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 September 30, 2016

 

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  ¨    No  x

 

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   ¨   No   x

 

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   ¨   Smaller reporting company   x
        (Do not check if a smaller reporting company)
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

 

As of September 27, 2017, 16,800,361 (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 3
     
Item 1. Unaudited Financial Statements. 3
     
  Condensed Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015. 3
     
  Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2016 and 2015. 4
     
  Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015. 5
     
  Notes to Condensed Consolidated Financial Statements. 6
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 40
     
Item 4. Controls and Procedures. 51
     
Part II. OTHER INFORMATION 52
     
Item 1. Legal Proceedings. 52
     
Item 1A. Risk Factors. 52
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 52
     
Item 6. Exhibits. 52
     
Signatures 53

 

  2  

 

     

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(In thousands)

 

    September 30,     December 31,  
    2016     2015  
ASSETS              
                 
CURRENT ASSETS:                
Cash   $ 9     $ 4  
Accounts receivables - related party     21,834       -  
Other receivables, net     3       163  
Other receivables - related party     65,226       -  
Prepaid expense and other     -       481  
Current assets held for sale     -       1,609  
TOTAL CURRENT ASSETS     87,072       2,257  
                 
OTHER ASSETS:                
Plant and equipment, net     1       -  
Investment in unconsolidated entities     13,545       14,886  
Other assets held for sale     -       18,618  
TOTAL OTHER ASSETS     13,546       33,504  
                 
TOTAL ASSETS   $ 100,618     $ 35,761  
                 
LIABILITIES AND EQUITY (DEFICIENCY)                
                 
CURRENT LIABILITIES:                
Short-term loan - other   $ -     $ 3,600  
Accounts payable - related party     11,972       -  
Other payables and accrued liabilities     3,169       636  
Other payables - related parties     51,024       42,756  
Customer deposit     7,724       -  
Customer deposit - related parties     20,945       -  
Taxes payable     521       14  
Current liabilities held for sale     -       31,155  
TOTAL CURRENT LIABILITIES     95,355       78,161  
                 
COMMITMENTS AND CONTINGENCIES                
                 
EQUITY (DEFICIENCY):                
Series A - Preferred stock, $0.001 par value, 50,000,000 shares authorized, 3,092,899 shares issued and outstanding as of September 30, 2016 and December 31, 2015     3       3  
Series B - Preferred stock, $0.001 par value, 50,000,000 shares authorized, 0 shares issued and outstanding as of September 30, 2016 and December 31, 2015     -       -  
Common stock, $0.001 par value, 40,000,000 shares authorized, 20,367,550 shares and 17,802,357 shares issued, and 19,873,088 shares and 17,307,895 shares outstanding as of September 30, 2016 and December 31, 2015, respectively (given retroactive effect to the 1-for-5 reverse stock split effective on October 29, 2015)     20       18  
Treasury stock, at cost, 494,462 shares as of September 30 and December 31, 2015 (given retroactive effect to the 1-for-5 reverse stock split effective on October 29, 2015)     (840 )     (840 )
Paid-in-capital     1,253,234       1,208,667  
Stock subscription receivable     (1,500 )     -  
Statutory reserves     1,107       1,107  
Accumulated deficit     (1,248,446 )     (1,252,810 )
Accumulated other comprehensive income     1,685       2,009  
TOTAL GENERAL STEEL HOLDINGS, INC. EQUITY (DEFICIENCY)     5,263       (41,846 )
                 
NONCONTROLLING INTERESTS     -       (554 )
                 
TOTAL EQUITY (DEFICIENCY)     5,263       (42,400 )
                 
TOTAL LIABILITIES AND EQUITY   $ 100,618     $ 35,761  

 

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

 

  3  

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015

(UNAUDITED)

(In thousands, except per share data)

 

    For the three months ended
September 30,
    For the nine months ended
September 30,
 
    2016     2015     2016     2015  
                         
REVENUE   $ 349     $ -     $ 372     $ -  
                                 
REVENUE - RELATED PARTIES     77       -       873       -  
TOTAL REVENUE     426       -       1,245       -  
                                 
GENERAL AND ADMINISTRATIVE EXPENSES     85       2,663       1,808       4,664  
                                 
INCOME (LOSS) FROM OPERATIONS     341       (2,663 )     (563 )     (4,664 )
                                 
OTHER INCOME (EXPENSE)                                
Loss from equity investment     (609 )     -       (956 )     -  
Finance/interest expense     -       (1 )     (1 )     (3 )
Gain from debt settlement     2,455       -       2,455       -  
Gain from disposal of Catalon     -       -       6,269       -  
Other income (expense), net     1,846       (1 )     7,767       (3 )
                                 
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES AND NONCONTROLLING INTEREST     2,187       (2,664 )     7,204       (4,667 )
                                 
PROVISION FOR INCOME TAXES     103       -       297       -  
                                 
NET INCOME (LOSS) FROM CONTINUING OPERATIONS     2,084       (2,664 )     6,907       (4,667 )
                                 
DISCONTINUED OPERATIONS - Note 2(p):                                
NET LOSS FROM OPERATIONS TO BE DISPOSED, net of applicable income taxes     -       -       -       -  
NET LOSS FROM OPERATIONS DISPOSED, net of applicable income taxes     -       (91,833 )     (2,569 )     (1,198,242 )
                                 
NET INCOME (LOSS)     2,084       (94,497 )     4,338       (1,202,909 )
                                 
Less: Net loss attributable to noncontrolling interest from operations to be disposed     -       -       -       -  
Less: Net loss attributable to noncontrolling interest from operations disposed     -       (34,016 )     (26 )     (482,248 )
                                 
NET INCOME (LOSS) ATTRIBUTABLE TO GENERAL STEEL HOLDINGS, INC.   $ 2,084     $ (60,481 )   $ 4,364     $ (720,661 )
                                 
NET INCOME (LOSS)   $ 2,084     $ (94,497 )   $ 4,338     $ (1,202,909 )
                                 
OTHER COMPREHENSIVE LOSS                                
Foreign currency translation adjustments     (48 )     65,647       (332 )     62,520  
                                 
COMPREHENSIVE INCOME (LOSS)     2,036       (28,850 )     4,006       (1,140,389 )
                                 
Less: Comprehensive income (loss) attributable to noncontrolling interest     -       (11,310 )     (34 )     (460,766 )
                                 
COMPREHENSIVE LOSS ATTRIBUTABLE TO GENERAL STEEL HOLDINGS, INC.   $ 2,036     $ (17,540 )   $ 4,040     $ (679,623 )
                                 
WEIGHTED AVERAGE NUMBER OF SHARES                                
Basic and Diluted (given retroactive effect to the 1-for-5 reverse stock split effective on October 29, 2015)     16,646       13,788       16,439       12,919  
                                 
LOSS PER SHARE - BASIC AND DILUTED                                
Continuing operations   $ 0.13     $ (0.19 )   $ 0.42     $ (0.36 )
Operations disposed   $ -     $ (4.19 )   $ (0.15 )   $ (55.42 )
                                 
Net income (loss) per share   $ 0.13     $ (4.39 )   $ 0.27     $ (55.78 )

 

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 CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015

(UNADUITED)

(In thousands)

 

   

For the nine months ended

September 30,

 
    2016     2015  
CASH FLOWS FROM OPERATING ACTIVITIES:                
Net loss   $ 4,338     $ (1,202,909 )
Net loss from operations disposed     2,569       1,198,242  
Net loss from continuing operations     6,907       (4,667 )
Adjustments to reconcile net loss to cash provided by (used in) operating activities from continuing operations:                
Bad debt expenses     169       -  
Share-based compensation     697       2,637  
Loss from equity investment     956       -  
Gain from debt settlement     (2,455 )     -  
Gain from disposition of Catalon     (6,269 )     -  
Changes in operating assets and liabilities                
Accounts receivable - related party     (22,128 )     -  
Other receivables     (7 )     27  
Customer deposit     7,828       -  
Customer deposit - related parties     21,227       -  
Prepaid expense and other     -       2,785  
Accounts payables - related party     12,133       -  
Other payables and accrued liabilities     2,930       (63 )
Taxes payable     538       (5 )
Net cash used in operating activities from operations to be disposed/ operations disposed     (12 )     (125,295 )
Net cash provided by (used in) operating activities     22,514     (124,581 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:                
Purchase of equipment     (1 )     -  
Other receivables - related parties     (23,089 )     -  
Net cash provided by investing activities from operations to be disposed / operations disposed     -       91,737  
Net cash provided by (used in) investing activities     (23,090 )     91,737  
                 
CASH FLOWS FINANCING ACTIVITIES:                
Borrowings from related parties     609       (20,503 )
Net cash provided by financing activities from operations to be disposed / operations disposed     -       36,810  
Net cash provided by financing activities     609       16,307  
                 
EFFECTS OF EXCHANGE RATE CHANGE IN CASH     (43 )     6,812  
                 
(DECREASE) INCREASE IN CASH     (10 )     (9,725 )
                 
CASH, beginning of period     44       11,641  
                 
CASH, end of period     34       1,916  
                 
Less: cash from operations disposed, end of period     (25 )     1,912  
                 
CASH FROM CONTINUING OPERATIONS, end of period   $ 9     $ 4  

 

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

 

  5  

 

 

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, has been operating steel companies serving various industries in the People’s Republic of China (“PRC”). The Company’s main operation, since its disposal of its significant steel producing operating assets at December 31, 2016 and the disposal of its final steel producing operating assets on March 21, 2016, has been its trading business on iron ore, nickel-iron-manganese alloys, and other steel-related products. The Company, together with its subsidiaries, majority owned subsidiaries and variable interest entity, is referred to as the “Group”.

 

In view of the near-term challenges for the steel manufacturing sector, the Company strategically accelerated its business transformation between 2015 and 2016. The Company’s transformation strategy is to pursue opportunities that offer compelling benefits to the Company’s organization and shareholders, and includes:

 

•          First, strengthen the Company’s financials while providing the financial flexibility to pursue higher return, higher growth opportunities;

•          Second, reduce the complexity of the Company’s business structure, which is consistent with the Company’s objectives for internal simplification and operating efficiency;

•          Third, diversify operating risk in order to lower the Company’s high reliance on steel business, while at the same time leverage on the Company’s vast vertical resources in the steel industry; and

•          Fourth, pursue opportunities for additional value creation.

  

On November 4, 2015, the Company's Board of Directors (the "Board"), including the audit committee, committed to a plan and authorized the Company's management to pursue the potential sale of all its ownership interest in Maoming Hengda Steel Company, Ltd. ("Maoming Hengda") and Shaanxi Longmen Iron and Steel Co., Ltd. (“Longmen Joint Venture”) in order to unlock the value in Maoming Hengda's land assets, as well as divest from and restructure the steel business.

 

On December 30, 2015, the Company entered into an agreement to sell its wholly-owned General Steel (China) and its entire equity interest in all of its subsidiaries for $1 million to Victory Energy Resource Limited, a HK registered company indirectly-owned by Henry Yu, the Company's Chairman. As a result of this transaction, the Company met the criteria under ASC 810-10-40-4 to deconsolidate General Steel (China), General Shengyuan, Yangpu Shengtong, Qiu Steel, and Longmen Joint Venture and subsidiaries at the disposal date. The disposed entities’ net loss through the disposal date were consolidated and presented as operations disposed for the three and nine months ended September 30, 2015 in the unaudited condensed consolidated financial statements. See Note 2(o) “Summary of significant accounting policies – operations held for sale and operations disposed/to be disposed” for details.

 

On March 21, 2016, the Company sold its interest in Maoming Hengda thereby fully completing the divestiture of its steel manufacturing business as planned. As a result, Maoming Hengda’s financial information was presented as operation disposed and assets and liabilities held for sales for the nine months ended September 30, 2016 and 2015 in the unaudited condensed consolidated financial statements. Certain prior period data has been reclassified to conform to the current year presentation and to reflect the results of operations disposed. See Notes 2(a) and 2(o) for details.

 

Other Business Operations:

 

The Company established a subsidiary wholly owned by General Steel Investment Co., Ltd., Tongyong Shengyuan (Tianjin) Technology Development Co., Ltd. (“Tongyong Shengyuan”) in June 2015. Tongyong Shengyuan is the holding company for Tianjin Shuangsi Trading Co. Ltd. (“Tianjin Shuangsi”).

 

In October 2015, the Company completed its acquisition of an 84.5% equity interest in Catalon Chemical Corp. (“Catalon”), a Delaware corporation headquartered in Virginia that develops and manufactures De-NOx honeycomb catalysts and industrial ceramics.  Prior to December 31, 2015, the Company became aware of some operational issues related to Catalon. It was determined that such issues might have affected the prior operations of Catalon as well as the ability to conduct business in the future. As such, the Company expected to cancel the shares issued to the 84.5% original owners of Catalon in accordance with the terms of the agreement. Therefore the company presented Catalon’s remaining assets, after impairment charges, and liabilities as held for sale as of December 31, 2015. On March 31, 2016, the Company decided to dispose of Catalon, so the result of operations of Catalon was presented as discontinued operations in September 30, 2016 in the consolidated financial statements. See Note 16 – Acquisitions.

 

  6  

 

  

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The Company’s remaining business is primarily comprised of Tianjin Shuangsi Trading Co. Ltd. (“Tianjin Shuangsi”), a trading company in which the Company acquired 100% equity interest on February 16, 2016 for a consideration of $0.03 million as Tianjin Shuangsi was established by the chief executive officer of the Company’s related entity and his relative. Tianjin Shuangsi primarily trades iron ore, nickel-iron-manganese alloys, and other steel-related products. The Company continued its trading business after the disposition of General Steel (China) and Maoming Hengda.

 

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 2015 annual report on Form 10-K filed on August 30, 2016.

 

(a) Basis of presentation

 

The consolidated financial statements of the Company reflect the activities of the following major directly owned subsidiaries as of September 30, 2016: 

 

Subsidiary       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 %
Tianjin Shuangsi Trading Co. Ltd. (“Tianjin Shuangsi”),   PRC     100.0 %
             

 

* Tongyong Shengyuan is a holding company of Tianjin Shuangsi in which the Company holds a 100% equity interest.

