UNITED STATES
SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-K
x |
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal
Year Ended December 31, 2014
OR
¨ |
TRANSITION REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number:
001-33717
General Steel
Holdings, Inc.
(Exact Name of
Registrant as Specified in its Charter)
Nevada |
41-2079252 |
(State of Incorporation) |
(I.R.S. Employer |
|
Identification Number) |
Level 21, Tower
B, Jiaming Center
No. 27 Dong San
Huan North Road
Chaoyang District,
Beijing, China,
100020
(Address of Principal
Executive Offices, Including Zip Code)
Registrant’s
telephone number: +86 (10) 5775 7648
Securities registered
pursuant to Section 12(b) of the Act:
Common Stock, $0.001
par value per share |
New York Stock Exchange |
(Title of each class) |
(Name of each exchange on which registered) |
Securities registered pursuant to Section
12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨
No x
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨
No x
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes x
No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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 such shorter period that the registrant was required to submit and post such files). Yes x
No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company”
in Rule 12b-2 of the Exchange Act.
Large
accelerated filer ¨ |
|
Accelerated
filer ¨ |
|
|
|
Non-accelerated
filer ¨
(Do not check if a smaller reporting company) |
|
Smaller reporting
company x |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨
No x
The aggregate market
value of the voting common equity held by non-affiliates as of June 30, 2014, the last business day of the registrant’s
most recently completed second fiscal quarter, based upon the price of $1.00 that was the closing price of the common stock as
reported on the New York Stock Exchange under the symbol “GSI” on such date, was approximately $22.2 million. The
registrant has no non-voting common equity.
As of April 8,
2015, 61,986,282 (excluding 2,472,306 shares of treasury stock) shares of common stock, par value $0.001 per share, were
outstanding.
TABLE OF CONTENTS
Cautionary Statement
This Annual Report on Form 10-K
contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These statements relate to future events or the Company’s future financial
performance. The Company has attempted to identify forward-looking statements by terminology including
“anticipates,” “believes,” “expects,” “can,” “continues,”
“could,” “estimates,” “expects,” “intends,” “may,”
“plans,” “potential,” “predicts,” “should” or “will” or the
negative of these terms or other comparable terminology. Such statements are subject to certain risks and
uncertainties, including the matters set forth in this Annual Report on Form 10-K or other reports or documents the Company
files with the Securities and Exchange Commission from time to time, which could cause actual results or outcomes to differ
materially from those projected. Although the Company believes that the expectations reflected in the forward-looking
statements are reasonable, the Company cannot guarantee future results, levels of activity, performance or achievements.
Undue reliance should not be placed on these forward-looking statements which speak only as of the date hereof. The
Company’s expectations are as of the date this Annual Report on Form 10-K is filed, and the Company does not intend to
update nor is obligated to update any of the forward-looking statements after the date this Annual Report on Form 10-K is
filed to confirm these statements to actual results, unless required by applicable law.
PART I
ITEM 1. BUSINESS.
Overview
We
were incorporated on August 5, 2002, in the State of Nevada. We are headquartered in Beijing, China and operate a portfolio
of Chinese steel companies. We serve various industries and produce a variety of steel products including, but not limited
to: reinforced bars (“rebar”), hot-rolled sheets and high-speed wire. Our current aggregate annual
production capacity of crude steel products under management, consisting mainly of steel rebar, is 7 million metric tons. Our
products have a variety of demand drivers, such as infrastructure construction and and rural income. Domestic economic conditions
are also an overall demand driver for all our products.
In June 2014, the Board
approved our plan to transform from an integrated steel producer into a multi-faceted, synergistic platform that will comprise
not only steel-related businesses but also high-growth, high-margin non-steel businesses. In February 2015, we established a radio-frequency
identification “RFID” joint venture to pursue Internet-of-Things (“IoT”) opportunities.
Our growth strategy
is a combination of optimizing operating efficiencies in our steel 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
aim to expand into other high-growth and high-margin non-steel industries, such as logistics
and Internet-of-Things. |
Unless the context
indicates otherwise, as used herein the terms “General Steel”, the “Company”, “we”, “our”
and “us” all refer to General Steel Holdings, Inc.
Steel Related Subsidiaries and IoT Technology Company
We presently have controlling
interests in three steel-related subsidiaries and one IoT Technology company:
|
· |
General Steel (China) Co., Ltd. (“General
Steel (China)”); |
|
· |
Shaanxi Longmen Iron and Steel Co., Ltd. (“Longmen Joint
Venture”); |
|
· |
Maoming Hengda Steel Co., Ltd. (“Maoming Hengda”);
and |
|
· |
Tianjin General Shengyuan IoT Technology Co., Ltd. (“General
Shengyuan IoT”). |
Our Company,
together with our subsidiaries, majority owned subsidiaries and variable interest entity are referred to as the
“Group.” Longmen Joint Venture, which is currently consolidated into our Company, represents the majority of our
revenue and assets. It was determined to be a variable interest entity in which we are considered the primary beneficiary, as
fully explained below.
In
view of the near-term challenges for the steel sector, we are strategically accelerating our business transformation. Our transformation
strategy is to pursue opportunities that offer compelling benefits to our organization and shareholders, including:
| · | First, strengthen our financials while
providing the financial flexibility to pursue higher return, higher growth opportunities; |
| · | Second, reduce the complexity of our business
structure, which is consistent with our objectives for internal simplification and operating efficiency; |
| · | Third, diversify operating risk in order
to lower our high reliance on steel business, while at the same time leverage on our vast vertical resources in the steel industry;
and |
| · | Fourth, pursue opportunities for additional
value creation. |
We formed a joint venture in February of
2015 with an RFID Expert team to develop and commercialize RFID technologies and data solutions. The formation of this joint venture
represents a unique opportunity to accelerate our expansion into the vibrant logistics and Internet-of-Things sectors.
General Steel (China) Co., Ltd
General Steel (China),
formerly known as “Tianjin Daqiuzhuang Metal Sheet Co., Ltd.” started operations in 1988.
On May 14, 2009, General
Steel (China) changed its official name from “Tianjin Daqiuzhuang Metal Sheet Co., Ltd.” to better reflect its role
as a merger and acquisition platform for steel company investments in China. In some instances, General Steel (China) retains
the use of the name “Daqiuzhuang Metal” for brand recognition purposes within the industry.
On January 1, 2010,
General Steel (China) entered into a lease agreement with Tianjin Shuangjie Liansheng Rolled Steel Co., Ltd. (the “Lessee”),
whereby General Steel (China) leased parts of its facility located at No. 1, Tonga Street, Daqiuzhuang Town, Jinghai County, Tianjin
City to the Lessee for a monthly payment of $0.1 million (RMB 0.5 million). The lease expires in May 2021. Management evaluates
the fair value of its long-term assets on an annual basis, or upon a triggering event which would require an assessment sooner,
and is of the opinion that the fair value of the property, plant and equipment as supported by the operating lease approximates
its current carrying value.
Shaanxi Longmen Iron and Steel Co., Ltd
Effective June
1, 2007, through General Steel (China) and Tianjin Qiu Steel Investment Co., Ltd. (“Qiu Steel”), a 99% owned subsidiary
of General Steel (China), we entered into a Joint Venture Agreement with Shaanxi Longmen Iron & Steel Group Co., Ltd. (“Long
Steel Group”) to form Shaanxi Longmen Iron and Steel Co., Ltd. (“Longmen Joint Venture”). Through General Steel
(China) and Qiu Steel, we invested approximately $39.3 million in cash and collectively held a 60% ownership interest in Longmen
Joint Venture until April 29, 2011, when a 20-year Unified Management Agreement (the “Unified Management Agreement”)
was entered into between our Company, Longmen Joint Venture, Shaanxi Coal and Shaanxi Steel. Longmen Joint Venture was determined
to be a Variable Interest Entity (“VIE”) and we are the primary beneficiary.
Currently, Longmen
Joint Venture has five branch offices, four consolidated subsidiaries and one entity in which it has a noncontrolling interest. It
employs approximately 8,400 full-time workers. In addition to steel production, Longmen Joint Venture operates transportation
services through its Changlong Branch, located in Hancheng city, Shaanxi Province. Changlong Branch owns 177 vehicles and provides
transportation services exclusively to Longmen Joint Venture.
Longmen Joint Venture’s
rebar products are categorized within the steel industry as “longs” (in reference to their shape). Rebar is generally
considered a regional product because its weight and dimension make it ill-suited for cost-effective long-haul ground transportation.
By our estimates, the market demand for rebar in Shaanxi Province is six to eight million metric tons per year. Slightly more
than half of this demand comes from Xi’an, the capital of Shaanxi Province, located 180km from Longmen Joint Venture’s
main steel production site. Currently, we estimate that we have approximately a 72% share of the Xi’an market for rebar.
An established
regional network of one hundred and twelve distributors, together with smaller distributors and eight sales offices sell Longmen
Joint Venture’s products. All products are sold under the registered brand name of “Yulong”, which has strong
regional recognition and awareness. Rebar and billet products carry ISO 9001 and 9002 certification and other Longmen Joint Venture’s
products have won national quality awards. Products produced at the facility have been used in the construction of the Yangtze
River Three Gorges Dam, the Xi’an International Airport, the Xi’an city subway system and the Xi Luo Du and Xiang
Jia Ba hydropower projects.
From June
2009 to March 2011, we worked with Shaanxi Steel to build new iron and steel making facilities, including two 1,280 cubic meter
blast furnaces, two 120 metric ton converters, one 400 square meter sintering machine and some auxiliary systems. As a result,
Longmen Joint Venture incurred certain costs of construction as well as economic losses on suspended production of certain small
furnaces and other equipment to accommodate the construction of the new equipment, on behalf of Shaanxi Steel. See Note 14 - “Deferred
lease income” of the Notes to Consolidated Financial Statements included herein
On April
29, 2011, a 20-year Unified Management Agreement (“the Agreement”) was entered into between the Company, the Company’s
60%-owned subsidiary Shaanxi Longmen Iron and Steel Co., Ltd. (“Longmen Joint Venture”), Shaanxi Coal and Chemical
Industry Group Co., Ltd. (“Shaanxi Coal”) and Shaanxi Iron and Steel Group (“Shaanxi Steel”). Shaanxi
Steel is the controlling shareholder of Shaanxi Longmen Iron and Steel Group Co., Ltd (“Long Steel Group”) which is
the non-controlling interest holder in Longmen Joint Venture, and Shaanxi Coal, a state owned entity, is the parent company of
Shaanxi Steel. Under the terms of the Agreement, all manufacturing machinery and equipment of Longmen Joint Venture and the $605.8
million (or approximately RMB 3.7 billion) of the constructed iron and steel making facilities owned by Shaanxi Steel, which includes
one 400 m 2 sintering machine, two 1,280 m 3 blast furnaces, two 120 ton converters and some auxiliary systems,
are managed collectively as a single virtual asset pool (“Asset Pool”). Longmen Joint Venture manages the Asset Pool
as the principal operating entity and is responsible for the daily operations of the new and existing facilities. The Agreement
leverages each of the parties’ operating strengths, allowing Longmen Joint Venture to derive the greatest benefit from the
cooperation and the newly constructed iron and steel making facilities. At the designed efficiency level, the facilities contribute
three million tons of crude steel production capacity per year.
Longmen
Joint Venture pays Shaanxi Steel for the use of the constructed iron and steel making facilities an amount equaling the depreciation
expense on the equipment constructed by Shaanxi Steel as well as 40% of the pre-tax profit generated by the Asset Pool. The remaining
60% of the pre-tax profit is allocated to Longmen Joint Venture. As a result, the Company’s economic interest in the profit
or loss generated by Longmen Joint Venture decreased from 60% to 36%. However, the overall capacity under the management of Longmen
Joint Venture increased by three million tons, or 75%. The Agreement improved Longmen Joint Venture’s cost structure through
sustainable and steady sourcing of key raw materials and reduced transportation costs. The distribution of profit is subject to
a prospective adjustment after the first two years based on each entity’s actual investment of time and resources into the
Asset Pool. There has been no adjustment to the Agreement from its inception to the present time, nor intention to make future
adjustment by the Company and Shaanxi Steel.
The parties
to the Agreement established the Shaanxi Longmen Iron and Steel Unified Management Supervisory Committee ("Supervisory Committee")
to ensure that the facilities and related resources are operated and managed according to the stipulations set forth in the Agreement.
The Board of Directors of Longmen Joint Venture, of which the Company holds 4 out of 7 seats, requires a simple majority vote
and remains the controlling decision-making body of Longmen Joint Venture and the Asset Pool. See Note 2(c) “Consolidation
of VIE.”
The Agreement
constitutes an arrangement that involves a lease which meets certain of the criteria of a capital lease and therefore the assets
constructed by Shaanxi Steel are accounted for by Longmen Joint Venture as a capital lease. The profit sharing liability portion
of the lease obligation, representing 40% of the pre-tax profit generated by the Asset Pool, is accounted for by Longmen Joint
Venture as a derivative financial instrument at fair value. See Notes 2 “Summary of significant accounting policies”,
15 “Capital lease obligations” and 16 “Profit sharing liability”.
In November
2010, we brought online a 1,200,000 metric ton capacity rebar production line, which was renovated based on an existing 800,000
metric ton capacity rebar production line. In July 2011, we brought online a 1,000,000 metric ton capacity high speed wire production
line. These two newly installed production lines were both relocated from the Maoming Hengda (as defined below) facility and consume
less energy when running at maximum efficiency compared to our previous production line.
Maoming Hengda Steel Co., Ltd
On June 25, 2008, through
our subsidiary Qiu Steel, we paid approximately $7.1 million (RMB 50 million) in cash to purchase 99% of Maoming Hengda Steel
Group, Ltd. (“Maoming Hengda”). The total registered capital of Maoming Hengda is approximately $77.8 million
(RMB 544.6 million).
Maoming
Hengda’s core business was the production of rebar products used in the construction industry. Located on
140 hectares (approximately 346 acres) in Maoming city, Guangdong Province, the Maoming Hengda facility previously had
two production lines capable of annual production capacities of 1.8 million metric tons of 5.5mm to 16mm diameter high-speed
wire and 12mm to 38mm diameter rebar. The products were sold through nine distributors that targeted customers in Guangxi
Province and the western region of Guangdong. To take advantage of a stronger market demand in Shaanxi Province, between 2009
and 2010, we relocated the 1.8 million metric ton capacity rebar production line and high-speed wire production line from
Maoming Hengda's facility to Longmen Joint Venture.
In December 2010, we
brought online a new 400,000 ton capacity rebar production line. On December 15, 2013, Maoming Hengda entered into a lease agreement
with Zhongshan Baohua Rebar Factory, with which Maoming Hengda leased the 400,000 ton capacity rebar production line and various
other buildings and equipment to Zhongshan Baohua Rebar Factory, for an annual payment of $1.2 million (RMB 7.2 million) for eight
years between March 2014 and February 2022.
Tianjin General Shengyuan IoT Technology Co., Ltd
On February 10, 2015,
we reached a definitive agreement (“the Agreement”) to form a joint venture with a team of RFID experts (the “Expert
Team”), to develop and commercialize RFID technology data solutions. The joint venture entity named Tianjin General Shengyuan
IoT Technology Co., Ltd. (“General Shengyuan IoT”) obtained its business license on February 13, 2015.
The Expert Team includes
several forerunners in the data integration and logistics industries, led by Mr. Michael Au, a veteran with over 17 years experience
and more than a dozen patents in RFID technology. In 1997, Mr. Au developed and patented the first non-contact RFID device for
moving vehicles that is still being used today for highway toll collections in the Guangdong Province. In 2005, Mr. Au co-founded
Xindeco IoT (formerly Xinda Huicong Technology Company), the first China-based company specializing in the development and production
of UHF RFID tags. Supporting Mr. Au and acting as the Expert Team’s chief technical adviser will be Dr. Changyu Wu, a member
of the US Institute of Electrical and Electronics Engineers with over 20 years experience in the development of data-integration
devices. Michael Au was appointed as CEO of General Shengyuan IoT.
The joint venture brings
together the strength and expertise of each partner in developing and commercializing RFID technologies and a cloud-based, Internet-of-Things
platform. We own 70% of General Shengyuan IoT by contributing $1.6 million (RMB 10.0 million), while the Expert Team contributes
intellectual property, including proprietary RFID technologies, licensed patents and domain expertise. The venture’s proprietary
RFID tags and related applications can effectively track supplies, inventories, and goods throughout the manufacturing process,
as well as, finished goods and merchandises in transit. Meanwhile, the venture’s cloud-based Internet-of-Things platform
for bulk commodity logistics provides real-time data on supplies, inventory, and goods, thereby greatly enhancing its customers’
administration and planning processes, as well as, asset tracking and supply chain management.
Steel Production Capacity Information Summary by Subsidiaries
Annual Production Capacity (metric tons) | |
General Steel (China) (1) | |
Longmen Joint Venture | |
Maoming Hengda (1) |
| |
| |
| |
|
Crude Steel | |
- | |
7 million | |
- |
Processing | |
400,000 | |
5 million | |
400,000 |
Main Products | |
Hot-rolled sheet | |
Rebar/High-speed wire | |
Rebar |
Main Application | |
Light agricultural vehicles | |
Infrastructure and construction | |
Infrastructure and construction |
| (1) | The production facilities of General Steel (China) and Maoming
Hengda currently are leased to unrelated parties. |
Marketing and Customers
We sell our products
primarily to distributors and related parties, and we typically collect payment from these distributors in advance. Our
marketing efforts are mainly directed toward those customers who have demanding requirements for on-time delivery, timeliness
of customer services, and product quality. We believe that these requirements, as well as product planning, are critical
factors in our ability to serve this segment of the market.
Our revenue is
dependent, in large part, on significant contracts with a limited number of large customers. For the year ended December 31,
2014, approximately 24.7% of our sales were to five customers. We believe that revenue derived from our current
and future large customers will continue to represent a significant portion of our total revenue.
Moreover, our success
will depend in part upon our ability to obtain orders from new customers, as well as the financial condition and success of our
customers and general economic conditions in China.
Demand for our Products
For the years ended
December 31, 2014 and 2013, rebar, our major product, comprised of more than 99% and 99% of our sales, respectively. Overall,
domestic economic growth is an important driver of demand for our major product, especially from construction and infrastructure
projects.
At Longmen Joint
Venture, growth in regional construction and infrastructure projects drives demand for our products. According to the 12th Five
Year National Economic and Social Development Plan (“NESDP”) (2011-2015), development of China’s western region
is one of China’s top five economic priorities. Shaanxi Province, where Longmen Joint Venture is located, has been designated
as a focal point for development in the Western region, and Xi’an, the provincial capital, has been designated as a focal
point for this development in China. Longmen Joint Venture is 180 kilometers from Xi’an and it does not have a major
competitor within a 250 km radius.
The Western region
of China, where our major sales market is located, has experienced a higher rate of growth than other Chinese regions in recent
years. Compared to an increase of 7.4% for the national GDP, a GDP increase of 9.7% was reported by Shaanxi Province in 2014. Additionally, according to Accounting and Corporate Finance Production Statistics in China, Sichuan Province
also reported a healthy GDP increase of 8.5% in 2014. We have a sales office in Chengdu City, Sichuan Province to meet the increasing
demand for the production of steel.
According to the
Shaanxi provincial government, the total fixed asset investment for the Shaanxi Province was approximately $299 billion (RMB 1.84
trillion) for the year ended December 31, 2014, an increase of 17.8% over the same period in 2013.
At the end of June
2009, the State Council Office announced that it approved the Guanzhong-Tianshui Economic Zone development program. This program
covers the development of two western provinces and seven cities from 2009 to 2020.
In addition,
the Guanzhong-Tianshui Economic Zone will concentrate on the development of the Xi’an area. The metropolitan area
construction program focuses on the cities of Xi’an, Xianyang, and their surrounding areas, covering up to 12,000
square kilometers, including the construction of railways, highways, subways, airport expansion and newly developed areas.
Under this program, the Shaanxi provincial government has announced that it will build approximately 4,500 kilometers of
railway with an investment of approximately $40.2 billion (RMB 260 billion) by 2015 and 8,080 kilometers of highway by 2020.
The infrastructure and construction projects provide strong and stable demand for our steel products in this area, in which
we have over 70% of the market share.
In January
2011, the Shaanxi provincial government announced that it would invest approximately $12.2 billion (RMB 80 billion) in the
construction of hydro projects, which is three times the amount invested during the 11th Five Year National Economic and
Social Development Plan. In addition to hydro projects, according to the central government, 16,000 total kilometers of
high speed railway will be built by 2020.
In May 2011, the
central government passed the Cheng-Yu Economic Zone Plan focusing on Chongqing City and Sichuan Province, covering 206,000 square
kilometers, to further accelerate the development of the western region of China. We anticipate that in the near future,
the demand for our products will increase in those areas, and we expect that our expanded production capacity will be able to
successfully meet the increase in demand. Furthermore, we have a sales office located in Chengdu to help facilitate such increased
demand.
In February 2012,
the government approved the Western Development 12th Five Year Plan, which continues the efforts to develop the Western
areas. The Plan is centered on the infrastructure and construction, highlighted by the development of economic zones, construction
of roads/railway and hydro projects, which drive the local demand for steel products.
In February 2014,
National Development and Reform Commission (“NDRC”) announced nine focal points of the western development, which
will speed up the major infrastructure construction in the western areas, including the construction of railway, highway and hydro-projects.
China’s central
government also introduced the One Belt and One Road (“OBAOR”) strategy, with an aim to create new markets for China’s
products by promoting China’s infrastructure investments in less-developed countries. “One Road” refers to the
21st century Maritime Silk Road initiative, which seeks to extend China’s trading and infrastructure investments into Southeast
Asian nations and further afield to south Asia and Africa. “One Belt” refers to the Silk Road Economic Belt, which
extends into central Asian nations.
According to figures
released by China’s National Development and Reform Commission, 33 infrastructure projects kicked off in 2014 in Western
China, worth a total investment of RMB 835.3 billion ($134.7 billion), more than doubled from a total investment of RMB 326.5
billion on 20 projects in 2013.
We anticipate strong
demand for our products driven by these and many other construction and infrastructure projects. We believe there will be sustained
regional demand for several years as both the central and provincial governments continue to drive western region development
efforts.
Supply of Raw Materials
The primary raw materials
we use for steel production are iron ore, coke, hot-rolled steel coil and steel billets. Longmen Joint Venture uses iron
ore and coke as its main raw materials. Maoming Hengda uses steel billets as its main raw material. Iron ore is the main
raw material used to produce hot-rolled steel coil and steel billets. Therefore, the prices of iron ore and coke are the primary
raw material cost drivers for our products.
Iron Ore
Longmen Joint Venture
has 7 million tons of annual crude steel production capacity. At Longmen Joint Venture, approximately 72% of production costs
are associated with raw materials, with iron ore being the largest component.
According to the China
Iron and Steel Association, approximately 60% of the Chinese domestic steel industry’s demand for iron ore must be filled
by imports. At Longmen Joint Venture, we purchase iron ore from four primary sources: Mulonggou mine (owned by Longmen Joint Venture),
Daxigou mine (owned by Long Steel Group, our partner in Longmen Joint Venture), surrounding local mines and mines located abroad.
Coke
Coke, produced from
metallurgical coal (also known as coking coal), is our second most consumed raw material, after iron ore. It requires approximately
550kg to 600kg of coke to make one metric ton of crude steel.
Under the terms of
the Unified Management Agreement, our partner, Shaanxi Coal, has committed to providing coke and coal to us at a cost not higher
than the market price.
Our Longmen Joint Venture
facility is located in the center of China’s coal belt. We source all coke used at Longmen Joint Venture from the town in
which Longmen Joint Venture is located. This ensures a dependable, local supply and minimum transportation costs.
The sources and/or
our top five major suppliers of our raw materials for the year ended December 31, 2014 are as follows:
Name of the Major Suppliers | |
Raw Material Purchased | |
% of Total Raw Material Purchased | | |
Relationship with Company |
Longgang Group Import & Export Co., Ltd. | |
Iron Ore | |
| 9.2 | % | |
Related Party |
Shaanxi Longmen Coal Chemical Industry Co., Ltd. | |
Coke | |
| 6.4 | % | |
Third Party |
Shaanxi Haiyan Coal Chemical Industry Co., Ltd. | |
Coke | |
| 6.2 | % | |
Related Party |
Tianwu General Steel Material Trading Co., Ltd. | |
Iron Ore | |
| 4.2 | % | |
Related Party |
Long Steel Group | |
Iron Ore | |
| 4.0 | % | |
Related Party |
| |
Total | |
| 30.0 | % | |
|
Industry Environment
Despite demand growth
experienced throughout the past years, the overall nationwide steelmaking capacity still exceeds steel demand. There is significant
over-capacity in the Chinese steel sector which is putting pressure on operators’ profitability and has become the most
significant challenge in the steel manufacturing business. Chinese crude steel production reached a record high of 823 million
tons in 2014, an increase of 0.89% over 2013, while the total consumption of crude steel was only 738 million tons in 2014, a
decrease of 3.4% from the same period last year, according to the China Iron and Steel Association.
For steelmakers, operating
performance depends on the volatility of the cost of raw materials. The shortage of these raw materials in the market has allowed
suppliers of iron ore and metallurgical coal to rebuild the pricing mechanisms through the shift from annual to shorter-term price
contracts. This has created numerous challenges for steelmakers as they must now deal with volatility in raw material prices,
as well as maintain margins with fluctuating demand. Over the past few years, we have witnessed perseverance in steel prices that
has given iron ore producers an opportunity to increase the prices in the next contract; however the reverse may not be true as
steel companies cannot always pass on the rise in iron ore prices to end consumers due to the market overcapacity and fragmentation.
China’s steel
industry is highly fragmented, and the Chinese government continues to encourage industry consolidation. The Chinese central government
has had a long-stated goal to consolidate 60% of domestic steel production among the top ten producers by 2015, and expanding
to 70% by 2020. The top ten producers’ output fell to 39% of the national output in 2013 from 49% in 2010, which is still
below the 60% target for 2015 set in the 12th year plan.
Meanwhile,
the Ministry of Industry and Information Technology of the People's Republic of China is targeting to cut up to 80 million
metric tons of capacity by the end of 2018. In April 2012, the central government announced its goal of reducing obsolete
iron and steel capacities by 17.8 million tons in 2012 and successfully reached the goal and eliminated 20.2 million tons of
obsolete iron and steel capacity. In April 2013, the central government published the industry target of eliminating 10.4
million tons of obsolete iron and steel capacities in 2013 and successfully eliminated 16.9 million tons of obsolete iron and
steel capacity. In May 2014, the government reaffirmed its determination of industry consolidation, and announced that it
plans to eliminate 28.7 million tons of obsolete iron and steel capacity in 2014 and successfully eliminated 31.1 million
tons, which was more than the original target amount. Such industry consolidation through the reduction of obsolete iron and
steel capacities are not expected to directly impact our Company because we continue to see a strong demand for our products,
especially in Western China, and believe there are significant growth opportunities in the industry and market we serve.
Despite the government’s
initiatives to encourage industry consolidation and cut over-capacity, it is estimated that new capacity of approximately 20~25
million metric tons was added in 2014. Excess supply, weakening economic growth, and sagging prices have resulted in depressed
margins and operating losses. According to statistics by China Iron and Steel Association, the blended net margin of China steel
enterprises in 2014 was only 0.85%, with approximately 15% of major steel companies monitored by China Iron and Steel Association
still incurring operating losses.
On July 12, 2010,
the Ministry of Industry & Information Technology enacted the Steel Industry Admittance and Operation Qualifications standards.
The new standards specify requirements for all aspects of steel production in China, which include: size of blast furnaces, size
of converters, emission of waste water, dust per ton from steel production, quantity of coal used for each process in
steel production and output capacity. According to the new standards, blast furnaces under 450 cubic meters are targeted
to be eliminated. These standards once again confirmed the central government’s determination to push forward the consolidation
of this fragmented industry.
Since 2013, the government
has exerted a more stringent environment protection policy on the steel industry. In January 2014, the Ministry of Industry and
Information Technology of the People's Republic of China (the "MIIT") announced a List of Enterprises Fulfilling
the Iron and Steel Industry Specification (the "List"). The List includes a highly-selected group of large and
medium steel manufacturers that have met or exceeded more stringent national requirements and standards on product quality, environmental
protection, energy consumption, workmanship and equipment, production scale, as well as work safety and social responsibility.
The MIIT will collaborate with China's other governmental agencies to provide support to the List's members and to speed
up the steel industry's restructuring and consolidation. Steel makers omitted from the List will most likely face higher electricity
costs, more restrictive administrative measures, and adverse effects of forceful regulations intent on reducing the nation's overcapacity.
Longmen Joint Venture, the major facility of General Steel, has been included on the List as one of the key steel enterprises
in China’s Shaanxi Province.
Intellectual Property Rights
“Qiu Steel”
is the registered trademark under which we sell hot-rolled carbon and silicon steel sheets products produced at General Steel
(China). The “Qiu Steel” logo has been registered with the China National Trademark Bureau under No. 586433. “Qiu
Steel” is registered under the GB 912-89 national quality standard and certified under the National Quality Assurance program.
“Yu Long”
is the registered trademark under which we sell rebar and high-speed wire products produced in Longmen Joint Venture. The trademark
is registered under the ISO9001:2000 international quality standard.
“Heng Da”
is the registered trademark under which we sell high-speed wire and rebar products produced at our Maoming facility. The trademark
is registered under the ISO9001:2000 international quality standard.
Employees
As
of December 31, 2014, we had approximately 8,505 full-time employees.
Executive Officers of the Registrant
The following sets forth certain information
as of March 25, 2015 concerning our executive officers.
Name |
|
Age |
|
Title |
Zuosheng Yu |
|
50 |
|
Chairman and Chief Executive Officer |
John Chen |
|
43 |
|
Chief Financial Officer |
Mr. Zuosheng
Yu, age 50, Chairman of the Board of Directors. Mr. Yu joined our Company in October 2004 and became
Chairman of the Board at that time. He also serves as our Chief Executive Officer. Since February 2001, he has been President
and Chairman of the Board of Directors of Beijing Wendlar Investment Management Group, Beijing, China. Mr. Yu graduated in 1985
from Sciences and Engineering Institute, Tianjin, China. In July 1994, he received a Bachelor’s degree from Institute of
Business Management for Officers. Mr. Yu received the title of “Senior Economist” from the Committee of Science and
Technology of Tianjin City in 1994. In July 1997, he received an MBA degree from the Graduate School of Tianjin Party University.
Since April 2003, Mr. Yu has held a position as a member of China’s APEC (Asia Pacific Economic Co-operation) Development
Council.
Mr. John Chen,
age 43, Director. Mr. Chen joined our Company in May 2004 and was elected as a director in March 2005. He also
serves as our Chief Financial Officer. From August 1997 to July 2003, he served as a senior accountant at Moore Stephens, Wurth,
Frazer and Torbet, LLP in Los Angeles, California. Mr. Chen graduated from Norman Bethune University of Medical Science, Changchun
City, Jilin Province, China in September 1992. He received a B.S. degree in accounting from California State Polytechnic University,
Pomona, California, U.S. in July 1997. He currently also serves on the board of directors of China Carbon Graphite
Group, Inc. (OTCBB: CHGI), SGOCO Group, Ltd. (NASDAQ: SGOC), and China HGS Real Estate Inc. (NASDAQ: HGSH).
ITEM 1A. RISK FACTORS.
Our business, financial
condition and results of operations are subject to various risks, including those discussed below, which may affect the value
of our securities. The risks discussed below are those that we believe are currently the most significant, although additional
risks not presently known to us or that we currently deem less significant may also impact our business, financial condition and
results of operations, perhaps materially.
Risks Related to Our Business
We face substantial competition
which, among other things, may lead to price pressure and adversely affect our sales.
We compete with other
market players on the basis of product quality, responsiveness to customer needs and price. There are two types of steel and iron
companies in China: state-owned enterprises (“SOEs”) and privately owned companies.
Criteria important
to our customers when selecting a steel supplier include:
|
• |
Quality; |
|
• |
Price/cost competitiveness; |
|
• |
System and product performance; |
|
• |
Reliability and timeliness of delivery; |
|
• |
New product and technology development capability; |
|
• |
Excellence and flexibility in operations; |
|
• |
Degree of global and local presence; |
|
• |
Effectiveness of customer service; and |
|
• |
Overall management capability. |
We compete with both
SOEs and privately owned steel manufacturers. While we believe that our price and quality are superior to other manufacturers,
many of our competitors are better capitalized, more experienced, and have deeper ties in the Chinese marketplace. We consider
there to be the following major competitors of similar size, production capability and product line in the marketplace competing
against our three operating subsidiaries as indicated:
| • | Competitors of General Steel (China) include: Tianjin
No. 1 Rolling Steel Plant, Tianjin Yinze Metal Sheet Plant and Tangshan Fengrun Metal Sheet Plant; |
| • | Competitors of Longmen Joint Venture include: Shanxi
Haixin Iron and Steel Co., Ltd. and Gansu Jiuquan Iron and Steel Co., Ltd.; |
| • | Competitors of Maoming Hengda include: Guangdong Shao
Guan Iron and Steel Group and Zhuhai Yue Yu Feng Iron and Steel Co., Ltd. |
In addition, with China’s
entry into the World Trade Organization and China’s agreements to lift many of the barriers to foreign competition, we believe
that competition will increase as a whole with the entry of foreign companies into this market. This may limit our opportunities
for growth, lead to price pressure and reduce our profitability. We may not be able to compete favorably and this increased competition
may harm our business, our business prospects and results of operations.
Our inability to fund our capital
expenditure requirements may adversely affect our growth and profitability.
Our continued growth
is dependent upon our ability to raise additional capital from outside sources. Our strategy is to grow through mergers, joint
ventures and acquisitions targeting SOE steel companies and selected entities we believe have outstanding potential. Our growth
strategy will require us to obtain additional financing through capital markets. In the future, we may be unable to obtain the
necessary financing on a timely basis and on favorable terms, if at all, and our failure to do so may weaken our financial position,
reduce our competitiveness, limit our growth and reduce our profitability. Our ability to obtain acceptable financing at any given
time may depend on a number of factors, including:
| • | Our financial condition and results of operations; |
| • | The condition of the PRC economy and the industry sectors
in which we operate; and |
| • | Conditions in relevant financial markets in the United
States, the PRC and elsewhere in the world. |
Future disruptions in world financial
markets and the resulting governmental action of the United States and other countries could have a material adverse impact on
our ability to obtain financing, our results of operations, financial condition and cash flow and could cause the market price
of our common stock to decline.
The credit markets
worldwide and in the United States have experienced significant contraction, de-leveraging and reduced liquidity in the past,
and the United States government and foreign governments have either implemented or are considering a broad variety of governmental
action and/or new regulation of the financial markets to prevent these from occurring again. Securities and futures markets and
the credit markets are subject to comprehensive statutes, regulations and other requirements.
The uncertainty surrounding
the future of the global credit markets has resulted in reduced access to credit worldwide. Major market disruptions, the current
adverse changes in global market conditions, and the regulatory climate in the United States and worldwide may adversely affect
our business or impair our ability to borrow funds as needed. The current market conditions may last longer than we anticipate.
Such economic and governmental factors may have a material adverse effect on our results of operations, financial condition or
cash flows and could cause the price of our common stock to decline significantly.
We have made and may continue to
make acquisitions which could divert management's attention, cause ownership dilution to our stockholders, or be difficult to
integrate, which may adversely affect our financial results.
We have made a number
of acquisitions, and it is our current plan to continue to acquire companies and technologies that we believe are strategic to
our future business. Integrating newly acquired businesses or technologies could put a strain on our resources, could be costly
and time consuming, and might not be successful. Such acquisitions could divert our management's attention from other business
concerns. In addition, we might lose key employees while integrating new organizations. Acquisitions could also result in customer
dissatisfaction, performance problems with an acquired company or technology, potentially dilutive issuances of equity securities
or the incurrence of debt, assumption or incurrence of contingent liabilities, possible impairment charges related to goodwill
or other intangible assets or other unanticipated events or circumstances, any of which could harm our business. We might not
be successful in integrating any acquired businesses, products or technologies, and might not achieve anticipated revenues and
cost benefits.
We may not be able to effectively control and manage
our growth.
If our business and
markets grow and develop, it will be necessary for us to finance and manage such an expansion in an orderly fashion. This growth
will lead to an increase in the responsibilities of existing personnel, the hiring of additional personnel and expansion of our
scope of operations. It is possible that we may not be able to obtain the required financing under terms that are acceptable to
us or hire additional personnel to meet the needs of our expansion.
Our new growth strategy into the Internet-of-Things sector
may not be successful.
In June 2014, the Board approved our plan
to transform from an integrated steel producer into a multi-faceted, synergistic platform that will comprise not only steel-related
businesses but also high-growth, high-margin non-steel businesses. In February 2015, we established a radio-frequency identification
“RFID” joint venture to pursue Internet-of-Things opportunities. Our growth strategy is a combination of optimizing
operating efficiencies in our steel business and expanding into other high-growth and high margin non-steel industries:
There, we expect that
a significant portion of our future revenue will be derived from this RFID joint venture and other Internet-of-Things opportunities,
along with opportunities in other new high margin non-steel industries. The market for these products is characterized by rapidly
changing technology, evolving industry standards and changes in customer needs. If we fail to respond such to changes in technology,
industry standards or customer needs, these opportunities could become less competitive or obsolete. We must continue to make smart
and efficient investments in these areas in order to make them profitable. However, there can be no assurance that such opportunities
and investments will be successful or profitable and could result in additional expenses.
If we are unable to
successfully enter the Internet-of-Things sector or other new high margin non-steel industries, our future results of operations
would be adversely affected. Our pursuit of such new opportunities will require substantial time and expense. We may need to license
new technologies to respond to technological change. These licenses may not be available to us on terms that we can accept or
may materially change the gross profits that we are able to obtain on our products. Further, we may not succeed in adapting our
business model to new technologies and industries as they emerge, which could materially harm our expansion and future growth.
Our business, revenues and profitability
are dependent on a limited number of large customers.
Our revenue is dependent,
in large part, on significant contracts with a limited number of large customers. For the year ended December 31, 2014, approximately
24.7% of our sales were to five customers. We believe that revenue derived from our current and future large customers will continue
to represent a significant portion of our total revenue. Our inability to continue to secure and maintain a sufficient number
of large contracts or the loss of, or significant reduction in purchases by, one or more of our major customers would have the
effect of reducing our revenues and profitability.
Moreover, our success
will depend in part upon our ability to obtain orders from new customers, as well as the financial condition and success of our
customers and general economic conditions in China.
Steel consumption is cyclical and
worldwide overcapacity in the steel industry and the availability of alternative products have resulted in intense competition,
which may have an adverse effect on profitability and cash flow.
Steel consumption is
highly cyclical and follows general economic and industrial conditions both worldwide and in regional markets. The steel industry
has historically been characterized by an excess in the world supply, which has led to substantial price decreases during periods
of economic weakness. We currently have an annual steel production capacity of 7 million metric tons of crude steel and if the
market for steel cannot support such production levels, the price for our products may go down. In addition, future economic downturns
could decrease the demand for our products. Substitute materials are increasingly available for many steel products, which further
reduces demand for steel.
We may not be able to pass on to
customers the increases in the costs of our raw materials, particularly iron-ore, coke, steel billets and steel coil.
The major raw materials
that we purchase for production are iron-ore, coke, steel billets and steel coil. The price and availability of these raw materials
are subject to market conditions affecting supply and demand. Our financial condition or results of operations may be impaired
by further increases in raw material costs to the extent we are unable to pass those increases to our customers. In addition,
if these materials are not available on a timely basis or at all, we may not be able to produce our products and our sales may
decline.
The price of steel may continue
declining due to overproduction by the Chinese steel companies.
According to the China
Iron and Steel Association, there are approximately 800 to 1,000 steel companies in China. Each steel company has its own production
plan. The Chinese government released new guidance on the steel industry to encourage consolidation within the fragmented steel
sector to mitigate problems of low-end repetitive production and inefficient use of resources. The current overproduction may
not be solved by these measures enacted by the Chinese government. If the current overproduction continues, our product shipments
could decline, our inventory could build up and eventually we may be required to decrease our sales price, which may decrease
our profitability.
Disruptions to our manufacturing
processes could adversely affect our operations, customer service and financial results.
Steel manufacturing
processes are dependent on critical steel-making equipment, such as furnaces, continuous casters, rolling mills and electrical
equipment (such as transformers), and such equipment may become temporarily inoperable as a result of unanticipated malfunctions
or other events, such as fires or furnace breakdowns. Although our manufacturing plants have not experienced plant shutdowns or
periods of reduced production as a result of such equipment failures or other events, we may experience such problems in the future.
To the extent that lost production as a result of such a disruption could not be recovered by unaffected facilities, such disruptions
could have an adverse effect on our operations, customer service and financial results.
Because we are a holding company
with substantially all of our operations conducted through our subsidiaries, our performance will be affected by the performance
of such subsidiaries.
We have no operations
other than General Steel (China), Longmen Joint Venture, and Maoming Hengda, and our principal assets are our investments in these
subsidiaries and VIE. As a result, we are dependent upon the performance of our subsidiaries and VIE and we will be subject to
the financial, business and other factors affecting them as well as general economic and financial conditions. As substantially
all of our operations are and will be conducted through our subsidiaries and VIE, we will be dependent on the cash flow of our
subsidiaries to meet our obligations.
Because virtually all
of our assets are and will be held by operating subsidiaries and VIE, the claims of our stockholders will be structurally subordinate
to all existing and future liabilities and obligations, and trade payables of such subsidiaries and VIE. In the event of our bankruptcy,
liquidation or reorganization, our assets and those of our subsidiaries will be available to satisfy the claims of our stockholders
only after all of our subsidiaries’ and VIE’s liabilities and obligations have been paid in full.
Because we have entered into a significant
number of related party transactions through the course of our routine business operations, there is a risk that we may not be
able to control the valuation of such transactions, which could then adversely impact our profitability.
In the course of our
normal business, we have purchased raw materials and supplies from our related parties and also engaged in sales of our products
to our related parties. Because such related party transactions may not always be completed at arm’s length due to their
nature, we may not be able to control the valuation of such transactions and as a result, there is a risk that the value of such
related party transactions exceeds market value, which could ultimately impact our profitability.
We depend on bank financing for
our working capital needs.
We have various financing
facilities which are due on demand or within one year. So far, we have not experienced any difficulties in repaying such financing
facilities. However, we may in the future encounter difficulties in repaying or refinancing such financings on time and may face
severe difficulties in our operations and financial position.
Our bank loans may not be renewed
if certain covenants of the loan agreements are not met.
We have various financing
facilities with banks which are due on demand or within one year. So far, we have not experienced any difficulties in repaying
such financing facilities. As of December 31, 2014, we have not satisfied our financial covenants stipulated by certain loan agreements
because of debt to asset ratios. Furthermore, we are party to loan agreements with cross default clause where any breach of other
loan covenants will automatically result in default of such loans. According to the loan agreements, the bank could request more
collateral or guarantees if the covenant is not satisfied or request early repayment of the loan if we cannot remedy the default
within a period of time. As of today, we have not received any notice from the banks requesting more collateral, guarantees or
early repayment of our short term loans due to a breach. However, we may in the future encounter difficulties in repaying or refinancing
such loans on time, or providing more collateral or guarantees to the banks or making early repayment of our loans.
We depend on our affiliates
financing for our working capital needs. We have various types of financing with our affiliates.
We rely on Mr. Zuosheng Yu for important
business leadership.
We depend, to a large
extent, on the abilities and operations of our current management team. However, we have a particular reliance upon Mr. Zuosheng
Yu, our Chairman, Chief Executive Officer and significant shareholder, for the direction of our business and leadership in our
growth efforts. The loss of the services of Mr. Yu, for any reason, may have a material adverse effect on our business and prospects.
We cannot guarantee that Mr. Yu will continue to be available to us, or that we will be able to find a suitable replacement for
Mr. Yu on a timely basis.
The report of our independent registered public accounting
firm expresses substantial doubt about the Company’s ability to continue as a going concern.
Our auditors, Friedman LLP, have indicated in their report on the Company’s financial statements
for the fiscal year ended December 31, 2014 that conditions exist that raise substantial doubt about our ability to continue as
a going concern. Our ability to continue as a going concern could impair our ability to finance our operations through the
sale of equity, incurring debt, or other financing alternatives, and depends
upon aligning our sources of funding (debt and equity) with our expenditure requirements and repayment of the short-term debt
facilities as and when they become due. If we are unable to achieve these goals, our business would be jeopardized and the
Company may not be able to continue. If we ceased operations, it is likely that all of our investors would lose their investment.
Failure to achieve and maintain
effective internal control over financial reporting could have a material adverse effect on our business, results of operations
and the trading rice of our common stock. Also, we are exposed to potential risks from regulations requiring companies to evaluate
controls under Section 404 of the Sarbanes-Oxley Act of 2002.
We are exposed to potential
risks from regulations requiring companies to evaluate controls under Section 404 of the Sarbanes-Oxley Act of 2002. Ensuring
that we have adequate internal financial and accounting controls and procedures in place to produce accurate financial statements
on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. Failure on our part to have
effective internal financial and accounting controls, including the material weakness, had and could in the future cause our financial
reporting to be unreliable, had and could in the future have a material adverse effect on our business, operating results, and
financial condition, and had and could in the future cause the trading price of our common stock to fall dramatically.
Under the supervision
and with the participation of our management, we have and will continue to evaluate our internal controls systems in order to
allow management to report on our internal controls, as required by Section 404 of the Sarbanes-Oxley Act. We have and will continue
to perform the system and process evaluation and testing required in an effort to comply with the management certification and
auditor attestation requirements of Section 404. As a result, we have and will continue to incur additional expenses and a diversion
of management’s time. If we are not able to meet the requirements of Section 404 in a timely manner or with adequate compliance,
we might be subject to sanctions or investigation by regulatory authorities, such as the SEC or the New York Stock Exchange. Any
such action could adversely affect our financial results and the market price of our stock.
We do not presently maintain product
liability insurance in China, and our property and equipment insurance does not cover the full value of our property and equipment,
which leaves us with exposure in the event of loss or damage to our properties or claims filed against us.
We currently do not
carry any product liability or other similar insurance in China. We cannot assure you that we would not face liability in the
event of the failure of any of our products.
We have purchased automobile
insurance with third party liability coverage for our vehicles. In addition, we have purchased property insurance to cover production
equipment. Except for property and automobile insurance, we do not have other insurance such as business liability or disruption
insurance coverage for our operations in China. In the event of a significant product liability claim or other uninsured event,
our financial results and the price of our common stock may be adversely affected.
Risks Related to Operating Our Business
in China
We face the risk that changes in
the policies of the Chinese government could have significant impact upon the business we may be able to conduct in China and
the profitability of such business.
The economy in China
is transitioning from a planned economy to a market oriented economy, subject to five-year and annual plans adopted by the government
that set forth national economic development goals. Policies of the Chinese government can have significant effects on the economic
conditions of China. The Chinese government has confirmed that economic development will follow a model of a market economy under
socialism. Under this direction, we believe that China will continue to strengthen its economic and trading relationships with
foreign countries and business development in China will follow market forces. While we believe that this trend will continue,
there can be no assurance that such will be the case. A change in policies by the Chinese government could adversely affect our
interests through, among other factors: changes in laws; regulations or the interpretation thereof; confiscatory taxation; restrictions
on currency conversion; imports or sources of supplies; or the expropriation or nationalization of private enterprises. Although
the Chinese government has been pursuing economic reform policies for approximately two decades, the Chinese government may significantly
alter such policies, especially in the event of a change in leadership, social or political disruption, or other circumstances
affecting China’s political, economic and social climate.
