500 kilometers of railway with an investment of approximately $40 billion (RMB
260 billion) by 2015 and 8,080 kilometers of highway by 2020. The infrastructure and construction projects provide strong and stable
demand for our steel products in this area, in which we have over 70% of the market share.
In January 2011, the
Shaanxi provincial government announced that it will invest approximately $13 billion (RMB 80 billion) in the construction of hydro
projects, which is three times the amount invested during the 11th Five Year National Economic and Social Development Plan. In
addition to hydro projects, according to the central government, 16,000 kilometers of high speed railway will be built by 2020.
In May 2011, the
central government passed the Cheng-Yu Economic Zone Plan focusing on Chongqing City and Sichuan Province, covering 206,000 square
kilometers, to further accelerate the development of the western region of China. We anticipate that in the near future,
the demand for our products will increase in those areas, and we expect that our expanded production capacity will be able to successfully
meet the increase in demand. Furthermore, we have a sales office located in Chengdu to help facilitate such increased demand.
In February 2012,
the government approved the Western Development 12th Five Year Plan, which continues the efforts to develop the Western
areas. The Plan is centered on infrastructure and construction, highlighted by the development of economic zones, construction
of roads/railway and hydro projects, which drive the local demand for steel products.
In February 2014,
the National Development and Reform Commission (“NDRC”) announced nine focal points of the western development, which
will speed up major infrastructure construction in the western areas, including the construction of railway, highway and hydro-projects.
We anticipate strong
demand for our products driven by these and many other construction and infrastructure projects. We believe there will be sustained
regional demand for several years as both the central and provincial governments continue to drive western region development efforts.
At Baotou Steel Pipe
Joint Venture, energy sector growth, which spurs the need to transport oil, natural gas and steam, drives demand for spiral-weld
steel pipe. Presently, demand is fueled by smaller pipeline projects and municipal energy infrastructure projects within the Inner
Mongolia Autonomous Region.
Supply of Raw Materials
The primary raw materials
we use for steel production are iron ore, coke, hot-rolled steel coil and steel billets. Baotou Steel Pipe Joint Venture
uses hot-rolled steel coil as its main raw material. Longmen Joint Venture uses iron ore and coke as its main raw materials.
Iron ore is the main raw material used to produce hot-rolled steel coil and steel billets. Therefore, the prices of iron ore and
coke are the primary raw material cost drivers for our products.
Iron Ore
Longmen Joint Venture
has 7 million tons of annual crude steel production capacity. At Longmen Joint Venture, approximately 80% of production costs are
associated with raw materials, with iron ore being the largest component.
According to the China
Iron and Steel Association, approximately 60% of the Chinese domestic steel industry’s demand for iron ore must be filled
by imports. At Longmen Joint Venture, we purchase iron ore from four primary sources: Mulonggou mine (owned by Longmen Joint Venture),
Daxigou mine (owned by Long Steel Group, our partner in Longmen Joint Venture), surrounding local mines and mines located abroad.
According to the terms of Longmen Joint Venture‘s Agreement with the Long Steel Group, we have a first right of refusal for
sales from the Daxigou mine. We presently purchase all of the iron ore produced by this mine.
Coke
Coke, produced from
metallurgical coal (also known as coking coal), is our second most consumed raw material, after iron ore. It requires approximately
550kg to 600kg of coke to make one metric ton of crude steel.
Under the terms of the
Unified Management Agreement, our partner, Shaanxi Coal, has committed to providing coke and coal to us at a cost not higher than
the market price.
Our Longmen Joint Venture
facility is located in the center of China’s coal belt. We source all coke used at Longmen Joint Venture from the town in
which Longmen Joint Venture is located. This ensures a dependable, local supply and minimum transportation costs.
The sources and/or our top five major suppliers
of our raw materials for the three months ended June 30, 2014 are as follows:
Name of Major Supplier | |
Raw Material Purchased | |
% of Total Raw Material Purchased | | |
Relationship with Company |
Tianwu General Steel Material Trading Co., Ltd. | |
Iron Ore | |
| 6.3 | % | |
Related Party |
Longgang Group Import & Export Co., Ltd. | |
Iron Ore | |
| 4.9 | % | |
Related Party |
Shaanxi Fengyi Industry Co., Ltd. | |
Coke | |
| 4.2 | % | |
Third Party |
Fuping Rolling Steel Mill | |
Coke | |
| 4.0 | % | |
Third Party |
Shaanxi Longmen Coal Chemical Industry Co., Ltd | |
Coke | |
| 3.8 | % | |
Third Party |
| |
Total | |
| 23.2 | % | |
|
The sources and/or our top five major suppliers
of our raw materials for the six months ended June 30, 2014 are as follows:
Name of Major Supplier | |
Raw Material Purchased | |
% of Total Raw Material Purchased | | |
Relationship with Company |
Longgang Group Import & Export Co., Ltd. | |
Iron Ore | |
| 12.7 | % | |
Related Party |
Shaanxi Longmen Coal Chemical Industry Co., Ltd | |
Coke | |
| 8.8 | % | |
Third Party |
Tianwu General Steel Material Trading Co., Ltd. | |
Iron Ore | |
| 8.2 | % | |
Related Party |
Shaanxi Haiyan Coal Chemical Industry Co., Ltd. | |
Coke | |
| 7.1 | % | |
Related Party |
Long Steel Group | |
Iron Ore | |
| 7.0 | % | |
Related Party |
| |
Total | |
| 43.8 | % | |
|
Industry Environment
Despite demand growth
experienced during 2010 and 2011, the overall nationwide steelmaking capacity still exceeds steel demand. There is significant
over-capacity in the Chinese steel sector which is putting pressure on operators’ profitability which has become the most
significant challenge in the steel manufacturing business. Chinese crude steel production was 412 million tons from January to
June in 2014, an increase of 3% compared with the same period last year, while the total consumption of crude steel reached 376
million tons from January to June in 2014, an increase of 0.4% from the same period last year, according to the China Iron and
Steel Association.
For steelmakers, operating
performance depends on the volatility of the cost of raw materials. The shortage of these raw materials in the market has allowed
suppliers of iron ore and metallurgical coal to rebuild the pricing mechanisms through the shift from annual to shorter-term price
contracts. This has created numerous challenges for steelmakers as they must now deal with volatility in raw material prices, as
well as maintain margins with fluctuating demand. Over the past few years, we have witnessed perseverance in steel prices that
has given iron ore producers an opportunity to increase the prices in the next contract; however the reverse may not be true as
steel companies cannot always pass on the rise in iron ore prices to end consumers due to the market overcapacity and fragmentation.
The Chinese central
government has had a long-stated goal to consolidate 70% of domestic steel production among the top ten producers by 2020. Currently,
there are over 500 crude steel producers throughout China, and the top ten producers account for approximately 48% of total national
output. In April 2012, the central government announced its goal of reducing obsolete iron and steel capacities by 17.8 million
tons in 2012 and successfully reached the goal and eliminated 20.2 million tons of obsolete iron and steel capacity. In April 2013,
the central government published the industry target of eliminating 10.4 million tons of obsolete iron and steel capacities in
2013 and successfully eliminated 16.9 million tons of obsolete iron and steel capacity. In March 2014, the government reaffirmed
its determination of industry consolidation, and announced that it plans to eliminate 27 million tons of obsolete iron and steel
capacity in order to reach the industry goal of 12th five-year plan ahead of schedule in 2014. However, we continue to see a strong
demand for our products and believe there are significant growth opportunities in the industry and market we service and such consolidation
is not expected to directly impact our Company.
On July 12, 2010,
the Ministry of Industry & Information Technology Commission enacted the Steel Industry Admittance and Operation Qualifications
standards. The new standards specify requirements for all aspects of steel production in China, which include: size of blast furnaces,
size of converters, emission of waste water, dust per ton from steel production, quantity of coal used for each process in
steel production and output capacity. According to the new standards, blast furnaces under 450 cubic meters are targeted
to be eliminated. These standards once again confirmed the central government’s determination to push forward the consolidation
of this fragmented industry. As the operational conditions become more stringent, more small and medium sized companies will
likely aggressively look for valued partners which could lead to opportunities for high quality acquisitions for us. We believe
the above government policy will strengthen our position as an industry consolidator by creating qualified potential acquisition
targets.
Since 2013, the government
has exerted a more stringent environment protection policy on the steel industry. In January 2014, the Ministry of Industry and
Information Technology of the People's Republic of China (the "MIIT") announced a List of Enterprises Fulfilling
the Iron and Steel Industry Specification (the "List"). The List includes
a highly-selected group of large and medium steel manufacturers that have met or exceeded more stringent national requirements
and standards on product quality, environmental protection, energy consumption, workmanship and equipment, production scale, as
well as work safety and social responsibility. The MIIT will collaborate with China's other governmental agencies to
provide support to the List's members and to speed up the steel industry's restructuring and consolidation. Steel makers omitted
from the List will most likely face higher electricity costs, more restrictive administrative measures, and adverse effects of
forceful regulations intent on reducing the nation's overcapacity. Longmen Joint Venture, the major facility of General Steel,
has been included on the List as the only enterprise in China’s Shaanxi Province.
Results of Operations for the Three and Six Months Ended
June 30, 2014
Sales
Three months ended June 30, 2014 compared with three months
ended June 30, 2013
The following table sets forth sales and volume in metric tons.
| |
Three
months ended | | |
| | |
| |
| |
June 30, 2014 | | |
June 30, 2013 | | |
Change | | |
Change | |
in thousands, except metric tons | |
Volume | | |
Sales | | |
% | | |
Volume | | |
Sales | | |
% | | |
Volume
% | | |
Sales
% | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Longmen Joint Venture | |
| 1,305,127 | | |
$ | 587,314 | | |
| 99.9 | % | |
| 1,348,173 | | |
$ | 650,741 | | |
| 99.6 | % | |
| (3.2 | )% | |
| (9.7 | )% |
Others | |
| 1,312 | | |
| 699 | | |
| 0.1 | % | |
| 36,731 | | |
| 2,910 | | |
| 0.4 | % | |
| (96.4 | )% | |
| (76.0 | )% |
Total Sales | |
| 1,306,439 | | |
$ | 588,013 | | |
| 100.0 | % | |
| 1,384,904 | | |
$ | 653,651 | | |
| 100.0 | % | |
| (5.7 | )% | |
| (10.0 | )% |
Total sales for the
three months ended June 30, 2014 decreased by 10.0% to $588.0 million from $653.7 million for the same period in 2013. The decrease
in sales compared with the same period in 2013 was due to the decrease in both the average selling price and sales volume of our
rebar products. Longmen Joint Venture comprised 99.9% and 99.6% of total sales for the second quarter of 2014 and 2013, respectively.
