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, 20142015
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 Center2, Building G,
No. 27 Dong San Huan North Road2A Chen Jia Lin, Ba Li Zhuang
Chaoyang District,
Beijing, China 100020100025
(Address of Principal Executive Offices,Office, Including Zip Code)
Registrant’s telephone number: +86 (10) 5775 76488572 3073
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.001 par value per share | |
(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¨Nox
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¨Nox
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. Yesx¨ No¨x
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). YesxNo¨
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¨Nox
The aggregate market value of the voting common equity held by non-affiliates as of June 30, 2014,2015, the last business day of the registrant’s most recently completed second fiscal quarter, based upon the price of $1.00$1.06 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$7.6 million. The registrant has no non-voting common equity.
As of April 8, 2015, 61,986,282August 19, 2016, 17,827,481 (excluding 2,472,306494,462 shares of treasury stock) shares of common stock, par value $0.001 per share, were outstanding.
TABLE OF CONTENTS
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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-KForm10-K is filed to confirm these statements to actual results, unless required by applicable law.
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Overview
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. and its subsidiaries.
We were incorporated on August 5, 2002, in the State of Nevada. We are headquartered in Beijing, China and operate a portfolio of Chinesethrough our 100% owned subsidiary, General Steel Investment, we had been operating steel companies. We servecompanies serving various industries in the People’s Republic of China (“PRC”). Our main operation through December 30, 2015 had been the manufacturing and produce a varietysales of steel products including, but not limited to: reinforced bars (“rebar”),such as steel rebar, hot-rolled carbon and silicon sheets and high-speed wire.spiral-weld pipes.
Since the first quarter of 2015, in view of the near-term challenges for the steel manufacturing sector, we strategically accelerated our business transformation. Our current aggregate annual production capacity of crude steel products under management, consisting mainly of steel rebar,transformation strategy is 7 million metric tons. Our products have a variety of demand drivers, such as infrastructure constructionto pursue opportunities that offer compelling benefits to our organization and and rural income. Domestic economic conditions are also an overall demand driver for all our products.shareholders, including:
· | strengthening the Company’s financials while providing the financial flexibility to pursue higher return, higher growth opportunities; |
· | reducing the complexity of the Company’s business structure, which is consistent with the Company’s objectives for internal simplification and operating efficiency; |
· | diversifying 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 |
· | pursuing opportunities for additional value creation. |
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 |
UnlessOn November 4, 2015, the context indicates otherwise,Board authorized the Company's management to pursue the potential sale of all its ownership in Maoming Hengda Steel Company, Ltd. ("Maoming Hengda") and Longmen Joint Venture in order to unlock the hidden value in Maoming Hengda's land assets, as used hereinwell as divest from and restructure the steel business. On December 30, 2015, we sold our equity interest in General Steel (China) Co., Ltd and Longmen Joint Venture. On March 21, 2016, we sold our equity interest in Maoming Hengda and completed the divestiture of our steel business as planned.
In October 2015, we completed our acquisition of an 84.5% equity interest in Catalon Chemical Corp. (“Catalon”), a Delaware corporation headquartered in Virginia that develops and manufactures De-NOx honeycomb catalysts and industrial ceramics. Prior to December 31, 2015, we became aware of operational issues related to Catalon. It was determined that such issues might have affected Catalon’s prior operations, as well as its ability to conduct business in the future. As such, we are expected to cancel the shares issued to the 84.5% original owners of Catalon in accordance with the terms “General Steel”,of the “Company”, “we”, “our”agreement. Because we have decided to dispose of Catalon in the near future, we are presenting Catalon’s remaining assets after impairment charges and “us” all referliabilities as held for sale as of December 31, 2015 in the consolidated financial statements. See Note 21 in the accompanying notes to General Steel Holdings, Inc. consolidated financial statements.
Steel Related SubsidiariesOur remaining steel business is primarily comprised of Tianjin Shuangsi, a trading company that mainly sources overseas iron ore for steel mills we acquired 100% equity interest of on February 16, 2016.
As a result of the restructuring, our former steel-related subsidiaries, including Longmen Joint Venture (prior to December 30, 2015), Maoming Hengda and IoT Technology Companyour recently acquired non steel-related subsidiary, Catalon, all of which represented over a majority of our consolidated sales and operations, are presented as single-line items as assets held for sale and discontinued operations in our Consolidated Balance Sheets and Consolidated Statements of Operations.
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The following are percentages of operations held for sale to the consolidated totals for major financial statement amounts:
For the year ended | For the year ended | |||||||
December 31, 2015 | December 31, 2014 | |||||||
Sales | 100.0 | % | 100.0 | % | ||||
Cost of goods sold | 100.0 | % | 100.0 | % | ||||
Provision for income taxes | 100.0 | % | 100.0 | % | ||||
Net loss | 99.2 | % | 89.8 | % | ||||
Net loss attributable to General Steel Holdings, Inc. | 98.6 | % | 83.6 | % |
December 31, 2015 | December 31, 2014 | |||||||
Current assets | 71.2 | % | 99.8 | % | ||||
Other assets | 55.6 | % | 100.0 | % | ||||
Total assets | 56.6 | % | 99.9 | % | ||||
Current liabilities | 39.9 | % | 100.0 | % | ||||
Noncurrent liabilities | -% | 100.0 | % | |||||
Total liabilities | 39.9 | % | 100.0 | % |
Recent Developments
On July 18, 2016, we received a notice from the staff of the New York Stock Exchange (the “NYSE”) stating that the NYSE has determined to commence proceedings to delist our common stock, and our common stock would be suspended at the close of trading on the same date.
In the notice and in a public announcement distributed by the NYSE on July 18, 2016, the NYSE stated that we were previously deemed below compliance with the NYSE’s continued listing standard requiring listed companies to maintain either (i) at least $50 million in stockholders’ equity or (ii) at least $50 million in total market capitalization on a 30 trading day average basis. The NYSE noted that they had previously accepted our 18-month plan to regain compliance with the listing standard. However, the NYSE stated that as of the expiration of the plan period on July 9, 2016, we were unable to demonstrate that we had regained compliance with the applicable continued listing standard. The NYSE also included in its public announcement that we were delayed in filing with the SEC of our Annual Report on Form 10-K for the year ended December 31, 2015 and our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2016 and June 30, 2016.
We appealed the delisting determination by submitting a request for review in writing to the Committee of the Board of Directors of the NYSE.
Prior to the NYSE notice, we had presented to the NYSE the steps we intended to take to address the deficiencies raised by the staff at NYSE. We reached an agreement with a number of our current debt holders to forgive existing debt and/or exchange debt for equity, which when completed, would have increased our stockholders’ equity to at least $50 million thereby satisfying the NYSE’s continued listing standard. However, there can be no assurance that we will be successful in our appeal and our request for continued listing will be granted.Subsidiaries
We presently have controlling interests in three steel-related subsidiariesone trading subsidiary and one IoT Technology company:internet-of-things subsidiary under continuing operations:
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Our Company, together with our subsidiaries,subsidiary and majority owned subsidiaries and variable interest entitysubsidiary are referred to as the “Group.” Longmen Joint Venture, which is currentlywas consolidated into our Company representsthrough December 30, 2015, represented the majority of our revenue and assets.revenue. It was determined to be a variable interest entity in which we arewere 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:
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”), an unrelated third party, 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
On December 30, 2015, we sold 100% of its long-term assets on an annual basis, or uponour equity interest in General Steel (China) as a triggering event which would require an assessment sooner, and ispart of the opinion that the fair value of the property, plant and equipment as supported by the operating lease approximates its current carrying value.our plan to divest our steel business.
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 beas a Variable Interest Entity (“VIE”) and we are the primary beneficiary.
Currently, Longmen Joint Venture hashad five branch offices, four consolidated subsidiariessubsidiaries/VIE and one entity in which it has a noncontrolling interest. It employsemployed approximately 8,400 full-time workers. In addition to steel production, Longmen Joint Venture operatesoperated transportation services through its Changlong Branch, located in Hancheng city, Shaanxi Province. Changlong Branch ownsowned 177 vehicles and provides transportation services exclusively to Longmen Joint Venture.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 weLongmen Joint Venture is estimated to have approximately a 72% share of the Xi’an market for rebar.
An established regional network of approximately one hundred and twelvetwenty-eight distributors, together with smaller distributors and eightthree 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 of 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
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On April 29, 2011, a 20-year Unified Management Agreement (“the Agreement”) was entered into between the Company, the Company’s 60%-owned subsidiary Shaanxi Longmen Iron and Steel Co., Ltd. (“Longmen Joint Venture”), Shaanxi Coal and Chemical Industry Group Co., Ltd. (“Shaanxi Coal”) and Shaanxi Iron and Steel Group (“Shaanxi Steel”). Shaanxi Steel is the controlling shareholder of Shaanxi Longmen Iron and Steel Group Co., Ltd (“Long Steel Group”) which is the non-controlling interest holder in Longmen Joint Venture, and Shaanxi Coal, a state owned entity, is the parent company of Shaanxi Steel. Under the terms of the Agreement, all manufacturing machinery and equipment of Longmen Joint Venture and the $605.8 million (or approximately RMB 3.7 billion) of the constructed iron and steel making facilities owned by Shaanxi Steel, which includes one 400 m2 sintering machine, two 1,280 m3 blast furnaces, two 120 ton converters and some auxiliary systems, are managed collectively as a single virtual asset pool (“Asset Pool”). Longmen Joint Venture manages the Asset Pool as the principal operating entity and is responsible for the daily operations of the new and existing facilities. The Agreement leverages each of the parties’ operating strengths, allowing Longmen Joint Venture to derive the greatest benefit from the cooperation and the newly constructed iron and steel making facilities. At the designed efficiency level, the facilities contribute three million tons of crude steel production capacity per year.
Longmen Joint Venture payspaid 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 iswas 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 iswas 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 hashad been no adjustment to the Agreement from its inception to the present time nor intention to make future adjustment byand disposition.. The Agreement did not preclude the Company and Shaanxi Steel.from selling its 60% ownership interest of Longmen Joint Venture.
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 holdswe held 4 out of 7 seats, requiresrequired 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 constitutesconstituted an arrangement that involves a lease which meets certain of the criteria of a capital lease and therefore the assets constructed by Shaanxi Steel arewere 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, iswas accounted for by Longmen Joint Venture as a derivative financial instrument at fair value. See Notes 2 “Summary
Due to recurring losses and the deterioration of significantsteel industry conditions, management impaired the fair value of Longmen Joint Venture’s long-lived assets in the second quarter of 2015, and an impairment charge of approximately $974 million was recorded (Also see critical accounting policies”, 15 “Capital lease obligations” and 16 “Profit sharing liability”policies – impairment of long-lived assets below).
In November 2010,On December 30, 2015, we brought onlinesold our equity interest in General Steel (China) Co., Ltd, which included our variable interest entity, Longmen Joint Venture, to Victory Energy Resource Limited, 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 onlineHK registered company indirectly-owned by Henry Yu, the Company's Chairman, 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.related party for $1million.
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.
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Tianjin General Shengyuan IoT Technology Co., Ltd
Management evaluates the fair value of Maoming Hengda’s long-lived assets on an annual basis, or upon a triggering event which would require an assessment sooner. As of December 31, 2015, Management is of the opinion that the fair value of the property, plant and equipment exceeded their current carrying value based on a third-party valuation.
On February 10, 2015,March 21, 2016, we reachedsold our equity interest in Maoming Hengda to Tianwu Tongyong (Tianjin) International Trade Co., Ltd, ("Tianwu Tongyong"), for which the Company already had 32% equity interest in, for RMB 328.0 million in cash or approximately $50.5 million and with this transaction completed the full divestiture of our steel manufacturing and distribution business was completed.