The PRC laws and regulations governing
our current business operations and contractual arrangements are uncertain, and if we are found to be in violation of such laws
and regulations, we could be subject to sanctions, which along with, any changes in such laws and regulations may have a material
and adverse effect on our business.
There are substantial
uncertainties regarding the interpretation and application of PRC laws and regulations, including but not limited to the laws
and regulations governing our business, or the enforcement and performance of our arrangements with customers in the event of
the imposition of statutory liens, bankruptcy, or criminal proceedings against us or our customers. Along with our subsidiaries,
we are considered foreign persons or foreign funded enterprises under PRC law, and, as a result, we are required to comply with
certain PRC laws and regulations. These laws and regulations are relatively new and may be subject to future changes, and their
official interpretation and enforcement may involve substantial uncertainty. The effectiveness of newly enacted laws, regulations
or amendments may be delayed, resulting in detrimental reliance by foreign investors. New laws and regulations that affect existing
and proposed future businesses may also be applied retroactively. In addition, the Chinese authorities retain broad discretion
in dealing with violations of laws and regulations, including levying fines, revoking business licenses and requiring actions
necessary for compliance. In particular, licenses, permits and beneficial treatment issued or granted to us by relevant governmental
bodies may be revoked at a later time under contrary findings of higher regulatory bodies. We cannot predict what effect the interpretation
of existing or new PRC laws or regulations may have on our businesses. We may be subject to sanctions, including fines, and could
be required to restructure our operations. Such restructuring may not be deemed effective or may encounter similar or other difficulties.
As a result of these substantial uncertainties, there is a risk that we may be found in violation of current or future PRC laws
or regulations. In addition, PRC laws and regulations relating to land use have caused, and may cause again in the future, us
to pay fines relating to the alleged misuse of certain agricultural land for industrial purposes. When such misuse is alleged,
the PRC also reserves the right to seize, and may seize, our equipment on the land in question.
A slowdown or other adverse developments
in the Chinese economy may materially and adversely affect our customers, demand for our services and our business.
Substantially all of
our assets, and the assets of our operating subsidiaries and VIE, are located in China and our revenue is derived from our operations
in China. We anticipate that our revenues generated in China will continue to represent all of our revenues in the near future.
Accordingly, our results of operations and prospects are subject, to a significant extent, to the economic, political and legal
developments in China. Although the PRC economy has grown significantly in recent years, we cannot assure you that such growth
will continue. In addition, the Chinese government also exercises significant control over Chinese economic growth through the
allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing
preferential treatment to particular industries or companies. Efforts by the Chinese government to slow the pace of growth of
the Chinese economy could result in reduced demand for our products. A slowdown in overall economic growth, an economic downturn
or recession or other adverse economic developments in the PRC may materially reduce the demand for our products and materially
and adversely affect our business.
The PRC government’s recent
measures to curb inflation rates could adversely affect future results of operations.
In recent years, the
Chinese economy has experienced periods of rapid expansion and high rates of inflation. Rapid economic growth can lead to growth
in the money supply and rising inflation. China’s Consumer Price Index increased by 2.0% for full year of 2014 according
to the National Bureau of Statistics of China, or the NBS. If prices for our products rise at a rate that is insufficient to compensate
for the rise in the costs of supplies, it may have an adverse effect on profitability. These factors have led to the adoption
by the Chinese government, from time to time, of various corrective measures designed to restrict the availability of credit or
regulate growth and contain inflation. High inflation may in the future cause the Chinese government to impose controls on credit
and/or prices, or to take other action, which could inhibit economic activity in China, and thereby harm the market for our products.
In recent years, the
government of China has undertaken various measures to alleviate the effects of inflation, especially with respect to key commodities.
From time to time, the PRC National Development and Reform Commission announces national price controls on various products. The
government of China has also encouraged local governments to institute price controls products. Such price controls could adversely
affect our future results of operations and, accordingly, the price of our common stock.
If relations between the United
States and China deteriorate, our stock price may decrease and we may experience difficulties accessing the United States capital
markets.
At various times during
recent years, the United States and China have had disagreements over political and economic issues. Controversies may arise in
the future between these two countries. Any political or trade controversies between the United States and China could impact
the market price of our common stock and our ability to access United States capital markets.
The Chinese Government could change
its policies toward private enterprises, which could result in the total loss of our investments in China.
Our business is subject
to political and economic uncertainties in China and may be adversely affected by its political, economic and social developments.
Over the past several years, the Chinese government has pursued economic reform policies including the encouragement of private
economic activity and greater economic decentralization. The Chinese government may not continue to pursue these policies or may
alter them to our detriment. Conducting our business might become more difficult or costly due to changes in policies, laws and
regulations, or in their interpretation or the imposition of confiscatory taxation, restrictions on currency conversion, restrictions
or prohibitions on dividend payments to stockholders, devaluations of currency or the nationalization or other expropriation of
private enterprises. In addition, nationalization or expropriation could result in the total loss of our investments in China.
The Chinese State Administration
of Foreign Exchange, or SAFE, requires Chinese residents to register with, or obtain approval from SAFE regarding their direct
or indirect offshore investment activities.
China’s State
Administration of Foreign Exchange Regulations regarding offshore financing activities by Chinese residents has undertaken continuous
changes which may increase the administrative burden we face and create regulatory uncertainties that could adversely affect the
implementation of our acquisition strategy. A failure by our shareholders who are Chinese residents to make any required applications
and filings pursuant to such regulations may prevent us from being able to distribute profits and could expose us and our Chinese
resident shareholders to liability under PRC law.
Our business, results of operations
and overall profitability are linked to the economic, political and social conditions in China.
All of our business,
assets and operations are located in China. The economy of China differs from the economies of most developed countries in many
respects, including government involvement, level of development, growth rate, control of foreign exchange, and allocation of
resources. The economy of China has been transitioning from a planned economy to a more market-oriented economy. Although the
Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of
state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial
portion of productive assets in China is still owned by the Chinese government. In addition, the Chinese government continues
to play a significant role in regulating industry by imposing industrial policies. It also exercises significant control over
China’s economic growth through the allocation of resources, controlling payment of foreign currency denominated obligations,
setting monetary policy and providing preferential treatment to particular industries or companies. Therefore, the Chinese government’s
involvement in the economy may negatively affect our business operations, results of operations and our financial condition.
If there will be any changes in
PRC Law, the PRC legal system could limit our Company’s ability to enforce the Unified Management Agreement, which in turn
may lead to reconsideration of the VIE assessment with respect to Longmen Joint Venture.
Prior to entering
into the Unified Management Agreement, Longmen Joint Venture had been consolidated as our 60% directly owned subsidiary. Upon
entering into the Unified Management Agreement on April 29, 2011, Longmen Joint Venture was considered to be a VIE of which we
are the primary beneficiary and therefore we continue to consolidate Longmen Joint Venture.
We believe that the
Unified Management Agreement between Longmen Joint Venture and Shaanxi Coal is in compliance with PRC law and is legally enforceable.
The Board of Directors of Longmen Joint Venture continues to be the controlling decision-making body with respect to Longmen Joint
Venture. We control 60% of the voting rights of the Board of Directors, and have control over the operations of Longmen Joint
Venture. As such, we believe we have the power to control the activities of the VIE. However, uncertainties in the PRC legal system
could limit our ability to enforce the Unified Management Agreement, which in turn, may lead to reconsideration of, and a different
conclusion under the VIE assessment.
Governmental control of currency
conversion may cause the value of your investment in our common stock to decrease.
The Chinese government
imposes controls on the conversion of Renminbi or RMB into foreign currencies and, in certain cases, the remittance of currency
out of China. We receive substantially all of our revenues in Renminbi, which is currently not a freely convertible currency.
Shortages in the availability of foreign currency may restrict our ability to remit sufficient foreign currency to pay dividends,
or otherwise satisfy foreign currency denominated obligations. Under existing Chinese foreign exchange regulations, payments of
current account items, including profit distributions, interest payments and expenditures from a transaction, can be made in foreign
currencies without prior approval from China’s State Administration of Foreign Exchange by complying with certain procedural
requirements. However, approval from appropriate governmental authorities is required where Renminbi is to be converted into foreign
currency and remitted out of China to pay capital expenses such as the repayment of bank loans denominated in foreign currencies.
The Chinese government
may also at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign
exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be
able to pay certain of our expenses as they come due.
Currency fluctuations and restrictions
on currency exchanges may adversely affect our business, including limiting our ability to convert RMB into foreign currencies
and, if RMB were to decline in value, reducing our revenue in U.S. dollar terms.
Our reporting currency
is the U.S. dollar and our operations in China use their local currency as their functional currencies. Substantially all of our
revenue and expenses are in Renminbi, or RMB. We are subject to the effects of exchange rate fluctuations with respect to local
currencies. For example, the value of the RMB depends to a large extent on Chinese government policies and China’s domestic
and international economic and political developments, as well as supply and demand in the local market. Prior to July 21, 2005,
the official exchange rate for the conversion of RMB to the U.S. dollar had generally been stable and the RMB had appreciated
slightly against the U.S. dollar. However, on July 21, 2005, the Chinese government changed its policy of pegging the value of
RMB to the U.S. dollar. Under the new policy, RMB may fluctuate within a narrow and managed band against a basket of certain foreign
currencies. The four main currencies in the basket are the U.S. dollar, the Euro, the Japanese yen and the Korean won. In the
three years that followed, a slight appreciation against the U.S. currency occurred and by the end of October 2008, the RMB exchange
rate with the U.S. dollar had risen to nearly 6.8 to the U.S. dollar. Since mid-2008, the RMB has been held stable as the Chinese
government considers how best to respond to the global economic crisis. In June 2010, the temporary dollar peg was again abandoned,
after the Chinese RMB rose approximately 16% against the Euro as a result of the Greek fiscal crisis. However, the Chinese government
has signaled that going forward its currency will only be allowed to appreciate gradually against the dollar. It is possible that
the Chinese government could adopt a more flexible currency policy, which could result in more significant fluctuation of RMB
against the U.S. dollar. We can offer no assurance that RMB will be stable against the U.S. dollar or any other foreign currency.
Our financial statements are translated into U.S. dollars at the average exchange rates in each applicable period. To the extent
the U.S. dollar strengthens against foreign currencies, the translation of these foreign currency-denominated transactions results
in reduced revenue, operating expenses and net income for our international operations. Similarly, to the extent the U.S. dollar
weakens against foreign currencies, the translation of these foreign currency-denominated transactions results in increased revenue,
operating expenses and net income for our international operations. We are also exposed to foreign exchange rate fluctuations
as we convert the financial statements of our foreign consolidated subsidiaries into U.S. dollars in consolidation. If there is
a change in foreign currency exchange rates, the conversion of the foreign consolidated subsidiaries’ financial statements
into U.S. dollars will lead to a translation gain or loss which is recorded as a component of other comprehensive income. In addition,
we have certain assets and liabilities that are denominated in currencies other than the relevant entity’s functional currency.
Changes in the functional currency value of these assets and liabilities create fluctuations that will lead to a transaction gain
or loss. We have not entered into agreements or purchased instruments to hedge our exchange rate risks, although we may do so
in the future. The availability and effectiveness of any hedging transaction may be limited and we may not be able to hedge our
exchange rate risks.
We are subject to environmental
and safety regulations, which may increase our compliance costs and reduce our overall profitability.
We are subject to the
requirements of environmental and occupational safety and health laws and regulations in China. We may incur substantial costs
or liabilities in connection with these requirements. Additionally, these regulations may become stricter, which will increase
our costs of compliance in a manner that could reduce our overall profitability. The capital requirements and other expenditures
that may be necessary to comply with environmental requirements could increase and become a significant expense linked to the
conduct of our business.
Our operating subsidiaries must
comply with environmental protection laws that could adversely affect our profitability.
We are required to
comply with the environmental protection laws and regulations promulgated by the national and local governments of China. Yearly
inspections of waste treatment systems require the payment of a license fee which could become a penalty fee if standards are
not maintained. If we fail to comply with any of these environmental laws and regulations in China, depending on the types and
seriousness of the violation, we may be subject to, among other things, warning from relevant authorities, imposition of fines,
specific performance and/or criminal liability, forfeiture of profits made, being ordered to close down our business operations
and suspension of relevant permits.
Because the Chinese legal system is not fully developed,
our legal protections may be limited.
The Chinese legal system
is based upon written statutes. Prior court decisions may be cited for reference but are not binding on subsequent cases and have
limited value as precedent. Since 1979, China’s legislative bodies have promulgated laws and regulations dealing with economic
matters such as foreign investment, corporate organization and governance, commerce, taxation and trade. However, China has not
developed a fully integrated legal system and the array of new laws and regulations may not be sufficient to cover all aspects
of economic activities in China. In particular, because these laws and regulations are relatively new, and because of the limited
volume of published decisions and their non-binding nature, the interpretation and enforcement of these laws and regulations involves
uncertainties. In addition, published government policies and internal rules may have retroactive effects and, in some cases,
the policies and rules are not published at all. As a result, we may be unaware of our violation of these policies and rules until
sometime later. The laws of China govern our contractual arrangements with our affiliated entities and the enforcement of these
contracts and the interpretation of the laws governing these relationships are subject to uncertainty.
In addition, our VIE
and all of our subsidiaries that are incorporated in China are subject to all applicable PRC laws and regulations. Because of
the relatively short period for enacting such a comprehensive legal system, the laws, regulations and legal requirements are relatively
recent, and their interpretation and enforcement involve uncertainties. These uncertainties could limit the legal protections
available to us and other foreign investors, including you, and may lead to penalties imposed on us because of the different understanding
between the relevant authority and us. For example, according to current tax laws and regulations, we are responsible to pay business
tax on a “Self-examination and Self-application” basis. However, since there is no clear guidance as to the applicability
of certain preferential tax treatments, we may be found in violation of the interpretation of local tax authorities with regard
to the scope of taxable services and the percentage of tax rate and therefore might be subject to penalties, including but not
limited to, monetary penalties. In addition, we cannot predict the effect of future developments in the PRC legal system, including
the promulgation of new laws, changes to existing laws or the interpretation or enforcement thereof, or the preemption of local
regulations by national laws.
The resolution of these
matters may be subject to the exercise of considerable discretion by agencies of the Chinese government, and forces unrelated
to the legal merits of a particular matter or dispute may influence their determination. Any rights we may have to specific performance
or to seek an injunction under PRC law, in either of these cases, are severely limited, and without a means of recourse by virtue
of the Chinese legal system, we may be unable to prevent these situations from occurring. Although legislation in China over the
past 30 years has significantly improved the protection afforded to various forms of foreign investment and contractual arrangements
in China, these laws, regulations and legal requirements are relatively new and their interpretation and enforcement involve uncertainties,
which could limit the legal protection available to us and foreign investors, including you.
The PRC State Administration of
Foreign Exchange, or SAFE, restrictions on currency exchange may limit our ability to receive and use our sales revenue effectively
and to pay dividends.
All of our sales revenues
and expenses are denominated in RMB. Under PRC law, RMB is currently convertible under the “current account,” which
includes dividends and trade and service-related foreign exchange transactions, but not under the “capital account,”
which includes foreign direct investment and loans. Currently, our PRC operating subsidiaries may purchase foreign currencies
for settlement of current account transactions, including payments of dividends to us, without the approval of SAFE, by complying
with certain procedural requirements. However, the relevant PRC government authorities may limit or eliminate our ability to purchase
foreign currencies in the future. Since substantially all of our future revenue will be denominated in RMB, any existing and future
restrictions on currency exchange may limit our ability to utilize revenue generated in RMB to fund our business activities outside
China that are denominated in foreign currencies.
Foreign exchange transactions
by PRC operating subsidiaries under the capital account continue to be subject to significant foreign exchange controls and require
the approval of or need to register with PRC government authorities, including SAFE. In particular, if our PRC operating subsidiaries
borrow foreign currency through loans from us or other foreign lenders, these loans must be registered with SAFE, and if we finance
our PRC operating subsidiaries by means of additional capital contributions, these capital contributions must be approved by certain
government authorities, including the Ministry of Commerce People’s Republic of China, or their respective local counterparts.
These limitations could affect our PRC operating subsidiaries’ ability to obtain foreign exchange through debt or equity
financing.
The PRC government
also may at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign
exchange control system prevents us from obtaining foreign currency, we may be unable to meet obligations that may be incurred
in the future that require payment in foreign currency.
Under the EIT Law, as defined below,
we may be classified as a “resident enterprise” of China, which would likely result in unfavorable tax consequences
to us and our non-PRC shareholders.
Under China’s
Enterprise Income Tax Law, or the “EIT Law”, and its implementing rules, which became effective in 2008, an enterprise
established with “de facto management bodies” within China is considered a “resident enterprise,” meaning
that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. Under the implementing
rules of the New EIT Law, de facto management means substantial and overall management and control over the production and operations,
personnel, accounting, and properties of the enterprise. Because the New EIT Law and its implementing rules are new, it is unclear
how tax authorities will determine tax residency based on the facts of each case.
In April 2009, the
State Administration of Taxation (“SAT”) issued a new circular to clarify the criteria for recognizing the resident
enterprise status for Chinese controlled foreign companies. According to the Circular Regarding the Determination Criteria on
Chinese Controlled Offshore Companies as Resident Enterprises (Circular Guoshuifa 2009 No. 82), if a foreign company simultaneously
satisfies the following four criteria it will have resident enterprise status:
|
· |
It constitutes a Chinese
controlled foreign company and shall be deemed to be a PRC resident enterprise. |
|
· |
The premises where the senior management
and the senior management bodies responsible for the routine production and business management of the enterprise perform
their functions are mainly located within China. |
|
· |
The financial decisions (including,
borrowing, lending, financing, financial risk management, etc.) and the personnel decisions (for example, appointment, dismissal,
remuneration, etc.) of the enterprise are made by the bodies or persons within China or are subject to the approval of the
bodies or persons within China. |
|
· |
The enterprise’s primary properties,
accounting books, company seals, minutes and archives of the meetings of the board of directors and shareholders are located
or preserved within China. The enterprise’s directors or senior management with fifty percent or more of the voting
rights usually live in China. |
Despite the issuance
of the new clarifying circular referenced above, the application of these standards remains uncertain. If the PRC tax authorities
determine that we are a “resident enterprise” for PRC enterprise income tax purposes, unfavorable PRC tax consequences
could follow. First, we will be subject to enterprise income tax at a rate of 25% on our worldwide taxable income as well as PRC
enterprise income tax reporting obligations. Second, although under the EIT Law and its implementing rules dividends paid to us
from our PRC subsidiaries would qualify as “tax-exempt income,” such dividends may be subject to a 10% withholding
tax, as the PRC foreign exchange control authorities, which enforce the withholding tax, have not yet issued guidance with respect
to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise income tax purposes.
Finally, it is possible that future guidance issued with respect to the new “resident enterprise” classification would
result in a situation in which a 10% withholding tax is imposed on dividends we pay to our non-PRC shareholders and with respect
to gains derived by our non-PRC shareholders from transferring our shares.
If we were treated
as a “resident enterprise” by PRC tax authorities, we would be subject to tax in both the U.S. and China, and our
PRC tax may not be creditable against our U.S. tax. In addition, we have not accrued any tax liability associated with the possible
payment of dividends to our U.S. parent company. Such a tax would be an added expense appearing on our income statement, which
would reduce our net income.
Failure to comply with the U.S.
Foreign Corrupt Practices Act could subject us to penalties and other adverse consequences.
We are subject to the
U.S. Foreign Corrupt Practices Act, or FCPA, which generally prohibits United States companies from engaging in bribery or other
prohibited payments to foreign officials for the purpose of obtaining or retaining business. In addition, we are required to maintain
records that accurately and fairly represent our transactions and have an adequate system of internal accounting controls. Foreign
companies, including some that may compete with us, are not subject to these prohibitions, and therefore may have a competitive
advantage over us. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time-to-time in the
PRC. We can make no assurance that our employees or other agents will not engage in such conduct for which we might be held responsible.
If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences
that may have a material adverse effect on our business, financial condition and results of operations.
If we become subject to the recent scrutiny, criticism
and negative publicity involving U.S.-listed Chinese companies, we may have to expend significant resources to investigate and
resolve such allegations, which could harm our business operations, stock price and reputation, especially if such matter cannot
be addressed and resolved favorably.
Recently, U.S. public
companies that have substantially all of their operations in China, particularly companies like us which have completed so-called
reverse merger transactions, have been the subject of intense scrutiny, criticism and negative publicity by investors, financial
commentators and regulatory agencies, such as the SEC. Much of the scrutiny, criticism and negative publicity has centered around
financial and accounting irregularities and mistakes, a lack of effective internal controls over financial accounting, inadequate
corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result of the scrutiny,
criticism and negative publicity, the publicly traded stock of many U.S. listed Chinese companies has sharply decreased in value
and, in some cases, has become virtually worthless. Many of these companies are now subject to shareholder lawsuits, SEC enforcement
actions and are conducting internal and external investigations into the allegations. It is not clear what effect this sector-wide
scrutiny, criticism and negative publicity will have on our Company, our business and our stock price. If we become the subject
of any unfavorable allegations, whether such allegations are proven to be true or untrue, we will have to expend significant resources
to investigate such allegations and/or defend our Company. This situation will be costly and time consuming and distract our management
from growing our Company. If such allegations are not proven to be groundless, our Company and our business operations will be
severely impacted and your investment in our stock could be rendered worthless.
The disclosures in our reports and other filings with
the SEC and our other public pronouncements are not subject to the scrutiny of any regulatory bodies in the PRC. Accordingly,
our public disclosure should be reviewed in light of the fact that no governmental agency that is located in China where substantially
all of our operations and business are located had conducted any due diligence on our operations or reviewed or cleared any of
our disclosure.
We are regulated by
the SEC and our reports and other filings with the SEC are subject to SEC review in accordance with the rules and regulations
promulgated by the SEC under the Securities Act of 1933 and the Securities Exchange Act of 1934. Since substantially all of our
operations and business takes place in China, it may be more difficult for the SEC to overcome the geographic and cultural obstacles
when reviewing our disclosure. These same obstacles are not present for similar companies whose operations or business take place
entirely or primarily in the United States. Furthermore, our SEC reports and other disclosure and public pronouncements are not
subject to the review or scrutiny of any PRC regulatory authority. For example, the disclosure in our SEC reports and other filings
are not subject to the review of the Chinese Securities Regulatory Commission, a PRC regulator that is tasked with oversight of
the capital markets in China. Accordingly, you should review our SEC reports, filings and our other public pronouncements with
the understanding that no local regulator has done any due diligence on our Company and with the understanding that none of our
SEC reports, other filings or any of our other public pronouncements has been reviewed or otherwise been scrutinized by any local
regulator.
We make equity compensation grants
to persons who are PRC citizens and they may be required to register with SAFE. We may also face regulatory uncertainties that
could restrict our ability to adopt equity compensation plans for our directors and employees and other parties under PRC laws.
On March 28, 2007,
SAFE issued the “Operating Procedures for Administration of Domestic Individuals Participating in the Employee Stock Ownership
Plan or Stock Option Plan of An Overseas Listed Company,” also known as “Circular 78.” It is not clear whether
Circular 78 covers all forms of equity compensation plans or only those which provide for the granting of stock options. For any
plans which are so covered and are adopted by a non-PRC listed company, such as our Company, after March 28, 2007, Circular 78
requires all participants who are PRC citizens to register with and obtain approvals from SAFE prior to their participation in
the plan. In addition, Circular 78 also requires PRC citizens to register with SAFE and make the necessary applications and filings
if they participated in an overseas listed company’s covered equity compensation plan prior to March 28, 2007. We believe
that the registration and approval requirements contemplated in Circular 78 are burdensome and time consuming.
We currently have an
effective equity incentive plan and make numerous stock grants under the plan to our officers, directors and employees, some of
whom are PRC citizens and may be required to register with SAFE. If it is determined that any of our equity compensation plans
are subject to Circular 78, failure to comply with relevant provisions may subject us and participants of any such equity incentive
plan who are PRC citizens to fines and legal sanctions and prevent us from being able to grant equity compensation to our PRC
employees. In that case, our ability to compensate our employees and directors through equity compensation and to attract and
retain employees and directors may be hindered and our business operations may be adversely affected.
Due to various restrictions under
PRC law on the distribution of dividends by our PRC operating companies, we may not be able to pay dividends to our shareholders.
The Wholly-Foreign
Owned Enterprise Law (1986) (“WFOE”), as amended and the Wholly-Foreign Owned Enterprise Law Implementing Rules (1990),
as amended and the Company Law of the PRC (2006) contain the principal regulations governing dividend distributions by wholly
foreign owned enterprises. Under these regulations WFOE’s may pay dividends only out of their accumulated profits, if any,
determined in accordance with PRC accounting standards and regulations. Additionally, a WFOE is required to set aside a certain
amount of its accumulated profits each year, if any, to fund certain reserve funds. These reserves are not distributable as cash
dividends, except in the event of liquidation, and cannot be used for working capital purposes.
Furthermore, if any
of our consolidated subsidiaries in China incurs debt in the future, the instruments governing the debt may restrict our ability
to pay dividends or make other payments. If we or our consolidated subsidiaries are unable to receive all of the revenues from
our operations due to these contractual or dividend arrangements, we may be unable to pay dividends on our common stock. In addition,
under WFOE regulations mentioned above, we must retain a reserve equal to 10 percent of net income after taxes, not to exceed
50 percent of registered capital. Accordingly, this reserve will not be available to be distributed as dividends to our shareholders.
We presently do not intend to pay dividends in the foreseeable future. Our management intends to follow a policy of retaining
all of our earnings to finance the development and execution of our strategy and the expansion of our business.
We may have difficulty establishing
adequate management, legal and financial controls in the PRC.
The PRC historically
has been deficient in western style management and financial reporting concepts and practices, as well as in modern banking and
other control systems. We may have difficulty in hiring and retaining a sufficient number of qualified employees to work in the
PRC. As a result of these factors, and especially given that we are an exchange listed company in the U.S. and subject to regulation
as such, we may experience difficulty in establishing management, legal and financial controls, collecting financial data and
preparing financial statements, books of account and corporate records and instituting business practices that meet western standards.
As there is a shortage of well-educated and experienced professionals who have bilingual and bicultural backgrounds in China,
especially in remote areas where our factories are located, we may experience high turnover in our staff. Therefore, we may, in
turn, experience difficulties in implementing and maintaining adequate internal controls as required under Section 404 of the
Sarbanes-Oxley Act and other applicable laws, rules and regulations. This may result in significant deficiencies or material weaknesses
in our internal controls which could impact the reliability of our financial statements and prevent us from complying with SEC
rules and regulations and the requirements of the Sarbanes-Oxley Act. Any such deficiencies, weaknesses or lack of compliance
could have a material adverse effect on our results of operations and the public announcement of such deficiencies could adversely
impact our stock price.
Risks Related to Our Common Stock
Our officers, directors and affiliates
control us through their positions and stock ownership and their interests may differ from other stockholders.
Our officers, directors
and affiliates beneficially own approximately 45.7% of our common stock. Mr. Zuosheng Yu, our major stockholder, beneficially
owns approximately 45.0% of our common stock. Mr. Yu can effectively control us and his interests may differ from other stockholders.
All of our subsidiaries and substantially
all of our assets are located outside the United States.
All our subsidiaries
are located in China and substantially all of our assets are located outside the United States. It may therefore be difficult
for investors in the United States to enforce their legal rights based on the civil liability provisions of the U.S. federal securities
laws against us in the courts of either the United States or China and, even if civil judgments are obtained in United States
courts, such judgments may not be enforceable in Chinese courts. Most of our directors and officers reside outside of the United
States. It is unclear if extradition treaties now in effect between the United States and China would permit effective enforcement
against us or our officers and directors of criminal penalties under the U.S. federal securities laws or otherwise.
We have never paid cash dividends
and are not likely to do so in the foreseeable future.
We currently intend
to retain any future earnings for use in the operation and expansion of our business. We do not expect to pay any cash dividends
in the foreseeable future but will review this policy as circumstances dictate.
Our common stock is subject to price
volatility unrelated to our operations.
The market price of
our common stock could fluctuate substantially due to a variety of factors, including market perception of our ability to achieve
our planned growth, quarterly operating results of other steel makers, trading volume in our common stock, changes in general
conditions in the economy and the financial markets or other developments affecting our competitors or us. In addition, the stock
market is subject to extreme price and volume fluctuations. This volatility has had a significant effect on the market price of
securities issued by many companies for reasons unrelated to their operating performance and could have the same effect on our
common stock.
Our failure to comply with conditions
required for our common stock to be listed on the New York Stock Exchange (“NYSE”) could result in delisting of our
common stock from the NYSE and have a significant negative effect on the value and liquidity of our securities as well as other
matters.
On January 9,
2015, we received a notice from NYSE Regulations, Inc. that we were not in compliance with the continued listing standard
set forth in Section 802.01B of the Listed Company Manual of the NYSE (the “Manual”). Noncompliance with
Section 802.01B of the Manual (the “Market Cap Standard”) is due to the Company not maintaining an average
market capitalization of at least fifty million dollars ($50,000,000.00) over a consecutive 30 trading-day period. We
have also in the past not been in compliance with the continued listing standard set forth in Section 802.01C of the Manual,
which is triggered when the average closing price of the Company’s common stock is less than $1.00 over a
consecutive 30 trading-day period. As a result of the Company’s non-compliance with the Market Cap Standard, we
submitted a business plan to the NYSE on February 23, 2015 that had been reviewed and approved by the NYSE. We remain
subject to quarterly monitoring for compliance with both continued listing standards.
We are required to
comply with all of the applicable continued listing standards set forth in the Manual as a condition for our common stock to continue
to be listed on the NYSE. We intend to appeal any decision to delist our shares from the NYSE, but cannot provide any assurance
that our appeal will be successful. Any such appeal will not stay the decision to delist our shares. If our common stock is delisted
from the NYSE, such securities may be traded over-the-counter on the “pink sheets.” The alternative market, however,
is generally considered to be less efficient than, and not as broad as, the NYSE. Accordingly, delisting of our common stock from
the NYSE could have a significant negative effect on the value and liquidity of our securities. In addition, the delisting of
such stock could adversely affect our ability to raise capital on terms acceptable to us or at all. In addition, delisting of
our common stock may preclude us from using exemptions from certain state and federal securities regulations, including the SEC’s
“penny stock” rules.
ITEM 1B. UNRESOLVED
STAFF COMMENTS.
Not Applicable.
ITEM 2. PROPERTIES.
General Steel (China)
The properties of General
Steel (China) consist of manufacturing sites and office buildings located in Jinghai county, about 20 miles (45 kilometers) southwest
of the Tianjin city center on a total of 17.81 acres (7.21 hectares) of land, which includes 320,390 square feet (29,667 square
meters) of building space.
Under PRC law, all
land in China is owned by the government, which grants a “land use right” to an individual or entity after a purchase
price for such “land use right” is paid to the government. The land use right allows the holder the right to use the
land for a specified long-term period of time and enjoy all the ownership incidents to the land. We are the registered owner of
the land use rights for the parcels of land identified in the chart below.
Registered
Owner of
Land Use Right |
|
Location
& Certificate of
Land Use Right |
|
Usage |
|
Space
(acres) |
|
|
Life
of Land
Use Right |
|
Remaining
Life |
|
|
|
|
|
|
|
|
|
|
|
|
Tianjin Daqiuzhuang Metal
Sheet Co., Ltd |
|
No. 6 West Gangtuan Road,
Daqiuzhuang, Jinghai Country, Tianjin |
|
Industrial Use |
|
|
6.78 |
|
|
50 years |
|
37 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
Tianjin Daqiuzhuang Metal Sheet Co.,
Ltd |
|
No. 35 Baiyi Road, Daqiuzhuang, Jinghai
County, Tianjin |
|
Industrial Use |
|
|
9.89 |
|
|
50 years |
|
37 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
Tianjin Daqiuzhuang Metal Sheet Co.,
Ltd |
|
Ying Feng Road North, Daqiuzhuang,
Jinghai country Tianjin |
|
Commercial Use |
|
|
1.14 |
|
|
50 years |
|
37 years |
Longmen Joint Venture
The properties of Longmen Joint Venture
consist of production and administrative sites located in various locations throughout the southern half of Shaanxi province on
land totaling approximately 307 acres (124.4 hectares).
Longmen Joint Venture is the registered
owner of the land use rights for the parcel of land identified in the chart below.
Registered
Owner of
Land Use Right |
|
Location
& Certificate
Of Land Use Right |
|
Usage |
|
Space
(acres) |
|
|
Life
of Land
Use Right |
|
Remaining
Life |
|
|
|
|
|
|
|
|
|
|
|
|
|
Longmen Joint Venture |
|
North Huanyuan Road, Weiyang District,
Xi'an, Shaanxi |
|
Industrial Use |
|
|
19.1 |
|
|
50 Years |
|
32 Years |
Longmen Joint Venture |
|
Longmen Town, Hancheng, Shaanxi |
|
Industrial Use |
|
|
179.6 |
|
|
40-48 Years |
|
32-36 Years* |
Longmen Joint Venture |
|
Sanping Village, Shipo Town, Zhashui
County, Shaanxi |
|
Industrial Use |
|
|
103.2 |
|
|
50 Years |
|
38 Years |
Longmen Joint Venture |
|
Zhaikouhe Village, Xunjian Town, Zhashui
County, Shaanxi |
|
Industrial Use |
|
|
1.9 |
|
|
50 Years |
|
37 Years |
Longmen Joint Venture |
|
East Taishi Avenue, Xincheng District,
Hancheng, Shaanxi |
|
Commercial Use |
|
|
3.6 |
|
|
40 Years |
|
28 Years |
*This location consists of six land use rights with
various remaining useful lives.
Maoming Hengda
The properties of Maoming Hengda consist
of our production and administrative sites located in two separated sites inside Maoming city, Guangdong province, on land totaling
approximately 240 acres (96.9 hectares).
Maoming Hengda is the registered owner of
the land use rights for the parcels of land identified in the chart below.
Registered
Owner
Of Land Use Right |
|
Location
& Certificate
Of Land Use Right |
|
Usage |
|
Space
(acres) |
|
|
Life
of Land
Use
Right |
|
Remaining
Life |
|
|
|
|
|
|
|
|
|
|
|
|
|
Maoming Hengda |
|
Diancheng Town,
Dianbai County, Maoming City, Industrial Zone of Bohe Port, Guangdong |
|
Industrial Use |
|
|
240 |
|
|
50 Years |
|
40 Years |
ITEM
3. 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 4. MINE SAFETY DISCLOSURES.
The information required by Item 4 is not
applicable to us, as we have no mining operations in the United States.
PART II
ITEM 5. MARKET FOR REGISTRANT’S
COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Our common stock is listed on the New York
Exchange under the symbol “GSI”. The high and low closing common stock price for each quarter of the last two years
is as follows:
HIGH AND LOW SALES PRICES | |
1ST QTR | | |
2ND QTR | | |
3RD QTR | | |
4TH QTR | |
2013 | |
| | | |
| | | |
| | | |
| | |
High | |
$ | 1.35 | | |
$ | 1.12 | | |
$ | 1.04 | | |
$ | 1.09 | |
Low | |
$ | 0.94 | | |
$ | 0.94 | | |
$ | 0.83 | | |
$ | 0.85 | |
2014 | |
| | | |
| | | |
| | | |
| | |
High | |
$ | 1.47 | | |
$ | 1.32 | | |
$ | 1.19 | | |
$ | 1.06 | |
Low | |
$ | 0.90 | | |
$ | 0.90 | | |
$ | 0.97 | | |
$ | 0.64 | |
As
of April 8, 2015, there were approximately 319 holders of record of our common stock. On the same date, the trading price of our
common stock closed at $1.00 per share.
Dividend Policy
Our Board of Directors currently does not
intend to declare dividends or make any other distributions to our shareholders. Any determination to pay dividends in the future
will be at our board’s discretion and will depend upon our results of operations, financial condition and prospects as well
as other factors deemed relevant by our Board of Directors.
Recent Sales of Unregistered Sale Securities
None.
ITEM 6. SELECTED FINANCIAL DATA.
Not Applicable.
ITEM 7. 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 consolidated financial statements and related notes
thereto included elsewhere in this Annual Report. The following discussion contains forward-looking statements. General Steel
Holdings, Inc. is referred to herein as “we”, “our,” “us” and “the Company.” The
words or phrases “would be,” “will allow,” “expect to”, “intends to,” “will
likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,”
or similar expressions are intended to identify forward-looking statements. Such statements include those concerning our expected
financial performance, our corporate strategy and operational plans. Actual results could differ materially from those projected
in the forward-looking statements as a result of a number of risks and uncertainties, including: (a) those risks and uncertainties
related to general economic conditions in 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” as well as other
factors described in “Item 1A: Risk Factors” in this Annual Report. You should carefully review all of these factors,
as well as the comprehensive discussion of forward-looking statements on page 4 of this Annual Report. 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.
OVERVIEW
We were founded on
the strategy to merge, partner with, and acquire State-owned enterprises and selected steel companies with great growth potential
within China’s highly fragmented steel industry. As of December 31, 2014, we were comprised of three steel producing and
processing subsidiaries/VIE of which Longmen Joint Venture is the largest. Located in Shaanxi province, Longmen Joint Venture
contributed approximately 99.8% and 99.5% of our total revenue for the 2014 and 2013 fiscal years, respectively.
Fiscal year 2014 financial highlights:
|
· |
Sales revenue decreased
by $174.3 million, or (7.1)% year-over-year to $2.3 billion, down from $2.5 billion in 2013, mainly due to the decrease in
average selling price of our rebar products despite an increase in our sales volume. For the year of 2014, sales volume in
Longmen Joint Venture totaled 5.4 million metric tons, an increase of 0.3 million metric tons, or 6.3%, compared to 5.1 million
metric tons in the year of 2013, with an average selling price of rebar of $422.2 per ton in the year of 2014, compared to
$490.7 per ton in the year of 2013. |
|
· |
Gross loss in the year
of 2014 totaled $(19.2) million, or (0.8)% of total revenue, as compared to $(55.9) million, or (2.3)% of total revenue in
the year of 2013. |
|
· |
Total finance expenses
in the year of 2014 were $96.7 million, as compared to $91.9 million in the year of 2013. Finance expenses mainly consisted
of interest expense on capital lease, which was $21.3 million and $20.8 million in the year of 2014 and 2013, respectively,
and interest expense on bank loans and discounted notes receivable, which was $75.4 million and $71.1 million in years of
2014 and 2013, respectively. |
Fiscal year 2014 operational
highlights:
| · | Fully
utilized the two additional continuous rolling rebar production lines constructed at
Longmen Joint Venture in 2013, to drive savings in unit production cost by the end of
the first quarter of 2014. |
| · | In
April 2014, we signed a direct purchase agreement with Rio Tinto to procure imported
iron ore, which ensured timely deliveries of the highest quality imported iron ore and
effectively lowered our sourcing costs. |
| · | In
June 2014, the Board approved our plan to accelerate business transformation by expanding
our business scope to include other non-steel industries, to further utilize our proven
corporate development team and sizable human capital, and increase overall profitability
and return on investments. We signed a Memorandum of Understanding with Tewoo Group to
co-develop bulk commodity e-commerce in October 2014; and established a RFID joint venture
with an Expert Team to pursue Internet-of-Things opportunities in February 2015. |
| · | During
the fourth quarter of 2014, we upgraded an existing 450 cubic-meter blast furnace to
a much larger and more efficient 1,800 cubic-meter blast furnace, as well as commissioned
a newly built 450 square meter sintering machine at Longmen Joint Venture. |
| · | On December 31, 2014, we sold our 80% stake in
Baotou General Steel Special Steel Pipe Joint Venture Company Limited
(“Baotou
Steel Pipe Joint Venture”). The assets, liabilities and the operating results of Baotou Steel Pipe Joint Venture were
immaterial to the Company’s consolidated financial statements as of and during the years ended December 31, 2014 and
2013. We believe
the disposal of
low-efficiency, non-core assets and restructure idle land resources will
help to unlock their hidden fair value. |
Our management
remains committed to continually enhancing operations for our steel business or exploring different opportunities for the
possibility of restructuring our steel business and unlocking considerable value for shareholders. Our growth strategy is a
combination of optimizing operating efficiencies in our steel business and expanding and focusing 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) or exploring different opportunities for the
possibility of restructuring our steel business. |
| · | We
aim to expand and focus into other high-growth and high-margin non-steel industries, such as logistics
and Internet-of-Things. |
Due to the near-term challenges for the
steel sector, we are strategically accelerating our business transformation. Our transformation strategy is to pursue opportunities
that offer compelling benefits to our organization and shareholders, including:
| · | First, strengthen our financials while
providing the financial flexibility to pursue higher return, higher growth opportunities; |
| · | Second, reduce the complexity of our business
structure, which is consistent with our objectives for internal simplification and operating efficiency; |
| · | Third, diversify operating risk in order
to lower our high reliance on steel business, while at the same time leverage on our vast vertical resources in the steel industry;
and |
| · | Fourth, pursue opportunities for additional
value creation. |
We formed a joint venture in February of
2015 with an RFID Expert team to develop and commercialize RFID technologies and data solutions. The formation of this joint venture
represents a unique opportunity to accelerate our expansion into the vibrant logistics and Internet-of-Things sectors.
Industry Environment
Despite demand growth
experienced throughout the past years, the overall nationwide steelmaking capacity still exceeds steel demand. There is significant
over-capacity in the Chinese steel sector which is putting pressure on operators’ profitability and has become the most
significant challenge in the steel manufacturing business. Chinese crude steel production reached a record high of 823 million
tons in 2014, an increase of 0.89% over 2013, while the total consumption of crude steel was only 738 million tons in 2014, a
decrease of 3.4% from the same period last year, according to the China Iron and Steel Association.
For steelmakers, operating
performance depends on the volatility of the cost of raw materials. The shortage of these raw materials in the market has allowed
suppliers of iron ore and metallurgical coal to rebuild the pricing mechanisms through the shift from annual to shorter-term price
contracts. This has created numerous challenges for steelmakers as they must now deal with volatility in raw material prices,
as well as maintain margins with fluctuating demand. Over the past few years, we have witnessed perseverance in steel prices that
has given iron ore producers an opportunity to increase the prices in the next contract; however the reverse may not be true as
steel companies cannot always pass on the rise in iron ore prices to end consumers due to the market overcapacity and fragmentation.
China’s steel
industry is highly fragmented, and the Chinese government continues to encourage industry consolidation. The Chinese central government
has had a long-stated goal to consolidate 60% of domestic steel production among the top ten producers by 2015, and expanding
to 70% by 2020. The top ten producers’ output fell to 39% of the national output in 2013 from 49% in 2010, which is still
below the 60% target for 2015 set in the 12th year plan.
Meanwhile, the Ministry
of Industry and Information Technology of the People's Republic of China is targeting to cut up to 80 million metric tons of capacity
by the end of 2018. In April 2012, the central government announced its goal of reducing obsolete iron and steel capacities by
17.8 million tons in 2012 and successfully reached the goal and eliminated 20.2 million tons of obsolete iron and steel capacity.
In April 2013, the central government published the industry target of eliminating 10.4 million tons of obsolete iron and steel
capacities in 2013 and successfully eliminated 16.9 million tons of obsolete iron and steel capacity. In May 2014, the government
reaffirmed its determination of industry consolidation, and announced that it plans to eliminate 28.7 million tons of obsolete
iron and steel capacity in 2014 and successfully eliminated 31.1 million tons, which was more than the original target amount.
Such industry consolidation through the reduction of obsolete iron and
steel capacities are not expected to directly impact our Company because we continue to see a strong demand for our products,
especially in Western China, and believe there are significant growth opportunities in the industry and market we serve.
Despite the government’s
initiatives to encourage industry consolidation and cut over-capacity, it is estimated that new capacity of approximately 20~25
million metric tons was added in 2014. Excess supply, weakening economic growth, and sagging prices have resulted in depressed
margins and operating losses. According to statistics by China Iron and Steel Association, the blended net margin of China steel
enterprises in 2014 was only 0.85%, with approximately 15% of major steel companies monitored by China Iron and Steel Association
still incurring operating losses.
On July 12, 2010, the
Ministry of Industry & Information Technology Commission enacted the Steel Industry Admittance and Operation Qualifications
standards. These new standards set forth requirements for all aspects of steel production in China, which include: size of blast
furnaces, size of converters, emission of waste water, dust per ton from steel production, quantity of coal used for each
process in steel production and output capacity. According to the new standards, blast furnaces under 450 cubic
meters are targeted to be eliminated. These standards once again confirmed the central government’s determination to
push forward the consolidation of this fragmented industry.
Since 2013, the Chinese
government has exerted a more stringent environmental protection policy on the steel industry. In January 2014, the Ministry of
Industry and Information Technology of the People's Republic of China (the "MIIT") announced a List of Enterprises
Fulfilling the Iron and Steel Industry Specification (the "List"). The
List includes a highly-selected group of large and medium steel manufacturers that have met or exceeded more stringent national
requirements and standards on product quality, environmental protection, energy consumption, workmanship and equipment, production
scale, as well as work safety and social responsibility. The MIIT will collaborate with China's other governmental agencies
to provide support to the List's members and to speed up the steel industry's restructuring and consolidation. Steel makers omitted
from the List will most likely face higher electricity costs, more restrictive administrative measures, and adverse effects of
forceful regulations intent on reducing the nation's overcapacity. Longmen Joint Venture, the major facility of General Steel
was included on the List as one of the key steel enterprises in China’s Shaanxi Province.
Due to the near-term challenges for the
steel sector, we are strategically accelerating our business transformation. Our transformation strategy is to pursue opportunities
that offer compelling benefits to our organization and shareholders, including:
| · | First, strengthen our financials while
providing the financial flexibility to pursue higher return, higher growth opportunities; |
| · | Second, reduce the complexity of our business
structure, which is consistent with our objectives for internal simplification and operating efficiency; |
| · | Third, diversify operating risk in order
to lower our high reliance on steel business, while at the same time leverage on our vast vertical resources in the steel industry;
and |
| · | Fourth, pursue opportunities for additional
value creation. |
We formed a joint venture in February of
2015 with an RFID Expert team to develop and commercialize RFID technologies and data solutions. The formation of this joint venture
represents a unique opportunity to accelerate our expansion into the vibrant logistics and Internet-of-Things sectors.