 

(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.

 

(c) Liquidity

 

In assessing the Company’s liquidity, the Company monitors and analyzes its cash on-hand and its operating and capital expenditure commitments. The Company’s liquidity needs are to meet its working capital requirements, operating expenses and capital expenditure obligations.

 

  7  

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The Company engages in trading of steel related products and the Company’s business is not capital intensive. Debt financing in the form of short term loans, loans from related parties, have been utilized to finance the working capital requirements of the Company. The main operating expenses are public Company maintenance costs which CEO Mr. Yu Zuo Sheng fully supports funding the Company’s operations.

 

Due to the restructuring, the Company’s working capital deficit has decreased to approximately $8.28 million as of September 30, 2016 from $75.9 million as of December 31, 2015. As of September 30, 2016 current assets are mainly composed of cash, accounts receivables and other receivables. In 2017, the Company extended the payment terms of its payable to related parties until the end of 2020, therefore removing theses related parties payable, working capital is $4 million.

 

Management considers the historical experience, the economy, trends in the industry, the expected collectability of the accounts and other receivables and the realization of the prepayments and determined the Company is expected to realize the remaining balances.

 

Based on the above considerations, the Company’s management is of the opinion that it has sufficient funds to meet its working capital requirements and debt obligations as they become due. However, this opinion is based on the market and general economic condition, the Company’s operating results not continuing to deteriorate and the Company shareholders continuing to provide liquidity.

 

(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 has significant exposure to the price fluctuation of raw materials and energy prices as part of its normal operations. As of September 30, 2016 and December 31, 2015, the Company did not have 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 September 30, 2016 and December 31, 2015 amounted to $0.009 million and $0.004 million, respectively. As of September 30, 2016 and December 31, 2015, $0.002 million and $0.02 million cash in the bank was covered by insurance. The Company has not experienced any losses in other bank accounts and believes it is not exposed to any risks on its cash in bank accounts.

 

Three of the Company’s customers, including related parties, individually accounted for 33.0%, 31.0% and 29.5% of total sales for the nine months ended September 30, 2016 respectively and two of the company’s customers individually accounted for 74% and 25% of total sales for the three months ended September 30, 2016, respectively. Two of the Company’s customers individually accounted for 15.0% and 13.9% of total sales from operations disposed for the three months ended September 30, 2015, while none of the Company’s customers individually accounted for more than 10% of total sales for the nine months ended September 30, 2015.

 

One of the Company’s customers, a related party, accounted for 100% of the total accounts receivable as of September 30, 2016. One of the Company’s customers from operation disposed individually accounted for 96.2% of total accounts receivable as of December 31, 2015.

 

  8  

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Two of the Company’s suppliers, including related parties, individually accounted for37.0% and 34.9% of the total purchases for the nine months ended September 30, 2016. One of the Company’s suppliers, a related party, accounted for 80.3% of the total purchases for the three months ended September 30, 2016. None of the Company’s supplier individually accounted for more than 10% of the total purchases for the three months and nine months ended September 30, 2015, respectively.

 

One of the Company’s suppliers, a related party, individually accounted for 100% of total accounts payable as of September 30, 2016, while none of the Company’s suppliers individually accounted for more than 10% of total accounts payable as of December 31, 2015.

 

(f) 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 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 $1.7 million and $2.0 million as of September 30, 2016 and December 31, 2015, respectively. The balance sheet amounts, with the exception of equity at September 30, 2016 and December 31, 2015 were translated at 6.67 RMB and 6.49 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 nine months ended September 30, 2016 and 2015 were 6.58 RMB and 6.15 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.

 

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

 

(h) Cash

 

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

 

  9  

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(i) Accounts receivable 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 allowance for doubtful accounts after management has determined that the likelihood of collection is not probable.

 

(j) Advances on inventory purchase

 

Advances on inventory purchases are monies deposited or advanced to outside vendors or related parties on future inventory purchases. Due to the shortage of raw material in China, most of the Company’s vendors require a certain amount of money to be deposited with them as a guarantee that the Company will 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 required the deposit to be returned to the Company when the contract ends. The inventory is normally delivered within one month after the monies have been advanced. 

 

(k) Inventories

 

Inventories are mainly finished goods and are stated at the lower of cost or market using the first-in, first-out method. Management reviews inventories for obsolescence and cost in excess of net realizable value at least annually and records a reserve against the inventory and additional cost of goods sold when the carrying value exceeds net realizable value.  

 

(l) 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  

 

Through their respective disposals 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.

 

Due to the recurring losses in the Longmen Joint Venture’s operations, the most recent economic down turn, the major sell off of the Chinese stock market and the lacking of government expansion in major infrastructure, the Company considered Longmen Joint Venture’s carrying amount for property and equipment not being recoverable. The Company used the undiscounted cash flow approach for the purpose of performing a recoverability test, which included future cash inflows less associated cash outflows that were directly associated with and that were expected to arise as a direct result of the use and eventual disposition of the assets. For purposes of assessment, the long lived assets were grouped at the lowest level for which there was identifiable cash flows. The major groupings analyses include Longmen Joint Venture, Maoming Hengda and General Steel (China). Further, the Company’s estimate of future cash flows included estimated future cash flows necessary to maintain our existing production potential over the entire period and within the various groups. The projections were based on a best estimate approach of likely outcomes. During the quarter ended September 30, 2015, the Company expected Longmen Joint Venture’s long-lived assets to be not fully recoverable and recognized an impairment loss of $973.9 million to reduce its carrying value to its fair value.

 

  10  

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(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) sold its 32% equity interest in Tianwu General Steel Material Trading Co., Ltd. to Tongyong Shengyuan, one of our wholly owned subsidiaries, for $14.9 million (RMB 96.6 million). As of September 30, 2016, Tongyong Shengyuan’s net investment in the unconsolidated entity was $13.5 million.

 

Total investment income (loss) in unconsolidated subsidiaries amounted to $(0.6) million and $0 for the three months ended September 30, 2016 and 2015, respectively, which was included in “Income (loss) from equity investment” in the condensed consolidated statements of operations and comprehensive loss. Total investment income (loss) in unconsolidated subsidiaries amounted to $(1.0) million and $0 for the nine months ended September 30, 2016 and 2015, respectively, which was included in “Income (loss) from equity investment” in the condensed consolidated statements of operations and comprehensive loss.

 

Total investment income (loss) in unconsolidated subsidiaries from operations disposed amounted to $0 for the three months ended September 30, 2016 and 2015, respectively, which was included in net loss from operations disposed in the consolidated statements of operations and comprehensive loss. Total investment income (loss) in unconsolidated subsidiaries from operations disposed amounted to $(3.0) million and $0 for the nine months ended September 30, 2016 and 2015, respectively, which was included in net loss from operations disposed in the consolidated statements of operations and comprehensive loss.

 

The Company performed a significance test in accordance with SEC Rule 1-02(w) of Regulation S-X and determined Tianwu qualify as a significant equity investee. The condensed income statement of Tianwu is presented as follows:

 

CONDENSED STATEMENT OF OPERATIONS            
(In thousands)            
    For the three months ended     For the nine months ended  
    September 30, 2016     September 30, 2016  
    (Unaudited)  
REVENUE   $ 960     $ 2,407  
SELLING, GENERAL AND  ADMINISTRATIVE EXPENSES     818       1,813  
FINANCE EXPENSES     2,099       3,695  
TOTAL EXPENSES     2,917       5,508  
OTHER INCOME     53       113  
LOSS BEFORE PROVISION FOR INCOME TAXES     (1,904 )     (2,988 )
PROVISION FOR INCOME TAXES     -       -  
NET LOSS   $ (1,904 )   $ (2,988 )

 

  11  

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(n) Revenue recognition

 

Sales is 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 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.

 

Gross versus Net Revenue Reporting

 

Starting from January 1 st , 2016, in the normal course of the Company’s trading business, the Company orders directly the iron ore, nickel-iron-manganese alloys, and other steel-related products from its suppliers and drop ships the products directly to its customers. In these situations, the Company generally collects the sales proceeds directly from its customers and pays for the inventory purchases to its suppliers separately. The determination of whether revenues should be reported on a gross or net basis is based on the Company’s assessment of whether it is the principal or an agent in the transaction. In determining whether the Company is the principal or an agent, the Company follows the accounting guidance for principal-agent considerations. Because the Company is not the primary obligor is not responsible for (i) fulfilling the steel-related products delivery, (ii) establishing the selling prices for delivery of the steel-related products, (iii) performing all billing and collection activities including retaining credit risk and (iv) baring the back-end risk of inventory loss with respect to any product return from its customer, the Company has concluded that it is the agent in these arrangements, and therefore report revenues and cost of revenues on a net basis.

 

For the three and nine months ended September 30, 2016, the Company reported gross sales of $26.6 million and $121.9 million, of which $7.0 million and $84.1 million were related party sales. The Company had $26.2 million and $120.6 million in purchases, respectively, of which $26.2 million and $78.5 million were related party purchases .Net revenue was $0.35million and $0.37 million for the three and nine months ended September 30, 2016, respectively and net revenue for related parties amounted to $0.08 million and $0.8 million for the three and nine months ended September 2016, respectively. See details of related party sales and purchases in Note 14.

 

(o) Operations held for sale and operations disposed/to be disposed

 

In accordance with ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, a disposal of a component of an entity or a group of components of an entity is required to be reported as discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when the components of an entity meet the criteria in paragraph 205-20-45-1E to be classified as held for sale. When all of the criteria to be classified as held for sale are met, including management, having the authority to approve the action, commits to a plan to sell the entity, the major current assets, other assets, current liabilities, and noncurrent liabilities shall be reported as components of total assets and liabilities separate from those balances of the continuing operations. At the same time, the results of all discontinued operations (which we presented as operations to be disposed and operations disposed), less applicable income taxes (benefit), shall be reported as components of net income (loss) separate from the net income (loss) of continuing operations in accordance with ASC 205-20-45.

 

  12  

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Reconciliation of the Carrying Amounts of Major Classes of Assets and Liabilities of Discontinued Operations Classified as Held for Sale in the Consolidated Balance Sheet which include Maoming Hengda’s operations as of December 31, 2015, Catalon as of September 30, 2106 and December 31, 2015.

 

    September 30,     December 31,  
(In thousands)   2016     2015  
             
Carrying amounts of major classes of assets included as part of discontinued operations:              
                 
CURRENT ASSETS:                
Cash   $          -     $ 38  
Accounts receivable, net     -       342  
Other receivables, net     -       11  
Prepaid taxes     -       1,218  
Total current assets held for sale     -       1,609  
                 
OTHER ASSETS:                
Property and equipment, net     -       16,593  
Long-term deferred expense     -       2  
Intangible assets, net of accumulated amortization     -       2,023  
Total other assets held for sale     -       18,618  
                 
Total assets of the disposal group classified as held for sale   $ -     $ 20,227  
                 
Carrying amounts of major classes of liabilities included as part of discontinued operations:                
CURRENT LIABILITIES:                
Accounts payable   $ -     $ 6,336  
Short term loans - others     -       461  
Other payables and accrued liabilities     -       2,551  
Other payables - related parties     -       21,807  
Total current liabilities held for sale     -       31,155  
                 
Total liabilities of the disposal group classified as held for sale   $ -     $ 31,155  

 

Reconciliation of the Amounts of Major Classes of Income and Losses from Operations to be Disposed Classified as Held for Sale and Disposed in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss which include Catalon and Maoming’soperation for the three and nine months ended September 30, 2016 and 2015 and Longmen Joint Venture’s operation for the three and nine months ended September 30, 2015.

 

Reconciliation of the Amounts of Major Classes of Income and Losses from Operations Disposed Classified as Held for Sale and Disposed in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss which include Catalon and Maoming’s operation for the three and nine months ended September 30, 2016 and 2015 and Longmen Joint Venture’s operation for the three and nine months ended September 30, 2015.

