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 March 31, 2019

 

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)    

 

Suite 106, Tower H,

Phoenix Place, Shuguangxili

Chaoyang District, Beijing, China 100028

 

(Address of Principal Executive Office, Including Zip Code)

 

+86 (10) 8572 3073

 

(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 every Interactive Data File required to be submitted 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 such files).  Yes  x  No  ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  ¨   Accelerated filer ¨   Non-accelerated filer  x   Smaller reporting company x
         
Emerging Growth Company ¨        

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

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

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
NONE   N/A   N/A

 

As of May 13, 2019, 46,013,959 (excluding 494,462 shares of treasury stock) shares of common stock, par value $0.001 per share, were outstanding.

 

 

 

  

 

 

Table of Contents

 

    Page
Part I.  FINANCIAL INFORMATION  
     
Item 1. Unaudited Financial Statements.  
     
  Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018. 3
     
  Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended March 31, 2019 and 2018. 4
     
  Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018. 5
     
  Notes to Condensed Consolidated Financial Statements. 7
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 20
     
Item 3. Quantitative and Qualitative Disclosure About Market Risk 25
     
Item 4. Controls and Procedures. 25
     
Part II. OTHER INFORMATION 26
     
Item 1. Legal Proceedings. 26
     
Item 1A. Risk Factors. 26
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 26
     
Item 3. Defaults Upon Senior Securities 26
     
Item 4. Mine Safety Disclosures 26
     
Item 5. Other Information 26
     
Item 6. Exhibits. 27
     
Signatures 28

 

2   

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

    March 31,     December 31,  
    2019     2018  
    (Unaudited)        
ASSETS                
CURRENT ASSETS:                
Cash and cash equivalents   $ 4,760,549     $ 4,820,832  
Accounts receivables     -       55,246  
Prepaid expense and other current assets     53,796       19,791  
TOTAL CURRENT ASSETS     4,814,345       4,895,869  
                 
                 
EQUIPMENT, NET     1,965       217  
RENT DEPOSIT     10,308       10,058  
RIGHT-OF-USE ASSETS     94,162       -  
 INVESTMENT IN UNCONSOLIDATED ENTITIES     12,837,819       12,972,148  
                 
TOTAL ASSETS   $ 17,758,599     $ 17,878,292  
                 
LIABILITIES AND EQUITY                
                 
CURRENT LIABILITIES:                
Other payables and accrued liabilities   $ 453,041     $ 542,692  
Other payables - related parties     9,813,177       9,187,882  
Taxes payable     -       277  
Lease liabilities - current     53,489       -  
TOTAL CURRENT LIABILITIES     10,319,707       9,730,851  
                 
LEASE LIABILITIES - NON-CURRENT     35,519       -  
                 
TOTAL LIABILITIES     10,355,226       9,730,851  
                 
COMMITMENTS AND CONTINGENCIES                
                 
EQUITY:                
               
Series A - Preferred stock, $0.001 par value, 50,000,000 shares authorized, 3,092,889 shares issued and outstanding as of March 31, 2019 and December 31, 2018     3,093       3,093  
Series B - Preferred stock, $0.001 par value, 50,000,000 shares authorized, 0 shares issued and outstanding as of March 31, 2019 and December 31, 2018     -       -  
Common stock, $0.001 par value, 200,000,000 shares authorized, 46,508,421 and 46,508,421 shares issued, 46,013,959 and 46,013,959 shares outstanding as of March 31, 2019 and December 31, 2018, respectively     46,509       46,509  
Treasury stock, at cost, 494,462 shares as of March 31, 2019 and December 31, 2018     (839,686 )     (839,686 )
Additional paid-in-capital     1,261,915,192       1,261,869,238  
Statutory reserves     1,107,010       1,107,010  
Accumulated deficit     (1,258,012,419 )     (1,257,246,837 )
Accumulated other comprehensive income     3,183,674       3,208,114  
TOTAL EQUITY     7,403,373       8,147,441  
                 
TOTAL LIABILITIES AND EQUITY   $ 17,758,599     $ 17,878,292  

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

3   

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

 

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS)INCOME

FOR THE THREE MONTHS ENDED MARCH 31

 

    2019     2018  
             
GENERAL AND ADMINISTRATIVE EXPENSES   $ 280,885     $ 26,573  
                 
LOSS FROM OPERATIONS     (280,885 )     (26,573 )
                 
OTHER INCOME (EXPENSE)                
(Loss)Income from equity investment     (500,007 )     3,467,056  
Finance/interest income(expense)     15,310       (134 )
Other (expense)income, net     (484,697 )     3,466,922  
                 
               
(LOSS)INCOME BEFORE PROVISION FOR INCOME TAXES AND NONCONTROLLING INTEREST     (765,582 )     3,440,349  
                 
PROVISION FOR INCOME TAXES     -       -  
                 
NET (LOSS)INCOME   $ (765,582 )   $ 3,440,349  
                 
OTHER COMPREHENSIVE INCOME                
Foreign currency translation adjustments     (24,440 )     (115,166 )
                 
COMPREHENSIVE (LOSS)INCOME   $ (790,022 )   $ 3,325,183  
                 
WEIGHTED AVERAGE NUMBER OF SHARES     46,013,959       20,200,208  
                 
(LOSS)INCOME PER SHARE   $ (0.02 )   $ 0.16  

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

4   

 

  

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

 

    Preferred stock     Common stock     Treasury stock           Retained earnings / Accumulated deficits     Accumulated other        
                                        Paid-in     Statutory           comprehensive        
    Shares     Par value     Shares     Par value     Shares     At cost     capital     reserves     Unrestricted     income     Total  
BALANCE, December 31, 2017     3,092,889       3,093       20,694,670       20,695       (494,462 )     (839,686 )     1,256,955,395       1,107,010       (1,256,044,414 )     2,939,523       4,141,616  
Net income                                                                     3,440,349               3,440,349  
Foreign currency translation adjustments                                                                             (115,166 )     (115,166 )
BALANCE, March 31, 2018 (Unaudited)     3,092,889     $ 3,093       20,694,670     $ 20,695       (494,462 )   $ (839,686 )   $ 1,256,955,395     $ 1,107,010     $ (1,252,604,065 )   $ 2,824,357     $ 7,466,799  

 

    Preferred stock     Common stock     Treasury stock           Retained earnings / Accumulated deficits     Accumulated other        
                                        Paid-in     Statutory           comprehensive        
    Shares     Par value     Shares     Par value     Shares     At cost     capital     reserves     Unrestricted     income     Total  
BALANCE, December 31, 2018     3,092,889     $ 3,093       46,508,421     $ 46,509       (494,462 )   $ (839,686 )   $ 1,261,869,238     $ 1,107,010     $ (1,257,246,837 )   $ 3,208,114     $ 8,147,441  
Net loss                                                                     (765,582 )             (765,582 )
Foreign currency translation adjustments                                                                             (24,440 )     (24,440 )
Contribution from equity investee                                                     45,954                               45,954  
BALANCE, March 31, 2019 (Unaudited)     3,092,889     $ 3,093       46,508,421     $ 46,509       (494,462 )   $ (839,686 )   $ 1,261,915,192     $ 1,107,010     $ (1,258,012,419 )   $ 3,183,674     $ 7,403,373  