Tongyong Shengyuan (Tianjin) Technology Development Co., Ltd
We established a definitive agreement (“the Agreement”) to form a joint venture with a team of RFID experts (the “Expert Team”)subsidiary wholly owned by General Steel Investment Co., to develop and commercialize RFID technology data solutions. The joint venture entity named Tianjin GeneralLtd., Tongyong Shengyuan IoT(Tianjin) Technology Development Co., Ltd. (“GeneralTongyong Shengyuan”) in June 2015. Tongyong 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 stage and production of UHF RFID tags. Supporting Mr. Au and acting ashas no revenues or significant operating expenses during 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,year ended December 31, 2015 as well as finished goodsthrough the reporting date of this Form 10K.
Catalon Chemical Corp.
In October 2015, we acquired an 84.5% equity interest in Catalon Chemical Corp. (“Catalon”), a Delaware corporation headquartered in Virginia that develops 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,manufactures De-NOx honeycomb catalysts and goods, thereby greatly enhancing its customers’ administration and planning processes,industrial ceramics. Prior to December 31, 2015, we became aware of some operational issues related to Catalon. It was determined that such issues might have affected Catalon’s prior operations as well as asset trackingits ability to conduct business in the future. As such, we are expected to cancel the shares issued to the 84.5% original owners of Catalon in accordance with the terms of the agreement at the end of 2016. Because we have decided to dispose of Catalon in the near future, we are presenting Catalon’s remaining assets, after impairment charges, and supply chain management.liabilities as held for sale as of December 31, 2015 in the consolidated financial statements. See Note 21 in the accompanying notes to consolidated financial statements.
Steel Production Capacity Information Summary by SubsidiariesSubsidiary
Annual Production Capacity (metric tons) | General Steel (China) (1) | Longmen Joint Venture | Maoming Hengda (1) | General Steel (China) (1) | Longmen Joint Venture | Maoming Hengda (1) | ||||||||||
Crude Steel | - | 7 million | - | - | 7 million | - | ||||||||||
Processing | 400,000 | 5 million | 400,000 | 400,000 | 5 million | 400,000 | ||||||||||
Main Products | Hot-rolled sheet | Rebar/High-speed wire | Rebar | Hot-rolled sheet | Rebar/High-speed wire | Rebar | ||||||||||
Main Application | Light agricultural vehicles | Infrastructure and construction | Infrastructure and construction | Light Agricultural vehicles | Infrastructure and construction | Infrastructure and construction |
(1) | The production facilities of General Steel (China) and Maoming Hengda |
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, 2014,2015, approximately 24.7%15.1% of our sales were to five customers.one customer from our disposed operations. We believe that revenue derived from our current and future large customers of our trading business will continue to represent a significant portion of our total revenue.revenue going forward.
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.
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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 strongconsistent demand for our products driven by these and many otherthe China construction and infrastructure projects.projects despite pricing challenges under the current industry climate. 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.efforts through our trading business customer.
Supply of Raw Materials
The primary raw materials we use for steel production areAfter our restructuring, our remaining businesses primarily trade iron ore, coke, hot-rolled steel coilnickel-iron-manganese alloys, 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 ourother steel-related products. We do not anticipate any shortage on these 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:
Industry Environment
Despite the growth in 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 shiftby shifting 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.overcapacity.
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 cutreduce 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.industry.
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.
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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, thewhich was our major facility, of General Steel, has beenis 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, 2014,2015, we had approximately 8,50576 full-time employees.
Executive Officers of the Registrant
The following sets forth certain information as of March 25, 2015 concerning our executive officers.
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).
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:
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:
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.financing. 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.
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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 itIt 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.
The divestiture of our steel business and the limited operating history of our newly acquired entity may adversely affect our growth and profitability.
We sold our entire equity interest in General Steel (China) Co., Ltd. together with Shaanxi Longmen Iron and Steel Co., Ltd. (“Longmen Joint Venture”) to Victory Energy Resource Limited, a HK registered company indirectly-owned by Henry Yu, our Chairman, in December 2015. In addition, we sold our entire equity interest in Maoming Hengda Steel Company, Ltd. ("Maoming Hengda") to a non-related party and completed the divestiture of our steel manufacturing business due to certain near-term challenges in the steel sector. The majority of our operating assets and businesses were divested at the end of 2015 and in the first quarter of 2016 and our only operating entity, Tianjin Shuangsi, a trading company that primarily trades iron ore, nickel-iron-manganese alloys, and other steel-related products, which we acquired in February 2016, has a limited operating history. We are still in an early phase, and are just beginning to implement our business plan. The likelihood of our success should be considered in light of the problems, expenses, difficulties, complications and delays usually encountered by companies in their early stages of development, with low barriers to entry. We may not be successful in attaining the objectives necessary for us to overcome these risks and uncertainties. There can be no assurance that we can properly develop and operate our newly acquired entity and as a result our future growth and profitability may be adversely effected.
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.
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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 financingalternatives, 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 riceprice 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.SEC. 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.
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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.
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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.
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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.
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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.
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Under the New 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.
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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.
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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, Chief Executive Officer and Chairman of the Board, beneficially owns approximately 45.0% of our common stock.stock in addition to Series A Preferred Stock which carries a voting power of 30% of the combined voting power of our common stock and preferred stock while outstanding. 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.
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Our failureThere can be no assurance that we will be successful in our appeal from the NYSE’s decision to comply with conditions required forcommence proceedings to delist our common stock to be listed on the New York Stock Exchange (“NYSE”) could result inand delisting of our common stock from the NYSE andcould have a significant negative effect on the value and liquidity of our securities as well as other matters.
On January 9, 2015, weWe received a notice from NYSE Regulations, Inc. stating that wethe NYSE has determined to commence proceedings to delist our common stock, and our common stock was suspended from trading at the close of trading on July 18, 2016. We were previously deemed 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)50,000,000) over a consecutive 30 trading-day period. We haveThe NYSE also included in the past not beenits public announcement that we were delayed in compliancefiling with the continued listing standard set forth in Section 802.01CSEC of our Form 10-K for the Manual, which is triggered whenyear ended December 31, 2015 and our Form 10-Q for 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.quarter end March 31, 2016.
We are required to comply with allhave submitted a written request appealing the delisting determination and have requested that such determination be reviewed by a Committee 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 fromBoard of Directors of the NYSE but cannot provide anyby submitting a request for review in writing. However, there is no assurance that our appeal will be successful. Any such appealsuccessful and our request for continued listing will not stay the decision to delist our shares.be granted. 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.
General Steel (China)
The propertiesAfter the disposition of General Steel (China) consist of manufacturing sites and office buildings locatedMaoming Hengda 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 ofMarch 2016, we no longer have the land use rights for the parcels of land identified in the chart below.disclosed here.
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.
*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 |
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.
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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.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
OurUntil July 18, 2016, our common stock iswas listed on the New York ExchangeNYSE under the symbol “GSI”. As of the close of trading on such date, our common stock was suspended from the NYSE and is now quoted on the “pink sheets.” We have timely submitted a written request to appeal the delisting determination and such determination will be reviewed by a Committee of the Board of Directors of the NYSE. Our common stock will remain suspended until a determination has been made by the Committee of the Board of Directors of the NYSE with respect to our listing.
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 | 1ST QTR | 2ND QTR | 3RD QTR | 4TH QTR | ||||||||||||||||||||||||
2013 | ||||||||||||||||||||||||||||||||
2015 | ||||||||||||||||||||||||||||||||
High | $ | 1.35 | $ | 1.12 | $ | 1.04 | $ | 1.09 | $ | 5.15 | $ | 5.15 | $ | 4.15 | $ | 3.50 | ||||||||||||||||
Low | $ | 0.94 | $ | 0.94 | $ | 0.83 | $ | 0.85 | $ | 3.15 | $ | 3.45 | $ | 3.00 | $ | 0.83 | ||||||||||||||||
2014 | ||||||||||||||||||||||||||||||||
High | $ | 1.47 | $ | 1.32 | $ | 1.19 | $ | 1.06 | $ | 7.35 | $ | 6.6 | $ | 5.95 | $ | 5.30 | ||||||||||||||||
Low | $ | 0.90 | $ | 0.90 | $ | 0.97 | $ | 0.64 | $ | 4.50 | $ | 4.50 | $ | 4.85 | $ | 3.20 |
As of April 8, 2015,August 25, 2016, there were approximately 319335 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.
21 |
OVERVIEW
We were founded onOn November 4, 2015, our Board of Directors (the "Board"), including the strategyaudit committee, committed to merge, partner with,a plan and acquire State-owned enterprisesauthorized our management to pursue the potential sale of all our ownership interest in Maoming Hengda 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 isin order to unlock the largest. Locatedhidden value in Shaanxi province,Maoming Hengda's land assets, as well as divest from and restructure our steel business. On December 30, 2015, we sold our equity interest in General Steel (China) Co., Ltd and Longmen Joint Venture. On March 21, 2016, we sold our equity interest in Maoming Hengda and completed the divestiture of our steel business as planned. As a result, General Steel (China) Co., Ltd. which included Longmen Joint Venture contributed approximately 99.8% and 99.5% of our total revenuesubsidiaries’ financial information was presented as operation disposed and Maoming Hengda’s financial information was presented as operations to be disposed and assets and liabilities held for sale for the years ended December 31, 2015 and 2014 and 2013 fiscal years, respectively.in the consolidated financial statements.
Fiscal year 2014 financial highlights:
Fiscal year 2014 operational highlights:
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) |
· | We aim to expand |
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:
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
Industry Environment
Despite demand growth experienced throughoutThe continuing operations mainly consists of our holding companies since we completed 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 thedivestiture of our 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 mechanismsbusiness as planned 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,December 30, 2015 and the Chinese government continues to encourage industry consolidation. The Chinese central government has had a long-stated goal to consolidate 60%March 21, 2016 sale and disposition 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:
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 OPERATIONSMaoming Hengda, respectively.
Statements of Operations for the years ended December 31, 20142015 and 2013:2014:
(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 | % |
(In thousands except share data) | 2015 | 2014 | Change | Percentage Change | ||||||||||||
Selling, General and Administrative Expenses | $ | (10,811 | ) | $ | (8,188 | ) | $ | (2,623 | ) | 32.0 | % | |||||
Change in Fair Value of Profit Sharing Liability | - | - | - | 0.0 | % | |||||||||||
Loss from Operations | (10,811 | ) | (8,188 | ) | (2,623 | ) | 32.0 | % | ||||||||
Other (Expense) Income, net | (3 | ) | 216 | (219 | ) | (101.4 | )% | |||||||||
Loss Before Provision for Income Taxes and Noncontrolling Interest | (10,814 | ) | (7,972 | ) | (2,842 | ) | 35.6 | % | ||||||||
Provision for Income Taxes | - | - | - | 0.0 | % | |||||||||||
Loss from Continuing Operations | (10,814 | ) | (7,972 | ) | (2,842 | ) | 35.6 | % | ||||||||
Net Loss from Operations to Be Disposed, Net of Application Income Taxes | (13,680 | ) | (1,658 | ) | (12,022 | ) | 725.1 | % | ||||||||
Net Loss from Operations Disposed, Net of Application Income Taxes | (1,279,820 | ) | (68,646 | ) | (1,211,174 | ) | 1,764.4 | % | ||||||||
Net Loss | (1,304,314 | ) | (78,276 | ) | (1,226,038 | ) | 1,566.3 | % | ||||||||
Less: Net Loss Attributable to Noncontrolling Interest from Continuing operations | - | - | - | 0.0 | % | |||||||||||
Less: Net Loss Attributable to Noncontrolling Interest from Operations to Be Disposed | (1,933 | ) | (53 | ) | (1,880 | ) | 3543.3 | % | ||||||||
Less: Net Loss Attributable to Noncontrolling Interest from Operations Disposed | (513,092 | ) | (29,500 | ) | (483,592 | ) | 1,639.3 | % | ||||||||
Net Loss Attributable to General Steel Holdings, Inc. | $ | (789,289 | ) | $ | (48,723 | ) | $ | (740,566 | ) | 1,520.0 | % | |||||
Net Loss | $ | (1,304,314 | ) | $ | (78,276 | ) | $ | (1,226,038 | ) | 1,566.3 | % | |||||
Foreign Currency Translation Adjustments | 93,824 | 590 | 93,234 | 15,802.4 | % | |||||||||||
Comprehensive Loss | (1,210,490 | ) | (77,686 | ) | (1,132,804 | ) | 1,458.2 | % | ||||||||
Less Comprehensive Loss Attributable to General Steel Holdings, Inc. | (483,442 | ) | (28,652 | ) | (454,790 | ) | 1,587.3 | % | ||||||||
Comprehensive Loss Attributable to General Steel Holding, Inc. | $ | (727,048 | ) | $ | (49,034 | ) | $ | (678,014 | ) | 1,382.7 | % | |||||
Weighted Average Number of Shares | 13,749 | 11,169 | 2,580 | 23.1 | % | |||||||||||
Loss Per Share – Basic and Diluted | ||||||||||||||||
Continuing Operations | $ | (0.79 | ) | $ | (0.71 | ) | $ | (0.08 | ) | 11.3 | % | |||||
Operations to be disposed | (0.85 | ) | (0.14 | ) | (0.71 | ) | 507.1 | % | ||||||||
Operations disposed | (55.77 | ) | (3.50 | ) | (52.27 | ) | 1,493.4 | % | ||||||||
Net Loss | $ | (57.41 | ) | $ | (4.35 | ) | $ | (53.06 | ) | 1,219.8 | % |
22 |
SalesGeneral and Administrative Expenses (“G&A”)
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, 20142015 compared with fiscal year ended December 31, 20132014
(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 | )% |
(in thousands)
December 31, 2015 | December 31, 2014 | Change % | ||||||||||
General and administrative expenses | $ | (10,811 | ) | $ | (8,188 | ) | 32.0 | % |
Our primary cost of goods sold is the cost of raw materials, such as iron ore, coke, alloy and scrap steel. The costs of iron ore and coke account for approximately 65.8% of our total cost of sales. Cost of goods sold decreasedG&A expenses increased by $211.132.0% to $(10.8) 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 as2015, compared to $(8.2) million for the same period in 2013.2014. The increase was mainly due to the increase in consulting expenses of approximately $3.8 million in related to the shares that we issued to a consulting firm for business growth and strategic consulting.