 

    For the three months ended September 30,  
Operations Disposed:   2016     2015  
             
SALES   $ -     $ 340,952  
SALES - RELATED PARTIES     -       187,955  
TOTAL SALES     -       528,907  
COST OF GOODS SOLD     -       373,811  
COST OF GOODS SOLD - RELATED PARTIES     -       202,675  
TOTAL COST OF GOODS SOLD     -       576,486  
GROSS LOSS     -       (47,579 )
                 
SELLING, GENERAL AND  ADMINISTRATIVE EXPENSES     -       (21,306 )
LOSS FROM OPERATIONS     -       (68,885 )
                 
OTHER INCOME (EXPENSE)                
Finance/interest expense     -       (23,746 )
Income from equity investments     -       28  
Foreign currency transaction loss     -       1,122  
Lease income     -       532  
Other non-operating income, net     -       1,198  
Other expense, net     -       (20,866 )
LOSS BEFORE PROVISION FOR INCOME TAXES AND NONCONTROLLING INTEREST     -       (89,751 )
PROVISION FOR INCOME TAXES     -       79  
NET LOSS FROM OPERATIONS DISPOSED     -       (89,830 )
Less: Net loss attributable to noncontrolling interest from operations disposed     -       (34,016 )
NET LOSS FROM OPERATIONS DISPOSED ATTRIBUTABLE TO GENERAL STEEL HOLDINGS, INC.   $ -     $ (55,814 )

 

  13  

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

   

For the nine months ended

September 30,

 
Operations Disposed:   2016     2015  
             
SALES   $ -     $ 725,624  
SALES - RELATED PARTIES     -       131,321  
TOTAL SALES     -       856,945  
COST OF GOODS SOLD     -       806,750  
COST OF GOODS SOLD - RELATED PARTIES     -       146,611  
TOTAL COST OF GOODS SOLD     -       953,361  
GROSS LOSS             (96,416 )
                 
SELLING, GENERAL AND  ADMINISTRATIVE EXPENSES     (949 )     (39,438 )
EXCESS OVERHEAD DURING MAINTENANCE     -       (24,443 )
IMPAIRMENT CHARGE     -       (973,860 )
CHANGE IN FAIR VALUE OF PROFIT SHARING LIABILITY     -       70,423  
(LOSS) INCOME FROM OPERATIONS     (949 )     (1,063,734 )
                 
OTHER INCOME (EXPENSE)                
Interest income     -       5,072  
Finance/interest expense     (414 )     (50,145 )
Loss on disposal of equipment and    intangible assets     -       (28 )
Loss from equity investments     -       (3 )
Foreign currency transaction loss     -       (1,122 )
Lease income     -       1,088  
Other non-operating income, net     (1,206 )     601  
Other income (expense), net     (1,620 )     (44,537 )
LOSS BEFORE PROVISION FOR INCOME TAXES AND NONCONTROLLING INTEREST     (2,569 )     (1,108,271 )
PROVISION FOR INCOME TAXES     -       141  
NET LOSS FROM OPERATIONS DISPOSED     (2,569 )     (1,108,412 )
Less: Net loss attributable to noncontrolling interest from operations disposed     (26 )     (448,232 )
NET LOSS FROM OPERATIONS DISPOSED ATTRIBUTABLE TO GENERAL STEEL HOLDINGS, INC.   $ (2,543 )   $ (660,180 )

 

  14  

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

General Steel (China)

 

On December 30, 2015, the Company entered into an agreement to sell its wholly-owned General Steel (China) and its entire equity interest in all of its subsidiaries for $1 million to Victory Energy Resource Limited, a HK registered company indirectly-owned by Henry Yu, the Company's Chairman. As Victory Energy Resource Limited is a related party under common control with the Company under Mr. Henry Yu, the net consideration has recognized as a contribution to capital as opposed to a gain. As of December 30, 2015, the net deficiency of GS China amounted to $1.0 billion and a net consideration of $1.0 million. Accordingly, the Company recorded the total amount of net consideration of $1.0 billion in additional-paid-in capital. The net deficiency of GS China as of December 30, 2015 is as follows:

 

    December 30,  
(In thousands)   2015  
       
CURRENT ASSETS:        
Cash   $ 122,577  
Restricted cash     12,336  
Notes receivable     9,010  
Loan receivable – related parties     5,769  
Accounts receivable, net     4,966  
Accounts receivable - related parties, net     173,287  
Other receivables, net     118,106  
Other receivables - related parties, net     236,162  
Inventories     72,024  
Advances on inventory purchase, net     39,463  
Advances on inventory purchase - related parties     15,968  
Prepaid expense and other     26  
Prepaid taxes     762  
Short-term investment     2,064  
Total current     812,520  
         
OTHER ASSETS:        
Property and equipment, net     515,169  
Advances on equipment purchase     9,140  
Investment in unconsolidated entities     1,024  
Long-term deferred expense     412  
Intangible assets, net of accumulated amortization     19,048  
Total other assets     544,793  
         
Total assets   $ 1,357,313  
         
CURRENT LIABILITIES:        
Short term notes payable   $ 273,632  
Accounts payable     571,366  
Accounts payable - related parties     465,858  
Short term loans - bank     45,151  
Short term loans - related parties     23,038  
Other payables and accrued liabilities     93,193  
Other payables - related parties     191,276  
Customer deposits     42,515  
Customer deposits - related parties     203,413  
Taxes payable     1,849  
Deferred lease income, current     2,059  
Capital lease obligations, current     11,201  
Total current liabilities     1,924,551  
         
NON-CURRENT LIABILITIES HELD FOR SALE        
Long-term loans     702,261  
Deferred lease income, noncurrent     68,407  
Capital lease obligations, noncurrent     385,576  
Total non-current liabilities held for sale     1,156,244  
         
NON-CONTROLLING INTEREST     (698,311 )
         
Total net deficiency     (1,025,171 )
Net consideration     (1,000 )
Currency translation adjustment     12,822  
Total addition to paid-in capital   $ (1,013,349 )

 

  15  

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Maoming Hengda

 

On March 21, 2016, the Company, along with its 1% minority interest holder, jointly signed an equity transfer agreement (the "Agreement") to sell 100% of the equity interest in Maoming Hengda to Tianwu Tongyong (Tianjin) International Trade Co., Ltd, ("Tianwu Tongyong"), a related party, in which the Company has a 32% equity interest. The agreement was further amended in April 2017 to set the sale price at RMB 155.3 million or approximately $23.9 million. The Company expected to receive   its 99% ownership for total proceeds of RMB 154.0 million (approximately $23.8 million), of which the full amount would be paid within one year after the signing of the Agreement

 

Accordingly, the Company recorded the total amount of net consideration of $45.7 million in additional-paid-in capital. The net deficiency of Maoming Hengda as of March 21, 2016 is as follows:

 

(In thousands)   March 21, 2016  
       
CURRENT ASSETS:        
Cash   $ 2  
Accounts receivable, net     344  
Other receivables, net     15  
Prepaid taxes     -  
Total current     361  
         
OTHER ASSETS:        
Property and equipment, net     16,321  
Long-term deferred expense     2  
Intangible assets, net of accumulated amortization     2,023  
Total other assets     18,346  
         
Total assets   $ 18,707  
         
CURRENT LIABILITIES:        
Accounts payable     6,378  
Short term loans - other     464  
Other payables and accrued liabilities     3,033  
Other payables - related parties     430  
Other payables - intercompany     30,650  
Total current liabilities     40,955  
         
NON-CONTROLLING INTEREST     (16 )
         
Total net deficiency     (22,232 )
Net consideration     (23,507 )
Currency translation adjustment     (81 )
Total addition to paid-in capital   $ (45,658 )

 

  16  

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Catalon:

 

Due to operational issues, Catalon was not able to meet the Minimum Sales Target or Minimum Net Profit applicable as stipulated in the Stock Exchange agreement, therefore Management decided to cancel the shares that were placed in escrow for the selling shareholders. As such the Company deconsolidated Catalon as of March 31, 2016. The net deficiency of Catalon as of March 31, 2016 is as follows:

 

(In thousands)   March 31, 2016  
       
CURRENT ASSETS:        
Cash   $ 24  
Total current     24  
         
CURRENT LIABILITIES:        
Other payables - related parties     2,335  
Total current liabilities     2,335  
         
NON-CONTROLLING INTEREST     (358 )
         
Total net deficiency     (1,953 )
Net consideration     (4,316 )
Gain in disposal of subsidiary   $ (6,269 )

 

(p) Reclassifications

 

Certain prior periods amounts have been reclassified to conform to the current period presentation. These reclassifications have no effect on the accompanying consolidated statements of operations and cash flows.

   

(q) Non-controlling interest

 

Non-controlling interest mainly consists of an individual’s 1% interest in Maoming Hengda prior to March 21, 2016, and two individuals’ 15.5% interest in Catalon prior to March 31, 2016. The non-controlling interests are presented in the consolidated balance sheets, separately from equity attributable to the shareholders of the Company. Non-controlling interests in the results of the Company are presented on the face of the consolidated statement of operations as an allocation of the total income or loss for the year between non-controlling interest holders and the shareholders of the Company.

 

  17  

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(r) 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.

 

(s) 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.

 

As of both September 30, 2016 and December 31, 2015, the Company had 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.

 

(t) 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.

 

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. No significant penalties or interest relating to income taxes have been incurred during the nine months ended September 30, 2016 and 2015. As of September 30, 2016, the Company’s income tax returns filed for December 31, 2015, 2014, 2013, 2012 and 2011 remain subject to examination by the taxing authorities.

 

  18  

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(u) 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.

 

(v) Recently issued accounting pronouncements

 

In January 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information. The update requires equity investments (except those accounted for under the equity method or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. It eliminated the requirement for public entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. For public entities, the ASU is effective for the fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Management is evaluating the effect, if any, on the Company’s consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02 Amendments to the ASC 842 Leases. This update requires lessee to recognize the assets and liability (the lease liability) arising from operating leases on the balance sheet for the lease term. When measuring assets and liabilities arising from a lease, a lessee (and a lessor) should include payments to be made in optional periods only if the lessee is reasonably certain to exercise an option to extend the lease or not to exercise an option to terminate the lease. Within a twelve months or less lease term, a lessee is permitted to make an accounting policy election not to recognize lease assets and liabilities. If a lessee makes this election, it should recognize lease expense on a straight-line basis over the lease term. In transition, this update will be effective for public entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Management is evaluating the effect, if any, on the Company’s consolidated financial statements.

 

In April 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The ASU includes multiple provisions intended to simplify various aspects of the accounting for share-based payments. While aimed at reducing the cost and complexity of the accounting for share-based payments, the amendments are expected to significantly impact net income, EPS, and the statement of cash flows. Implementation and administration may present challenges for companies with significant share-based payment activities. The ASU is effective for public companies in annual periods beginning after December 15, 2016, and interim periods within those years. Management is evaluating the effect, if any, on the Company’s consolidated financial statements.

 

In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. The objective is to clarify the two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance, while retaining the related principles for these areas. The ASU affects the guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for this ASU are the same as the effective date and transition requirements in Topic 606 (and any other Topic amended by ASU 2014-09). ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date of ASU 2014-09 by one year. Management is evaluating the effect, if any, on the Company’s consolidated financial statements.

 

  19  

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

In May 2016, the FASB issued ASU 2016-11, “Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting”, The amendments rescinds SEC paragraphs pursuant to two SEC Staff Announcements at the March 3, 2016 Emerging Issues Task Force (EITF) meeting. Specifically, registrants should not rely on the following SEC Staff Observer comments upon adoption of Topic 606: 1) Revenue and Expense Recognition for Freight Services in Process, which is codified in paragraph 605-20-S99-2; 2) Accounting for Shipping and Handling Fees and Costs, which is codified in paragraph 605-45-S99-1; 3) Accounting for Consideration Given by a Vendor to a Customer (including Reseller of the Vendor's Products), which is codified in paragraph 605-50-S99-1; 4) Accounting for Gas-Balancing Arrangements (i.e., use of the "entitlements method"), which is codified in paragraph 932-10-S99-5, which is effective upon adoption of ASU 2014-09. Management is evaluating the effect, if any, on the Company’s consolidated financial statements.

 

In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. The object is to address certain issues identified by the FASB-IASB Joint Transition Resource Group for Revenue Recognition. The amendments in this Update affect the guidance in Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements for Topic 606 (and any other Topic amended by Update 2014-09). Accounting Standards Update 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date of Update 2014-09 by one year. Management is evaluating the effect, if any, on the Company’s consolidated financial statements.

 

In August 2016, the FASB has issued Accounting Standards Update (ASU) No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments provide guidance on the following eight specific cash flow issues: (1) Debt Prepayment or Debt Extinguishment Costs; (2) Settlement of Zero-Coupon Debt Instruments or Other Debt Instruments with Coupon Interest Rates That Are Insignificant in Relation to the Effective Interest Rate of the Borrowing; (3) Contingent Consideration Payments Made after a Business Combination; (4)Proceeds from the Settlement of Insurance Claims; (5) Proceeds from the Settlement of Corporate-Owned Life Insurance Policies, including Bank-Owned; (6) Life Insurance Policies; (7) Distributions Received from Equity Method Investees; (8) Beneficial Interests in Securitization Transactions; and Separately Identifiable Cash Flows and Application of the Predominance Principle. The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. The amendments should be applied using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. Management is evaluating the effect, if any, on the Company’s consolidated financial statements.

 

In October 2016, the FASB has issued Accounting Standards Update (ASU) No. 2016-17, Consolidation (Topic 810): Interests held through related parties that are under common control. The amendments in this ASU require that the reporting entity, in determining whether it satisfies the second characteristic of a primary beneficiary, to include all of its direct variable interests in a VIE and, on a proportionate basis, its indirect variable interests in a VIE held through related parties, including related parties that are under common control with the reporting entity. The amendments are effective for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. For all other entities, the amendments in this ASU are effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. The adoption of this ASU did not have a material effect on the Company’s consolidated financial statements.

 

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the definition of a business. The amendments in this ASU is to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The amendments are effective for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. For all other entities, the amendments in this ASU are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Management does not believe the adoption of this ASU would have a material effect on the Company’s consolidated financial statements.

 

  20  

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The Company does not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on the consolidated financial position, statements of operations and cash flows.

 

Note 3 – Accounts receivable (including related party), net

 

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

 

    September 30,
2016
    December 31,
2015
 
    (in thousands)     (in thousands)  
Accounts receivable   $ -     $ 342  
Accounts receivable – related party     21,834          
Less: allowance for doubtful accounts     -       -  
Net accounts receivable     21,834       342  
Less: accounts receivables – held for sale     -       (342 )
Net accounts receivables – continuing operations   $ 21,834     $ -  
                 
Movement of allowance for doubtful accounts is as follows:
                 
    September  30,
2016
    December 31,
2015
 
    (in thousands)     (in thousands)  
Beginning balance   $ -     $ 609  
Charge to expense     -       201  
Less: recovery     -          
Deconsolidation     -       (769 )
Exchange rate effect     -       (41 )
Ending balance   $ -     $ -  

 

Note 4– Other receivables (including related parties), net 

 

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

 

    September 30,
2016
    December 31,
2015
 
    (in thousands)     (in thousands)  
Other receivables   $ 170     $ 174  
Other receivables – related party     65,226       -  
Less: allowance for doubtful accounts     (167 )     -  
Net other receivables     65,229       174  
Less: other receivables – held for sale     -       (11 )
Net other receivables – continuing operations   $ 65,229     $ 163  

 

Movement of allowance for doubtful accounts, including related parties, is as follows:

 

    September 30,
2016
    December 31,
2015
 
    (in thousands)     (in thousands)  
Beginning balance   $ -     $ 10,262  
Charge to expense     167       5,007  
Less: recovery     -       (5 )
Less: deconsolidation     -       (15,119 )
Exchange rate effect     -       (145 )
Ending balance     167       -  
Less: balance – held for sale     -       -  
Ending balance – continuing operations   $ 167     $ -  

 

  21  

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 5 – Inventories

 

Inventories consist of the following:

 

    September 30,
2016
    December 31,
2015
 
    (in thousands)     (in thousands)  
Finished goods          -            -  
Less: allowance for inventory valuation     -       -  
Inventories   $ -     $ -  

 

The cost of finished goods includes direct inventory purchase costs and indirect costs. 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 first-in, first-out method, or net realizable value.