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

5   

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

 

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31

 

    2019     2018  
CASH FLOWS FROM OPERATING ACTIVITIES:                
Net (loss)income   $ (765,582 )   $ 3,440,349  
Adjustments to reconcile net loss to cash provided by (used in) operating activities from continuing operations:                
Depreciation     20       -  
Loss(income) from equity investment     500,007       (3,467,056 )
Amortization of right-of-use asset     14,577       -  
Changes in operating assets and liabilities                
Accounts receivable     56,297       -  
Other receivables     (20,409 )     -  
Other receivables, related party     2,912       -  
Prepaid expense and other current assets     (4,412 )     -  
Accounts payables     (8,563 )     -  
Other payables and accrued liabilities     (93,107 )     (1,545,566 )
Taxes payable     (282 )     -  
Lease liabilities     (19,702 )     -  
Net cash used in operating activities     (338,244 )     (1,572,273 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:                
Purchase of equipment     (1,758 )     -  
Net cash used in investing activities     (1,758 )     -  
                 
CASH FLOWS FINANCING ACTIVITIES:                
Borrowings from related parties     170,966       1,572,599  
Net cash provided by financing activities     170,966       1,572,599  
                 
EFFECTS OF EXCHANGE RATE CHANGE IN CASH AND CASH EQUIVALENTS     108,753       192  
                 
 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS     (60,283 )     518  
                 
CASH AND CASH EQUIVALENTS, beginning of period     4,820,832       5,260  
                 
CASH AND CASH EQUIVALENTS, end of period   $ 4,760,549     $ 5,778  
                 
NON-CASH TRANSACTIONS OF INVESTING AND FINANCING ACTIVITIES                
Initial recognition of right-of-use assets and lease labilities   $ 108,202     $ -  
Additional paid in capital contribute from equity investee   $ 45,954     $ -  

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

6   

 

 

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 Co., Ltd, has been operating steel companies serving various industries in the People’s Republic of China (“PRC”). The Company’s main operation, since disposal of its significant steel producing operating assets and trading business at December 31, 2017 has been the 32% equity holding in Tianwu General Steel Material Trading Co., Ltd (“Tianwu”). Beijing Ouruixi is in the business of cell research, development, and storage and cell culture service in the People’s Republic of China.

 

On December 31, 2018, the Company entered into a Share Exchange Agreement (the “Agreement”) with Fresh Human Global Ltd., a Cayman Islands corporation (“Fresh Human”) and Hummingbird Holdings Limited, the sole shareholder of Fresh Human (“Hummingbird”) holding one share of Fresh Human. Pursuant to the terms of the Agreement, Hummingbird exchanged its equity interest in Fresh Human for 4,175,095 shares of restricted stock of the Company. As a result of the Exchange, Fresh Human is now a wholly-owned subsidiary of the Company.

 

The transactions contemplated by the Agreement are related party transactions. Hummingbird is a shareholder of the Company, holding 51.1% of the Company’s outstanding common stock and through ownership of the Company’s Series A Preferred Stock has voting power of 30% of the combined voting power of our common stock and preferred stock, and as a result of the Exchange, Hummingbird now holds 55.5 % of the common stock of the Company.

 

Fresh Human is a holding company incorporated on May 25, 2018, under the laws of Cayman Islands. Fresh Human has no substantive operations other than holding the outstanding share of Tuotuo River HK Limited (“Tuotuo River”). Tuotuo River, a Hong Kong Limited Liability Company, is a holding company incorporated on June 6, 2018. Tuotuo River holds all of the outstanding equity of Beijing Qianhaitong Technology Development Co., Ltd (“Tuotuo River WFOE”).

 

Fresh Human and Tuotuo River were established as the holding companies of Tuotuo River WFOE. Tuotuo River WFOE is the primary beneficiary of Beijing Ouruixi Medical Technology Co., Ltd. (“Beijing Ouruixi”). Beijing Ouruixi is in the business of cell research, development, and storage and cell culture service in the PRC. All of these entities included in Fresh Human are under common control, which results in the consolidation of Beijing Ouruixi which have been accounted for as a reorganization of entities under common control at carrying value. The Company issued 4,175,095 shares of common stock at $.001 par value, the excess of $4,189,657 carrying value of assets acquired over fair value of shares issued is recorded as additional paid in capital.

 

Contractual Arrangements

 

Beijing Ouruixi’s PRC business license includes business activities of cell research, development, and storage and cell culture service and it is being included as social survey category, which is within the business category in which foreign investment is restricted pursuant to the current PRC regulations. As such, Beijing Ouruixi is controlled through contractual agreements in lieu of direct equity ownership by the Company or any of its subsidiaries. Such contractual arrangements consist of a series of four agreements (collectively the “Contractual Arrangements”). The significant terms of the Contractual Agreements are as follows: 

 

Technical Consultation and Services Agreement

 

Pursuant to the Technical Consultation and Services Agreement dated December 19, 2018 between Tuotuo River WFOE and Beijing Ouruixi, Tuotuo River WFOE is engaged as exclusive provider of management consulting services to Beijing Ouruixi. For such services, the Beijing Ouruixi agrees to pay service fees determined based on all of their net income to Tuotuo River WFOE or Tuotuo River WFOE has obligation to absorb all of the losses Beijing Ouruixi.

 

The technical consultation and services agreement, remains in effect for 20 years until December 19, 2038. The agreement can be extended only if Tuotuo River WFOE gives its written consent of extension of the agreement before the expiration of the agreement and Beijing Ouruixi shall agree to the extension without reserve.

 

7   

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Equity Option Agreements

 

Pursuant to the equity option agreements dated December 19, 2018 among the shareholders who collectively owned all of Beijing Ouruixi and Tuotuo River WFOE, these shareholders jointly and severally granted Tuotuo River WFOE an option to purchase their equity interests in Beijing Ouruixi. The purchase price shall be the lowest price permitted under applicable PRC laws. If the purchase price is greater than the registered capital of Beijing Ouruixi, these shareholders of Beijing Ouruixi are required to immediately return any amount in excess of the registered capital to Tuotuo Ricer WFOE or its designee of Tuotuo River WFOE. Tuotuo River WOFE may exercise such option at any time until it has acquired all equity interests of Beijing Ouruixi. The agreements will terminate at the date on which all of these shareholders’ equity interests of Beijing Ouruixi has been transferred to Tuotuo River WFOE or its designee.