As such, the average costs of rebar manufactured decreased 15.2% to approximately $425.8 per ton during the year ended December 31, 2014(Loss) Income from approximately $501.9 per ton in the same period 2013.
Gross LossOperations
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, 20142015 compared with fiscal year ended December 31, 20132014
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 | )% |
(in thousands) | ||||||||||||
2015 | 2014 | Change % | ||||||||||
Loss from operations | $ | (10,811 | ) | $ | (8,188 | ) | 32.0 | % |
Loss from operations for the year ended December 31, 20142015 was $(6.7)$(10.8) million as compared to $34.4a loss of $(8.2) million income from operations for the same period in 2013.2014. The decreaseincrease in incomeloss from operations was predominantly due to decreasethe increase in the gain from change in fair value of profit sharing liability offset by the decrease in gross loss and SGG&A expenses.expenses as discussed above.
Total Other Income (Expense), Net
Fiscal year ended December 31, 20142015 compared with fiscal year ended December 31, 20132014
Other Income (Expense)
(in thousands) | ||||||||||||
2015 | 2014 | Change % | ||||||||||
Interest income | - | 315 | (100.0 | )% | ||||||||
Finance/interest expense | (3 | ) | (99 | ) | (97.0 | )% | ||||||
Total other (expense) income, net | $ | (3 | ) | $ | 216 | (101.4 | )% |
(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 | )% |
23 |
Total other expense,(expense) income, net, for the year ended December 31, 2014 were $71.3 million2015 was $3 thousand, a 101.4% decrease compared to $76.7$0.2 million other income for the same period in 2013.2014. 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$0.3 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.
Income Taxes
For the yearsyear ended December 31, 20142015 and 2013,2014, we had a totalno tax provision from our profitable subsidiaries of $0.3 million and $0.4 million, respectively. For the years ended December 31, 2014 and 2013, wefor income taxes. We evaluated the deferred tax assets and concluded the net operating loss may not be fully realizable and providedto provide 100% valuation allowance for the deferred tax assets.assets for our continuing operations. No deferred income tax benefit was recorded for the year ended December 31, 20142015 as the resulting deferral of tax assets had beenbeing fully reserved because the benefit was not considered to be realizable due to recent historical experience.
For the yearsNet Loss from Continuing Operations
Fiscal year 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 years2015 compared with fiscal year ended December 31, 2014 and 2013 were mainly
(in thousands) | ||||||||||||
2015 | 2014 | Change % | ||||||||||
Net loss from continuing operations | $ | (10,814 | ) | $ | (7,972 | ) | 35.6 | % |
Net loss from continuing operations for the year ended December 31, 2015 was $(10.8) million as compared to a loss of approximately $(8.0) million for the same period in 2014. The increase in loss from operations was predominantly due to the increase of consulting expenses of approximately $3.8 million related to the shares that we issued to a consolidated loss before income tax while we provided 100% valuation allowanceconsulting firm for the deferred tax assets at subsidiaries with lossesbusiness growth and incurred income tax expenses in our profitable subsidiaries.strategic consulting.
Net Loss from Operations to be Disposed
Fiscal year ended December 31, 20142015 compared with fiscal ended December 31, 2014
(in thousands) | ||||||||||||
2015 | 2014 | Change % | ||||||||||
Net loss from operations to be disposed, net of applicable income taxes | $ | (13,680 | ) | $ | (1,658 | ) | 725.1 | % |
Net loss from operations to be disposed for the year ended December 31, 20132015 was $(13.7) million as compared to a loss of $(1.6) million for the same period in 2014. The increase in loss from operations to be disposed was predominantly due to the impairment charge of $12.2 million from our Catalon acquisition after we became aware of operational issues related to Catalon, which we determined impaired the future viability of Catalon.
( in thousands) | 2014 | 2013 | Change | Percentage Change | ||||||||||||
Net loss | $ | (78,276 | ) | $ | (42,625 | ) | $ | (35,651 | ) | 83.6 | % |
Net Loss Attributablefrom Operations Disposed
Fiscal year ended December 31, 2015 compared with fiscal ended December 31, 2014
(in thousands) | ||||||||||||
2015 | 2014 | Change % | ||||||||||
Net loss from operations to be disposed, net of applicable income taxes | $ | (1,279,820 | ) | $ | (68,646 | ) | 1,764.4 | % |
Net loss from operations disposed for the year ended December 31, 2015 was approximately $(1.3) billion as compared to a loss of approximately $(70.0) million for the same period in 2014. The increase in loss from our Longmen Joint Venture operations was a result of a significant decrease in rebar selling price despite an increase of sales volume during the period.
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For the year ended 2015, sales from operations disposed amounted to $1.5 billion, a decrease of $0.7 billion or 32.6% compared to $2.3 billion for the year ended of 2014. The decrease was mainly due to a significant decrease in rebar selling price despite an increase of sales volume during the period.
For the year ended of 2015, cost of goods sold from operations to be disposed amounted to $1.7 billion, a decrease of $0.6 billion or 25.1% compared to $2.3 billion for the year ended of 2014. The decrease was mainly driven by the decreased unit costs of raw materials which is consistent with the decrease in selling price.
As a result, our gross loss from operations disposed in 2015 was $(187.2) million, an increase in loss of $168.0 million compared to a gross loss of $19.2 million in 2014. Along with a $3.8 million increase in selling, general and administrative expenses mainly due to increase in freight cost along with the increase in sales volume, an impairment charge of $974 million in our Longmen Joint Venture’s long-lived assets, a decrease in $20.6 million gain from change in fair value of profit sharing liabilities and $1.0 million increase in finance/interest expense, net loss from operations disposed increased to $(1.3) billion as compared to a $(68.6) million loss for the same period in 2014.
Net Loss attributable to General Steel Holdings, Inc.
Fiscal year ended December 31, 20142015 compared to fiscalwith the year ended December 31, 20132014
( in thousands) | 2014 | 2013 | Change | Percentage Change | ||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
2015 | 2014 | Change % | ||||||||||||||||||||||||||
Net loss | $ | (78,276 | ) | $ | (42,625 | ) | $ | (35,651 | ) | 83.6 | % | $ | (1,304,314 | ) | $ | (78,276 | ) | 1,566.3 | % | |||||||||
Less: Net loss attributable to noncontrolling interest | (29,553 | ) | (9,609 | ) | (19,944 | ) | 207.6 | % | ||||||||||||||||||||
Less: Net loss attributable to the noncontrolling interest from continuing operations | - | - | - | |||||||||||||||||||||||||
Less: Net loss attributable to the noncontrolling interest from operations to be disposed | (1,933 | ) | (53 | ) | 3,543.3 | % | ||||||||||||||||||||||
Less: Net loss attributable to the noncontrolling interest from operations disposed | (513,092 | ) | (29,500 | ) | 1,639.3 | % | ||||||||||||||||||||||
Net loss attributable to General Steel Holdings, Inc. | $ | (48,723 | ) | $ | (33,016 | ) | $ | (15,707 | ) | 47.6 | % | $ | (789,289 | ) | $ | (48,723 | ) | 1,520.0 | % |
Net loss attributable to us for the year ended December 31, 2014 increased to $48.72015 was $(789.3) million as compared to $33.0$(48.7) million for the year ended December 31, 2013.same period in 2014. The increase in net loss attributable to us for the year ended December 31, 20142015 was mainly a result of a decrease in $83.6 million in the change in fair valueloss from our Longmen Joint Venture operations, which we disposed 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 endedon December 31, 2014 as compared to the same period in 2013.30, 2015.
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, 2014,2015, our current liabilities exceeded the current assets by approximately $1.3 billion.$75.9 million. Given our expected capital expenditureexpenditures in the foreseeable future together with our cash flow from trading operations, we have comprehensively considered our available sources of funds as follows:
· | Financial support and credit guarantee from related parties; and |
· |
Based on the above considerations, our Board of Directors is of the opinion that we havemay not be able to obtain sufficient funds to meet our working capital requirements and debt obligations as they become due.due over the twelve months from the balance sheet date. However, this opinion is based onwe have completed the demanddivestiture of our products, economic conditions,steel manufacturing business as planned on terms favorable to the overcapacity issueCompany by reducing our net deficiency and although recently acquired businesses are not yet profitable or proven, they are not expected to result in thenet working capital deficiency as compared to our 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.
business.
As of December 31, 2014,2015, 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.$4 thousand.
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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 PayableLoans – Other
As of December 31, 2014,2015, we had $661.6$4.1 million in short-term notes payables,loans - other, of which $0.5 million are held for sale. These were third party loans 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 interestdue 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.demand.
We are able to repay our short-term notes payables and short term bank loans - other upon maturity using available capital resources.
For more details about our debts, pleasedebt, see Note 10 in our Notes to the consolidated financial statements included in this Annual Report.report.
For more details about our related party debt financing, see Note 2019 in our Notes to the consolidated financial statements included in this Annual Report.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 courseIn view 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 reactionthe Company strategically accelerated its business transformation. On November 4, 2015, our Board of Directors (the "Board"), including the audit committee, committed to this challenging market, we are proactively reviewing our strategya plan and asset portfolioauthorized the Company's management to pursue the potential sale of all its ownership interest in Maoming Hengda and seekingLongmen Joint Venture in order to restructure low-efficient, non-coreunlock the hidden value in Maoming Hengda's land assets, as well as idle land resourcesdivest from and restructure the steel business. On December 30, 2015, we sold its entire equity interest in General Steel (China) Co., Ltd. together with Longmen Joint Venture to unlock hidden fair value.Victory Energy Resource Limited, a HK registered company indirectly-owned by Henry Yu, our Chairman. On March 21, 2016, we sold our entire equity interest in Maoming Hengda to a related party and completed the divestiture of its steel business as planned. Accordingly, Maoming Hengda’s assets and liabilities were presented as held for sale as of December 31, 2015 in our consolidated financial statements.