RESULTS OF OPERATIONS
Statements of Operations for the years ended December 31,
2014 and 2013:
(In thousands except share data) | |
2014 | | |
2013 | | |
Change | | |
Percentage Change | |
Sales | |
$ | 2,289,412 | | |
$ | 2,463,747 | | |
$ | (174,335 | ) | |
| (7.1 | )% |
Cost of Goods Sold | |
| 2,308,578 | | |
| 2,519,685 | | |
| (211,107 | ) | |
| (8.4 | )% |
Gross Loss | |
| (19,166 | ) | |
| (55,938 | ) | |
| 36,772 | | |
| (65.7 | )% |
Gross Loss Margin % | |
| (0.8 | )% | |
| (2.3 | )% | |
| 1.5 | % | |
| | |
Selling, General and Administrative Expenses | |
| (78,555 | ) | |
| (84,226 | ) | |
| 5,671 | | |
| (6.7 | )% |
Change in Fair Value of Profit Sharing Liability | |
| 91,018 | | |
| 174,569 | | |
| (83,551 | ) | |
| (47.9 | )% |
Income (Loss) from Operations | |
| (6,703 | ) | |
| 34,405 | | |
| (41,108 | ) | |
| (119.5 | )% |
| |
| | | |
| | | |
| | | |
| | |
Other Expense, net | |
| (71,304 | ) | |
| (76,676 | ) | |
| 5,372 | | |
| (7.0 | )% |
Loss Before Provision for Income Taxes and Noncontrolling Interest | |
| (78,007 | ) | |
| (42,271 | ) | |
| (35,736 | ) | |
| 84.5 | % |
Provision for Income Taxes | |
| 269 | | |
| 354 | | |
| (85 | ) | |
| (24.0 | )% |
Net Loss | |
| (78,276 | ) | |
| (42,625 | ) | |
| (35,651 | ) | |
| 83.6 | % |
Less: Net Loss Attributable to Noncontrolling Interest | |
| (29,553 | ) | |
| (9,609 | ) | |
| (19,944 | ) | |
| 207.6 | % |
Net Loss Attributable to General Steel Holdings, Inc. | |
$ | (48,723 | ) | |
$ | (33,016 | ) | |
$ | (15,707 | ) | |
| 47.6 | % |
Loss Per Share | |
| | | |
| | | |
| | | |
| | |
Basic and Diluted | |
$ | (0.86 | ) | |
$ | (0.60 | ) | |
$ | (0.26 | ) | |
| 43.3 | % |
Sales
Fiscal year ended December 31, 2014 compared to fiscal
year ended December 31, 2013
Sales by Subsidiary and Product
(in thousands) | |
| |
2014 | | |
2013 | | |
Change | | |
Percentage Change | |
Subsidiary | |
Product | |
| | | |
| | | |
| | | |
| | |
Longmen Joint Venture | |
Rebar | |
$ | 2,284,485 | | |
$ | 2,450,256 | | |
$ | (165,771 | ) | |
| (6.8 | )% |
Others | |
| |
| 4,927 | | |
| 13,491 | | |
| (8,564 | ) | |
| (63.5 | )% |
Total Sales | |
| |
$ | 2,289,412 | | |
$ | 2,463,747 | | |
$ | (174,335 | ) | |
| (7.1 | )% |
(In thousand metric tons) | |
| |
2014 | | |
2013 | | |
Change | | |
Percentage Change | |
Subsidiary | |
Product | |
| | | |
| | | |
| | | |
| | |
Longmen Joint Venture | |
Rebar | |
| 5,411 | | |
| 4,994 | | |
| 417 | | |
| 8.4 | % |
Others | |
| |
| 12 | | |
| 106 | | |
| (94 | ) | |
| (88.7 | )% |
Total Sales Volume | |
| |
| 5,423 | | |
| 5,100 | | |
| 323 | | |
| 6.3 | % |
Total sales for the
fiscal year 2014 decreased by $174.3 million or (7.1)% to $2.3 billion from $2.5 billion in 2013. The decrease in sales compared
to 2013 was due to the decrease in average selling price of our rebar products. Longmen Joint Venture comprised 99.8% and 99.5%
of total sales for the years ended 2014 and 2013, respectively. Sales volume of rebar increased by 0.3 million metric tons,
or 6.3% to 5.4 million metric tons, compared to 5.1 million metric tons in 2013. The average selling price of rebar decreased
by 14.0% to approximately $422.2 per ton in 2014 from approximately $490.7 per ton in 2013.
As a result of the
China and global steel industry over-capacity, Chinese economic control polices and weakened global economy, commodity prices
dropped, and the price of steel had been on a declining trend from the third quarter of 2012 to 2014. The over-capacity issue
impacted our results since the third quarter of 2012 and continued to do so in 2013 and 2014. At the same time, we strategically
discounted our products in order to establish a foothold into neighboring markets and expand our presence in Western China in
2014. As such, our sales prices have shown a continued decline.
Our five major customers
were distributors and collectively represented approximately 24.7% of our total sales for the year ended December 31, 2014 in
comparison to 22.1% of our total sales for year ended December 31, 2013. These five customers included related parties and major
distributors owned by the Chinese central government. As we are the largest supplier in Shaanxi Province, we maintain a good relationship
with these five customers to stabilize our sales channel.
Cost of Goods Sold
Fiscal year ended December 31, 2014 compared with fiscal
year ended December 31, 2013
(in thousands) | |
2014 | | |
2013 | | |
Change | | |
Percentage Change | |
Subsidiary | |
| | | |
| | | |
| | | |
| | |
Longmen Joint Venture | |
$ | 2,303,981 | | |
$ | 2,506,322 | | |
$ | (202,341 | ) | |
| (8.1 | )% |
Others | |
| 4,597 | | |
| 13,363 | | |
| (8,766 | ) | |
| (65.6 | )% |
Total Cost of Goods Sold | |
$ | 2,308,578 | | |
$ | 2,519,685 | | |
$ | (211,107 | ) | |
| (8.4 | )% |
Our primary cost of
goods sold is the cost of raw materials, such as iron ore, coke, alloy and scrap steel. The costs of iron ore and coke account
for approximately 65.8% of our total cost of sales. Cost of goods sold decreased by $211.1 million or (8.4)% to $2.3 billion in
2014 from $2.5 billion in 2013. This decrease was mainly driven by the decreased unit costs of raw materials as a result of the
decline in iron ore and coke purchase prices of approximately 17.4% and approximately 18.6%, respectively, for the year ended
December 31, 2014 as compared to the same period in 2013.
As such, the average
costs of rebar manufactured decreased 15.2% to approximately $425.8 per ton during the year ended December 31, 2014 from approximately
$501.9 per ton in the same period 2013.
Gross Loss
Fiscal year ended December 31, 2014 compared to fiscal
year ended December 31, 2013
(in thousands) | |
2014 | | |
2013 | | |
Change | | |
Percentage Change | |
Gross Loss | |
$ | (19,166 | ) | |
$ | (55,938 | ) | |
$ | 36,772 | | |
| (65.7 | )% |
Gross Loss Margin | |
| (0.8 | )% | |
| (2.3 | )% | |
| | | |
| | |
Gross loss for the
year of 2014 was $19.2 million, or (0.8)% of total sales, as compared to $55.9 million, or (2.3)% of total sales in the same period
in 2013. The increase in gross margin percentage was mainly attributable to the percentage decrease in the cost of rebar manufactured
of 15.2% being higher than the percentage decrease in the average rebar selling price of 14.0% for the year of 2014 as compared
to the same period of 2013. As the cost of iron ore and coke decreased by 17.4% and 18.6% year-over-year, respectively, we were
able to achieve leverage from the increased sales volume and expanded our gross margin in 2014 compared to 2013.
Gross Profit (Loss) and Gross Profit
(Loss) Margin by Quarters
The over-capacity issue
in the Chinese and global steel industry affected our results during 2013 and the Chinese economy remained weak, which indirectly
affected our industry, and our selling prices suffered a decline during the first two quarters of 2013. At the same time, the
prices of iron ore and coke, which accounted for the majority of our cost goods sold, had risen slightly at the beginning of 2013
before declining again in the second and third quarters of 2013. Consequently our selling prices in the second quarter of 2013
dropped below the cost of raw materials purchased earlier in the year, resulting in a gross loss. In the third quarter of 2013,
demand and prices of our products rose slightly while unit cost declined further as a result of decreasing cost of raw materials
purchased earlier in the year, leading to an increase in gross margins. However, the combination of a slight climb in raw material
costs and Longmen Joint Venture’s production line stoppage due to mechanical repairs, which increased our unit cost, caused
our unit cost of goods sold to increase above the unit selling price again, leading to a drop in gross margin in the fourth quarter
of 2013.
As raw material costs
for iron ore and coke continued to decline in the first two quarters of 2014 at a faster rate than rebar selling prices, our gross
margin recovered to positive margin by the second quarter of 2014. By the third quarter of 2014, our gross margin declined slightly
as we strategically discounted our products in order to establish a foothold into neighboring markets and expand our presence
in Western China. In the fourth quarter of 2014, the Chinese steel market winter slow-down kicked in, and rebar selling prices
decreased at a faster rate than the decrease in raw material costs, which led to a further decline in our gross margin.
Selling, General and Administrative Expenses
Fiscal year ended December 31, 2014 compared with fiscal
year ended December 31, 2013
| |
| | |
| | |
| | |
Percentage | |
(in thousands) | |
2014 | | |
2013 | | |
Change | | |
Change | |
| |
| | |
| | |
| | |
| |
Selling, General and Administrative expenses | |
$ | (78,555 | ) | |
$ | (84,226 | ) | |
$ | 5,671 | | |
| (6.7 | )% |
SG&A expenses as percentage of total revenue | |
| (3.4 | )% | |
| (3.4 | )% | |
| | | |
| | |
Selling, general and
administrative (“SG&A”) expenses decreased by $5.7 million, or 6.7% to $78.6 million for the year ended December
31, 2014, compared to $84.2 million for of the same period in 2013.
Selling expenses
decreased by 0.1% to $34.08 million for the year ended December 31, 2014 as compared to $34.13 million in the same period of
2013. The decrease was mainly due to the decrease in sales tax expense along with the decrease in sales for the year ended
December 31, 2014 as compared to 2013, which was offset by an increase in freight expense for the year ended December 31,
2014 as we expanded sales into neighboring provincial markets.
In addition, general
and administrative (“G&A”) expenses decreased by 11.2% to $44.5 million for the year ended December 31, 2014 as
compared to $50.1 million in the same period of 2013. The decrease was mainly due to Longmen Joint Venture decreased employee
base salaries and employee training expenses during 2014.
Change in Fair Value of Profit Sharing
Liability
Fiscal year ended December 31, 2014 compared with fiscal
year ended December 31, 2013
(in thousands) | |
2014 | | |
2013 | | |
Change | | |
Change % | |
| |
| | |
| | |
| | |
| |
Change in fair value of profit sharing liability (gain (loss)) | |
$ | 91,018 | | |
$ | 174,569 | | |
| (83,551 | ) | |
| (47.9 | )% |
For 2013, we considered
the recent changes in China’s economic situation, which included a new estimation and downgrade of 2014 GDP by major investment
bankers in June 2013, and a steel industry outlook reports issued for 2014. Also, there was a tightening of the monetary policy
by the Chinese policy makers since June 20, 2013 by increasing the short-term borrowing rates of approximately 1% in China, and
removal of the floor rate charged to customers by the Chinese central bank. As a result, we re-evaluated our projected operating
profit (loss) taking into consideration the recent macroeconomic events in China, as well as our fourth quarter and year to date
operating results. Due to the continued decrease in our rebar selling price, the market slow-down in the fourth quarter of 2013,
and the lack of gross profit recovery as quickly as expected in the year ended December 31, 2013, we foresaw a greater downward
trend in 2014 through 2016 than previously anticipated. As our projected profit (loss) decreased, the fair value of our profit
sharing liability was reduced as compared to our previous estimates in 2012 and we recognized a gain of $174.6 million in our
income from operations for the year ended December 31, 2013.
In September 2014,
Goldman Sachs published its latest global economic forecast, which showed a greater downgrade of China’s GDP growth rate
from 2014 to 2017 than projected in prior year. Thus we re-evaluated our projected operating profit (loss) taking into consideration
both the projected GDP downgrade in China and our recent operating results in the third quarter of 2014. On January 20, 2015,
the International Monetary Fund (“IMF”) published its latest “World Economic Outlook,” in which it downgraded
its projected 2015 and 2016 GDP% for China from its October 2014 projections mainly as a result of China’s sluggish infrastructure
investment and consumption growth in 2014 and the downgrade in overall world economic forecast. Thus we re-evaluated our projected
operating profit (loss) taking into consideration both the latest projected GDP downgrade in China and our recent operating results
in the fourth quarter of 2014. As a result, we recognized a gain of $91.0 million on the change in the fair value of the profit
sharing liability primarily due to the reduction in the fair value of profit sharing liability as a result of the change in estimate
of future operating results for the year ended December 31, 2014.
Income (Loss) from Operations
Fiscal year ended December 31, 2014 compared to fiscal
year ended December 31, 2013
( in thousands) | |
2014 | | |
2013 | | |
Change | | |
Percentage Change | |
Income (Loss) from Operations | |
$ | (6,703 | ) | |
$ | 34,405 | | |
$ | (41,108 | ) | |
| (119.5 | )% |
Loss from operations
for the year ended December 31, 2014 was $(6.7) million as compared to $34.4 million income from operations for the same period
in 2013. The decrease in income from operations was predominantly due to decrease in the gain from change in fair value of profit
sharing liability offset by the decrease in gross loss and SG&A expenses.
Total Other Income (Expense), Net
Fiscal year ended December 31, 2014 compared with fiscal
year ended December 31, 2013
Other Income (Expense)
(in thousands) | |
2014 | | |
2013 | | |
Change | | |
Percentage Change | |
Interest Income | |
$ | 21,700 | | |
$ | 11,214 | | |
$ | 10,486 | | |
| 93.5 | % |
Finance/Interest Expense | |
| (75,421 | ) | |
| (71,079 | ) | |
| (4,342 | ) | |
| 6.1 | % |
Financing Cost on Capital Lease | |
| (21,252 | ) | |
| (20,799 | ) | |
| (453 | ) | |
| 2.2 | % |
Gain (Loss) on Disposal of Equipment and Intangible Assets | |
| (1,125 | ) | |
| 424 | | |
| (1,549 | ) | |
| (365.3 | )% |
Government Grant | |
| 327 | | |
| 4,216 | | |
| (3,889 | ) | |
| (92.2 | )% |
Income from Equity Investments | |
| 139 | | |
| 203 | | |
| (64 | ) | |
| (31.5 | )% |
Foreign Currency Transaction (Loss) Gain | |
| 786 | | |
| 1,394 | | |
| (608 | ) | |
| (43.6 | )% |
Lease income | |
| 2,175 | | |
| 2,158 | | |
| 17 | | |
| 0.8 | % |
Gain on deconsolidation of a subsidiary | |
| 1,795 | | |
| 1,011 | | |
| 784 | | |
| 77.5 | % |
Payment for public highway construction | |
| - | | |
| (6,462 | ) | |
| 6,462 | | |
| (100.0 | )% |
Other non-operating income (expense), net | |
| (428 | ) | |
| 1,044 | | |
| (1,472 | ) | |
| (141.0 | )% |
Total Other Expense, Net | |
$ | (71,304 | ) | |
$ | (76,676 | ) | |
$ | 5,372 | | |
| (7.0 | )% |
Total
other expense, net for the year ended December 31, 2014 were $71.3 million compared to $76.7 million in 2013. The decrease of
$5.4 million or 7.0% was mainly a result of the $10.5 million increase in interest income and $6.5 million decrease in
payment for public highway construction offset by $4.3 million increase in finance/interest expense, $1.5 million decrease in
gain on disposal of equipment and $3.9 million decrease in gain from government grant. Interest income increased by 93.5% in
2014 compared to 2013 mainly as a result of increased loans receivable, including related parties, in 2014 compared to
2013. Interest expense for early submission request of payment increased by $11.4 million or 30.1% to $49.3 million
for the year ended December 31, 2014 from $37.9 million for the year ended December 31, 2013. The increase in discounted interest
on notes receivable in 2014 as compared to 2013 was mainly due to more conversions of notes receivable before maturity date into
cash for financing our operations in 2014 as compared to 2013. Short-term loan interest expense decreased by $7.1 million to $26.1
million from $33.2 million in 2013 mainly as a result of decreased borrowings from banks, which offered higher interest rates than
unrelated and related party business lenders, during 2014 as compared to 2013.
Income Taxes
For the years ended
December 31, 2014 and 2013, we had a total tax provision from our profitable subsidiaries of $0.3 million and $0.4 million, respectively.
For the years ended December 31, 2014 and 2013, we evaluated the deferred tax assets and concluded the net operating loss may
not be fully realizable and provided 100% valuation allowance for the deferred tax assets. No deferred income tax benefit was
recorded for the year ended December 31, 2014 as the resulting deferral of tax assets had been fully reserved because the benefit
was not considered to be realizable due to recent historical experience.
For the years ended
December 31, 2014 and 2013, we had effective tax rates of (0.3)% and of (0.8)%, respectively. The negative effective tax rates
for the years ended December 31, 2014 and 2013 were mainly due to a consolidated loss before income tax while we provided 100%
valuation allowance for the deferred tax assets at subsidiaries with losses and incurred income tax expenses in our profitable
subsidiaries.
Net Loss
Fiscal year ended December 31, 2014 compared with fiscal
year ended December 31, 2013
( in thousands) | |
2014 | | |
2013 | | |
Change | | |
Percentage Change | |
Net loss | |
$ | (78,276 | ) | |
$ | (42,625 | ) | |
$ | (35,651 | ) | |
| 83.6 | % |
Net Loss Attributable to General Steel Holdings, Inc.
Fiscal year ended December 31, 2014 compared to fiscal
year ended December 31, 2013
( in thousands) | |
2014 | | |
2013 | | |
Change | | |
Percentage Change | |
| |
| | |
| | |
| | |
| |
Net loss | |
$ | (78,276 | ) | |
$ | (42,625 | ) | |
$ | (35,651 | ) | |
| 83.6 | % |
Less: Net loss attributable to noncontrolling interest | |
| (29,553 | ) | |
| (9,609 | ) | |
| (19,944 | ) | |
| 207.6 | % |
Net loss attributable to General Steel Holdings, Inc. | |
$ | (48,723 | ) | |
$ | (33,016 | ) | |
$ | (15,707 | ) | |
| 47.6 | % |
Net loss attributable
to us for the year ended December 31, 2014 increased to $48.7 million compared to $33.0 million for the year ended December 31,
2013. The increase in net loss attributable to us for the year ended December 31, 2014 was mainly a result of a decrease in $83.6
million in the change in fair value of profit sharing liability, offset by a $36.8 million decrease in gross loss, a $5.7 million
decrease in SG&A expense, a $5.4 million decrease in other expense, net and a $19.9 million increase in net loss attributable
to noncontrolling interest for the year ended December 31, 2014 as compared to the same period in 2013.
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 December 31,
2014, our current liabilities exceeded the current assets by approximately $1.3 billion. Given our expected capital expenditure
in the foreseeable future, we have comprehensively considered our available sources of funds as follows:
|
· |
Financial support and credit
guarantee from related parties; and |
|
· |
Other available sources
of financing from domestic banks and other financial institutions given our credit history. |
Based on the above
considerations, our Board of Directors is of the opinion that we have sufficient funds to meet our working capital requirements
and debt obligations as they become due. However, this opinion is based on the demand of our products, economic conditions, the
overcapacity issue in the steel industry and our operating results not continuing to deteriorate and on our vendors and related
parties being able to provide continued liquidity. Therefore, as noted in the Liquidity and Going Concern section below,
this raises substantial doubt about our ability to continue as a going concern.
As of December 31,
2014, we had cash and restricted cash aggregating $367.3 million, of which $355.7 million was restricted. As of December 31, 2013,
we had cash and restricted cash aggregating $431.3 million, of which $399.3 million was restricted.
The steel business
is capital intensive and we utilize leverage greater than our industry peers, which we believe enables us to generate revenue
compared to our shareholder equity at a rate higher than our industry peers. We utilize leverage in the form of credit from banks,
vendor financing, customer deposits and from other sources. This blended form of financing reduces our reliance on any single
source.
Substantially all our
operations are conducted in China and all of our revenues are denominated in Renminbi (RMB). RMB is subject to 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.
We have previously
raised money in the U.S. capital markets which provided the capital needed for our operations and for General Steel Investment
Co, Ltd. (“General Steel Investment”). Thus the foreign currency restrictions and regulations in the PRC on the dividends
distribution will not have a material impact on the liquidity, financial condition and results of operations of General Steel
Holdings, Inc. and General Steel Investment.
Although the steel
industry is slowing down due to over-capacity issues in the PRC, in order for us to stay competitive, we continue to look for
opportunities to improve the efficiency on our production lines. In addition to the 1,200,000 metric ton capacity rebar production
renovation of an existing 800,000 metric ton capacity rebar production line that we brought online in November 2010, in July 2011,
we also brought online a 1,000,000 metric ton capacity high speed wire production line. These two newly installed production lines
were both relocated from the Maoming Hengda (as defined below) facility and are expected to consume less energy when running at
maximum efficiencies compared to our previous production line. In September 2012 we began the construction of a 900,000 metric
ton capacity rebar production line, which was completed and put into production in September 2013. In March 2013, we began the
construction of a 1,200,000 metric ton capacity rebar production line for the purpose of reducing our reprocessing cost and to
increase our profit margin. The 1,200,000 metric ton capacity rebar production lines was completed and put into test production
in November 2013. Any future facility expansion will require additional financing and/or equity capital and will be dependent
upon the availability of financing arrangements and capital at the time.
Short-term Notes Payable
As of December 31,
2014, we had $661.6 million in short-term notes payables, which are secured by restricted cash of $339.4 million. These are lines
of credit extended by banks for a maximum of six months and are used to finance working capital. The short-term notes payable
must be paid in full at maturity and credit availability is continued upon payment at maturity. There are no additional significant
financial covenants. We pay zero interest on this type of credit as this is a monetary tool used by China’s central bank
to control liquidity over the Chinese monetary system. However, we are subject to pay a transaction fee of 0.05% of the notes’
value. In addition, the banks usually require us to deposit either a certain amount of cash at the bank as a guarantee deposit
or provide notes receivable as security.
Short-term Loans – Banks
As of December 31,
2014, we had $257.5 million in short-term bank loans. We believe our current creditors will renew their loans to us after our
loans mature as they did in the past. Longmen Joint Venture has been included in the List of Enterprises Fulfilling the Iron and
Steel Industry Specification (the "List") released by the MIIT in January 2014. The MIIT will collaborate with China's
other governmental agencies to provide various supports to the List's members, which includes financing supports from the banks.
We are able to repay
our short-term notes payables and short term bank loans upon maturity using available capital resources.
For more details about
our debts, please see Note 10 in our Notes to the consolidated financial statements included in this Annual Report.
For more details about
our related party debt financing, see Note 20 in our Notes to the consolidated financial statements included in this Annual Report.
As part of our working
capital management, Longmen Joint Venture has entered into a number of sale and purchase back contracts (“Contracts”)
with third party companies and two 100% owned subsidiaries of Longmen Joint Venture, named Yuxin Trading Co., Ltd. (“Yuxin”)
and Yuteng Trading Co., Ltd. (“Yuteng”). Pursuant to the Contracts, Longmen Joint Venture sells rebar to the third
party companies at a certain price, and within the same month, Yuxin and Yuteng will purchase back the rebar from the third party
companies at a price of 4.6% to 12.0% higher than the original selling price from Longmen Joint Venture (this transaction is referred
to as “financing sales”). Based on the Contract terms, Longmen Joint Venture is paid in advance for the rebar sold
to the third party companies and Yuxin and Yuteng are given a credit period of several months to one year from the third party
companies. There is no physical movement of the inventory during the sale and purchase back arrangement. A margin of between 4.6%
and 12.0% is determined by reference to the bank loan interest rates at the time when the Contracts are entered into, plus an
estimated premium based on the financing sale amount, which represents the interest charged by the third party companies for financing
Longmen Joint Venture through the above sale and purchase back arrangement. As such, the revenue and cost of goods sold arising
from the above transactions are recorded on a net basis and the incremental amounts paid by Yuxin and Yuteng to purchase back
the goods are treated as financing costs in the consolidated financial statements.
Total financing sales
for the years ended December 31, 2014 and 2013 amounted to $922.6 million and $724.3 million, respectively, which were eliminated
in our consolidated financial statements. The financial cost related to financing sales for the year ended December 31, 2014 and
2013, accounted to $4.2 million and $5.4 million, respectively.
Liquidity
and Going Concern
Our accounts
have been prepared assuming that we will continue as a going concern basis. The going concern basis assumes that assets are
realized and liabilities are extinguished in the ordinary course of business at amounts disclosed in the financial
statements. Our ability to continue as a going concern depends upon aligning our sources of funding (debt and equity) with
our expenditure requirements and repayment of the short-term debt facilities as and when they become due. The steel
business is capital intensive and as a normal industry practice in PRC, our Company is highly leveraged. Debt financing in
the form of short term bank loans, loans from related parties, financing sales, bank acceptance notes, and capital leases
have been utilized to finance the working capital requirements and the capital expenditures of our Company. As a result, our
debt to equity ratio as of December 31, 2014 and 2013 were (5.6) and (6.5), respectively. As of December 31, 2014, our
current liabilities exceed current assets (excluding deferred lease income) by $1.3 billion, which raises substantial doubt
about our ability to continue as a going concern.
Our steel business has faced very tough
market conditions and challenging profitability over the last several years, and based on current trends, we think the near-term
challenges for the steel sector will likely linger. In reaction to this challenging market, we are proactively reviewing our strategy
and asset portfolio and seeking to restructure low-efficient, non-core assets, as well as idle land resources to unlock hidden
fair value.
We aim to transform into a leaner and fitter
organization with better profitability. As such, we are strategically accelerating our business transformation to pursue opportunities
that offer compelling benefits to our organization and shareholders, including:
| · | First, strengthen our financials while
providing the financial flexibility to pursue higher return, higher growth opportunities; |
| · | Second, reduce the complexity of our business
structure, which is consistent with our objectives for internal simplification and operating efficiency; |
| · | Third, diversify operating risk in order
to lower our high reliance on steel business, while at the same time leverage on our vast vertical resources in the steel industry;
and |
| · | Fourth, pursue opportunities for additional
value creation. |
Management has
implemented the following plans that are intended to mitigate the conditions or events that raise substantial doubt about the
Company’s ability to continue as a going concern.
Longmen Joint Venture,
as our most important subsidiary, accounted for a majority of our total sales. As such, the majority of our working capital needs
to come from Longmen Joint Venture. Our ability to continue as a going concern depends heavily on Longmen Joint Venture’s
operations. Longmen Joint Venture has obtained different types of financial supports, which include line of credit from banks,
vendor financing, financing sales, other financing and sales representative financing.
For more details and
terms about our financial supports, see Note 2(d) in our Notes to the consolidated financial statements included in this Annual
Report.
With the financial
support from the banks and the companies, management is of the opinion that we have sufficient funds to meet our future operations, working capital
requirements and debt obligations until the end of December 31, 2015. However, this opinion is based on the demand of our products, economic conditions, the overcapacity issue
in the steel industry and our operating results not continuing to deteriorate and on our vendors and related parties being able
to provide continued liquidity, as summarized below. The detailed breakdown of Longmen Joint Venture’s
estimated cash flows items are listed below.
| |
Cash inflow (outflow) (in millions) | |
| |
For the twelve months ended December
31, 2015 | |
Estimated current liabilities over current assets (excluding deferred lease income)
as of December 31, 2014 | |
$ | (1,278.8 | ) |
Projected cash financing and outflows: | |
| | |
Cash provided by line of credit from banks | |
| 141.7 | |
Cash provided by vendor financing | |
| 896.0 | |
Cash provided by other financing | |
| 363.3 | |
Cash provided by sales representatives | |
| 20.4 | |
Cash projected to be used in operations in the twelve months ended December
31, 2015 | |
| (37.2 | ) |
Cash projected to be used for financing cost in the twelve
months ended December 31, 2015 | |
| (50.1 | ) |
Net projected change in cash for the twelve months ended December 31,
2015 | |
$ | 55.3 | |
Cash-flow
Operating activities
Net cash provided by
operating activities for the year ended December 31, 2014 was $137.9 million compared to $163.9 million used in operating activities
for the year ended December 31, 2013. This change was mainly due to the combination of the following factors:
The impact of non-cash
items included in net loss was $34.3 million in the year ended December 31, 2014, compared to $(69.1) million for the same
period in 2013. The non-cash items are the following:
|
- |
Depreciation, amortization and depletion; |
|
- |
Change in fair value of derivative liabilities; |
|
- |
Gain/loss on disposal of equipment and intangible assets; |
|
- |
Provision (recovery) for doubtful accounts; |
|
- |
Reservation of mine maintenance fee; |
|
- |
Stock issued for services and compensation; |
|
- |
Amortization of deferred financing cost on capital lease; |
|
- |
Income from equity investments; |
|
- |
Foreign currency transaction gain/loss; |
|
- |
Gain on deconsolidation of a subsidiary; |
|
- |
Deferred lease income; and |
|
- |
Change in fair value of profit sharing liability. |
The other primary reasons for the material
fluctuations in cash inflow from operations are as follows:
|
- |
Notes receivable: The decrease
of notes receivable was mainly due to our acceptance of fewer notes receivables as a substitute for cash receipts during year
ended December 31, 2014; |
|
- |
Other receivables - related parties:
The decrease in other receivables – related parties was mainly due to the increase in business related expenses imbursement
and advances returned to the Company with related parties during the year ended December 31, 2014; |
|
- |
Inventories: The decrease in inventories
in the year of 2014 was mainly due to the decrease in the price of raw materials during the year, which also decreased finished
goods cost; |
|
- |
Advance on inventory purchases –
related parties: The decrease in advance on inventory purchases to related parties was mainly due to more advances being paid
to third party vendors instead of related parties for the year ended December 31, 2014. |
|
- |
Accounts payable: The increase in accounts
payable was mainly due to Longmen Joint Venture paying less to its suppliers as compared to the same period in 2013. Pursuant
to the supplier financing agreements signed between Longmen Joint Venture and its suppliers, those suppliers agreed not to
demand certain cash payment for a period of time under the agreements; |
|
- |
Other payables and accrued liabilities:
The increase in other payables and accrued liabilities was mainly due to Longmen Joint Venture incurring more miscellaneous
payables to third parties during the year ended December 31, 2014; and |
|
- |
Customer deposits, including related
parties: The increase in customer deposits, including related parties was mainly due to more of our customers making prepayment
to us prior to the end of 2014. These deposits were subsequently recognized as sales after December 31, 2014 in accordance
with our sales recognition policy. |
The primary reasons for the material fluctuations
in cash outflows are as follows:
|
- |
Accounts receivable, including
related parties: The increase was mainly due to more credit sales to both third parties and related parties were incurred
that have not yet been collected for the year ended December 31, 2014 compared with the same period in 2013; |
|
- |
Other receivables: The increase was
mainly due to an increase in receivables incurred with third parties for cash flow purpose for doing business on our behalf; |
|
- |
Advances on inventory purchases: The increase was mainly due to the fact that more advance payments were made for raw material purchases to meet future production capacity. Advance payment is a prevailing requirement on iron ore purchases in the steel
production industry; |
|
- |
Prepaid expense and other: The increase
was mainly due to more prepayments being made for miscellaneous expenses at the end of 2014 compared to the prior year; |
|
- |
Accounts payable – related parties:
The decrease in accounts payable – related parties was mainly due to Longmen Joint Venture making fewer purchases from
related parties during the year ended December 31, 2014 compared with the same period in 2013. Pursuant to the supplier financing
agreements signed between Longmen Joint Venture and its suppliers, those suppliers agreed not to demand certain cash payments
for a certain period; and |
|
- |
Other payables – related parties:
The decrease in other payables – related parties was mainly due to an increase in payments to various related parties
for the year ended December 31, 2014 compared to the prior year. |
Investing activities
Net cash used
in investing activities was $229.0 million and $105.8 million for the year ended December 31, 2014 and 2013, respectively. Cash
inflow from investing activities mainly came from the decrease in our restricted cash used as a pledge for our notes payable as
required by banks and the increase in loan receivable repayment from related parties during 2014. The increase in cash provided
was partially offset by the increase in loans to unrelated parties. We also incurred additional spending on equipment
purchase of $239.6 million mainly for the construction of a new blast furnace and miscellaneous production support facilities.
Financing activities
Net cash provided by
financing activities was $70.6 million for the year ended December 31, 2014 compared to $254.0 million for the year ended December
31, 2013. The increase of cash inflow from financing activities was mainly driven by the following:
|
- |
Notes receivable - restricted:
The decrease in notes receivable – restricted was mainly due to less notes receivable was used as guarantee for notes
payable and bank loans during the year ended December 31, 2014; and |
|
- |
Long term loans – related party:
We borrowed more long term loans from related party during the year ended December 31, 2014. |
The cash inflow was offset by the following cash outflow:
|
- |
Short term notes payable:
We repaid more short term notes payable during the year ended December 31, 2014 compared to the prior year; |
|
- |
Short term loans: We repaid more money
to banks, unrelated parties and related parties during the year ended December 31, 2014 as short term loans became due; |
|
- |
Deposits due to sales representatives:
We repaid more deposits to third party sales representatives during the year ended December 31, 2014; and |
|
- |
Capital lease obligation: we made more
principal payment on capital lease obligations during the year ended December 31, 2014. |
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 year
ended December 31, 2014. 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 raw materials. We have generally been able to pass on
cost increases through price adjustments. However, the ability to pass on these increases depends on market conditions influenced
by the overall economic conditions in China. We manage our price risks through productivity improvements and cost-containment
measures. We do not believe that inflation risk is material to our business or our financial position, results of operations or
cash flows.
Compliance with environmental laws and regulation
Longmen Joint Venture:
In 2005, we received
ISO 14001 certification for our overall environmental management system. We have received several awards from the Shaanxi provincial
government as a result of our increased effort in environmental protection.
We have a comprehensive
waste water recycling and water treatment system. The 2,000 cubic meter/h treatment capacity systems were implemented at the end
of 2005. In 2010, 0.9 metric tons of new water was consumed per metric ton of steel produced.
We have one 10,000
cubic meter coke-oven gas tank, one 50,000 cubic meter blast furnace coal gas tank and one 80,000 cubic meter converter furnace
coal gas tank to collect the residual coal gas produced from our facility and that of surrounding enterprises. We also have spent
$35.6 million (RMB 230 million) on a thermal power plant with two 25 Kilowatt generators that use the residual coal gas from the
blast furnaces and converters as fuel to generate power.
We have several plants
to further process solid waste generated from the steel making process into useful products such as construction materials, building
blocks, porcelain tiles, curb tops, ornamental tiles, as well as other products.
In 2009, we treated
and recycled about 6.8 million tons of waste water, 335,320 tons of slag, 130 million m³ of gas from the converters and 6.1
billion m³ of gas from the blast furnaces. We also reused 855,714 tons of hot steam and generated 433 million KWH of electricity.
During 2010 and 2011,
more than $9.6 million (RMB 60 million) was used on the technical upgrade and renovation of our converters and $0.88 billion (RMB
5.5 billion) was spent on the upgrade of the blast furnaces and sintering machines.
In 2012, we installed
desulfidation equipment for two sintering machines, which started operating in June 2012.
OFF-BALANCE SHEET ARRANGEMENTS
There were no off-balance
sheet arrangements for the 2014 fiscal year that have or that in the opinion of management are likely to have, a current
or future material effect on our financial condition or results of operations.
Contractual Obligations and Commercial Commitments
We have certain fixed
contractual obligations and commitments that include future estimated payments. Changes in our business needs, cancellation provisions,
changing interest rates, and other factors may result in actual payments differing from the estimates. We cannot provide certainty
regarding the timing and amounts of payments. Throughout our operating history, we have funded our contractual obligations and
commercial commitments through financing arrangements and operating cash flow, including, but not limited to, the operating income,
payments collected from the customers in advance and stock issuances. Below, we have presented a summary of the most significant
contractual obligations and commercial commitments in the tables, in order to assist in the review of this information within
the context of our consolidated financial position, results of operations, and cash flows.
The following tables
summarize our contractual obligations as of December 31, 2014 and the effect these obligations are expected to have on our liquidity
and cash flows in future periods.
| |
Principal due by period | | |
| |
| |
| | |
Less than | | |
| | |
| | |
| |
Contractual obligations | |
Total | | |
1 year | | |
1-3 years | | |
3- 5 years | | |
5 years after | |
| |
(in thousands) | | |
| |
Note payable | |
$ | 661,635 | | |
$ | 661,635 | | |
$ | - | | |
$ | - | | |
$ | - | |
Bank loans | |
| 257,502 | | |
| 257,502 | | |
| - | | |
| - | | |
| - | |
Other loans, including related parties | |
| 107,097 | | |
| 107,097 | | |
| - | | |
| - | | |
| - | |
Deposits due to sales representatives, including related parties | |
| 20,380 | | |
| 20,380 | | |
| - | | |
| - | | |
| - | |
Operating lease obligations | |
| 50,137 | | |
| 3,109 | | |
| 3,900 | | |
| 2,540 | | |
| 40,588 | |
Construction obligations - Longmen Joint Venture | |
| 7,996 | | |
| 7,996 | | |
| - | | |
| - | | |
| - | |
Long term loan – Shaanxi Steel | |
| 339,549 | | |
| - | | |
| 339,549 | | |
| - | | |
| - | |
Capital lease obligations | |
| 401,760 | | |
| 8,508 | | |
| 144,599 | | |
| 27,617 | | |
| 221,036 | |
Profit sharing liability | |
| 70,422 | | |
| - | | |
| - | | |
| - | | |
| 70,422 | |
Total | |
$ | 1,916,478 | | |
$ | 1,066,227 | | |
$ | 488,048 | | |
$ | 30,157 | | |
$ | 332,046 | |
Bank loans in the PRC are due either on
demand or, more typically, within one year. These loans can be renewed with the banks subject to bank’s credit reevaluation.
This amount includes estimated interest payments as well as principal repayment.
As of December 31, 2014, Longmen Joint Venture
guaranteed bank loans for related parties and third parties, including lines of credit, amounting to $103.4 million, as follows:
Nature of guarantee | |
Guarantee amount | | |
Guaranty Expiration Date |
| |
(In thousands) | | |
|
Line of credit | |
$ | 100,265 | | |
Various from January 2015 to August 2017 |
Financing by the rights of goods delivery in future | |
| 3,095 | | |
June 2015 |
Total | |
$ | 103,360 | | |
|
As of December 31,
2014, we did not accrue any liability for the amount guaranteed for third and related parties because those parties are current
in their payment obligations and we have not experienced any loss from providing guarantees. We evaluated the debt guarantees
and concluded that the likelihood of having to make payments under the guarantees is remote and that the fair value of the stand-ready
obligation under these commitments is not material.
Critical Accounting Policies
Management’s
discussion and analysis of its financial condition and results of operations are based upon our consolidated financial statements,
which have been prepared in accordance with generally accepted accounting principles in the United States. Our 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 we are 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 our Company
in accordance with the generally accepted accounting principles in the United States of America (“U.S. GAAP”).
Subsidiaries are those
entities in which our Company, directly or indirectly, controls more than one half of the voting power; or has the power to govern
the financial and operating policies, to appoint or remove the majority of the members of the board of directors, or to cast a
majority of votes at 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.
Consolidation of VIE
Prior to entering
into the Unified Management Agreement on April 29, 2011, Longmen Joint Venture had been consolidated as our 60% direct owned subsidiary.
Upon entering into the Unified Management Agreement on April 29, 2011, Longmen Joint Venture was re-evaluated by us to determine
if Longmen Joint Venture is a VIE and if we are the primary beneficiary.
Longmen Joint Venture’s
equity at risk is considered insufficient to finance its activities and therefore Longmen Joint Venture is considered to be a
VIE.
We would be considered
the primary beneficiary of the VIE if it has both of the following characteristics:
|
a. |
The power to direct the
activities of the VIE that most significantly impact the VIE’s economic performance; and |
|
b. |
The obligation to absorb losses of
the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially
be significant to the VIE. |
A Supervisory Committee
was formed during the negotiation of the Unified Management Agreement. Given there is both a Supervisory Committee and a Board
of Directors with respect to Longmen Joint Venture , the powers (rights and roles) of both bodies were considered to determine
which party has the power to direct the activities of Longmen Joint Venture, and by extension, whether we continue to have the
power to direct Longmen Joint Venture’s activities after this Supervisory Committee was formed and the significant investment
in plant and equipment by owners of the Longmen Joint Venture partner. The Supervisory Committee, in which we hold 2 out of 4
seats, requires a ¾ majority vote, while the Board of Directors, on which we hold 4 out of 7 seats, requires a simple majority
vote. As the Supervisory Committee’s role is limited to supervising and monitoring management of Longmen Joint Venture and
in the event there is any disagreement between the Board and the Supervisory Committee, the Board prevails, the Supervisory Committee
is considered subordinate to the Board. Thus, the Board of Directors of Longmen Joint Venture continues to be the controlling
decision-making body with respect to Longmen Joint Venture. We, which controls 60% of the voting rights of the Board of Directors,
have control over the operations of Longmen Joint Venture and as such, have the power to direct the activities of the VIE that
most significantly impact Longmen Joint Venture’s economic performance.
In connection with
the Unified Management Agreement, we, Shaanxi Coal and Shaanxi Steel may provide such support on a discretionary basis or as needed
in the future. See Note 2(d) Liquidity.
We have the obligation
to absorb losses and the rights to receive benefits based on the profit allocation as stipulated by the Unified Management Agreement
that are significant to the VIE. As both conditions are met, we are the primary beneficiary of Longmen Joint Venture and therefore,
continue to consolidate Longmen Joint Venture as a VIE.
We believe that the
Unified Management Agreement between Longmen Joint Venture and Shaanxi Coal is in compliance with PRC law and is legally enforceable.
However, PRC law and/or uncertainties in the PRC legal system could limit our ability to enforce the Unified Management Agreement,
which in turn, may lead to reconsideration of the VIE assessment and the potential for a different conclusion. If the Unified
Management Agreement cannot be enforced, we would not consolidate Longmen Joint Venture as a VIE. However, the current PRC legal
system has not limited our ability to enforce the Unified Management Agreement nor do we believe it is likely to do so in the
future. We make an ongoing assessment to determine whether Longmen Joint Venture is a VIE.
Longmen Joint Venture
has two 100% owned subsidiaries, Yuxin Trading Co., Ltd. (“Yuxin”) and Yuteng Trading Co., Ltd. (“Yuteng”).
Longmen Joint Venture has two consolidated subsidiaries, Hualong Fire Retardant Material Co., Ltd. (“Hualong”) and
Beijing Huatianyulong International Steel Trading Co., Ltd. (“Huatianyulong”), in which it does not hold a controlling
interest. Hualong and Huatianyulong are separate legal entities which were established in the PRC as limited liability companies
and subsequently invested in by Longmen Joint Venture in June 2007 and July 2008, respectively. However, these two entities do
not meet the definition of variable interest entities. Further consideration was given to whether consolidation was appropriate
under the voting interest model, specifically where the power of control may exist with a lesser percentage of ownership (i.e.
less than 50%), for example, by contract, lease, agreement with other stockholders or by court decree.
Hualong
Longmen Joint Venture,
the single largest shareholder, holds a 36.0% equity interest in Hualong. The other two shareholders, who own 34.67% and 29.33%
respectively, assigned their voting rights to Longmen Joint Venture in writing at the time of the acquisition of Hualong. The
voting rights have been assigned through the date Hualong ceases its business operation or the other two shareholders sell their
interest in Hualong. Hualong’s main business is to supply refractory. The assets, liabilities and the operating results
of Hualong are immaterial to our consolidated financial statements as for and during the years ended December 31, 2014 and 2013.
Huatianyulong
Longmen Joint Venture
holds a 50.0% equity interest in Huatianyulong and the other unrelated shareholder holds the remaining 50.0%. The other shareholder
assigned its voting rights to Longmen Joint Venture in writing at the time of acquisition of Huatianyulong. The voting rights
have been assigned through the date Huatianyulong ceases its business operation or the other unrelated shareholder sells its interest
in Huatianyulong. Huatianyulong mainly sells imported iron ore. The assets, liabilities and the operating results of Huatianyulong
are immaterial to our consolidated financial statements as for and during the years ended December 31, 2014 and 2013.
We have determined
that it is appropriate for Longmen Joint Venture to consolidate Hualong and Huatianyulong with appropriate recognition in our
financial statements of the non-controlling interests in each entity, beginning on the acquisition dates as these were also the
effective dates of the agreements with other stockholders granting a majority voting rights in each entity, and thereby, the power
of control, to Longmen Joint Venture. .
Revenue recognition
We follow U.S. GAAP
regarding revenue recognition. Sales revenue is recognized at the date of shipment to customers when a formal arrangement exists,
the price is fixed or determinable, the delivery is completed, we have no other significant obligations and collectability is
reasonably assured. Payments received before all of the relevant criteria for revenue recognition are recorded as customer deposits.
Sales revenue represents the invoiced value of goods, net of value-added tax (VAT). All our products sold in the PRC are subject
to a Chinese VAT at a rate of 13% to 17% of the gross sales price. This VAT may be offset by VAT paid by us on raw materials
and other materials included in the cost of producing the finished product.
We infrequently engage
in trading transactions in which we act as an agent between the suppliers and the customers. The trading arrangements are such
that the suppliers are the primary obligors, we do not have any general inventory risk, physical inventory loss risk or credit
risk, and we do not have latitude in establishing price. Sales and cost of goods sold from these trading arrangements are recorded
at the net amount in accordance with ASC 605-45.
Accounts receivable, other receivables
and allowance for doubtful accounts
Accounts receivable
include trade accounts due from customers and other receivables from cash advances to employees, related parties or third parties.
An allowance for doubtful accounts is established and recorded based on managements’ assessment of potential losses based
on the credit history and relationships with the customers. Management reviews its receivable 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.
Useful lives of plant and equipment
Plant and equipment
are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful
lives of the assets with a 3%-5% residual value. The depreciation expense on assets acquired under capital leases is included
with depreciation expense on owned assets.
The estimated useful
lives are as follows:
Buildings and Improvements |
|
|
10-40 Years |
|
Machinery |
|
|
10-30 Years |
|
Machinery under capital lease |
|
|
10-20 Years |
|
Other equipment |
|
|
5 Years |
|
Transportation Equipment |
|
|
5 Years |
|
We have re-evaluated
the useful lives of depreciation and amortization to determine whether subsequent events and circumstances warrant any revisions.
Impairment of long-lived assets
The carrying
values of long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable. Based on the existence of one or more indicators of impairment, we measure
any impairment of long-lived assets using the projected undiscounted cash flow method, which includes future cash inflows
less associated cash outflows that are directly associated with and that are expected to arise as a direct result of the use
and eventual disposition of the assets. The estimation of future cash flows requires significant management judgment based on
our historical results and anticipated results and is subject to many factors.
The discount rate that
is commensurate with the risk inherent in our business model is determined by our management. An impairment charge would be recorded
if we determined that the carrying value of long-lived assets may not be recoverable. The impairment to be recognized is measured
by the amount by which the carrying values of the assets exceed the fair value of the assets. We used the
discounted cash flows model to determine the fair value of these assets. The key assumptions that were included in the model are
projected selling units and growth in the steel market, projected unit selling price in the steel market, projected unit purchase
cost in the coal and iron ore markets, selling and general and administrative expenses to be in line with the growth in the steel
market, and projected bank borrowings. We believed these assumptions provided us the best estimates of projecting our future cash
flows on these assets, net of any related cash outflow of our cost, expenses and taxes in related to these revenues. The estimated
fair value of these assets may be lower than their current fair value, thus could result in future impairment charge if potential
events occur to further reduce the current selling price or product demand in the steel market or increase our cost that are associated
with our revenues. In addition, competitive pricing pressure and changes in interest rates could materially and adversely affect
our estimates of future net cash flows to be generated by our long-lived assets, and thus could result in future impairment losses.
As of December 31, 2014, the fair value of our plant and equipment, which was estimated using the undiscounted cash flow
method, exceeded our carrying value of these assets by approximately 18.2%.