Sales volume of rebar decreased by 3.2% to 1.31 million metric tons, compared with 1.35 million metric tons in the same period
in 2013. The average selling price of rebar decreased by 6.8% to approximately $450.0 per ton in the second quarter of 2014
compared with approximately $482.7 per ton in the same period of 2013.
Our product demands
and prices had been rising in the first two quarters of 2012. As a result of the China and global steel industry over-capacity,
Chinese economic control polices and the financial crisis, commodity prices declined significantly in the third quarter of 2012.
With weakened demand, market forces kicked-in and the price of steel dropped substantially. As such, our sales prices have dropped
since the third quarter of 2012, evidencing a continued decline. The over-capacity issue continued to impact our results during
the year of 2013 and into 2014. Further, the Chinese economy remained weak, which had an indirect impact of affecting our industry,
and the selling price of our products continued to decrease during this period in comparison with the same period in 2013.
Our five major customers
are distributors and collectively represented 31.8% of our total sales for the three months ended June 30, 2014 compared with 27.8%
of our total sales for the three months ended June 30, 2013. These five customers include related parties and major distributors
owned by the central government. As we are the largest supplier in Shaanxi Province, we maintain a good relationship with these
five customers to stabilize our sales channel.
Six months ended June 30, 2014 compared with six months
ended June 30, 2013
The following table sets forth sales and volume in metric tons.
| |
Six
months ended | | |
| | |
| |
| |
June 30, 2014 | | |
June 30, 2013 | | |
Change | | |
Change | |
in thousands, except metric tons | |
Volume | | |
Sales | | |
% | | |
Volume | | |
Sales | | |
% | | |
Volume
% | | |
Sales
% | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Longmen Joint Venture | |
| 2,622,667 | | |
$ | 1,181,328 | | |
| 99.9 | % | |
| 2,603,296 | | |
$ | 1,297,489 | | |
| 99.4 | % | |
| 0.7 | % | |
| (9.0 | )% |
Others | |
| 2,035 | | |
| 896 | | |
| 0.1 | % | |
| 86,031 | | |
| 7,453 | | |
| 0.6 | % | |
| (97.6 | )% | |
| (88.0 | )% |
Total Sales | |
| 2,624,702 | | |
$ | 1,182,224 | | |
| 100.0 | % | |
| 2,689,327 | | |
$ | 1,304,942 | | |
| 100.0 | % | |
| (2.4 | )% | |
| (9.4 | )% |
Total sales for the
six months ended June 30, 2014 decreased by 9.4% to $1.2 billion from $1.3 billion for the same period in 2013. The decrease in
sales compared with the same period in 2013 was predominantly due to the decreased average selling price. Longmen Joint Venture
comprised 99.9% and 99.4% of total sales for the six months ended June 30, 2014 and 2013, respectively. Sales volume of rebar
increased by 0.7% to 2.62 million metric tons, compared with 2.60 million metric tons in the same period in 2013. The average
selling price of rebar decreased by 9.6% to approximately $450.4 per ton in the six months ended June 30, 2014 compared with approximately
$498.4 per ton in the same period of 2013.
Our product demands
and prices had been rising in the first two quarters of 2012. As a result of the China and global steel industry over-capacity,
Chinese economic control polices and the financial crisis, commodity prices declined significantly in the third quarter of 2012.
With weakened demand, market forces kicked-in and the price of steel dropped substantially. As such, our sales prices have dropped
since the third quarter of 2012, evidencing a continued decline. The over-capacity issue continued to impact our results during
the year of 2013 and into 2014. Further, the Chinese economy remained weak, which had an indirect impact of affecting our industry,
and the selling price of our products continued to decrease during this period in comparison with the same period in 2013.
Our five major customers
are distributors and collectively represented 24.4% of our total sales for the six months ended June 30, 2014 compared with 23.3%
of our total sales for the six months ended June 30, 2013. These five customers included related parties and major distributors
owned by the central government. As we are the largest supplier in Shaanxi Province, we maintain a good relationship with these
five customers to stabilize our sales channel.
Cost of Goods Sold
Three months ended June 30, 2014 compared with three months
ended June 30, 2013
| |
Three
months ended | | |
| | |
| |
| |
June 30, 2014 | | |
June 30, 2013 | | |
Change | | |
Change | |
in thousands, except metric tons | |
Volume | | |
Cost of Goods Sold | | |
% | | |
Volume | | |
Cost of Goods Sold | | |
% | | |
Volume
% | | |
Cost of
Goods Sold
% | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Longmen Joint Venture | |
| 1,305,127 | | |
$ | 559,084 | | |
| 99.9 | % | |
| 1,348,173 | | |
$ | 686,934 | | |
| 99.7 | % | |
| (3.2 | )% | |
| (18.6 | )% |
Others | |
| 1,312 | | |
| 835 | | |
| 0.1 | % | |
| 36,731 | | |
| 2,253 | | |
| 0.3 | % | |
| (96.4 | )% | |
| (62.9 | )% |
Total Cost of Goods Sold | |
| 1,306,439 | | |
$ | 559,919 | | |
| 100.0 | % | |
| 1,384,904 | | |
$ | 689,187 | | |
| 100.0 | % | |
| (5.7 | )% | |
| (18.8 | )% |
Our primary cost of
goods sold is the cost of raw materials such as iron ore, coke, alloy and scrap steel. The costs of iron ore and coke accounted
for 82.6% of our total cost of sales. The cost of goods sold decreased by 18.8% to $559.9 million in the second quarter of 2014
from $689.2 million in the same period of 2013. The decrease was mainly driven by the decreased unit costs of raw materials as
a result of the decline in iron ore and coke purchase prices of 9.7% and 17.3%, respectively, for the three months ended June 30,
2014 compared with the same period in 2013. As such, the average costs of rebar manufactured decreased 15.9% to $428.4 per ton
in the second quarter of 2014 from $509.5 per ton in the same period of 2013.
Six months ended June 30, 2014 compared with six months
ended June 30, 2013
| |
Six
months ended | | |
| | |
| |
| |
June 30, 2014 | | |
June 30, 2013 | | |
Change | | |
Change | |
in thousands, except metric tons | |
Volume | | |
Cost of Goods Sold | | |
% | | |
Volume | | |
Cost of Goods Sold | | |
% | | |
Volume
% | | |
Cost of Goods Sold
% | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Longmen Joint Venture | |
| 2,622,667 | | |
$ | 1,175,318 | | |
| 99.9 | % | |
| 2,603,296 | | |
$ | 1,329,315 | | |
| 99.5 | % | |
| 0.7 | % | |
| (11.6 | )% |
Others | |
| 2,035 | | |
| 1,373 | | |
| 0.1 | % | |
| 86,031 | | |
| 7,096 | | |
| 0.5 | % | |
| (97.6 | )% | |
| (80.7 | )% |
Total Cost of Goods Sold | |
| 2,624,702 | | |
$ | 1,176,691 | | |
| 100.0 | % | |
| 2,689,327 | | |
$ | 1,336,411 | | |
| 100.0 | % | |
| (2.4 | )% | |
| (12.0 | )% |
Our primary cost of
goods sold is the cost of raw materials such as iron ore, coke, alloy and scrap steel. The costs of iron ore and coke accounted
for 74.6% of our total cost of sales. The cost of goods sold decreased by 12.0% to $1.2 billion in the six months ended June 30,
2014 from $1.3 billion in the same period of 2013. The decrease was mainly driven by the decreased unit costs of raw materials
as a result of the decline in iron ore and coke purchase prices of 7.0% and 17.3%, respectively, for the six months ended June
30, 2014 compared with the same period in 2013. As such, the average costs of rebar manufactured decreased 12.2% to $448.1 per
ton in the six months ended June 30, 2014 from $510.6 per ton in the same period of 2013.
Gross Profit (Loss)
Three months ended June 30, 2014 compared with three months
ended June 30, 2013
| |
Three months ended | | |
| |
| |
June 30, 2014 | | |
June 30, 2013 | | |
Change | |
in thousands, except metric tons | |
Volume | | |
Gross
Profit (Loss) | | |
Margin % | | |
Volume | | |
Gross
Profit (Loss) | | |
Margin % | | |
Gross
Profit | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Longmen Joint Venture | |
| 1,305,127 | | |
$ | 28,230 | | |
| 4.8 | % | |
| 1,348,173 | | |
$ | (36,193 | ) | |
| (5.6 | )% | |
| (178.0 | )% |
Others | |
| 1,312 | | |
| (136 | ) | |
| (19.5 | )% | |
| 36,731 | | |
| 657 | | |
| 22.6 | % | |
| (120.7 | )% |
Total Gross Profit (Loss) | |
| 1,306,439 | | |
$ | 28,094 | | |
| 4.8 | % | |
| 1,384,904 | | |
$ | (35,536 | ) | |
| (5.4 | )% | |
| (179.1 | )% |
Gross profit for the
second quarter of 2014 was $28.1 million, or 4.8% of total sales, compared with a gross loss of $35.5 million, or (5.4)% of total
sales in the same period in 2013. The increase in gross margin percentage was mainly attributable to the percentage decrease in
the costs of rebar manufactured of 15.9%, which was higher than the percentage decrease in the average rebar selling price of 6.8%
compared with the same period of 2013.
Six months ended June 30, 2014 compared with six months
ended June 30, 2013
| |
Six months ended | | |
| |
| |
June 30, 2014 | | |
June 30, 2013 | | |
Change | |
in thousands, except metric tons | |
Volume | | |
Gross
Profit (Loss) | | |
Margin % | | |
Volume | | |
Gross
Profit (Loss) | | |
Margin % | | |
Gross
Profit | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Longmen Joint Venture | |
| 2,622,667 | | |
$ | 6,010 | | |
| 0.5 | % | |
| 2,603,296 | | |
$ | (31,826 | ) | |
| (2.5 | )% | |
| (118.9 | )% |
Others | |
| 2,035 | | |
| (477 | ) | |
| (53.2 | )% | |
| 86,031 | | |
| 357 | | |
| 4.8 | % | |
| (233.6 | )% |
Total Gross Profit (Loss) | |
| 2,624,702 | | |
$ | 5,533 | | |
| 0.5 | % | |
| 2,689,327 | | |
$ | (31,469 | ) | |
| (2.4 | )% | |
| (117.6 | )% |
Gross profit for the
six months ended June 30, 2014 was $5.5 million, or 0.5% of total sales, compared with a gross loss of $31.5 million, or (2.4)%
of total sales in the same period in 2013. The increase in gross margin percentage was mainly attributable to the percentage decrease
in the costs of rebar manufactured of 12.2%, which was higher than the percentage decrease in the average rebar selling price of
9.6% compared with the same period of 2013.