Our remaining business is primarily comprised of Tianjin Shuangsi, a trading company that mainly sources overseas iron ore for steel mills. We aimacquired 100% equity interest of Tianjin Shuangsi on February 16, 2016.
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As of December 31, 2015, the Company’s current liabilities was $78.2 million. However, the Company has consummated the following transactions subsequent 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:year end which summarized as follows:
The cash flows, taking these transactions into consideration as well as the expected cash needs to support the operations, is expected to yield the following:
Cash inflow (outflow) (in thousands) | ||||
For the twenty months ended August 29, 2017 | ||||
Current liabilities as of December 31, 2015 | $ | (78,161 | ) | |
Deconsolidation of current liabilities in Maoming Hengda in March 2016 | 28,820 | |||
Conversion of debt into common stock and Series B Preferred Stock in August 2016 | 5,313 | |||
Reduction of other payables - related parties after execution of offset agreements | 40,412 | |||
Estimated operating expenses for the twenty months ended August 29, 2017 | (1,200 | ) | ||
Net projected change in cash for the twenty months ended August 29, 2017 | $ | (4,816 | ) |
The Company’s net projected outflow for the twenty months ended August 29, 2017 is expected to be at approximately $4.8 million. The Company is expected to complete the following plan to remediate our projected cash shortfall for the twenty months ended August 29, 2017:
2) | The Company is expected to raise approximately $2 to $3 million capital through a private placement. |
The majority of the Company’s operating assets and businesses have been divested at year end and in the first quarter of 2016 as previously disclosed. The Company’s only operating entity is a new trading company on February 16, 2016 which has limited operating history. Management has implementedcommenced a strategy to raise capital which will be utilized to fund other strategic acquisitions. However, there can be no certainty that these additional financings will be available on acceptable terms, or at all and that future strategic acquisitions will generate enough cash or generate sufficient cash prior to the following plans that are intendedCompany utilizing its cash on hand. If management is unable to mitigateexecute this plan, there would likely be a material adverse effect on the conditions or events that raiseCompany’s business. As a result, management has substantial doubt about the Company’s ability to continue as a going concern.of the company.
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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 activitiesActivities
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, 2013.2015 and 2014 was $16.6 million compared to $137.9 million net cash provided by operating activities, respectively. This change was mainly due to the combination of the following factors:
· | The impact of some non-cash items included in net loss from continuing operations of $7.9 million for the year ended December 31, 2015, compared to $1.1 million in the same period in 2014. The non-cash items include the following: |
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:
- | Stock issued for service and compensation; |
· | The primary reasons for the material fluctuations in cash inflow were as follows: |
- | ||
The other primary reasons for the material fluctuations in cash inflow from operations are as follows:
· | The primary reasons for material fluctuations in cash outflow were as follows: |
- | ||
Other | ||
The primary reasons for the material fluctuations in cash outflows are as follows:
- | ||
Investing activities
Net cash used inprovided by investing activities was $229.0 million and $105.8$151.2 million for the year ended December 31, 2014 and 2013, respectively. Cash inflow from2015 compared to net cash used in investing activities of $229.0 million for the year ended December 31, 2014. Fluctuation in cash inflow between the two periods was mainly camedue to the net cash provided by the investing activities from operations to be disposed and from our disposed entity, Longmen Joint Venture, from January 1, 2015 to December 30, 2015 resulting in the decrease in ourof restricted cash. Restricted cash was 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 bybank. During the increase in loansperiod, Longmen Joint Venture needed less note payable 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.settle with suppliers.
Financing activities
Net cash provided byused in financing activities was $70.6$148.7 million for the year ended December 31, 20142015 compared to $254.0$70.6 million provided by financing activities for the year ended December 31, 2013. The2014. Compared to the same period in 2014, the increase of cash inflow from financing activities was mainly driven by the following:
The cash inflow was offset by the following cash outflow:borrowing from short term unrelated parties loans.
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.
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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 20142015 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, 20142015 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.
Principal due by period | ||||||||||||||||||||
Less than | ||||||||||||||||||||
Contractual obligations | Total | 1 year | 1-3 years | 3- 5 years | 5 years after | |||||||||||||||
(in thousands) | ||||||||||||||||||||
Short-term loan – other | $ | 4,061 | $ | 4,061 | $ | - | $ | - | $ | - | ||||||||||
Other payables - related parties | 64,563 | 64,563 | - | - | - | |||||||||||||||
Total | $ | 68,624 | $ | 68,624 | $ | - | $ | - | $ | - |
Critical Accounting Policies
Management’s discussion and analysis of its financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted accounting principles in the United States. Our consolidated financial statements reflect the selection and application of accounting policies which require management to make significant estimates and judgments. See Note 2 to our consolidated financial statements,Consolidated Financial Statements “Summary of Significant Accounting Policies.”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 areour Company is the ultimate primary beneficiary, and the VIE’s subsidiaries.
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The consolidated financial statements have been prepared on a historical cost basis to reflect the financial position and results of operations of ourthe Company in accordance with the accounting principles 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% directdirectly owned subsidiary. Upon entering into the Unified Management Agreement, on April 29, 2011, Longmen Joint Venture was re-evaluatedevaluated by usour Company to determine if Longmen Joint Venture is a VIE and if we are the primary beneficiary.
Based on the projected profit in this entity and future operating plans, Longmen Joint Venture’sVenture ’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 haswe have both of the following characteristics:
a. | The power to direct the activities of the VIE that most significantly impact the VIE’s economic performance; and |
b. | The obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. |
A Supervisory Committee was formed during the negotiation of the Unified Management Agreement. Given there is both a Supervisory Committee and a Boardboard of Directorsdirectors with respect to Longmen Joint Venture, , the powers (rightsrights and roles)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.formed. The Supervisory Committee, in which we hold 2 out of 4 seats, requires a ¾ majority vote, while the Boardboard of Directors, ondirectors, 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 Boardboard of directors and the Supervisory Committee, the Board prevails,board of directors prevails. In other words, the Supervisory Committee is considered to be subordinate to the Board.board of directors. Thus, the Boardboard of Directorsdirectors of Longmen Joint Venture continues to be the controlling decision-making body with respect to Longmen Joint Venture. We which controlscontrol 60% of the voting rights of the Boardboard of Directors,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, we and Shaanxi Steel may provide such support on a discretionary basis or as needed in the future. See Note 2(d) Liquidity.future, which could expose us to a loss.
WeAs discussed in Note 2(c) to the consolidated financial statements – Consolidation of VIE, we have the obligation to absorb losses and the rights to receive benefits based on the profit allocation as stipulated by the Unified Management Agreement that are significant to the VIE.Agreement. 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.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 have the power to direct the activities of the VIE. 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.assessment.
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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, 20142015 and 2013.2014.
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, 20142015 and 2013.2014.
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 actacts as an agent between the suppliers and the customers. The trading arrangements are such that the suppliers are the primary obligors,obligators, 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 retained in accordance with ASC 605-45.
Accounts receivable, other receivables and allowanceOperations held for doubtful accountssale
Accounts receivable include trade accounts due from customersIn accordance with ASU No. 2014-08, Reporting Discontinued Operations and other receivables from cash advancesDisclosures of Disposals of Components of an Entity, a disposal of a component of an entity or a group of components of an entity is required to 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 determinebe reported as discontinued operations if the bad debt allowance is adequate,disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and adjustsfinancial results when the allowance when necessary. Delinquent accountcomponents of an entity meets the criteria in paragraph 205-20-45-1E to be classified as held for sale. When all of the criteria to be classified as held for sale are met, including management, having the authority to approve the action, commits to a plan to sell the entity, the major current assets, other assets, current liabilities, and noncurrent liabilities shall be reported as components of total assets and liabilities separate from those balances are written-off against allowance for doubtful accounts after management has determined thatof the likelihoodcontinuing operations. At the same time, the results of collection is not probable.all discontinued operations (which we presented as operations to be disposed and operations disposed), less applicable income taxes (benefit), shall be reported as components of net income (loss) separate from the net income (loss) of continuing operations in accordance with ASC 205-20-45.
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:
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.
One of our most significant estimates is the determination of fair value of the profit sharing liability. Since the liability is calculated and largely based on management’s expectations of product demand, pricing, raw materials cost and projected manufacturing efficiencies, it is susceptible to material changes when actual results deviate from those expectations. While we believe our current assumptions are reasonable and achievable, there is no assurance that those future expectations will be met or that significant adjustments won’t be required in the future.
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 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:
Level 3: | inputs to the valuation methodology are unobservable and significant to the fair value.
Income
We did not conduct any business and did not maintain any branch office in the United States during the
General Steel (China), our disposed entity, is located in Tianjin Costal Economic Development Zone and is subject to an income tax rate of 25%.
Longmen Joint Venture, our disposed entity, is located in the Mid-West Region of China. It qualifies for the “Go-West” tax rate of 15% promulgated by the government. In 2010, the central government announced that the “Go-West” tax initiative was extended for 10 years, and thus, the preferential tax rate of 15% will be in effect until 2020. This special tax treatment will be evaluated on a year-to-year basis by the local tax bureau.
Maoming Hengda is located in Guangdong Province and is subject to an income tax rate of 25%.
In Recently issued accounting pronouncements In February 2015, the FASB issued ASU No. In April 2015, the FASB issued authoritative guidance on accounting for Interest-Imputation of Interest (Subtopic 835-30); Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). This update requires that debt issuance cost related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts, without changing existing recognition and measurement guidance for debt issuance costs. The new guidance is required to be applied on a retrospective basis and to be accounted for as a change in an accounting principle. The amendments in this update are effective for financial statements issued for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years and early adoption of the amendments in this update is permitted. We have applied early adoption of this standard in the second quarter of 2015. The implementation of this standard resulted in the reclassification of certain debt issuance costs from deferred financing cost to a reduction in the carrying amount of the related debt liability within our consolidated balance sheets. In July 2015, the FASB issued ASU No. 2015-11, an amendment to Topic 330 for simplifying the measurement of inventory. The update requires that inventory be measured at the lower of cost and net realizable value where net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. The amendment is intended to provide clarification on the measurement and disclosure of inventory in Topic 330 and not intended for those clarifications to result in any changes in practice. The ASU is effective for interim and annual periods beginning after December 15, 2016. Early application is permitted for all entities and should be applied prospectively. We do not expect the adoption of ASU 2015-11 to have material impact on our consolidated financial statements.