 

Equity Pledge Agreements

 

Pursuant to the equity pledge agreements dated December 19, 2018, the shareholders who collectively owned all of Beijing Ouruixi, pledge all of the equity interests in Beijing Ouruixi to Tuotuo River WFOE as collateral to secure the obligations of Beijing Ouruixi under the exclusive consulting services and operating agreement. These shareholders may not transfer or assign transfer or assign the pledged equity interests, or incur or allow any encumbrance that would jeopardize Tuotuo River WFOE’s interests, without Tuotuo River WFOE’s prior approval. In the event of default, Tuotuo River WFOE as the pledgee will be entitled to certain rights and entitlements, including the priority in receiving payments by the evaluation or proceeds from the auction or sale of whole or part of the pledged equity interests of Beijing Ouruixi. The agreement shall be continuously valid until these shareholders are no longer shareholders of Beijing Ouruixi or the satisfaction of all its obligations by the Beijing Ouruixi under the Technical Consultation and Services Agreement.

 

Voting Rights Proxy and Financial Supporting Agreements

 

Pursuant to the voting rights proxy and financial supporting agreements dated December 19, 2018, the shareholders of Beijing Ouruixi give Tuotuo River WFOE an irrevocable proxy to act on their behalf on all matters pertaining to Beijing Ouruixi and to exercise all of their rights as shareholders of Beijing Ouruixi, including the right to attend shareholders meeting, to exercise voting rights and to transfer all or a part of their equity interests in Beijing Ouruixi. In consideration of such granted rights, Tuotuo River WFOE agrees to provide the necessary financial support to Beijing Ouruixi whether or not Beijing Ouruixi incurs loss, and agrees not to request repayment if Beijing Ouruixi is unable to do so. The agreements shall remain in effect for 20 years until December 19, 2038.

 

Based on the foregoing contractual arrangements, which grant Tuotuo River WFOE effective control of Beijing Ouruixi, obligate Tuotuo River WFOE to absorb all of the risk of loss from their activities, and enable Tuotuo River WFOE to receive all of their expected residual returns, the Company accounts for Beijing Ouruixi as a variable interest entity (“VIE”).

 

The Company consolidates the accounts of its subsidiaries and VIE, in accordance with Regulation S-X-3A-02 promulgated by the Securities Exchange Commission (“SEC”), and Accounting Standards Codification (“ASC”) 810-10, Consolidation. 

 

The accompanying consolidated financial statements reflect the activities of the Company’s subsidiaries and VIEs:

 

Subsidiary/VIE   Place of incorporation   Percentage
of Ownership
 
General Steel Investment Co., Ltd.   British Virgin Islands     100.0 %
Tongyong Shengyuan (Tianjin) Technology Development Co., Ltd. (“Tongyong Shengyuan”)   PRC     100.0 %
Fresh Human Global Ltd. (“Fresh Human”)   Cayman     100.0 %
Tuotuo River HK Limited (“Tuotuo River”)   Hong Kong     100.0 %
Beijing Qianhaitong Technology Development Co., Ltd. (“Tuotuo River WFOE”)   PRC     100.0 %
Beijing Ouruixi Medical Technology Co., Ltd. (“Beijing Ouruixi”)   PRC      VIE  

 

8   

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 2 – Summary of significant accounting policies

 

  (a) Basis of presentation

 

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities Exchange Commission (“SEC”).

 

  (b) Principles of consolidation

  

The consolidated financial statements include the financial statements of the Company and its subsidiaries, which include the wholly-foreign owned enterprise ("WFOE") and variable interest entities ("VIEs") over which the Company exercises control and, when applicable, entities for which the Company has a controlling financial interest or is the primary beneficiary. All inter-company transactions and balances have been eliminated upon consolidation. 

 

  (c) Liquidity

 

Historically, the Company finances its operations through internally generated cash and payable from related parties. As of March 31, 2019, the Company had approximately $4.8 million in cash and primarily consists of cash on hand and bank deposits, among which $0.3 million are unrestricted as to withdrawal and use and are deposited with banks in China. Although the Company’s working capital deficit was $5.5 million, $9.8 million of which was payable to related parties. The related parties agreed temporally not to collect the amounts due as long as the Company is currently experiencing working capital deficits, so the Company believes working capital is sufficient to support its operations for the next twelve months. 

 

  (d) 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 accompanying consolidated financial statements and footnotes. Actual results could differ from these estimates.

 

  (e) Concentration of risks and other 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 maintains cash with banks in the PRC. In China, a depositor has up to RMB500,000 insured by the People’s Bank of China Financial Stability Bureau (“FSD”). In US, a depositor has up to $250,000 insured by the Federal Deposit Insurance Corporation (“FDIC”). As of March 31, 2019 and December 31, 2018, approximately $152,000 and $145,000 of the Company’s cash held by financial institutions were insured, and the remaining balances of approximately $4,608,000 and $4,670,000 were not insured.

 

  (f) Foreign currency translation and other comprehensive income

 

The reporting currency of the Company is the U.S. dollar. The Company’s subsidiaries 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 statement of operations accounts 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.

 

Translation adjustments included in accumulated other comprehensive income amounted to $3.19 million and $3.21 million as of March 31, 2019 and December 31, 2018, respectively. The balance sheet amounts, with the exception of equity at March 31, 2019 and December 31, 2018 were translated at 6.71 RMB and 6.88 RMB to $1.00, respectively. The equity accounts were stated at their historical rate. The average translation rates applied to statement of operations accounts for the years ended March 31, 2019 and 2018 were 6.75 RMB and 6.36 RMB, respectively. Cash flows are also translated at average translation rates for the periods, therefore, amounts reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheet.

 

9   

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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.

 

  (g) 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, other receivables, other 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.

 

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 did not identify any other assets or liabilities that are required to be presented on the balance sheet at fair value.

 

  (h) Cash and cash equivalents

 

Cash and cash equivalents include cash on hand, demand deposits and time deposit in banks with original maturities of three months or less than three months.  

 

  (i) Accounts receivable and allowance for doubtful accounts

 

Accounts receivable include trade accounts due from customers. 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 allowance for doubtful accounts after management has determined that the likelihood of collection is not probable.

 

  (j) Prepaid Expenses

 

Prepaid expenses represent advance payments made to vendors for services such as rent, consulting and certification.

 

  (k) Equipment, net

 

Equipment is 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:

 

Office equipment   5 Years  

 

The Company considers assets to be impaired if the carrying value exceeds the future projected cash flows from related operations.

 

10   

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

  (l) Right-of-use Asset and Lease Liabilities

 

In February 2016, the FASB issued ASU 2016-02 “Leases (Topic 842).” The new standard requires lessees to recognize lease assets (right of use) and lease obligations (lease liability) for leases previously classified as operating leases under generally accepted accounting principles on the balance sheet for leases with terms in excess of 12 months. The standard is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. The Company adopted ASC 2016-02 since January 1, 2019. See note 11 for details.