 

Movement of allowance for inventory valuation is as follows:

 

    September 30,
2016
    December 31,
2015
 
    (in thousands)     (in thousands)  
Beginning balance   $      -     $ 18,375  
Addition     -       22,192  
Less: write-off     -       (18,115 )
Less: inventory disposed of - Note 2(p)     -       (22,192 )
Exchange rate effect     -       (260 )
Ending balance   $ -     $ -  

 

Note 6– Advances on inventory purchases

 

Advances on inventory purchases, including related party, net of allowance for doubtful accounts consists of the following:  

 

    September 30,
2016
    December 31,
2015
 
    (in thousands)     (in thousands)  
Advances on inventory purchases   $      -     $ 439  
Advances on inventory purchases – related party     -       -  
Less: allowance for doubtful accounts     -       (439 )
Net advances on inventory purchases   $ -     $ -  

 

Movement of allowance for doubtful accounts, including related parties, is as follows:

 

    September 30,
2016
    December 31,
2015
 
    (in thousands)     (in thousands)  
Beginning balance   $      -     $ 2,501  
Charge to expense     -       -  
Less recovery     -       (462 )
Less deconsolidation     -       (1,927 )
Exchange rate effect     -       (327 )
Ending balance   $ -     $ 439  

 

  22  

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 7 – Plant and equipment, net

 

Plant and equipment consist of the following:

 

    September 30,
2016
    December 31,
2015
 
    (in thousands)     (in thousands)  
Buildings and improvements   $       -     $ 21,895  
Machinery     -       9,344  
Machinery under capital lease     -       262  
Transportation and other equipment     6       -  
Subtotal     6       31,501  
Less: accumulated depreciation     (5 )     (14,908 )
Plant and equipment, net – held for sale   $ 1     $ 16,593  
Less: plant and equipment, net – held for sale     -       (16,593 )
Net plant and equipment, net – continuing operations   $ 1     $ -  

  

Depreciation expense for the three months ended September 30, 2016 amounted to $0. Depreciation expense from operations disposed for the three months ended September 30, 2015 amounted to $15.2 million. These amounts include depreciation of assets held under capital leases for the three months ended September 30, 2015, which amounted to $7.5 million.

 

Depreciation expense for the nine months ended September 30, 2016 amounted to $0.001 million. Depreciation expense from operations disposed for the nine months ended September 30, 2015 amounted to $70.0 million. These amounts include depreciation of assets held under capital leases for the nine months ended September 30, 2015, which amounted to $23.5 million.

 

Note 8 – Intangible assets, net – held for sale

 

Intangible assets consist of the following:

 

    September 30,
2016
    December 31,
2015
 
    (in thousands)     (in thousands)  
Land use rights   $      -     $ 2,558  
Mining right     -       -  
Software     -       10  
Subtotal     -       2,568  
Less:                
Accumulated amortization – land use rights     -       (535 )
Accumulated amortization – mining right     -       -  
Accumulated amortization – software     -       (10 )
Subtotal     -       (545 )
Intangible assets, net – held for sale   $ -     $ 2,023  

 

The gross amount of the intangible assets amounted to $0 and $2.6 million as of September 30, 2016 and December 31, 2015, respectively.

 

Total amortization expense from operations disposed for the three months ended September 30, 2016 and 2015 amounted to $0 million and $0.2 million, respectively.

 

Total amortization expense from operations disposed for the nine months ended September 30, 2016 and 2015 amounted to $0 and $0.6 million, respectively.

 

Total depletion expense from operations disposed for the three months ended September 30, 2016 and 2015 amounted to $0 million and $0.04 million, respectively.

 

  23  

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Total depletion expense from operations disposed for the nine months ended September 30, 2016 and 2015 amounted to $0 million and $0.1 million, respectively.

 

Note 9 – Debt

 

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 is 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:

 

Short-term Loan - other

 

    September 30,
2016
   

December 31,
2015

 
    (in thousands)     (in thousands)  
Maoming Hengda: Loans from one unrelated party and one related party, due on demand, non-interest bearing.   $ -     $ 461  
General Steel Investment Co., Ltd.: Loan from one unrelatedparty, due to demand, the interest rate was 5% per annum as of September 30, 2016.     -       3,600  
Total short-term loans – others     -       4,061  
Less: short-term loans – others – held for sale     -       (461 )
Short-term loans – others – continuing operations   $ -     $ 3,600  

  

All short term loans from unrelated companies are payable on demand and unsecured.

 

As part of its working capital management until the disposition of Longmen Joint Venture on December 30, 2015, Longmen Joint Venture entered into a number of sale and purchase back contracts ("contracts") with third party companies, Longmen Joint Venture entered into a number of sale and purchase back contracts ("contracts") with third party companies and Yuxin and Yuteng. According to the contracts, Longmen Joint Venture would sell rebar to the third party companies at a certain price, and within the same month, Yuxin and Yuteng would purchase back the rebar from the third party companies at a price of 4.6% to 12.0% higher than the original selling price from Longmen Joint Venture. Based on the contract terms, Longmen Joint Venture would be paid in advance for the rebar sold to the third party companies and Yuxin and Yuteng would be given a credit for a period of several months to one year from the third party companies. There was no physical movement of the inventory during the sale and purchase back arrangement. The margin of 4.6% to 12.0% was determined by reference to the bank loan interest rates at the time when the contracts were entered into, plus an estimated premium based on the financing sale amount, which represented 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 were eliminated and the incremental amounts paid by Yuxin and Yuteng to purchase back the goods were treated as financing costs included in the unaudited condensed consolidated financial statements.

 

Longmen Joint Venture’s total financing sales for the three months ended September 30, 2016 and 2015 amounted to $0 million and $105.8 million, respectively, which were eliminated in the Company’s consolidated financial statements. The financial cost related to financing sales for the three months ended September 30, 2016 and 2015 amounted to $0 million and $0.2 million, respectively, and classified in net loss from operation disposed included in the unaudited condensed consolidated statements of operations.

 

Longmen Joint Venture’s total financing sales for the nine months ended September 30, 2016 and 2015 amounted to $0 million and $331.6 million, respectively, which were eliminated in the Company’s consolidated financial statements. The financial cost related to financing sales for the nine months ended September 30, 2016 and 2015 amounted to $0 million and $1.5 million, respectively, and classified in net loss from operation disposed in the consolidated statements of operations.

 

Total interest expense, net of capitalized interest, from operations disposed amounted to $0 million and $14.0 million for the three months ended September 30, 2016 and 2015.

 

  24  

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Total interest expense, net of capitalized interest, from operations disposed amounted to $0 million and $36.0 million for the nine months ended September 30, 2016 and 2015.

    

Note 10 - Supplemental disclosure of cash flow information

 

Interest paid, net of capitalized interest, amounted to $0 and $7.3 million for the nine months ended September 30, 2016 and 2015, respectively.

 

Income tax paid amounted to $0 and $0.2 million for the nine months ended September 30, 2016 and 2015, respectively.

 

During the nine months ended September 30, 2016, the Company increased additional paid-in capital of $45.6 million as a result of the gain on sale of subsidiary to a related party. As of September 30, 2016, the unpaid receivable resulted from this transaction amounted to $23.1 million.

 

During the nine months ended September 30, 2016, the Company incurred $0.1 million share-based compensation expense to prepay for future services.

 

During the nine months ended September 30, 2016, the Company incurred $0.4 million share-based compensation expense to pay off its accrued liabilities.

 

The Company offset $10.6 million of other receivable – related parties with other payable – related parties for the nine months ended September 30, 2016.

 

During the nine months ended September 30, 2016, the Company incurred $0.04 million share-based compensation expense for consulting services.

 

On August 10, 2016, the Company has signed two offset agreements with Tianwu Tongyuan and two of its debtors, GS China and Qiu Steel, to offset its payables of RMB 262.3 million (approximately $40.4 million) to its debtors with Tianwu Tongyong.

 

During the nine months ended September 30, 2015, the Company converted $0.3 million of equipment into inventory production.

 

During the nine months ended September 30, 2015, the Company used $1.1 million of inventory in plant and equipment construction.

 

During the nine months ended September 30, 2015, the Company incurred $5.5 million of accounts payable to be paid for the purchase of equipment and construction in progress.

 

The Company had $0.6 million notes receivable from financing sales loans to be converted to cash as of September 30, 2015.

 

The Company transferred $7.3 million purchase deposits - related parties from loan receivables – related parties as of September 30, 2015.

 

The Company offset $92.9 million of customer deposits – related parties with loan receivables – related parties for the six

months ended September 30, 2015.

 

  25  

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 11 - Capital lease obligations – operations disposed

 

Iron and steel production facilities

 

On April 29, 2011, Longmen Joint Venture entered into a Unified Management Agreement with Shaanxi Steel and Shaanxi Coal under which Longmen Joint Venture used 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 exceeded 75% of the assets’ useful lives, this arrangement was accounted for as a capital lease. The ongoing lease payments were comprised of two elements: (1) a monthly payment based on Shaanxi Steel’s cost to construct the assets of $2.3 million (RMB 14.6 million) 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 payment from Longmen Joint Venture until February 2017. For purposes of determining the value of the leased asset and obligation at the inception of the lease, the lease liability was then reduced by the value of the profit sharing component, which was recognized as a derivative liability, which was carried at fair value. See Note 12 – “Profit sharing liability – operations disposed”.

 

Energy-saving equipment

 

During 2013 and 2014, 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 used the energy-saving equipment for which the vendors were 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 varied between four to six years, began 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 were accounted for as capital leases.

 

The minimum lease payments were based on the energy cost saved during the lease periods, which was determined by the estimated annual equipment operating hours per the lease agreements. If the actual annual equipment operating hours were less than the estimated amount, the lease periods might be extended, subject to further negotiation and agreement between Longmen Joint Venture and the vendors. If the actual annual equipment operating hours exceeded the estimated amount, Longmen Joint Venture was obligated to make additional lease payments based on the additional energy cost saved during the lease period and would recognize the additional lease payments as contingent rent expense. $23.0 million (RMB $146.5) energy-saving equipment under these lease agreements had been capitalized through the date of the Company’s disposal of Longmen Joint Venture and no contingent rent expense had been incurred.

 

Interest expense for the three months ended September 30, 2016 and 2015 on the capital lease obligations from operations disposed was $0 million and $5.0 million, respectively.

 

Interest expense for the nine months ended September 30, 2016 and 2015 on the capital lease obligations from operations disposed was $0 million and $15.3 million, respectively.

 

Note 12– Profit sharing liability – operations disposed

 

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 was accounted for separately from the fixed portion of the capital lease obligation (see Note 11 - “Capital lease obligation – operations disposed”) and was accounted for as a derivative instrument in accordance with ASC 815-10-15-83. The estimated fair value of the profit sharing liability was 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”. As of December 30, 2015, date of disposal of GS China, the profit sharing liability was reduced to $0. See Note 2(g) – “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 through ultimate disposition in December 30, 2015.

 

Note 13 – 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 months and the nine months ended September 30, 2016 and 2015 are as follows: 

 

(In thousands)   The three months ended
September 30, 2016
    The three months ended
September 30, 2015
 
Current   $ 103     $ -  
Total provision for income taxes   $ 103     $ -  
                 
(In thousands)   The nine months ended
September 30, 2016
    The nine months ended
September 30, 2015
 
Current   $ 297     $ -  
Total provision for income taxes   $ 297     $ -  

 

  26  

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

  

Under the Income Tax Laws of the PRC, Tianjin Shuangsi and Maoming Hengda (located in Guangdong province) are subject to income tax at a rate of 25%.

 

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. The Company’s losses carried forward from operations disposed of $930.6 million has begun to expire in 2016. However, the balance was disposed after the disposed operations in Longman Joint Venture on December 30, 2015 and after the disposed operations in Maoming Hengda on March 21, 2016. 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 100% valuation allowance for the deferred tax assets. The valuation allowance for operations held for sale as of September 30, 2016 and December 31, 2015 was $0 million and $4.1 million, respectively.

 

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 nine months ended September 30, 2016 in the amount of $10.3 million. The net operating loss carry forwards for United States income taxes amounted to $10.3million, 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 September 30, 2016 was $3.5 million. The net change in the valuation allowance for the nine months ended September 30, 2016 was $0.8 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 September 30, 2016. 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.

 

  27  

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 14 – Related party transactions and balances

 

Related party transactions

 

a. The following chart summarized revenue to related parties for the three months and nine months ended September 30, 2016 and 2015.

 

Name of related parties   Relationship  

For the three
months ended
September 30,
2016

    For the three
months ended
September 30,
2015
 
        (in thousands)     (in thousands)  
Long Steel Group*   Noncontrolling shareholder of Longmen Joint Venture   $ -     $ 19,874  
Sichuan Yutai Trading Co., Ltd   Significant influence by Long Steel Group *     -       1,365  
Tianjin Dazhan Industry Co., Ltd   Partially owned by CEO through indirect shareholding**     -       1,969  
Shaanxi Haiyan Trade Co., Ltd   Significant influence by Long Steel Group*     -       16,939  
Shaanxi Shenganda Trading Co., Ltd   Partially owned by CEO through indirect shareholding**     -       7,280  
Shaanxi Steel   Majority shareholder of Long Steel Group     -       79,702  
Shaanxi Coal and Chemical Industry Group Co., Ltd.   Shareholder of Shaanxi Steel     -       31,746  
Shaanxi Long Steel Group Baoji Group Co., Ltd   Subsidiary of Long Steel Group     -       29,080  
Wendlar Tianjin Industry Co., Ltd.   Partially owned by CEO through indirect shareholding   $ 76     $ -  
Tianjin Dazhen Trading Co., Ltd   Partially owned by CEO through indirect shareholding     -       -  
Tianjin Hengying Trading Co., Ltd   Partially owned by CEO through indirect shareholding     1       -  
Total         77       187,955  
Less: Sales to related parties from operations disposed         -       (187,955 )
Sales–related parties – continuing operations       $ 77     $ -  

 

*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.