Selling, General and Administrative Expenses (“SG&A”)
Three months ended June 30, 2014 compared with three months
ended June 30, 2013
(in thousands) | |
Three months ended | | |
| |
| |
June 30, 2014 | | |
June 30, 2013 | | |
Change % | |
| |
| | |
| | |
| |
Selling, general and administrative expenses | |
$ | (18,849 | ) | |
$ | (20,848 | ) | |
| (9.6 | )% |
SG&A expenses as a percentage of total revenue | |
| (3.2 | )% | |
| (3.2 | )% | |
| | |
SG&A expenses, such
as travel expenses and transportation fees, entertainment, employee benefits, training, and travel expenses decreased by 9.6% to
$18.8 million for the three months ended June 30, 2014, compared with $20.8 million for the same period in 2013.
Selling expenses increased
by 4.7% to $9.7 million for the three months ended June 30, 2014 compared with $9.3 million in the same period of 2013. The increase
was mainly due to the increase in freight expenses as a result of the PRC government’s policy to increase freight train fees
in early 2014.
In addition, general
and administrative (“G&A”) expenses were approximately $9.1 million and $11.6 million for three months ended June
30, 2014 and 2013, respectively. The 21.0% decrease was mainly due to the decrease in salary expenses, union expenses, and employee
education and training expenses in the second quarter of 2014 compared with the same period in 2013.
Six months ended June 30, 2014 compared with six months
ended June 30, 2013
(in thousands) | |
Six months ended | | |
| |
| |
June 30, 2014 | | |
June 30, 2013 | | |
Change % | |
| |
| | |
| | |
| |
Selling, general and administrative expenses | |
$ | (39,902 | ) | |
$ | (39,803 | ) | |
| 0.2 | % |
SG&A expenses as a percentage of total revenue | |
| (3.4 | )% | |
| (3.1 | )% | |
| | |
| |
| | | |
| | | |
| | |
SG&A expenses, such
as travel expenses and transportation fees, entertainment, employee benefit, training, and travel expenses increased by 0.2% to
$39.9 million for the six months ended June 30, 2014, compared to $39.8 million for the same period in 2013.
Selling expenses increased
by 4.1% to $18.0 million for six months ended June 30, 2014 as compared to $17.3 million in the same period of 2013. The increase
was mainly due to the increase in freight expenses as a result of the PRC government’s policy to increase freight train fees
in early 2014.
In addition, general
and administrative (“G&A”) expenses were approximately $21.9 million and $22.5 million for six months ended June
30, 2014 and 2013, respectively. The 2.7% decrease was mainly due to the decrease in salary expenses and union expenses.
Change in Fair Value of Profit Sharing Liability
Three months ended June 30, 2014 compared with three months
ended June 30, 2013
(in thousands) | |
Three months ended | | |
| |
| |
June 30, 2014 | | |
June 30, 2013 | | |
Change % | |
| |
| | |
| | |
| |
Change in fair value of profit sharing liability | |
$ | (2,920 | ) | |
$ | 9,494 | | |
| (130.8 | )% |
Our profit sharing liability
relates to equipment operated by Longmen Joint Venture under a capital lease arrangement. Part of the payments under the capital
lease is a portion of our future operating profits. Our estimate of those future profit sharing payments are accounted for as a
derivative liability at fair value. In 2013, we considered the recent changes in China’s economic situation, which included
a new estimation and downgrade of 2014 GDP by major investment bankers in June 2013, and steel industry outlook reports issued
for 2014. As a result, we re-evaluated our projected operating profit (loss) taking into consideration the macroeconomic events
in China, as well as our most recent operating results. Due to the continued decrease in our rebar selling price, the market slow-down
in the first quarter of 2013, and the lack of gross profit recovery as quickly as expected in 2012, we foresaw a greater downward
trend in 2014 through 2016 than previously anticipated in 2012. As our projected profit (loss) decreased in 2013, the fair value
of our profit sharing liability was reduced compared with our previous estimates in 2012 and we recognized a gain of $9.5 million
in our income from operations for the three months ended June 30, 2013. In 2014, the outlook has not changed significantly. As
a result, we recognized a loss on the change in the fair value of the profit sharing liability of $(2.9) million primarily due
to the change in fair value related to the passage of time and change in the number of future periods over which the present value
of future cash flows was estimated.
Six months ended June 30, 2014 compared with six months
ended June 30, 2013
(in thousands) | |
Six months ended | | |
| |
| |
June 30, 2014 | | |
June 30, 2013 | | |
Change % | |
| |
| | |
| | |
| |
Change in fair value of profit sharing liability | |
$ | (2,969 | ) | |
$ | 56,273 | | |
| (105.3 | )% |
As discussed above,
our projected profit (loss) decreased in 2013, and as a result, the fair value of our profit sharing liability was reduced compared
with our previous estimates in 2012 and we recognized a gain of $56.3 million in our income (loss) from operations for the three
months ended June 30, 2013. In 2014, the outlook has not changed significantly and we recognized a loss on the change in the fair
value of the profit sharing liability of $(3.0) million primarily due to the change in fair value related to the passage of time and change in the number of future periods over which the present value
of future cash flows was estimated.
Income (Loss) from Operations
Three months ended June 30, 2014 compared with three months
ended June 30, 2013
(in thousands) | |
Three months ended | | |
| |
| |
June 30, 2014 | | |
June 30, 2013 | | |
Change % | |
| |
| | |
| | |
| |
Income (loss) from operations | |
$ | 6,325 | | |
$ | (46,890 | ) | |
| (113.5 | )% |
Income from operations
for the three months ended June 30, 2014 was $6.3 million compared with a $46.9 million loss from operations for the same period
in 2013. The increase in income from operations was predominantly due to the increase in gross profit offset by the loss from the
change in fair value of the profit sharing liability.
Six months ended June 30, 2014 compared with six months
ended June 30, 2013
(in thousands) | |
Six months ended | | |
| |
| |
June 30, 2014 | | |
June 30, 2013 | | |
Change % | |
| |
| | |
| | |
| |
Loss from operations | |
$ | (37,338 | ) | |
$ | (14,999 | ) | |
| 148.9 | % |
Loss from operations
for the six months ended June 30, 2014 was $37.3 million compared with a loss of $15.0 million for the same period in 2013. The
increase in the loss from operations was predominantly due to the decrease in the gain from the change in fair value of the profit
sharing liability, offset by the increase in gross profit.
Other Income (Expense)
Three months ended June 30, 2014 compared with three months
ended June 30, 2013
(in thousands) | |
Three months ended | | |
| |
| |
June 30, 2014 | | |
June 30, 2013 | | |
Change % | |
| |
| | |
| | |
| |
Interest income | |
$ | 4,066 | | |
$ | 3,383 | | |
| 20.2 | % |
Finance/interest expense | |
| (20,950 | ) | |
| (16,094 | ) | |
| 30.2 | % |
Financing cost on capital lease | |
| (5,669 | ) | |
| (5,122 | ) | |
| 10.7 | % |
Loss on disposal of equipment | |
| (142 | ) | |
| (235 | ) | |
| (39.6 | )% |
Income from equity investment | |
| 54 | | |
| 132 | | |
| (59.1 | )% |
Foreign currency transaction gain (loss) | |
| (963 | ) | |
| 98 | | |
| (1,082.7 | )% |
Lease income | |
| 542 | | |
| 539 | | |
| 0.6 | % |
Other non-operating income, net | |
| 302 | | |
| 521 | | |
| (42.0 | )% |
Total other expense, net | |
$ | (22,760 | ) | |
$ | (16,778 | ) | |
| 35.7 | % |
Total other expense,
net, for the three months ended June 30, 2014 was $22.8 million, a 35.7% increase compared with $16.8 million for the same period
in 2013. The increase was mainly a result of the $4.9 million increase in finance/interest expense and $1.1 million increase in
foreign currency transaction loss from the appreciation of our USD bank loans. The increase in finance/interest expense was mainly
a result of the increase in finance charges from bank notes receivable redemptions prior to maturity and the amount borrowed from
banks and third parties in the second quarter of 2014 compared with the same period in 2013. As a result, notes receivable early
redemption expenses for the three months ended June 30, 2014 amounted to $12.8 million, a $6.3 million or 96.9% increase from $
6.5 million for the same period in 2013. At the same time, interest expense on loan borrowings for the three months ended June
30, 2014 amounted to $8.2 million, a $2.3 million or 21.9% decrease from $10.5 million for the same period in 2013.
Six months ended June 30, 2014 compared with six months
ended June 30, 2013
(in thousands) | |
Six months ended | | |
| |
| |
June 30, 2014 | | |
June 30, 2013 | | |
Change % | |
| |
| | |
| | |
| |
Interest income | |
$ | 7,258 | | |
$ | 5,822 | | |
| 24.7 | % |
Finance/interest expense | |
| (44,559 | ) | |
| (35,856 | ) | |
| 24.3 | % |
Financing cost on capital lease | |
| (10,755 | ) | |
| (10,217 | ) | |
| 5.3 | % |
Gain (loss) on disposal of equipment | |
| (96 | ) | |
| 96 | | |
| (200.0 | )% |
Income from equity investment | |
| 67 | | |
| 90 | | |
| (25.6 | )% |
Foreign currency transaction gain (loss) | |
| (1,817 | ) | |
| 126 | | |
| (1,542.1 | )% |
Lease income | |
| 1,088 | | |
| 1,071 | | |
| 1.6 | % |
Other non-operating income, net | |
| 126 | | |
| 790 | | |
| (84.1 | )% |
Total other expense, net | |
$ | (48,688 | ) | |
$ | (38,078 | ) | |
| 27.9 | % |
Total other expense,
net, for the six months ended June 30, 2014 was $48.7 million, a 27.9% increase compared with $38.1 million for the same period
in 2013. The increase was mainly a result of the $8.7 million increase in finance/interest expense and $1.9 million increase in
foreign currency transaction loss from the appreciation of our USD bank loans. The increase in finance/interest expense was mainly
a result of the increase in finance charges from bank notes receivable redemptions prior to maturity and the amount borrowed from
banks and third parties for the six months ended June 30, 2014 compared with the same period in 2013. As a result, notes receivable
early redemption expenses for the six months ended June 30, 2014 amounted to $26.9 million, a $9.6 million or 55.5% increase from
$17.3 million for the same period in 2013, and interest expense on loan borrowings for the six months ended June 30, 2014 amounted
to $17.7 million, a $0.8 million or 4.3% decrease from $18.5 million for the same period in 2013.