Use of estimates
The preparation of
financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Significant accounting estimates reflected in our financial statements
include the useful lives of and impairment for property, plant and equipment, potential losses on uncollectible receivables, the
recognition of contingent liabilities, the interest rate used in financing sales, the fair value of the assets recorded under
capital lease, the present value of the net minimum lease payments of the capital lease and the fair value of the profit share
liability. Actual results could differ from these estimates.
Financial instruments
The accounting standard
regarding “Disclosures about fair value of financial instruments” defines financial instruments and requires disclosure
of the fair value of financial instruments held by us. We consider the carrying amount of cash, accounts receivable, other receivables,
accounts payable and accrued liabilities to approximate their fair values because of the short period of time between the origination
of such instruments and their expected realization. For short-term loans and notes payable, we concluded the carrying values are
a reasonable estimate of fair value because of the short period of time between the origination and repayment and their stated
interest rate approximates current rates available.
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.
We analyze all financial
instruments with features of both liabilities and equity, pursuant to which warrants previously issued by us were required to
be recorded as a liability at fair value and marked to market each reporting period. The warrants were accounted for as derivative
liabilities and recorded at their fair value, with the change in fair value charged or credited to income each period. The
warrants expired unexercised on May 13, 2013. Prior to their expiration, the fair value of the warrants was estimated using a
binomial lattice model, using level 3 inputs.
We determined that
the carrying value of the profit sharing liability using Level 3 inputs by taking consideration of the present value of our projected
profits/losses with the discount interest rate of 6.9% based on our average borrowing rate. The projected profits/losses in Longmen
Joint Venture were based upon, but not limited to, the following assumptions until April 30, 2031:
|
· |
projected selling units
and growth in the steel market; |
|
· |
projected unit selling price in the
steel market; |
|
· |
projected unit purchase cost in the
coal and iron ore markets; |
|
· |
selling and general and administrative
expenses to be in line with the growth in the steel market; |
|
· |
projected bank borrowing; |
|
· |
interest rate index; |
|
· |
gross nation product index; |
|
· |
industry index; and |
|
· |
government policy. |
Income tax
We did not conduct
any business and did not maintain any branch office in the United States during the years ended December 31, 2014 and 2013. Therefore,
no provision for withholding of U.S. federal or state income taxes has been made. The tax impact from undistributed earnings from
overseas subsidiaries is not recognized as there is no intension for future repatriation of these earnings.
General Steel (China)
is located in Tianjin Costal Economic Development Zone and is subject to an income tax rate of 25%.
Longmen Joint Venture
is located in the Mid-West Region of China. It qualifies for the “Go-West” tax rate of 15% promulgated by the government.
In 2010, the central government announced that the “Go-West” tax initiative was extended for 10 years, and thus, the
preferential tax rate of 15% will be in effect until 2020. This special tax treatment will be evaluated on a year-to-year basis
by the local tax bureau.
Maoming Hengda is
located in Guangdong Province and is subject to an income tax rate of 25%.
For the years ended
December 31, 2014 and 2013, we had total tax provisions of $0.3 million and $0.4 million, respectively.
Deferred lease income
From June 2009 to March
2011, we worked with Shaanxi Steel to build new state-of-the-art equipment at the site of Longmen Joint Venture. To compensate
Longmen Joint Venture for costs and economic losses incurred during construction of the new iron and steel making facilities owned
by Shaanxi Steel, Shaanxi Steel reimbursed Longmen Joint Venture $11.4 million (RMB 70.1 million) in the fourth quarter of 2010
for the value of assets dismantled and rent under a 40-year property sub-lease that was entered into by the parties in June 2009,
and $29.8 million (RMB 183.1 million) for the reduced production efficiency caused by the construction. In addition, in 2010 and
2011, Shaanxi Steel reimbursed Longmen Joint Venture $14.6 million (RMB 89.5 million) and $14.6 million (RMB 89.3 million), respectively,
for trial production costs related to the new iron and steel making facilities.
During the period June
2010 to March 2011, as construction progressed and certain of the assets came online, Longmen Joint Venture used the assets free
of charge to produce saleable units of steel products during this period. As such, the cost of using these assets was imputed
with reference to what the depreciation charge would have been on these assets had they been owned or under capital lease to Longmen
Joint Venture during the free use period. This cost of $7.2 million (RMB 43.9 million) each year were deferred and will be recognized
over the term of the land sub-lease similar to the other charges and credits related to the construction of these assets.
The deferred lease
income is amortized to income over the remaining term of the 40-year land sub-lease.
Capital lease obligations
Iron and steel production facilities
On April 29,
2011, our subsidiary, Longmen Joint Venture entered into a Unified Management Agreement with Shaanxi Steel and Shaanxi Coal
under which Longmen Joint Venture uses new iron and steel making facilities including one sintering machine, two converters,
two blast furnaces and other auxiliary systems constructed by Shaanxi Steel. As the 20-year term of the agreement exceeds 75%
of the assets’ useful lives, this arrangement is accounted for as a capital lease. The ongoing lease payments are
comprised of two elements: (1) a monthly payment 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 would not demand capital lease payment from Longmen Joint Venture
until February 2017. The profit sharing component does not meet the definition of contingent rent because it is based on
future revenue and is therefore considered part of the financing for the capital leased assets which is related to the
Unified Management Agreement. For purposes of determining the value of the leased asset and obligation at the inception of
the lease, the lease liability is then reduced by the value of the profit sharing component, which is recognized as a
separate financial liability carried at fair value. See Note 17 – “Profit sharing liability”.
Energy-saving equipment
During 2013, our
subsidiary, Longmen Joint Venture, entered into capital lease agreements for energy-saving equipment to be installed throughout
the production chain. Under these agreements, Longmen Joint Venture uses the energy-saving equipment for which the vendors are
responsible for the design, purchase, installation, and on-site testing, as well as the ownership rights to the equipment during
the lease periods. The lease periods, which vary between four to six years, begin upon the completion of the equipment installation,
testing, and the issuance of the energy-saving rate reports to be agreed upon by both the vendors and Longmen Joint Venture. As
the ownership rights of the equipment transfer to Longmen Joint Venture at the end of the lease periods, these agreements are
accounted for as capital leases.
The minimum lease
payments are based on the energy cost saved during the lease periods, which is determined by the estimated annual equipment operating
hours per the lease agreements. If the actual annual equipment operating hours are less than the estimated amount, the lease periods
may be extended, subject to further negotiation and agreement between us and the vendors. If the actual annual equipment operating
hours exceed the estimated amount, we are obligated to pay the additional lease payment based on the additional energy cost saved
during the lease period and recognize the additional lease payments as contingent rent expense. As of December 31, 2014, $23.9
million (RMB $146.5 million) energy-saving equipment under these lease agreements have been capitalized and no contingent rent
expense has been incurred.
Profit sharing liability
The profit sharing
liability is 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. This financial
instrument is accounted for separately from the lease accounting (Note 16 - “Capital lease obligation” to the Notes
to Consolidated Financial Statements) and has met the definition of a derivative instrument under ASC 815-10-15-83; as such, the
profit sharing liability is treated as a derivative liability. The value of the profit sharing liability will be reassessed each
reporting period with any change in fair value accounted for on a prospective basis. Refer to Note 2(i) – “Financial
instruments” to the Notes to Consolidated Financial Statements for details.
Based on the performance
of the Asset Pool, no profit sharing payment, which is not required until net cumulative profits are achieved, was made for the
years ended December 31, 2014 and 2013. Payments to Shaanxi Steel for the profit sharing are made based on net cumulative profits.
Recently Issued Accounting Pronouncements
In May 2014, the FASB
issued ASU No. 2014-09, Revenue from Contracts with Customers: Topic 606. This Update affects any entity that either enters
into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets,
unless those contracts are within the scope of other standards. The guidance in this Update supersedes the revenue recognition
requirements in Topic 605, Revenue Recognition and most industry-specific guidance. The core principle of the guidance
is that an entity should recognize revenue to illustrate the transfer of promised goods or services to customers in an amount
that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance
also includes a cohesive set of disclosure requirements that will provide users of financial statements with comprehensive information
about the nature, amount, timing, and uncertainty of revenue and cash flows arising from a reporting organization’s contracts
with customers. This ASU is effective retrospectively for fiscal years, and interim periods within those years beginning after
December 15, 2016 for public companies and 2017 for non-public entities. Management is evaluating the effect, if any, on our financial
position and results of operations.
In November 2014, FASB
issued ASU No. 2014-17, Business Combinations (Topic 805): Pushdown Accounting (a consensus of the FASB Emerging Issues
Task Force. The amendments in this update provide an acquired entity with an option to apply pushdown accounting in
its separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity.
An acquired entity may elect the option to apply pushdown accounting in the reporting period in which the change-in-control event
occurs. An acquired entity should determine whether to elect to apply pushdown accounting for each individual change-in-control
event in which an acquirer obtains control of the acquired entity. If pushdown accounting is not applied in the reporting
period in which the change-in-control event occurs, an acquired entity will have the option to elect to apply pushdown accounting
in a subsequent reporting period to the acquired entity’s most recent change-in-control event. An election to apply
pushdown accounting in a reporting period after the reporting period in which the change-in-control event occurred should be considered
a change in accounting principle in accordance with Topic 250, Accounting Changes and Error Corrections. If pushdown accounting
is applied to an individual change-in-control event, that election is irrevocable. The amendments in this ASU are effective on
November 18, 2014. After the effective date, an acquired entity can make an election to apply the guidance to future change-in-control
events or to its most recent change-in-control event. However, if the financial statements for the period in which the most
recent change-in-control event occurred already have been issued or made available to be issued, the application of this guidance
would be a change in accounting principle. The adoption of ASU 2014-17 did not have a material impact on our consolidated
financial statements.
In
January 2015, FASB issued ASU No. 2015-01, Income Statement—Extraordinary and Unusual Items (Subtopic 225-20):
Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items.
This Update is issued as part of its initiative to reduce complexity in accounting standards (the Simplification Initiative).
The objective of the Simplification Initiative is to identify, evaluate, and improve areas of generally accepted accounting principles
(GAAP) for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided
to the users of financial statements. This Update eliminates from GAAP the concept of extraordinary items. The amendments
in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015.
A reporting entity may apply the amendments prospectively. A reporting entity also may apply the amendments retrospectively to
all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from
the beginning of the fiscal year of adoption. The effective date is the same for both public business entities and all other entities.
We do not expect the adoption of ASU 2015-01 to have material impact on our consolidated financial statements.
In February 2015, FASB
issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. This Update focuses on the consolidation
evaluation for reporting organizations that are required to evaluate consolidation of certain legal entities by reducing the number
of consolidation models from four to two and is intended to improve current GAAP. The amendments in the ASU are effective beginning
after December 15, 2016. We do not expect the adoption of ASU 2015-02 to have a material impact on our consolidated financial
statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA.
GENERAL STEEL
HOLDINGS, INC.
CONSOLIDATED FINANCIAL
STATEMENTS
Index to consolidated
financial statements
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Board of Directors and Stockholders
General Steel Holdings, Inc.
We have audited the accompanying consolidated
balance sheets of General Steel Holdings, Inc. and Subsidiaries (the “Company”) as of December 31, 2014 and 2013, and
the related consolidated statements of operations and comprehensive loss, changes in deficiency and cash flows for the years then
ended. General Steel Holdings, Inc.’s management is responsible for these consolidated financial statements. Our responsibility
is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with
the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate
in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the consolidated financial position of General Steel Holdings,
Inc. and Subsidiaries as of December 31, 2014 and 2013, and the consolidated results of their operations and their cash flows for
the years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial
statements have been prepared assuming that the Company will continue as a going concern. As more fully discussed in Note 2(d)
to the consolidated financial statements, the Company has an accumulated deficit, has incurred a gross loss from operations, and
has a working capital deficiency at December 31, 2014. These conditions raise substantial doubt about the Company’s ability
to continue as a going concern. Management’s plans regarding this matter are also described in Note 2(d). The consolidated
financial statements do not include any adjustments that might result from the outcome of this uncertainty. If the Company is unable
to successfully obtain and receive the alternative forms of financing specified in Note 2(d) and/or achieve operating profitability,
there could be a material adverse effect on the Company.
/s/ Friedman LLP
New York, New York
April 10, 2015
GENERAL STEEL HOLDINGS,
INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
| |
December 31, | | |
December 31, | |
| |
2014 | | |
2013 | |
ASSETS | |
| | | |
| | |
| |
| | | |
| | |
CURRENT ASSETS: | |
| | | |
| | |
Cash | |
$ | 11,641 | | |
$ | 31,967 | |
Restricted cash | |
| 355,685 | | |
| 399,333 | |
Notes receivable | |
| 10,290 | | |
| 60,054 | |
Restricted notes receivable | |
| 111,801 | | |
| 395,589 | |
Loan receivable | |
| 36,001 | | |
| - | |
Loan receivable - related party | |
| 34,713 | | |
| 4,540 | |
Accounts receivable, net | |
| 9,321 | | |
| 4,078 | |
Accounts receivable - related parties, net | |
| 8,498 | | |
| 2,942 | |
Other receivables, net | |
| 63,746 | | |
| 54,716 | |
Other receivables - related parties, net | |
| 39,670 | | |
| 54,106 | |
Inventories | |
| 156,327 | | |
| 212,921 | |
Advances on inventory purchase, net | |
| 73,819 | | |
| 44,897 | |
Advances on inventory purchase - related parties | |
| 45,617 | | |
| 83,003 | |
Prepaid expense and other | |
| 4,803 | | |
| 1,388 | |
Prepaid taxes | |
| 5,789 | | |
| 28,407 | |
Short-term investment | |
| 2,688 | | |
| 2,783 | |
TOTAL CURRENT ASSETS | |
| 970,409 | | |
| 1,380,724 | |
| |
| | | |
| | |
PLANT AND EQUIPMENT, net | |
| 1,543,136 | | |
| 1,271,907 | |
| |
| | | |
| | |
OTHER ASSETS: | |
| | | |
| | |
Advances on equipment purchase | |
| 11,438 | | |
| 6,409 | |
Investment in unconsolidated entities | |
| 16,823 | | |
| 16,943 | |
Long-term deferred expense | |
| 458 | | |
| 668 | |
Intangible assets, net of accumulated amortization | |
| 22,960 | | |
| 23,707 | |
TOTAL OTHER ASSETS | |
| 51,679 | | |
| 47,727 | |
| |
| | | |
| | |
TOTAL ASSETS | |
$ | 2,565,224 | | |
$ | 2,700,358 | |
| |
| | | |
| | |
LIABILITIES AND DEFICIENCY | |
| | | |
| | |
| |
| | | |
| | |
CURRENT LIABILITIES: | |
| | | |
| | |
Short term notes payable | |
$ | 661,635 | | |
$ | 1,017,830 | |
Accounts payable | |
| 612,801 | | |
| 434,979 | |
Accounts payable - related parties | |
| 207,783 | | |
| 235,692 | |
Short term loans - bank | |
| 257,502 | | |
| 301,917 | |
Short term loans - others | |
| 60,717 | | |
| 62,067 | |
Short term loans - related parties | |
| 46,380 | | |
| 126,693 | |
Current maturities of long-term loans - related party | |
| - | | |
| 53,013 | |
Other payables and accrued liabilities | |
| 55,488 | | |
| 45,653 | |
Other payable - related parties | |
| 87,252 | | |
| 94,079 | |
Customer deposits | |
| 92,974 | | |
| 87,860 | |
Customer deposits - related parties | |
| 132,616 | | |
| 64,881 | |
Deposit due to sales representatives | |
| 17,871 | | |
| 24,343 | |
Deposit due to sales representatives - related parties | |
| 2,509 | | |
| 1,997 | |
Taxes payable | |
| 5,201 | | |
| 4,628 | |
Deferred lease income, current | |
| 2,176 | | |
| 2,187 | |
Capital lease obligations, current | |
| 8,508 | | |
| 4,321 | |
TOTAL CURRENT LIABILITIES | |
| 2,251,413 | | |
| 2,562,140 | |
| |
| | | |
| | |
NON-CURRENT LIABILITIES: | |
| | | |
| | |
Long-term loans - related party | |
| 339,549 | | |
| 19,644 | |
Deferred lease income, noncurrent | |
| 72,713 | | |
| 75,257 | |
Capital lease obligations, noncurrent | |
| 393,252 | | |
| 375,019 | |
Profit sharing liability at fair value | |
| 70,422 | | |
| 162,295 | |
TOTAL NON-CURRENT LIABILITIES | |
| 875,936 | | |
| 632,215 | |
| |
| | | |
| | |
TOTAL LIABILITIES | |
| 3,127,349 | | |
| 3,194,355 | |
| |
| | | |
| | |
COMMITMENTS AND CONTINGENCIES | |
| | | |
| | |
| |
| | | |
| | |
DEFICIENCY: | |
| | | |
| | |
Preferred stock, $0.001 par value, 50,000,000 shares authorized, 3,092,899
shares issued and outstanding as of December 31, 2014 and 2013 | |
| 3 | | |
| 3 | |
Common stock, $0.001 par value, 200,000,000 shares authorized, 64,458,588
and 58,234,688 shares issued, 61,986,282 and 55,762,382 shares outstanding as of December 31, 2014 and 2013, respectively | |
| 64 | | |
| 58 | |
Treasury stock, at cost, 2,472,306 shares as of December 31, 2014 and
2013 | |
| (4,199 | ) | |
| (4,199 | ) |
Paid-in-capital | |
| 115,494 | | |
| 106,878 | |
Statutory reserves | |
| 6,472 | | |
| 6,243 | |
Accumulated deficits | |
| (463,521 | ) | |
| (414,798 | ) |
Accumulated other comprehensive
income | |
| 644 | | |
| 729 | |
TOTAL GENERAL STEEL HOLDINGS, INC. DEFICIENCY | |
| (345,043 | ) | |
| (305,086 | ) |
| |
| | | |
| | |
NONCONTROLLING INTERESTS | |
| (217,082 | ) | |
| (188,911 | ) |
| |
| | | |
| | |
TOTAL DEFICIENCY | |
| (562,125 | ) | |
| (493,997 | ) |
| |
| | | |
| | |
TOTAL LIABILITIES AND DEFICIENCY | |
$ | 2,565,224 | | |
$ | 2,700,358 | |
The accompanying notes are an integral part of these consolidated
financial statements.
GENERAL STEEL HOLDINGS,
INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE LOSS
FOR THE YEARS ENDED DECEMBER 31, 2014 AND
2013
(In thousands, except per share data)
| |
2014 | | |
2013 | |
| |
| | |
| |
SALES | |
$ | 1,900,292 | | |
$ | 2,016,548 | |
| |
| | | |
| | |
SALES - RELATED PARTIES | |
| 389,120 | | |
| 447,199 | |
TOTAL SALES | |
| 2,289,412 | | |
| 2,463,747 | |
| |
| | | |
| | |
COST OF GOODS SOLD | |
| 1,913,549 | | |
| 2,062,570 | |
| |
| | | |
| | |
COST OF GOODS SOLD - RELATED PARTIES | |
| 395,029 | | |
| 457,115 | |
TOTAL COST OF GOODS SOLD | |
| 2,308,578 | | |
| 2,519,685 | |
| |
| | | |
| | |
GROSS LOSS | |
| (19,166 | ) | |
| (55,938 | ) |
| |
| | | |
| | |
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES | |
| (78,555 | ) | |
| (84,226 | ) |
CHANGE IN FAIR VALUE OF PROFIT SHARING LIABILITY | |
| 91,018 | | |
| 174,569 | |
| |
| | | |
| | |
INCOME (LOSS) FROM OPERATIONS | |
| (6,703 | ) | |
| 34,405 | |
| |
| | | |
| | |
OTHER INCOME (EXPENSE) | |
| | | |
| | |
Interest income | |
| 21,700 | | |
| 11,214 | |
Finance/interest expense | |
| (96,673 | ) | |
| (91,878 | ) |
Gain (loss) on disposal of equipment and intangible assets | |
| (1,125 | ) | |
| 424 | |
Government grant | |
| 327 | | |
| 4,216 | |
Income from equity investments | |
| 139 | | |
| 203 | |
Foreign currency transaction gain | |
| 786 | | |
| 1,394 | |
Lease income | |
| 2,175 | | |
| 2,158 | |
Gain on deconsolidation of a subsidiary | |
| 1,795 | | |
| 1,011 | |
Payment for public highway construction | |
| - | | |
| (6,462 | ) |
Other non-operating (expense) income, net | |
| (428 | ) | |
| 1,044 | |
Other expense, net | |
| (71,304 | ) | |
| (76,676 | ) |
| |
| | | |
| | |
LOSS BEFORE PROVISION FOR INCOME
TAXES AND NONCONTROLLING INTEREST | |
| (78,007 | ) | |
| (42,271 | ) |
| |
| | | |
| | |
PROVISION FOR INCOME TAXES | |
| 269 | | |
| 354 | |
| |
| | | |
| | |
NET LOSS | |
| (78,276 | ) | |
| (42,625 | ) |
| |
| | | |
| | |
Less: Net loss attributable to noncontrolling interest | |
| (29,553 | ) | |
| (9,609 | ) |
| |
| | | |
| | |
NET LOSS ATTRIBUTABLE TO GENERAL STEEL HOLDINGS, INC. | |
$ | (48,723 | ) | |
$ | (33,016 | ) |
| |
| | | |
| | |
NET LOSS | |
$ | (78,276 | ) | |
$ | (42,625 | ) |
| |
| | | |
| | |
OTHER COMPREHENSIVE LOSS | |
| | | |
| | |
Foreign currency translation adjustments | |
| 590 | | |
| (14,425 | ) |
| |
| | | |
| | |
COMPREHENSIVE LOSS | |
| (77,686 | ) | |
| (57,050 | ) |
| |
| | | |
| | |
Less: Comprehensive loss attributable to noncontrolling interest | |
| (28,652 | ) | |
| (15,107 | ) |
| |
| | | |
| | |
COMPREHENSIVE LOSS ATTRIBUTABLE TO GENERAL STEEL HOLDINGS, INC. | |
$ | (49,034 | ) | |
$ | (41,943 | ) |
| |
| | | |
| | |
WEIGHTED AVERAGE NUMBER OF SHARES | |
| | | |
| | |
Basic and Diluted | |
| 56,841 | | |
| 55,126 | |
| |
| | | |
| | |
LOSS PER SHARE | |
| | | |
| | |
Basic and Diluted | |
$ | (0.86 | ) | |
$ | (0.60 | ) |
The accompanying notes are an integral part of these consolidated
financial statements.
GENERAL STEEL HOLDINGS,
INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN DEFICIENCY
(In thousands)
| |
Preferred stock | | |
Common stock | | |
Treasury stock | | |
| | |
Retained earnings
/
Accumulated deficits | | |
Accumulated other | | |
| | |
| |
| |
| | |
| | |
| | |
| | |
| | |
| | |
Paid-in | | |
Statutory | | |
| | |
comprehensive | | |
Noncontrolling | | |
| |
| |
Shares | | |
Par value | | |
Shares | | |
Par value | | |
Shares | | |
At cost | | |
capital | | |
reserves | | |
Unrestricted | | |
income | | |
interest | | |
Total | |
BALANCE, December 31, 2012 | |
| 3,093 | | |
$ | 3 | | |
| 57,270 | | |
$ | 57 | | |
| (2,472 | ) | |
$ | (4,199 | ) | |
$ | 105,714 | | |
$ | 6,076 | | |
$ | (381,782 | ) | |
$ | 10,185 | | |
$ | (172,063 | ) | |
$ | (436,009 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net loss attributable to General Steel Holdings,
Inc. | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| (33,016 | ) | |
| | | |
| | | |
| (33,016 | ) |
Net loss attributable to noncontrolling interest | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| (9,609 | ) | |
| (9,609 | ) |
Addition to special reserve | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 619 | | |
| | | |
| | | |
| 553 | | |
| 1,172 | |
Usage of special reserve | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| (452 | ) | |
| | | |
| | | |
| (393 | ) | |
| (845 | ) |
Common stock transferred by CEO for compensation | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 276 | | |
| | | |
| | | |
| | | |
| | | |
| 276 | |
Common stock issued for compensation | |
| | | |
| | | |
| 665 | | |
| 1 | | |
| | | |
| | | |
| 633 | | |
| | | |
| | | |
| | | |
| | | |
| 634 | |
Common stock issued for services | |
| | | |
| | | |
| 300 | | |
| | | |
| | | |
| | | |
| 255 | | |
| | | |
| | | |
| | | |
| | | |
| 255 | |
Addition to Tianwu paid-in capital | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 18,028 | | |
| 18,028 | |
Deconsolidation of a subsidiary | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| (529 | ) | |
| (19,929 | ) | |
| (20,458 | ) |
Foreign currency translation
adjustments | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| (8,927 | ) | |
| (5,498 | ) | |
| (14,425 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
BALANCE, December 31, 2013 | |
| 3,093 | | |
$ | 3 | | |
| 58,235 | | |
$ | 58 | | |
| (2,472 | ) | |
$ | (4,199 | ) | |
$ | 106,878 | | |
$ | 6,243 | | |
$ | (414,798 | ) | |
$ | 729 | | |
$ | (188,911 | ) | |
$ | (493,997 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net loss attributable to
General Steel Holdings, Inc. | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| (48,723 | ) | |
| | | |
| | | |
| (48,723 | ) |
Net loss attributable to
noncontrolling interest | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| (29,553 | ) | |
| (29,553 | ) |
Addition to special reserve | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 605 | | |
| | | |
| | | |
| 451 | | |
| 1,056 | |
Usage of special reserve | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| (376 | ) | |
| | | |
| | | |
| (384 | ) | |
| (760 | ) |
Common stock transferred
by CEO for compensation | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 276 | | |
| | | |
| | | |
| | | |
| | | |
| 276 | |
Common stock issued for
services | |
| | | |
| | | |
| 1,224 | | |
| 1 | | |
| | | |
| | | |
| 845 | | |
| | | |
| | | |
| | | |
| | | |
| 846 | |
Common stock issued to CEO | |
| | | |
| | | |
| 5,000 | | |
| 5 | | |
| | | |
| | | |
| 7,495 | | |
| | | |
| | | |
| | | |
| | | |
| 7,500 | |
Deconsolidation of a subsidiary | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 226 | | |
| 414 | | |
| 640 | |
Foreign currency translation
adjustments | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| (311 | ) | |
| 901 | | |
| 590 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
BALANCE, December 31, 2014 | |
| 3,093 | | |
$ | 3 | | |
| 64,459 | | |
$ | 64 | | |
| (2,472 | ) | |
$ | (4,199 | ) | |
$ | 115,494 | | |
$ | 6,472 | | |
$ | (463,521 | ) | |
$ | 644 | | |
$ | (217,082 | ) | |
$ | (562,125 | ) |
The accompanying notes are an integral part of these consolidated
financial statements.
GENERAL STEEL HOLDINGS,
INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2014 AND
2013
(In thousands)
| |
2014 | | |
2013 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | |
| | | |
| | |
Net loss | |
$ | (78,276 | ) | |
$ | (42,625 | ) |
Adjustments to reconcile net loss to cash provided by (used in) operating
activities: | |
| | | |
| | |
Depreciation, amortization and depletion | |
| 96,277 | | |
| 89,048 | |
Change in fair value of derivative liabilities | |
| - | | |
| (1 | ) |
Change in fair value of profit sharing liability | |
| (91,018 | ) | |
| (174,569 | ) |
(Gain) loss on disposal of equipment and intangible assets | |
| 1,125 | | |
| (424 | ) |
Provision (recovery) of doubtful accounts | |
| 10,110 | | |
| (677 | ) |
Reservation of mine maintenance fee | |
| 296 | | |
| 327 | |
Stock issued for services and compensation | |
| 1,122 | | |
| 1,165 | |
Amortization of deferred financing cost on capital lease | |
| 21,252 | | |
| 20,799 | |
Income from equity investments | |
| (139 | ) | |
| (203 | ) |
Foreign currency transaction gain | |
| (786 | ) | |
| (1,394 | ) |
Deferred lease income | |
| (2,175 | ) | |
| (2,158 | ) |
Gain on deconsolidation of a subsidiary | |
| (1,795 | ) | |
| (1,011 | ) |
Changes in operating assets and liabilities | |
| | | |
| | |
Notes receivable | |
| 51,841 | | |
| 25,555 | |
Accounts receivable | |
| (6,037 | ) | |
| 1,281 | |
Accounts receivable - related parties | |
| (5,694 | ) | |
| 12,161 | |
Other receivables | |
| (13,029 | ) | |
| (1,116 | ) |
Other receivables - related parties | |
| 8,005 | | |
| (48,017 | ) |
Inventories | |
| 50,950 | | |
| (40,632 | ) |
Advances on inventory purchases | |
| (32,293 | ) | |
| 25,414 | |
Advances on inventory purchases - related parties | |
| 8,332 | | |
| (145,686 | ) |
Prepaid expense and other | |
| (3,418 | ) | |
| (916 | ) |
Long-term deferred expense | |
| 206 | | |
| 422 | |
Prepaid taxes | |
| 22,464 | | |
| (3,485 | ) |
Accounts payable | |
| 49,705 | | |
| 23,760 | |
Accounts payable - related parties | |
| (26,227 | ) | |
| 113,034 | |
Other payables and accrued liabilities | |
| 8,580 | | |
| (10,508 | ) |
Other payables - related parties | |
| (6,370 | ) | |
| 8,332 | |
Customer deposits | |
| 6,134 | | |
| (41,069 | ) |
Customer deposits - related parties | |
| 68,007 | | |
| 41,636 | |
Taxes payable | |
| 735 | | |
| (12,367 | ) |
Net cash provided by (used in) operating activities | |
| 137,884 | | |
| (163,924 | ) |
| |
| | | |
| | |
CASH FLOWS FROM INVESTING ACTIVITIES: | |
| | | |
| | |
Restricted cash | |
| 41,669 | | |
| (64,860 | ) |
Proceeds from dividends declared | |
| 545 | | |
| - | |
Loan to unrelated parties | |
| (35,977 | ) | |
| - | |
Loans to related parties | |
| - | | |
| (200 | ) |
Repayments from related parties | |
| 4,540 | | |
| 1,660 | |
Cash proceeds from short term investment | |
| 81 | | |
| (81 | ) |
Cash proceeds from sales of equipment and intangible assets | |
| 36 | | |
| 160 | |
Equipment purchase and intangible assets | |
| (239,633 | ) | |
| (43,355 | ) |
Cash proceeds from sale of equity ownership | |
| - | | |
| 13,619 | |
Effect on cash due to deconsolidation of a subsidiary | |
| (267 | ) | |
| (12,735 | ) |
Net cash used in investing activities | |
| (229,006 | ) | |
| (105,792 | ) |
| |
| | | |
| | |
CASH FLOWS FINANCING ACTIVITIES: | |
| | | |
| | |
Capital contributed by noncontrolling interest | |
| - | | |
| 18,028 | |
Restricted notes receivable | |
| 281,665 | | |
| (26,066 | ) |
Borrowings on short term notes payable | |
| 1,570,660 | | |
| 1,913,987 | |
Payments on short term notes payable | |
| (1,921,644 | ) | |
| (1,911,006 | ) |
Borrowings on short term loans - bank | |
| 358,001 | | |
| 371,685 | |
Payments on short term loans - bank | |
| (402,259 | ) | |
| (222,104 | ) |
Borrowings on short term loan - others | |
| 47,797 | | |
| 69,632 | |
Payments on short term loans - others | |
| (53,403 | ) | |
| (72,989 | ) |
Borrowings on short term loan - related parties | |
| - | | |
| 393,833 | |
Payments on short term loans - related parties | |
| (28,712 | ) | |
| (248,119 | ) |
Deposits due to sales representatives | |
| (6,348 | ) | |
| (10,455 | ) |
Deposit due to sales representatives - related parties | |
| 521 | | |
| 711 | |
Borrowings on long-term loans - related party | |
| 219,929 | | |
| - | |
Payments on long-term loans - related party | |
| (1,700 | ) | |
| (22,940 | ) |
Principal payment on capital lease obligation | |
| (1,375 | ) | |
| (218 | ) |
Proceed from common stock issued to CEO | |
| 7,500 | | |
| - | |
Net cash provided by financing activities | |
| 70,632 | | |
| 253,979 | |
| |
| | | |
| | |
EFFECTS OF EXCHANGE RATE CHANGE IN CASH | |
| 164 | | |
| 1,237 | |
| |
| | | |
| | |
DECREASE IN CASH | |
| (20,326 | ) | |
| (14,500 | ) |
| |
| | | |
| | |
CASH, beginning of year | |
| 31,967 | | |
| 46,467 | |
| |
| | | |
| | |
CASH, end of year | |
$ | 11,641 | | |
$ | 31,967 | |
The accompanying notes are an integral part of these consolidated
financial statements.
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS |
Note 1 – Organization and Operations
General Steel Holdings, Inc. (the “Company”)
was incorporated on August 5, 2002 in the state of Nevada. The Company through its 100% owned subsidiary, General Steel Investment,
operates steel companies serving various industries in the People’s Republic of China (“PRC”). The Company’s
main operation is manufacturing and sales of steel products such as steel rebar, hot-rolled carbon and silicon sheets and spiral-weld
pipes. The Company, together with its subsidiaries, majority owned subsidiaries and variable interest entity, is referred to as
the “Group”.
On April 29, 2011, a 20-year Unified Management
Agreement (“the Agreement”) was entered into between the Company, the Company’s 60%-owned subsidiary Shaanxi
Longmen Iron and Steel Co., Ltd. (“Longmen Joint Venture”), Shaanxi Coal and Chemical Industry Group Co., Ltd. (“Shaanxi
Coal”) and Shaanxi Iron and Steel Group (“Shaanxi Steel”). Shaanxi Steel is the controlling shareholder of Shaanxi
Longmen Iron and Steel Group Co., Ltd (“Long Steel Group”) which is the non-controlling interest holder in Longmen
Joint Venture, and Shaanxi Coal, a state owned entity, is the parent company of Shaanxi Steel. Under the terms of the Agreement,
all manufacturing machinery and equipment of Longmen Joint Venture and the $605.8 million (or approximately RMB 3.7 billion) of
the constructed iron and steel making facilities owned by Shaanxi Steel, which includes one 400 m 2 sintering machine,
two 1,280 m 3 blast furnaces, two 120 ton converters and some auxiliary systems, are managed collectively as a single
virtual asset pool (“Asset Pool”). Longmen Joint Venture manages the Asset Pool as the principal operating entity
and is responsible for the daily operations of the new and existing facilities. The Agreement leverages each of the parties’
operating strengths, allowing Longmen Joint Venture to derive the greatest benefit from the cooperation and the newly constructed
iron and steel making facilities. At the designed efficiency level, the facilities contribute three million tons of crude steel
production capacity per year.
Longmen Joint Venture pays Shaanxi Steel for
the use of the constructed iron and steel making facilities an amount equaling the depreciation expense on the equipment constructed
by Shaanxi Steel as well as 40% of the pre-tax profit generated by the Asset Pool. The remaining 60% of the pre-tax profit is
allocated to Longmen Joint Venture. As a result, the Company’s economic interest in the profit or loss generated by Longmen
Joint Venture decreased from 60% to 36%. However, the overall capacity under the management of Longmen Joint Venture increased
by three million tons, or 75%. The Agreement improved Longmen Joint Venture’s cost structure through sustainable and steady
sourcing of key raw materials and reduced transportation costs. The distribution of profit is subject to a prospective adjustment
after the first two years based on each entity’s actual investment of time and resources into the Asset Pool. There has
been no adjustment to the Agreement from its inception to the present time nor intention to make future adjustment by the Company
and Shaanxi Steel.
The parties to the Agreement established the
Shaanxi Longmen Iron and Steel Unified Management Supervisory Committee ("Supervisory Committee") to ensure that the
facilities and related resources are operated and managed according to the stipulations set forth in the Agreement. The Board
of Directors of Longmen Joint Venture, of which the Company holds 4 out of 7 seats, requires a simple majority vote and remains
the controlling decision-making body of Longmen Joint Venture and the Asset Pool. See Note 2(c) “Consolidation of VIE.”
The Agreement constitutes an arrangement
that involves a lease which meets certain of the criteria of a capital lease and therefore the assets constructed by Shaanxi
Steel are accounted for by Longmen Joint Venture as a capital lease. The profit sharing liability portion of the lease
obligation, representing 40% of the cumulative pre-tax profit generated by the Asset Pool, is accounted for by Longmen Joint
Venture as a derivative financial instrument at fair value. See Notes 2 “Summary of significant accounting
policies”, Note 16 “Capital lease obligations” and Note 17 “Profit sharing liability”.
In view of the near-term challenges
for the steel sector (see Note 2(d) Liquidity and Going Concern), the Company strategically accelerating the Company’s
business transformation. The Company’s transformation strategy is to pursue opportunities that offer
compelling benefits to our organization and shareholders, including:
| · | 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. |
The
Company formed a joint venture in February of 2015 with an RFID Expert team to develop and commercialize RFID technologies
and data solutions. The formation of this joint venture represents a unique opportunity to accelerate the Company’s
expansion into the vibrant logistics and Internet-of-Things sectors.
Note 2 – Summary of significant accounting
policies
The accompanying consolidated financial statements
have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”)
for information pursuant to the rules and regulations of the Securities 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.
The consolidated financial statements of the
Company reflect the activities of the following major directly owned subsidiaries:
Subsidiary | |
Percentage of Ownership | |
General Steel Investment Co., Ltd. | |
British Virgin Islands | |
| 100.0 | % |
General Steel (China) Co., Ltd. (“General Steel (China)”) | |
PRC | |
| 100.0 | % |
Yangpu Shengtong Investment Co., Ltd. (“Yangpu Shengtong”) | |
PRC | |
| 99.1 | % |
Tianjin Qiu Steel Investment Co., Ltd. (“Qiu Steel”) | |
PRC | |
| 98.7 | % |
Longmen Joint Venture | |
PRC | |
| VIE/60.0 | % |
Maoming Hengda Steel Company, Ltd. (“Maoming Hengda”) | |
PRC | |
| 99.0 | % |
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS |
Tianwu
Prior to November 19, 2013, the Company held
a 60.0% equity interest in Tianwu General Steel Material Trading Co., Ltd. (“Tianwu”).
32% interest was held by General Steel (China) and 28% interest was held by Yangpu Shengtong. On November 19, 2013, the Company
sold its 28% equity interest of Tianwu held by Yangpu Shengtong to Tianjin Dazhan Industry Co., Ltd., a related party through
indirect common ownership, for $13.6 million (RMB 84.3 million) while retaining 32% interest held by General Steel (China). As
a result of this transaction, the Company met the criteria under ASC 810-10-40-4 to deconsolidate Tianwu at disposal date and
recognized a gain in accordance with ASC 810-10-40-5. See Note 17 – Other income (expense) under the section “Gain
on deconsolidation of a subsidiary” for details. At the same time, General Steel (China)’s remaining 32% interest
is accounted for as an investment in unconsolidated subsidiaries using the equity method. See Note 2(u) - Investments in unconsolidated
entities for details.
Baotou Steel
Prior to December 31, 2014, the Company held
an 80.0% equity interest in Baotou Steel – General Steel Special Steel Pipe Joint Venture Co., Ltd. (“Baotou
Steel”) through General Steel (China). On December 31, 2014, the Company sold its 80.0% equity interest in Baotou Steel
to Tianjin Shuangjie Liansheng Rolled Steel Co., Ltd., an unrelated party for $0.7 million (RMB 4.0 million), receivable within
one year of the sale. As a result of this transaction, the Company met the criteria under ASC 810-10-40-4
to deconsolidate Baotou Steel at disposal date and recognized a gain in accordance with ASC 810-10-40-5. See Note 18 – Other
income (expense) under the section “Gain on deconsolidation of a subsidiary” for details.
| (b) | Principles of consolidation – subsidiaries |
The accompanying consolidated financial statements
include the financial statements of the Company, its subsidiaries, its variable interest entity (“VIE”) for which
the Company is the ultimate primary beneficiary, and the VIE’s subsidiaries.
Subsidiaries are those entities in which the
Company, directly or indirectly, controls more than one half of the voting power; or has the power to govern the financial and
operating policies, to appoint or remove the majority of the members of the board of directors, or to cast a majority of votes
at the meeting of directors.
A VIE is an entity in which the Company, or
its subsidiary, through contractual arrangements, bears the risks of, and enjoys the rewards normally associated with ownership
of the entity, and therefore the Company or its subsidiary is the primary beneficiary of the entity.
All significant inter-company transactions and balances have been
eliminated upon consolidation.
Prior to entering into the Unified Management
Agreement on April 29, 2011, Longmen Joint Venture had been consolidated as the Company’s 60% direct owned subsidiary. Upon
entering into the Unified Management Agreement on April 29, 2011, Longmen Joint Venture was re-evaluated by the Company to determine
if Longmen Joint Venture is a VIE and if the Company is the primary beneficiary.
Longmen Joint Venture’s equity at risk
is considered insufficient to finance its activities and therefore Longmen Joint Venture is considered to be a VIE.
The Company would be considered the primary
beneficiary of the VIE if it has both of the following characteristics:
| a. | The power to direct the activities of the VIE that most significantly
impact the VIE’s economic performance; and |
| b. | The obligation to absorb losses of the VIE that could potentially
be significant to the VIE or the right to receive benefits from the VIE that could potentially
be significant to the VIE. |
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS |
A Supervisory Committee was formed during
the negotiation of the Unified Management Agreement. Given there is both a Supervisory Committee and a Board of Directors with
respect to Longmen Joint Venture , the powers (rights and roles) of both bodies were considered to determine which party has the
power to direct the activities of Longmen Joint Venture, and by extension, whether the Company continues to have the power to
direct Longmen Joint Venture’s activities after this Supervisory Committee was formed and the significant investment in
plant and equipment by owners of the Longmen Joint Venture partner. The Supervisory Committee, in which the Company holds 2 out
of 4 seats, requires a ¾ majority vote, while the Board of Directors, on which the Company holds 4 out of 7 seats, requires
a simple majority vote. As the Supervisory Committee’s role is limited to supervising and monitoring management of Longmen
Joint Venture and in the event there is any disagreement between the Board and the Supervisory Committee, the Board prevails,
the Supervisory Committee is considered subordinate to the Board. Thus, the Board of Directors of Longmen Joint Venture continues
to be the controlling decision-making body with respect to Longmen Joint Venture. The Company, which controls 60% of the voting
rights of the Board of Directors, has control over the operations of Longmen Joint Venture and as such, has the power to direct
the activities of the VIE that most significantly impact Longmen Joint Venture’s economic performance.
In connection with the Unified Management
Agreement, the Company, Shaanxi Coal and Shaanxi Steel may provide such support on a discretionary basis or as needed in the future.
See Note 2(d) Liquidity.
The Company has the obligation to absorb losses
and the rights to receive benefits based on the profit allocation as stipulated by the Unified Management Agreement that are significant
to the VIE. As both conditions are met, the Company is the primary beneficiary of Longmen Joint Venture and therefore, continues
to consolidate Longmen Joint Venture as a VIE.
The Company believes that the Unified Management
Agreement between Longmen Joint Venture and Shaanxi Coal is in compliance with PRC law and is legally enforceable. However, PRC
law and/or uncertainties in the PRC legal system could limit the Company’s ability to enforce the Unified Management Agreement,
which in turn, may lead to reconsideration of the VIE assessment and the potential for a different conclusion. If the Unified
Management Agreement cannot be enforced, the Company would not consolidate Longmen Joint Venture as a VIE. However, the current
PRC legal system has not limited the Company’s ability to enforce the Unified Management Agreement nor does the Company
believe it is likely to do so in the future. The Company makes an ongoing assessment to determine whether Longmen Joint Venture
is a VIE.
The carrying amount of the VIE and its subsidiaries’
consolidated assets and liabilities are as follows:
| |
December 31, 2014 | | |
December 31, 2013 | |
| |
(in thousands) | | |
(in thousands) | |
Current assets | |
$ | 837,135 | | |
$ | 1,282,054 | |
Plant and equipment, net | |
| 1,537,687 | | |
| 1,262,144 | |
Other noncurrent assets | |
| 33,396 | | |
| 29,014 | |
Total assets | |
| 2,408,218 | | |
| 2,573,212 | |
Total liabilities | |
| (2,946,126 | ) | |
| (3,040,879 | ) |
Net liabilities | |
$ | (537,908 | ) | |
$ | (467,667 | ) |
VIE and its subsidiaries’ liabilities
consist of the following:
| |
December 31, 2014 | | |
December 31, 2013 | |
| |
(in thousands) | | |
(in thousands) | |
Current liabilities: | |
| | | |
| | |
Short term notes payable | |
$ | 638,829 | | |
$ | 988,364 | |
Accounts payable | |
| 605,025 | | |
| 393,816 | |
Accounts payable - related parties | |
| 205,914 | | |
| 235,116 | |
Short term loans - bank | |
| 216,940 | | |
| 267,688 | |
Short term loans - others | |
| 54,524 | | |
| 55,844 | |
Short term loans - related parties | |
| 45,710 | | |
| 125,236 | |
Current maturities of long-term loans – related party | |
| - | | |
| 56,614 | |
Other payables and accrued liabilities | |
| 47,121 | | |
| 37,
028 | |
Other payables - related parties | |
| 78,615 | | |
| 88,914 | |
Customer deposits | |
| 87,372 | | |
| 87,661 | |
Customer deposits - related parties | |
| 34,895 | | |
| 18,359 | |
Deposit due to sales representatives | |
| 17,871 | | |
| 24,343 | |
Deposit due to sales representatives – related parties | |
| 2,509 | | |
| 1,997 | |
Taxes payable | |
| 4,026 | | |
| 3,357 | |
Deferred lease income | |
| 2,176 | | |
| 2,187 | |
Capital lease obligations, current | |
| 8,508 | | |
| 4,321 | |
Intercompany payable to be eliminated | |
| 20,155 | | |
| 21,420 | |
Total current liabilities | |
| 2,070,190 | | |
| 2,412,265 | |
Non-current liabilities: | |
| | | |
| | |
Long term loans - related parties | |
| 339,549 | | |
| 16,043 | |
Long-term other payable – related party | |
| - | | |
| - | |
Deferred lease income - noncurrent | |
| 72,713 | | |
| 75,257 | |
Capital lease obligations, noncurrent | |
| 393,252 | | |
| 375,019 | |
Profit sharing liability | |
| 70,422 | | |
| 162,295 | |
Total non-current liabilities | |
| 875,936 | | |
| 628,614 | |
Total liabilities of consolidated VIE | |
$ | 2,946,126 | | |
$ | 3,040,879 | |
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS |
| |
For the year ended December 31, 2014 | | |
For the year ended December 31, 2013 | |
| |
(in thousands) | | |
(in thousands) | |
Sales | |
$ | 2,284,485 | | |
$ | 2,450,256 | |
Gross loss | |
$ | (19,496 | ) | |
$ | (56,065 | ) |
Income from operations | |
$ | 4,219 | | |
$ | 45,161 | |
Net loss attributable to controlling interest | |
$ | (45,425 | ) | |
$ | (16,457 | ) |
Longmen Joint Venture has two 100% owned subsidiaries,
Yuxin Trading Co., Ltd. (“Yuxin”) and Yuteng Trading Co., Ltd. (“Yuteng”). Longmen Joint Venture has two
consolidated subsidiaries, Hualong Fire Retardant Material Co., Ltd. (“Hualong”) and Beijing Huatianyulong International
Steel Trading Co., Ltd. (“Huatianyulong”), in which it does not hold a controlling interest. Hualong and Huatianyulong
are separate legal entities which were established in the PRC as limited liability companies and subsequently invested in by Longmen
Joint Venture in June 2007 and July 2008, respectively. However, these two entities do not meet the definition of variable interest
entities. Further consideration was given to whether consolidation was appropriate under the voting interest model, specifically
where the power of control may exist with a lesser percentage of ownership (i.e. less than 50%), for example, by contract, lease,
agreement with other stockholders or by court decree.