 

**The CEO is referred to herein as the chief executive officer of General Steel Holdings, Inc., Mr. Henry Yu.

 

  28  

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Name of related parties   Relationship   For the nine
months ended
September 30,
2016
    For the nine
months ended
September 30,
2015
 
        (in thousands)     (in thousands)  
Long Steel Group   Noncontrolling shareholder of Longmen Joint Venture   $ -     $ 69,404  
Sichuan Yutai Trading Co., Ltd   Significant influence by Long Steel Group*     -       1,365  
Tianjin Dazhan Trade Co., Ltd   Partially owned by CEO through indirect shareholding     -       1,969  
Shaanxi Haiyan Trade Co., Ltd   Significant influence by Long Steel Group*     -       45,339  
Shaanxi Shenganda Trading Co., Ltd   Significant influence by Long Steel Group     -       24,138  
Shaanxi Steel   Majority shareholder of Long Steel Group     -       80,421  
Shaanxi Coal and Chemical Industry Group Co., Ltd.   Shareholder of Shaanxi Steel     -       67,560  
Tianjin Dazhen Trading Co., Ltd   Partially owned by CEO through indirect shareholding     45       -  
                     
Wendlar Tianjin Industry Co., Ltd.   Partially owned by CEO through indirect shareholding     353       -  
Tianjin Hengying Trading Co., Ltd   Partially owned by CEO through indirect shareholding     328       -  
Shaanxi Long Steel Group Baoji Steel Rolling Co., Ltd   Subsidiary of Long Steel Group             29,080  
Tianjin Daqiuzhuang Steel Plates Co., Ltd   Partially owned by CEO through indirect shareholding     147       -  
Total       $ 873     $ 319,276  
Less: Sales to related parties from operations disposed         -       (319,276 )
Sales–related parties – continuing operations       $ 873     $ -  

 

Sales to related parties in trading transactions from disposed operations, which were netted against the corresponding cost of goods sold, amounted to $0 million and $58.1 million for the three months ended September 30, 2016 and 2015, respectively.

 

Sales to related parties in trading transactions from disposed operations, which were netted against the corresponding cost of goods sold, amounted to $0 million and $253.1 million for the nine months ended September 30, 2016 and 2015, respectively.

 

b. The following charts summarize purchases from related parties for the three months and nine months ended September 30, 2016 and 2015.

 

  29  

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Name of related parties   Relationship   For the three
months ended
September 30,
2016
    For the three
months ended
September 30,
2015
 
        (in thousands)     (in thousands)  
Long Steel Group   Noncontrolling shareholder of Longmen Joint Venture   $ -     $ 111,458  
Hancheng Haiyan Coking Co., Ltd   Noncontrolling shareholder of Long   Steel Group     -       34,220  
Xi’an Pinghe Metallurgical Raw Material Co., Ltd   Noncontrolling shareholder of Long Steel Group     -       4,091  
Tianjin Dazhan Industry Co., Ltd   Partially owned by CEO through indirect shareholding     -          
Shaanxi Huafu New Energy Co., Ltd   Significant influence by the Long Steel Group     -       5,442  
Shaanxi Coal and Chemical Industry Group Co., Ltd   Shareholder of Shaanxi Steel     -       835  
Tianwu General Steel Material Trading Co., Ltd.   Investee of General Steel (China)     -          
Wendlar Investment & Management Group Co., Ltd   Common control under CEO     -          
Tianjin General Quigang Pipe co., Ltd   Partially owned by CEO through indirect shareholding     -       9,716  
Others   Entities either owned or have significant influence by our affiliates or management     -          
Tianjin Daqiuzhuang Steel Plates Co., Ltd   Partially owned by CEO through indirect shareholding             -  
Tianjin Hengying Trading Co., Ltd   Partially owned by CEO through indirect shareholding     5,145 *        
General Steel (China) Co., Ltd   Partially owned by CEO through indirect shareholding     21,018 *     -  
Total       $ 26,163     $ 165,762  
Less Purchases from related parties from operations disposed         -       (156,046 )
Purchases–related parties–continuing operations       $ 26,163     $ 9,716  

 

* For the three months ended September 30, 2016, purchases were netted with revenue

 

  30  

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Name of related parties   Relationship   For the nine
months ended
September 30,
2016
    For the nine
months ended
September 30,
2015
 
        (in thousands)     (in thousands)  
Long Steel Group   Noncontrolling shareholder of Longmen Joint Venture   $ -     $ 294,258  
Hancheng Haiyan Coking Co., Ltd   Noncontrolling shareholder of Long   Steel Group     -       91,286  
Xi’an Pinghe Metallurgical Raw Material Co., Ltd   Noncontrolling shareholder of Long Steel Group     -       5,165  
Shaanxi Steel   Majority shareholder of Long Steel Group             10,479  
Tianjin Dazhan Industry Co., Ltd   Partially owned by CEO through indirect shareholding     11,965 *     6,283  
Shaanxi Huafu New Energy Co., Ltd   Significant influence by the Long Steel Group     -       19,542  
Shaanxi Coal and Chemical Industry Group Co., Ltd   Shareholder of Shaanxi Steel     -       3,486  
Tianwu General Steel Material Trading Co., Ltd.   Investee of General Steel (China)     -          
Wendlar Investment & Management Group Co., Ltd   Common control under CEO     -       14,794  
Tianjin General Quigang Pipe co., Ltd   Partially owned by CEO through indirect shareholding     -       18,201  
Tianwu General Steel Material Trading Co., Ltd   Investee of General Steel (China)             73,646  
Tianjin Daqiuzhuang Steel Plate Co., Ltd   Partially owned by CEO through indirect shareholding     12,202 *        
Tianjin Hengying Trading Co., Ltd   Partially owned by CEO through indirect shareholding     9,726 *     711  
General Steel (China) Co., Ltd   Partially owned by CEO through indirect shareholding     44,603 *        
Total       $ 78,496     $ 537,851  
Less Purchases from related parties from operations disposed         -       (498,573 )
Purchases–related parties–continuing operations       $ 78,496     $ 39,278  

 

* For the nine months ended September 30, 2016, purchases were netted with revenue.

 

  31  

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

c. On December 30, 2015, the Company entered into an agreement to sell its wholly-owned General Steel (China) and its entire equity interest in all of its subsidiaries for $1 million to Victory Energy Resource Limited, a HK registered company indirectly-owned by Henry Yu, the Company's Chairman.

 

d. On March 21, 2016, the Company, along with its 1% minority interest holder, jointly signed an equity transfer agreement (the "Agreement") to sell 100% of the equity interest in Maoming Hengda to Tianwu Tongyong (Tianjin) International Trade Co., Ltd, ("Tianwu Tongyong"), a related party, in which the Company has 32% equity interest for RMB 331.3 million or approximately $51 million.

 

 Related party balances

 

a. Accounts receivable – related party:

 

Name of related parties   Relationship   September 30,
2016
    December 31,
2015
 
        (in thousands)     (in thousands)  
Wendlar Tianjin Industry Co., Ltd   Partially owned by CEO through indirect shareholding   $ 21,834     $ -  
Total       $ 21,834     $ -  

 

b.       Other receivable – related parties:

 

Other receivables - related parties are those nontrade receivables arising from transactions through the sales of its subsidiary, which was bought by its related party or arising from transactions through accumulated intercompany payable upon the disposal of its subsidiary.

 

Name of related parties   Relationship   September 30,
2016
    December 31,
2015
 
        (in thousands)     (in thousands)  
Tianwu General Steel Material Trading Co., Ltd.   Investee of General Steel (China)   $ 23,058 *   $ -  
General Steel (China) Co., Ltd   Partially owned by CEO through indirect shareholding     22,782 *   -  
Maoming Hengda   Wholly owned by Tianwu Tongyong     19,386 *     -  
Other receivable – related party       $ 65,226     $ -  

 

* The Company is expected to collect the balance by July 2017.

 

c.       Accounts payable – related party:

 

Name of related parties   Relationship   September 30,
2016
    December 31,
2015
 
        (in thousands)     (in thousands)  
Tianjin Dazhan Industry Co., Ltd   Partially owned by CEO through indirect shareholding   $ 11,972     $ -  
Total       $ 11,972     $ -  

 

d.       Customer deposit – related parties:

 

Name of related parties   Relationship   September 30,
2016
    December 31,
2015
 
        (in thousands)     (in thousands)  
Tianjin Hengying Trading Co., Ltd   Partially owned by CEO through indirect shareholding   $ 20,945     $ -  
Total       $ 20,945     $ -  

 

  32  

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

e. 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   September 30,
2016
    December 31,
2015
 
        (in thousands)     (in thousands)  
Wendlar Investment & Management Group Co., Ltd   Common control under CEO   $ 34     $ 28  
Yangpu Capital Automobile   Partially owned by CEO through indirect shareholding     82       -  
Maoming Shengze Trading Co., Ltd   Partially owned by CEO through indirect shareholding             483  
Lindenburg Investment & Management        Group Co., Ltd   Minority Shareholder of Catalon Chemical     -       1,405  
Tianjin Qiu Steel Investment Co., Ltd   Partially owned by CEO through indirect shareholding             38,987  
General Steel (China) Co., Ltd   Partially owned by CEO through indirect shareholding     50,387       23,660  
                     
Zuosheng Yu   CEO     521       -  
Total         51,024       64,563  
Less: other payables – related parties - held for sale         -       (21,807 )
Other payables – related parties – continuing operations       $ 51,024     $ 42,756  

 

On August 10, 2016, the Company has signed two offset agreements with Tianwu Tongyuan and two of its debtors, GA China and Qiu Steel, to offset its payables of RMB 262.3 million (approximately $40.4 million) to its debtors with Tianwu Tongyong.

 

e. Deferred lease income – operation disposed

 

For the three months ended September 30, 2016 and 2015, the Company’s operations disposed realized lease income from Shaanxi Steel, a related party, amounting to $0 million and $0.5 million, respectively.

 

For the nine months ended September 30, 2016 and 2015, the Company’s operations disposed realized lease income from Shaanxi Steel, a related party, amounting to $0 million and $1.6 million, respectively.

 

Note 15 – Equity

 

2015 Equity Transactions

 

On April 14, 2015, the Company issued 100,000 shares of common stock for investor relations consulting services under a service agreements dated April 14, 2015. The shares were valued at $4.9 per share, the quoted market price at the time the services were provided.

 

On June 9, 2015, the Company issued 299,600 shares of common stock to senior management personnel. The shares were valued at $3.85 per share, the quoted market price at the time the shares were issued.

 

  33  

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

On July 17, 2015, the Company issued 1,200,000 shares of common stock for business growth and strategic consulting services under two six-month service agreements dated July 1, 2015. The shares were valued at $3.00 per share, the quoted market price at the time the shares were granted.

 

On October 23, 2015, the Company completed its acquisition of an 84.5% equity interest in Catalon Chemical Corp. ("Catalon"), a Delaware corporation headquartered in Virginia that develops and manufactures De-NOx honeycomb catalysts and industrial ceramics.  Catalon's honeycomb technology is an integral part of the selective catalytic reduction ("SCR") process widely used in steel mills, thermal power stations, waste incinerators, stationary diesel motors, industrial plants, and heavy-duty trucks. Pursuant to the terms of the acquisition, the Company issued 13 million shares (2,600,000 "Payment Shares" after applying the retroactive effect of the one-for-five reverse stock split) of its common stock in exchange for a portion of their equity interests in Catalon, equating to 84.5% of all outstanding ownership interests in Catalon. The Payment Shares are being held in escrow, subject to minimum performance targets of Catalon. If those performance targets are not met in their entirety, the Payment Shares will be reduced proportionately to the percentage of the performance targets actually achieved. The Payment Shares are also subject to a lock-up period placing restrictions on the Selling Shareholders' ability to directly or indirectly transfer or otherwise dispose of the Payment Shares for a defined period. As a result of the issuance of the Payment Shares, the Company had 85,456,588 common stock (17,091,857 shares after applying the retroactive effect of the one-for-five reverse stock split) issued and outstanding as of October 23, 2015.

 

On October 20, 2015, the board of directors of the Company approved a 1-for-5 reverse stock split of its common stock, to be effectuated subject to approval by the Secretary of State of Nevada. The reverse stock split was effected on October 29, 2015. All shares and per share amounts used in the Company’s consolidated financial statements and notes thereto have been retroactively restated to reflect the 1-for-5 reverse stock split effected on October 29, 2015.

 

On December 1, 2015, the Company granted 710,500 shares of common stock to senior management personnel. The shares were valued at $1.33 per share, the quoted market price at the time the shares were granted.

 

On December 30, 2015, the Company entering into an agreement to sell its wholly-owned General Steel (China) and its entire equity interest in all of its subsidiaries for $1 million to Victory Energy Resource Limited, a HK registered company indirectly-owned by Henry Yu, the Company's Chairman. As a result of this transaction, the Company met the criteria under ASC 810-10-40-4 to deconsolidate General Steel (China), General Shengyuan, Yangpu Shengtong, Qiu Steel, and Longmen Joint Venture at disposal date. Since the transaction was between related parties under common control, the net gain from the disposal of $1.1 billion was recorded as an addition in paid-in capital.

 

2016 Equity Transactions

 

On December 17 and 18, 2015, the Company entered into service contracts for investor relation consulting services. The shares were valued at $0.90 and $0.91, respectively per share, based on the closing price of the ordinary shares on issuance date.

 

On January 20, 2016, the Company issued 242,466 restricted shares of common stock for financial reporting consulting services. The shares were valued at $1.80 per share, based on the contract if the stock price is less than $1.80, the Company will pay the difference in one year.