 

  (m) 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.

  

On December 28, 2015 General Steel (China) Co., Ltd sold its 32% equity interest in Tianwu General Steel Material Trading Co., Ltd. to Tongyong Shengyuan, one of the Company’s wholly owned subsidiaries, for $14.9 million (RMB 96.6 million). As of March 31, 2019 and December 31, 2018, Tongyong Shengyuan’s net investment in the unconsolidated entity was $12.8 million and $13.0 million, respectively.

 

Total investment income (loss) in unconsolidated subsidiaries which was included in “Income (Loss) from equity investment” in the consolidated statements of operations and comprehensive income, amounted to $(0.5) million and $3.5 million for the three months ended March 31, 2019 and 2018, respectively.

 

(In thousands)   For the three
months ended March 31,
 
    2019     2018  
Balance – beginning of period   $ 12,972     $ 14,709  
Investment (loss)gain     (500 )     3,467  
Contribute from equity investee     46       -  
Effect of exchange rate     319       587  
Balance – end of period   $ 12,837     $ 18,763  

 

The Company performed significance tests in accordance with SEC Rule 1-02(w) of Regulation S-X and determined Tianwu qualify as significant equity investee, the condensed financial statements of Tianwu is presented as follows:

 

CONDENSED STATEMENT OF OPERATIONS

 

(In thousands)   For the three
months ended March 31,
 
    2019     2018  
NET SALES   $ 7     $ 53  
                 
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES     77       103  
FINANCE EXPENSES     1,255       1,305  
TOTAL EXPENSES     1,332       1,408  
                 
LOSS BEFORE PROVISION FOR INCOME TAXES     (1,325 )     (1,355 )
                 
PROVISION FOR INCOME TAXES     -       -  
                 
NET LOSS FOR CONTINUING OPERATIONS     (1,325 )     (1,355 )
                 
NET (LOSS) INCOME FROM OPERATIONS HELD FOR SALE     (239 )     12,190  
                 
NET (LOSS) INCOME   $ (1,564 )     10,835  

 

11   

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

  (n) Revenue recognition

 

On January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) 2014-09 Revenue from Contracts with Customers (FASB ASC Topic 606) using the modified retrospective method for contracts that were not completed as of January 1, 2018. This did not result in an adjustment to the retained earnings upon adoption of this new guidance as the Company’s revenue was recognized based on the amount of consideration expected to receive in exchange for satisfying the performance obligations.

 

The core principle underlying the revenue recognition ASU is that the Company will recognize revenue to represent the transfer of goods and services to customers in an amount that reflects the consideration to which the Company expects to be entitled in such exchange. This will require the Company to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time, based on when control of goods and services transfers to a customer. The Company’s revenue streams are recognized over time.

 

The ASU requires the use of a new five-step model to recognize revenue from customer contracts. The five-step model requires that the Company (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies the performance obligation. The application of the five-step model to the revenue streams compared to the prior guidance did not result in significant changes in the way the Company records its revenue. Upon adoption, the Company evaluated its revenue recognition policy for all revenue streams within the scope of the ASU under previous standards and using the five-step model under the new guidance and confirmed that there were no difference in the pattern of revenue recognition.

 

(o) Earnings (loss) per share

 

The Company has adopted the accounting principles generally accepted in the United States regarding earnings per share (“EPS”), which requires presentation of basic and diluted earnings (loss) per share in conjunction with the disclosure of the methodology used in computing such earnings (loss) per share.

 

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

 

(p) Treasury Stock

 

Treasury stock consists of shares repurchased by the Company that are no longer outstanding and are held by the Company. Treasury stock is accounted for under the cost method.

 

The Company has repurchased 494,462 total shares of its common stock, given retroactive effect to the 1-for-5 reverse stock split effective on October 29, 2015, under the share repurchase plan approved by the Board of Directors in December 2010.

 

(q) Income taxes

 

The Company accounts for income taxes in accordance with the accounting principles generally accepted in the United States for income taxes. Under the asset and liability method as required by this accounting standard, the recognition of deferred income tax liabilities and assets for the expected future tax consequences of temporary differences between the income tax basis and financial reporting basis of assets and liabilities. Provision for income taxes consists of taxes currently due plus deferred taxes. The accounting principles generally accepted in the United States for accounting for uncertainty in income taxes clarify the accounting and disclosure for uncertain tax positions.  A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.

 

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

 

12   

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

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

 

An uncertain tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the period incurred. As of March 31, 2019, the Company’s income tax returns for December 31, 2017, 2016, 2015 and 2014 remain subject to examination by the taxing authorities.

 

(r) Share-based compensation

 

The Company accounts for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance with the accounting standards regarding accounting for stock-based compensation and accounting for equity instruments that are issued to other than employees for acquiring or in conjunction with selling goods or services. Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably determinable. The value of equity instruments issued for consideration other than employee services is determined on the earlier of a performance commitment or completion of performance by the provider of goods or services as defined by these accounting standards. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement.

 

  (s) Recently issued accounting pronouncements

 

In June 2016, the FASB issued ASU No. 2016-13, (Topic 326), Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments which amends the current accounting guidance and requires the use of the new forward-looking “expected loss” model, rather than the “incurred loss” model, which requires all expected losses to be determined based on historical experience, current conditions and reasonable and supportable forecasts. This guidance amends the accounting for credit losses for most financial assets and certain other instruments including trade and other receivables, held-to-maturity debt securities, loans and other instruments. ASU 2016-13 is effective for public entities for annual periods beginning after December 15, 2019, and interim periods within those annual periods. Early adoption is permitted for annual periods beginning after December 15, 2018, and interim periods therein. The Company does not believe the adoption of ASU 2016-13 will have a material effect on the Company’s unaudited consolidated financial statements.

 

In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting , or ASU 2018-07. ASU 2018-07 simplifies the accounting for share-based payments made to nonemployees so the accounting for such payments is substantially the same as those made to employees. Under this ASU, share based awards to nonemployees will be measured at fair value on the grant date of the awards, entities will need to assess the probability of satisfying performance conditions if any are present, and awards will continue to be classified according to Accounting Standards Codification (“ASC”) 718 upon vesting which eliminates the need to reassess classification upon vesting, consistent with awards granted to employees. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company does not believe the adoption of this ASU will have a material effect on the Company’s unaudited condensed consolidated financial statements.

 

Note 3 – Variable interest entity (“VIE”)

 

On December 19, 2018, Tuotuo River WFOE entered into Contractual Arrangements with Beijing Ouruixi and its shareholders who collectively owns 100% of Beijing Ouruixi. The significant terms of these Contractual Arrangements are summarized in “Note 1 - Nature of business and organization” above. As a result, the Company classifies Beijing Ouruixi as a VIE. 