Income Taxes
For the three months
ended June 30, 2014 and 2013, we had a total tax provision of $107 thousand and $105 thousand, respectively, from our profitable
subsidiaries. For the three months ended June 30, 2014, we evaluated the deferred tax assets of Longmen Joint Venture and Baotou
Steel Pipe Joint Venture and concluded the net operating loss may not be fully realizable and thus we provided a 100% valuation
allowance for the deferred tax assets. No deferred income tax provision was recorded for the three months ended June 30, 2014 as
the deferred tax assets had been fully reserved.
For the three months
ended June 30, 2014 and 2013, we had effective tax rates of (0.7)% and (0.2)%, respectively.
For the six months ended
June 30, 2014 and 2013, we had a total tax provision of $112 thousand and $176 thousand, respectively, from our profitable subsidiaries.
For the six months ended June 30, 2014, we evaluated the deferred tax assets of Longmen Joint Venture and Baotou Steel Pipe Joint
Venture and concluded the net operating loss may not be fully realizable and thus we provided a 100% valuation allowance for the
deferred tax assets. As a result, no deferred income tax provision was recorded for the six months ended June 30, 2014 as the deferred
tax assets had been fully reserved.
For the six months ended
June 30, 2014 and 2013, we had effective tax rates of (0.1)% and (0.3)%, respectively.
Net Loss
Three months ended June 30, 2014 compared with three months
ended June 30, 2013
(in thousands) | |
Three months ended | | |
| |
| |
June 30, 2014 | | |
June 30, 2013 | | |
Change % | |
| |
| | |
| | |
| |
Net loss | |
$ | (16,542 | ) | |
$ | (63,773 | ) | |
| (74.1 | )% |
Six months ended June 30, 2014 compared with six months
ended June 30, 2013
(in thousands) | |
Six months ended | | |
| |
| |
June 30, 2014 | | |
June 30, 2013 | | |
Change % | |
| |
| | |
| | |
| |
Net Loss | |
$ | (86,138 | ) | |
$ | (53,253 | ) | |
| 61.8 | % |
Net Loss attributable to General Steel Holdings, Inc.
Three months ended June 30, 2014 compared with three months
ended June 30, 2013
(in thousands) | |
Three months ended | | |
| |
| |
June 30, 2014 | | |
June 30, 2013 | | |
Change % | |
| |
| | |
| | |
| |
Net loss | |
$ | (16,542 | ) | |
$ | (63,773 | ) | |
| (74.1 | )% |
Less: Net
loss attributable to the non-controlling interest | |
| (5,523 | ) | |
| (23,955 | ) | |
| (76.9 | )% |
Net loss attributable to General Steel Holdings, Inc. | |
$ | (11,019 | ) | |
$ | (39,818 | ) | |
| (72.3 | )% |
Net loss attributable
to us for the three months ended June 30, 2014 was $11.0 million compared with $39.8 million for the same period in 2013. The decrease
in net loss attributable to us for the three months ended June 30, 2014 was mainly a result of the $63.6 million increase in gross
profit offset by a $12.4 million decrease in the gain from the change in the fair value of our profit sharing liability and a $4.9
million increase in finance/interest expense.
We have subsidiaries
in which we do not have a 100% ownership interest. Allocation of income or loss to these non-controlling interests is based on
the percentage of their equity investment times the subsidiaries’ net income or loss.
Six months ended June 30, 2014 compared with six months
ended June 30, 2013
(in thousands) | |
Six months ended | | |
| |
| |
June 30, 2014 | | |
June 30, 2013 | | |
Change % | |
| |
| | |
| | |
| |
Net income (loss) | |
$ | (86,138 | ) | |
$ | (53,253 | ) | |
| 61.8 | % |
Less: Net
income (loss) attributable to the non-controlling interest | |
| (31,555 | ) | |
| (16,538 | ) | |
| 90.8 | % |
Net income (loss) attributable to General Steel Holdings, Inc. | |
$ | (54,583 | ) | |
$ | (36,715 | ) | |
| 48.7 | % |
Net loss attributable
to us for the six months ended June 30, 2014 was $54.6 million compared with $36.7 million for the same period in 2013. The increase
in net loss attributable to us for the six months ended June 30, 2014 was mainly a result of the $37.0 million increase in gross
profit offset by a $59.2 million decrease in the gain from the change in the fair value of our profit sharing liability and a $8.7
million increase in finance/interest expense.
We have subsidiaries
in which we do not have a 100% ownership interest. Allocation of income or loss to these non-controlling interests is based on
the percentage of their equity investment times the subsidiaries’ net income or loss.
Liquidity and capital resources
As of June 30, 2014,
our current liabilities exceeded our current assets by approximately $1.3 billion. Given our expected capital expenditure in the
foreseeable future, we have comprehensively considered our available sources of funds as follows:
|
· |
Financial support and credit guarantees from related parties; and |
|
· |
Other available sources of financing
from domestic banks and other financial institutions given our credit history. |
Based on the above
considerations, Management and our Board of Directors are of the opinion that we have sufficient funds to meet our working capital
requirements and debt obligations as they become due for at least the next year from the reporting date. As a result, our unaudited
condensed consolidated financial statements for the period ended June 30, 2014 have been prepared on a going concern basis.
As of June 30, 2014, we had cash and restricted
cash aggregating $492.9 million, of which $448.1 million was restricted.
We believe our cash
flows generated from operations and financing, which include customer prepayments and vendor financing, existing cash balances,
and credit facilities will be adequate to finance our working capital requirements, fund capital expenditures, make required debt
and interest payments, pay taxes, and support our operating strategies.
The steel business is
capital intensive and we utilize leverage greater than our industry peers, which we believe enables us to generate revenue
compared to our shareholder equity at a rate higher than our industry peers. We utilize leverage in the form of credit from banks,
vendor financing and customer deposits and from other sources. This blended form of financing reduces our reliance on any single
source.
Substantially all our
operations are conducted in China and all of our revenues are denominated in Renminbi (“RMB”). RMB is subject to exchange control
regulation in China, and, as a result, we may have difficulty distributing any dividends outside of China due to PRC exchange
control regulations that restrict our ability to convert RMB into U.S. Dollars.
Under applicable PRC
regulations, foreign-invested enterprises in China may pay dividends only out of their accumulated profits, if any, determined
in accordance with PRC accounting standards and regulations. In addition, a foreign-invested enterprise in China is required to
set aside at least 10% of its after-tax profit based on PRC accounting standards each year to its general reserves until the accumulative
amount of such reserves reaches 50% of its registered capital. These reserves are not distributable as cash dividends. The board
of directors of a foreign-invested enterprise has the discretion to allocate a portion of its after-tax profits to staff welfare
and bonus funds, which may not be distributed to equity owners except in the event of liquidation. Under PRC law, RMB is currently
convertible into U.S. Dollars under a company’s “current account,” which includes dividends, trade and service-related
foreign exchange transactions, without prior approval of the State Administration of Foreign Exchange (SAFE), but is not convertible
from a company’s “capital account,” which includes foreign direct investments and loans, without the prior approval
of the SAFE.
We have previously raised
money in the U.S. capital markets which provided the capital needed for our operations and for General Steel Investment Co, Ltd.
(“General Steel Investment”). Thus the foreign currency restrictions and regulations in the PRC on dividend distributions
will not have a material impact on the liquidity, financial condition and results of operations of General Steel Holdings, Inc.
and General Steel Investment.
Although the steel industry
is slowing down due to over-capacity issues in the PRC, in order for us to stay competitive, we continue to look for opportunities
to improve the efficiency of our production lines. In addition to the renovation of an existing 800,000 metric ton capacity rebar
production line that we brought online in November 2010, in July 2011, we also brought online a 1,000,000 metric ton capacity high
speed wire production line. These two newly installed production lines were both relocated from our Maoming Hengda facility and
will consume less energy when running at maximum efficiencies compared with our previous production line. In September 2012 we
began the construction of a 900,000 metric ton capacity rebar production line, which was completed and put into production in September
2013. In March 2013, we began the construction of a 1,200,000 metric ton capacity rebar production line for the purpose of reducing
our reprocessing cost and to increase our profit margin. The 1,200,000 metric ton capacity rebar production line was completed
and put into t production in February 2014. Any future facility expansion will require additional financing and/or equity capital
and will be dependent upon the availability of financing arrangements and capital at the time.
Short-term Notes Payable
As of June 30, 2014,
we had $875.5 million in short-term notes payable liabilities, which were secured by restricted cash of $430.2 million and restricted
notes receivable of $51.0 million. These are lines of credit extended by banks for a maximum of six months and are used to
finance working capital. The short-term notes payable must be paid in full at maturity and credit availability is continued upon
payment at maturity. There are no additional significant financial covenants. We pay zero interest on this type of credit as this
is a monetary tool used by China’s central bank to control liquidity over the Chinese monetary system. However, we are required
to pay a transaction fee of 0.05% of the notes’ value. In addition, the banks usually require us to deposit either a certain
amount of cash at the bank as a guarantee deposit or provide notes receivable as security.
Short-term Loans – Banks
As of June 30, 2014,
we had $201.7 million in short-term bank loans. These were bank loans with a one year maturity and must be paid in full upon maturity.
PRC banks have not been impacted as heavily by the financial crisis as U.S. banks and we believe our current creditors will renew
their loans to us after our loans mature as they did in the past.
We are able to repay our short-term notes
payables and short term bank loans upon maturity using available capital resources.
For more details about our debt, see Note
9 in our Notes to the unaudited condensed consolidated financial statements included in this report.
For more details about our related party
debt financing, see Note 19 in our Notes to the unaudited condensed consolidated financial statements included in this report.
As part of our working
capital management, Longmen Joint Venture has entered into a number of sale and purchase back contracts (“Contracts”)
with third party companies and two 100% owned subsidiaries of Longmen Joint Venture, named Yuxin Trading Co., Ltd. (“Yuxin”)
and Yuteng Trading Co., Ltd. (“Yuteng”). Pursuant to the Contracts, Longmen Joint Venture sells rebar to the third
party companies at a certain price, and within the same month, Yuxin and Yuteng will purchase back the rebar from the third party
companies at a price between 4.6% to 9.6% higher than the original selling price from Longmen Joint Venture. Based on the Contract
terms, Longmen Joint Venture is paid in advance for the rebar sold to the third party companies and Yuxin and Yuteng are given
a credit period of several months to one year for the purchase back of the inventory from the third party companies. There is no
physical movement of the inventory during the sale and purchase back arrangement. The margin between 4.6% to 9.6% is determined
by reference to the bank loan interest rates at the time when the Contracts are entered into, plus an estimated premium based on
the financing sale amount, which represents the interest charged by the third party companies for financing Longmen Joint Venture
through the above sale and purchase back arrangement. As such, the revenue and cost of goods sold arising from the above transactions
are recorded on a net basis and the incremental amounts paid by Yuxin and Yuteng to purchase back the goods are treated as financing
costs in the consolidated financial statements.