Hualong
Longmen Joint Venture, the single largest
shareholder, holds a 36.0% equity interest in Hualong. The other two shareholders, who own 34.67% and 29.33% respectively, assigned
their voting rights to Longmen Joint Venture in writing at the time of the acquisition of Hualong. The voting rights have been
assigned through the date Hualong ceases its business operations or the other two shareholders sell their interest in Hualong.
Hualong’s main business is to supply refractory. The assets, liabilities and the operating results of Hualong are immaterial
to the Company’s consolidated financial statements as for and during the years ended December 31, 2014 and 2013.
Huatianyulong
Longmen Joint Venture holds a 50.0% equity
interest in Huatianyulong and the other unrelated shareholder holds the remaining 50.0%. The other shareholder assigned its voting
rights to Longmen Joint Venture in writing at the time of acquisition of Huatianyulong. The voting rights have been assigned through
the date Huatianyulong ceases its business operation or the other unrelated shareholder sells its interest in Huatianyulong. Huatianyulong
mainly sells imported iron ore. The assets, liabilities and the operating results of Huatianyulong are immaterial to the Company’s
consolidated financial statements as for and during the years ended December 31, 2014 and 2013.
The Company has determined that it is appropriate
for Longmen Joint Venture to consolidate Hualong and Huatianyulong with appropriate recognition in the Company’s financial
statements of the non-controlling interests in each entity, beginning on the acquisition dates as these were also the effective
dates of the agreements with other stockholders granting a majority voting rights in each entity, and thereby, the power of control,
to Longmen Joint Venture.
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS |
| (d) | Liquidity and going concern |
The Company’s accounts have been
prepared assuming that the company will continue as a going concern basis. The going concern basis assumes that assets
are realized and liabilities are extinguished in the ordinary course of business at amounts disclosed in the
financial statements. The Company’s ability to continue as a going concern depends upon aligning its sources of funding
(debt and equity) with the expenditure requirements of the Company and repayment of the short-term debt facilities as and
when they fall due.
Our steel business has faced very tough
market conditions and challenging profitability over the last several years, and based on current trends, we think the near-term
challenges for the steel sector will likely linger. In reaction to this challenging market, we are proactively reviewing our strategy
and asset portfolio and seeking to restructure low-efficient, non-core assets, as well as idle land resources to unlock hidden
fair value.
The Company aims to transform into
a leaner and fitter organization with better profitability. As such, the Company is strategically accelerating
its business transformation to pursue opportunities that offer compelling benefits to the Company and shareholders,
including:
| · | 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 our 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. |
The steel business is capital
intensive and as a normal industry practice in PRC, the Company is highly leveraged. Debt financing in the form of short term
bank loans, loans from related parties, financing sales, bank acceptance notes, and capital leases have been utilized to
finance the working capital requirements and the capital expenditures of the Company. As a result, the Company’s debt
to equity ratio as of December 31, 2014 and 2013 were (5.6) and (6.5), respectively. As of December 31, 2014, the
Company’s current liabilities exceed current assets (excluding non-cash item) by $1.3 billion, which together with
the gross loss from operations raises substantial doubt about its ability to continue as a going concern.
Management has implemented the following plans
that are intended to mitigate the conditions or events that raise substantial doubt about the Company’s ability to continue
as a going concern.
Longmen Joint Venture, as the most important
entity of the Company, accounted for majority of total sales of the Company. As such, the majority of the Company’s working
capital needs come from Longmen Joint Venture. The Company’s ability to continue as a going concern depends heavily on Longmen
Joint Venture’s operations. Longmen Joint Venture has obtained different types of financial supports, which are listed below
by category:
Line of credit
The Company has lines of credit from the listed
major banks totaling $141.7 million with expiration dates ranging from January 21, 2016 to October 14, 2016.
Banks | |
Amount of Line of Credit
(in millions) | | |
Repayment Date |
China Everbright Bank | |
| 19.5 | | |
January 21, 2016 |
Huaxia Bank | |
| 24.4 | | |
January 30, 2016 |
Bank of Beijing | |
| 81.5 | | |
October 14, 2016 |
Bank of Xi’an | |
| 16.3 | | |
February 4, 2016 |
Total | |
$ | 141.7 | | |
|
As of the date of this report, the Company
utilized $39.4 million of these lines of credit.
Vendor financing
Longmen Joint Venture signed additional vendor
financing agreements, which will provide liquidity to the Company in a total amount of $896.0 million with the following companies:
Company | |
Financing Period | |
Financing Amount (in millions) | |
| |
| |
| |
Company A – related party | |
July 30, 2014 – July 30, 2019 | |
$ | 244.4 | |
Company B – third party | |
January 22, 2014 – January 22, 2017 | |
| 162.9 | |
Company C – third party | |
October 1, 2013 – March 31, 2016 | |
| 488.7 | |
Total | |
| |
$ | 896.0 | |
Company A, a related party company and Company
B, a third party company, are both Longmen Joint Venture’s major coke suppliers. They have been doing business with Longmen
Joint Venture for many years. On July 30, 2014, Company A signed a five-year agreement with Longmen Joint Venture to finance its
coke purchases up to $244.4 million. Company B signed a three-year agreement with Longmen Joint Venture on January 22, 2014 to
finance its coke purchases up to $162.9 million. According to the above signed agreements, both Company A and B will not demand
any cash payments during their respective financing periods. As of the date of this report, the Company’s payables to Company
A and Company B were approximately $64.3 million and $61.4 million, respectively.
Company C is a Fortune 500 Company. On June
28, 2013, Company C signed an agreement with Longmen Joint Venture to finance Longmen Joint Venture’s purchase of iron ore
for an amount up to $488.7 million to commence on October 1, 2013 and end on March 31, 2015. On August 1, 2014, Company C signed
an extension agreement with the Company and extended the financing terms to March 31, 2016. Subject to the terms of the agreement,
Longmen Joint Venture is subject to a penalty of 0.05% of the daily outstanding balance owed to Company C in an event of late
payment. As of the date of this report, the Company’s payable to Company C was approximately $24.7 million
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS |
Other financing
On March 5, 2014, April 22, 2014,
April 23, 2014, and October 30, 2014, Longmen Joint Venture signed two-to-three-year payment extension agreements with
Company D, E, F, G and H listed below. In total, Longmen Joint Venture can obtain $363.3 million in financial support
from payment extensions granted by the following six companies:
Company | |
Financing Period | |
Financing Amount (in millions) | |
| |
| |
| |
Company D – related party | |
April 22, 2014 – April 22, 2017 | |
$ | 81.5 | |
Company E – related party | |
April 23, 2014 – April 23, 2017 | |
| 86.3 | |
Company F – related party | |
April 22, 2014 – April 22, 2017 | |
| 81.5 | |
Company G – related party | |
March 5, 2014 – March 5, 2016 | |
| 57.0 | |
Company H – related party | |
March 5, 2014 – March 5, 2016 | |
| 57.0 | |
Total | |
| |
$ | 363.3 | |
As of the date of this report, our
payables to Company D, Company E, Company F, Company G, and Company H are approximately $16.3
million, $0, $34.1 million, $0, and $0.9 million, respectively.
Amount due to sales representatives
Longmen Joint Venture entered into agreements
with various entities to act as the Company’s exclusive sales agents in specified geographic areas. These exclusive
sales agents must meet certain criteria and are required to deposit a certain amount of money with the Company. In return, the
sales agents receive exclusive sales rights in a specified area and discounted prices on products they order. These deposits bear
no interest and are required to be returned to the sales agent once the agreement is terminated. As of December 31, 2014, Longmen
Joint Venture has collected a total amount of $20.4 million. Historically, this amount is quite stable and we do not expect a
big fluctuation in this amount for the next twelve months from December 31, 2014 onwards.
With the financial support from the banks
and the companies above, management is of the opinion that the Company has sufficient funds to meet its future operations, working
capital requirements and debt obligations until the end of December 31, 2015. However, this opinion is based on the demand of the Company's products, economic conditions, the overcapacity
issue in the steel industry and the Company's operating results not continuing to deteriorate and on our vendors and related parties
being able to provide continued liquidity, as summarized below. The detailed breakdown of Longmen Joint Venture’s
estimated cash flows items are listed below.
| |
Cash inflow (outflow) (in millions) | |
| |
For the twelve months
ended December 31, 2015 | |
Current liabilities over current assets (excluding non-cash items) as of December
31, 2014 | |
$ | (1,278.8 | ) |
Projected cash financing and outflows: | |
| | |
Cash provided by line of credit from banks | |
| 141.7 | |
Cash provided by vendor financing | |
| 896.0 | |
Cash provided by other financing | |
| 363.3 | |
Cash provided by sales representatives | |
| 20.4 | |
Cash projected to be used in operations in the twelve months ended December
31, 2015 | |
| (37.2 | ) |
Cash projected to be used for financing cost in the twelve
months ended December 31, 2015 | |
| (50.1 | ) |
Net projected change in cash for the twelve months ended December 31,
2015 | |
$ | 55.3 | |
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS |
The preparation of financial statements in
conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the accompanying
consolidated financial statements and footnotes. Significant accounting estimates reflected in the Company’s consolidated
financial statements include the fair value of the profit sharing liability, the useful lives of and impairment for property,
plant and equipment, and potential losses on uncollectible receivables, allowance for inventory valuation, the interest rate used
in the financing sales, the fair value of the assets recorded under capital lease and the present value of the net minimum lease
payments of the capital lease. Actual results could differ from these estimates.
| (f) | Concentration of risks and uncertainties |
The Company’s operations are carried
out in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by
the political, economic and legal environment in the PRC, and by the general state of the PRC’s economy. The Company’s
operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in
North America and Western Europe. The Company’s results may be adversely affected by changes in governmental policies with
respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods
of taxation, among other things.
The Company has significant exposure to the
fluctuation of raw materials and energy prices as part of its normal operations. As of December 31, 2014 and 2013, the Company
does 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 PRC
banks on December 31, 2014 and 2013 amounted to $367.2 million and $431.2 million, including $1.0 million and $2.0
million that were deposited in Shaanxi Coal and Chemical Industry Group Financial Co., Ltd., a related party, respectively. As
of December 31, 2014 and 2013, $0.1 million and $0.1 million cash in the U.S. and Hong Kong banks was covered by insurance, respectively.
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.
None of the Company’s customers accounted
for more than 10% of total sales for the years ended December 31, 2014 and 2013, respectively. Two customers individually accounted
for 32.1% and 20.5% of total accounts receivable, including related parties as of December 31, 2014, respectively. Three customers
individually accounted for 13.7%, 11.1% and 10.8% of total accounts receivable, including related parties as of December 31, 2013,
respectively.
None of the Company’s suppliers individually
accounted for more than 10% of the total purchases for the year ended December 31, 2014 and one of the Company’s suppliers
individually accounted for 12.0% of the total purchases for the year ended December 31, 2013. None of the Company’s suppliers
individually accounted for more than 10% of total accounts payable as December 31, 2014 and 2013.
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.
The Company infrequently engages in trading
transactions in which the Company acts as an agent between the suppliers and the customers. The trading arrangements are such
that the suppliers are the primary obligors, the Company does not have any general inventory risk, physical inventory loss risk
or credit risk, and the Company does not have latitude in establishing price. Sales and cost of goods sold from these trading
arrangements are recorded at the net amount in accordance with ASC 605-45.
| (h) | 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.
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS |
Translation adjustments included in accumulated
other comprehensive income amounted to $0.6 million and $0.7 million as of December 31, 2014 and 2013, respectively. The balance
sheet amounts, with the exception of equity at December 31, 2014 and 2013 were translated at 6.14 RMB and 6.11 RMB to $1.00, respectively.
The equity accounts were stated at their historical rate. The average translation rates applied to statement of operations accounts
for the years ended December 31, 2014 and 2013 were 6.14 RMB and 6.19 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.
The accounting standard regarding fair value
of financial instruments and related fair value measurements defines financial instruments and requires disclosure of the fair
value of financial instruments held by the Company. The Company considers the carrying amount of cash, short term investments,
accounts receivable, other receivables, accounts payable and accrued liabilities, to approximate their fair values because of
the short period of time between the origination of such instruments and their expected realization. For short term loans and
notes payable, the Company concluded the carrying values are a reasonable estimate of fair values because of the short period
of time between the origination and repayment and as their stated interest rates approximate current rates available. The carrying
value of the long term loans-related party approximates its fair value as of the reporting date as their stated interest rates
approximate current rates available.
The accounting standards define fair value,
establish a three-level valuation hierarchy for disclosures of fair value measurement and enhance disclosure requirements for
fair value measures. The three levels are defined as follow:
| · | Level
1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets
or liabilities in active markets. |
| · | Level
2 inputs to the valuation methodology include quoted prices for similar assets and liabilities
in active markets, and inputs that are observable for the assets or liability, either
directly or indirectly, for substantially the full term of the financial instruments. |
| · | Level
3 inputs to the valuation methodology are unobservable and significant to the fair value. |
The Company analyzes all financial instruments
with features of both liabilities and equity, pursuant to which warrants previously issued by the Company were required to be
recorded as a liability at fair value and marked to market each reporting period. The warrants were accounted for as derivative
liabilities and recorded at their fair value, with the change in fair value charged or credited to income each period. The
warrants expired unexercised on May 13, 2013. Prior to their expiration, the fair value of the warrants was estimated using a
binomial lattice model, using level 3 inputs.
As described in Note 16 - Capital lease obligations,
payments related to the capital lease of the Asset Pool consist of two components: (1) a fixed monthly payment of $2.3 million
(RMB 14.6 million), based on Shaanxi Steel’s cost to construct the assets, to be paid for the 20 year term of the Unified
Management Agreement; and (2) 40% of any remaining pre-tax profits from the Asset Pool, which includes Longmen Joint Venture and
the constructed iron and steel making facilities. The aforementioned profit sharing component meets the definition of a derivative
instrument under ASC 815-10-15-83 and, accordingly, the profit sharing liability is accounted for separately as a derivative liability.
It was recognized initially at its estimated fair value at inception. The estimated fair value is adjusted each reporting period,
with changes in the estimated fair value of the profit sharing liability charged or credited to operating income each period.
The Company determines the fair value of the
profit sharing liability using Level 3 inputs by considering the present value of Longmen Joint Venture’s projected profits/losses,
discounted based on our average borrowing rate, which is currently 6.9%.
The fair value of the profit sharing liability
will change each period as a result of (a) any changes in our estimate of Longmen Joint Venture’s projected profits/losses
over the remaining term of the Agreement, (b) any change in the discount rate used, based on changes in our current or expected
borrowing rate, (c) the change in fair value related to the passage of time and change in the number of future periods over which
the present value of future cash flows is estimated and (d) any difference between the previously estimated operating results
for the current period and actual results.
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS |
Each period, the Company considers whether
the discount rate based on the Company’s average borrowing rate should be adjusted based upon the current and expected future
financial condition of the Company. On November 22, 2014, the People’s Bank of China decreased standard bank borrowing rate
across the board by 0.4%. Accordingly, the Company adjusted down the present value discount rate for profit sharing liability
by 0.4% from 7.3% to 6.9%.
The projected profits/losses in Longmen Joint
Venture are based upon, but not limited to, the following assumptions:
| · | projected selling units and growth in the steel market |
| · | projected unit selling price in the steel market |
| · | projected unit purchase cost in the coal and iron ore
markets |
| · | selling and general and administrative expenses to be
in line with the growth in the steel market |
| · | projected bank borrowings |
| · | gross national product index |
The above assumptions were reviewed by the Company at December 31, 2013 and the Company changed those assumptions
as compared to the assumption used at December 31, 2012 and 2011 because of the changes in market conditions in PRC. Since the
Company had the most updated information from the banks, GDP report, government policies, and the operating results from the year
ended December 31, 2013, all of the above information indicated the downward trend in the steel manufacturing industry in the coming
years. As a result, the Company re-measured the fair value of the 40% profit sharing liability as of the period ended December
31, 2013 and recorded a gain on change in fair value of profit sharing liability of $174.6 million for the year ended December
31, 2013. The above assumptions were again reviewed by the Company at December
31, 2014 and the assumptions related to the projected growth in the steel market and costs were revised, resulting in a further
reduction of the estimated profit sharing liability.
The major drivers of the change in our
estimate were the continuing decrease in the selling price of our products as well as a continuing downtrend in the sluggish infrastructure
investment and consumption growth for the next ten years or so. As such, we have lowered our projected growth in the steel market
for approximately ten years as compared to our previous estimates at December 31, 2013. The variables and the impact on our inputs
to the 2014 valuation of profit sharing fair value, as compared to the 2013 valuation of the profit sharing fair value can be summarized
as follows:
| - | Volume Inputs: The most recent 5 year China GDP forecast and Shaanxi GDP forecast decreased on
average by 0.4% and 1.4%, respectively, versus the forecast used in 2013. |
| - | Steel Sales Price Inputs: The most recent China Steel Association price index, together with our
actual result decreased, on average, by 5.6% versus the same forecast used in 2013. |
| - | Raw Material Cost Inputs: The most recent China Steel Association price index, together with the
our actual result decreased, on average, by 4.7% versus the same forecast used in 2013 |
The above reduced our Gross Profit % over
the next 5 years by, on average, 0.4% from the 2013 valuation. In addition, the above reduced our Gross Profit % over the remaining
profit sharing period of 11.33 years by, on average, 1.75% from the 2013 valuation.
As a result of the changes in valuation
inputs noted above for the year ended December 31, 2014, the Company recognized a gain on the change in the fair value of the
profit sharing liability of $91.0 million due to a $110.6 million reduction in the fair value of profit sharing liability
resulting from the change in estimates of future operating profits and a $0.1 million reduction resulting from the Asset
Pool’s operating results for the year ended December 31, 2014 being slightly less favorable than previously estimated
as of December 31, 2013, offset by a $8.1 million loss resulting from the 0.4% reduction of the present value discount rate
and a $11.5 million loss from the present value discount. The estimated fair value of the profit sharing liability at
December 31, 2014 is $70.4 million.
Changes in any of the assumptions used to
estimate the fair value of the profit sharing liability will change the liability accordingly. If we were to reduce the projected
bank borrowing rate used to discount the liability to a present value by 1.0% and other factors remained unchanged, our profit
sharing liability as of December 31, 2014 would have been $80.8 million and we would decrease the gain from the change in the
fair value of the profit sharing liability by $10.4 million. If we were to reduce the projected selling units and growth in the
steel market rate by 1.0% and other factors remained unchanged, our profit sharing liability as of December 31, 2014 would have
been $64.4 million and we would increase the gain from the change in the fair value of the profit sharing liability by $6.0 million.
The following table sets forth by level within
the fair value hierarchy, the Company’s financial assets and liabilities that were accounted for at fair value on a recurring
basis as of December 31, 2014:
(in thousands) | |
Carrying Value as of December 31,
2014 | | |
Fair Value Measurements at December 31,
2014 Using Fair Value Hierarchy | |
| |
| | |
Level 1 | | |
Level 2 | | |
Level 3 | |
Profit sharing liability | |
$ | 70,422 | | |
$ | - | | |
$ | - | | |
$ | 70,422 | |
Total | |
$ | 70,422 | | |
$ | - | | |
$ | - | | |
$ | 70,422 | |
The following table sets forth by level within
the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value on a recurring
basis as of December 31, 2013:
(in thousands) | |
Carrying Value as of December 31,
2013 | | |
Fair Value Measurements at December 31,
2013 Using Fair Value Hierarchy | |
| |
| | |
Level 1 | | |
Level 2 | | |
Level 3 | |
| |
| | |
| | |
| | |
| |
Profit sharing liability | |
$ | 162,295 | | |
$ | - | | |
$ | - | | |
$ | 162,295 | |
Total | |
$ | 162,295 | | |
$ | - | | |
$ | - | | |
$ | 162,295 | |
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS |
The following is a reconciliation of the beginning
and ending balance of the assets and liabilities measured at fair value on a recurring basis for the years ended December 31,
2014 and 2013:
| |
December 31, 2014 | | |
December 31, 2013 | |
| |
(in thousands) | | |
(in thousands) | |
Beginning balance | |
$ | 162,295 | | |
$ | 328,828 | |
Change in fair value of profit sharing liability: | |
| | | |
| | |
Change in preset value of estimate of future
operating profits | |
| (110,589 | ) | |
| (183,528 | ) |
Change in discount rate | |
| 8,106 | | |
| - | |
Interest expense - present value discount amortization | |
| 11,544 | | |
| 16,872 | |
Difference between the previously estimated operating
results for the current period and actual results | |
| (79 | ) | |
| (7,913 | ) |
Change in derivative liabilities - warrants | |
| - | | |
| 1 | |
Exchange rate effect | |
| (855 | ) | |
| 8,035 | |
Ending balance | |
$ | 70,422 | | |
$ | 162,295 | |
Except for the derivative liabilities related
to the profit sharing liability and to the warrants issued by the Company, which expired on May 13, 2013, the Company did not
identify any other assets or liabilities that are required to be presented on the balance sheet at fair value.
Cash includes cash on hand and demand
deposits in banks with original maturities of less than three months.
The Company has notes payable outstanding
with various banks and is required to keep certain amounts on deposit that are subject to withdrawal restrictions. The notes payable
are generally short term in nature due to its maturity period of six months or less, thus restricted cash is classified as a current
asset.
Short-term investments are certificated deposits
maintained with banks within the PRC with maturity date of less than one year.
Loans receivable, including to related parties
represent interest-bearing amounts the Company expects to collect from unrelated and related parties with maturity dates of less
than one year or due on demand.
| (n) | 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.
Notes receivable represents trade accounts
receivable due from various customers where the customers’ banks have guaranteed the payment. The notes are non-interest
bearing and normally paid within three to six months. The Company has the ability to submit request for payment to the customer’s
bank earlier than the scheduled payment date, but will incur an interest charge and a processing fee.
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS |
Restricted notes receivable represents notes
receivable pledged as collateral for short-term loans and short-term notes payable issued by banks.
Interest expenses for early submission request
of payment amounted to $49.3 million and $37.9 million, respectively, for the years ended December 31, 2014 and 2013.
| (p) | 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.
Inventories are comprised of raw
materials, work in progress and finished goods and are stated at the lower of cost or market using the weighted average cost
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. The Company had a net realizability adjustment of $15.3 million and $9.8 million inventory cost as
of December 31, 2014 and 2013, respectively.
Shipping and handling for raw materials purchased
are included in cost of goods sold. Shipping and handling cost incurred to ship finished products to customers are included in
selling expenses. Shipping and handling expenses for finished goods for the years ended December 31, 2014 and 2013 amounted to
$25.5 million and $23.1 million, respectively.
| (s) | 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 |
The Company assesses all significant leases
for purposes of classification as either operating or capital. At lease inception, if the lease meets any of the four following
criteria, the Company will classify it as a capital lease; otherwise it will be treated as an operating lease: a) transfer of
ownership to lessee at the end of the lease term, b) bargain purchase option, c) lease term is equal to 75% or more of the estimated
economic life of the leased property, d) the present value of the minimum lease payments is 90% or more of the fair value of the
leased asset.
Construction in progress represents the costs
incurred in connection with the construction of buildings or new additions to the Company’s plant facilities. No depreciation
is provided for construction in progress until such time as the assets are completed and are placed into service, maintenance,
repairs and minor renewals are charged directly to expense as incurred. Major additions and betterment to buildings and equipment
are capitalized. Interest incurred during construction is capitalized into construction in progress. All other interest is expensed
as incurred.
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS |
Long lived assets, including buildings and
improvements, equipment and intangible assets are reviewed if events and changes in circumstances indicate that its 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 Company has considered it is a triggering event that Longmen Joint
Venture’s carrying amount may not be recoverable, to determine whether its carrying value has become impaired. The
Company uses the undiscounted cash flow estimation approach for the purpose of performing a recoverability test which
includes future cash inflows less associated cash outflows that are directly associated with and that are 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 is identifiable cash flows. The major groupings analyzed include Longmen Joint
Venture, Maoming Hengda and General Steel (China). Further, our estimate of future cash flows includes estimated future cash
flows necessary to maintain our existing production potential over the entire period and within the various groups. The
projections are based on a best estimate approach as opposed to a probability weighted approach based on the likelihood of
possible outcomes. When the Company identifies an impairment, the Company reduces the carrying amount of the asset to its
estimated fair value based on a discounted cash flows method. As of December 31, 2014, the Company expects its long-lived
assets to be fully recoverable.
The Company also re-evaluates the periods
of depreciation and amortization to determine whether subsequent events and circumstances warrant revised estimates of useful
lives.
Finite lived intangible assets of the Company
are reviewed for impairment if events and circumstances require. The Company considers assets to be impaired if the carrying value
exceeds the future projected cash flows from related operations. The Company also re-evaluates the periods of amortization to
determine whether subsequent events and circumstances warrant revised estimates of useful lives. As of December 31,
2014, the Company expects these assets to be fully recoverable.
Land use rights
All land in the PRC is owned by the government.
However, the government grants “land use rights.” General Steel (China) acquired land use rights in 2001
for a total of $3.9 million (RMB 23.7 million). These land use rights are for 50 years and expire in 2050 and 2053. The Company
amortizes the land use rights over the twenty-year business term because its business license had a twenty-year term.
Long Steel Group contributed land use rights
for a total amount of $24.2 million (RMB 148.3 million) to the Longmen Joint Venture. The contributed land use rights are for
50 years and expire in 2048 to 2052.
Maoming Hengda has land use rights amounting
to $2.7 million (RMB 16.6 million) for 50 years that expire in 2054.
Other than the land use rights that General
Steel (China) acquired in 2001, the Company amortizes the land use rights over their 50 year term.
Entity | |
Original Cost | | |
Expires on | |
| |
(in thousands) | | |
| |
General Steel (China) | |
$ | 3,865 | | |
| 2050
& 2053 | |
Longmen Joint Venture | |
$ | 24,157 | | |
| 2048
& 2052 | |
Maoming Hengda | |
$ | 2,704 | | |
| 2054 | |
Mining right
Mining rights are capitalized at cost when
acquired, including amounts associated with any value beyond proven and probable reserves, and amortized to operations as depletion
expense using the units-of-production method over the estimated proven and probable recoverable tons. Longmen Joint Venture has
iron ore mining right amounting to $2.4 million (RMB 15.0 million), which is amortized over the estimated recoverable reserve
of 4.2 million tons.
| (u) | 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.
The table below summarizes Longmen Joint Venture’s
investment holdings as of December 31, 2014 and 2013.
Unconsolidated entities | |
Year acquired | | |
December 31, 2014 Net investment
(In thousands) | | |
Owned % | | |
December 31, 2013 Net investment
(In thousands) | | |
Owned % | |
Xi’an Delong Powder Engineering Materials Co., Ltd. | |
| 2007 | | |
$ | 1,153 | | |
| 24.1 | | |
$ | 1,215 | | |
| 24.1 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS |
The table below summarizes General Steel (China)’s
investment holding (see Note 2(a) - Basis of presentation) as of December 31, 2014 and 2013.
Unconsolidated entities | |
Year acquired | | |
December 31, 2014 Net investment
(In thousands) | | |
Owned % | | |
December 31, 2013 Net investment
(In thousands) | | |
Owned % | |
Tianwu General Steel Material Trading Co., Ltd. | |
| 2010 | | |
$ | 15,670 | | |
| 32.0 | | |
$ | 15,728 | | |
| 32.0 | |
Total investment income in unconsolidated
subsidiaries amounted to $0.1 million and $0.2 million for the years ended December 31, 2014 and 2013, respectively, which was
included in “Income from equity investments” in the consolidated statements of operations and comprehensive loss.
| (v) | Short-term notes payable |
Short-term notes payable are lines of credit
extended by banks. The banks in-turn issue the Company a bankers acceptance note, which can be endorsed and assigned to vendors
as payments for purchases. The notes payable are generally payable at a determinable period, generally three to six months. This
short-term notes payable bears no interest and is guaranteed by the bank for its complete face value and usually matures within
three to six-month period. The banks usually require the Company to deposit a certain amount of cash at the bank as a guarantee
deposit, which is classified on the balance sheet as restricted cash.
Customer deposits represent amounts advanced
by customers on product orders. The product normally is shipped within one month after receipt of the advance payment, and the
related sale is recognized in accordance with the Company’s revenue recognition policy.
To reimburse Longmen Joint Venture for certain
construction costs incurred as well as economic losses on suspended production to accommodate the construction of the new iron
and steel making facilities on behalf of Shaanxi Steel, in the fourth quarter of 2010, Shaanxi Steel reimbursed Longmen Joint
Venture for the value of assets dismantled, various site preparation costs incurred and rent under a 40-year land sub-lease that
was entered into by the parties in June 2009 (the "Longmen Sub-lease"), and for the reduced production efficiency caused
by the construction. Applying the lease accounting guidance, the Company has concluded that, except for the reimbursement for
site preparation costs incurred, the amount of reimbursement should be deferred and recognized as a component of the land that
was sub-leased during the construction, to be amortized to income over the remaining term of the 40-year sub-lease. Deferred lease
income represents the remaining balance of compensation being deferred. See Note 14 - “Deferred lease income”.
| (y) | Non-controlling Interest |
Non-controlling interest mainly consists of
Long Steel Group’s 40% interest in Longmen Joint Venture, an individuals’ 0.9% interest in Yangpu Shengtong, two individuals’
1.3% interest in Qiu Steel, and an individual’s 1% interest in Maoming Hengda, 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.
| (z) | 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.
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS |
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 December 31, 2014 and 2013, the
Company had repurchased 2,472,306 total shares of its common stock under the share repurchase plan approved by the Board of Directors
in December 2010.
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 years ended December
31, 2014, and 2013. As of December 31, 2014, the Company’s income tax returns filed for December 31, 2014, 2013, 2012, 2011
and 2010 remain subject to examination by the taxing authorities.
| (cc) | 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.
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS |
| (dd) | Recently issued accounting pronouncements |
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers: Topic 606. This Update affects any entity that either enters into contracts with
customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets, unless those contracts
are within the scope of other standards. The guidance in this Update supersedes the revenue recognition requirements in Topic
605, Revenue Recognition and most industry-specific guidance. The core principle of the guidance is that an entity should
recognize revenue to illustrate the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services. The new guidance also includes a cohesive
set of disclosure requirements that will provide users of financial statements with comprehensive information about the nature,
amount, timing, and uncertainty of revenue and cash flows arising from a reporting organization’s contracts with customers.
This ASU is effective retrospectively for fiscal years, and interim periods within those years beginning after December 15, 2016
for public companies and 2017 for non-public entities. Management is evaluating the effect, if any, on the Company’s financial
position and results of operations.
In November 2014, FASB issued ASU No. 2014-17,
Business Combinations (Topic 805): Pushdown Accounting (a consensus of the FASB Emerging Issues Task Force.
The amendments in this update provide an acquired entity with an option to apply pushdown accounting in its separate financial
statements upon occurrence of an event in which an acquirer obtains control of the acquired entity. An acquired entity may
elect the option to apply pushdown accounting in the reporting period in which the change-in-control event occurs. An acquired
entity should determine whether to elect to apply pushdown accounting for each individual change-in-control event in which an
acquirer obtains control of the acquired entity. If pushdown accounting is not applied in the reporting period in which
the change-in-control event occurs, an acquired entity will have the option to elect to apply pushdown accounting in a subsequent
reporting period to the acquired entity’s most recent change-in-control event. An election to apply pushdown accounting
in a reporting period after the reporting period in which the change-in-control event occurred should be considered a change in
accounting principle in accordance with Topic 250, Accounting Changes and Error Corrections. If pushdown accounting is applied
to an individual change-in-control event, that election is irrevocable. The amendments in this ASU are effective on November 18,
2014. After the effective date, an acquired entity can make an election to apply the guidance to future change-in-control
events or to its most recent change-in-control event. However, if the financial statements for the period in which the most
recent change-in-control event occurred already have been issued or made available to be issued, the application of this guidance
would be a change in accounting principle. The adoption of ASU 2014-17 did not have a material impact on the Company’s
consolidated financial statements.
In
January 2015, FASB issued ASU No. 2015-01, Income Statement—Extraordinary and Unusual Items (Subtopic 225-20):
Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items.
This Update is issued as part of its initiative to reduce complexity in accounting standards (the Simplification Initiative).
The objective of the Simplification Initiative is to identify, evaluate, and improve areas of generally accepted accounting principles
(GAAP) for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided
to the users of financial statements. This Update eliminates from GAAP the concept of extraordinary items. The amendments
in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015.
A reporting entity may apply the amendments prospectively. A reporting entity also may apply the amendments retrospectively to
all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from
the beginning of the fiscal year of adoption. The effective date is the same for both public business entities and all other entities.
The Company does not expect the adoption of ASU 2015-01 to have material impact on the Company’s consolidated financial
statements.
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS |
In February 2015, FASB issued ASU 2015-02,
Consolidation (Topic 810): Amendments to the Consolidation Analysis. This Update focuses on the consolidation evaluation
for reporting organizations that are required to evaluate consolidation of certain legal entities by reducing the number of consolidation
models from four to two and is intended to improve current GAAP. The amendments in the ASU are effective beginning after December
15, 2016. The Company does not expect the adoption of ASU 2015-02 to have a material impact on the consolidated financial statements.
Note 3 – Loans receivable
Loans receivable, including to related parties
represent amounts the Company expects to collect from unrelated and related parties upon maturity.
The Company had the following loan receivable
due within one year as of:
| |
December 31, 2014 | | |
December 31, 2013 | |
| |
(in thousands) | | |
(in thousands) | |
Loan to unrelated party; due on demand; interest rate is 8.0%. | |
$ | 36,001 | | |
$ | - | |
The Company has the following loans receivable
– related parties due within one year as of:
| |
December 31, 2014 | | |
December 31, 2013 | |
| |
(in thousands) | | |
(in thousands) | |
Loan to Tianjin Hengying Trading Co., Ltd.; due on demand; interest rate is 10.0%. | |
$ | 13,997 | | |
$ | - | |
Loan to Tianjin Dazhan Industry Co., Ltd.; due on demand; interest rate is 10.0%. | |
| 14,617 | | |
| - | |
Loan to Beijing Shenghua Xinyuan Metal Materials Co., Ltd.; due on demand; interest rate is 10.0%. | |
| 6,099 | | |
| - | |
Loan to Teamlink Investment Co., Ltd; due in June, July and December 2014;
interest rate was 4.75% | |
| - | | |
| 4,540 | |
Total loans receivable – related parties | |
$ | 34,713 | | |
$ | 4,540 | |
See Note 20 “Related party transactions and balances”
for the nature of the relationship of related parties.
Total interest income for the loans amounted
to $8.2 million and $0.3 million for the years ended December 31, 2014 and 2013, respectively.
Note 4 – Accounts receivable (including
related parties), net
Accounts receivable, including related party
receivables, net of allowance for doubtful accounts consists of the following:
| |
December 31, 2014 | | |
December 31, 2013 | |
| |
(in thousands) | | |
(in thousands) | |
Accounts receivable | |
$ | 9,804 | | |
$ | 5,131 | |
Less: allowance for doubtful accounts | |
| (483 | ) | |
| (1,053 | ) |
Accounts receivable – related parties | |
| 8,624 | | |
| 2,942 | |
Less: allowance for doubtful
accounts – related parties | |
| (126 | ) | |
| - | |
Net accounts receivable | |
$ | 17,819 | | |
$ | 7,020 | |
Movement of allowance for doubtful accounts, including related
parties, is as follows:
| |
December 31, 2014 | | |
December 31, 2013 | |
| |
(in thousands) | | |
(in thousands) | |
Beginning balance | |
$ | 1,053 | | |
$ | 1,367 | |
Charge to expense | |
| 368 | | |
| 96 | |
Less: recovery | |
| (8 | ) | |
| (449 | ) |
Deconsolidation of Baotou Steel | |
| (798 | ) | |
| - | |
Exchange rate effect | |
| (6 | ) | |
| 39 | |
Ending balance | |
$ | 609 | | |
$ | 1,053 | |
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS |
Note 5 – Other receivables (including
related parties), net
Other receivables, including related party
receivables, net of allowance for doubtful accounts consists of the following:
| |
December 31, 2014 | | |
December 31, 2013 | |
| |
(in thousands) | | |
(in thousands) | |
Other receivables | |
$ | 73,944 | | |
$ | 57,322 | |
Less: allowance for doubtful accounts | |
| (10,198 | ) | |
| (2,606 | ) |
Other receivables – related parties | |
| 39,734 | | |
| 54,106 | |
Less: allowance for doubtful
accounts – related parties | |
| (64 | ) | |
| - | |
Net other receivables | |
$ | 103,416 | | |
$ | 108,822 | |
Movement of allowance for doubtful accounts, including related
parties, is as follows:
| |
December 31, 2014 | | |
December 31, 2013 | |
| |
(in thousands) | | |
(in thousands) | |
Beginning balance | |
$ | 2,606 | | |
$ | 2,849 | |
Charge to expense | |
| 7,670 | | |
| 48 | |
Less: recovery | |
| (6 | ) | |
| (376 | ) |
Exchange rate effect | |
| (8 | ) | |
| 85 | |
Ending balance | |
$ | 10,262 | | |
$ | 2,606 | |
Note 6 – Inventories
Inventories consist of the following:
| |
December 31, 2014 | | |
December 31, 2013 | |
| |
(in thousands) | | |
(in thousands) | |
Supplies | |
$ | 18,838 | | |
$ | 21,040 | |
Raw materials | |
| 143,563 | | |
| 164,301 | |
Finished goods | |
| 12,301 | | |
| 42,977 | |
Less: allowance for inventory valuation | |
| (18,375 | ) | |
| (15,397 | ) |
Total inventories | |
$ | 156,327 | | |
$ | 212,921 | |
Raw materials consist primarily of iron ore
and coke at Longmen Joint Venture. The cost of finished goods includes direct costs of raw materials as well as direct labor used
in production. Indirect production costs at normal capacity such as utilities and indirect labor related to production such as
assembling, shipping and handling costs for purchasing are also included in the cost of inventory.
The Company values its inventory at the lower
of cost or market, determined on a weighted average method, or net realizable value. As of December 31, 2014 and 2013, the Company
had provided allowance for inventory valuation in the amounts of $18.4 million and $15.4 million, respectively.
Movement of allowance for inventory valuation is as follows:
| |
December 31, 2014 | | |
December 31, 2013 | |
| |
(in thousands) | | |
(in thousands) | |
Beginning balance | |
$ | 15,397 | | |
$ | 9,585 | |
Addition | |
| 18,362 | | |
| 15,194 | |
Less: net realizable value adjustment | |
| (15,311 | ) | |
| (9,757 | ) |
Exchange rate effect | |
| (73 | ) | |
| 375 | |
Ending balance | |
$ | 18,375 | | |
$ | 15,397 | |
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS |
Note 7 – Advances on inventory purchases
Advances on inventory purchases, including
related party, net of allowance for doubtful accounts consists of the following:
| |
December 31, 2014 | | |
December 31, 2013 | |
| |
(in thousands) | | |
(in thousands) | |
Advances on inventory purchases | |
$ | 76,320 | | |
$ | 45,002 | |
Less: allowance for doubtful accounts | |
| (2,501 | ) | |
| (105 | ) |
Advances on inventory purchases
– related parties | |
| 45,617 | | |
| 83,003 | |
Net advances on inventory purchases | |
$ | 119,436 | | |
$ | 127,900 | |
Movement of allowance for doubtful accounts, including related
parties, is as follows:
| |
December 31, 2014 | | |
December 31, 2013 | |
| |
(in thousands) | | |
(in thousands) | |
Beginning balance | |
$ | 105 | | |
$ | 97 | |
Charge to expense | |
| 2,395 | | |
| 5 | |
Exchange rate effect | |
| 1 | | |
| 3 | |
Ending balance | |
$ | 2,501 | | |
$ | 105 | |
Note 8 – Plant and equipment, net
Plant and equipment consist of the following:
| |
December 31, 2014 | | |
December 31, 2013 | |
| |
(in thousands) | | |
(in thousands) | |
Buildings and improvements | |
$ | 279,776 | | |
$ | 274,402 | |
Machinery | |
| 669,427 | | |
| 667,093 | |
Machinery under capital lease | |
| 626,735 | | |
| 623,895 | |
Transportation and other equipment | |
| 22,765 | | |
| 22,991 | |
Construction in progress | |
| 342,660 | | |
| 11,412 | |
Subtotal | |
| 1,941,363 | | |
| 1,599,793 | |
Less: accumulated depreciation | |
| (398,227 | ) | |
| (327,886 | ) |
Total | |
$ | 1,543,136 | | |
$ | 1,271,907 | |
Construction in progress consisted of the
following as of December 31, 2014:
Construction in progress | |
Value | | |
Completion | |
Estimated additional cost to complete | |
description | |
(In thousands) | | |
date | |
(In thousands) | |
Sintering machine construction | |
| 107,139 | | |
March 2015 | |
| 1,112 | |
#5 blast furnace construction | |
| 212,086 | | |
March 2015 | |
| 2,204 | |
Reconstruction of miscellaneous factory buildings | |
| 5,349 | | |
December 2015 | |
| 4,680 | |
Project materials | |
| 2,144 | | |
| |
| - | |
Others | |
| 15,942 | | |
| |
| - | |
Total | |
$ | 342,660 | | |
| |
$ | 7,996 | |
The Company is obligated under a capital lease
for the iron and steel making facilities, including one sintering machine, two converters, two blast furnaces and some auxiliary
systems that expire on April 30, 2031. During 2013, Longmen Joint Venture entered into a number of capital lease agreements for
energy-saving equipment installed throughout the steel production line. The Company is obligated under the capital lease for the
equipment upon the confirmation of the energy-saving rate between the Company and its vendors.
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS |
The carrying value of assets acquired under
the capital lease consists of the following:
| |
December 31, 2014 | | |
December 31, 2013 | |
| |
(in thousands) | | |
(in thousands) | |
Machinery | |
$ | 626,735 | | |
$ | 623,895 | |
Less: accumulated
depreciation | |
| (107,782 | ) | |
| (77,086 | ) |
Carrying value of leased assets | |
$ | 518,953 | | |
$ | 546,809 | |
The Company assessed the recoverability of
all of its remaining long lived assets at December 31, 2014 and 2013, and such assessment did not result in any impairment charges
for the years ended December 31, 2014 and 2013, respectively.
Depreciation expense for the years ended December
31, 2014 and 2013 amounted to $95.3 million and $87.9 million, respectively. These amounts include depreciation of assets held
under capital leases for the years ended December 31, 2014 and 2013, which amounted to $31.1 million and $28.7 million, respectively.
Note 9 – Intangible assets, net
Intangible assets consist of the following:
| |
December 31, 2014 | | |
December 31, 2013 | |
| |
(in thousands) | | |
(in thousands) | |
Land use rights | |
$ | 30,726 | | |
$ | 30,884 | |
Mining right | |
| 2,447 | | |
| 2,459 | |
Software | |
| 1,058 | | |
| 743 | |
Subtotal | |
| 34,231 | | |
| 34,086 | |
Less: | |
| | | |
| | |
Accumulated amortization – land use rights | |
| (9,127 | ) | |
| (8,498 | ) |
Accumulated amortization – mining right | |
| (1,431 | ) | |
| (1,320 | ) |
Accumulated amortization –
software | |
| (713 | ) | |
| (561 | ) |
Subtotal | |
| (11,271 | ) | |
| (10,379 | ) |
Intangible assets, net | |
$ | 22,960 | | |
$ | 23,707 | |
The gross amount of the intangible assets
amounted to $34.2 million and $34.1 million as of December 31, 2014 and 2013, respectively. The remaining weighted average amortization
period is 32.7 years as of December 31, 2014.
Total amortization expense for the years ended
December 31, 2014 and 2013 amounted to $0.9 million and $0.8 million, respectively.
Total depletion expense for the years ended
December 31, 2014 and 2013 amounted to $0.1 million and $0.3 million, respectively.
The estimated aggregate amortization and depletion
expenses for each of the five succeeding years is as follows:
Year ending | |
Estimated amortization and
depletion expenses | | |
Gross carrying Amount | |
| |
(in thousands) | | |
(in thousands) | |
December 31, 2015 | |
$ | 971 | | |
| 21,989 | |
December 31, 2016 | |
| 971 | | |
| 21,018 | |
December 31, 2017 | |
| 971 | | |
| 20,047 | |
December 31, 2018 | |
| 971 | | |
| 19,076 | |
December 31, 2019 | |
| 971 | | |
| 18,105 | |
Thereafter | |
| 18,105 | | |
| - | |
Total | |
$ | 22,960 | | |
| | |
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS |
Note 10 – Debt
Short-term notes payable
Short-term notes payable are lines of credit
extended by banks. Banks in turn issue the Company a bank acceptance note, which can be endorsed and assigned to vendors as payments
for purchases. The notes payable are generally payable within three to six months. This short-term note payable is guaranteed
by the bank for its complete face value. The banks do not charge interest on these notes, but usually charge a transaction fee
of 0.05% of the notes value. In addition, the banks usually require the Company to deposit either a certain amount of cash at
the bank as a guarantee deposit, which is classified on the balance sheet as restricted cash, or provide notes receivable as security,
which are classified on the balance sheet as restricted notes receivable. Restricted cash as a guarantee for the notes payable
amounted to $339.4 million and $399.4 million as of December 31, 2014 and 2013, respectively. Restricted notes receivable as a
guarantee for the notes payable amounted to $0 and $231.7 million as of December 31, 2014 and 2013, respectively.
The Company had the following short-term notes
payable as of:
| |
December 31, 2014 | | |
December 31, 2013 | |
| |
(in thousands) | | |
(in thousands) | |
General Steel (China): Notes payable to various banks in China, due various dates
from January to June 2015. Restricted cash required of $14.7 million and $16.4 million as of December 31, 2014 and 2013, respectively;
guaranteed by third parties. These notes payable were either repaid or renewed subsequently on the due dates. | |
$ | 22,806 | | |
$ | 29,466 | |
Longmen Joint Venture: Notes payable to various banks in China, due various
dates from January to October 2014. $324.7 million restricted cash and $0 notes receivable are secured for notes payable as
of December 31, 2014, and comparatively $383.0 million restricted cash and $231.7 million notes receivable secured as of December
31, 2013, respectively; some notes are further guaranteed by third parties. These notes payable were either repaid or renewed
subsequently on the due dates. | |
| 638,829 | | |
| 988,364 | |
Total short-term notes payable | |
$ | 661,635 | | |
$ | 1,017,830 | |
Short-term loans
Short-term loans represent amounts due to
various banks, other companies and individuals, including related parties, normally due within one year. The principal of the
loans are due at maturity but can be renewed at the bank’s option. Accrued interest is due either monthly or quarterly.