 

13   

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

A VIE is an entity that has either a total equity investment that is insufficient to permit the entity to finance its activities without additional subordinated financial support, or whose equity investors lack the characteristics of a controlling financial interest, such as through voting rights, right to receive the expected residual returns of the entity or obligation to absorb the expected losses of the entity. The variable interest holder, if any, that has a controlling financial interest in a VIE is deemed to be the primary beneficiary and must consolidate the VIE. Tuotuo River WFOE is deemed to have a controlling financial interest and be the primary beneficiary of Beijing Ouruixi because it has both of the following characteristics:

 

  (1) The power to direct activities at Beijing Ouruixi that most significantly impact such entity’s economic performance, and
     
  (2) The obligation to absorb losses of, and the right to receive benefits from Beijing Ouruixi that could potentially be significant to such entity.

 

Pursuant to the Contractual Arrangements, Beijing Ouruixi pays service fees equal to all of its net income to Tuotuo River WFOE. At the same time, Tuotuo River WFOE is obligated to absorb all of Beijing Ouruixi’s losses. The Contractual Arrangements are designed so that Beijing Ouruixi operate for the benefit of Tuotuo River WFOE and ultimately, the Company.

 

Accordingly, the accounts of Beijing Ouruixi is consolidated in the accompanying financial statements pursuant to ASC 810-10, Consolidation. In addition, its financial positions and results of operations are included in the Company’s financial statements.

 

The carrying amount of the VIE’s consolidated assets and liabilities are as follows:

 

    March 31, 2019  
       
Current assets   $ 4,559,551  
Total assets     4,665,769  
Total liabilities     (524,594 )
Net assets   $ 4,141,175  

 

    March 31, 2019  
       
Current liabilities:        
Other payables and accrued liabilities   $ 24,463  
Other payable – related party     411,123  
Lease liabilities - current     53,489  
Total current liabilities     489,075  
Lease liabilities – non-current     35,519  
Total liabilities   $ 524,594  

 

The summarized operating results of the VIE’s are as follows: 

 

    For the three months ended
March 31, 2019
 
       
Operating revenues   $ -  
Operating expenses   $ 167,901  
Loss from operations   $ (167,901 )
Net loss   $ (151,800 )

 

14   

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Under the VIE Arrangements, the Company has the power to direct activities of Beijing Ouruixi and can have assets transferred out of Beijing Ouruixi. Therefore, the Company considers that there is no asset in Beijing Ouruixi that can be used only to settle obligations of Beijing Ouruixi, except for registered capital and PRC statutory reserves, if any. As Beijing Ouruixi is incorporated as limited liability company under the Company Law of the PRC, creditors of the Beijing Ouruixi do not have recourse to the general credit of the Company for any of the liabilities of Beijing Ouruixi.

 

Note 4 – Cash and cash equivalents

 

Cash and cash equivalents consisted of the following as of March 31, 2019 and December 31, 2018:

 

    March 31, 2019     December 31, 2018  
    (in thousands)     (in thousands)  
Cash and cash equivalents:                
Cash in bank and on hand   $ 291     $ 459  
Time deposit – with original maturities less than three months     4,470       4,362  
Total Cash and cash equivalents:   $ 4,761     $ 4,821  

 

As of December 31, 2018, the Company had time deposits of approximately $4.4 million (RMB 30 million), pledged as collateral for Tianjin Guangtai Changxin International Trading Co to its bank. The loan was maturated on March 18 and March 25, 2019.

 

As of March 31, 2019, the Company had time deposits of approximately $4.5 million (RMB 30 million), pledged as collateral for Langge (Tianjin) Trading Co to its bank. The maturity date of the loan was June 18 and June 25, 2019.See Note 10.

 

As of March 31, 2019, one of the Company’s bank account amounted totaling $249 thousands was under the third party trust account.

 

Note 5– Accounts receivable, net 

 

Accounts receivables, net of allowance for doubtful accounts consists of the following:  

 

    March 31, 2019     December 31, 2018  
    (in thousands)     (in thousands)  
Accounts receivable   $      -     $ 55  
Less: allowance for doubtful accounts     -       -  
Net accounts receivable   $ -     $ 55  

 

Note 6 - Other payable and accrued liabilities

 

Other payable and accrued liabilities consist of the following:

 

    March 31, 2019     December 31, 2018  
    (in thousands)     (in thousands )  
Salary payable   $ 142     $ 142  
Short term payable, no interest due on demand     41       37  
Professional fees     270       364  
Other payable and accrued liabilities, net   $ 453     $ 543  

 

15   

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 7– Taxes  

 

Income tax

 

Cayman Islands

 

Under the current laws of the Cayman Islands, Fresh Human is not subject to tax on income or capital gain. Additionally, upon payments of dividends to the shareholders, no Cayman Islands withholding tax will be imposed.

  

Hong Kong

 

Tuotuo River HK is incorporated in Hong Kong and are subject to Hong Kong Profits Tax on the taxable income as reported in its statutory financial statements adjusted in accordance with relevant Hong Kong tax laws. The applicable tax rate is 16.5% in Hong Kong. The Company did not make any provisions for Hong Kong profit tax as there were no assessable profits derived from or earned in Hong Kong since inception. Under Hong Kong tax law, Tuotuo River HK is exempted from income tax on its foreign-derived income and there are no withholding taxes in Hong Kong on remittance of dividends.

 

PRC

 

The subsidiaries and VIEs incorporated in the PRC are governed by the income tax laws of the PRC and the income tax provision in respect to operations in the PRC is calculated at the applicable tax rates on the taxable income for the periods based on existing legislation, interpretations and practices in respect thereof. Under the Enterprise Income Tax Laws of the PRC (the “EIT Laws”), domestic enterprises and Foreign Investment Enterprises (the “FIE”) are usually subject to a unified 25% enterprise income tax rate.

 

Beijing Ouruixi’s operations have incurred a cumulative net operating loss (“NOL”) of approximately RMB 2,254,000 (USD 337,000) as of March 31, 2019 which may reduce future taxable income. The Company periodically evaluates the likelihood of the realization of deferred tax assets, and reduces the carrying amount of the deferred tax assets by a valuation allowance to the extent it believes a portion will not be realized. Since Beijing Ouruixi had continuing losses so the Company made a full allowance of related deferred tax assets.

 

Deferred taxes assets – China

  

According to Chinese tax regulations, net operating losses can be carried forward to offset operating income for the next five years. Management took into consideration its 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 100% valuation allowance for the deferred tax assets.

 

Deferred taxes 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 three months ended March 31, 2019. The net operating loss carry forwards for United States income taxes amounted to $6.8 million, which may be available to reduce future years’ taxable income. These carry forwards will expire, if not utilized, starting from 2027 through 2037. 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 March 31, 2019 was $2.9 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 March 31, 2019. 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.