Total financing sales
for the three months ended June 30, 2014 and 2013 amounted to $229.1 million and $188.1 million, respectively, which were eliminated
in our consolidated financial statements. The financial cost related to financing sales for the three months ended June 30, 2014
and 2013 amounted to $0.8 million and $1.5 million, respectively.
Total financing sales
for the six months ended June 30, 2014 and 2013 amounted to $459.6 million and $353.3 million, respectively, which were eliminated
in our consolidated financial statements. The financial cost related to financing sales for the six months ended June 30, 2014
and 2013 amounted to $1.7 million and $3.1 million, respectively.
Liquidity
Our accounts have been
prepared in accordance with U.S. GAAP on a going concern basis. The going concern basis assumes that assets are realized and liabilities
are extinguished in the ordinary course of business at amounts disclosed in the financial statements. Our ability to continue as
a going concern depends upon aligning our sources of funding (debt and equity) with our expenditure requirements and repayment
of the short-term debt facilities as and when they fall due.
The steel business
is capital intensive and as a normal industry practice in PRC, we are highly leveraged. Debt financing in the form of short term
bank loans, loans from related parties, financing sales, bank acceptance notes, and capital leases have been utilized to finance
the working capital requirements and the capital expenditures of our Company. As a result, our debt to equity ratio as of June
30, 2014 and December 31, 2013 were (5.4) and (6.5), respectively. As of June 30, 2014, our current liabilities exceed current
assets (excluding deferred lease income) by $1.3 billion.
Longmen Joint Venture,
as our most important subsidiary, accounted for a majority of our total sales. As such, the majority of our working capital needs
come from Longmen Joint Venture. Our ability to continue as a going concern depends heavily on Longmen Joint Venture’s operations,
as well as its ability to obtain external financial supports, including but not limited to lines of credit from banks and vendor
financing. If Longmen Joint Venture does not maintain a sufficient level of financial support by renewing its financing terms with
existing financing sources or obtaining new sources of financial support, there may be an immediate negative impact on our operations
and ability to continue as a going concern. Longmen Joint Venture has obtained different types of financial support, which include
lines of credit from banks, vendor financing, financing sales, other financing and sales representative financing.
For more details and
terms about our financial support, see Note 2(d) in our Notes to the condensed consolidated financial statements.
With the financial
support from the banks and the companies discussed in Note 2(d) in our Notes to the condensed consolidated financial statements,
management is of the opinion that we have sufficient funds to meet our future operations, working capital requirements and debt
obligations until the end of June 30, 2015. The detailed breakdown of Longmen Joint Venture’s estimated cash flow items are
listed below.
|
|
Cash inflow (outflow)
(in millions) |
|
|
|
For the twelve months ending
June 30, 2015 |
|
Estimated current liabilities over current assets (excluding deferred lease income) as of June 30, 2014 (unaudited) |
|
$ |
(1,327.5 |
) |
Projected cash financing and outflows: |
|
|
|
|
Cash provided by lines of credit from banks |
|
|
147.9 |
|
Cash provided by vendor financing |
|
|
893.8 |
|
Cash provided by other financing |
|
|
362.4 |
|
Cash provided by sales representatives |
|
|
23.1 |
|
Cash projected to be used in operations in the twelve months ending June 30, 2015 |
|
|
(28.8 |
) |
Cash projected to be used for financing cost in the twelve months ending June 30, 2015 |
|
|
(63.7 |
) |
Net projected change in cash for the twelve months ending June 30, 2015 |
|
$ |
7.2 |
|
As a result, the unaudited
condensed consolidated financial statements for the six month period ended June 30, 2014 have been prepared on a going concern
basis.
Cash-flow
Operating Activities
Net cash provided by
(used in) operating activities for the six months ended June 30, 2014 and 2013 was $121.7 million and $(61.4) million, respectively.
This change was mainly due to the combination of the following factors:
|
· |
The impact of some non-cash items included in net income (loss) of $61.0 million for the six months ended June 30, 2014, compared with $(3.8) million in the same period in 2013. The non-cash items include the following: |
|
- |
Depreciation, amortization and depletion; |
|
- |
Change in fair value of derivative
liabilities - warrants; |
|
- |
Change in fair value of profit sharing liability. |
|
- |
(Gain) loss on disposal of equipment and intangible assets; |
|
- |
Provision for doubtful accounts; |
|
- |
Reservation of mine maintenance fee; |
|
- |
Stock issued for service and compensation; |
|
- |
Amortization of deferred financing cost on capital lease; |
|
- |
(Income) loss from equity investments; |
|
- |
Foreign currency transaction (gain) loss; |
|
- |
Deferred lease income; and |
|
· |
The primary reasons for the material fluctuations in cash inflow were as follows: |
|
- |
Notes receivable: The decrease was mainly due to less notes receivable being received as a form of payment in the first six months of 2014 compared with the same period in 2013; |
|
- |
Prepaid taxes: The decrease was mainly due to the decrease in prepaid VAT purchase taxes along with the decrease in purchases in the first six months of 2014 compared with the same period in 2013; |
|
- |
Accounts payable - related parties: The increase in accounts payable - related parties was mainly due to Longmen Joint Venture making more purchases from related parties during the six months ended June 30, 2014 compared with the same period in 2013. Pursuant to the supplier financing agreements signed between Longmen Joint Venture and its suppliers, those suppliers agreed not to demand certain cash payments for a certain period; |
|
- |
Customer deposits, including related parties: The increase in customer deposits, including related parties, was mainly due to our customers making more prepayments to us in the six months ended June 30, 2014. These deposits were subsequently recognized as sales after June 30, 2014 in accordance with our sales recognition policy. |
| · | The
primary reasons for material fluctuations in cash outflow were as follows: |
|
- |
Advance on inventory purchases, including related parties: The increase was mainly due to more advance payments made to both third parties and related parties for raw material purchases to meet future production requirements. Advance payments are a prevailing requirement on iron ore purchases in the steel production industry; and |
|
- |
Accounts payable: The decrease in accounts payable was mainly due to Longmen Joint Venture making fewer purchases from third parties during the six months ended June 30, 2014 compared with the same period in 2013. Pursuant to the supplier financing agreements signed between Longmen Joint Venture and its suppliers, those suppliers agreed not to demand certain cash payments for a certain period. |
|
|
|
Investing activities
Net cash used
in investing activities was $164.5 million for the six months ended June 30, 2014 compared with $102.2 million for the six months
ended June 30, 2013. Fluctuations in cash outflow between the two periods was mainly due to the increase in cash used for
equipment and intangible asset purchases for the six months ended June 30, 2014, which amounted to $112.7 million, compared with
$52.4 million in the same period in 2013.
Financing activities
Net cash provided
by financing activities was $56.0 million for the six months ended June 30, 2014 compared with $183.9 million for the six months
ended June 30, 2013. Compared with the same period in 2013, the decrease of cash inflow from financing activities was mainly driven
by the following:
| · | Short term notes payable: We borrowed
more notes payables to banks to pay suppliers for the six months ended June 30, 2014 compared with the same period in 2013 and
repaid more notes payable from the banks during the quarter; |
| · | Short term loans – bank: We borrowed
more from banks during the six months ended June 30, 2014 compared with the same period in 2013; |
| · | Short term loans – others: We repaid
fewer loans from third parties during the six months ended June 30, 2014 compared with the same period in 2013; and |
| · | Short term loans – related parties:
We repaid fewer loans from related parties during the six months ended June 30, 2014 compared with the same period in 2013. |
The cash inflow was offset by the following cash outflow:
|
|
|
|
· |
Short term loans: We repaid more money to banks during the six months ended June 30, 2014 as they became due compared with the same period in 2013 and borrowed less short term loans from the other parties and related parties during the quarter as we generated positive operating cash flows in the first quarter of 2014 allowing us to decrease borrowings on short term loans; and |
|
· |
Deposits due to sales representatives: We received fewer deposits from sales representatives during the three months ended June 30, 2014 compared with the same period in 2013. |
Impact of Inflation
We are subject to commodity
price risks arising from price fluctuations in the market prices of our raw materials. We have generally been able to pass on cost
increases through price adjustments. However, the ability to pass on these increases depends on market conditions influenced by
the overall economic conditions in China. We manage our price risks through productivity improvements and cost-containment measures.
We do not believe that inflation risk is material to our business or our financial position, results of operations or cash flows.
Compliance with Environmental Laws and Regulations
Longmen Joint Venture:
Together with our joint
venture partners Long Steel Group and Shaanxi Steel, we have invested RMB 580 million in a series of comprehensive projects to
reduce our waste emissions of coal gas, water, and solid waste. In 2005, we received ISO 14001 certification for our overall environmental
management system. We have received several awards from the Shaanxi provincial government as a result of our increased effort in
environmental protection.
We have spent in excess
of $9.1 million (RMB 57 million) on a comprehensive waste water recycling and water treatment system. The 2,000 cubic meter/h treatment
capacity systems were implemented at the end of 2005. In 2010, 1.08 metric tons of new water was consumed per metric ton of steel
produced.
We have one 10,000
cubic meter coke-oven gas tank, one 50,000 cubic meter blast furnace coal gas tank and one 80,000 cubic meter converter furnace
coal gas tank to collect the residual coal gas produced from our facility and that of surrounding enterprises. We also have spent
$36.6 million (RMB 230 million) on a thermal power plant with two 25 Kilowatt generators that use the residual coal gas from the
blast furnaces and converters as fuel to generate power.
We have several plants
to further process solid waste generated from the steel making process into useful products such as construction materials, building
blocks, porcelain tiles, curb tops, ornamental tiles, as well as other products.
In 2009, we treated
and recycled about 6.8 million tons of waste water, 335,320 tons of slag, 130 million m³ of gas from the converters and 6.1
billion m³ of gas from the blast furnaces. We also reused 855,714 tons of hot steam and generated 433 million KWH of electricity.
During 2010 and 2012,
more than $9.6 million (RMB 60 million) was spent on the technical upgrade and renovation of our converters and $0.88 billion (RMB
5.5 billion) was spent on the upgrade of the blast furnaces and sintering machines.
In 2012, we installed
desulfidation equipment for two sintering machines, which started operating in June 2012.
Off-balance Sheet Arrangements
There were no off-balance
sheet arrangements for the period ended June 30, 2014 that have or that, in the opinion of management, are likely to have
a current or future material effect on our financial condition or results of operations.