In August 2015, the FASB issued ASU 2015-14,Revenue from Contracts with In February 2016, the FASB issuedASU 2016-02 Amendments to the ASC 842 Leases. This In March 2016, the FASB issued ASU 2016-07 Investments-Equity and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of
In In March 2016, the FASB issued ASU
In
In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. The object is to address certain issues identified by the FASB-IASB Joint Transition Resource Group for Revenue Recognition. The amendments in this Update affect the guidance in Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements for Topic 606 (and any other Topic amended by Update 2014-09). Accounting Standards Update 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date of Update 2014-09 by one year. We are evaluating the effect, if any, 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 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,
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
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,
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
/s/ Friedman LLP
New York,
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (In thousands)
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, (In thousands, except per share data)
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)
(1) Given retroactive effect to the 1-for-5 reverse stock split effective on October 29, 2015
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, (In thousands)
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,
In view of the near-term challenges for the steel manufacturing sector, the Company strategically accelerated its business transformation. The Company’s transformation strategy is to pursue opportunities that offer compelling benefits to the Company’s 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. On November 4, 2015, the Company's Board of Directors (the "Board"), including the audit committee, committed to a plan and authorized the Company's management to pursue the potential sale of all its ownership interest in Maoming Hengda Steel Company, Ltd. ("Maoming Hengda") and Shaanxi Longmen Iron and Steel Co., Ltd. (“Longmen Joint Venture”) in order to unlock the value in Maoming Hengda's land assets, as well as divest from and restructure the steel business. On December 30, 2015, the Company sold its equity interest in General Steel (China) Co., Ltd (“General Steel (China)”) and Longmen Joint Venture to a related party (See Notes 2(a) and 2(v)). On March 21, 2016, the Company sold its interest in Maoming Hengda thereby fully completing the divestiture of its steel manufacturing business as planned. As a result, General Steel (China) Co., Ltd. which included Longmen Joint Venture and subsidiaries’ financial information was presented as operation disposed and Maoming Hengda’s financial information was presented as operations to be disposed and assets and liabilities held for sale for the years ended December 31, 2015 and 2014 in the consolidated financial statements. Certain prior period data has been reclassified to conform to the current year presentation and to reflect the results of operations expected to be disposed. See Notes 2(a) and 2(v) for details. Longmen Joint Venture: On April 29, 2011, a 20-year Unified Management Agreement (“the Agreement”) was entered into between the Company, the Company’s former 60%-owned subsidiary Shaanxi Longmen Iron and Steel Co., Ltd. (“Longmen Joint Venture”), Shaanxi Coal and Chemical Industry Group Co., Ltd. (“Shaanxi Coal”) and Shaanxi Iron and Steel Group (“Shaanxi Steel”). Shaanxi Steel is the controlling shareholder of Shaanxi Longmen Iron and Steel Group Co., Ltd (“Long Steel Group”) which is the non-controlling interest holder in Longmen Joint Venture, and Shaanxi Coal, a state owned entity, is the parent company of Shaanxi Steel. Under the terms of the Agreement, all manufacturing machinery and equipment of Longmen Joint Venture and the $605.8 million (or approximately RMB 3.7 billion) of the constructed iron and steel making facilities owned by Shaanxi Steel, which includes one 400 m2 sintering machine, two 1,280 m3 blast furnaces, two 120 ton converters and some auxiliary systems, are managed collectively as a single virtual asset pool (“Asset Pool”). Longmen Joint Venture manages the Asset Pool as the principal operating entity and is responsible for the daily operations of the new and existing facilities.
Longmen Joint Venture
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
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
Other Business Operations:
The Company formed a joint venture, Tianjin General Shengyuan IoT Technology Co., Ltd. (“General Shengyuan IoT”), in February of 2015 with an RFID Expert team to develop and commercialize RFID technologies and data solutions. General Shengyuan IoT was still in the development stage and no revenues and significant operating expenses were incurred during the year ended December 31, 2015 and through the Filing date. The In October 2015, the Company completed its acquisition of The Company’s remaining business is primarily comprised of Tianjin Shuangsi Trading Co. Ltd. (“Tianjin Shuangsi”), a trading company in which the Company received 100% equity interest on February 16, 2016 at no cost as Tianjin Shuangsi was established by the chief executive office of the Company’s
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 and Exchange Commission (“SEC”). The financial statements include the accounts of all directly, indirectly owned subsidiaries and the variable interest entity listed below. All material intercompany transactions and balances have been eliminated in consolidation.
The consolidated financial statements of the Company reflect the activities of the following major directly owned subsidiaries:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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)
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.
Longmen Joint Venture’s equity at risk
The Company would be considered the primary beneficiary of the VIE if it has both of the following characteristics:
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
The Company
The carrying amount of the VIE and its subsidiaries’ consolidated assets and liabilities
VIE and its subsidiaries’ liabilities consist of the following:
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.
The
In view of the near-term challenges for the steel sector, the Company strategically accelerated its business transformation. On November 4, 2015, the Company's Board of Directors (the "Board"), including the audit committee, committed to a plan and authorized the Company's management to pursue the potential sale of all its ownership interest in Maoming Hengda and Longmen Joint Venture in order to unlock the hidden value in Maoming Hengda's land assets, as well as divest from and restructure the steel business. On December 30, 2015, the Company sold its entire equity interest in General Steel (China) Co., Ltd. together with Longmen Joint Venture to Victory Energy Resource Limited, a HK registered company indirectly-owned by Henry Yu, the Company’s Chairman. On March 21, 2016, the Company sold its entire equity interest in Maoming Hengda to a related party and completed the divestiture of its steel business as planned. Accordingly, Maoming Hengda’s assets and liabilities were presented as held for sale as of December 31, 2015 in the consolidated financial statements. The Company’s remaining businesses primarily comprised of Tianjin Shuangsi, a trading company that mainly sources overseas iron ore for steel mills. The Company received 100% equity interest of Tianjin Shuangsi on February 16, 2016. As of December 31, 2015, the Company’s current liabilities was $78.2 million. However, the Company has consummated the following transactions subsequent to year end summarized as follows:
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The cash flows, taking these transactions into consideration as well as the expected cash needs to support the operations, is expected to yield the following:
The Company’s net projected outflow for the twenty months ended August 29, 2017 is expected to be at approximately $4.8 million. The Company is expected to complete the following plan to remediate our projected cash shortfall for the twenty months ended August 29, 2017:
The majority of the Company’s operating assets and businesses have been divested at year end and in the first quarter of 2016 as previously disclosed. The Company’s only operating entity is a new trading company received on February 16, 2016 which has limited operating history. Management has
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 the weighted average calculation used in the 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.
One of the Company’s most significant estimates are the determination of fair value of the profit sharing liability see note 2(h). Since the liability is calculated and largely based on management’s expectations of product demand, pricing, raw materials cost and projected manufacturing efficiencies, it is susceptible to material changes when actual results deviate from those expectations. While management believes its current assumptions are reasonable and achievable, there is no assurance that those future expectations will be met.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company’s operations are carried out in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC’s economy. The Company’s operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in North America and Western Europe. The Company’s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.
The Company has significant exposure to the price fluctuation of raw materials and energy prices as part of its normal operations. As of December 31,
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
One of the Company’s customers individually accounted for 15.1% of total sales from operations disposed for the year ended December 31, 2015. One of the Company’s customers from operation held for sale individually accounted for 96.2% of total accounts receivable, including related parties as of December 31, 2015. None of the Company’s customers individually accounted for more than 10% of the Company’s total sales for the
None of the Company’s suppliers individually accounted for more than 10% of the total purchases for the
The reporting currency of the Company is the U.S. dollar. The Company’s subsidiaries and VIE in China use the local currency, Renminbi
Translation adjustments included in accumulated other comprehensive income amounted to
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 market rates available.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
As described in Note
The Company
The fair value of the profit sharing liability
Each reporting period, the Company
The projected profits/losses in Longmen Joint Venture
The major drivers of the change in our estimate were the continuing decrease in the selling price of
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
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. For the three months ended March 31, 2015, the Company recognized a $12.9 million reduction in the fair value of profit sharing liability resulting from the change in estimates of future operating profits based on the April 2015 actual operating results and consideration for the Chinese steel market trends in April 2015 as well as the May 11, 2015 change to the Borrowing Rate by 0.25%. These further recent changes in market conditions resulted in a decrease in the expected liability of $16.6 million primarily from adjustments to the 2015 and 2016 expected cash flows as well as a $2.5 million loss from the reduction in the present value discount rate of 0.25% and a $1.2 million loss from the present value discount. The variables and the impact on the Company’s inputs to the first quarter of 2015 valuation of profit sharing fair value, as compared to the 2014 valuation of the profit sharing fair value can be summarized as follows:
For the three months ended June 30, 2015, the Company recognized a $57.5 million reduction in the fair value of profit sharing liability resulting from the change in estimates of future operating profits based on the actual operating results through June 2015 and the continued deterioration of steel market conditions in the second quarter of 2015, which deviated from our previously anticipated industry environment improvement, as well as the June 27, 2015 change to the Borrowing Rate by 0.25%. These further recent changes in market conditions resulted in a decrease in the expected liability of $54.8 million primarily from adjustments to the 2015 to 2031 expected cash flows as well as a $2.6 million loss from the reduction in the present value discount rate of 0.25%, a $1.2 million loss from the present value discount, and a $6.5 million gain resulting from the Asset Pool’s operating results for the three months ended June 30, 2015 being less favorable than previously estimated as of March 31, 2015. The estimated fair value of the profit sharing liability at June 30, 2015 and through the date of the business disposition on December
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 in operations held for sale as of December 31, 2014:
The following is a reconciliation of the beginning and ending balance of the assets and liabilities measured at fair value on a recurring basis in operations disposed for the years ended December 31,
Cash includes cash on hand and demand deposits in banks with original maturities of less than three months.
The Company
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.
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.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Restricted notes receivable represents notes receivable pledged as collateral for short-term loans and short-term notes payable issued by banks.
Interest
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.
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,
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:
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.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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.
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. The Company also re-evaluates the periods of depreciation and amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives.
Due to the recurring losses in the Longmen Joint Venture’s operations, the most recent economic down turn, the major sell off of the Chinese stock market and the lacking of government expansion in major infrastructure, the Company
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,
Land use rights
All land in the PRC is owned by the government. However, the government grants “land use rights.”
Maoming Hengda has land use rights amounting to $2.7 million (RMB 16.6 million) for 50 years that expire in 2054.
Entities in which the Company has the ability to exercise significant influence, but does not have a controlling interest, are accounted for using the equity method. Significant influence is generally considered to exist when the Company has an ownership interest in the voting stock between 20% and 50%, and other factors, such as representation on the Board of Directors, voting rights and the impact of commercial arrangements, are considered in determining whether the equity method of accounting is appropriate. The Company accounts for investments with ownership less than 20% using the cost method.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On December 28, 2015 General Steel (China) sold its 32% equity interest in Tianwu General Steel Material Trading Co., Ltd. to Tongyong Shengyuan, one of
Total investment
Total investment income in unconsolidated subsidiaries from operations disposed amounted to $0.3 million and $0.1 million for the years ended December 31, 2015 and 2014, respectively, which was included in net loss from operations disposed in the consolidated statements of operations and comprehensive loss.
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 engaged in trading transactions in which the Company act as an agent between the suppliers and the customers. The trading arrangements are such that the suppliers were the primary obligators, the Company did not have any general inventory risk, physical inventory loss risk or credit risk, and the Company did not have latitude in establishing price. Sales and cost of goods sold from these trading arrangements were recorded at the net amount retained in accordance with ASC 605-45. Sales in trading transactions, which were netted against corresponding cost of goods sold, amounted to $336.6 million and $335.0 million for the years ended December 31, 2015 and 2014, respectively. The net gain (loss) included in either net sales or cost of sales from operations disposed amounted to $1.0 million and $(0.5) million for the years ended December 31, 2015 and 2014, respectively.
In accordance with ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, a disposal of a component of an entity or a group of components of an entity is required to be reported as discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when the components of an entity meets the criteria in paragraph 205-20-45-1E to be classified as held for sale. When all of the criteria to be classified as held for sale are met, including management, having the authority to approve the action, commits to a plan to sell the entity, the major current assets, other assets, current liabilities, and noncurrent liabilities shall be reported as components of total assets and liabilities separate from those balances of the continuing operations. At the same time, the results of all discontinued operations (which we presented as operations to be disposed and operations disposed), less applicable income taxes (benefit), shall be reported as components of net income (loss) separate from the net income (loss) of continuing operations in accordance with ASC 205-20-45. Reconciliation of the Carrying Amounts of Major Classes of Assets and Liabilities of Discontinued Operations Classified as Held for Sale in the Consolidated Balance Sheet.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS *As of December 31, 2015, Catalon has total cash of $24 thousand, incurred other payables of $0.9 million and other payable – related party of $1.4 million. All the remaining assets and liabilities held for sale are held and for Maoming Hengda. Reconciliation of the Amounts of Major Classes of Income and Losses from Operations to be Disposed Classified as Held for Sale and Disposed in the Consolidated Statements of Operations and Comprehensive Loss.