Short term loans due to banks, related parties
and other parties consisted of the following as of:
Due to banks
| |
December 31, 2014 | | |
December 31, 2013 | |
| |
(in thousands) | | |
(in thousands) | |
General Steel (China): Loans from various banks in China, due various dates from
January to August 2015. Weighted average interest rate was 7.2% per annum and 7.2% per annum as of December 31, 2014 and 2013,
respectively; some are guaranteed by third parties. These loans were either repaid or renewed subsequently on the due dates. | |
$ | 40,562 | | |
$ | 34,229 | |
Longmen Joint Venture: Loans from various banks in China, due various
dates from January to November 2015. Weighted average interest rate was 7.1% per annum and 6.3% per annum as of December 31,
2014 and 2013, respectively; some are guaranteed by third parties; $16.3 million restricted cash and $111.8 notes receivable
and comparatively $163.9 million notes receivable were secured for the loans as of December 31, 2014 and 2013, respectively;
These loans were either repaid or renewed subsequently on the due dates. | |
| 216,940 | | |
| 267,688 | |
Total short-term loans - bank | |
$ | 257,502 | | |
$ | 301,917 | |
As of December 31, 2014 and 2013, the Company
did not met its financial covenants stipulated by certain loan agreements related to the Company’s debt to asset ratio.
As of December 31, 2014, two of General Steel (China)’s bank loans contained financial covenants stipulating debt to asset
ratios below 70%. However, as of December 31, 2014, General Steel (China)’s debt to asset ratio was 90.8%. As of December
31, 2013, three of General Steel (China)’s bank loans contained financial covenants stipulating debt to asset ratios below
20% and 70%. However, as of December 31, 2013, General Steel (China)’s debt to asset ratio was 89.7%.
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS |
Furthermore, the Company is a party to loan
agreements with a cross default clause whereby any breach of loan covenants would automatically result in default of the loans.
The outstanding balance of the short term loans affected by the above breach of covenants and cross default as of December 31,
2014 and 2013 was $4.7 and $6.4 million, respectively. According to the Company’s short term loan agreements, the banks
have the rights to request for more collateral or additional guarantees if the breach of covenant is not remedied or request early
repayment of the loan if the Company does not cure such breach within a certain period of time. As of the date of this report,
the Company has not received any notice from the banks to request more collateral, additional guarantees or early repayment of
the short term loans due to the breach of covenant.
Due to unrelated parties
| |
December 31, 2014 | | |
December 31, 2013 | |
| |
(in thousands) | | |
(in thousands) | |
Longmen Joint Venture: Loans from various unrelated companies and individuals,
due various dates from January to September 2015, and weighted average interest rate was 5.7% per annum and 5.2% per annum
as of December 31, 2014 and 2013, respectively. These loans were either repaid or renewed subsequently on the due dates. | |
$ | 16,999 | | |
$ | 22,720 | |
Longmen Joint Venture: Loans from financing sales. | |
| 37,525 | | |
| 33,124 | |
Maoming Hengda: Loans from one unrelated parties and one related party,
due on demand, none interest bearing. | |
| 6,193 | | |
| 6,223 | |
Total short-term loans – others | |
$ | 60,717 | | |
$ | 62,067 | |
The Company had various loans from unrelated
companies amounting to $60.7 million and $62.1 million as of December 31, 2014 and 2013, respectively. Of the $60.7 million, $6.2
million loans carry no interest, $37.5 million of financing sales are subject to interest rates ranging between 4.6% and 12.0%,
and the remaining $17.0 million are subject to interest rates ranging from 5.0% to 12.0%. All short term loans from unrelated
companies are payable on demand and unsecured.
As part of its working capital management,
Longmen Joint Venture has entered into a number of sale and purchase back contracts ("contracts") with third party companies
and Yuxin and Yuteng. According to the contracts, Longmen Joint Venture sells rebar to the third party companies at a certain
price, and within the same month, Yuxin and Yuteng will purchase back the rebar from the third party companies at a price of 4.6%
to 12.0% higher than the original selling price from Longmen Joint Venture. Based on the contract terms, Longmen Joint Venture
is paid in advance for the rebar sold to the third party companies and Yuxin and Yuteng are given a credit period of several months
to one year from the third party companies. There is no physical movement of the inventory during the sale and purchase back arrangement.
The margin of 4.6% to 12.0% is determined by reference to the bank loan interest rates at the time when the contracts are entered
into, plus an estimated premium based on the financing sale amount, which represents the interest charged by the third party companies
for financing Longmen Joint Venture through the above sale and purchase back arrangement. The revenue and cost of goods sold arising
from the above transactions are eliminated and the incremental amounts paid by Yuxin and Yuteng to purchase back the goods are
treated as financing costs in the consolidated financial statements.
Total financing sales for the years ended
December 31, 2014 and 2013 amounted to $922.6 million and $724.3 million, respectively, which are eliminated in the Company’s
consolidated financial statements. The financial cost related to financing sales for the years ended December 31, 2014 and 2013
amounted to $4.2 million and $5.4 million, respectively.
Short term loans due to related parties
| |
December 31, 2014 | | |
December 31, 2013 | |
| |
(in thousands) | | |
(in thousands) | |
General Steel (China): Loans from Yangpu Capital Automobile, due on demand, and
interest rates is 10% per annum. | |
$ | 670 | | |
$ | 1,458 | |
Longmen Joint Venture: Loan from Shaanxi Coal and Chemical Industry Group Co., Ltd., due on
demand, and interest rate is 7.0% per annum. | |
| 128 | | |
| 28,216 | |
Longmen Joint Venture: Loan from Shaanxi Steel Group due various dates between February and
December 2015; and interest rate is 8% per annum. | |
| - | | |
| 49,110 | |
Longmen Joint Venture: Loans from financing sales. | |
| 45,582 | | |
| 47,909 | |
Total short-term loans - related parties | |
$ | 46,380 | | |
$ | 126,693 | |
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS |
Long-term loans due to related party
| |
December 31, 2014 | | |
December 31, 2013 | |
| |
(in thousands) | | |
(in thousands) | |
Longmen Joint Venture: Loans from Shaanxi Steel Group, due on various dates through
March 2018 and interest rate are 5.6% - 8.0% per annum. | |
$ | 339,549 | | |
$ | 72,657 | |
Less: Current maturities of long-term loans – related party | |
| - | | |
| (53,013 | ) |
Long-term loans - related party | |
$ | 339,549 | | |
$ | 19,644 | |
As of December 31, 2014 and 2013, total assets
used by the Company as collateral were $96.9 million and $0 for the aforementioned debts, respectively.
Total interest expense, net of capitalized
interest, amounted to $26.1 million and $33.2 million for the years ended December 31, 2014 and 2013, respectively.
Capitalized interest amounted to $11.9 million
and $2.8 million for the years ended December 31, 2014 and 2013, respectively.
Note 11 – Customer deposits
Customer deposits represent amounts advanced
by customers on product orders. The product normally is shipped within one month after receipt of the advance payment, and the
related sale is recognized in accordance with the Company’s revenue recognition policy. As of December 31, 2014 and 2013,
customer deposits amounted to $225.6 million and $152.7 million, respectively, including deposits received from related parties,
which amounted to $132.6 million and $64.9 million, respectively.
Note 12 – Deposits due to sales representatives
Longmen Joint Venture entered into agreements
with various entities to act as the Company’s exclusive sales agent in a specified geographic area. These exclusive
sales agents must meet certain criteria and are required to deposit a certain amount of money with the Company. In return the
sales agents receive exclusive sales rights in a specified area and at discounted prices on products they order. These deposits
bear no interest and are required to be returned to the sales agent once the agreement is terminated. The agreement is normally
entered/or renewed on an annual basis. Termination of the agreement can be mutually agreed to by both parties at any time. The
Company had $20.4 million and $26.3 million in deposits due to sales representatives, including deposits due to related parties,
as of December 31, 2014 and 2013, respectively.
Note 13 – Convertible notes and warrants
The Company had 3,900,871 common stock warrants
outstanding, which were issued in connection with $40.0 million of convertible notes issued by the Company in 2007. The warrants,
which were accounted for as a derivative liability at fair value, expired unexercised on May 13, 2013.
Note 14 - Supplemental disclosure of cash
flow information
Interest paid, net of capitalized, amounted
to $10.4 million and $14.5 million for the years ended December 31, 2014 and 2013, respectively.
The Company paid income tax amounted to $0.2 million
and $0.9 million for the years ended December 31, 2014 and 2013, respectively.
During the years ended December 31, 2014 and
2013, the Company had receivables of $43 thousand and $1.2 million as a result of the disposal of equipment that has not been
collected, respectively.
During the years ended December 31, 2014 and
2013, the Company converted $57 thousand and $1.0 million of equipment into inventory productions, respectively.
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS |
During the years ended December 31, 2014 and
2013, the Company used $4.2 million and $46.3 million inventory in plant and equipment constructions.
During the years ended December 31, 2014 and
2013, the Company capitalized $5.9 million and $17.8 million on energy-saving equipment under capital lease agreements, respectively.
During the years ended December 31, 2014 and
2013, the Company incurred $130.4 million and $48.7 million accounts payable to be paid for the purchase of equipment and construction
in progress, respectively.
The Company had $2.5 million and $63.3 notes
receivable from financing sales loans to be converted to cash as of December 31, 2014 and 2013, respectively.
The Company reclassified $28.6 million
advances on inventory purchase - related parties that carried interest to loan receivable - related parties as of December 31,
2014.
The Company reclassified $6.1 million other
receivables - related parties that carried interest to loan receivable - related parties as of December 31, 2014.
The Company had $0.7 million receivable from
the sale of Baotou Steel as of December 31, 2014.
As of December 31, 2013, the Company was entitled
to uncollected dividend of $0.2 million, which was declared by one of the Company’s unconsolidated entities during the year
ended December 31, 2013.
During the year ended December 31, 2013, the
Company offset $64.5 million accounts payable to a related party as loan receivable – related party repayment as contractually
agreed to with the related party.
During the year ended December 31, 2013, the
Company offset $120.3 million advance on inventory purchases and other receivables to related parties as short-term loan repayments.
During the year ended December 31, 2013, the
Company reclassified $3.8 million refundable advances on inventory purchase – related parties to other receivables –
related parties.
Note 15 - Deferred lease income
To compensate the Company for costs and economic
losses incurred during construction of the iron and steel making facilities owned by Shaanxi Steel, Shaanxi Steel reimbursed Longmen
Joint Venture $11.4 million (RMB 70.1 million) in the fourth quarter of 2010 for the value of assets dismantled and rent under
a 40-year property sub-lease that was entered into by the parties in June 2009 (the "Longmen Sub-lease"), and $29.8
million (RMB 183.1 million) for the reduced production efficiency caused by the construction. In addition, in 2010 and 2011, Shaanxi
Steel reimbursed Longmen Joint Venture $14.6 million (RMB 89.5 million) and $14.6 million (RMB 89.3 million), respectively, for
trial production costs related to the new equipment.
During the period from June 2010 to March
2011, as construction progressed and certain of the assets came online, Longmen Joint Venture used the assets free of charge to
produce saleable units of steel products during this period. As such, the cost of using these assets and therefore the fair value
of the free rent received was imputed with reference to what the depreciation charge would have been on these assets had they
been owned or under capital lease to Longmen Joint Venture during the free use period. This cost of $7.2 million (RMB 43.9 million)
each year were deferred and will be recognized over the term of the land sub-lease similar to the other charges and credits related
to the construction of these assets.
The deferred lease income is amortized to
income over the remaining term of the 40-year land sub-lease. For the years ended December 31, 2014 and 2013, the Company recognized
$2.2 million and $2.2 million, respectively. As of December 31, 2014 and 2013, the balance of deferred lease income amounted to
$74.9 million and $77.4 million, respectively, of which $2.2 million and $2.2 million represents balance to be amortized within
one year. See Note 20 – Related party transactions and balances (l) – Deferred lease income for details.
Note 16 - Capital lease obligations
Iron and steel production facilities
On April 29, 2011, the Company’s subsidiary,
Longmen Joint Venture entered into a Unified Management Agreement with Shaanxi Steel and Shaanxi Coal under which Longmen Joint
Venture uses new iron and steel making facilities including one sintering machine, two converters, two blast furnaces and other
auxiliary systems constructed by Shaanxi Steel. As the 20-year term of the agreement exceeds 75% of the assets’ useful lives,
this arrangement is accounted for as a capital lease. The ongoing lease payments are comprised of two elements: (1) a monthly
payment of $2.3 million (RMB 14.6 million), based on Shaanxi Steel’s cost to construct the assets, to be paid over the term
of the Unified Management Agreement of 20 years and (2) 40% of any remaining pre-tax profits from the Asset Pool which includes
Longmen Joint Venture and the newly constructed iron and steel making facilities. In February 2014, Shaanxi Steel agreed that
it will not demand capital lease payments from Longmen Joint Venture until February 2017. The profit sharing component does not
meet the definition of contingent rent because it is based on future revenue and was therefore considered part of the financing
for the capital leased assets. The initial fair value of the profit sharing liability was included in determining the value of
the leased assets at inception. The profit sharing liability is accounted for separately from the monthly lease payments and is
accounted for as a derivative liability at fair value, with changes in the fair value charged or credited to income each period.
See Note 2(i) – “Financial instruments” and Note 17 – “Profit sharing liability”.
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS |
Energy-saving equipment
During 2013 and 2014, the Company’s
subsidiary, Longmen Joint Venture, entered into capital lease agreements for energy-saving equipment to be installed throughout
the production chain. Under these agreements, Longmen Joint Venture uses the energy-saving equipment for which the vendors are
responsible for the design, purchase, installation, and on-site testing, as well as the ownership rights to the equipment during
the lease periods. The lease periods, which vary between four to six years, begin upon the completion of the equipment installation,
testing, and the issuance of the energy-saving rate reports to be agreed upon by both the vendors and Longmen Joint Venture. As
the ownership rights of the equipment transfer to Longmen Joint Venture at the end of the lease periods, these agreements are
accounted for as capital leases.
The minimum lease payments are based on the
energy cost saved during the lease periods, which is determined by the estimated annual equipment operating hours per the lease
agreements. If the actual annual equipment operating hours are less than the estimated amount, the lease periods may be extended,
subject to further negotiation and agreement between the Company and the vendors. If the actual annual equipment operating hours
exceed the estimated amount, the Company is obligated to make additional lease payments based on the additional energy cost saved
during the lease period and will recognize the additional lease payments as contingent rent expense. As of December 31, 2014,
$23.9 million (RMB $146.5 million) energy-saving equipment under these lease agreements have been capitalized and no contingent
rent expense has been incurred.
Presented below is a schedule of estimated
minimum lease payments on the capital lease obligation for the next five years as of December 31, 2014:
Year ending December 31, | |
Capital Lease Obligations
Minimum Lease Payments | |
| |
(in thousands) | |
2015 | |
$ | 10,340 | |
2016 | |
| 5,818 | |
2017 | |
| 196,143 | |
2018 | |
| 31,450 | |
2019 | |
| 29,944 | |
Thereafter | |
| 324,549 | |
Total minimum lease payments | |
| 598,244 | |
Less: amounts
representing interest | |
| (196,484 | ) |
Ending balance | |
$ | 401,760 | |
Interest expense for the years ended December
31, 2014 and 2013 on the capital lease obligations was $21.3 million and $20.8 million, respectively.
Note 17 – Profit sharing liability
The profit sharing liability component of
the capital lease obligation was recognized initially at its estimated fair value at the lease commencement date and included
in the initial measurement and recognition of the capital lease, in addition to the fixed payment component of the minimum lease
payments. The profit sharing liability is accounted for separately from the fixed portion of the capital lease obligation (see
Note 16 - “Capital lease obligation”) and is accounted for as a derivative instrument in accordance with ASC 815-10-15-83.
The estimated fair value of the profit sharing liability is reassessed at the end of each reporting period, with any change in
fair value charged or credited to income as “Change in Fair Value of Profit Sharing Liability”. See Note 2(i) –
“Financial instruments” for details.
Payments to Shaanxi Steel for the profit sharing
liability are not required until net cumulative profits are achieved. Based on the performance of the Asset Pool, no profit sharing
payment was made from inception to date.
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS |
Note 18 – Other income (expense)
Government grant
During 2014, the Company received government
grants totaling $0.3 million (RMB 2.0 million) from the local government as reward for timely tax reporting and payment and outstanding
contribution to local economic growth.
On November 8, 2013, the Company received
government grants totaling $4.2 million (RMB 26.1 million) from the local government as production equipment upgrade incentive
and rural urbanization development incentive for building material suppliers.
Lease income
The deferred lease income from the reimbursement
from Shaanxi Steel for the net book value of the fixed assets that were demolished and for the inefficiency costs caused by the
construction and loss incurred in the beginning stages of the system production is amortized to income over the remaining sub-lease
term. For the years ended December 31, 2014 and 2013, the Company recognized lease income of $2.2 million and $2.2 million, respectively.
Gain on deconsolidation of a subsidiary
On November 19, 2013, the Company sold its
28% equity interest of Tianwu held by Yangpu Shengtong to Tianjin Dazhan Industry Co., Ltd., a related party through indirect
common ownership, for $13.6 million (RMB 84.3 million) while retaining 32% interest held by General Steel (China). As a result
of this transaction, the Company met the criteria under ASC 810-10-40-4 to deconsolidate Tianwu at disposal date and recognized
a gain in accordance with ASC 810-10-40-5. At the same time, Tianwu’s cumulative translation adjustment as of the disposal
date was released to net income in accordance with ASC 830-30-40-1A. At the time of deconsolidation, the fair value of the 32%
equity interest retained by General Steel (China) was $15.3 million (RMB 96.3 million), which was based on an independent third-party
valuation, while Tianwu’s carrying value was $48.2 million (RMB 301.0 million). $19.4 million (RMB 121.2 million) noncontrolling
interest in Tianwu was deconsolidated (see Note 20 – Equity) while 0.9 million cumulative translation adjustment was released
to net income. The total gain from the deconsolidation of Tianwu was approximately $1.0 million.
On December 31, 2014, the Company sold its
80% equity interest of Baotou Steel held by General Steel (China) to an unrelated party for $0.7 million (RMB 4.0 million). As
a result of this transaction, the Company met the criteria under ASC 810-10-40-4 to deconsolidate Baotou Steel at disposal date
and recognized a gain in accordance with ASC 810-10-40-5. At the same time, Baotou Steel’s cumulative translation adjustment
as of the disposal date was released to net income in accordance with ASC 830-30-40-1A. At the time of deconsolidation, the carrying
value of Baotou Steel’s net deficit was $(1.8) million (RMB 11.0 million). $0.4 million (RMB 2.2 million) noncontrolling
interest in Baotou Steel was deconsolidated (see Note 20 – Equity) while $0.3 million cumulative translation adjustment
was released to net income. The total gain from the deconsolidation of Baotou Steel was approximately $1.8 million, which was
included in other income.
Payment for public highway construction
During 2013, Longmen Joint Venture paid $6.5
million (RMB 40 million) for the construction of an exit ramp from a highway that leads to its facility. Total costs for this
project is approximately $8.0 million (RMB 49 million) for Longmen Joint venture. Longmen Joint Venture will not be able
to obtain any easement rights, land use rights or exclusive rights after the completion of the exit ramp. Therefore, this payment
was recorded as an expense for the year ended December 31, 2013.
Note 19 – Taxes
Income tax
Significant components of the provision for income taxes on earnings
and deferred taxes on net operating losses from operations for the years ended December 31, 2014 and 2013 are as follows:
(In thousands) | |
For the year ended December 31, 2014 | | |
For the year ended December 31, 2013 | |
Current | |
$ | 269 | | |
$ | 354 | |
Deferred | |
| - | | |
| - | |
Total provision for income taxes | |
$ | 269 | | |
$ | 354 | |
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS |
Under the Income Tax Laws of the PRC, General
Steel (China), Baotou Steel Pipe Joint Venture (located in Inner Mongolia province) and Maoming Hengda (located in Guangdong province)
are subject to income tax at a rate of 25%.
Longmen Joint Venture is located in the Mid-West
region of China and as such, qualifies for the “Go-West” tax rate of 15% promulgated by the government. In 2010, the
Chinese government announced that the “Go-West” tax initiative would be extended for 10 years, and thus, the preferential
tax rate of 15% will be in effect until 2020. This special tax treatment for Longmen Joint Venture will be evaluated on a year-to-year
basis by the local tax bureau.
The following table reconciles the U.S. statutory
rates to the Company’s effective tax rate for the years ended December 31, 2014 and 2013 are as follows:
| |
December 31, 2014 | | |
December 31, 2013 | |
| |
| | |
| |
U.S. Statutory rates | |
| 34.0 | % | |
| 34.0 | % |
Foreign income not recognized in the U.S. | |
| (34.0 | )% | |
| (34.0 | )% |
China income tax rate | |
| 25.0 | % | |
| 25.0 | % |
Effect of tax rate differential of subsidiaries/VIE | |
| (9.5 | )% | |
| (12.0 | )% |
Effect of change in deferred tax assets valuation allowance | |
| (23.5 | )% | |
| (58.4 | )% |
Effect of permanent difference – change in
fair value of profit sharing liability | |
| 17.5 | % | |
| 61.9 | % |
Effect of permanent difference
– capital lease obligation for iron and steel production facilities | |
| (9.4 | )% | |
| (17.3 | )% |
Nondeductible expenses | |
| (0.4 | )% | |
| - | |
Total provision for income
taxes* | |
| (0.3 | )% | |
| (0.8 | )% |
*The negative effective tax rates for the
years ended December 31, 2014 and 2013 were mainly due to a consolidated loss before income tax while the Company provided 100%
valuation allowance for the deferred tax assets at subsidiaries with losses and incurred income tax expenses in our profitable
subsidiaries.
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 Group’s losses carried forward
of $604.9 million will begin to expire in 2015. The Chinese government recently announced several policies to curb the real estate
price increases across the country which led to a slowdown in demand for construction steel products. Additionally due to the
continued global economic slowdown and the overcapacity issues in China's steel market, management expected there would be a sustained
increase in margin pressure in the next five years until all the existing but outdated steel capacity across the whole industry
are 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 as of December 31, 2014 and 2013 was $114.8 million and $97.6 million, respectively.
Management will review this valuation allowance periodically and make adjustments as warranted. Temporary differences represent
tax and book differences in various items, such as receivable allowances, inventory allowances, impairments on fixed assets and
deferred lease income.
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS |
The movement of the deferred income tax assets arising from carried
forward losses is as follows:
| |
December 31, 2014 | | |
December 31, 2013 | |
| |
(in thousands) | | |
(in thousands) | |
Beginning balance | |
$ | - | (A) | |
$ | - | (A) |
| |
| | | |
| | |
(Tax
assets realized) net operating losses carried forward for subsidiaries subject to a 25% tax rate | |
| 5,064 | | |
| (272 | ) |
Effective tax rate | |
| 25 | % | |
| 25 | % |
Addition (deduction) in deferred tax
asset | |
| 1,266 | (B) | |
| (68 | )(B) |
Net
operating losses carried forward for Longmen Joint Venture and subsidiaries subject to a 15% tax rate | |
| 104,313 | | |
| 143,873 | |
Effective tax rate | |
| 15 | % | |
| 15 | % |
Addition in deferred tax asset | |
| 15,647 | (C) | |
| 21,581 | (C) |
Temporary
difference carried forward for subsidiaries subject to a 25% tax rate | |
| 2,947 | | |
| (2,697 | ) |
Effective tax rate | |
| 25 | % | |
| 25 | % |
Addition (deduction) in deferred tax
asset | |
| 737 | (D) | |
| (674 | )(D) |
Temporary
difference carried forward for subsidiaries subject to a 15% tax rate | |
| 4,660 | | |
| 10,282 | |
Effective tax rate | |
| 15 | % | |
| 15 | % |
Addition (deduction) in deferred tax
asset | |
| 699 | (E) | |
| 1,542 | (E) |
Addition in valuation allowance | |
| (18,337 | )(F) | |
| (22,087 | )(F) |
Exchange difference | |
| (12 | )(H) | |
| (294 | )(H) |
Total (A+B+C+D+E+F+G+H) | |
$ | - | | |
$ | - | |
Movement of valuation allowance:
| |
December 31, 2014 | | |
December 31, 2013 | |
| |
(in thousands) | | |
(in thousands) | |
Beginning balance | |
$ | 97,569 | | |
$ | 72,891 | |
Current period addition | |
| 18,951 | | |
| 23,293 | |
Current period reversal | |
| (614 | ) | |
| (1,206 | ) |
Deconsolidation of Baotou Steel | |
| (625 | ) | |
| - | |
Exchange difference | |
| (461 | ) | |
| 2,591 | |
Ending balance | |
$ | 114,820 | | |
$ | 97,569 | |
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 year ended December 31, 2014. The net
operating loss carry forwards for United States income taxes amounted to $3.1 million, which may be available to reduce future
years’ taxable income. These carry forwards will expire, if not utilized, starting from 2026 through 2033. Management believes
that the realization of the benefits from these losses appears uncertain due to the Company’s limited operating history
and continuing losses for United States income tax purposes. Accordingly, the Company has provided a 100% valuation allowance
on the deferred tax asset benefit to reduce the asset to zero. The valuation allowance as of December 31, 2014 was $1.1 million.
The net change in the valuation allowance for the year ended December 31, 2014 was $0.4 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 December 31, 2014. Accordingly, no provision has been made for U.S. deferred
taxes related to future repatriation of these earnings, nor is it practicable to estimate the amount of income taxes that would
have to be provided if we concluded that such earnings will be remitted in the future.
Value added tax
Enterprises or individuals who sell commodities,
engage in repair and maintenance or import and export goods in the PRC are subject to a value added tax in accordance with PRC
laws. The value added tax (“VAT”) standard rates are 13% to 17% of the gross sales price. A credit is available whereby
VAT paid on the purchases of semi-finished products or raw materials used in the production of the Company’s finished products
can be used to offset the VAT due on sales of the finished product. As of December 31, 2014 and 2013, the Company had $3.2 million
and $3.5 million in value added tax credit which are available to offset future VAT payables, respectively.
Sales and purchases are recorded net of VAT
collected and paid as the Company acts as an agent for the government for VAT collection. VAT on sales and VAT on purchases amounted
to $852.9 million and $835.2 million, respectively, for the year ended December 31, 2014 and $751.6 million and $713.5 million,
respectively, for the year ended December 31, 2013.
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS |
Taxes payable consisted of the following:
| |
December 31, 2014 | | |
December 31, 2013 | |
| |
(in thousands) | | |
(in thousands) | |
VAT taxes payable | |
$ | 3,147 | | |
$ | 2,211 | |
Income taxes payable | |
| 243 | | |
| 173 | |
Misc. taxes | |
| 1,811 | | |
| 2,244 | |
Totals | |
$ | 5,201 | | |
$ | 4,628 | |
Note 20 – Related party transactions and balances
Related party transactions
As disclosed in Notes 16 – “Capital
lease obligations”, Longmen Joint Venture entered into a capital lease arrangement on April 29, 2011, with Shaanxi Coal
and Shaanxi Steel, which are related parties of the Group. The following is an analysis of the leased assets under the capital
lease:
| |
December 31, 2014 | | |
December 31, 2013 | |
| |
(in thousands) | | |
(in thousands) | |
Machinery | |
$ | 602,878 | | |
$ | 605,839 | |
Less: accumulated
depreciation | |
| (105,001 | ) | |
| (76,740 | ) |
Carrying value of leased assets | |
$ | 497,877 | | |
$ | 529,099 | |
b. The following chart summarized sales to related parties for
the years ended December 31, 2014 and 2013.
Name of related parties | |
Relationship | |
For the year ended December 31, 2014 | | |
For the year ended December 31, 2013 | |
| |
| |
(in thousands) | | |
(in thousands) | |
Long Steel Group | |
Noncontrolling shareholder of Longmen Joint Venture | |
$ | 164,879 | | |
$ | 255,859 | |
Sichuan Yutai Trading Co., Ltd | |
Significant influence by Long Steel Group* | |
| - | | |
| 73 | |
Shaanxi Yuchang Trading Co., Ltd | |
Significant influence by Long Steel Group | |
| - | | |
| 21,570 | |
Shaanxi Haiyan Trade Co., Ltd | |
Significant influence by Long Steel Group | |
| 40,224 | | |
| 16,273 | |
Shaanxi Shenganda Trading Co., Ltd | |
Significant influence by Long Steel Group | |
| 112,231 | | |
| 77,899 | |
Shaanxi Steel | |
Majority shareholder of Long Steel Group | |
| 2,527 | | |
| 3,221 | |
Shaanxi Coal and Chemical Industry Group Co., Ltd. | |
Shareholder of Shaanxi Steel | |
| 46,637 | | |
| 27,911 | |
Shaanxi Long Steel Group Baoji Steel Rolling Co., Ltd | |
Subsidiary of Long Steel Group | |
| 13,739 | | |
| 7,325 | |
Shaanxi Junlong Rolling Co., Ltd | |
Investee of Long Steel Group | |
| 8,883 | | |
| 37,068 | |
Total | |
| |
$ | 389,120 | | |
$ | 447,199 | |
*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.
Sales to related parties in trading transactions, which were netted
against the corresponding cost of goods sold, amounted to $204.2 million for the year ended December 31, 2014. See Note 2(g) Revenue
Recognition for details.
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS |
c. The following charts summarize purchases from related parties
for the years ended December 31, 2014 and 2013.
Name of related parties | |
Relationship | |
For the year ended December 31, 2014 | | |
For the year ended December 31, 2013 | |
| |
| |
(in thousands) | | |
(in thousands) | |
Long Steel Group | |
Noncontrolling shareholder of Longmen Joint
Venture | |
$ | 382,075 | | |
$ | 522,295 | |
Tianjin Hengying Trading Co., Ltd. | |
Partially owned by CEO through indirect shareholding** | |
| 45,623 | | |
| - | |
Tianjin Dazhan Industry Co., Ltd. | |
Partially owned by CEO through indirect shareholding | |
| 2,554 | | |
| - | |
Tianjin General Qiugang Pipe Co., Ltd. | |
Partially owned by CEO through indirect shareholding | |
| 19,422 | | |
| - | |
Maoming Shengze Trading Co., Ltd. | |
Partially owned by CEO through indirect shareholding | |
| 16,772 | | |
| - | |
Hancheng Haiyan Coking Co., Ltd | |
Noncontrolling shareholder of Long Steel Group | |
| 166,719 | | |
| 180,401 | |
Xi’an Pinghe Metallurgical Raw Material Co.,
Ltd | |
Noncontrolling shareholder of Long Steel Group | |
| 20,009 | | |
| 19,943 | |
Shaanxi Steel | |
Majority shareholder of Long Steel Group | |
| 172,249 | | |
| - | |
Shaanxi Junlong Rolling Co., Ltd | |
Investee of Long Steel Group | |
| - | | |
| 213 | |
Shaanxi Huafu New Energy Co., Ltd | |
Significant influence by the Long Steel Group | |
| 28,424 | | |
| 32,824 | |
Beijing Daishang Trading Co., Ltd. | |
Noncontrolling shareholder of Longmen Joint Venture’s
subsidiary | |
| - | | |
| 6,933 | |
Shaanxi Coal and Chemical Industry Group Co., Ltd. | |
Shareholder of Shaanxi Steel | |
| 39,704 | | |
| 26,047 | |
Tianwu General Steel Material Trading Co., Ltd. | |
Investee of General Steel (China) | |
| 121,304 | | |
| 76,735 | |
Shaanxi Shenganda Trading Co., Ltd. | |
Significant influence by the Long Steel Group | |
| - | | |
| 20,213 | |
Others | |
Entities either owned or have significant
influence by our affiliates or management | |
| - | | |
| 797 | |
Total | |
| |
$ | 1,014,855 | | |
$ | 886,401 | |
**The CEO is referred to herein
as the chief executive officer of General Steel Holdings, Inc.
Related party balances
| a. | Loans receivable – related parties: |
Name of related parties | |
Relationship | |
December 31, 2014 | | |
December 31, 2013 | |
| |
| |
(in thousands) | | |
(in thousands) | |
Tianjin Hengying Trading Co., Ltd.* | |
Partially owned by CEO through indirect shareholding | |
$ | 13,997 | | |
$ | - | |
Tianjin Dazhan Industry Co., Ltd.* | |
Partially owned by CEO through indirect shareholding | |
| 14,617 | | |
| - | |
Beijing Shenghua Xinyuan Metal Materials Co., Ltd. | |
Partially owned by CEO through indirect shareholding | |
| 6,099 | | |
| - | |
Teamlink Investment Co., Ltd | |
Partially owned by CEO through indirect shareholding | |
| - | | |
| 4,540 | |
Total | |
| |
$ | 34,713 | | |
$ | 4,540 | |
*The Company reclassified advances for inventory purchase - related parties related to trading transactions,
as noted in note 2(g), to loans receivable - related parties due to their interest-bearing nature.
The Company issued loans to these related parties for cash flow purposes to earn interest income, which have a higher interest
rate than the bank financing interest rates.
See Note 3 – loans receivable –
related parties for loan details.
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS |
| b. | Accounts receivables – related parties: |
Name of related parties | |
Relationship | |
December 31, 2014 | | |
December 31, 2013 | |
| |
| |
(in thousands) | | |
(in thousands) | |
Long Steel Group | |
Noncontrolling shareholder of Longmen Joint Venture | |
$ | 148 | | |
$ | 548 | |
Shaanxi Shenganda Trading Co., Ltd. | |
Significant influence by Long Steel Group | |
| 5,715 | | |
| - | |
Tianjin Daqiuzhuang Steel Plates | |
Partially owned by CEO through indirect shareholding | |
| 19 | | |
| 19 | |
Shaanxi Steel | |
Majority shareholder of Long Steel Group | |
| 2,101 | | |
| 1,741 | |
Others | |
| |
| 641 | | |
| 634 | |
Total | |
| |
$ | 8,624 | | |
$ | 2,942 | |
| c. | Other receivables – related parties: |
Other receivables - related parties are those
nontrade receivables arising from transactions between the Company and its related parties, such as advances or payments made
on behalf of these related parties.
Name of related parties | |
Relationship | |
December 31, 2014 | | |
December 31, 2013 | |
| |
| |
(in thousands) | | |
(in thousands) | |
Long Steel Group | |
Noncontrolling shareholder of Longmen Joint Venture | |
$ | 165 | | |
$ | 406 | |
Shaanxi Steel | |
Majority shareholder of Long Steel Group | |
| 35,669 | | |
| 46,439 | |
Tianjin General Quigang Pipe Co., Ltd | |
Partially owned by CEO through indirect shareholding | |
| 1,237 | | |
| 1,247 | |
Tianjin Dazhan Industry Co, Ltd | |
Partially owned by CEO through indirect shareholding | |
| - | | |
| 491 | |
Tianjin Hengying Trading Co., Ltd | |
Partially owned by CEO through indirect shareholding | |
| 721 | | |
| - | |
Beijing Shenghua Xinyuan Metal Materials Co., Ltd. | |
Partially owned by CEO through indirect shareholding | |
| 313 | | |
| 4,901 | |
Victory Energy Resource Co., Ltd. | |
Partially owned by CEO through indirect shareholding | |
| 1,101 | | |
| - | |
Others | |
Entities either owned or have significant influence by our affiliates or
management | |
| 528 | | |
| 622 | |
Total | |
| |
$ | 39,734 | | |
$ | 54,106 | |
| d. | Advances on inventory purchase – related parties: |
Name of related parties | |
Relationship | |
December 31, 2014 | | |
December 31, 2013 | |
| |
| |
(in thousands) | | |
(in thousands) | |
Long Steel Group | |
Noncontrolling shareholder of Longmen Joint Venture | |
$ | 7,139 | | |
$ | 9,123 | |
Shaanxi Shenganda Trading Co., Ltd. | |
Significant influence by Long Steel Group | |
| 27,549 | | |
| 25,607 | |
Tianjin Dazhan Industry Co., Ltd | |
Partially owned by CEO through indirect shareholding | |
| - | | |
| 10,343 | |
Tianjin Hengying Trading Co., Ltd | |
Partially owned by CEO through indirect shareholding | |
| 3,807 | | |
| 16,158 | |
Tianjin General Qiugang Pipe Co., Ltd | |
Partially owned by CEO through indirect shareholding | |
| 7,091 | | |
| 555 | |
Maoming Shengze Trading Co., Ltd | |
Partially owned by CEO through indirect shareholding | |
| - | | |
| 21,197 | |
Others | |
Entities either owned or have significant influence
by our affiliates or management | |
| 31 | | |
| 20 | |
Total | |
| |
$ | 45,617 | | |
$ | 83,003 | |
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS |
e. |
Accounts payable - related parties: |
Name of related parties | |
Relationship | |
December 31, 2014 | | |
December 31, 2013 | |
| |
| |
(in thousands) | | |
(in thousands) | |
Hancheng Haiyan Coking Co., Ltd | |
Noncontrolling shareholder of Longmen Joint Venture | |
$ | 64,276 | | |
$ | 58,163 | |
Long Steel Group | |
Noncontrolling shareholder of Longmen Joint Venture | |
| 79,886 | | |
| 134,758 | |
Shaanxi Coal and Chemical Industry Group Co., Ltd. | |
Shareholder of Shaanxi Steel | |
| 23,726 | | |
| 29,990 | |
Tianjin Dazhan Industry Co., Ltd | |
Partially owned by CEO through indirect shareholding | |
| 869 | | |
| 958 | |
Xi’an Pinghe Metallurgical Raw Material Co., Ltd | |
Noncontrolling shareholder of Long Steel Group | |
| 11,035 | | |
| 8,714 | |
Tianjin Hengying Trading Co., Ltd | |
Partially owned by CEO through indirect shareholding | |
| 1 | | |
| 1 | |
Henan Xinmi Kanghua Fire Refractory Co., Ltd | |
Noncontrolling shareholder of Longmen Joint Venture’s subsidiary | |
| 746 | | |
| 716 | |
Beijing Daishang Trading Co., Ltd | |
Noncontrolling shareholder of Longmen Joint Venture’s subsidiary | |
| 36 | | |
| 1,004 | |
Tianjin General Qiugang Pipe Co., Ltd | |
Partially owned by CEO through indirect shareholding | |
| 2,462 | | |
| - | |
Tianwu General Steel Material Trading Co., Ltd. | |
Investee of General Steel (China) | |
| 22,916 | | |
| 759 | |
Maoming Shengze Trading Co., Ltd | |
Partially owned by CEO through indirect shareholding | |
| 1,773 | | |
| - | |
Others | |
Entities either owned or have significant influence
by our affiliates or management | |
| 57 | | |
| 629 | |
Total | |
| |
$ | 207,783 | | |
$ | 235,692 | |
f. |
Short-term loans - related parties: |
Name of related parties | |
Relationship | |
December 31, 2014 | | |
December 31, 2013 | |
| |
| |
(in thousands) | | |
(in thousands) | |
Shaanxi Steel | |
Majority shareholder of Long Steel Group | |
$ | - | | |
$ | 49,110 | |
Shaanxi Coal and Chemical Industry Group Co., Ltd | |
Shareholder of Shaanxi Steel | |
| 34,460 | | |
| 28,216 | |
Long Steel Group | |
Noncontrolling shareholder of Longmen Joint Venture | |
| - | | |
| 33,183 | |
Tianjin Hengying Trading Co., Ltd | |
Partially owned by CEO through indirect shareholding | |
| 3,039 | | |
| 8,178 | |
Tianjin Dazhan Industry Co., Ltd | |
Partially owned by CEO through indirect shareholding | |
| 8,211 | | |
| 6,548 | |
Yangpu Capital Automobile | |
Partially owned by CEO through indirect shareholding | |
| 670 | | |
| 1,458 | |
Total | |
| |
$ | 46,380 | | |
$ | 126,693 | |
See Note 10 – Debt for the loan details.
g. Current maturities of long-term loans – related parties
Name of related party | |
Relationship | |
December 31, 2014 | | |
December 31, 2013 | |
| |
| |
(in thousands) | | |
(in thousands) | |
Shaanxi Steel | |
Majority shareholder of Long Steel Group | |
$ | - | | |
$ | 53,013 | |
Total | |
| |
$ | - | | |
$ | 53,013 | |
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS |
| h. | Other payables – related parties: |
Other payables – related parties are
those nontrade payables arising from transactions between the Company and its related parties, such as advances or payments from
these related parties on behalf of the Group.
Name of related parties | |
Relationship | |
December 31, 2014 | | |
December 31, 2013 | |
| |
| |
(in thousands) | | |
(in thousands) | |
Tianjin Hengying Trading Co, Ltd | |
Partially owned by CEO through indirect shareholding | |
$ | 378 | | |
$ | 380 | |
Long Steel Group | |
Noncontrolling shareholder of Longmen Joint Venture | |
| 33,968 | | |
| 43,636 | |
Shaanxi Steel | |
Majority shareholder of Long Steel Group | |
| 44,146 | | |
| 44,363 | |
Wendlar Investment & Management Group Co., Ltd | |
Common control under CEO | |
| 1,196 | | |
| 895 | |
Yangpu Capital Automobile | |
Partially owned by CEO through indirect shareholding | |
| 399 | | |
| 291 | |
Tianjin Dazhan Industry Co., Ltd | |
Partially owned by CEO through indirect shareholding | |
| 3,883 | | |
| 473 | |
Maoming Shengze Trading Co., Ltd | |
Partially owned by CEO through indirect shareholding | |
| 2,775 | | |
| 1,745 | |
Victory Energy Resource Co., Ltd | |
Partially owned by CEO through indirect shareholding | |
| - | | |
| 1,375 | |
Others | |
Entities either owned or have significant influence
by our affiliates or management | |
| 507 | | |
| 921 | |
Total | |
| |
$ | 87,252 | | |
$ | 94,079 | |
| i. | Customer deposits – related parties: |
Name of related parties | |
Relationship | |
December 31, 2014 | | |
December 31, 2013 | |
| |
| |
(in thousands) | | |
(in thousands) | |
Shaanxi Yuchang Trading Co., Ltd | |
Significant influence by Long Steel Group | |
$ | 10 | | |
$ | 10 | |
Shaanxi Coal and Chemical Industry Group Co., Ltd | |
Shareholder of Shaanxi Steel | |
| 4,467 | | |
| - | |
Shaanxi Haiyan Trade Co, Ltd | |
Significant influence by Long Steel Group | |
| 6,844 | | |
| - | |
Long Steel Group | |
Noncontrolling shareholder of Longmen Joint Venture | |
| 23,517 | | |
| 15,038 | |
Shaanxi Junlong Rolling Co., Ltd | |
Investee of Long Steel Group | |
| 57 | | |
| 2,748 | |
Shaanxi Shenganda Trading Co., Ltd | |
Significant influence by Long Steel Group | |
| - | | |
| 275 | |
Tianwu General Steel Material Trading Co., Ltd. | |
Investee of General Steel (China) | |
| 97,721 | | |
| 46,521 | |
Others | |
Entities either owned or have
significant influence by our affiliates or management | |
| - | | |
| 289 | |
Total | |
| |
$ | 132,616 | | |
$ | 64,881 | |
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS |
| j. | Deposits due to sales representatives – related parties |
Name of related parties | |
Relationship | |
December 31, 2014 | | |
December 31, 2013 | |
| |
| |
(in thousands) | | |
(in thousands) | |
Hancheng Haiyan Trade Co., Ltd | |
Significant influence by Long Steel Group | |
$ | 652 | | |
$ | - | |
Gansu Yulong Trading Co., Ltd. | |
Significant influence by Long Steel Group | |
| 1,075 | | |
| 1,408 | |
Long Steel Group | |
Noncontrolling shareholder of Longmen Joint Venture | |
| 196 | | |
| - | |
Shaanxi Yuchang Trading Co., Ltd | |
Significant influence by Long Steel Group | |
| 586 | | |
| 589 | |
Total | |
| |
$ | 2,509 | | |
$ | 1,997 | |
| k. | Long-term loans – related party: |
Name of related party | |
Relationship | |
December 31, 2014 | | |
December 31, 2013 | |
| |
| |
(in thousands) | | |
(in thousands) | |
Shaanxi Steel | |
Majority shareholder of Long Steel Group | |
$ | 339,549 | | |
$ | 19,644 | |
Total | |
| |
$ | 339,549 | | |
$ | 19,644 | |
The Company also provided guarantee on related
parties’ bank loans amounting to $82.3 million and $205.8 million as of December 31, 2014 and 2013, respectively.
| |
December 31, 2014 | | |
December 31, 2013 | |
| |
(in thousands) | | |
(in thousands) | |
Beginning balance | |
$ | 77,444 | | |
$ | 77,199 | |
Less: Lease income realized | |
| (2,176 | ) | |
| (2,158 | ) |
Exchange rate effect | |
| (379 | ) | |
| 2,403 | |
Ending balance | |
| 74,889 | | |
| 77,444 | |
Current portion | |
| (2,176 | ) | |
| (2,187 | ) |
Noncurrent portion | |
$ | 72,713 | | |
$ | 75,257 | |
For the years ended December 31, 2014 and
2013, the Company realized lease income from Shaanxi Steel, a related party, amounted to $2.2 million and $2.2 million, respectively.
On November 19, 2013, the Company sold its
28% equity interest of Tianwu held by Yangpu Shengtong to Tianjin Dazhan Industry Co., Ltd., a related party through indirect
common ownership by the CEO, for $13.6 million (RMB 84.3 million) while retaining the 32% interest held by General Steel (China).
As a result of this transaction, the Company met the criteria under ASC 810-10-40-4 to deconsolidate Tianwu as of the ownership
disposal date and recognize a gain, which amounted to $1.0 million. After the deconsolidation of Tianwu, General Steel (China)’s
32% interest in Tianwu was accounted for as an equity method investment, which amounted to $15.8 million as of December 31, 2013.
Note 21 – Equity
Preferred Stock
On May 18, 2007, the Company entered into
a Purchase Agreement with Victory New Holdings Limited (“Victory New”), a British Virgin Islands registered company
under the control of the Company’s Chairman, CEO and majority shareholder, Zuosheng Yu (aka Henry Yu), to acquire Victory
New’s 30% interest in General Steel (China). The Company agreed to issue to Victory New an aggregate of 3,092,899 shares
of its Series A Preferred Stock with a fair value of $8,374,000. These shares of Series A Preferred Stock carry a voting power
of 30% of the combined voting power of the Company’s common and preferred stock while outstanding. The holders of preferred
stock are entitled to receive noncumulative dividends, when and if declared by the board of directors. Dividends are not
mandatory and shall not accrue. Preferred shares are non-redeemable.
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS |
2013 Equity Transactions
On March 28, 2013, the Company granted senior
management and directors 174,900 shares of common stock at $1.01 per share, as compensation under the Company’s 2008 Equity
Incentive Plan. The shares were valued at the quoted market price on the grant date.
On June 27, 2013, the Company granted senior
management and directors 163,150 shares of common stock at $1.02 per share, as compensation under the Company’s 2008 Equity
Incentive Plan. The shares were valued at the quoted market price on the grant date.
On August 16, 2013, an additional $45.1 million
(or RMB 280 million) was contributed to Tianwu Joint Venture with $27.0 million (or RMB 168 million) contributed by the Company
and $18.0 million (or RMB 112 million) contributed by Tianjin Material and Equipment Group Corporation (“TME Group”).
The Company’s controlling interest of Tianwu Joint Venture remains at 60% after the capital contribution.
On September 28, 2013, the Company granted
senior management and directors 163,150 shares of common stock at $0.88 per share as compensation under the Company’s 2008
Equity Incentive Plan. The shares were valued at the quoted market price on the grant date.
On October 11, 2013, the Company granted 300,000
shares of common stock at $0.85 per share as service fee for investor relations consulting services under a one year service agreement
dated September 25, 2013. The shares were valued at the quoted market price on the grant date.