 

On March 15, 2016, the Company issued 30,000 restricted shares of common stock for financial advisory and research coverage services. The shares were valued at $1.26 per share, based on the closing price at the date the Company signed the contract.

 

On August 19, 2016, the Company signed a debt cancellation agreement with Oriental Ace Limited, an unrelated third party, in conversion of short-term loan payable of $3.6 million into 3,272,727 shares of Common Stock at $1.10 per share. These stocks are to be issued.

 

On September 30, 2016, the Company completed a private placement through the issuance of 1,500,000 shares of the Company's common stock at $1.00 per shares and raised capital of RMB 10.0 million (approximately $1.5 million). The Company received proceeds in October 2016.

 

Note 16 – Acquisition

 

Catalon Acquisition

 

On October 23, 2015, the Company completed its acquisition of an 84.5% equity interest in Catalon. At the closing of the share exchange on October 23, 2015, the Selling Shareholders received 2.6 million shares (“Payment Shares”) of General Steel Common Stock valued at $3.20 per shares in exchange for a portion of their equity interests in Catalon, equating to 84.5% of all outstanding ownership interests in Catalon.

 

  34  

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The Company’s acquisition of Catalon was accounted for as a business combination in accordance with ASC 805. The Company has allocated the purchase price of Catalon based upon the fair value of the identifiable assets acquired and liabilities assumed on the acquisition date. Except for cash, the Group estimated the fair values of the assets acquired and liabilities assumed at the acquisition date in accordance with the business combination standard issued by FASB with the following valuation methodologies with level 3 inputs: Other current assets, equipment and current liabilities were valued using the cost approach; Intangible asset (Honeycomb Catalyst technology) was valued using the income approach based on generally accepted relief from royalty appraisal methodology. Management of the Company is responsible for determining the fair value of assets acquired, liabilities assumed and intangible assets identified as of the acquisition date and considered a number of factors including valuations from independent appraisers. Acquisition-related costs incurred for the acquisitions are not material and have been expensed as incurred in general and administrative expense.

 

The following table summarizes the fair value of the identifiable assets acquired and liabilities assumed at the acquisition date, which represents the net purchase price allocation at the date of the acquisition of Catalon based on valuation performed by an independent appraisal firm engaged by the Company: 

 

(in thousands)   Fair Value  
Cash   $ 66,980  
Other current assets     3,162,107  
Equipment     11,791  
Intangible asset     9,026,823  
Total asset     12,267,701  
Total liabilities     (2,421,547 )
Net asset acquired   $ 9,846,154  

 

In accordance of SEC Reguation S-X Rule 3-05, Catalon was not a significant subsidiary as of acquisition date therefore no separate audited financial statements are presented.

 

Following the acquisition, the Company became aware of some operational issues related to Catalon. It was determined that such issues impacted the ability to operate the business and obtain any value for the related intangibles might have affected the operations of Catalon, which the Company is expected to cancel the shares that we have issued to the 84.5% original owners of Catalon in accordance with the term of the agreement. Thus, the Company does not expect Catalon to be able to produce any products or generate sales in the future. Accordingly, the Company considered its assets’ carrying amounts may not be recoverable and took an impartment charge of $12.2 million for the year ended December 31, 2015. The Company disposed of Catalon in March 2016, see details in note 2 (o).

 

Tianjin Shuangsi Acquisition

 

On February 16, 2016, the Company received 100% equity interest for a consideration of $0.03 million as Tianjin Shuangsi was established by the chief executive office of the Company’s related entity and his relative. Tianjin Shuangsi primarily trades iron ore, nickel-iron-manganese alloys, and other steel-related products, which the Company would continue on its trading business after the disposition of General Steel (China) and Maoming Hengda.

 

Note 17 – Retirement plan - operations disposed

 

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 highest 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 September 30, 2016 and 2015 amounted to $0 million and $3.3 million, respectively. Total pension expense incurred by the Company for the nine months ended September 30, 2016 and 2015 amounted to $0 and $9.3 million, respectively, which were included in the net loss from operation disposed.

 

  35  

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 18 – 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 Company’s four regional divisions in the PRC: Longmen Joint Venture in Shaanxi province (disposed in December 2015), Maoming Hengda in Guangdong province (disposed in March 2016), and General Steel (China) (disposed in December 2015) & Tianjin Shuangsi in Tianjin City.

 

The Group had two business segments, one consisting of General Shengyuan and one consisting of three different divisions including Longmen Joint Venture, Maoming Hengda and General Steel (China). 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 (loss) from operations is generally the same as those applied at the consolidated financial statement level.

 

The following represents results of division operations for the three months ended September 30, 2016 and 2015:

 

(In thousands)            
Sales:   2016     2015  
Longmen Joint Venture – operation disposed   $ -     $ 528,903  
Maoming Hengda – operation disposed     -       182  
General Steel (China) – operation disposed             1,173  
Tianjin Shuangsi     426       -  
Total sales     426       530,258  
Interdivision sales     -       -  
Consolidated sales     426       530,258  
Less: operations disposed     -       530,258  
Total from continuing operation   $ 426     $ -  

  

Gross profit (loss):   2016     2015  
Longmen Joint Venture – operation disposed   $ -     $ (48,748 )
Maaoming Hengda-operation disposed     -       (4 )
General Steel (China) – operation disposed             1,173  
Tianjin Shuangsi     426          
Total gross loss     426       (47,579 )
Interdivision gross profit     -       -  
Consolidated gross (loss) profit     426       (47,579 )
Less: operations disposed     -       47,579  
Total from continuing operation   $ 426     $ -  

 

Income (loss) from operations:   2016     2015  
Longmen Joint Venture – operation disposed   $ -     $ (71,083 )
Maoming Hengda – operation disposed     -       (253 )
Tianjin Shuangsi     (301 )     -  
General Steel (China) – operation disposed     -       456  
Catalon – operation to be disposed     -       -  
Total income (loss) from operations     (301 )     (70,880 )
Reconciling item (1)     (40 )     (2,663 )
Consolidated income (loss) from operations     (341 )     (73,543 )
Less: operation disposed     -       (70,880 )
Total from continuing operation   $ (341 )   $ (2,663 )

 

  36  

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Net income (loss) attributable to General Steel Holdings, Inc.:   2016     2015  
Longmen Joint Venture – operation disposed   $ -     $ (56,738 )
Maoming Hengda – operation disposed     -       (292 )
Tianjin Shuangsi     (301 )     -  
General Steel (China) – operation disposed     -       (779 )
Total net loss attributable to General Steel Holdings, Inc.     (301 )     (57,809 )
Reconciling item (1)     2,385       2,664
Consolidated net loss attributable to General Steel Holdings, Inc.     2,084       (55,145 )
Less: operations disposed     -       (57,809 )
Total from continuing operation   $ 2,084     $ 2,664

 

Depreciation, amortization and depletion:   2016     2015  
Longmen Joint Venture – operation disposed   $ -     $ 14,465  
Maoming Hengda – operation disposed     -       310  
General Steel (China) – operation disposed     -       596  
Consolidated depreciation, amortization and depletion     -       15,371  
Less: operations disposed     -       15,371  
Total from continuing operation   $ -       -  

 

Finance/interest expenses:   2016     2015  
Longmen Joint Venture – operation disposed   $ -     $ 21,282  
General Steel (China)– operation disposed     -       752  
Reconciling item (1)     -       1  
Consolidated interest expenses     -       22,035  
Less: operations to be disposed     -       -
Less: operations disposed     -       22,034  
Total from continuing operation   $ -     $ 1  

 

Capital expenditures:   2016     2015  
Longmen Joint Venture – operation disposed   $ -     $ 45,737  
Maoming Hengda – operation disposed     -          
General Steel (China) – operation disposed     -          
Consolidated capital expenditures     -       45,737  
Less: operations disposed     -       45,737  
Total from continuing operation   $ -     $ -  

 

The following represents results of division operations for the nine months ended September 30, 2016 and 2015:

 

(In thousands)            
Sales:   2016     2015  
Longmen Joint Venture – operation disposed   $ -     $ 1,385,661  
Maoming Hengda – operation disposed     -       191  
General Steel (China) – operation disposed             1,175  
Tianjin Shuangsi     1,245       -  
Catalon – operation to be disposed     -       -  
Consolidated sales     1,245       1,387,027  
Less: operations disposed     -       1,387,027  
Total from continuing operation   $ 1,245     $ -  

  

  37  

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Gross profit (loss):   2016     2015  
Longmen Joint Venture – operation disposed   $ -     $ (145,117 )
Maaoming Hengda-operation disposed     -       (53 )
General Steel (China) – Operation disposed             1,175  
Tianjin Shuangsi     1,245       -  
Consolidated gross (loss) profit     1,245       (143,995 )
Less: operations disposed     -       (143,995 )
Total from continuing operation   $ 1,245     $ -  

 

Income (loss) from operations:   2016     2015  
Longmen Joint Venture – operation disposed   $ -     $ (1,130,403 )
Maoming Hengda – operation disposed     (2,569 )     (1,084 )
Tianjin Shuangsi     -       -  
General Steel (China) – operation disposed     -       (1,125 )
Catalon – operation to be disposed     (65 )     -  
Total loss from operations     (2,634 )     (1,132,612 )
Reconciling item (1)     4,640       4,664
Consolidated (loss) income from operations     2,006       (1,127,948 )
Less: operation disposed     (2,569 )     (1,132,612 )
Total from continuing operation   $ (563 )   $ 4,664

 

Net income (loss) attributable to General Steel Holdings, Inc.:   2016     2015  
Longmen Joint Venture – operation disposed   $ -     $ (712,262 )
Maoming Hengda – operation disposed     (2,569 )     (1,213 )
Tianjin Shuangsi     -       -  
General Steel (China) – operation disposed     -       (2,512 )
Catalon – operation to be disposed     (65 )     -  
Total net loss attributable to General Steel Holdings, Inc.     2,634       (715,987 )
Reconciling item (1)     12,110       4,667
Consolidated net loss attributable to General Steel Holdings, Inc.     9,476       (711,320 )
Less: operations disposed     (2,569 )     (715,987 )
Total from continuing operation   $ 6,907     $ 4,667

 

Depreciation, amortization and depletion:   2016     2015  
Longmen Joint Venture – operation disposed   $ -     $ 69,109  
Maoming Hengda – operation disposed     -       924  
Tianjin Shuangsi     1       -  
General Steel (China) – operation disposed     -       1,939  
Consolidated depreciation, amortization and depletion     1       71,972  
Less: operations disposed     -       71,972  
Total from continuing operation   $ 1       -  

 

Finance/interest expenses:   2016     2015  
Longmen Joint Venture – operation disposed   $ -     $ 69,086  
General Steel (China)– operation disposed     -       3,091  
Reconciling item (1)     1       3  
Consolidated interest expenses     1       72,180  
Less: operations disposed     -       72,177  
Total from continuing operation   $ 1     $ 3  

 

  38  

 

 

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Capital expenditures:   2016     2015  
Longmen Joint Venture – operation disposed   $ -     $ 85,911  
Maoming Hengda – operation disposed     -          
Tianjin Shuangsi     1          
General Steel (China) – operation disposed     -          
Consolidated capital expenditures     1       85,911  
Less: operations disposed     -       85,911  
Total from continuing operation   $ 1     $ -  
                 
Total Assets as of:   September 30,
2016
    December 31,
2015
 
Maoming Hengda – operation disposed   $ -     $ 20,202  
Catalon – operation to be disposed     -       24  
Tianjin Shuangsi     100,610       -  
Reconciling item (2)     8       15,535  
Total assets     100,618       35,761  
Total assets held for sale     -       (20,227 )
Total assets from continuing operations   $ 100,618     $ 15,534  

 

(1) Reconciling item represents income or expenses of the Company, arising from General Steel Investment Co., Ltd, Yangpu Shengtong Investment Co., Ltd, Qiu Steel and Tongyong Shengyuan for the three and nine ended September 30, 2016 and 2015, which are non-operating entities.

 

(2) Reconciling item represents assets held at General Steel Holdings, Inc., General Steel Investment Co., Ltd, Yangpu Shengtong Investment Co., Ltd, Qiu Steel and Tongyong as of September 30, 2016 and December 31, 2015, which are non-operating entities.

 

Note 19 – Subsequent event

 

The Company extended the due date of its other payable to related parties till December, 2020. These agreements were executed in July 2017.

 

On March 21, 2016, the Company, along with its 1% minority interest holder, have jointly signed an equity transfer agreement (the "Agreement") to sell 100% of the equity interest in Maoming Hengda to Tianwu Tongyong (Tianjin) International Trade Co., Ltd, ("Tianwu Tongyong"), a related party, in which the Company has a 32% equity interest. The agreement was further amended in April 2017 to set the sale price at RMB 155.3 million or approximately $23.9 million. The Company expected to receive its 99% ownership for the total proceeds of RMB 154.0 million (approximately $23.8 million), of which the full amount would be paid within one year after the signing of the Agreement.

 

The Company amended the article of incorporation on October 14, 2016 to increase the authorized shares of Common Stock from 40,000,000 shares to 200,000,000 shares with the same par value of $0.001 per share.

 

In March 2017, the board approved the issuance of 200,000 restricted shares to a consultant pursuant to consulting services performed in 2016.

 

On August 19, 2016, the Company signed a debt cancellation agreement with GS China, a related party, in conversion of the other payables – related party of approximately $21.6 million into 100,000 shares of Common Stock at $1.10 per share and 19,565,758 shares of Series B Preferred Stock at $1.10 per share, which Series B Stock. This agreement was subsequently cancelled and the board approved the cancellation in September 2017.

 

  39  

 

   

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, 2015 filed with the SEC on August 30, 2016.