*Included an impairment charge of $12.2 million in December 2015 associated with Catalon intangible assets (See Note 21)
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On December 30, 2015, the Company entered into an agreement to sell its wholly-owned General Steel (China) and its entire equity interest in all of its subsidiaries for $1 million to Victory Energy Resource Limited, a HK registered company indirectly-owned by Henry Yu, the Company's Chairman. As Victory Energy Resource Limited is a related party under common control with the Company under Mr. Henry Yu, the net consideration has recognized as a contribution to capital as opposed to a gain. As of December 30, 2015, the net deficiency of GS China amounted to $1.0 billion and a net consideration of $1.0 million. Accordingly, the Company recorded the total amount of net consideration of $1.0 billion in additional-paid-in capital. The net deficiency of GS China as of December 30, 2015 is as follows:
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Certain prior year amounts have been reclassified to conform to the current year presentation. These reclassifications have no effect on the accompanying consolidated statements of operations and cash flows.
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.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
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,
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.
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,
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.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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,
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.
In February 2015, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2015-02, Amendments to the Consolidation Analysis. Under both current GAAP requirements and the amendments in this update, a decision maker is determined to be the primary beneficiary of a VIE if it satisfies both the power and the economics criteria. The primary beneficiary consolidates a VIE because it has a controlling financial interest. Under the requirements in current GAAP, if a fee arrangement paid to a decision maker, such as an asset management fee, is determined to be a variable interest in a VIE, the decision maker must include the fee arrangement in its primary beneficiary determination and could consolidate the VIE on the basis of power (decision-making authority) and economics (the fee arrangement). However, the amendments in this Update specify that some fees paid to a decision maker are excluded from the evaluation of the economics criterion if the fees are both customary and commensurate with the level of effort required for the services provided. Those amendments make it less likely for a decision maker to meet the economics criterion solely on the basis of a fee arrangement. The amendments in this update are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. Management is evaluating the impact that will arise from these Amendments.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In In July 2015, the FASB issued ASU No. In August 2015, the FASB issued ASU 2015-14,Revenue from Contracts with
In In March 2016, the FASB issued ASU
In
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In March 2016, the FASB issued ASU
In In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. The object is to address certain issues identified by the FASB-IASB Joint Transition Resource Group for
Note 3 – Loans receivable – held for sale
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 held for sale due within one year as of:
The Company has the following loans receivable – related parties held for sale due within one year as of:
See Note
Total interest income for the loans in operations disposed amounted to
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 – Accounts receivable (including related parties), net – held for sale
Accounts receivable, including related party receivables, net of allowance for doubtful accounts consists of the following:
Movement of allowance for doubtful accounts
Note 5 – Other receivables (including related parties), net
Other receivables, including related party receivables, net of allowance for doubtful accounts consists of the following:
Movement of allowance for doubtful accounts, including related parties, is as follows:
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 – Inventories – held for sale
Inventories consist of the following:
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,
Movement of allowance for inventory valuation is as follows:
Note 7 – Advances on inventory purchases – held for sale
Advances on inventory purchases, including related party, net of allowance for doubtful accounts consists of the following:
Movement of allowance for doubtful accounts, including related parties, is as follows:
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 – Plant and equipment, net – held for sale
Plant and equipment consist of the following:
The carrying value of assets acquired under the capital lease under operations held for sale consists of the following:
Long-lived assets, including construction in progress, 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 assessed the recoverability of all of its remaining
Depreciation expense from operations to be disposed for the years ended December 31,
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 – Intangible assets, net – held for sale
Intangible assets consist of the following:
The gross amount of the intangible assets amounted to
Total amortization expense from operations disposed for both of the years ended December 31,
Total depletion expense from operations disposed for the years ended December 31,
The estimated aggregate amortization and depletion expenses for each of the five succeeding years is as follows:
Note 10 – Debt
Short-term notes payable – held for sale
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 held for sale amounted to
The Company had the following short-term notes payable held for sale as of:
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 – held for sale
As of December 31, 2014,
Furthermore, the Company
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As part of its working capital management, Longmen Joint Venture
Short term loans
Long-term loans
As of December 31,
Total interest expense, net of capitalized interest, from operations disposed amounted to
Capitalized interest from operations disposed amounted to
Note 11 – Customer deposits – held for sale
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,
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 – Deposits due to sales representatives – held for sale
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
Note
Interest paid, net of capitalized, amounted to
The Company paid income tax from operations disposed amounted to $0.2
During the years ended December 31,
The Company had
The Company
The Company The Company prepaid $0.5 million for consulting services through the issuance of common stocks for the year ended December 31, 2015. The Company offset $2.6 million other receivables The Company incurred unpaid equity investment in Tianwu Tongyong and investment in Maoming Hengda of $56.2 million due to the disposed operations. The Company issued $8.3 million in common stocks to acquire Catalon on October 23, 2015. During the year ended December 31, 2014, the Company had receivables of $43 thousand as a result of the disposal of equipment that has not been collected. During the year ended December 31, 2014, the Company converted $57 thousand of equipment into inventory productions. During the year ended December 31, 2014, the Company capitalized $5.9 million on energy-saving equipment under capital lease agreements. During the year ended December 31, 2014, the Company incurred $130.4 million accounts payable to be paid for the purchase of equipment and construction in progress.
The Company had $0.7 million receivable from the sale of Baotou Steel as of December 31, 2014.
Note
To compensate
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 from operations disposed is amortized to income over the remaining term of the 40-year land sub-lease. For the years ended December 31,
Note
Iron and steel production facilities
On April 29, 2011,
Energy-saving equipment
During 2013 and 2014,
The minimum lease payments
Interest expense for the years ended December 31,
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note
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
Payments to Shaanxi Steel for the profit sharing liability are not required until net cumulative profits are achieved. Based on the performance of the Asset Pool, no profit sharing payment was made from inception to date.
Note
Government grant
For the year ended December 31, 2014,
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,
Gain on deconsolidation of a subsidiary
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
Note
Income tax
Significant components of the provision for income taxes on earnings and deferred taxes on net operating losses from operations disposed for the years ended December 31,
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under the Income Tax Laws of the PRC, General Steel (China)
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,
*The negative effective tax rates for the years ended December 31,
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 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:
Movement of valuation allowance:
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,
The Company has no cumulative proportionate retained earnings from profitable subsidiaries as of December 31,
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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,
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 from disposed operations amounted to $654.4 million and $635.8 million, respectively, for the year ended December 31, 2015 and $852.9 million and $835.2 million, respectively, for the year ended December 31,
Taxes payable consisted of the following:
Note
Related party transactions
As disclosed in Notes
b. The following chart summarized sales to related parties from operations disposed for the years ended December 31,
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
*Long Steel Group has the ability to significantly influence the operating and financial decisions of the entity through equity ownership either directly or through key employees, commercial contractual terms, or the ability to assign management personnel.
**The CEO is referred to herein as the chief executive officer of General Steel Holdings, Inc. Mr. Henry Yu. Sales to related parties in trading transactions from continuing operations, which were netted against the corresponding cost of goods sold, amounted to $272.9 million and $204.2 million for the years ended December 31, 2015 and 2014, respectively. See Note 2(u) Revenue Recognition for details. c. The following charts summarize purchases from related parties from operations disposed for the years ended December 31, 2015 and 2014.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS d. On December 30, 2015, the Company entering into an agreement to sell its wholly-owned General Steel (China) and its entire equity interest in all of its subsidiaries for $1 million to Victory Energy Resource Limited, a HK registered company indirectly-owned by Henry Yu, the Company's Chairman.
Related party balances
*The Company reclassified advances for inventory purchase - related parties related to trading transactions, as noted in
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
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.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
See Note 10 – Debt for the loan details.
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.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The
For the years ended December 31, 2015 and 2014,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note
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.
2014 Equity Transactions
On February 3, 2014, the Company granted
On August 21, 2014, the Company granted
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
On December 26, 2014, the Company granted
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:
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2015 Equity Transactions On April 14, 2015, the Company granted 100,000 shares of common stock for investor relations consulting services under a service agreements dated April 14, 2015. The shares were valued at $4.9 per share, the quoted market price at the time the services were provided. On June 9, 2015, the Company granted 299,600 shares of common stock to senior management personnel. The shares were valued at $3.85 per share, the quoted market price at the time the shares were granted. On July 17, 2015, the Company granted 1,200,000 shares of common stock for business growth and strategic consulting services under two six-month service agreements dated July 1, 2015. The shares were valued at $3.00 per share, the quoted market price at the time the shares were granted. On October 23, 2015, the Company completed its acquisition of an 84.5% equity interest in Catalon Chemical Corp. ("Catalon"), a Delaware corporation headquartered in Virginia that develops and manufactures De-NOx honeycomb catalysts and industrial ceramics. Catalon's honeycomb technology is an integral part of the selective catalytic reduction ("SCR") process widely used in steel mills, thermal power stations, waste incinerators, stationary diesel motors, industrial plants, and heavy-duty trucks. Pursuant to the terms of the acquisition, the Company issued 13 million shares (2,600,000 "Payment Shares" after applying the retroactive effect of the one-for-five reverse stock split) of its common stock in exchange for a portion of their equity interests in Catalon, equating to 84.5% of all outstanding ownership interests in Catalon. The Payment Shares are being held in escrow, subject to minimum performance targets of Catalon. If those performance targets are not met in their entirety, the Payment Shares will be reduced proportionately to the percentage of the performance targets actually achieved. The Payment Shares are also subject to a lock-up period placing restrictions on the Selling Shareholders' ability to directly or indirectly transfer or otherwise dispose of the Payment Shares for a defined period. As a result of the issuance of the Payment Shares, the Company had 85,456,588 common stock (17,091,857 shares after applying the retroactive effect of the one-for-five reverse stock split) issued and outstanding as of October 23, 2015. On October 20, 2015, the board of directors of the Company approved a 1-for-5 reverse stock split of its common stock, to be effectuated subject to approval by the Secretary of State of Nevada. The reverse stock split was effected on October 29, 2015. All shares and per share amounts used in the Company’s consolidated financial statements and notes thereto have been retroactively restated to reflect the 1-for-5 reverse stock split effected on October 29, 2015. On December 1, 2015, the Company granted 710,500 shares of common stock to senior management personnel. The shares were valued at $1.33 per share, the quoted market price at the time the shares were granted. On December 30, 2015, the Company entering into an agreement to sell its wholly-owned General Steel (China) and its entire equity interest in all of its subsidiaries for $1 million to Victory Energy Resource Limited, a HK registered company indirectly-owned by Henry Yu, the Company's Chairman. As a result of this transaction, the Company met the criteria under ASC 810-10-40-4 to deconsolidate General Steel (China), General Shengyuan, Yangpu Shengtong, Qiu Steel, and Longmen Joint Venture at disposal date. As the transaction was between related parties under common control, the net gain from the disposal of $1.1 billion was recorded as an addition in paid-in capital. The following is a reconciliation of the Company’s noncontrolling interest for the year ended December 31, 2015:
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 21 – Catalon Acquisition On October 23, 2015, the Company completed its acquisition of an 84.5% equity interest in Catalon. At the closing of the share exchange on October 23, 2015, the Selling Shareholders received 2.6 million shares (“Payment Shares”) of General Steel Common Stock valued at $3.20 per shares in exchange for a portion of their equity interests in Catalon, equating to 84.5% of all outstanding ownership interests in Catalon. The Company’s acquisition of Catalon was accounted for as a business combination in accordance with ASC 805. The Company has allocated the purchase price of Catalon based upon the fair value of the identifiable assets acquired and liabilities assumed on the acquisition date. Except for cash, the Group estimated the fair values of the assets acquired and liabilities assumed at the acquisition date in accordance with the business combination standard issued by FASB with the following valuation methodologies with level 3 inputs: Other current assets, equipment and current liabilities were valued using the cost approach; Intangible asset (Honeycomb Catalyst technology) was valued using the income approach based on generally accepted relief from royalty appraisal methodology. Management of the Company is responsible for determining the fair value of assets acquired, liabilities assumed and intangible assets identified as of the acquisition date and considered a number of factors including valuations from independent appraisers. Acquisition-related costs incurred for the acquisitions are not material and have been expensed as incurred in general and administrative expense. The following table summarizes the fair value of the identifiable assets acquired and liabilities assumed at the acquisition date, which represents the net purchase price allocation at the date of the acquisition of Catalon based on valuation performed by an independent appraisal firm engaged by the Company:
In accordance of SEC Reguation S-X Rule 3-05, Catalon was not a significant subsidiary as of acquisition date therefore no separate audited financial statements are presented. Following the acquisition, the Company became aware of some of the operations issues related to Catalon. It was determined that such issues impacted the ability to operate the business and obtain any value for the related intangibles might have affected the operations of Catalon, which the Company might potentially cancel the shares that we have issued to the 84.5% original owners of Catalon. Thus, the Company does not expect Catalon to be able to produce any products or generate sales in the future. Accordingly, the Company considered its assets’ carrying amounts may not be recoverable and took an impairment charge of $12.2 million for the year ended December 31, 2015.