On December 30, 2013, the Company granted
senior management and directors 163,650 shares of common stock at $0.91 per share as compensation under the Company’s 2008
Equity Incentive Plan. The shares were valued at the quoted market price on the grant date.
Prior to November 19, 2013, the Company held
a combined 60.0% equity interest in Tianwu. 32% interest was held by General Steel (China) and 28% interest was held by Yangpu
Shengtong. On November 19, 2013, the Company sold its 28% equity interest of Tianwu held by Yangpu Shengtong to Tianjin Dazhan
Industry Co., Ltd., a related party through indirect common ownership, for $13.6 million (RMB 84.3 million) while retaining the
32% interest held by General Steel (China). As a result of this transaction, the Company met the criteria under ASC 810-10-40-4
to deconsolidate Tianwu at disposal date and recognized a gain in accordance with ASC 810-10-40-5. At the same time, Tianwu’s
cumulative translation adjustment as of the disposal date was released to net income in accordance with ASC 830-30-40-1A. The
total gain from the deconsolidation of Tianwu amounted to $1.0 million.
The following is a reconciliation of the Company’s
noncontrolling interest for the year ended December 31, 2013:
(in thousands) | |
Noncontrolling interest | |
| |
Total | | |
Tianwu | | |
Others | |
Balance at December 31, 2012 | |
$ | (172,063 | ) | |
$ | 1,339 | | |
$ | (173,402 | ) |
Net income (loss) attributable to noncontrolling interest | |
| (9,609 | ) | |
| 2 | | |
| (9,611 | ) |
Addition to special reserve | |
| 553 | | |
| - | | |
| 553 | |
Usage of special reserve | |
| (393 | ) | |
| - | | |
| (393 | ) |
Addition to Tianwu paid-in capital | |
| 18,028 | | |
| 18,028 | | |
| - | |
Deconsolidation of a subsidiary | |
| (19,929 | ) | |
| (19,929 | ) | |
| - | |
Foreign currency translation adjustments | |
| (5,498 | ) | |
| 560 | | |
| (6,058 | ) |
Balance at December 31, 2013 | |
$ | (188,911 | ) | |
$ | - | | |
$ | (188,911 | ) |
2014 Equity Transactions
On February 3, 2014, the Company granted 80,000
shares of common stock at $1.01 per share as service fees for investor relations consulting services under two service agreements
dated January 14, 2014. The shares were valued at the quoted market price on the grant date.
On August 21, 2014, the Company granted 80,000
shares of common stock for investor relations consulting services under two service agreements dated July 10, 2014. The shares
were valued at $1.04 per share, the quoted market price at the time the services were provided.
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS |
On July 14, 2014, the Company entered into
a Subscription Agreement (the "Subscription Agreement") with Zuosheng Yu, the Company's Chief Executive Officer and
a member of the Company's Board of Directors, relating to a private placement of the Company's common stock, par value $0.001
per share. On October 23, 2014, after certain closing conditions contained in the Subscription Agreement were satisfied, the transaction
closed and the Company sold to Zuosheng Yu 5,000,000 shares of common stock at a purchase price of $1.50 per share (the "Purchase
Price"), upon receipt of $7,500,000 in gross proceeds in accordance with the terms of the Subscription Agreement. The Purchase
Price represents a 23% premium to the volume weighted average closing price of the Common Stock from March 5, 2014 to July 11,
2014, which ranged from $0.90 to $1.47 per share of common stock during the period. Upon completion of this transaction, Zuosheng
Yu beneficially owned 44.7% of the Company’s common stock.
On December 26, 2014, the Company granted
1,063,900 shares of common stock at $0.64 per share to senior management personnel. The shares were valued at quoted market price
on the grant date.
On December 31, 2014, the Company sold its
80% equity interest of Baotou Steel held by General Steel (China) to an unrelated party for $0.7 million (RMB 4.0 million). As
a result of this transaction, the Company met the criteria under ASC 810-10-40-4 to deconsolidate Baotou Steel at disposal date
and recognized a gain in accordance with ASC 810-10-40-5. At the same time, Baotou Steel’s cumulative translation adjustment
as of the disposal date was released to net income in accordance with ASC 830-30-40-1A. At the time of deconsolidation, the carrying
value of Baotou Steel’s net deficit was $(1.8) million (RMB 11.0 million). $0.4 million (RMB 2.2 million) noncontrolling
interest in Baotou Steel was deconsolidated while $0.3 million cumulative translation adjustment was released to net income. The
total gain from the deconsolidation of Baotou Steel was approximately $1.8 million.
The following is a reconciliation of the Company’s
noncontrolling interest for the year ended December 31, 2014:
(in thousands) | |
Noncontrolling interest | |
| |
Total | | |
Baotou Steel | | |
Others | |
Balance at December 31, 2013 | |
$ | (188,911 | ) | |
$ | (281 | ) | |
$ | (188,630 | ) |
Net income (loss) attributable to noncontrolling interest | |
| (29,553 | ) | |
| (78 | ) | |
| (29,475 | ) |
Addition to special reserve | |
| 451 | | |
| - | | |
| 451 | |
Usage of special reserve | |
| (384 | ) | |
| - | | |
| (384 | ) |
Deconsolidation of a subsidiary | |
| 414 | | |
| 414 | | |
| - | |
Foreign currency translation adjustments | |
| 901 | | |
| (55 | ) | |
| 956 | |
Balance at December 31, 2014 | |
$ | (217,082 | ) | |
$ | - | | |
$ | (217,082 | ) |
Note 22 – Retirement plan
Regulations in the PRC require the Company
to contribute to a defined contribution retirement plan for all employees. All the employees of the Company’s entities in
China are entitled to a retirement pension amount calculated based upon their salary at their date of retirement and their length
of service in accordance with a government managed pension plan. The PRC government is responsible for the pension liability to
the retired staff. The Company’s entities in China are required to contribute based on the higher of 20% of the employees’
monthly base salary or 12% of the minimum social average salary of the city where the facilities are located. Employees are required
to contribute 8% of their base salary to the plan. The minimum social average salary is announced by the local Social Security
bureau and updated annually. Total pension expense incurred by the Company for the years ended December 31, 2014 and 2013 amounted
to $11.3 million and $8.5 million, respectively.
Note 23 – Statutory reserves
The laws and regulations of the People’s
Republic of China require that before a foreign -invested enterprise distributes profits to its shareholders, it must first satisfy
all tax liabilities, provision for losses in previous years, and make allocations, in proportions determined at the discretion
of the board of directors, to the statutory reserves. The statutory reserves include the surplus reserve funds and the enterprise
fund and these statutory reserves represent restricted retained earnings.
Surplus reserve fund
The Company is required to transfer 10% of
its net income, as determined in accordance with the PRC accounting rules and regulations, to a statutory surplus reserve fund
until such reserve balance reaches 50% of the Company’s registered capital.
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS |
The transfer to this reserve must be made
before distribution of any dividend to shareholders. The surplus reserve fund is non-distributable other than during liquidation
and can be used to fund previous years’ losses, if any, and may be utilized for business expansion or converted into share
capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing the par value of the
shares currently held by them, provided that the remaining reserve balance after such issue is not less than 25% of the registered
capital. For the years ended December 31, 2014 and 2013, the Company did not make any contributions to these reserves.
Special reserve
The Company is required by the PRC government
to reserve safety and maintenance expense to the cost of production based on the actual quantity of mineral exploited. The
amount of reserves is determined within the unit price range provided by Ministry of Finance of PRC. For the years ended December
31, 2014 and 2013, the Company made contributions of $1.1 million and $1.2 million to these reserves, respectively and used $0.8
million and $0.8 million of safety and maintenance expense, respectively.
Note 24 – Commitment and contingencies
Operating Lease Commitments
Total operating lease commitments for rental
of offices, buildings, equipment and land use rights of the Company’s PRC subsidiaries as of December 31, 2014 is as follows:
Year ending December 31, | |
Minimum lease payment | |
| |
(in thousands) | |
2015 | |
$ | 3,109 | |
2016 | |
| 1,950 | |
2017 | |
| 1,950 | |
2018 | |
| 1,332 | |
2019 | |
| 1,208 | |
Years after | |
| 40,588 | |
Total minimum payments required | |
$ | 50,137 | |
Total rental expense was $3.3 million and
$3.2 million for the years ended December 31, 2014 and 2013, respectively.
Contractual Commitments
Longmen Joint Venture has $8.0 million contractual
obligations related to construction projects as of December 31, 2014 estimated to be fulfilled between March and December 2015.
Contingencies
As of December 31, 2014, Longmen Joint Venture
provided guarantees to related parties’ and third parties’ bank loans, including lines of credit and others, amounting
to $103.4 million.
Nature of guarantee | |
Guarantee amount | | |
Guaranty Expiration Date |
| |
(In thousands) | | |
|
Line of credit | |
$ | 100,265 | | |
Various from January 2015 to August 2017 |
Financing by the rights of goods delivery in future | |
| 3,095 | | |
June 2015 |
Total | |
$ | 103,360 | | |
|
Name of parties being guaranteed | |
Guarantee amount | | |
Guaranty Expiration Date |
| |
(In thousands) | | |
|
Long Steel Group | |
$ | 35,919 | | |
Various from April 2015 to August 2017 |
Hancheng Haiyan Coking Co., Ltd | |
| 13,032 | | |
September 2015 |
Long Steel Group Fuping Rolling Steel Co., Ltd | |
| 3,095 | | |
June 2015 |
Chengdu Zhongyi Steel Co., Ltd | |
| 8,145 | | |
March 2015 |
Xi’an Laisheng Logistics Co., Ltd | |
| 3,258 | | |
May 2015 |
Xi'an Kaiyuan Steel Sales Co., Ltd | |
| 6,516 | | |
January 2015 |
Tianjin Dazhan Industry Co., Ltd | |
| 20,363 | | |
Various from January to March 2015 |
Tianjin Hengying Trading Co., Ltd | |
| 13,032 | | |
January 2015 |
Total | |
$ | 103,360 | | |
|
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS |
As of December 31, 2014, the Company did not
accrue any liability for the amounts the Group has guaranteed for third and related parties because those parties are current
in their payment obligations and the Company has not experienced any losses from providing guarantees. The Company has evaluated
the debt guarantees and concluded that the likelihood of having to make payments under the guarantees is remote and that the fair
value of the stand-ready obligation under these commitments is not material.
On May 12, 2014, Longmen Joint Venture was
fined $0.4 million (RMB 2.7 million) by the local Ministry of Land and Resources for misuse of certain agricultural land for industrial
purposes. The local Ministry of Land and Resources also reserved the right to seize Longmen Joint Venture’s equipment on
the land in question. Longmen Joint Venture is in a long-term lease agreement with the local village committee that collectively
owns the agricultural land and is in the process of converting the land-use code to industrial purpose to comply with local regulations.
The Company has evaluated the corresponding potential future liability and concluded that the likelihood of additional fines and
the local authorities seizing its equipment are remote and that the fair value of the stand-ready obligation is not material.
Note 25 – Segments
The Company’s chief operating decision
maker evaluates performance and determines resource allocations based on a number of factors, the primary measure being income
from operations of the Group’s four regional divisions in the PRC: Longmen Joint Venture in Shaanxi province, Maoming Hengda
in Guangdong province, Baotou Steel Pipe Joint Venture in Inner Mongolia province and General Steel (China) in Tianjin City.
The Group operates in one business segment
that includes four different divisions. These reportable divisions are consistent with the way the Company manages its business,
each division operates under separate management groups and produces discrete financial information. The accounting principles
applied at the operating division level in determining income from operations is generally the same as those applied at the consolidated
financial statement level.
The following represents results of division
operations for the years ended December 31, 2014 and 2013:
(In thousands) | |
| | |
| |
Sales: | |
2014 | | |
2013 | |
Longmen Joint Venture | |
$ | 2,284,485 | | |
$ | 2,450,256 | |
Maoming Hengda | |
| 32 | | |
| 3,814 | |
Baotou Steel Pipe Joint Venture | |
| 4,895 | | |
| 5,585 | |
General Steel (China) | |
| 62,184 | | |
| 58,630 | |
Total sales | |
| 2,351,596 | | |
| 2,518,285 | |
Interdivision sales | |
| (62,184 | ) | |
| (54,538 | ) |
Consolidated sales | |
$ | 2,289,412 | | |
$ | 2,463,747 | |
Gross profit (loss): | |
2014 | | |
2013 | |
Longmen Joint Venture | |
$ | (19,496 | ) | |
$ | (56,065 | ) |
Maoming Hengda | |
| 19 | | |
| (130 | ) |
Baotou Steel | |
| 311 | | |
| 229 | |
General Steel (China) | |
| - | | |
| 28 | |
Total gross loss | |
| (19,166 | ) | |
| (55,938 | ) |
Interdivision gross profit | |
| - | | |
| - | |
Consolidated gross loss | |
$ | (19,166 | ) | |
$ | (55,938 | ) |
| |
| | | |
| | |
Income (loss) from operations: | |
2014 | | |
2013 | |
Longmen Joint Venture | |
$ | 4,219 | | |
$ | 45,161 | |
Maoming Hengda | |
| (1,290 | ) | |
| (2,811 | ) |
Baotou Steel | |
| (389 | ) | |
| (407 | ) |
General Steel (China) | |
| (4,078 | ) | |
| (2,971 | ) |
Total income (loss) from operations | |
| (1,538 | ) | |
| 38,972 | |
Interdivision income (loss) from operations | |
| - | | |
| - | |
Reconciling item (1) | |
| (5,165 | ) | |
| (4,567 | ) |
Consolidated income (loss) from operations | |
$ | (6,703 | ) | |
$ | 34,405 | |
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS |
Net income (loss) attributable to General Steel Holdings, Inc.: | |
2014 | | |
2013 | |
Longmen Joint Venture | |
$ | (45,425 | ) | |
$ | (16,457 | ) |
Maoming Hengda | |
| (1,604 | ) | |
| (2,721 | ) |
Baotou Steel | |
| (311 | ) | |
| 70 | |
General Steel (China) | |
| 3,851 | | |
| (10,485 | ) |
Total net income (loss) attributable to General Steel Holdings, Inc. | |
| (43,489 | ) | |
| (29,593 | ) |
Interdivision net income | |
| - | | |
| - | |
Reconciling item (1) | |
| (5,234 | ) | |
| (3,423 | ) |
Consolidated net loss attributable to General Steel
Holdings, Inc. | |
$ | (48,723 | ) | |
$ | (33,016 | ) |
Depreciation, amortization and depletion: | |
2014 | | |
2013 | |
Longmen Joint Venture | |
$ | 93,094 | | |
$ | 85,603 | |
Maoming Hengda | |
| 1,149 | | |
| 1,237 | |
Baotou Steel | |
| 242 | | |
| 246 | |
General Steel (China) | |
| 1,792 | | |
| 1,962 | |
Consolidated depreciation, amortization and depletion | |
$ | 96,277 | | |
$ | 89,048 | |
Finance/interest expenses: | |
2014 | | |
2013 | |
Longmen Joint Venture | |
$ | 90,792 | | |
$ | 83,062 | |
Maoming Hengda | |
| 1 | | |
| 1 | |
Baotou Steel | |
| - | | |
| - | |
General Steel (China) | |
| 5,781 | | |
| 8,812 | |
Interdivision interest expenses | |
| - | | |
| - | |
Reconciling item (1) | |
| 99 | | |
| 3 | |
Consolidated interest expenses | |
$ | 96,673 | | |
$ | 91,878 | |
Capital expenditures: | |
2014 | | |
2013 | |
Longmen Joint Venture | |
$ | 239,496 | | |
$ | 43,341 | |
Maoming Hengda | |
| 49 | | |
| 2 | |
Baotou Steel | |
| 1 | | |
| 8 | |
General Steel (China) | |
| 87 | | |
| 4 | |
Consolidated capital expenditures | |
$ | 239,633 | | |
$ | 43,355 | |
Total Assets as of: | |
December 31, 2014 | | |
December 31, 2013 | |
Longmen Joint Venture | |
$ | 2,408,218 | | |
$ | 2,573,212 | |
Maoming Hengda | |
| 25,933 | | |
| 29,211 | |
Baotou Steel Pipe Joint Venture | |
| - | | |
| 4,448 | |
General Steel (China) | |
| 158,606 | | |
| 121,883 | |
Interdivision assets | |
| (30,486 | ) | |
| (34,213 | ) |
Reconciling item (2) | |
| 2,953 | | |
| 5,817 | |
Total Assets | |
$ | 2,565,224 | | |
$ | 2,700,358 | |
| (1) | Reconciling item represents income
or expenses of the Company, arising from General Steel Investment Co., Ltd, Yangpu Shengtong
Investment Co., Ltd and Qiu Steel for the years ended December 31, 2014 and 2013, 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 and Qiu Steel as of December 31, 2014 and 2013, which are non-operating
entities. |
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS |
Note 26 – Subsequent events
On February 13, 2015, the Company formed a
joint venture entity, Tianjin General Shengyuan IoT Technology Co., Ltd, with a team of radio-frequency identification (“RFID”)
experts (the “Expert Team”), to develop and commercialize RFID technology data solutions. Under the terms of the Agreement,
the Company will own 70% of the joint venture by contributing $1.6 million (RMB 10.0 million), while the Expert Team will contribute
intellectual property, including proprietary RFID technologies, licensed patents and domain expertise.
On January 9, 2015, the Company received
a notice from NYSE Regulations, Inc. that it was not in compliance with the continued listing standard set forth in
Section 802.01B of the Listed Company Manual of the NYSE (the “Manual”). Noncompliance with Section 802.01B of
the Manual (the “Market Cap Standard”) is due to the Company not maintaining an average market capitalization of
at least fifty million dollars ($50,000,00.00) over a consecutive 30 trading-day period. The Company has also in the past
not been in compliance with the continued listing standard set forth in Section 802.01C of the Manual, which is
triggered when the average closing price of the Company's common stock is less than $1.00 over a consecutive 30 trading-day
period. As a result of the Company's non-compliance with the Market Cap Standard, it submitted a business plan to the NYSE on
February 23, 2015 that had been reviewed and approved by the NYSE. The Company remains subject to quarterly monitoring for
compliance with both continued listing standards.
GENERAL STEEL HOLDINGS,
INC.
SCHEDULE 1 - PARENT
COMPANY BALANCE SHEETS
AS OF DECEMBER 31,
2014 AND 2013
(In thousands)
(Unaudited)
| |
2014 | | |
2013 | |
ASSETS | |
| | | |
| | |
| |
| | | |
| | |
CURRENT ASSETS: | |
| | | |
| | |
Cash | |
$ | 2 | | |
$ | 11 | |
Other receivables | |
| 39 | | |
| 39 | |
Prepaid expense | |
| 29 | | |
| 301 | |
TOTAL CURRENT ASSETS | |
| 70 | | |
| 351 | |
| |
| | | |
| | |
OTHER ASSETS: | |
| | | |
| | |
Intercompany receivable | |
| 89,930 | | |
| 82,987 | |
TOTAL OTHER ASSETS | |
| 89,930 | | |
| 82,987 | |
| |
| | | |
| | |
TOTAL ASSETS | |
$ | 90,000 | | |
$ | 83,338 | |
| |
| | | |
| | |
LIABILITIES AND DEFICIENCY | |
| | | |
| | |
| |
| | | |
| | |
CURRENT LIABILITIES: | |
| | | |
| | |
Other payables and accrued liabilities | |
$ | 23 | | |
$ | 6 | |
Taxes payable | |
| 1 | | |
| - | |
TOTAL CURRENT LIABILITIES | |
| 24 | | |
| 6 | |
| |
| | | |
| | |
OTHER LIABILITIES: | |
| | | |
| | |
Loss in excess of investment in subsidiaries | |
| 435,019 | | |
| 388,418 | |
TOTAL OTHER LIABILITIES | |
| 435,019 | | |
| 388,418 | |
| |
| | | |
| | |
TOTAL LIABILITIES | |
| 435,043 | | |
| 388,424 | |
| |
| | | |
| | |
COMMITMENTS AND CONTINGENCIES | |
| | | |
| | |
| |
| | | |
| | |
DEFICIENCY: | |
| | | |
| | |
Preferred stock, $0.001 par value, 50,000,000 shares authorized, 3,092,899
shares issued and outstanding as of December 31, 2014 and 2013 | |
| 3 | | |
| 3 | |
Common stock, $0.001 par value, 200,000,000 shares authorized, 64,458,588
and 58,234,688 shares issued, 61,986,282 and 55,762,382 shares outstanding as of December 31, 2014 and 2013, respectively | |
| 64 | | |
| 58 | |
Treasury stock, at cost, 2,472,306 shares as of December 31, 2014 and
2013 | |
| (4,199 | ) | |
| (4,199 | ) |
Paid-in-capital | |
| 115,494 | | |
| 106,878 | |
Statutory reserves | |
| 6,472 | | |
| 6,243 | |
Accumulated deficits | |
| (463,521 | ) | |
| (414,798 | ) |
Accumulated other comprehensive
income | |
| 644 | | |
| 729 | |
TOTAL GENERAL STEEL HOLDINGS, INC. DEFICIENCY | |
| (345,043 | ) | |
| (305,086 | ) |
| |
| | | |
| | |
TOTAL LIABILITIES AND DEFICIENCY | |
$ | 90,000 | | |
$ | 83,338 | |
The accompanying notes are an integral part of Schedule I.
GENERAL STEEL HOLDINGS,
INC.
SCHEDULE 1 - PARENT
COMPANY STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE YEARS ENDED
DECEMBER 31, 2014 AND 2013
(In thousands)
(Unaudited)
| |
2014 | | |
2013 | |
| |
| | |
| |
OPERATING EXPENSES | |
| | | |
| | |
| |
| | | |
| | |
General and administrative expenses | |
$ | (2,098 | ) | |
$ | (1,324 | ) |
Total operating expenses | |
| (2,098 | ) | |
| (1,324 | ) |
| |
| | | |
| | |
OTHER INCOME | |
| | | |
| | |
Change in fair value of derivative liabilities | |
| - | | |
| 1 | |
Total other income, net | |
| - | | |
| 1 | |
| |
| | | |
| | |
EQUITY LOSS OF SUBSIDIARIES | |
| (46,625 | ) | |
| (31,693 | ) |
| |
| | | |
| | |
NET LOSS | |
| (48,723 | ) | |
| (33,016 | ) |
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS | |
| (311 | ) | |
| (8,927 | ) |
COMPREHENSIVE LOSS | |
$ | (49,034 | ) | |
$ | (41,943 | ) |
The accompanying notes are an integral part of Schedule I.
GENERAL STEEL HOLDINGS,
INC.
SCHEDULE 1 - PARENT
COMPANY STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
DECEMBER 31, 2014 AND 2013
(In thousands)
(Unaudited)
| |
2014 | | |
2013 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | |
| | | |
| | |
Net loss | |
$ | (48,723 | ) | |
$ | (33,016 | ) |
| |
| | | |
| | |
Adjustments to reconcile net loss to cash provided by (used in) operating
activities: | |
| | | |
| | |
Change in fair value of derivative instrument | |
| - | | |
| (1 | ) |
Stock issued for services and compensation | |
| 1,122 | | |
| 1,165 | |
Loss from subsidiaries | |
| 46,625 | | |
| 31,693 | |
Changes in operating assets and liabilities | |
| | | |
| | |
Other receivables | |
| - | | |
| (20 | ) |
Prepaid expense | |
| 272 | | |
| (257 | ) |
Other payables and accrued liabilities | |
| 17 | | |
| - | |
Taxes payable | |
| 1 | | |
| - | |
Net cash provided by (used in) operating activities | |
| (686 | ) | |
| (436 | ) |
| |
| | | |
| | |
CASH FLOWS FROM INVESTING ACTIVITIES: | |
| | | |
| | |
Loan repayment from subsidiaries | |
| (6,943 | ) | |
| 334 | |
Net cash (used in) provided by investing activities | |
| (6,943 | ) | |
| 334 | |
| |
| | | |
| | |
CASH FLOWS FINANCING ACTIVITIES: | |
| | | |
| | |
Proceed from common stock issued to CEO | |
| 7,500 | | |
| - | |
Borrowings from subsidiaries | |
| 120 | | |
| 25 | |
Net cash provided by financing activities | |
| 7,620 | | |
| 25 | |
| |
| | | |
| | |
DECREASE IN CASH | |
| (9 | ) | |
| (77 | ) |
| |
| | | |
| | |
CASH, beginning of year | |
| 11 | | |
| 88 | |
| |
| | | |
| | |
CASH, end of year | |
$ | 2 | | |
$ | 11 | |
The accompanying notes are an integral part of Schedule I.
GENERAL STEEL HOLDINGS, INC.
NOTES TO SCHEDULE 1
The parent company financial statements should be read in conjunction with the Company's consolidated financial
statements and footnotes (Also see Note 2(d) for “Liquidity and going concern”).
Certain information and footnote disclosures
normally included in financial statements prepared in conformity with generally accepted accounting principles have been omitted.
The Company’s investment in subsidiaries is stated at cost plus equity in undistributed earnings of subsidiaries.
Schedule I of Article 5-04 of Regulation
S-X requires the financial information of registrant shall be filed when the restricted net assets of consolidated subsidiaries
exceed 25 percent of consolidated net assets as of the end of the most recently completed fiscal year. For purposes of the above
test, restricted net assets of consolidated subsidiaries shall mean that amount of the registrant’s proportionate share
of net assets of consolidated subsidiaries (after intercompany eliminations) which as of the end of the most recent fiscal year
may not be transferred to the parent company by subsidiaries in the form of loans, advances or cash dividends without the consent
of a third party (i.e., lender, regulatory agency, foreign government, etc.).
The parent company financial statements
have been prepared in accordance with Rule 12-04, Schedule I of Regulation S-X as the restricted net assets of the subsidiaries
of General Steel Holdings, Inc. exceed 25% of the consolidated net assets of General Steel Holdings, Inc. The ability of our Chinese
operating affiliates to pay dividends may be restricted due to the foreign exchange control policies and availability of cash
balances of the Chinese operating subsidiaries. Because a significant portion of our operations and revenues are conducted and
generated in China, a significant portion of our revenues being earned and currency received are denominated in Renminbi (RMB).
RMB is subject to the exchange control regulation in China, and, as a result, we may be unable to distribute any dividends outside
of China due to PRC exchange control regulations that restrict our ability to convert RMB into US Dollars.
The Company had 3,900,871 common stock
warrants outstanding, which were issued in connection with $40.0 million of convertible notes issued by the Company in 2007. The
warrants, which were accounted for as a derivative liability at fair value, expired unexercised on May 13, 2013.
Refer to Note 13 of the Notes to the Consolidated
Financial Statements for the convertible notes and warrants.
Preferred Stock
On May 18, 2007, the Company entered into
a Purchase Agreement with Victory New Holdings Limited (“Victory New”), a British Virgin Islands registered company
under the control of the Company’s Chairman, CEO and majority shareholder, Zuosheng Yu (aka Henry Yu), to acquire Victory
New’s 30% interest in General Steel (China). The Company agreed to issue to Victory New an aggregate of 3,092,899 shares
of its Series A Preferred Stock with a fair value of $8,374,000. These shares of Series A Preferred Stock carry a voting power
of 30% of the combined voting power of the Company’s common and preferred stock while outstanding. The holders of preferred
stock are entitled to receive noncumulative dividends, when and if declared by the board of directors. Dividends are not
mandatory and shall not accrue. Preferred shares are non-redeemable.
2013 Equity Transactions
On March 28, 2013, the Company granted
senior management and directors 174,900 shares of common stock at $1.01 per share, as compensation under the Company’s 2008
Equity Incentive Plan. The shares were valued at the quoted market price on the grant date.
On June 27, 2013, the Company granted
senior management and directors 163,150 shares of common stock at $1.02 per share, as compensation under the Company’s 2008
Equity Incentive Plan. The shares were valued at the quoted market price on the grant date.
On August 16, 2013, an additional $45.1
million (or RMB 280 million) was contributed to Tianwu Joint Venture with $27.0 million (or RMB 168 million) contributed by the
Company and $18.0 million (or RMB 112 million) contributed by Tianjin Material and Equipment Group Corporation (“TME Group”).
The Company’s controlling interest of Tianwu Joint Venture remains at 60% after the capital contribution.
GENERAL STEEL HOLDINGS,
INC.
NOTES TO SCHEDULE
1
On September 28, 2013, the Company granted
senior management and directors 163,150 shares of common stock at $0.88 per share as compensation under the Company’s 2008
Equity Incentive Plan. The shares were valued at the quoted market price on the grant date.
On October 11, 2013, the Company granted
300,000 shares of common stock at $0.85 per share as service fee for investor relations consulting services under a one year service
agreement dated September 25, 2013. The shares were valued at the quoted market price on the grant date.
On December 30, 2013, the Company granted
senior management and directors 163,650 shares of common stock at $0.91 per share as compensation under the Company’s 2008
Equity Incentive Plan. The shares were valued at the quoted market price on the grant date.
Prior to November 19, 2013, the Company
held a combined 60.0% equity interest in Tianwu. 32% interest was held by General Steel (China) and 28% interest was held by Yangpu
Shengtong. On November 19, 2013, the Company sold its 28% equity interest of Tianwu held by Yangpu Shengtong to Tianjin Dazhan
Industry Co., Ltd., a related party through indirect common ownership, for $13.6 million (RMB 84.3 million) while retaining the
32% interest held by General Steel (China). As a result of this transaction, the Company met the criteria under ASC 810-10-40-4
to deconsolidate Tianwu at disposal date and recognized a gain in accordance with ASC 810-10-40-5. At the same time, Tianwu’s
cumulative translation adjustment as of the disposal date was released to net income in accordance with ASC 830-30-40-1A. The
total gain from the deconsolidation of Tianwu amounted to $1.0 million.
The following is a reconciliation of the
Company’s noncontrolling interest for the year ended December 31, 2013:
(in thousands) | |
Noncontrolling interest | |
| |
Total | | |
Tianwu | | |
Others | |
Balance at December 31, 2012 | |
$ | (172,063 | ) | |
$ | 1,339 | | |
$ | (173,402 | ) |
Net income (loss) attributable to noncontrolling interest | |
| (9,609 | ) | |
| 2 | | |
| (9,611 | ) |
Addition to special reserve | |
| 553 | | |
| - | | |
| 553 | |
Usage of special reserve | |
| (393 | ) | |
| - | | |
| (393 | ) |
Addition to Tianwu paid-in capital | |
| 18,028 | | |
| 18,028 | | |
| - | |
Deconsolidation of a subsidiary | |
| (19,929 | ) | |
| (19,929 | ) | |
| - | |
Foreign currency translation adjustments | |
| (5,498 | ) | |
| 560 | | |
| (6,058 | ) |
Balance at December 31, 2013 | |
$ | (188,911 | ) | |
$ | - | | |
$ | (188,911 | ) |
2014 Equity Transactions
On February 3, 2014, the Company granted
80,000 shares of common stock at $1.01 per share as service fees for investor relations consulting services under two service
agreements dated January 14, 2014. The shares were valued at the quoted market price on the grant date.
On August 21, 2014, the Company granted
80,000 shares of common stock for investor relations consulting services under two service agreements dated July 10, 2014. The
shares were valued at $1.04 per share, the quoted market price at the time the services were provided.
On July 14, 2014, the Company entered
into a Subscription Agreement (the "Subscription Agreement") with Zuosheng Yu, the Company's Chief Executive Officer
and a member of the Company's Board of Directors, relating to a private placement of the Company's common stock, par value $0.001
per share. On October 23, 2014, after certain closing conditions contained in the Subscription Agreement were satisfied, the transaction
closed and the Company sold to Zuosheng Yu 5,000,000 shares of common stock at a purchase price of $1.50 per share (the "Purchase
Price"), upon receipt of $7,500,000 in gross proceeds in accordance with the terms of the Subscription Agreement. The Purchase
Price represents a 23% premium to the volume weighted average closing price of the Common Stock from March 5, 2014 to July 11,
2014, which ranged from $0.90 to $1.47 per share of common stock during the period. Upon completion of this transaction, Zuosheng
Yu beneficially owned 44.7% of the Company’s common stock.
On December 26, 2014, the Company granted
1,063,900 shares of common stock at $0.64 per share to senior management personnel. The shares were valued at quoted market price
on the grant date.
On December 31, 2014, the Company sold
its 80% equity interest of Baotou Steel held by General Steel (China) to an unrelated party for $0.7 million (RMB 4.0 million).
As a result of this transaction, the Company met the criteria under ASC 810-10-40-4 to deconsolidate Baotou Steel at disposal
date and recognized a gain in accordance with ASC 810-10-40-5. At the same time, Baotou Steel’s cumulative translation adjustment
as of the disposal date was released to net income in accordance with ASC 830-30-40-1A. At the time of deconsolidation, the carrying
value of Baotou Steel’s net deficit was $(1.8) million (RMB 11.0 million). $0.4 million (RMB 2.2 million) noncontrolling
interest in Baotou Steel was deconsolidated while $0.3 million cumulative translation adjustment was released to net income. The
total gain from the deconsolidation of Baotou Steel was approximately $1.8 million.
GENERAL STEEL HOLDINGS,
INC.
NOTES TO SCHEDULE
1
The following is a reconciliation of the
Company’s noncontrolling interest for the year ended December 31, 2014:
(in thousands) | |
Noncontrolling interest | |
| |
Total | | |
Baotou Steel | | |
Others | |
Balance at December 31, 2013 | |
$ | (188,911 | ) | |
$ | (281 | ) | |
$ | (188,630 | ) |
Net income (loss) attributable to noncontrolling interest | |
| (29,553 | ) | |
| (78 | ) | |
| (29,475 | ) |
Addition to special reserve | |
| 451 | | |
| - | | |
| 451 | |
Usage of special reserve | |
| (384 | ) | |
| - | | |
| (384 | ) |
Deconsolidation of a subsidiary | |
| 414 | | |
| 414 | | |
| - | |
Foreign currency translation adjustments | |
| 901 | | |
| (55 | ) | |
| 956 | |
Balance at December 31, 2014 | |
$ | (217,082 | ) | |
$ | - | | |
$ | (217,082 | ) |
On February 13, 2015, the Company formed
a joint venture entity, Tianjin General Shengyuan IoT Technology Co., Ltd, with a team of radio-frequency identification (“RFID”)
experts (the “Expert Team”), to develop and commercialize RFID technology data solutions. Under the terms of the Agreement,
the Company will own 70% of the joint venture by contributing $1.6 million (RMB 10.0 million), while the Expert Team will contribute
intellectual property, including proprietary RFID technologies, licensed patents and domain expertise.
On January 9, 2015, the Company
received a notice from NYSE Regulations, Inc. that it was not in compliance with the continued listing standard set forth in
Section 802.01B of the Listed Company Manual of the NYSE (the “Manual”). Noncompliance with Section 802.01B of
the Manual (the “Market Cap Standard”) is due to the Company not maintaining an average market capitalization of
at least fifty million dollars ($50,000,00.00) over a consecutive 30 trading-day period. The Company has also in the past not
been in compliance with the continued listing standard set forth in Section 802.01C of the Manual, which is triggered
when the average closing price of the Company's common stock is less than $1.00 over a consecutive 30 trading-day period. As
a result of the Company's non-compliance with the Market Cap Standard, it submitted a business plan to the NYSE on February
23, 2015 that had been reviewed and approved by the NYSE. The Company remains subject to quarterly monitoring for compliance
with both continued listing standards.
ITEM 9. CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
| a) | Evaluation
Disclosure 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 in Rule 13a-15(e) under the United States Securities Exchange Act of 1934,
as amended (the “Exchange Act”), as of December 31, 2014. Our Company’s disclosure controls and procedures are
designed: (i) to ensure that information required to be disclosed by us in the reports that we file or 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 December 31, 2014 due to the material weakness in our internal control over financial reporting described
below.
Despite the existence
of the material weaknesses discussed below, our management, including our Chief Executive Officer and Chief Financial Officer,
have concluded that the consolidated financials included in this Annual Report on Form 10-K 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.
| b) | Management’s
Annual Report on Internal Control over Financial Reporting |
Our management is
responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under
the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. Our internal
control over financial reporting includes those policies and procedures that:
|
· |
pertain to the maintenance
of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
|
|
· |
provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management
and members of our board of directors; and |
| · | provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition,
use, or disposition of our assets that could have a material effect on our financial
statements. |
Internal control
over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent
limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject
to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented
by collusion or improper override. Because of such limitations, there is a risk that material misstatements may not be prevented
or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features
of the financial reporting process, and it is possible to design into the process safeguards to reduce, though not eliminate,
this risk.
Our management assessed
the effectiveness of its internal control over financial reporting as of December 31, 2014. In making this assessment, management
used the 2013 framework set forth in the report entitled Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission, or COSO. The COSO framework summarizes each of the components of a company’s
internal control system, including (i) the control environment, (ii) risk assessment, (iii) control activities, (iv) information
and communication, and (v) monitoring.
As a result of comments
received from the Staff of the United States Securities and Exchange Commission following the Staff’s review of certain
of our prior quarterly and annual reports, and based on subsequent communications between the Staff of the Commission and us,
we concluded that the classification, display and disclosure of our profit sharing liability (which is accounted for at fair value
as a derivative instrument liability) had been incomplete and inconsistent. As a result, we restated our financial statements
and related disclosures for each of the reporting periods from the period ended June 30, 2011 to the period ended March 31, 2014.
The restatements are set out in our Form 10-K/A for the year ended December 31, 2013 and Form 10-Q/A for the quarter ended March
31, 2014. Although the restatements did not result in any restatement of the reported balance sheets nor adjustment of reported
net income for any period presented, because of the restatement, management concluded that the restatements resulted from control
deficiencies that represent a material weakness in our disclosure controls and procedures. During the course of our audit for the year ended December 31, 2014, our auditors proposed numerous audit adjustments related to the control process for our year-end closing. Management concluded that these proposed adjustments (both recorded and waived) are a result of our control deficiencies that represent a material weakness in our financial reporting.
As a result of
such material weaknesses, our Chief Executive Officer and Chief Financial Officer concluded that our Company’s disclosure
controls and procedures were not effective as of December 31, 2014.
This Annual Report
does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the SEC
that permit our Company to provide only management’s report in this Annual Report.
Remediation
Our management
has dedicated significant resources to correcting the control deficiencies and to ensuring that we take proper steps to improve
our internal control over financial reporting in the area of financial statement disclosures.
We will take
and have taken a number of remediation actions that we believe will improve the effectiveness of our internal control over
financial reporting including the following:
| · | We
have engaged an outside professional consulting firm to supplement our efforts to improve
our internal control over financial reporting; |
| · | We
have engaged and will continue to engage accounting experts to review complex accounting
transactions and our financial statement disclosures related to such transactions. |
| · | We
have transitioned from the 1992 COSO framework for internal controls to the 2013 framework,
which formalized the principles embedded in the original framework more explicitly, incorporated
business and operating environment changes over the past two decades, and improved the
framework’s ease of use and application. |
| · | We will implement a number of control procedures related to the control process for our year-end closing for each location to ensure the internal control over financial reporting is proper. |
Management believes
the foregoing efforts will effectively remediate the material weakness described above.
| c) | Changes
in Internal Control 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.
ITEM 9B. OTHER
INFORMATION.
None.
PART III
ITEM 10. DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Directors and executive officers
The following table
sets forth the names and ages of our current directors and executive officers, their principal offices and positions and the date
each such person became our director or executive officer. Our executive officers are elected annually by the Board of Directors.
Our directors serve one-year terms until they are re-elected or their successors are elected. The executive officers serve by
election of the Board of Directors for one year terms or until their death, resignation, removal or renewal by the Board of Directors.
The executive officers are all full-time employees of General Steel Holdings, Inc.
There are no known
familial relationships between any of the directors and executive officers. In addition, there was no arrangement or understanding
between any executive officer and any other person pursuant to which any person was selected as an executive officer. Our Common
Stock is listed on the New York Stock Exchange, or “NYSE.” Under NYSE listing standards, the Board of Directors is
required to affirmatively determine that each “independent” director has no material relationship with our Company,
either directly or as a partner, stockholder or officer of an organization that has a relationship with the Company. Our Board
has determined that the following directors are “independent” as required by NYSE listing standards: Angela He, Zhongkui
Cao and James Hu. Additionally, all members of our Audit Committee are “independent” as defined in Rule
10A-3(b)(1) under the Securities Exchange Act and as required by NYSE listing standards. The non-management directors,
all of whom currently are independent, met once during the fiscal year ended December 31, 2014 without management present and
James Hu served as the lead independent director at such meeting.
Our directors
and executive officers are as follows:
Name |
|
Age |
|
Position |
|
Date of
appointment |
|
|
|
|
|
|
|
Zuosheng Yu |
|
50 |
|
Chairman of the
Board of Directors and Chief Executive Officer |
|
10/14/04 |
John Chen |
|
44 |
|
Director/Chief Financial
Officer |
|
03/07/05 |
James Hu |
|
42 |
|
Independent Director |
|
02/15/10 |
Angela He |
|
45 |
|
Independent Director |
|
07/23/10 |
Zhongkui Cao |
|
65 |
|
Independent Director |
|
04/13/07 |
On February 25,
2011, James Hu was chosen to preside at the regularly scheduled executive sessions of the independent directors to comply with
Section 303A.03 of the corporate governance rules of the NYSE. Any stockholder or interested party who wishes to communicate
with our Board of Directors or any specific director, including the Presiding Director, any non-management director or the non-management
directors as a group, may do so by writing to such direct or directors at: General Steel Holdings, Inc., Level 21, Tower B, Jia
Ming Center, No. 27 Dong San Huan North Road, Chaoyang District, Beijing 100020, China. This communication will be
forwarded to the director or directors to whom addressed. This information regarding contacting the board of directors
is also posted on our website at www.gshi-steel.com.
Biographical information
Mr. Zuosheng
Yu, age 50, Chairman of the Board of Directors. Mr. Yu joined our Company in October 2004 and became
Chairman of the Board at that time. He also serves as our Chief Executive Officer. Since February 2001, he has been President
and Chairman of the Board of Directors of Beijing Wendlar Investment Management Group, Beijing, China. Mr. Yu graduated in 1985
from Sciences and Engineering Institute, Tianjin, China. In July 1994, he received a Bachelor’s degree from Institute of
Business Management for Officers. Mr. Yu received the title of “Senior Economist” from the Committee of Science and
Technology of Tianjin City in 1994. In July 1997, he received an MBA degree from the Graduate School of Tianjin Party University.
Since April 2003, Mr. Yu has held a position as a member of China’s APEC (Asia Pacific Economic Co-operation) Development
Council. Mr. Yu’s strong knowledge of, and experience in, the Chinese steel industry, as well as his extensive
institutional knowledge of our Company make him well suited to contribute to our Board of Directors.
Mr. John Chen,
age 44, Director. Mr. Chen joined us in May 2004 and was elected as a director in March 2005. He also serves as
our Chief Financial Officer. From August 1997 to July 2003, he served as a senior accountant at Moore Stephens, Wurth, Frazer
and Torbet, LLP in Los Angeles, California. Mr. Chen graduated from Norman Bethune University of Medical Science, Changchun City,
Jilin Province, China in September 1992. He received a B.S. degree in accounting from California State Polytechnic University,
Pomona, California, U.S. in July 1997. Mr. Chen’s accounting skills and experience make him well suited to contribute
to our Board. He currently also serves on the board of directors of China Carbon Graphite Group, Inc. (OTCBB: CHGI),
SGOCO Group, Ltd. (NASDAQ: SGOC), and China HGS Real Estate Inc. (NASDAQ: HGSH).
Mr. James
Hu, age 42, Independent Director. Mr. Hu was elected as an independent director in February 2009. Since 2006, Mr.
Hu has worked at Standard Chartered Bank (China) Limited. Previously, Mr. Hu was a Senior Auditor with Deloitte Touche Tohmatsu
in the United States before moving on to hold management positions at both U.S. and China-based firms. His education includes
a Bachelor’s degree in Economics from the University of California at Berkeley and a Masters degree in Business Administration
from the Darden Graduate School at the University of Virginia. He is a California licensed certified public accountant. Mr. Hu’s
auditing and consulting experience make him well suited to contribute to our Board of Directors.
Ms. Angela
He, age 45, Independent Director. Ms. He was elected as an independent director in July 2010. She
currently serves as the Chief Financial Officer of Procell Biotech Asia Corp. in Newport Beach, California and as an SEC reporting
and accounting advisor to various publicly traded and private companies in the United States. From 2010 to 2012, she
served as the Chief Officer of Aero Technology in Long Beach, California. From 2006 to 2007, she served as a Senior Auditor for
PriceWaterhouse Coopers in Los Angeles. From 2003 to 2006, she served as an auditor for Moore Stephens Wurth Frazer
and Torbet, LLP (now known as Frazer LLP). Ms. He graduated with a Bachelor of Arts from California State University
at Fullerton and is a California Certified Public Accountant. Ms. He’s strong accounting skills and experiences of
advising public companies make her well suited to contribute to our Board of Directors.
Mr. Zhongkui
Cao, age 65, Independent Director. Mr. Cao was elected as a director in April 2007. From January 1994 to December
1998, Mr. Cao was President and Chairman of the Board at Baotou Metallurgy Machinery State-owned Asset Management Co. Mr. Cao
graduated from Baotou Institute of Iron and Steel in 1974. Mr. Cao’s understanding and experience relating to the Chinese
steel industry make him well suited to contribute to our Board of Directors.
Board Committees and Meetings of
the Board of Directors
Our business is
managed under the direction of our Board of Directors, which meets during the year to review significant developments affecting
us and acts upon matters requiring its approval. Our Board of Directors met twice during the fiscal year ended December 31, 2014. Our
Board of Directors acted by written consent six times during the fiscal year ended December 31, 2014.
It is our policy
to encourage all directors to attend the Annual Meeting.
Our Board of Directors
has three standing committees: the Compensation Committee, the Audit Committee and the Governance and Nominating Committee. A
brief description of the composition and functions of each committee follows.
Audit Committee
Our Audit Committee
consists of James Hu, Angela He and Zhongkui Cao. Mr. Hu is the Chairman of the Audit Committee. Each member of our
Audit Committee is “independent” within the meaning of the NYSE listing standards and the rules and regulations of
the United States Securities and Exchange Commission (the “SEC”) and related federal law. The Audit Committee
held four meetings during the fiscal year ended December 31, 2014.
The primary responsibilities
of the Audit Committee are to review the results of the annual audit and to discuss the financial statements, including the independent
auditors’ judgment about the quality of accounting principles, the reasonableness of significant judgments, and the clarity
of the disclosures in the financial statements. Additionally, the Audit Committee meets with our independent auditors to review
the interim financial statements prior to the filing of our Quarterly Reports on Form 10-Q, recommends independent auditors to
our Board of Directors to be retained by us, oversees the independence of the independent auditors, evaluates the independent
auditors’ performance, receives and considers the independent auditors’ comments as to controls, adequacy of staff
and management performance and procedures in connection with audit and financial controls, including our system to monitor and
manage business risks and legal and ethical compliance programs, audit and non-audit services provided to us by our independent
auditors, and considers conflicts of interest involving executive officers or Board members. Our Board of Directors has determined
that each of Mr. Hu and Ms. He are “audit committee financial experts” as defined by the SEC. Our
Board of Directors has adopted a written charter for the Audit Committee which may be accessed and reviewed through our website:
http://www.gshi-steel.com. This website address is not intended to function as a hyperlink, and the information contained in our
website is not intended to be a part of this filing.