 

On December 22, 2017, the “Tax Cuts and Jobs Act” (the “Act”) was enacted. Under the provisions of the Act, the U.S. corporate tax rate decreased from 35% to 21%. Additionally, the Tax Act imposes a one-time transition tax on deemed repatriation of historical earnings of foreign subsidiaries, and future foreign earnings are subject to U.S. taxation. The enactment of the ACT did not have a material effect on the Company’s financials as the Company has accumulated deficits and has provided full valuation allowance to its deferred tax assets.

 

16   

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 8 – Related party balances

 

 Related party balances

 

  a. 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 Company.

 

Name of related parties   Relationship   March 31,
2019
    December 31,
2018
 
        (in thousands)     (in thousands)  
Yangpu Capital Automobile   Partially owned by CEO indirectly     95       95  
General Steel (China) Co., Ltd   Partially owned by CEO indirectly     7,836       7,388  
Zuosheng Yu   CEO     1,471       1,471  
Baoning Shi   Major shareholder     348       173  
Beijing Ronghuida Investment Consulting Co., Ltd.   Common control by major shareholder     62       60  
Beijing Hanjiang International Investment Consulting Co., Ltd.   Common control by major shareholder     1       1  
Total       $ 9,813     $ 9,188  

 

Note 9 – Equity

 

On August 24, 2018, the Company entered into a subscription agreement with Hummingbird. Pursuant to the Subscription Agreement, the Investor purchased 7,352,941 shares of the Company’s common stock, par value $0.001 per share, at a purchase price of $0.034 per share for aggregate gross proceeds of $250,000.

 

On November 30, 2018, the Company entered into another subscription agreement with Hummingbird. Pursuant to the Subscription Agreement, the Investor purchased 14,285,715 shares of the Company’s common stock, par value $0.001 per share, at a purchase price of $0.035 per share for aggregate gross proceeds of $500,000.

 

On December 31, 2018, the Company entered into a Share Exchange Agreement (the “Agreement”) with Fresh Human and Hummingbird. Pursuant to the terms of the Agreement, Hummingbird exchanged its equity interest in Fresh Human for 4,175,095 shares of restricted stock (the “Shares”) of the Company (the “Exchange”). As a result of the Exchange, Fresh Human is now a wholly owned subsidiary of the Company. Fresh Human was valued at $4,175,095. The transactions contemplated by the Agreement are related party transactions. Hummingbird is a shareholder of the Company, holding 51.1% of the Company’s outstanding common stock and through ownership of the Company’s Series A Preferred Stock has voting power of 30% of the combined voting power of our common stock and preferred stock, and as a result of the Exchange, Hummingbird now holds 55.5 % of the common stock of the Company.

 

Restricted net assets

 

The Company’s ability to pay dividends is primarily dependent on the Company receiving distributions of funds from its subsidiary and VIE. Relevant PRC statutory laws and regulations permit payments of dividends only out of its retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. The results of operations reflected in the accompanying consolidated financial statements prepared in accordance with U.S. GAAP differ from those reflected in the statutory financial statements of the Company’s subsidiaries and VIE.

 

The Company’s subsidiaries and VIE are required to set aside at least 10% of their after-tax profits each year, if any, to fund certain statutory reserve funds until such reserve funds reach 50% of its registered capital. In addition, the Company’s subsidiaries and VIE may allocate a portion of its after-tax profits based on PRC accounting standards to enterprise expansion fund and staff bonus and welfare fund at its discretion. The Company’s subsidiaries and VIE may allocate a portion of its after-tax profits based on PRC accounting standards to a discretionary surplus fund at its discretion. The statutory reserve funds and the discretionary funds are not distributable as cash dividends. Remittance of dividends by a wholly foreign-owned company out of China is subject to examination by the banks designated by State Administration of Foreign Exchange.

 

17   

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

As of March 31, 2019 and December 31, 2018, the Company’s subsidiaries and VIE collectively attributed none of retained earnings for their statutory reserves, respectively due to operation losses for both years.

 

Note 10 – Contingencies

 

Contingencies

 

From time to time, the Company’s VIE Ouruixi maybe a party to various legal actions arising in the ordinary course of business. The Company accrues costs associated with these matters when they become probable and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. The Company’s management does not expect any liability from the disposition of such claims and litigation individually or in the aggregate would have a material adverse impact on the Company’s consolidated financial position, results of operations and cash flows.

 

In December 2018, Beijing Ouruixi signed a bank acceptance pledge contract with Tianjin Branch, Shengjing Bank in China and pledged its 30 million RMB time deposits in Shengjing Bank as collateral for the bank loan Tianjin Guangtai Changxin International Trading Co. borrowed. The maturity date of the loan was March 18 and March 25, 2019. After the maturity date, the time deposits was automatically released as well as the collateral obligation.

 

In March 2019, Beijing Ouruixi signed a bank acceptance pledge contract with Tianjin Branch, Shengjing Bank in China and pledged its 30 million RMB time deposits in Shengjing Bank as collateral for the bank loan Langge (Tianjin) Trading Co. borrowed. The maturity date of the loan is June 18 and June 25, 2019. After the maturity date, the time deposits will be automatically released as well as the collateral obligation.

 

The Company did not, however, accrue any liability in connection with such guarantee because the borrowers have been current in its repayment obligation and the Company has not experienced any losses from providing such guarantee. As of the date of this report, the Company has evaluated the guarantee and has concluded that the likelihood of having to make any payments under the guarantee agreement is remote.

 

Variable interest entity structure

 

In the opinion of management, (i) the corporate structure of the Company is in compliance with existing PRC laws and regulations; (ii) the Contractual Arrangements are valid and binding, and do not result in any violation of PRC laws or regulations currently in effect; and (iii) the business operations of the Company’s subsidiaries and VIE are in compliance with existing PRC laws and regulations in all material respects. 

 

However, there are substantial uncertainties regarding the interpretation and application of current and future PRC laws and regulations. Accordingly, the Company cannot be assured that PRC regulatory authorities will not ultimately take a contrary view to the foregoing opinion of its management. If the current corporate structure of the Company or the Contractual Arrangements is found to be in violation of any existing or future PRC laws and regulations, the Company may be required to restructure its corporate structure and operations in the PRC to comply with changing and new PRC laws and regulations. In the opinion of management, the likelihood of loss in respect of the Company’s current corporate structure or the Contractual Arrangements is remote based on current facts and circumstances.

 

Note 11 – Lease

 

Effective January 1, 2019, the Company adopted ASU 2016-02, “Leases” (Topic 842), and elected the package of practical expedients that does not require us to reassess: (1) whether any expired or existing contracts are, or contain, leases, (2) lease classification for any expired or existing leases and (3) initial direct costs for any expired or existing leases. The Company adopted the practical expedient that allows lessees to treat the lease and non-lease components of a lease as a single lease component. The impact of the adoption of ASC 842, as of January 1, 2019, was approximately $109,000 to our assets, approximately $73,000 to our current liability and approximately $36,000 to our long-term liability.