Note 22 – Retirement plan - operations disposed
Regulations in the PRC require the Company to contribute to a defined contribution retirement plan for all employees. All the employees of the Company’s entities in China are entitled to a retirement pension amount calculated based upon their salary at their date of retirement and their length of service in accordance with a government managed pension plan. The PRC government is responsible for the pension liability to the retired staff. The Company’s entities in China are required to contribute based on the 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 from operations disposed incurred by the Company for the years ended December 31,
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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,
Special reserve
Note 24 – Commitment and contingencies
Operating Lease Commitments
Total
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) & General Shengyuan in Tianjin City.
The Group
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following represents results of division operations for the years ended December 31,
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 26 – Subsequent
On January On January 20, 2016, the Company On January 20, 2016, Tongyong Shengyuan, Maoming Hengda, and GS China signed a tri-party agreement which Tongyong Shenyuan would assume the liabilities of its 99% owned subsidiary, Maoming Hengda’s payable to GS China of $19.9 million. On February 16, 2016, the Company received 100% equity interest of Tianjin Shuangsi, a trading company that primarily trade iron ore, nickel-iron-manganese alloys, and other steel-related products at no cost. On March 16, 2016, the Company granted 30,000 restricted shares of common stock On March 21, 2016, the Company, along with its 1% minority interest holder, have jointly signed an equity transfer agreement (the "Agreement") to sell 100% of the On June 15, 2016, the Company granted 127,120 restricted shares of common stock for financial reporting consulting services. The shares were valued at $1.18 per share, based on On August 19, 2016, the Company signed a debt cancellation agreement with GS China, a related party, in conversion of the other payables – related party of approximately $21.6 million into 100,000 shares of Common Stock at $1.10 per share and On August 19, 2016, the Company
GENERAL STEEL HOLDINGS, INC.
SCHEDULE 1 - PARENT COMPANY BALANCE SHEETS AS OF DECEMBER 31, (In thousands) (Unaudited)
The accompanying notes are an integral part of Schedule
GENERAL STEEL HOLDINGS, INC.
SCHEDULE 1 - PARENT COMPANY STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS FOR THE YEARS ENDED DECEMBER 31, (In thousands) (Unaudited)
The accompanying notes are an integral part of Schedule
GENERAL STEEL HOLDINGS, INC.
SCHEDULE 1 - PARENT COMPANY STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, (In thousands) (Unaudited)
The accompanying notes are an integral part of Schedule
GENERAL STEEL HOLDINGS, INC. NOTES TO SCHEDULE 1 (UNAUDITED)
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.
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.
2014 Equity Transactions
On February 3, 2014, the Company granted
On August 21, 2014, the Company granted
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
On December 26, 2014, the Company granted
GENERAL STEEL HOLDINGS, INC. NOTES TO SCHEDULE 1 (UNAUDITED)
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:
2015 Equity Transactions
On On June 9, 2015, the Company granted 299,600 shares of On July 17, 2015, the Company granted 1,200,000 shares of common stock for business growth and strategic consulting services under two six-month service agreements dated July 1, 2015. The shares were valued at $3.00 per share, the quoted market price at the time the shares were granted. On October 23, 2015, the Company completed its acquisition of an 84.5% equity interest in Catalon Chemical Corp. ("Catalon"), On October 20, 2015, the board of directors of the Company approved a 1-for-5 reverse stock split of its common stock, to be effectuated subject to approval by On December 1, 2015, the Company granted 710,500 shares of common stock to senior management personnel. The shares were valued at $1.33 per share, the quoted market price at the time the shares were granted. On December 30, 2015, the Company entering into an agreement to sell its wholly-owned General Steel (China) and its entire equity interest in all of its subsidiaries for $1 million
GENERAL STEEL HOLDINGS, INC. NOTES TO SCHEDULE 1 (UNAUDITED) The following is a reconciliation of the Company’s noncontrolling interest for the year ended December 31, 2015:
4. Subsequent events
On January On January 20, 2016, the Company On March 16, 2016, the Company granted 30,000 restricted shares of common stock On June 15, 2016, the Company granted 127,120 restricted shares of common stock for financial reporting consulting services. The shares were valued at $1.18 per share, based on the average closing price of the On August 19, 2016, the Company signed a debt cancellation agreement with GS China, a related party, in conversion of the On August 19, 2016, the
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. 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,
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,
Despite the existence of the material weaknesses discussed
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:
|
· | 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.
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Our management assessed the effectiveness of its internal control over financial reporting as of December 31, 2014.2015. 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 suchthe above mentioned 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, 2014.2015.
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 inafter the areacompletion of financial statement disclosures.divesture of our steel business and current business model from our trading business.
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:
· |
· |
· |
Management believes the foregoing efforts will effectively remediate the material weaknessweaknesses 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.
None.On July 18, 2016, we received a notice from the staff of the NYSE stating that the NYSE has determined to commence proceedings to delist our common stock, and our common stock would be suspended at the close of trading on the same date.
In the notice and in a public announcement distributed by the NYSE on July 18, 2016, the NYSE stated that we were previously deemed below compliance with the NYSE’s continued listing standard requiring listed companies to maintain either (i) at least $50 million in stockholders’ equity or (ii) at least $50 million in total market capitalization on a 30 trading day average basis. The NYSE noted that they had previously accepted our 18-month plan to regain compliance with the listing standard. However, the NYSE stated that as of the expiration of the plan period on July 9, 2016, we were unable to demonstrate that we had regained compliance with the applicable continued listing standard. The NYSE also included in its public announcement that we were delayed in filing with the SEC of our Annual Report on Form 10-K for the year ended December 31, 2015 and our Quarterly Reports on Form 10-Q for the quarters end March 31, 2016 and June 30, 2016.
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We appealed the delisting determination by submitting a request for review in writing to the Committee of the Board of Directors of the NYSE.
Prior to the NYSE notice, we had presented to the NYSE the steps we intended to take to address the deficiencies raised by the staff at NYSE. We reached an agreement with a number of our current debt holders to forgive existing debt and/or exchange debt for equity, which when completed, would have increased our stockholders’ equity to at least $50 million thereby satisfying the NYSE’s continued listing standard. However, there can be no assurance that we will be successful in our appeal and our request for continued listing will be granted.
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, 20142015 without management present and James Hu served as the lead independent director at such meeting.
Our directors and executive officers as of August , 2016, are as follows:
Name | Age | Position | Date of appointment | |||
Zuosheng Yu | Chairman of the Board of Directors and Chief Executive Officer | 10/14/04 | ||||
John Chen | Director/Chief Financial Officer | 03/07/05 | ||||
James Hu | Independent Director | 02/15/10 | ||||
Independent Director | ||||||
Zhongkui Cao | 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 atwww.gshi-steel.com. www.gshi-steel.com.
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Biographical information
Mr. Zuosheng Yu,age 50,51, Chairman of the Board of Directors and Chief Executive Officer. 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 44,45, Director and Chief Financial Officer. 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 42,43, 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 HeTong Yin,age 45,42, Independent Director. Ms. HeYin was electedappointed 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, sheFebruary 2016. Ms. Yin served as the Chief OfficerCorporate Controller and subsequently VP Corporate Development of Aero Technology in Long Beach, California. From 2006RB Energy Inc. (formerly Canada Lithium Corp., a TSX listed lithium producer) from 2011 to 2007, she2015. She served as the Corporate Controller of Torex Gold Resources Inc., a TSX listed gold producer, from 2010 to 2011. Prior to that, Ms. Yin practiced public accounting serving public and private audit clients in the industrial, automotive and energy sectors. She was Staff Accountant, Senior Auditor for PriceWaterhouse Coopersand Audit Manager with KPMG Toronto office from 2001 to 2010. Ms. Yin also has experience in Los Angeles. From 2003 to 2006, she served as an auditor for Moore Stephens Wurth Frazerthe management and Torbet, LLP (now known as Frazer LLP).finance of Sino-foreign joint venture companies and has 20 years of accounting, finance and management experience in the manufacturing and mining sectors. Ms. He graduated withYin is a Canadian Chartered Public Accountant (CPA, CA) and holds a Master of Management and Professional Accounting degree from the University of Toronto and a Bachelor of ArtsScience degree 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.Qingdao University.
Mr. Zhongkui Cao,age 65,66, 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, 2014.2015. Our Board of Directors acted by written consent six times during the fiscal year ended December 31, 2014. 2015.
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.
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Audit Committee
OurDuring fiscal 2015, the members of our Audit Committee consistswere James Hu who served as the Chairman of James Hu,the Audit Committee, Angela He, and Zhongkui Cao. Mr. Hu isOn February 15, 2016, Ms. He resigned from her positions as a member of the ChairmanBoard of Directors and as a member of the Audit Committee. On February 28, 2016, the Board of Directors appointed Ms. Tong Yin as member of the Board of Directors and a member of the Audit Committee to replace Ms. He. 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, 2014.2015.
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. HeYin 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
OurDuring fiscal 2015, the members of our Compensation Committee consistswere Angela He who served as the Chairman of the Compensation Committee, James Hu, Angela He and Zhongkui Cao. On February 15, 2016, Ms. He isresigned from her positions as a member of the ChairwomanBoard of Directors and as a member of the Compensation Committee. On February 28, 2016, the Board of Directors appointed Ms. Tong Yin as member of the Board of Directors and [the Chairwoman] of the Compensation Committee to replace Ms. He. 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, 2014.2015.
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.
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Governance and Nominating Committee
OurDuring fiscal 2015, the members of our Governance and Nominating Committee consists of James Hu, Angela He andwere Zhongkui Cao. Mr. Cao serveswho served as the Chairman of the Governance and Nominating Committee, James Hu, Angela He. On February 15, 2016, Ms. He resigned from her positions as a member of the Board of Directors and as a member of the Governance and Nominating Committee. On February 28, 2016, the Board of Directors appointed Ms. Tong Yin as member of the Board of Directors and a member of the Governance and Nominating Committee to replace Ms. He. 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, 2014.2015.
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,No. 2A Chen Jia Ming Center, No. 27 Dong San Huan North Road,Lin, Ba Li Zhuang, Chaoyang District, Beijing, China 100020.100025. 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.
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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,No. 2A Chen Jia Ming Center, No. 27 Dong San Huan North Road,Lin, Ba Li Zhuang, Chaoyang District, Beijing, China 100020.100025. 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.comjchen@gshi-steel.com or by phone: +86-10-5775-7691.+86-10-13910177819.
ITEM 11. EXECUTIVE COMPENSATION
Employment Agreements
We have not entered into employment agreements with any of our named executive officers.
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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 ($) (1) | Year | Salary ($) (1) | Bonus ($) (1) | Stock Awards ($)(2) | Total ($) (1) | ||||||||||||||||||||||||||
Zuosheng Yu, | 2014 | 170,304 | — | 435,200 | 605,504 | 2015 | 166,632 | — | 294,000 | 460,632 | ||||||||||||||||||||||||||
Chief Executive Officer | 2013 | 169,007 | — | 171,900 | 340,907 | 2014 | 170,304 | — | 435,200 | 605,504 | ||||||||||||||||||||||||||
John Chen, | 2014 | 68,115 | — | 64,000 | 132,115 | 2015 | 67,683 | — | 252,000 | 319,683 | ||||||||||||||||||||||||||
Chief Financial Officer | 2013 | 67,871 | — | 51,850 | 119,721 | 2014 | 68,115 | — | 64,000 | 132,115 |
(1) | The amounts shown were paid in RMB and were translated into U.S. dollars at the rate of $0.1606 per RMB for 2015, and $0.16279 per RMB for |
(2) | The stock price assumption used to calculate the grant date fair value of all stock awards granted in the year indicated, as computed in accordance with FASB ASC Topic 718, and as disclosed in Note 20 to the financial statements in this Annual Report. |
Director Compensation
The table below sets forth information regarding compensation earned by directors, other than our Chief Executive Officer and Chief Financial Officer, as compensation for their service to our Company during the year ended December 31, 2014.2015.