Contractual Obligations and Commercial Commitments
We have certain fixed
contractual obligations and commitments that include future estimated payments. Changes in our business needs, cancellation provisions,
changing interest rates, and other factors may result in actual payments differing from the estimates. We cannot provide certainty
regarding the timing and amounts of payments. Throughout our operating history, we have funded our contractual obligations and
commercial commitments through financing arrangements and operating cash flow, including but not limited to, operating income,
payments collected from customers in advance and stock issuances. We have presented in the tables below a summary of the most significant
contractual obligations and commercial commitments, in order to assist in the review of this information within the context of
our consolidated financial position, results of operations, and cash flows.
The following tables
summarize our contractual obligations as of June 30, 2014 and the effect these obligations are expected to have on our liquidity
and cash flows in future periods.
| |
Payment due by period | | |
| |
| |
| | |
Less than | | |
| | |
| | |
| |
Contractual obligations | |
Total | | |
1 year | | |
1-3 years | | |
3- 5 years | | |
5
years after | |
| |
(in thousands) | | |
| |
Notes payable | |
$ | 875,479 | | |
$ | 875,479 | | |
$ | - | | |
$ | - | | |
$ | - | |
Bank loans (1) | |
| 201,673 | | |
| 201,673 | | |
| - | | |
| - | | |
| - | |
Other loans, including related parties | |
| 218,391 | | |
| 218,391 | | |
| - | | |
| - | | |
| - | |
Deposits due to sales representatives, including related parties | |
| 23,093 | | |
| 23,093 | | |
| - | | |
| - | | |
| - | |
Lease obligations | |
| 23,168 | | |
| 1,055 | | |
| 1,132 | | |
| 1,132 | | |
| 19,849 | |
Construction obligations - Longmen Joint Venture (2) | |
| 326,316 | | |
| 326,316 | | |
| - | | |
| - | | |
| - | |
Long term loan – Shaanxi Steel | |
| 72,124 | | |
| 62,374 | | |
| 9,750 | | |
| - | | |
| - | |
Capital lease obligations | |
| 391,274 | | |
| 6,443 | | |
| 128,950 | | |
| 28,558 | | |
| 227,323 | |
Profit
sharing liability | |
| 164,067 | | |
| - | | |
| - | | |
| - | | |
| 164,067 | |
Total | |
$ | 2,295,585 | | |
$ | 1,714,824 | | |
$ | 139,832 | | |
$ | 29,690 | | |
$ | 411,239 | |
| (1) | Bank loans in the PRC are due either on demand or, more typically, within one year. These loans can be renewed with the banks
subject to the bank’s credit reevaluation. These loans amount includes estimated interest payments as well as principal repayment. |
| (2) | Upon completion of the construction obligations – Longmen Joint Venture, if Longmen Joint Venture is unable to repay
the obligation when due, Shaanxi Steel will support Longmen Joint Venture for such obligations. |
As of June 30, 2014, Longmen Joint Venture
guaranteed bank loans for related parties and third parties, including lines of credit, amounting to $265.4 million, as follows:
Nature of guarantee | |
Guarantee amount | | |
Guaranty Due Date |
| |
(In thousands) | | |
|
Line of credit | |
$ | 153,563 | | |
Various from July 2014 to August 2015 |
Three-party financing agreements | |
| 19,500 | | |
Various from July 2014 to May 2015 |
Confirming storage | |
| 52,975 | | |
Various from August 2014 to April 2015 |
Financing by the rights of goods delivery in future | |
| 39,406 | | |
Various from July to October 2014
|
Total | |
$ | 265,444 | | |
|
| |
| | | |
|
As of June 30,
2014, we did not accrue any liability for the amount we have guaranteed for third parties and related parties because those parties
are current in their payment obligations and we have not experienced any losses from providing guarantees. We evaluated the debt
guarantees and concluded that the likelihood of having to make payments under the guarantees is remote and that the fair value
of the stand-ready obligation under these commitments is not material.
Critical Accounting Policies
Management’s
discussion and analysis of its financial condition and results of operations are based upon our unaudited condensed consolidated
financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.
Our unaudited condensed consolidated financial statements reflect the selection and application of accounting policies which require
management to make significant estimates and judgments. See Note 2 to our unaudited Condensed Consolidated Financial Statements
“Summary of Significant Accounting Policies”. Management bases its estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under
different assumptions or conditions.
We believe that the
following reflect the more critical accounting policies that currently affect our financial condition and results of operations.
Principles of consolidation – subsidiaries
The accompanying unaudited
condensed consolidated financial statements include the financial statements of our Company, our subsidiaries, our variable interest
entity (“VIE”) for which our Company is the ultimate primary beneficiary, and the VIE’s subsidiaries.
The unaudited condensed
consolidated financial statements have been prepared on a historical cost basis to reflect the financial position and results of
operations of the Company in accordance with accounting principles generally accepted in the United States of America (“U.S.
GAAP”).
Subsidiaries are those
entities in which our Company, directly or indirectly, controls more than one half of the voting power; or has the power to govern
the financial and operating policies, to appoint or remove the majority of the members of the board of directors, or to cast a
majority of votes at a meeting of directors.
A VIE is an entity
in which our Company, or our subsidiary, through contractual arrangements, bears the risks of, and enjoys the rewards normally
associated with, ownership of the entity, and therefore our Company or our subsidiary is the primary beneficiary of the entity.
All significant inter-company
transactions and balances have been eliminated upon consolidation.
Consolidation of VIE
Prior to entering into
the Unified Management Agreement on April 29, 2011, Longmen Joint Venture had been consolidated as our 60% directly owned subsidiary.
Upon entering into the Unified Management Agreement, Longmen Joint Venture was evaluated by our Company to determine if Longmen
Joint Venture is a VIE and if we are the primary beneficiary.
Based on the projected
profit in this entity and future operating plans, Longmen Joint Venture’s equity at risk is considered insufficient to finance
its activities and therefore Longmen Joint Venture is considered to be a VIE.
We would be considered
the primary beneficiary of the VIE if we have both of the following characteristics:
|
a. |
The power to direct the activities of the VIE that most significantly impact the VIE’s economic performance; and |
|
b. |
The obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. |
A Supervisory Committee
was formed during the negotiation of the Unified Management Agreement. Given there is both a Supervisory Committee and a Board
of Directors with respect to Longmen Joint Venture, the powers, rights and roles of both bodies were considered to determine which
has the power to direct the activities of Longmen Joint Venture, and by extension, whether we continue to have the power to direct
Longmen Joint Venture’s activities after this Supervisory Committee was formed. The Supervisory Committee, on which we hold
2 out of 4 seats, requires a ¾ majority vote, whereas the Board of Directors, on which we hold 4 out of 7 seats, requires
a simple majority vote. The Supervisory Committee’s role is limited to supervising and monitoring management of Longmen Joint
Venture and in the event there is any disagreement between the Board of Directors and the Supervisory Committee, the Board of Directors
prevails. In other words, the Supervisory Committee is considered to be subordinate to the Board of Directors. Thus, the Board
of Directors of Longmen Joint Venture continues to be the controlling decision-making body with respect to Longmen Joint Venture.
We control 60% of the voting rights of the Board of Directors, have control over the operations of Longmen Joint Venture and as
such, have the power to direct the activities of the VIE that most significantly impact Longmen Joint Venture’s economic
performance. We believe that the Unified Management Agreement between Longmen Joint Venture and Shaanxi Coal is in compliance with
PRC law and is legally enforceable. As such, we have the power to direct the activities of the VIE. However, uncertainties in the
PRC legal system could limit our ability to enforce the Unified Management Agreement, which in turn, may lead to reconsideration
of the VIE assessment.
In connection with the
Unified Management Agreement, Shaanxi Coal, we and Shaanxi Steel may provide such support on a discretionary basis in the future,
which could expose us to a loss.
As discussed in Note
2(c) to the consolidated financial statements – Consolidation of VIE, we have the obligation to absorb losses and the rights
to receive benefits based on the profit allocation as stipulated by the Unified Management Agreement. As both conditions are met,
we are the primary beneficiary of Longmen Joint Venture and therefore, continue to consolidate Longmen Joint Venture.
Longmen Joint Venture
has two 100% owned subsidiaries, Yuxin Trading Co., Ltd. (“Yuxin”) and Yuteng Trading Co., Ltd. (“Yuteng”).
Longmen Joint Venture has two consolidated subsidiaries, Hualong and Huatianyulong, in which it does not hold a controlling interest.
Hualong and Huatianyulong are separate legal entities which were established in the PRC as limited liability companies and subsequently
invested in by Longmen Joint Venture in June 2007 and July 2008, respectively. However, these two entities do not meet the definition
of variable interest entities. Further consideration was given to whether consolidation was appropriate under the voting interest
model, specifically where the power of control may exist with a lesser percentage of ownership (i.e. less than 50%), for example,
by contract, lease, agreement with other stockholders or by court decree.
Hualong
Longmen Joint Venture,
the single largest shareholder, holds a 36.0% equity interest in Hualong. The other two shareholders, who own 34.67% and 29.33%
respectively, assigned their voting rights to Longmen Joint Venture in writing at the time of the acquisition of Hualong. The voting
rights have been assigned through the date Hualong ceases its business operation or the other two shareholders sell their interest
in Hualong. Hualong’s main business is to supply refractory.
Huatianyulong
Longmen Joint Venture
holds a 50.0% equity interest in Huatianyulong and the other unrelated shareholder holds the remaining 50.0%. The other shareholder
assigned its voting rights to Longmen Joint Venture in writing at the time of acquisition of Huatianyulong. The voting rights have
been assigned through the date Huatianyulong ceases its business operation or the other unrelated shareholder sells its interest
in Huatianyulong. Huatianyulong mainly sells imported iron ore.
We have determined that
it is appropriate for Longmen Joint Venture to consolidate Hualong and Huatianyulong with appropriate recognition in our financial
statements of the non-controlling interests in each entity, beginning on the acquisition dates as these were also the effective
dates of the agreements with other stockholders granting majority voting rights in each entity, and thereby, the power of control,
to Longmen Joint Venture.
Revenue recognition
We follow U.S. GAAP
regarding revenue recognition. Sales revenue is recognized at the date of shipment to customers when a formal arrangement exists,
the price is fixed or determinable, the delivery is completed, we have no other significant obligations and collectability is reasonably
assured. Payments received before all of the relevant criteria for revenue recognition are met are recorded as customer deposits.