 

Under the transition method selected by the Company, leases expiring at, or entered into after, January 1, 2019 were required to be recognized and measured. Prior period amounts have not been adjusted and continue to be reflected in accordance with the Company's historical accounting under ASC 840. The adoption of this standard resulted in the recording of operating lease assets and operating lease liabilities as of January 1, 2019, with no related impact on the Company's Consolidated Statement of Stockholders' Equity or Consolidated Statement of Income (Loss).

 

The Company also leases a space on a month-to-month basis which classify as operating leases. Leases with an initial term of 12 months or less are not recorded on the balance sheet. Short-term leases for the three months ended March 31, 2019 amounted to $3,449.

 

18   

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

 

For the three months ended March 31, 2019, lease expenses under operating leases amounted to $15,374 under ASC 842 and recorded in the general and administrative expenses in the accompanying unaudited condensed statements of operations.

 

The two year and beyond maturity of the Company’s lease obligations is presented below:

 

Twelve months ended March 31,   Operating lease amount  
2020   $ 61,850  
2021     30,925  
Total lease payments     92,775  
Less: Interest     (3,767 )
Present value of lease liabilities   $ 89,008  

 

Note 12 – Subsequent events

 

The Company has evaluated subsequent events through the date these consolidated financial statements were issued and determine that there were no subsequent events or transactions that require recognition or disclosures in the consolidated financial statements.

 

19   

 

  

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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. and its subsidiaries 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”, to our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 filed with the SEC on April 1, 2019.  

 

OVERVIEW

 

We were incorporated on August 5, 2002, in the State of Nevada. We are headquartered in Beijing, China and through our 100% owned subsidiary, General Steel Investment Co., Ltd., we have been operating steel companies serving various industries in the People’s Republic of China (“PRC”). Our main operation through December 31, 2015 had been the manufacturing and sales of steel products such as steel rebar, hot-rolled carbon and silicon sheets and spiral-weld pipes while we commenced trading in 2016.

 

Our main operation, since disposal of its significant steel producing operating assets and trading business at December 31, 2018 has been the 32% equity holding in Tianwu General Steel Material Trading Co., Ltd (“Tianwu”).

 

On December 31, 2018, the Company entered into a Share Exchange Agreement (the “Agreement”) with Fresh Human Global Ltd., a Cayman Islands corporation (“Fresh Human”) and Hummingbird Holdings Limited, the sole shareholder of Fresh Human (“Hummingbird”) holding one share of Fresh Human. Pursuant to the terms of the Agreement, Hummingbird exchanged its equity interest in Fresh Human for 4,175,095 shares of restricted stock (the “Shares”) of the Company (the “Exchange”). As a result of the Exchange, Fresh Human is now a wholly-owned subsidiary of the Company. Fresh Human was valued at $4,175,095.

 

The transactions contemplated by the Agreement are related party transactions. Hummingbird is a shareholder of the Company, holding 51.1% of the Company’s outstanding common stock and through ownership of the Company’s Series A Preferred Stock has voting power of 30% of the combined voting power of our common stock and preferred stock, and as a result of the Exchange, Hummingbird now holds 55.5 % of the common stock of the Company.

 

Fresh Human is the sole shareholder of Tuotuo River HK Limited, a Hong Kong limited liability company, which through various contractual arrangements between Tuotuo’s wholly-owned subsidiary Beijing Qianhaitong Technology Development Co., Ltd. and Beijing Ouruixi Medical Technology Co., Ltd., a PRC entity and its shareholders is in the business of cell research, development, storage and cell culture service in the People’s Republic of China.

 

RESULTS OF OPERATIONS

 

The Company’s remaining business for the year ended March 31, 2019 consists mainly of our 32% equity holding in Tianwu Tongyong (Tianjin) International Trade Co., Ltd, ("TianwuTongyong").

 

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Statements of Operations for the three months ended March 31, 2019 and 2018:

 

(In thousands except share data)   2019     2018     Change     Percentage
Change
 
Selling, General and Administrative Expenses   $ (281 )   $ (27 )   $ (254 )     940.7 %
Loss from Operations     (281 )     (27 )   $ (254 )     940.7 %
                                 
Other (Expense)Income     (485 )     3,467     $ (3,952 )     (114.0 )%
(Loss)Income Before Provision for Income Taxes and Noncontrolling Interest     (766 )     3,440     $ (4,206 )     (122.3 )%
Provision for Income Taxes     -       -     $       - %
Net (Loss)Income   $ (766 )   $ 3,440     $ (4,206 )     (122.3 )%
Foreign Currency Translation Adjustments     (24 )     (115 )   $ 91       (79.1 )%
Comprehensive (Loss)Income     (790 )     3,325     $ (4,115 )     (123.8 )%
                                 
Weighted Average Number of Shares     46,0140       20,200       25,814       127.8 %
Net (Loss)Income   $ (0.02 )   $ 0.16     $ (0.18 )     (112.5 )%

 

General and Administrative Expenses (“G&A”)

 

Three months ended March 31, 2019 compared with three months ended March 31, 2018  

 

(in thousands)                  
    2019     2018     Change %  
                         
General and administrative expenses   $ (281 )   $ (27 )     940.7 %

 

G&A expenses increased by 940.7% to $(0.3) million for the three months ended March 31, 2019, compared to $(0.03) million for the same period in 2018. The increase was mainly due to the increase in professional expenses.

 

Loss from Operations

 

Three months ended March 31, 2019 compared with three months ended March 31, 2018

 

(in thousands)                  
    2019     2018     Change %  
                         
Loss from operations   $ (281 )   $ (27 )     940.7 %

 

Loss from operations for the three months ended March 31, 2019 was $(0. 3) million as compared to a loss of $(0.03) million for the same period in 2018. The increase was mainly due to increase in professional expenses.

 

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Other Income(Expense)

 

Three months ended March 31, 2019 compared with three months ended March 31, 2018

 

(in thousands)                  
    2019     2018     Change %  
                         
(Loss) Income from equity investment     (500 )     3,467       (114.4 )%
Finance/interest expense     15       -       100.0 %
Total other (expense)income, net   $ (485 )   $ 3,467       (114.0 )%

 

Total other expenses for the three months ended March 31, 2019 was $(0.5) million, as compared to $3.5 million other income for the same period in 2018. The decrease in other income was mainly due to a loss from equity investment.

 

Net (Loss) Income

 

Three months ended March 31, 2019 compared with three months ended March 31, 2018 

 

(in thousands)            
    2019     2018     Change %  
                         
Net (loss)income   $ (766 )   $ 3,440       (122.3 )%

 

Net loss for the three months ended March 31, 2019 was $(0.8) million as compared to an income of approximately $3.4 million for the same period in 2018. The decrease in net income from operations was predominantly due to the reasons stated above. 