To the best of our
knowledge, none of the following has ever occurred to any of our directors and officers.
(1) Any bankruptcy
petition filed by or against any business of which such person was a general partner or executive officer either at the time of
the bankruptcy or within two years prior to that time;
(2) Any conviction
in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
(3) Being
subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction,
permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities
or banking activities; or
(4) Being
found by a court of competent jurisdiction (in a civil action), the SEC or the Commodity Futures Trading Commission to have violated
a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.
Compensation Committee
Our Compensation
Committee consists of James Hu, Angela He and Zhongkui Cao. Ms. He is the Chairwoman of the Compensation Committee.
Each member of our Compensation Committee is a non-management director and each is (i) independent as defined under the NYSE listing
standards and as determined by the Board of Directors, (ii) a “non-employee director” for purposes of Rule 16b-3 of
the Securities Exchange Act of 1934, as amended, and (iii) an “outside director” for purposes of Section 162(m) of
the Internal Revenue Code. The Compensation Committee met once during the fiscal year ended December 31, 2014.
The Compensation
Committee reviews and recommends compensation policies and programs, as well as salary and other compensation levels for individual
executives, including our Chief Executive Officer. The Compensation Committee makes these recommendations to our Board of Directors
which, in turn, provides final approval on individual compensation matters for our executives. The Compensation Committee has
the authority to retain any advisors, counsel and consultants as the members deem necessary in order to carry out these functions.
The Compensation Committee also administers the compensation programs for our employees, including executive officers, reviews
and approves all awards granted under these programs, and approves the compensation committee report. Our Board of Directors has
adopted a written charter for the Compensation Committee which may be accessed and reviewed through our website: http://www.gshi-steel.com.
This website address is not intended to function as a hyperlink, and the information contained in our website is not intended
to be a part of this filing.
Governance and Nominating Committee
Our Governance and
Nominating Committee consists of James Hu, Angela He and Zhongkui Cao. Mr. Cao serves as the Chairman of the Governance and
Nominating Committee. All of the members of the Governance and Nominating Committee are considered “independent”
within the meaning of the NYSE listing standards. The Governance and Nominating Committee held one meeting during the fiscal year
ended December 31, 2014.
The Governance and
Nominating Committee recommends criteria for service as a director, reviews candidates and recommends appropriate governance practices
for the Company in light of corporate governance guidelines set forth by the NYSE and other regulatory entities, as applicable.
The Governance and Nominating Committee considers director candidates who are suggested by directors, management, stockholders
and search firms hired to identify and evaluate qualified candidates. From time to time, the Governance and Nominating Committee
may recommend highly qualified candidates who it believes will enhance the strength, independence and effectiveness of the Company’s
Board of Directors. Additionally, the Governance and Nominating Committee annually reviews the size of our Board of Directors. The
Governance and Nominating Committee does not have a formal policy specifically focusing on the consideration of diversity;
however, diversity is one of the many factors that the Governance and Nominating Committee considers when identifying candidates
and making its recommendations to the Board.
The Governance and
Nominating Committee considers nominees for the Board recommended by stockholders if such recommendations are submitted in writing
to our Secretary, John Chen, at Level 21, Tower B, Jia Ming Center, No. 27 Dong San Huan North Road, Chaoyang District, Beijing,
China 100020. At this time, no additional specific procedures to propose a candidate for consideration by the Governance
and Nominating Committee or minimum criteria for consideration of a proposed candidate for nomination to the Board of Directors
have been adopted as the Company believes that the procedures currently in place will continue to serve the needs of the Board
and stockholders. Our Board of Directors has adopted a written charter for the Nominating Committee which may be accessed and
reviewed through our website: http://www.gshi-steel.com. This website address is not intended to function as a hyperlink, and
the information contained in our website is not intended to be a part of this filing.
Risk-Management Oversight
Risk is inherent
in any business and our management is responsible for the day-to-day management of risks that we face. Our Board of
Directors has responsibility for the oversight of risk management. In its risk oversight role, our Board of Directors has the
responsibility to evaluate the risk management process to ensure its adequacy and to seek assurances that it is implemented properly
by management.
Our Board of Directors
believes that full and open communication between management and our Board of Directors is essential for effective risk management
and oversight. Relevant members of senior management, as necessary, attend the Board of Directors’ meetings and, as
necessary, Board committee meetings, in order to address any questions or concerns raised by our Board of Directors on risk management-related
and other matters. At meetings, our Board of Directors may receive presentations from senior management on business
operations, financial results and strategic matters, including an assessment of the sensitivity of the various financial, operational
and strategic risks faced by our Company, and discuss strategies, key challenges, risks and opportunities.
Our committees assist
our Board of Directors in fulfilling its oversight responsibilities in certain areas of risk. The Audit Committee assists the
Board in fulfilling its oversight responsibilities with respect to risk management in the areas of financial reporting, internal
controls and compliance with legal and regulatory requirements. The Compensation Committee assists the Board in fulfilling its
oversight responsibilities with respect to the management of risks arising from our compensation policies and programs and succession
planning for executives. The Governance and Nominating Committee assists our Board of Directors in fulfilling its oversight responsibilities
with respect to the management of risks associated with Board organization and structure, code of conduct, conflict of interest
policies and corporate governance, and in overseeing the membership and independence of our Board of Directors. While each committee
is responsible for evaluating certain risks and overseeing the management of those risks, the entire Board of Directors is regularly
informed about those risks and committee activities through committee reports.
Board Leadership Structure
Our Chief Executive
Officer, Zuosheng Yu, also serves as the Chairman of our Board of Directors. Our Board of Directors believes that this leadership
structure is appropriate because Mr. Yu founded General Steel Holdings, Inc. and has the most comprehensive institutional knowledge
of any member of our Board of Directors and is thus best positioned to develop agendas that ensure that the Board’s time
and attention are focused on the most critical matters. Mr. Yu’s combined role also provides decisive leadership,
ensures clear accountability and enhances our ability to communicate our message and strategy clearly and consistently to our
stockholders, employees, and investors. James Hu, our lead independent director, serves as a liaison between the Chairman
and our non-management directors, consults with the Chairman and Chief Executive Officer regarding information sent
to directors, reviews meeting agendas and schedules and may call meetings of our non-management directors.
Each of the directors
other than Mr. Yu and Mr. Chen are independent and our Board of Directors believes that the independent directors provide effective
oversight of management. Moreover, in addition to feedback provided during the course of Board meetings, the independent
directors provide the Chairman with regular input regarding agenda items for Board of Directors and committee meetings and coordinate
with the Chairman regarding information to be provided to the independent directors in performing their duties. Our Board of Directors
believes that this approach appropriately and effectively complements the combined Chairman/Chief Executive Officer structure.
Our Board of Directors
periodically evaluates whether the leadership structure of our Board of Directors continues to be optimal for our Company and
our stockholders. Although we believe that the combination of the Chairman and Chief Executive Officer roles is appropriate in
our current circumstances, our Board of Directors has the flexibility to modify the leadership structure in the future if it determines
that to be appropriate.
Communications with the Board of
Directors
Stockholders and
all interested parties who wish to communicate with our Board of Directors, or specific individual directors, may do so by directing
correspondence to our Secretary, John Chen, at Level 21, Tower B, Jia Ming Center, No. 27 Dong San Huan North Road, Chaoyang District,
Beijing, China 100020. Such correspondence should prominently display the fact that it is a stockholder-director communication
and indicate whether the correspondence should be forwarded to the entire Board of Directors or to particular directors.
Section 16(a) Beneficial Ownership
Reporting Compliance
Section 16(a)
of the Exchange Act requires our directors and executive officers, and persons who own more than 10% of a registered class of
our securities, to file with the SEC initial reports of ownership and reports of changes in ownership of our common stock and
other equity securities. Based solely on a review of copies of such forms received with respect to fiscal year 2012
and the written representations received from certain reporting persons that no other reports were required, we believe that all
Section 16(a) filings were timely made by our directors, executive officers and persons who own more than 10% of our common stock
and other equity securities.
Code of Ethics and Business Conduct
and Corporate Governance Guidelines
Our Code of Ethics
and Business Conduct and Corporate Governance Guidelines provides information to guide employees, including our Chief Executive
Officer, Chief Financial Officer, and our Directors, so that their business conduct is consistent with our ethical standards and
improves the understanding of our ethical standards among customers, suppliers and others outside our Company. Our
Code of Ethics and Business Conduct and Corporate Governance Guidelines are available on our website at www.gshi-steel.com. We
intend to post any amendments to or waivers from our Code of Ethics and Business Conduct at this location on its website. This
website address is not intended to function as a hyperlink, and the information contained in our website is not intended to be
a part of this filing.
Our Code of Ethics
and Business Conduct and Corporate Governance Guidelines may also be obtained free of charge by contacting Investor Relations
at jenny.wang@gshi-steel.com or by phone: +86-10-5775-7691.
ITEM 11. EXECUTIVE
COMPENSATION
Employment Agreements
We have not entered
into employment agreements with any of our named executive officers.
Severance Arrangements
We do not have any
severance agreements or other arrangements with any of our named executive officers.
Change of Control Arrangements
We do not have any
change of control agreements or other arrangements with any of our named executive officers.
No Policies Regarding Equity Ownership
and Hedging
We do not have any
equity or other security ownership requirements or guidelines that specify applicable amounts or forms of ownership. We do not
have any policies regarding hedging the economic risk of equity ownership.
Executive Compensation
The table below
sets forth all compensation awarded to, earned by or paid to our named executive officers for the fiscal years indicated.
No other executive officers received more than $100,000 in total compensation.
Summary Compensation Table
Name and Principal Position | |
Year | |
Salary ($) (1) | | |
Bonus ($) (1) | | |
Stock Awards
($)(2) | | |
Total ($) (1) | |
Zuosheng Yu, | |
2014 | |
| 170,304 | | |
| — | | |
| 435,200 | | |
| 605,504 | |
Chief Executive Officer | |
2013 | |
| 169,007 | | |
| — | | |
| 171,900 | | |
| 340,907 | |
| |
| |
| | | |
| | | |
| | | |
| | |
John Chen, | |
2014 | |
| 68,115 | | |
| — | | |
| 64,000 | | |
| 132,115 | |
Chief Financial Officer | |
2013 | |
| 67,871 | | |
| — | | |
| 51,850 | | |
| 119,721 | |
|
(1) |
The
amounts shown were paid in RMB and were translated into U.S. dollars at the rate of $0.16279 per RMB for 2014, and $0.16155
per RMB for 2013. |
|
(2) |
The
stock price assumption used to calculate the grant date fair value of all stock awards granted in the year indicated, as computed
in accordance with FASB ASC Topic 718, and as disclosed in Note 20 to the financial statements in this Annual Report. |
Director Compensation
The table below
sets forth information regarding compensation earned by directors, other than our Chief Executive Officer and Chief Financial
Officer, as compensation for their service to our Company during the year ended December 31, 2014.
Name | |
Stock Awards
($) (1) | | |
Total ($) (1) | |
James Hu | |
$ | 9,600 | | |
$ | 9,600 | |
Angela He | |
| 9,600 | | |
| 9,600 | |
Zhongkui Cao | |
| 1,910 | | |
| 1,910 | |
|
(1) |
The
stock price assumption used to calculate the grant date fair value of all stock awards granted on the date indicated, as computed
in accordance with FASB ASC Topic 718, and as disclosed in Note 20 to the financial statements in this Annual Report on Form
10-K. |
Currently, we do
not pay annual fees to our directors. During fiscal year 2014, we granted fully-vested unregistered shares of common stock to
our directors on a quarterly basis. We determined the amount of each grant based on level of involvement, responsibility and length
of service.
COMPENSATION COMMITTEE INTERLOCKS
AND INSIDER PARTICIPATION
During 2014, the
members of the Compensation Committee were Angela He, James Hu and Zhongkui Cao. In fiscal 2014, no member of the Compensation
Committee was an officer or employee of our Company or any of our subsidiaries.
ITEM 12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The
following table sets forth certain information as of April 8, 2015,
as to shares of common stock and preferred stock beneficially owned by: (i) each person who is known by our
Company to own beneficially more than 5% of common stock and preferred stock, (ii) each of our current
named executive officers, (iii) each of our current directors, and (iv) all of our current directors and named executive
officers as a group. Unless otherwise stated below, the address of each beneficial owner listed on the table is c/o General
Steel Holdings, Inc., Level 21, Tower B, Jia Ming Center, No. 27 Dong San Huan North Road, Chaoyang District, Beijing, China
100020.
Name of Beneficial Owner |
|
Shares
Beneficially
Owned |
|
|
Percentage Beneficial
Ownership of Class (1) |
|
|
Percentage of
Voting Power |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
Directors and Named Executive Officers |
|
|
|
|
Common
Stock |
|
|
Series A
Preferred Stock |
|
|
|
|
Zuosheng Yu (2)
Chief Executive Officer
and Chairman of the Board of Directors |
|
|
13,883,900 |
|
|
|
22.4 |
% |
|
|
|
|
|
|
10.3 |
% |
John Chen
Chief Financial Officer
and Director |
|
|
295,000 |
|
|
|
* |
|
|
|
|
|
|
|
* |
|
James Hu
Independent Director |
|
|
70,000 |
|
|
|
* |
|
|
|
|
|
|
|
* |
|
Angela He
Independent Director |
|
|
63,750 |
|
|
|
* |
|
|
|
|
|
|
|
* |
|
Zhongkui Cao
Independent Director |
|
|
14,500 |
|
|
|
* |
|
|
|
|
|
|
|
* |
|
Executive Officers
and Directors as a group 5% Owners |
|
|
14,327,150 |
|
|
|
23.0 |
% |
|
|
|
|
|
|
10.8 |
% |
Golden Eight Investments
Limited (2) |
|
|
14,000,000 |
|
|
|
22.6 |
% |
|
|
|
|
|
|
17.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A Preferred
Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Victory New Holdings
Limited (3) |
|
|
3,092,899 |
|
|
|
|
|
|
|
100 |
% |
|
|
30.0 |
% |
* Less than 1%
(1) Percentages based on 61,986,282
shares of Common Stock and 3,092,899 shares of Preferred Stock outstanding as of December 31, 2014.
(2) Mr. Yu is the beneficial
owner of 13,883,900 shares of common stock held in his name and 14,000,000 shares of common stock held in the name of Golden Eight
Investments Limited (“Golden Eight”). Mr. Yu is the sole director of Golden Eight. Golden Eight
is wholly owned by The GSI Family Trust U/A/D 01/21/10 (the “Trust”). Mr. Yu has sole power of revocation
over the Trust and is the sole member of the Investment Committee of the Trust. As such, Mr. Yu has voting and investment control
directly over the securities held by the Trust and indirectly over the securities held by Golden Eight. Mr. Yu also has voting
and investment control over 3,092,899 shares of Series A Preferred Stock held in the name of Victory New Holdings Limited, a British
Virgin Islands registered company, which, while outstanding, have a voting power equal to 30% of the combined voting power of
our common stock and Preferred Stock.
(3) Victory New Holdings Limited,
a British Virgin Islands registered company (“Victory New”), is controlled by our Chairman and Chief Executive Officer,
Zuosheng Yu. Victory New holds 3,092,899 shares of our Series A Preferred Stock which, while outstanding, have
a voting power equal to 30% of the combined voting power of our common stock and preferred stock.
EQUITY INCENTIVE PLAN INFORMATION
The following table
provides information as of December 31, 2014, about compensation plans under which shares of our Common Stock may be issued to
employees, consultants or non-employee directors upon exercise of options, warrants or rights.
|
|
(a) |
|
|
(b) |
|
|
(c) |
|
Plan Category |
|
Number of Securities
to be Issued Upon
Exercise of Outstanding
Options, Warrants and
Rights(1) |
|
|
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and
Rights(1) |
|
|
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation
Plans (Excluding
Securities Reflected in
Column (a))(2) |
|
Plans approved by stockholders |
|
|
- |
|
|
$ |
- |
|
|
|
1,243,866 |
|
Plans
not approved by stockholders |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total |
|
|
|
|
|
$ |
|
|
|
|
1,243,866 |
|
(1) |
We
grant fully vested, unregistered shares of our common stock to employees under our 2008 Equity Incentive Plan. Our
stock grants are not restricted and therefore there are no securities to be issued upon exercise of outstanding options, warrants
and rights. |
(2) |
Represents
the number of securities remaining available for issuance under our 2008 Equity Incentive Plan. |
ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Set for below are
our related party transactions.
Related party transactions
As disclosed in Notes 16 – “Capital
lease obligations”, Longmen Joint Venture entered into a capital lease arrangement on April 29, 2011, with Shaanxi Coal
and Shaanxi Steel, which are related parties of the Group. The following is an analysis of the leased assets under the capital
lease:
| |
December 31, 2014 | | |
December 31, 2013 | |
| |
(in thousands) | | |
(in thousands) | |
Machinery | |
$ | 602,878 | | |
$ | 605,839 | |
Less: accumulated depreciation | |
| (105,001 | ) | |
| (76,740 | ) |
Carrying value of leased assets | |
$ | 497,877 | | |
$ | 529,099 | |
b. The following chart summarized sales to related parties
for the years ended December 31, 2014 and 2013.
Name of related parties | |
Relationship | |
For the year ended December 31, 2014 | | |
For the year ended December 31, 2013 | |
| |
| |
(in thousands) | | |
(in thousands) | |
Long Steel Group | |
Noncontrolling shareholder of Longmen Joint Venture | |
$ | 164,879 | | |
$ | 255,859 | |
Sichuan Yutai Trading Co., Ltd | |
Significant influence by Long Steel Group* | |
| - | | |
| 73 | |
Shaanxi Yuchang Trading Co., Ltd | |
Significant influence by Long Steel Group | |
| - | | |
| 21,570 | |
Shaanxi Haiyan Trade Co., Ltd | |
Significant influence by Long Steel Group | |
| 40,224 | | |
| 16,273 | |
Shaanxi Shenganda Trading Co., Ltd | |
Significant influence by Long Steel Group | |
| 112,231 | | |
| 77,899 | |
Shaanxi Steel | |
Majority shareholder of Long Steel Group | |
| 2,527 | | |
| 3,221 | |
Shaanxi Coal and Chemical Industry Group Co., Ltd. | |
Shareholder of Shaanxi Steel | |
| 46,637 | | |
| 27,911 | |
Shaanxi Long Steel Group Baoji Steel Rolling Co., Ltd | |
Subsidiary of Long Steel Group | |
| 13,739 | | |
| 7,325 | |
Shaanxi Junlong Rolling Co., Ltd | |
Investee of Long Steel Group | |
| 8,883 | | |
| 37,068 | |
Total | |
| |
$ | 389,120 | | |
$ | 447,199 | |
*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.
Sales to related parties in trading transactions, which
were netted against the corresponding cost of goods sold, amounted to $204.2 million for the year ended December 31, 2014. See
Note 2(g) Revenue Recognition for details.
c. The following charts summarize purchases from related
parties for the years ended December 31, 2014 and 2013.
Name of related
parties | |
Relationship | |
For the year ended December 31, 2014 | | |
For the year ended December 31, 2013 | |
| |
| |
(in thousands) | | |
(in thousands) | |
Long Steel Group | |
Noncontrolling shareholder of Longmen Joint
Venture | |
$ | 382,075 | | |
$ | 522,295 | |
Tianjin Hengying Trading Co., Ltd. | |
Partially owned by CEO through indirect shareholding** | |
| 45,623 | | |
| - | |
Tianjin Dazhan Industry Co., Ltd. | |
Partially owned by CEO through indirect shareholding | |
| 2,554 | | |
| - | |
Tianjin General Qiugang Pipe Co., Ltd. | |
Partially owned by CEO through indirect shareholding | |
| 19,422 | | |
| - | |
Maoming Shengze Trading Co., Ltd. | |
Partially owned by CEO through indirect shareholding | |
| 16,772 | | |
| - | |
Hancheng Haiyan Coking Co., Ltd | |
Noncontrolling shareholder of Long Steel
Group | |
| 166,719 | | |
| 180,401 | |
Xi’an Pinghe Metallurgical Raw Material Co.,
Ltd | |
Noncontrolling shareholder of Long Steel Group | |
| 20,009 | | |
| 19,943 | |
Shaanxi Steel | |
Majority shareholder of Long Steel Group | |
| 172,249 | | |
| - | |
Shaanxi Junlong Rolling Co., Ltd | |
Investee of Long Steel Group | |
| - | | |
| 213 | |
Shaanxi Huafu New Energy Co., Ltd | |
Significant influence by the Long Steel Group | |
| 28,424 | | |
| 32,824 | |
Beijing Daishang Trading Co., Ltd. | |
Noncontrolling shareholder of Longmen Joint Venture’s
subsidiary | |
| - | | |
| 6,933 | |
Shaanxi Coal and Chemical Industry Group Co., Ltd. | |
Shareholder of Shaanxi Steel | |
| 39,704 | | |
| 26,047 | |
Tianwu General Steel Material Trading Co., Ltd. | |
Investee of General Steel (China) | |
| 121,304 | | |
| 76,735 | |
Shaanxi Shenganda Trading Co., Ltd. | |
Significant influence by the Long Steel Group | |
| - | | |
| 20,213 | |
Others | |
Entities either owned or have
significant influence by our affiliates or management | |
| - | | |
| 797 | |
Total | |
| |
$ | 1,014,855 | | |
$ | 886,401 | |
**The CEO is referred to
herein as the chief executive officer of General Steel Holdings, Inc.
Related party balances
| a. | Loans receivable – related parties: |
Name of related parties | |
Relationship | |
December 31, 2014 | | |
December 31, 2013 | |
| |
| |
(in thousands) | | |
(in thousands) | |
Tianjin Hengying Trading Co., Ltd.* | |
Partially owned by CEO through indirect shareholding | |
$ | 13,997 | | |
$ | - | |
Tianjin Dazhan Industry Co., Ltd.* | |
Partially owned by CEO through indirect shareholding | |
| 14,617 | | |
| - | |
Beijing Shenghua Xinyuan Metal Materials Co., Ltd. | |
Partially owned by CEO through indirect shareholding | |
| 6,099 | | |
| - | |
Teamlink Investment Co., Ltd | |
Partially owned by CEO through indirect shareholding | |
| - | | |
| 4,540 | |
Total | |
| |
$ | 34,713 | | |
$ | 4,540 | |
*We reclassified advances for inventory purchase - related parties related to trading transactions, as
noted in note 2(g) of the consolidated financial statements, to loans receivable - related parties due to their interest-bearing
nature.
We issued loans to these related parties for cash flow purposes to earn interest income, which have a higher interest rate
than the bank financing interest rates.
See Note 3 – loans receivable
– related parties for loan details.
| b. | Accounts
receivables – related parties: |
Name of related parties | |
Relationship | |
December 31, 2014 | | |
December 31, 2013 | |
| |
| |
(in thousands) | | |
(in thousands) | |
Long Steel Group | |
Noncontrolling shareholder of Longmen Joint
Venture | |
$ | 148 | | |
$ | 548 | |
Shaanxi Shenganda Trading Co., Ltd. | |
Significant influence by Long Steel Group | |
| 5,715 | | |
| - | |
Tianjin Daqiuzhuang Steel Plates | |
Partially owned by CEO through indirect shareholding | |
| 19 | | |
| 19 | |
Shaanxi Steel | |
Majority shareholder of Long Steel Group | |
| 2,101 | | |
| 1,741 | |
Others | |
| |
| 641 | | |
| 634 | |
Total | |
| |
$ | 8,624 | | |
$ | 2,942 | |
| c. | Other
receivables – related parties: |
Other receivables - related parties
are those nontrade receivables arising from transactions between the Company and its related parties, such as advances or payments
made on behalf of these related parties.
Name of related parties | |
Relationship | |
December 31, 2014 | | |
December 31, 2013 | |
| |
| |
(in thousands) | | |
(in thousands) | |
Long Steel Group | |
Noncontrolling shareholder of Longmen Joint Venture | |
$ | 165 | | |
$ | 406 | |
Shaanxi Steel | |
Majority shareholder of Long Steel Group | |
| 35,669 | | |
| 46,439 | |
Tianjin General Quigang Pipe Co., Ltd | |
Partially owned by CEO through indirect shareholding | |
| 1,237 | | |
| 1,247 | |
Tianjin Dazhan Industry Co, Ltd | |
Partially owned by CEO through indirect shareholding | |
| - | | |
| 491 | |
Tianjin Hengying Trading Co., Ltd | |
Partially owned by CEO through indirect shareholding | |
| 721 | | |
| - | |
Beijing Shenghua Xinyuan Metal Materials Co., Ltd. | |
Partially owned by CEO through indirect shareholding | |
| 313 | | |
| 4,901 | |
Victory Energy Resource Co., Ltd. | |
Partially owned by CEO through indirect shareholding | |
| 1,101 | | |
| - | |
Others | |
Entities either owned or have significant influence
by our affiliates or management | |
| 528 | | |
| 622 | |
Total | |
| |
$ | 39,734 | | |
$ | 54,106 | |
| d. | Advances
on inventory purchase – related parties: |
Name of related parties | |
Relationship | |
December 31, 2014 | | |
December 31, 2013 | |
| |
| |
(in thousands) | | |
(in thousands) | |
Long Steel Group | |
Noncontrolling shareholder of Longmen Joint Venture | |
$ | 7,139 | | |
$ | 9,123 | |
Shaanxi Shenganda Trading Co., Ltd. | |
Significant influence by Long Steel Group | |
| 27,549 | | |
| 25,607 | |
Tianjin Dazhan Industry Co., Ltd | |
Partially owned by CEO through indirect shareholding | |
| - | | |
| 10,343 | |
Tianjin Hengying Trading Co., Ltd | |
Partially owned by CEO through indirect shareholding | |
| 3,807 | | |
| 16,158 | |
Tianjin General Qiugang Pipe Co., Ltd | |
Partially owned by CEO through indirect shareholding | |
| 7,091 | | |
| 555 | |
Maoming Shengze Trading Co., Ltd | |
Partially owned by CEO through indirect shareholding | |
| - | | |
| 21,197 | |
Others | |
Entities either owned or have significant influence
by our affiliates or management | |
| 31 | | |
| 20 | |
Total | |
| |
$ | 45,617 | | |
$ | 83,003 | |
e. |
Accounts payable - related
parties: |
Name of related parties | |
Relationship | |
December 31, 2014 | | |
December 31, 2013 | |
| |
| |
(in thousands) | | |
(in thousands) | |
Hancheng Haiyan Coking Co., Ltd | |
Noncontrolling shareholder of Longmen Joint Venture | |
$ | 64,276 | | |
$ | 58,163 | |
Long Steel Group | |
Noncontrolling shareholder of Longmen Joint Venture | |
| 79,886 | | |
| 134,758 | |
Shaanxi Coal and Chemical Industry Group Co., Ltd. | |
Shareholder of Shaanxi Steel | |
| 23,726 | | |
| 29,990 | |
Tianjin Dazhan Industry Co., Ltd | |
Partially owned by CEO through indirect shareholding | |
| 869 | | |
| 958 | |
Xi’an Pinghe Metallurgical Raw Material Co., Ltd | |
Noncontrolling shareholder of Long Steel Group | |
| 11,035 | | |
| 8,714 | |
Tianjin Hengying Trading Co., Ltd | |
Partially owned by CEO through indirect shareholding | |
| 1 | | |
| 1 | |
Henan Xinmi Kanghua Fire Refractory Co., Ltd | |
Noncontrolling shareholder of Longmen Joint Venture’s subsidiary | |
| 746 | | |
| 716 | |
Beijing Daishang Trading Co., Ltd | |
Noncontrolling shareholder of Longmen Joint Venture’s subsidiary | |
| 36 | | |
| 1,004 | |
Tianjin General Qiugang Pipe Co., Ltd | |
Partially owned by CEO through indirect shareholding | |
| 2,462 | | |
| - | |
Tianwu General Steel Material Trading Co., Ltd. | |
Investee of General Steel (China) | |
| 22,916 | | |
| 759 | |
Maoming Shengze Trading Co., Ltd | |
Partially owned by CEO through indirect shareholding | |
| 1,773 | | |
| - | |
Others | |
Entities either owned or have significant influence
by our affiliates or management | |
| 57 | | |
| 629 | |
Total | |
| |
$ | 207,783 | | |
$ | 235,692 | |
f. |
Short-term loans - related
parties: |
Name of related parties | |
Relationship | |
December 31, 2014 | | |
December 31, 2013 | |
| |
| |
(in thousands) | | |
(in thousands) | |
Shaanxi Steel | |
Majority shareholder of Long Steel Group | |
$ | - | | |
$ | 49,110 | |
Shaanxi Coal and Chemical Industry Group Co., Ltd | |
Shareholder of Shaanxi Steel | |
| 34,460 | | |
| 28,216 | |
Long Steel Group | |
Noncontrolling shareholder of Longmen Joint Venture | |
| - | | |
| 33,183 | |
Tianjin Hengying Trading Co., Ltd | |
Partially owned by CEO through indirect shareholding | |
| 3,039 | | |
| 8,178 | |
Tianjin Dazhan Industry Co., Ltd | |
Partially owned by CEO through indirect shareholding | |
| 8,211 | | |
| 6,548 | |
Yangpu Capital Automobile | |
Partially owned by CEO through indirect shareholding | |
| 670 | | |
| 1,458 | |
Total | |
| |
$ | 46,380 | | |
$ | 126,693 | |
See Note 10 – Debt for the loan details.
| g. | Current maturities
of long-term loans – related parties |
Name of related party | |
Relationship | |
December 31, 2014 | | |
December 31, 2013 | |
| |
| |
(in thousands) | | |
(in thousands) | |
Shaanxi Steel | |
Majority shareholder of Long Steel Group | |
$ | - | | |
$ | 53,013 | |
Total | |
| |
$ | - | | |
$ | 53,013 | |
h. |
Other payables – related
parties: |
Other payables – related parties
are those nontrade payables arising from transactions between us and our related parties, such as advances or payments from these
related parties on behalf of the Group.
Name of related parties | |
Relationship | |
December 31, 2014 | | |
December 31, 2013 | |
| |
| |
(in thousands) | | |
(in thousands) | |
Tianjin Hengying Trading Co, Ltd | |
Partially owned by CEO through indirect shareholding | |
$ | 378 | | |
$ | 380 | |
Long Steel Group | |
Noncontrolling shareholder of Longmen Joint Venture | |
| 33,968 | | |
| 43,636 | |
Shaanxi Steel | |
Majority shareholder of Long Steel Group | |
| 44,146 | | |
| 44,363 | |
Wendlar Investment & Management Group Co., Ltd | |
Common control under CEO | |
| 1,196 | | |
| 895 | |
Yangpu Capital Automobile | |
Partially owned by CEO through indirect shareholding | |
| 399 | | |
| 291 | |
Tianjin Dazhan Industry Co., Ltd | |
Partially owned by CEO through indirect shareholding | |
| 3,883 | | |
| 473 | |
Maoming Shengze Trading Co., Ltd | |
Partially owned by CEO through indirect shareholding | |
| 2,775 | | |
| 1,745 | |
Victory Energy Resource Co., Ltd | |
Partially owned by CEO through indirect shareholding | |
| - | | |
| 1,375 | |
Others | |
Entities either owned or have significant influence
by our affiliates or management | |
| 507 | | |
| 921 | |
Total | |
| |
$ | 87,252 | | |
$ | 94,079 | |
i. |
Customer deposits –
related parties: |
Name of related parties | |
Relationship | |
December 31, 2014 | | |
December 31, 2013 | |
| |
| |
(in thousands) | | |
(in thousands) | |
Shaanxi Yuchang Trading Co., Ltd | |
Significant influence by Long Steel Group | |
$ | 10 | | |
$ | 10 | |
Shaanxi Coal and Chemical Industry Group Co., Ltd | |
Shareholder of Shaanxi Steel | |
| 4,467 | | |
| - | |
Shaanxi Haiyan Trade Co, Ltd | |
Significant influence by Long Steel Group | |
| 6,844 | | |
| - | |
Long Steel Group | |
Noncontrolling shareholder of Longmen Joint Venture | |
| 23,517 | | |
| 15,038 | |
Shaanxi Junlong Rolling Co., Ltd | |
Investee of Long Steel Group | |
| 57 | | |
| 2,748 | |
Shaanxi Shenganda Trading Co., Ltd | |
Significant influence by Long Steel Group | |
| - | | |
| 275 | |
Tianwu General Steel Material Trading Co., Ltd. | |
Investee of General Steel (China) | |
| 97,721 | | |
| 46,521 | |
Others | |
Entities either owned or have
significant influence by our affiliates or management | |
| - | | |
| 289 | |
Total | |
| |
$ | 132,616 | | |
$ | 64,881 | |
j. |
Deposits due to sales representatives
– related parties |
Name of related parties | |
Relationship | |
December 31, 2014 | | |
December 31, 2013 | |
| |
| |
(in thousands) | | |
(in thousands) | |
Hancheng Haiyan Trade Co., Ltd | |
Significant influence by Long Steel Group | |
$ | 652 | | |
$ | - | |
Gansu Yulong Trading Co., Ltd. | |
Significant influence by Long Steel Group | |
| 1,075 | | |
| 1,408 | |
Long Steel Group | |
Noncontrolling shareholder of Longmen Joint Venture | |
| 196 | | |
| - | |
Shaanxi Yuchang Trading Co., Ltd | |
Significant influence by Long Steel Group | |
| 586 | | |
| 589 | |
Total | |
| |
$ | 2,509 | | |
$ | 1,997 | |
| k. | Long-term
loans – related party: |
Name of related party | |
Relationship | |
December 31, 2014 | | |
December 31, 2013 | |
| |
| |
(in thousands) | | |
(in thousands) | |
Shaanxi Steel | |
Majority shareholder of Long Steel Group | |
$ | 339,549 | | |
$ | 19,644 | |
Total | |
| |
$ | 339,549 | | |
$ | 19,644 | |
We also provided guarantee on related
parties’ bank loans amounting to $82.3 million and $205.8 million as of December 31, 2014 and 2013, respectively.
| |
December 31, 2014 | | |
December 31, 2013 | |
| |
(in thousands) | | |
(in thousands) | |
Beginning balance | |
$ | 77,444 | | |
$ | 77,199 | |
Less: Lease income realized | |
| (2,176 | ) | |
| (2,158 | ) |
Exchange rate effect | |
| (379 | ) | |
| 2,403 | |
Ending balance | |
| 74,889 | | |
| 77,444 | |
Current portion | |
| (2,176 | ) | |
| (2,187 | ) |
Noncurrent portion | |
$ | 72,713 | | |
$ | 75,257 | |
For the years ended December 31, 2014
and 2013, we realized lease income from Shaanxi Steel, a related party, amounted to $2.2 million and $2.2 million, respectively.
On November 19, 2013, the Company sold
its 28% equity interest of Tianwu held by Yangpu Shengtong to Tianjin Dazhan Industry Co., Ltd., a related party through indirect
common ownership by the CEO, for $13.6 million (RMB 84.3 million) while retaining the 32% interest held by General Steel (China).
As a result of this transaction, the Company met the criteria under ASC 810-10-40-4 to deconsolidate Tianwu as of the ownership
disposal date and recognize a gain, which amounted to $1.0 million. After the deconsolidation of Tianwu, General Steel (China)’s
32% interest in Tianwu was accounted for as an equity method investment, which amounted to $15.8 million as of December 31, 2013.
ITEM 14. PRINCIPAL
ACCOUNTING FEES AND SERVICES.
Fees for professional services provided
by our independent registered public accounting firms in each of the last two fiscal years, in each of the following categories
are as follows:
| |
2014 | | |
2013 | |
Audit fees | |
$ | 870,000 | | |
$ | 870,000 | |
Audit-related fees | |
$ | - | | |
$ | - | |
Tax fees | |
$ | 29,000 | | |
$ | 29,000 | |
All other fees | |
$ | - | | |
$ | - | |
Audit fees were
for the audit of our annual financial statements and the review of our financial statements included in our quarterly reports
on Form 10-Q and services that are normally provided by our independent registered public accounting firm in connection with the
statutory and regulatory filings. Tax fees involved the preparation of our consolidated tax returns. Please note that the audit
fees include services provided by our current independent registered public accounting firms. Our current auditor, Friedman LLP,
fees are $870,000 and $870,000 in fiscal year 2014 and 2013, respectively.
Audit Committee’s Pre-Approval Policies and Procedures
The Audit Committee’s
policy is to pre-approve all audit and non-audit services provided by our independent registered public accounting firm. These
services may include audit services, audit-related services, tax services and other services. Pre-approval is generally
provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is generally
subject to a specific budget. The Audit Committee has delegated pre-approval authority to the Audit Committee Chairman, or any
Audit Committee member in his absence, when services are required on an expedited basis, with such pre-approval disclosed to the
full Audit Committee at its next scheduled meeting. None of the fees paid to the independent auditors under the categories “Audit-Related
fees” and “All other fees” described above were approved by the Audit Committee prior to services being rendered
pursuant to the de minimis exception established by the SEC.
All of the Audit
fees and Tax fees provided by our independent registered public accounting firm in fiscal 2014 and related fees were approved
in advance by our Audit Committee.
Audit Committee Report
The Audit Committee
oversees our financial reporting process on behalf of the Board of Directors. Management has the primary responsibility for the
financial statements and the reporting process, including the system of internal controls. In fulfilling its oversight responsibilities,
the Audit Committee reviewed and discussed the audited financial statements for this Annual Report on Form 10-K with management,
including a discussion of the quality, not just the acceptability, of the accounting principles; the reasonableness of significant
judgments; and the clarity of disclosures in the financial statements.
The Audit Committee
discussed with Friedman LLP, our independent registered public accounting firm (independent auditors) for the fiscal year ended
December 31, 2014, who are responsible for expressing an opinion on the conformity of those audited financial statements with
U.S. generally accepted accounting principles, their judgments as to the quality, not just the acceptability, of our accounting
principles and such other matters as are required to be discussed with the independent registered public accounting firm under
generally accepted auditing standards including Statement on Auditing Standards No. 61, as amended by Statement on Auditing Standards
No. 90 (Communication with Audit Committees), other standards of the Public Company Accounting Oversight Board (United States),
rules of the SEC and other applicable regulations. In addition, the Audit Committee has discussed with the independent
registered public accounting firm the auditors’ independence from management and our Company, including the matters in the
written disclosures required by the applicable requirements of the Public Company Accounting Oversight Board regarding the independent
registered public accounting firm’s communications with the Audit Committee concerning independence, which the Audit Committee
received from the independent registered public accounting firm, and considered the compatibility of non-audit services with the
independent registered public accounting firm’s independence.
The Audit Committee also reviewed management’s
report on its assessment of the effectiveness of our internal control over financial reporting.
The Audit Committee
discussed with our independent registered public accounting firm and the persons responsible for the internal audit function the
overall scope and plans for their respective audits. The Audit Committee meets with the independent registered public accounting
firm and the persons responsible for the internal audit function, with and without management present, to discuss the results
of their examinations, their evaluations of the Company’s internal control, including internal control over financial reporting,
and the overall quality of our financial reporting. During 2014, the Audit Committee held four meetings, including
quarterly closing conferences with the independent registered public accounting firm and management during which financial results
and related issues were reviewed and discussed prior to the release of quarterly results to the public.
The Audit Committee is governed by a
charter which may be found on our website. The members of the Audit Committee are considered to be “independent”
because they satisfy the independence requirements of the NYSE listing standards and Rule 10A-3 of the Securities Exchange Act
of 1934.
Based on the reviews and discussions
referred to above, the Audit Committee recommended to the Board of Directors and the Board of Directors has approved the inclusion
of the audited financial statements and management’s assessment of the effectiveness of our internal control over financial
reporting in this Annual Report on Form 10-K for filing with the SEC.
Audit Committee: |
James Hu, Chairman |
|
Angela He, Member |
|
Zhongkui Cao, Member |
The Audit Committee
Report does not constitute soliciting material, and shall not be deemed to be filed or incorporated by reference into any other
Company filing under the Securities Act or the Exchange Act, except to the extent that our Company specifically incorporates the
Audit Committee Report by reference therein.
We have removed
some of the material contracts (10 Exhibits). A 10 Exhibit can be removed, other than what we have removed, if: (1) they
are not being performed in whole or in part at or after the filing of this Annual Report; and (2) if they were entered into more
than two years before the filing of this Annual Report.
PART IV
ITEM 15. EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
| (a) | (1)
and (2) – LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES set
forth below |
(3) See Item 15(b) below.
|
(b) |
The following financial
statements are included herein under Part II, Item 8, Financial Statements and Supplementary Data: |
|
• |
Reports
of Independent Registered Public Accounting Firms |
|
• |
Consolidated Balance
Sheets —December 31, 2014 and 2013 |
|
• |
Consolidated Statements
of Operations and Comprehensive Loss for the years ended December 31, 2014 and 2013 |
|
• |
Consolidated Statements
of Changes in Equity for the years ended December 31, 2014 and 2013 |
|
• |
Consolidated Statements
of Cash Flows for the years ended December 31, 2014 and 2013 |
|
• |
Notes to Consolidated Financial Statements |
All other schedules
for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required
under the related instructions, are not applicable, or information required is included in the financial statements or notes thereto
and, therefore, have been omitted.
(c) – LIST
OF EXHIBITS
Exhibit
Number |
|
Description |
|
|
|
3.1 |
|
Articles of Incorporation
of General Steel Holdings, Inc. (included as Exhibit 3.1 to the Form SB-2 filed with the Commission on June 6, 2003 and incorporated
herein by reference). |
3.2 |
|
Amendment to the Articles
of Incorporation dated February 22, 2005 (included as Exhibit 3.2 to the Form 10-K filed March 16, 2010 and incorporated herein
by reference). |
|
3.3 |
|
Amendment to the Articles of Incorporation
dated November 14, 2007 (included as Exhibit 3.3 to the Form 10-K filed March 16, 2010 and incorporated herein by reference). |
|
|
|
3.4 |
|
Certificate of Designation of Series
A Preferred Stock of the registrant (included as Exhibit 10.6 to the Form 10-K filed March 31, 2008 and incorporated herein
by reference). |
3.5 |
|
Bylaws of General Steel Holdings,
Inc. (included as Exhibit 3.5 to the Form 10-K filed March 16, 2010 and incorporated herein by reference). |
10.1 |
|
General Steel Holdings, Inc.
2008 Equity Incentive Plan (included as Appendix A to the Schedule 14A filed June 20, 2008 and incorporated herein by reference). |
|
|
|
10.2 |
|
Lease Agreement, dated March 31, 2010,
by and between General Steel (China) Co., Ltd. and Tianjin Daqiuzhuang Steel Plates Co., Ltd. (included as Exhibit 10.1 to
the Form 8-K filed with the Commission on April 6, 2010 and incorporated herein by reference). |
|
|
|
10.3 |
|
Joint Venture Framework Agreement, dated
May 13, 2010, by and between General Steel Holdings, Inc. and Shanxi Meijin Energy Group Co., Ltd. (included as Exhibit 10.1
to the Form 8-K filed with the Commission on May 18, 2010 and incorporated herein by reference). |
10.4 |
|
Cooperation Agreement (also
referred to as the Unified Management Agreement), dated April 29, 2011, by and among General Steel Holdings, Inc., Shaanxi
Coal and Chemical Industry Group Co., Ltd., Shaanxi Iron and Steel Group Co., Ltd., and Shaanxi Longmen Iron and Steel Co.,
Ltd. (included as Exhibit 10.1 to the Form 8-K filed with the Commission on May 5, 2011 and incorporated herein by reference). |
|
|
|
10.5 |
|
Debt Repayment Agreement, dated June
16, 2011, by and among Maoming Hengda Steel Co. Ltd., Tianjin Qiu Gang Investment Co., Ltd, Guangzhou Hengda Industrial Group
Ltd., and Ms. Ding Yumei (included as Exhibit 10.1 to the Form 8-K filed with the Commission on June 20, 2011 and incorporated
herein by reference). |
|
|
|
21* |
|
Subsidiaries of the registrant (filed
herewith). |
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) and 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 |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 |
|
|
|
|
By: |
/s/ Zuosheng Yu |
|
|
Name: Zuosheng Yu |
|
|
Title: Chairman and Chief Executive Officer
(Principal Executive Officer) |
|
|
Date: April 10, 2015 |
Pursuant to the requirements of the Securities Exchange
Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
SIGNATURE |
|
TITLE |
|
DATE |
|
|
|
|
|
/s/
Zuosheng Yu |
|
Chairman and Chief Executive Officer
and Director |
|
April 10, 2015 |
Zuosheng Yu |
|
(Principal Executive Officer) |
|
|
|
|
|
|
|
/s/
John Chen |
|
Chief Financial Officer and Director |
|
April 10, 2015 |
John Chen |
|
(Principal Accounting and Financial Officer) |
|
|
|
|
|
|
|
/s/
James Hu |
|
Independent Director |
|
April 10, 2015 |
James Hu |
|
|
|
|
|
|
|
|
|
/s/
Angela He |
|
Independent Director |
|
April 10, 2015 |
Angela He |
|
|
|
|
|
|
|
|
|
/s/
Zhong Kui Cao |
|
Independent Director |
|
April 10, 2015 |
Zhong Kui Cao |
|
|
|
|
|
|
|
|
|
Exhibit
21
Subsidiary | |
| |
Percentage of Ownership | |
General Steel Investment Co., Ltd. | |
British Virgin Islands | |
| 100.0 | % |
General Steel (China) Co., Ltd. | |
P.R.C. | |
| 100.0 | % |
Yangpu Shengtong Investment Co., Ltd. | |
P.R.C. | |
| 99.1 | % |
Tianjin Qiu Steel Investment Co., Ltd. | |
P.R.C. | |
| 98.7 | % |
Shaanxi Longmen Iron and Steel Co., Ltd. | |
P.R.C. | |
| VIE
/ 60.0 | % |
Maoming Hengda Steel Co., Ltd. | |
P.R.C. | |
| 99.0 | % |
EXHIBIT 31.1
Certification
I, Zuosheng Yu, certify that:
| 1. | I
have reviewed this Annual Report on Form 10-K of General Steel Holdings, Inc.; |
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
|
4. |
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed
such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared; |
|
(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
(c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
(d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
|
5. |
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
|
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: April 10, 2015 |
|
|
/s/ Zuosheng Yu |
|
|
|
Zuosheng Yu |
|
|
|
Chief Executive Officer |
|
|
|
(Principal Executive Officer) |
EXHIBIT 31.2
Certification
I, John Chen, certify that:
|
1. |
I have reviewed this Annual Report on Form 10-K of General Steel Holdings, Inc.; |
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
|
4. |
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
(c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
(d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
|
5. |
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
|
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: April 10, 2015 |
|
|
/s/ John Chen |
|
|
|
John Chen |
|
|
|
Chief Financial Officer |
|
|
|
(Principal Accounting and Financial Officer) |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT
OF 2002
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned officers of General Steel Holdings, Inc., a Nevada corporation
(the “Corporation”), does hereby certify that:
The Annual Report on Form 10-K for the year ended December
31, 2014 (the “Form 10-K”) of the Corporation fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 and the information contained in the Form 10-K fairly presents, in all material respects, the financial
condition and results of operations of the Corporation.
/s/ Zuosheng Yu |
|
Zuosheng Yu |
|
Chief Executive Officer |
|
(Principal Executive Officer) |
|
April 10, 2015 |
|
/s/ John Chen |
|
John Chen |
|
Chief Financial Officer |
|
(Principal Financial Officer) |
|
April 10, 2015 |
|
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