Sales revenue represents the invoiced value of goods, net of value-added tax (VAT). All our products sold in the PRC are subject
to a Chinese VAT at a rate of 13% to 17% of the gross sales price. This VAT may be offset by VAT paid by us on raw materials
and other materials included in the cost of producing the finished product.
We infrequently engage
in trading transactions in which we act as an agent between the suppliers and the customers. The trading arrangements are such
that the suppliers are the primary obligors, we do not have any general inventory risk, physical inventory loss risk or credit
risk, and we do not have latitude in establishing prices. Sales and cost of goods sold from these trading arrangements are recorded
at the net amount retained in accordance with ASC 605-45.
Accounts receivable, other receivables and allowance for
doubtful accounts
Accounts receivable
include trade accounts due from customers and other receivables from cash advances to employees, related parties or third parties.
An allowance for doubtful accounts is established and recorded based on managements’ assessment of potential losses based
on the credit history and relationships with the customers. Management reviews its receivables on a regular basis to determine
if the bad debt allowance is adequate, and adjusts the allowance when necessary. Delinquent account balances are written-off against
the allowance for doubtful accounts after management has determined that the likelihood of collection is not probable.
Useful lives of plant and equipment
Plant and equipment
are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful
lives of the assets with a 3%-5% residual value. The depreciation expense on assets acquired under capital leases is included with
depreciation expense on owned assets.
The estimated useful lives are as follows:
Buildings and improvements |
|
10-40 Years |
|
Machinery |
|
10-30 Years |
|
Machinery and equipment under capital leases |
|
20 Years |
|
Other equipment |
|
5 Years |
|
Transportation equipment |
|
5 Years |
|
We periodically re-evaluate
the useful lives of our plant and equipment to determine whether events subsequent to their acquisition or other circumstances
warrant any revision of the estimated useful lives.
Impairment of long-lived assets
The carrying values
of long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of
an asset may not be recoverable. Based on the existence of one or more indicators of impairment, we determine whether any impairment
of long-lived assets exists using the projected undiscounted cash flow method. The estimation of future cash flows requires significant
management judgment based on our historical results and anticipated results and is subject to many factors.
The discount rate that
is commensurate with the risk inherent in our business model is determined by our management. An impairment charge would be recorded
if we determined that the carrying value of long-lived assets may not be recoverable. The impairment to be recognized is measured
by the amount by which the carrying values of the assets exceed the fair value of the assets.
As of June 30, 2014,
the fair value of our plant and equipment exceeded our carrying value of these assets by approximately 75%. We used the estimated
discounted cash flow from these assets to determine their fair value. The key assumptions that were included in the model are projected
selling units and growth in the steel market, projected unit selling price in the steel market, projected unit purchase cost in
the coal and iron ore markets, selling and general and administrative expenses to be in line with the growth in the steel market,
and projected bank borrowings. We believe these assumptions provide us the best estimates of projecting our future cash flows from
these assets, net of any related cash outflow of our costs, expenses and taxes related to these revenues. In the future, the estimated
fair value of these assets may be lower than their current fair value, which could result in future impairment charges if potential
events occur to further reduce the current selling price or product demand in the steel market or increase our costs that are associated
with our revenues. In addition, competitive pricing pressure and changes in interest rates could materially and adversely affect
our estimates of future net cash flows to be generated by our long-lived assets, and thus could result in future impairment losses.
Use of estimates
The preparation of financial
statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Significant accounting estimates reflected in our financial statements include
the useful lives of and impairment for property, plant and equipment, potential losses on uncollectible receivables, the recognition
of contingent liabilities, the interest rate used in financing sales, the fair value of the assets recorded under capital leases,
the present value of the net minimum lease payments for the capital leases and the fair value of the profit sharing liability.
Actual results could differ from these estimates.
Financial instruments
The accounting standard
regarding “Disclosures about fair value of financial instruments” defines financial instruments and requires disclosure
of the fair value of financial instruments held by us. We consider the carrying amount of cash, accounts receivable, other receivables,
accounts payable and accrued liabilities to approximate their fair values because of the short period of time between the origination
of such instruments and their expected realization. For short-term loans and notes payable, we concluded the carrying values are
a reasonable estimate of fair value because of the short period of time between the origination and repayment and their stated
interest rate approximates current rates available. The carrying value of the long term loans-related party approximates its fair
value as of the reporting date as their stated interest rates approximate current rates available.
We also analyze all
financial instruments with features of both liabilities and equity under the accounting standard establishing, “accounting
for certain financial instruments with characteristics of both liabilities and equity,” the accounting standard regarding
“accounting for derivative instruments and hedging activities” and “accounting for derivative financial instruments
indexed to, and potentially settled in, a company’s own stock.” Additionally, we analyze registration rights agreements
associated with any equity instruments issued to determine if penalties triggered for late filing should be accrued under the accounting
standard establishing “accounting for registration payment arrangements.”
Fair value measurements
The accounting standards
regarding fair value of financial instruments and related fair value measurement define fair value, establish a three-level valuation
hierarchy for disclosures of fair value measurement and enhance disclosure requirements for fair value measures. The three levels
are defined as follow:
Level 1: inputs to the
valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2: inputs to the
valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable
for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.
Level 3: inputs to the
valuation methodology are unobservable and significant to the fair value.
The warrants issued
in conjunction with notes we issued in December 2007 were carried at fair value. The warrants were accounted for as derivative
liabilities and recorded at their fair value, with the change in fair value charged or credited to income each period. The
warrants expired unexercised on May 13, 2013. Prior to their expiration, the fair value of the warrants was estimated using a binomial
lattice model, using level 3 inputs.
The profit sharing liability
associated with our capital lease at Longmen Joint Venture is accounted for as a derivative liability and is recorded at its fair
value, with the change in fair value charged or credited to income each period. We determine the fair value of the profit
sharing liability using Level 3 inputs by considering the present value of Longmen Joint Venture’s projected profits/losses,
discounted based on our average borrowing rate, which is currently 7.3%.
The fair value of the
profit sharing liability will change each period as a result of (a) any changes in our estimate of Longmen Joint Venture’s
projected profits/losses over the remaining term of the agreement, (b) any change in the discount rate used, based on changes in
our current or expected borrowing rate, (c) the change in fair value related to the passage of time and change in the number of future periods over which the present
value of future cash flows is estimated and (d) any difference between the previously estimated operating results for the current period and actual results.
Each period, we consider whether the
discount rate based on our average borrowing rate should be adjusted based upon the current and
expected future financial condition of the Company. To date, we have not considered any adjustment to be necessary based
upon, but not limited to, the following assumptions:
| · | because the joint venture partner of Longmen Joint Venture is a state-owned enterprise
with
an excellent credit history, PRC banks grant similar credit treatment to Longmen Joint Venture in terms of credit
availability |
| · | the current average borrowing rate of
enterprises in the steel industry in the PRC is similar to this borrowing rate |
| · | the current new/renewal borrowing rates
of the Company’s bank loans are similar to prior periods |
| · | the People’s Bank of China has not
recently adjusted any borrowing rate |
| · | PRC bank interest rates are not industry specific. The downtrend in the steel industry
did not materially impact the bank borrowing rates for steel companies |
| · | the bank interest rates are assessed by each individual bank and governed by the Chinese
banking regulatory bodies. Reports from credit rating research firms are not commonly used by PRC banks |
The projected profits/losses
in Longmen Joint Venture are based upon, but not limited to, the following assumptions:
|
· |
projected selling units and growth in the steel market; |
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· |
projected unit selling price in the steel market; |
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· |
projected unit purchase cost in the coal and iron ore markets; |
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· |
selling and general and administrative expenses to be in line with the growth in the steel market; |
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· |
projected bank borrowing; |
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· |
interest rate index; |
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· |
gross national product index; |
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· |
industry index; and |
|
· |
government policy. |
Income Taxes
We did not conduct
any business and did not maintain any branch office in the United States during the six months ended June 30, 2014 and 2013. Therefore,
no provision for withholding of U.S. federal or state income taxes has been made. The tax impact from undistributed earnings from
overseas subsidiaries is not recognized as there is no intention for future repatriation of these earnings.
General Steel (China) is located in Tianjin
Coastal Economic Development Zone and is subject to an income tax rate of 25%.
Longmen Joint Venture
is located in the Mid-West Region of China. It qualifies for the “Go-West” tax rate of 15% promulgated by the government.
In 2010, the central government announced that the “Go-West” tax initiative was extended for 10 years, and thus, the
preferential tax rate of 15% will be in effect until 2020. This special tax treatment will be evaluated on a year-to-year basis
by the local tax bureau.
Baotou Steel Pipe Joint Venture is located
in Inner Mongolia autonomous region and is subject to an income tax rate of 25%.
Maoming Hengda is located in Guangdong
Province and is subject to an income tax rate of 25%.
Capital lease obligations
Iron and steel production facilities
On April 29, 2011,
we, along with Longmen Joint Venture entered into a Unified Management Agreement with Shaanxi Steel and Shaanxi Coal under which
Longmen Joint Venture uses new iron and steel making facilities constructed by Shaanxi Steel, including one sintering machine,
two converters, two blast furnaces and other auxiliary systems. As the 20-year term of the agreement exceeds 75% of the assets’
useful lives, this arrangement is accounted for as a capital lease. The ongoing lease payments are comprised of two elements: (1)
a monthly payment of $2.3 million (RMB
14.6 million), based on Shaanxi Steel’s cost to construct the new iron and steel making facilities, to be paid over the term of the Unified Management Agreement of 20 years; and (2) 40% of any remaining pre-tax profits
from the Asset Pool which includes Longmen Joint Venture and the newly constructed iron and steel making facilities. The profit
sharing component does not meet the definition of contingent rent because it is based on future revenue and was therefore considered
part of the minimum lease payment for purposes of determining the value of the leased asset and obligation at the inception of
the lease. The initial lease liability was reduced by the initial fair value of the profit sharing component which, as discussed
above, is recognized as a separate derivative instrument financial liability carried at fair value. See Note 16 – “Profit
sharing liability” in the Notes to Condensed Consolidated Financial Statements.
Energy-saving equipment
During 2013, Longmen
Joint Venture entered into capital lease agreements for energy-saving equipment to be installed throughout the production chain.
Under these agreements, Longmen Joint Venture uses the energy-saving equipment for which the vendors are responsible for the design,
purchase, installation, and on-site testing, as well as the ownership rights to the equipment during the lease periods. The lease
periods, which vary between four to six years, begin upon the completion of the equipment installation, testing, and the issuance
of the energy-saving rate reports to be agreed upon by both the vendors and Longmen Joint Venture. As the ownership rights of the
equipment transfer to Longmen Joint Venture at the end of the lease periods, these agreements are accounted for as capital leases.