 

22   

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

As of March 31, 2019, our current liabilities exceeded the current assets by approximately $5.5 million. Given our expected expenditures in the foreseeable future together with our cash flow from the financing activities, we have comprehensively considered our available sources of funds as follows:

 

  · Financial support and credit guarantee from related parties; and

  · Additional equity or debt financing

 

Based on the above considerations, our Board of Directors is of the opinion that we are able to obtain sufficient funds to meet our working capital requirements and debt obligations as they become due over the twelve months from the balance sheet date.  

  

Substantially all our operations are conducted in China and all of our revenues are denominated in Renminbi (RMB). RMB is subject to the 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 its 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 10.0% of its after-tax profit based on PRC accounting standards each year to its general reserves until the accumulative amount of such reserves reaches 50.0% 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 from a company’s “capital account,” which includes foreign direct investments and loans, without the prior approval of the SAFE.

 

23   

 

 

Cash-flow

 

Operating Activities

 

Net cash used in operating activities for the three months ended March 31, 2019 and 2018 was $0.3 million and $1.6 million, respectively. This change was mainly due to the combination of the following factors:

 

The net loss of $0.8 million, mainly from non-cash loss from equity investment for the three months ended March 31, 2019 compared to net income of $3.4 million in the same period in 2018 which were mainly due to income from equity investment.

 

The cash outflow was mainly due to the change in other payables and accrued liabilities.

 

Investing activities

 

During the three months ended March 31, 2019, we purchased immaterial amount of equipment while we did not use any cash for investing activities for the three months ended March 31, 2018.

 

Financing activities

 

Net cash provided by financing activities was $0.2 million for the three months ended March 31, 2019 compared to $1.6 million provided by financing activities for the three months ended March 31, 2018. The decrease of cash inflow from financing activities was because we had less borrowings from our related parties.

 

Restrictions on our ability to distribute dividends

 

Substantially all of our assets are located within the PRC. Under the laws of the PRC governing foreign invested enterprises, dividend distribution and other funds transfers are allowed but subject to special procedures under relevant rules and 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 10.0% of its after-tax profit based on PRC accounting standards each year to its general reserves until the accumulative amount of such reserves reaches 50.0% 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 regulations, 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). Transfers from a company’s “capital account,” which includes foreign direct investments and loans, can’t be executed without the prior approval of the SAFE.

 

24   

 

 

There are no restrictions to distribute or transfer other funds from General Steel Investment to us.

 

We have never declared or paid any cash dividends to our shareholders. We do not plan to pay any dividends out of our retained earnings for the three months ended March 31, 2019. With respect to retained earnings accrued after such date, our Board of Directors may declare dividends after taking into account our operations, earnings, financial condition, cash requirements and availability and other factors as it may deem relevant at such time. Any declaration and payment, as well as the amount, of dividends will be subject to our By-Laws, charter and applicable Chinese and U.S. state and federal laws and regulations, including the approval from the shareholders of each subsidiary which intends to declare such dividends, if applicable.

 

We have previously raised money in the U.S. capital markets which has provided the capital needed for our operations and investments activities. Thus, the foreign currency restrictions and regulations in the PRC on the dividends distribution will not have a material impact on our liquidity, financial condition, and results of operation.

  

Impact of Inflation

 

We are subject to commodity price risks arising from price fluctuations in the market prices of the steel-related products. 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 do not believe that inflation risk is material to our business or our financial position, results of operations or cash flows.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

There were no off-balance sheet arrangements for the three months ended March 31, 2019 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.

 

Critical Accounting Policies

 

We prepare our consolidated financial statements in accordance with US GAAP. These accounting principles require us to make judgments, estimates and assumptions on the reported amounts of assets and liabilities at the end of each fiscal period, and the reported amounts of revenues and expenses during each fiscal period. We continually evaluate these judgments and estimates based on our own historical experience, knowledge and assessment of current business and other conditions, our expectations regarding the future based on available information and assumptions that we believe to be reasonable.

 

There have been no other material changes during the quarter ended March 31 2019 in our significant accounting policies from those previously disclosed in the Company’s annual report for the fiscal year ended December 31, 2018. The discussion of our critical accounting policies contained in Note 2 to our unaudited condensed consolidated financial statements in this Report, “Summary of our Significant Accounting Policies”, is incorporated herein by reference.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE 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 March 31, 2019. 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 submits 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.

 

Based on their evaluations, our Chief Executive Officer and Chief Financial Officer have concluded that our Company’s disclosure controls and procedures were not effective as of March 31, 2019 due to the material weaknesses in our internal control over financial reporting previously identified in our December 31, 2018 Form 10K filing and described below:

 

  · Ineffective review process in our accounting department.

  · Lack of a qualified full-time accountant who possesses U.S. GAAP knowledge to oversee the recording of our daily transaction.

 

25   

 

 

Based on the above material weakness, our Chief Executive Officer and Chief Financial Officer concluded that our Company’s disclosure controls and procedures were not effective as of March 31, 2019.

 

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 after the completion of divesture of our steel business and current business model from our trading business.

 

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:

 

  · Implement an internal review process over financial reporting to review all recent accounting pronouncements and to verify that the accounting treatment identified in such report have been fully implemented. In the future, we will continue to improve our ongoing review and supervision of our internal control over financial reporting;

 

  · Revise our internal control over financial reporting procedure on potential acquisition and unusual transactions.

 

Management believes the foregoing efforts will effectively remediate the material weaknesses described above.

 

Despite the existence of the material weaknesses discussed above, our management, including our Chief Executive Officer and Chief Financial Officer, have concluded that the consolidated financials included in this Quarterly Report on Form 10-Q present, in all material aspects, our financial position, results of operations, comprehensive loss and cash flows for the periods presented, in conformity with U.S. GAAP.

 

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

 

Not Applicable

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not Applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

26   

 

 

ITEM 6. EXHIBITS

 

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, as filed herewith.
     
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, as filed herewith.
     
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, as filed herewith.
     
32.2*   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, as filed herewith.

 

101.INS*   XBRL Instance Document
     
101.SCH*   XBRL Taxonomy Extension Schema Document
     
101.CAL*   XBRL Taxonomy Extension Calculation Linkbase Document
     
101.DEF*   XBRL Taxonomy Extension Definition Linkbase Document
     
101.LAB*   XBRL Taxonomy Extension Label Linkbase Document
     
101.PRE*   XBRL Taxonomy Extension Presentation Linkbase Document

 

*Filed herewith.

 

27   

 

 

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.

 

  General Steel Holdings, Inc.
   
Date: May 15, 2019 By: /s/ Zuosheng Yu
  Zuosheng Yu
  Chief Executive Officer
   
Date: May 15, 2019 By: /s/ John Chen
  John Chen
  Director and Chief Financial Officer

 

28   

 

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