 

OVERVIEW

 

On November 4, 2015, our Board of Directors (the "Board"), including the audit committee, committed to a plan and authorized our management to pursue the potential sale of all our ownership interest in Maoming Hengda and Longmen Joint Venture in order to unlock the hidden value in Maoming Hengda's land assets, as well as divest from and restructure our steel business. On December 30, 2015, we sold our equity interest in General Steel (China) Co., Ltd and Longmen Joint Venture. On March 21, 2016, we sold our equity interest in Maoming Hengda and completed the divestiture of our steel business as planned. As a result, General Steel (China) Co., Ltd. which included Longmen Joint Venture and subsidiaries’ financial information was presented as operation disposed and also Maoming Hengda’s financial information was presented as operations disposed for the nine months ended September 30, 2016 and 2015 in the consolidated financial statements.

 

Our remaining business is primarily comprised of Tianjin Shuangsi Trading Co. Ltd, (“Tianjin Shuangsi”) a trading company in which we received 100% equity interest on February 16, 2016. Tianjin Shuangsi trades iron ore, nickel-iron-manganese alloys, and other steel-related products.

 

Our growth strategy is a combination of optimizing operating efficiencies in our steel-related trading business and expanding into other high-growth and high-margin non-steel industries. We aim to drive profitability through improved operational efficiencies and optimization of our cost structure and continual cooperation and partnerships with leading state-owned enterprises (SOEs).We also intend to expand into other high-growth and high-margin non-steel industries.

 

RESULTS OF OPERATIONS

 

Since we completed the divestiture of our steel manufacturing business as planned through the December 30, 2015 and the March 21, 2016 sale and disposition of Longmen Joint Venture and Maoming Hengda, respectively, the Company’s remaining business is primarily comprised of Tianjin Shuangsi, a trading company in which the Company received 100% equity interest on February 16, 2016 for a consideration of $0.03 million as Tianjin Shuangsi was established by the chief executive officer of the Company’s related entity and his relative. Tianjin Shuangsi primarily trades iron ore, nickel-iron-manganese alloys, and other steel-related products.

 

  40  

 

 

Statements of Operations for the three months ended September 30, 2016 and 2015:

 

(In thousands except share data)   2016     2015     Change     Percentage
Change
 
                         
Revenue     349       -       349       100.0 %
Revenue – Related Parties     77       -     $ 77       100.0 %
Total Revenue     426       -     $ 426       100.0 %
Selling, General and Administrative Expenses     (85 )     (2,663 )   $ (2,578 )     (96.8 )%
Income (Loss) from Operations     341       (2,663 )   $ 3,004       (112.8 )%
                                 
Other (Expense) Income, net     1,846       (1 )   $ 1,847       (184700.0 )%
Income (Loss) Before Provision for Income Taxes and Noncontrolling Interest     2,187       (2,664 )   $ 4,851       (182.1 )%
Provision for Income Taxes     103       -     $ 103       100.0 %
Income (Loss) from Continuing Operations     2,084       (2,664 )   $ 4,748       (178.2 )%
Net Loss from Operations Disposed, Net of Income Taxes     -       (91,833 )   $ 91,833       (100.0 )%
Net Income (Loss)     2,084       (94,497 )   $ 96,581       (102.2 )%
Less: Net Loss Attributable to Noncontrolling Interest from Operations Disposed     -       (34,016 )   $ 34,016       (100.0 )%
Net Income (Loss) Attributable to General Steel Holdings, Inc.   $ 2,084     $ (60,481 )   $ 62,565       (103.4 )%
Net Income (Loss)   $ 2,084     $ (94,497 )   $ 96,581       (102.2 )%
Foreign Currency Translation Adjustments     (48 )     65,647     $ (65,695 )     (100.1 )%
Comprehensive Income (Loss)     2,036       (28,850 )   $ 30,886       (107.1 )%
Less Comprehensive Loss Attributable to noncontrolling interest     -       (11,310 )   $ 11,310       (100.0 )%
Comprehensive Income (Loss) Attributable to General Steel Holding, Inc.   $ 2,036     $ (17,540 )   $ 19,576       (111.6 )%
                                 
Weighted Average Number of Shares     16,646       13,788       2,858       20.7 %
Loss Per Share – Basic and Diluted                                
Continuing Operations   $ 0.13     $ (0.19 )   $ 0.32       (164.8 )%
Operations disposed     0.00       (4.19 )   $ 4.19       (100.0 )%
Net Income (Loss) per share   $ 0.13     $ (4.39 )   $ 4.51       (102.9 )%

 

Statements of Operations for the nine months ended September 30, 2016 and 2015:

 

(In thousands except share data)   2016     2015     Change     Percentage
Change
 
Revenue     372               372       100.0 %
Revenue – Related Parties     873       -       873       100.0 %
Total Revenue     1,245       -       1,245       100.0 %
Selling, General and Administrative Expenses     (1,808 )     (4,664 )     (2,856 )     (61.2 )%
Loss from Operations     (563 )     (4,664 )     4,101       (87.9 )%
                                 
Other Expense, net     7,767       (3 )     7,770       (259000.0 )%
Loss Before Provision for Income Taxes and Noncontrolling Interest     7,204       (4,667 )     11,871       (254.4 )%
Provision for Income Taxes     297       -       297       100.0 %
Income (Loss) from Continuing Operations     6,907       (4,667 )     11,574       (248.0 )%
Net Loss from Operations Disposed, Net of Income Taxes     (2,569 )     (1,198,242 )     1,195,673       (99.8 )%
Net Income (Loss)     4,338       (1,202,909 )     1,207,247       (100.4 )%
Less: Net Loss Attributable to Noncontrolling Interest from Operations Disposed     (26 )     (482,248 )     482,222       (100.0 )%
Net Income (Loss) Attributable to General Steel Holdings, Inc.   $ 4,364     $ (720,661 )   $ 725,025       (100.6 )%
Net Loss   $ 4,338     $ (1,202,909 )   $ 1,207,247       (100.4 )%
Foreign Currency Translation Adjustments     (332 )     62,520       (62,852 )     (100.5 )%
Comprehensive Income ( Loss)     4,006       (1,140,389 )     1,144,395       (100.4 )%
Less Comprehensive Income (Loss) Attributable to General Steel Holdings, Inc.     34     (460,766 )     460,758       (100.0 )%
Comprehensive Income (Loss) Attributable to General Steel Holding, Inc.   $ 4,040     $ (679,623 )   $ 683,637       (100.6 )%
                                 
Weighted Average Number of Shares     16,439       12,919       3,520       27.2 %
Loss Per Share – Basic and Diluted                                
Continuing Operations   $ 0.42     $ (0.36 )   $ 0.78       (216.7 )%
Operations disposed     (0.15 )     (55.42 )     55.27       (99.7 )%
Net Income (Loss) per share   $ 0.27     $ (55.78 )   $ 56.05       (100.5 )%

 

  41  

 

 

Revenue, Cost of goods sold and gross profit

 

Three months ended September 30, 2016 compared with three months ended September 30, 2015

 

(in thousands)                  
    September 30,
2016
    September 30,
2015
    Change %  
                   
Revenue     349       -       100.0 %
Revenue – Related Parties     77       -       100.0 %
Total Revenue     426       -       100.0 %

 

Revenue, Cost of goods Sold and Gross Profit for the three months ended September 30, 2016 increased by 100% compared to the same period in 2015. Those increases were due to trading iron ore, nickel-iron-manganese alloys, and other steel-related products starting in the first quarter of 2016 from our acquisition of 100% equity in Tianjin Shuangsi. Since we completed the divestiture of our steel manufacturing business as planned through the December 30, 2015 and the March 21, 2016 sale and disposition of Longmen Joint Venture and Maoming Hengda, respectively, the Company’s remaining business is primarily comprised of Tianjin Shuangsi Trading Co. Ltd. (“Tianjin Shuangsi”), a trading company in which the Company received 100% equity interest on February 16, 2016.

 

The Company is not the primary obligor in these trading transactions therefore revenue is reported net of purchases. For the three months ended September 30, 2016, the Company reported gross sales of $26,6 million, all of which $7.0 million was related party sales and the Company had $26.2 million in related party purchases resulting in net revenue of $0.35 million in revenue and $0.08million in related parties revenue.

 

Nine months ended September 30, 2016 compared with nine months ended September 30, 2015

 

(in thousands)                  
    September 30,
2016
    September 30,
2015
    Change %  
                   
Revenue     372       -       100.0 %
Revenue – Related Parties     873       -       100.0 %
Total Revenue     1,245       -       100.0 %

 

Revenue, Cost of goods Sold and Gross Profit for the nine months ended September 30, 2016 increased by 100% compared to the same period in 2015. Those increases were due to trading iron ore, nickel-iron-manganese alloys, and other steel-related products starting in the first quarter of 2016 from our Tianjin Shuangsi.

 

The Company is not the primary obligor in these trading transactions therefore revenue is reported net of purchases. For the nine months ended September 30, 2016, the Company reported gross sales of $121.9 million, of which $84.1 million was related party sales and the Company had $120.6 million in purchases, of which $78.5 million were related party purchases resulting in net revenue of $0.4 million and $0.9 million for related party revenue.

 

General and Administrative Expenses (“G&A”)

 

Three months ended September 30, 2016 compared with three months ended September 30, 2015  

 

(in thousands)                  
    September 30,
2016
    September 30,
2015
    Change %  
                         
General and administrative expenses   $ (85 )   $ (2,663 )     (96.8 )%

 

  42  

 

 

G&A expenses decrease by 96.8% to $85 thousands for the three months ended September 30, 2016, compared to $(2.7) million for the same period in 2015. The decrease was mainly due to the decrease in professional expenses in related to our listing expenses as a public company as well as the decrease in corporate office expenses. Since we completed the divestiture of our steel manufacturing business as planned through the December 30, 2015 and the March 21, 2016 sale and disposition of Longmen Joint Venture and Maoming Hengda, respectively, the Company’s professional expenses in relation to the accounting and auditing of these entities were also be reduced accordingly. In addition, we were downsizing our corporate office in Beijing, as a result, our rental expense, salary expenses, office expense and travel expenses also reduced significantly.

 

Nine months ended September 30, 2016 compared with nine months ended September 30, 2015  

 

(in thousands)                  
    September 30,
2016
    September 30,
2015
    Change %  
                         
General and administrative expenses   $ (1,808 )   $ (4,664 )     (61.2 )%

 

G&A expenses decrease by 61.2 % to $(1.81) million for the nine months ended September 30, 2016, compared to $(4.66) million for the same period in 2015. The decrease was mainly due to the decrease in corporate office expenses. Since we completed the divestiture of our steel manufacturing business as planned through the December 30, 2015 and the March 21, 2016 sale and disposition of Longmen Joint Venture and Maoming Hengda, respectively. We were downsizing our corporate office in Beijing, as a result our rental expense, salary expenses, office expense and travel expenses reduced significantly.

 

Income   (Loss) from Operations

 

Three months ended September 30, 2016 compared with three months ended September 30, 2015

 

(in thousands)            
    2016     2015     Change %  
                         
Income (Loss) from operations   $ 341     $ (2,663 )     (112.8 )%

 

Income from operations for the three months ended September 30, 2016 was $0.341 million as compared to a loss of $(2.66) million for the same period in 2015. The decrease in loss from operations was predominantly due to the decrease in G&A expenses and the increase revenue as discussed above.

 

Nine months ended September 30, 2016 compared with nine months ended September 30, 2015

 

(in thousands)            
    2016     2015     Change %  
                         
Loss from operations   $ (563 )   $ (4,664 )     (87.9 )%

 

Loss from operations for the nine months ended September 30, 2016 was $(0.56) million as compared to a loss of $(4.66) million for the same period in 2015. The decrease in loss from operations was predominantly due to the decrease in G&A expenses and the increase revenue as discussed above.

 

 

Other Income (Expense)

 

Three months ended September 30, 2016 compared with three months ended September 30, 2015  

 

(in thousands)            
    2016     2015     Change %  
                   
Income (Loss) from equity investment   $ (609 )   $ -       (100.0 )%
Finance/interest expense     -       (1 )     (100.0 )%
Gain from debt settlement     2,455               100.0 %
Total other (expense) income, net   $ 1,846     $ (1 )     (184700.0 )%

 

Total other income (expense), net, for the three months ended September 30, 2016 was $1.8 million, a 184700.0% increase compared to $(0.001) million for the same period in 2015. The increase was mainly a result of the $2.5 million gain from $3.6 million debt settlement.

 

  43  

 

 

Nine months ended September 30, 2016 compared with nine months ended September 30, 2015  

 

(in thousands)            
    2016     2015     Change %  
                   
Loss from equity investment   $ (956 )   $ -       (100.0 )%
Finance/interest expense     (1 )     (3 )     (66.7 )%
Gain from debt settlement     2,455       -       100 %
Gain from disposal of Catalon     6,269       -       100 %
Total other income (expense), net   $ 7,767     $ (3 )     (259000.0 )%

 

Total other income (expense), net, for the nine months ended September 30, 2016 was $7.8 million, compared to $0.003 million other expense for the same period in 2015. The change was mainly the $2.5 million gain from $3.6 million debt settlement and disposal of subsidiary.

On March 31, 2016, the Company decided to dispose of Catalon. The net efficiency of Catalon at the time of disposal was $1.93 million, the cancellation of shares that were issued and valued at $4.3 million resulted in a gain of $6.27 million.

 

Income Taxes

 

Three months ended September 30, 2016 compared with three months ended September 30, 2015  

 

(in thousands)            
    2016     2015     Change %  
                         
Provision for income taxes   $ 103     $ -       100 %

 

For the three months ended September 30, 2016, we had a total tax provision from our profitable subsidiary, Tianjin Shuangsi of $0.1 million, compared to $0 tax provision for the same period in 2015. No deferred income tax benefit was recorded for the three months ended September 30, 2015 as the resulting deferral of tax assets being fully reserved because the benefit was not considered to be realizable due to recent historical experience.

 

Nine months ended September 30, 2016 compared with nine months ended September 30, 2015  

 

(in thousands)            
    2016     2015     Change %  
                         
Provision for income taxes   $ 297     $ -       100 %

 

For the nine months ended September 30, 2016, we had a total tax provision from our profitable subsidiary, Tianjin Shuangsi of $0.3 million, compared to $0 tax provision for the same period in 2015. No deferred income tax benefit was recorded for the nine months ended September 30, 2016 as the resulting deferral of tax assets being fully reserved because the benefit was not considered to be realizable due to recent historical experience.