The minimum lease payments
are based on the energy cost saved during the lease periods, which is determined by the estimated annual equipment operating hours
per the lease agreements. If the actual annual equipment operating hours are less than the estimated amount, the lease periods
may be extended, subject to further negotiation and agreement between us and the vendors. If the actual annual equipment operating
hours exceed the estimated amount, we are obligated to make additional lease payments based on the additional energy cost saved
during the lease period and recognize the additional lease payments as contingent rent expense. For the six months ended June 30,
2014 and 2013, no contingent rent expense was incurred under these lease agreements.
Profit sharing liability
The profit sharing
liability component of the capital lease obligation was recognized initially at its estimated fair value at the lease commencement
date and included in the initial measurement and recognition of the capital lease, in addition to the fixed payment component of
the minimum lease payments. The profit sharing liability is accounted for separately from the fixed portion of the capital lease
obligation (see Note 15 - “Capital lease obligation” in the Notes to Condensed Consolidated Financial Statements) and
is accounted for as a derivative instrument in accordance with ASC 815-10-15-83. The estimated fair value of the profit sharing
liability is reassessed at the end of each reporting period, with any change in fair value charged or credited to income as “Change
in Fair Value of Profit Sharing Liability”. See Note 2(h) – “Financial instruments” and Note 16 –
“Profit sharing liability” in the Notes to Condensed Consolidated Financial Statements for details.
Payments to Shaanxi
Steel for the profit sharing liability are not required until net cumulative profits are achieved. Based on the performance of
the Asset Pool, no profit sharing payment was made during the six months ended June 30, 2014 and 2013.
New Accounting Pronouncements
In April 2014, the
Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-08, Presentation
of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures
of Disposals of Components of an Entity. Under the new guidance, only disposals representing a strategic shift in operations
should be presented as discontinued operations. The new guidance also requires disclosure of the pre-tax income attributable to
a disposal of a significant part of an organization that does not qualify for discontinued operations reporting. The amendments
in the ASU are effective in the first quarter of 2015 for public organizations with calendar year ends. Early adoption is permitted.
We do not expect the adoption of this guidance will have a significant impact on the our financial position and results of operations.
In
May 2014, the FASB issued ASU
No. 2014-09, Revenue from Contracts with Customers: Topic 606. This Update affects any entity that either enters into contracts
with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets, unless those contracts
are within the scope of other standards. The guidance in this Update supersedes the revenue recognition requirements in Topic 605,
Revenue Recognition and most industry-specific guidance. The core principle of the guidance is that an entity should recognize
revenue to illustrate the transfer of promised goods or services to customers in an amount that reflects the consideration to which
the entity expects to be entitled in exchange for those goods or services. The new guidance also includes
a cohesive set of disclosure requirements that will provide users of financial statements with comprehensive information about
the nature, amount, timing, and uncertainty of revenue and cash flows arising from a reporting organization’s contracts with
customers. This ASU is effective retrospectively for fiscal years, and interim periods within those years beginning after
December 15, 2016 for public companies and 2017 for non-public entities. Management is evaluating the effect, if any, on our financial
position and results of operations.
ITEM 3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 4. CONTROLS AND PROCEDURES
Our Company, with the
participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the design and operation of
our disclosure controls and procedures, as defined under Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”), as of June 30, 2014. Our Company’s disclosure controls and procedures are designed: (i)
to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and (ii) to ensure that
information required to be disclosed in the reports we file or submit under the Exchange Act is accumulated and communicated to
our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding
required disclosure.
As a result of
comments received from the Staff of the United States Securities and Exchange Commission following the Staff’s review
of certain of our prior quarterly and annual reports, and based on subsequent communications between the Staff of the
Commission and us, we concluded that the classification, display and disclosure of our profit sharing liability (which is
accounted for at fair value as a derivative instrument liability) had been incomplete and inconsistent. As a result, we have
restated our financial statements and related disclosures for each of the reporting periods from the period ended June 30,
2011 to the period ended March 31, 2014. The restatements are set out in our Form 10-K/A for the year ended December 31,
2013 and Form 10-Q/A for the quarter ended March 31, 2014. Although the restatements did not result in any restatement of the
reported balance sheets nor adjustment of reported net income for any period presented, because of the restatement,
management concluded that the restatements resulted from control deficiencies that represent a material weakness in our
disclosure controls and procedures.
As a result of such
material weakness, our Chief Executive Officer and Chief Financial Officer concluded that our Company’s disclosure controls
and procedures were not effective as of June 30, 2014.
Despite the
existence of the material weakness in our disclosure controls and procedures, we believe that the condensed consolidated
financial statements included in this Form 10-Q present, in all material respects, our financial position, results of
operations and comprehensive income (loss) and cash flows for the periods presented in conformity with U.S. GAAP.
Remediation
Our management has
dedicated significant resources to correcting the control deficiencies and to ensuring that we take proper steps to improve our
internal control over financial reporting in the area of financial statement disclosures.
We have taken a number
of remediation actions that we believe will improve the effectiveness of our internal control over financial reporting including
the following:
| · | We
have engaged an outside professional consulting firm to supplement our efforts to improve our internal control over financial
reporting; |
| · | We
have engaged and will continue to engage accounting experts to review complex accounting transactions and our financial statement
disclosures related to such transactions. |
Management
believes the foregoing efforts will effectively remediate the material weakness described above.
Changes in Internal Controls over Financial Reporting
Except as otherwise
noted above, there has not been any changes in our internal control over financial reporting (as such term is defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we are subject to certain
legal proceedings, claims and disputes that arise in the ordinary course of our business. Although we cannot predict the outcomes
of these legal proceedings, we do not believe these actions, in the aggregate, will have a material adverse impact on our financial
position, results of operations or liquidity. We are currently not a party to any material legal proceedings.
ITEM 1A. RISK FACTORS
To our knowledge and
to the extent additional factual information disclosed in this Quarterly Report on Form 10-Q relates to such risk factors, there
have been no other changes in the risk factors described in “ITEM 1A. RISK FACTORS” in our Annual Report on Form 10-K/A
for the year ended December 31, 2013, which was filed with the SEC on August 19, 2014.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
On February 3, 2014, in connection with
two services agreements relating to investor relations and consulting services, both dated as of January 14, 2014, we issued 80,000
shares of common stock. The total cost of the stock issuance was $80,800. The shares were valued at $1.01 per share, the quoted
market price at the time the services were provided. The recipients are accredited investors and the issuances are exempt from
registration under the Securities Act of 1933, as amended (the “Securities Act”) in reliance on an exemption from registration
provided pursuant to Section 4(2) of the Securities Act.
ITEM 3. DEFAULT UPON SENIOR SECURIITES
Not Applicable.
ITEM 4. MINE SAFETY DISCLOSURE
Not Applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS
3.1 |
Articles of Incorporation of General Steel Holdings, Inc. (included as Exhibit 3.1 to the Form SB-2 filed with the Commission on June 6, 2003 and incorporated herein by reference). |
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3.2 |
Amendment to the Articles of Incorporation dated February 22, 2005 (included as Exhibit 3.2 to the Form 10-K filed March 16, 2010 and incorporated herein by reference). |
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3.3 |
Amendment to the Articles of Incorporation dated November 14, 2007 (included as Exhibit 3.3 to the Form 10-K filed March 16, 2010 and incorporated herein by reference). |
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3.4 |
Certificate of Designation of Series A Preferred Stock of the registrant (included as Exhibit 10.6 to the Form 10-K filed June 30, 2008 and incorporated herein by reference). |
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3.5 |
Bylaws of General Steel Holdings, Inc. (included as Exhibit 3.5 to the Form 10-K filed March 16, 2010 and incorporated herein by reference). |
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31.1* |
Certification of the CEO (Principal Executive Officer) pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith. |
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31.2* |
Certification of the CFO (Principal Financial Officer) pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith. |
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32.1* |
Certification of the CEO (Principal Executive Officer) pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith. |
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32.2*
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Certification of the CFO (Principal Financial Officer) pursuant to 18 U.S.C. Section 1350 adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
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101.INS*** |
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XBRL Instance Document |
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101.SCH*** |
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XBRL Taxonomy Extension Schema Document |
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101.CAL*** |
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XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF*** |
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XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB*** |
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XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE*** |
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XBRL Taxonomy Extension Presentation Linkbase Document |
*** |
XBRL (Extensive Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections. |
*Filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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General Steel Holdings, Inc. |
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|
Date: August 19, 2014 |
By: /s/ Zuosheng Yu |
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Zuosheng Yu |
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Chief Executive Officer and Chairman |
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Date: August 19, 2014 |
By: /s/ John Chen |
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John Chen |
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Director and Chief Financial Officer |
Exhibit 31.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF
2002
I, Zuosheng Yu, certify that:
1. I have reviewed this quarterly report
on Form 10-Q of General Steel Holdings, Inc.;
2. Based on my knowledge, this report does
not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements,
and other financial information included in this report, fairly present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying
officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
a) Designed such disclosure controls and
procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Designed such internal control over financial
reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s
disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in
the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying
officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material
weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect
the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that
involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Dated: August 19, 2014 |
By: |
/s/ Zuosheng Yu |
|
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Zuosheng Yu |
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|
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Chief Executive Officer |
|
Exhibit 31.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF
2002
I, John Chen, certify that:
1. I have reviewed this quarterly report
on Form 10-Q of General Steel Holdings, Inc.;
2. Based on my knowledge, this report does
not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements,
and other financial information included in this report, fairly present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying
officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
a) Designed such disclosure controls and
procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Designed such internal control over financial
reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s
disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in
the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying
officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material
weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect
the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that
involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: August 19, 2014 |
By: |
/s/ John Chen |
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John Chen |
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|
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Chief Financial Officer |
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Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF
2002
In connection with the Quarterly Report
of General Steel Holdings, Inc. (the “Company”) on Form 10-Q for the quarter ended June 30, 2014 as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I, Zuosheng Yu, Chief Executive Officer of the
Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that
to the best of my knowledge:
|
1) |
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
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2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Dated: August 19, 2014 |
By: |
/s/ Zuosheng Yu |
|
|
|
Zuosheng Yu |
|
|
|
Chief Executive Officer |
|
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF
2002
In connection with the Quarterly Report of General Steel Holdings,
Inc. (the “Company”) on Form 10-Q for the quarter ended June 30, 2014 as filed with the Securities and Exchange Commission
on the date hereof (the “Report”), I, John Chen, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
|
1) |
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
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2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Dated: August 19, 2014 |
By: |
/s/ John Chen |
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John Chen |
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|
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Chief Financial Officer |
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