 

Net Loss from Continuing Operations

 

Three months ended September 30, 2016 compared with three months ended September 30, 2015  

 

(in thousands)            
    2016     2015     Change %  
                         
Net income (loss) from continuing operations   $ 2,084     $ (2,664 )     (178.2 )%

 

 Net income from continuing operations for the three months ended September 30, 2016 was $2.084 million as compared to a loss of approximately $(2.664) million for the same period in 2015. The decrease in loss from operations was predominantly due to the decrease of of G&A expenses and the increase revenue as discussed above.

 

Nine months ended September 30, 2016 compared with nine months ended September 30, 2015  

 

(in thousands)            
    2016     2015     Change %  
                         
Net income (loss) from continuing operations   $ 6,907     $ (4,667 )     (248.0 )%

 

  44  

 

 

Net income from continuing operations for the nine months ended September 30, 2016 was $6.9 million as compared to a loss of approximately $(4.7) million for the same period in 2015. The decrease in loss from operations was predominantly due to the decrease of G&A expenses, the increase revenue and the gain from disposal of Catalon as discussed above.

 

Net Loss from Operations Disposed

 

Three months ended September 30, 2016 compared with three months ended September 30, 2015  

 

(in thousands)            
    2016     2015     Change %  
                         
Net loss from operations disposed, net of applicable income taxes   $ -     $ (91,833 )     (100.0 )%

 

Net loss from operations disposed for the three months ended September 30, 2016 was approximately $0 as compared to a loss of approximately $(91.8) million for the same period in 2015. The loss from our Longmen Joint Venture and Maoming Hengda disposed operations was a result of disposing its rebar business. We did not have such loss since Longmen Joint Venture operation was disposed in December 2015 and Maoming Hendga operations in March 2016.

 

Nine months ended September 30, 2016 compared with nine months ended September 30, 2015  

 

(in thousands)            
    2016     2015     Change %  
                         
Net loss from operations disposed, net of applicable income taxes   $ (2,569 )   $ (1,198,242 )     (99.8 )%

 

Net loss from operations disposed for the nine months ended September 30, 2016 was approximately $(2.6) million as compared to a loss of approximately $(1.2) billion for the same period in 2015. The loss from our Longmen Joint Venture and Maoming Hengda disposed operations was a result of disposing its rebar business as opposed to the disposed operations from Maoming Hengda for the current period. Net loss from Maoming Hengda operation was approximately $(2.6) million for the nine months ended September 30, 2016.

 

Net Loss attributable to General Steel Holdings, Inc.

 

Three months ended September 30, 2016 compared with three months ended September 30, 2015 

 

(in thousands)            
    2016     2015     Change %  
                   
Net income (loss)   $ 2,084     $ (94,497 )     (102.2 )%
Less: Net loss attributable to the noncontrolling interest from operations disposed     -       (34,016 )     (100.0 )%
Net loss attributable to General Steel Holdings, Inc.   $ 2,084     $ (60,481 )     (103.4 )%

 

Net income attributable to us for the three months ended September 30, 2016 was $2.084 million as compared to $60.5 million net loss for the same period in 2015. The decrease in net loss attributable to us for the three months ended September 30, 2016 was mainly a result of the loss from our Longmen Joint Venture operations, which we disposed of on December 30, 2015 and a result of the loss from our Maoming Hengda operations, which we disposed of on March 21, 2016.

 

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.

 

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Nine months ended September 30, 2016 compared with nine months ended September 30, 2015 

 

(in thousands)            
    2016     2015     Change %  
                   
Net income (loss)   $ 4,338     $ (1,202,909 )     (100.4 )%
Less: Net loss attributable to the noncontrolling interest from operations to be disposed     -       -       0 %
Less: Net loss attributable to the noncontrolling interest from operations disposed     (26 )     (482,248 )     (100 )%
Net income (loss) attributable to General Steel Holdings, Inc.   $ 4,364     $ (720,661 )     (100.6 )%

 

Net income attributable to us for the nine months ended September 30, 2016 was $4.36 million as compared to $(720.7) million for the same period in 2015. The decrease in net loss attributable to us for the nine months ended September 30, 2015 was mainly a result of the loss from our Longmen Joint Venture operations, which we disposed of on December 30, 2015 and a result of the loss from our Maoming Hengda operations, which we disposed of on March 21, 2016.

 

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 September 30, 2016, our current liabilities exceeded the current assets by approximately $8.28 million. Given our expected expenditures in the foreseeable future together with our cash flow from trading operations, 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

 

Substantially all of 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.

 

Short-term Loans – Other

 

As of September 30, 2016, we had no short-term loans – other.

 

We are able to convert our short-term loans - other upon maturity in August 2016.

 

For more details about our debt, see Note 9 in our Notes to the consolidated financial statements included in this report.

 

For more details about our related party debt financing, see Note 14 in our Notes to the consolidated financial statements included in this report.

 

Liquidity

 

In assessing the Company’s liquidity, the Company monitors and analyzes its cash on-hand and its operating and capital expenditure commitments. The Company’s liquidity needs are to meet its working capital requirements, operating expenses and capital expenditure obligations.

 

The Company engages in trading of steel related products and the Company’s business is not capital intensive. Debt financing in the form of short term loans, loans from related parties, have been utilized to finance the working capital requirements of the Company. The main operating expenses are public Company maintenance costs which our CEO, Mr. Yu Zuo Sheng, fully provides the operating funds.

 

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Due to restructuring, the Company’s working capital deficit has decreased to approximately $8.28 million as of September 30, 2016 from $75.9 million as of December 31, 2015. As of September 30, 2016 current assets are mainly composed of cash, accounts receivables and other receivables. In 2017, the Company extended the payment terms of its payable to related parties until the end of 2020, therefore removing theses related parties payable, working capital is $4.0 million.

 

Management considers the historical experience, the economy, trends in the industry, the expected collectability of the accounts and other receivables and the realization of the prepayments and determined the Company is expected to realize the remaining balances.

 

Based on the above considerations, the Company’s management is of the opinion that it has sufficient funds to meet our working capital requirements and debt obligations as they become due. However, this opinion is based on the market and general economic conditions the Company’s operating results not continuing to deteriorate and the Company shareholders will be able to provide continued liquidity.

 

Cash-flow

 

Operating Activities

 

Net cash provided by and used in operating activities for the nine months ended September 30, 2016 and 2015 was $22.5 million and $124.6 million, respectively. This change was mainly due to the combination of the following factors:

 

· The net income from continuing operations of $6.9 million, net of some non-cash items for the nine months ended September 30, 2016 compared to loss of $4.7 million in the same period in 2015. The non-cash items include the following

 

- Stock issued for service and compensation
- Loss from equity investment
- Gain from disposal of Catalon
- Bad debt expense

 

· The primary reasons for material fluctuations in cash inflows were as follows:

 

- Customer deposit, including related party: the increase in customer deposits mainly due to our customer deposits made prior to September 30, 2016 to pay for the products that we subsequently sold for our new trading business.
- Accounts payable – related party: the increase in accounts payable enables us to have more cash flow to support our trading business

 

· The primary reasons for material fluctuations in cash outflows were as follows:

 

- Accounts receivable, including related party: the increase in accounts receivable was mainly due to sales made prior to September 30, 2016 that have not been collected for our new trading business.

 

Net cash used in operating activities from operations to be disposed/operations disposed: The cash outflow was mainly because we incurred significant losses from our Longmen Joint Venture from January 1, 2015 to September 30, 2015. The cash outflow for the nine months ended September 30, 2016 was mainly due to Hengda Steel which was disposed in March, 2016.

 

Investing activities

 

Net cash used in investing activities was approximately $23.1 million for the nine months ended September 30, 2016 compared to net cash provided by investing activities of $91.7 million for the nine months ended September 30, 2015. During the nine months ended September 30, 2016, we purchased an immaterial amount of equipment and had other receivables from related parties in the amount of approximately $23.1 million. During the same period in 2015, the increase in cash from investing activities was mainly due to the net cash provided by the investing activities from operations to be disposed and from our disposed entity, Longmen Joint Venture, from January 1, 2015 to September 30, 2015 resulting in the decrease of restricted cash. Restricted cash was used as a pledge for our notes payable as required by the bank. During the period, Longmen Joint Venture had less note payable to settle with suppliers.

 

Financing activities

 

Net cash provided by financing activities was $0.6 million for the nine months ended September 30, 2016 compared to $16.3 million for the nine months ended September 30, 2015. During the nine months ended September 30, 2016, we had borrowings from our related parties to pay for certain operating expenses on behalf of the Company. Compared to the same period in 2015, the increase of cash inflow from financing activities was mainly driven by our disposed entity, Longmen Joint Venture, from January 1, 2015 to September 30, 2015 due to repayment of short term notes payable and short term bank loans offset by the borrowing from short term unrelated party loans.

 

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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.

 

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 nine months ended September 30, 2016. 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 nine months ended September 30, 2016 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

 

Management’s discussion and analysis of its financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. Our 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 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 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 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 the accounting principles generally accepted in the United States of America (“U.S. GAAP”).

 

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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 the 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.

 

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.

 

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 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.

 

· Gross versus Net Revenue Reporting

 

In the normal course of our trading business, we order directly the iron ore, nickel-iron-manganese alloys, and other steel-related products from our suppliers and drop ship the products directly to our customers. In these situations, we generally collect the sales proceed directly from our customers and pay for the inventory purchases to our suppliers separately. The determination of whether revenues should be reported on a gross or net basis is based on our assessment of whether we are the principal or an agent in the transaction. In determining whether we are the principal or an agent, we follow the accounting guidance for principal-agent considerations. Because we are the primary obligor and are responsible for (i) fulfilling the steel-related products delivery, (ii) establishing the selling prices for delivery of the steel-related products, (iii) performing all billing and collection activities including retaining credit risk and (iv) baring the back-end risk of inventory loss with respect to any product return from our customer, we have concluded that we are the principal in these arrangements, and therefore report revenues and cost of revenues on a gross basis.

 

Operations held for sale

 

In accordance with ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, a disposal of a component of an entity or a group of components of an entity is required to be reported as discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when the components of an entity meets the criteria in paragraph 205-20-45-1E to be classified as held for sale. When all of the criteria to be classified as held for sale are met, including management, having the authority to approve the action, commits to a plan to sell the entity, the major current assets, other assets, current liabilities, and noncurrent liabilities shall be reported as components of total assets and liabilities separate from those balances of the continuing operations. At the same time, the results of all discontinued operations (which we presented as operations to be disposed and operations disposed), less applicable income taxes (benefit), shall be reported as components of net income (loss) separate from the net income (loss) of continuing operations in accordance with ASC 205-20-45.

 

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.

 

One of our most significant estimates had been the determination of fair value of the profit sharing liability. Since the liability is calculated and largely based on management’s expectations of product demand, pricing, raw materials cost and projected manufacturing efficiencies, it is susceptible to material changes when actual results deviate from those expectations. While we believe our current assumptions up through the disposition date of this liability on December 30, 2015 are reasonable and achievable, there is no assurance that those future expectations will be met or that significant adjustments won’t be required in the future.

 

  49  

 

 

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.

 

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 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 disclosures requirements for fair value measures. The three levels are defined as follow:

 

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

 

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

 

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

 

Income Taxes

 

We did not conduct any business and did not maintain any branch office in the United States during the nine months ended September 30, 2016 and 2015. 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), our disposed entity, is located in Tianjin Costal Economic Development Zone and is subject to an income tax rate of 25%.

 

Longmen Joint Venture, our disposed entity, 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.

 

Maoming Hengda is located in Guangdong Province and Tianjin Shuangsi is subject to an income tax rate of 25%.

 

Recently issued accounting pronouncements

 

In August 2016, the FASB has issued Accounting Standards Update (ASU) No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments provide guidance on the following eight specific cash flow issues: (1) Debt Prepayment or Debt Extinguishment Costs; (2) Settlement of Zero-Coupon Debt Instruments or Other Debt Instruments with Coupon Interest Rates That Are Insignificant in Relation to the Effective Interest Rate of the Borrowing; (3) Contingent Consideration Payments Made after a Business Combination; (4) Proceeds from the Settlement of Insurance Claims; (5) Proceeds from the Settlement of Corporate-Owned Life Insurance Policies, including Bank-Owned; (6) Life Insurance Policies; (7) Distributions Received from Equity Method Investees; (8) Beneficial Interests in Securitization Transactions; and Separately Identifiable Cash Flows and Application of the Predominance Principle. The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The amendments should be applied using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. We are evaluating the effect, if any, on our consolidated financial statements.

 

  50  

 

 

We do not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on the consolidated financial position, statements of operations and cash flows.

   

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 September 30, 2016. 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 September 30, 2016 due to material weaknesses in our internal control over financial reporting previously identified in our December 31, 2015 Form 10K filing and described below:

 

· Ineffective review process in our accounting department relating unusual and complex transactions.
· Ineffective due diligence procedure performed in our acquisition of Catalon.
· Lack of a qualified full-time accountant who possess U.S. GAAP knowledge to oversee the recording of our daily transaction.

 

 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 September 30, 2016.

 

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 and confirmed by our internal control department. In the future, we will continue to improve our ongoing review and supervision of our internal control over financial reporting;

 

  · Hire a full-time individual that possesses the requisite U.S. GAAP experience and education.

 

  · 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.

 

  51  

 

 

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 for the year ended December 31, 2015, which was filed with the SEC on August 30, 2016.

 

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.

 

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.

 

  52  

 

 

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: October 23, 2017 By: /s/ Zuosheng Yu
  Zuosheng Yu
  Chief Executive Officer
   
Date: October 23, 2017 By: /s/ John Chen
  John Chen
  Director and Chief Financial Officer

 

  53  

 

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