Name | Stock Awards ($) (1) | Total ($) (1) | Stock Awards ($) (1) | Total ($) (1) | ||||||||||||
James Hu | $ | 9,600 | $ | 9,600 | $ | 15,750 | $ | 15,750 | ||||||||
Angela He | 9,600 | 9,600 | 15,750 | 15,750 | ||||||||||||
Zhongkui Cao | 1,910 | 1,910 | 2,100 | 2,100 |
(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. | |
(2) | On February 15, 2016, Ms. He resigned as a member of our Board of Directors. |
Currently, we do not pay annual fees to our directors. During fiscal year 2014,2015, 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.
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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 2014,2015, the members of the Compensation Committee were Angela He, James Hu and Zhongkui Cao. In fiscal 2014,2015, 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,August 19, 2016, 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,No. 2A Chen Jia Ming Center, No. 27 Dong San Huan North Road,Lin, Ba Li Zhuang, Chaoyang District, Beijing, China 100020.100025.
Name of Beneficial Owner | Shares Beneficially Owned | Percentage Beneficial Ownership of Class (1) | Percentage of Voting Power | 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 | 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 | % | 944,780 | 3.7 | % | 3.7 | % | ||||||||||||||||||||||
John Chen Chief Financial Officer and Director | 295,000 | * | * | 203,000 | * | * | ||||||||||||||||||||||||||
James Hu Independent Director | 70,000 | * | * | 23,000 | * | * | ||||||||||||||||||||||||||
Angela He Independent Director | 63,750 | * | * | |||||||||||||||||||||||||||||
Angela He(3) Independent Director | - | * | * | |||||||||||||||||||||||||||||
Zhongkui Cao Independent Director | 14,500 | * | * | 4,100 | * | * | ||||||||||||||||||||||||||
Executive Officers and Directors as a group 5% Owners | 14,327,150 | 23.0 | % | 10.8 | % | |||||||||||||||||||||||||||
Tong Yin (4) Independent Director | - | |||||||||||||||||||||||||||||||
Executive Officers and Directors as a group | 1,174,880 | 4.6 | % | 4.6 | % | |||||||||||||||||||||||||||
5% Owners | ||||||||||||||||||||||||||||||||
Golden Eight Investments Limited (2) | 14,000,000 | 22.6 | % | 17.9 | % | 4,800,000 | 18.8 | % | 18.8 | % | ||||||||||||||||||||||
Series A Preferred Stock | ||||||||||||||||||||||||||||||||
Victory New Holdings Limited (3) | 3,092,899 | 100 | % | 30.0 | % | |||||||||||||||||||||||||||
Victory New Holdings Limited (5) | 3,092,899 | 100 | % | 30.0 | % |
* Less than 1%
(1) Percentages based on 61,986,28217,827,481 shares of Common Stock and 3,092,899 shares of Preferred Stock outstanding as of December 31, 2014.August 19, 2016.
(2) Mr. Yu is the beneficial owner of 13,883,900944,780 shares of common stock held in his name and 14,000,0004,800,000 shares of common stock held in the name of Golden Eight Investments Limited (“(‘‘Golden Eight”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”‘‘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.
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(3)On February 15, 2016, Ms. He resigned as a member of our Board of Directors.
(4) On February 28, 2016, the Board of Directors appointed Ms. Yin to serve as a member of the Board, effective immediately, and to fill the vacancy caused by resignation of Ms. He.
(5) 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, 2014,2015, 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
a. | Capital lease - operations disposed: |
As disclosed in Notes 1615 – “Capital lease obligations”obligations – operations disposed”, 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 | December 31, 2015 | December 31, 2014 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
Machinery | $ | 602,878 | $ | 605,839 | $ | - | $ | 602,878 | ||||||||
Less: accumulated depreciation | (105,001 | ) | (76,740 | ) | - | (105,001 | ) | |||||||||
Carrying value of leased assets | $ | 497,877 | $ | 529,099 | $ | - | $ | 497,877 |
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b. The following chart summarized sales to related parties from operations disposed for the years ended December 31, 20142015 and 2013. 2014.
Name of related parties | Relationship | For the year ended December 31, 2014 | For the year ended December 31, 2013 | Relationship | For the year ended December 31, 2015 | For the year ended December 31, 2014 | ||||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | $ | 164,879 | $ | 255,859 | Noncontrolling shareholder of Longmen Joint Venture | $ | 76,939 | $ | 164,879 | ||||||||||
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 | |||||||||||||||||
Tianjin Dazhan Industry Co., Ltd | Partially owned by CEO through indirect shareholding** | 1,956 | - | |||||||||||||||||
Shaanxi Haiyan Trade Co., Ltd | Significant influence by Long Steel Group | 40,224 | 16,273 | Significant influence by Long Steel Group* | 45,031 | 40,224 | ||||||||||||||
Shaanxi Shenganda Trading Co., Ltd | Significant influence by Long Steel Group | 112,231 | 77,899 | Significant influence by Long Steel Group | 23,974 | 112,231 | ||||||||||||||
Shaanxi Steel | Majority shareholder of Long Steel Group | 2,527 | 3,221 | Majority shareholder of Long Steel Group | 304,086 | 2,527 | ||||||||||||||
Shaanxi Coal and Chemical Industry Group Co., Ltd. | Shareholder of Shaanxi Steel | 46,637 | 27,911 | Shareholder of Shaanxi Steel | 67,293 | 46,637 | ||||||||||||||
Shaanxi Long Steel Group Baoji Steel Rolling Co., Ltd | Subsidiary of Long Steel Group | 13,739 | 7,325 | Subsidiary of Long Steel Group | 28,882 | 13,739 | ||||||||||||||
Shaanxi Junlong Rolling Co., Ltd | Investee of Long Steel Group | 8,883 | 37,068 | Investee of Long Steel Group | - | 8,883 | ||||||||||||||
Tianjin Hengying Trading Co., Ltd | Partially owned by CEO through indirect shareholding | 763 | - | |||||||||||||||||
Tianwu General Steel International Trading Co., Ltd | Investee of Tongyong Shengyuan | 273 | - | |||||||||||||||||
Total | $ | 389,120 | $ | 447,199 | $ | 549,197 | $ | 389,120 |
*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. Mr. Henry Yu.
Sales to related parties in trading transactions from continuing operations, which were netted against the corresponding cost of goods sold, amounted to $272.9 million and $204.2 million for the years ended December 31, 2015 and 2014, respectively. See Note 2(u) Revenue Recognition for details.
c. The following charts summarize purchases from related parties from operations disposed for the years ended December 31, 2015 and 2014.
Name of related parties | Relationship | For the year ended December 31, 2015 | For the year ended December 31, 2014 | |||||||
(in thousands) | (in thousands) | |||||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | $ | 177,436 | $ | 382,075 | |||||
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 | 89,755 | 166,719 | |||||||
Xi’an Pinghe Metallurgical Raw Material Co., Ltd | Noncontrolling shareholder of Long Steel Group | 3,446 | 20,009 | |||||||
Shaanxi Steel | Majority shareholder of Long Steel Group | 131,822 | 172,249 | |||||||
Shaanxi Huafu New Energy Co., Ltd | Significant influence by the Long Steel Group | 8,049 | 28,424 | |||||||
Shaanxi Coal and Chemical Industry Group Co., Ltd | Shareholder of Shaanxi Steel | 44,848 | 39,704 | |||||||
Tianwu General Steel Material Trading Co., Ltd. | Investee of General Steel (China) | 95,261 | 121,304 | |||||||
Shaaxi Shenganda Trading Co. Ltd. | Significant influence by Long Steel Group | 5,871 | - | |||||||
Others | Entities either owned or have significant influence by our affiliates or management | 701 | - | |||||||
Total | $ | 557,189 | $ | 1,014,855 |
103 |
d. On December 30, 2015, the Company entering into an agreement to sell its wholly-owned General Steel (China) and its entire equity interest in all of its subsidiaries for $1 million to Victory Energy Resource Limited, a HK registered company indirectly-owned by Henry Yu, the Company's Chairman.
Related party balances
a. | Loans receivable – related |
Name of related parties | Relationship | December 31, 2014 | December 31, 2013 | Relationship | December 31, 2015 | December 31, 2014 | ||||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||||||
Tianjin Hengying Trading Co., Ltd.* | Partially owned by CEO through indirect shareholding | $ | 13,997 | $ | - | Partially owned by CEO through indirect shareholding | $ | - | $ | 13,997 | ||||||||||
Tianjin Dazhan Industry Co., Ltd.* | Partially owned by CEO through indirect shareholding | 14,617 | - | 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 | - | 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 | $ | - | $ | 34,713 |
*WeThe Company reclassified advances for inventory purchase - related parties related to trading transactions, as noted in note 2(g) of the consolidated financial statements,Note 2(l), to loans receivable - related parties due to their interest-bearing nature.
WeThe 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.
b. | Accounts receivables – related |
Name of related parties | Relationship | December 31, 2014 | December 31, 2013 | Relationship | December 31, 2015 | December 31, 2014 | ||||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | $ | 148 | $ | 548 | Noncontrolling shareholder of Longmen Joint Venture | $ | - | $ | 148 | ||||||||||
Shaanxi Shenganda Trading Co., Ltd. | Significant influence by Long Steel Group | 5,715 | - | Significant influence by Long Steel Group | - | 5,715 | ||||||||||||||
Tianjin Daqiuzhuang Steel Plates | Partially owned by CEO through indirect shareholding | 19 | 19 | Partially owned by CEO through indirect shareholding | - | 19 | ||||||||||||||
Shaanxi Steel | Majority shareholder of Long Steel Group | 2,101 | 1,741 | Majority shareholder of Long Steel Group | - | 2,101 | ||||||||||||||
Others | 641 | 634 | - | 641 | ||||||||||||||||
Total | $ | 8,624 | $ | 2,942 | $ | - | $ | 8,624 |
104 |
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 | Relationship | December 31, 2015 | December 31, 2014 | ||||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | $ | 165 | $ | 406 | Noncontrolling shareholder of Longmen Joint Venture | $ | - | $ | 165 | ||||||||||
Shaanxi Steel | Majority shareholder of Long Steel Group | 35,669 | 46,439 | Majority shareholder of Long Steel Group | - | 35,669 | ||||||||||||||
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 General Qiugang Pipe Co., Ltd | Partially owned by CEO through indirect shareholding | - | 1,237 | |||||||||||||||||
Tianjin Hengying Trading Co., Ltd | Partially owned by CEO through indirect shareholding | 721 | - | 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 | Partially owned by CEO through indirect shareholding | - | 313 | ||||||||||||||
Victory Energy Resource Co., Ltd. | Partially owned by CEO through indirect shareholding | 1,101 | - | Partially owned by CEO through indirect shareholding | - | 1,101 | ||||||||||||||
General Steel (China) Co., Ltd | Partially owned by CEO through indirect shareholding | - | - | |||||||||||||||||
Others | Entities either owned or have significant influence by our affiliates or management | 528 | 622 | Entities either owned or have significant influence by our affiliates or management | - | 528 | ||||||||||||||
Total | $ | 39,734 | $ | 54,106 | - | 39,734 | ||||||||||||||
Less: other receivables – related parties held for sale | - | (38,489 | ) | |||||||||||||||||
Other receivables – related parties – continuing operations | $ | - | $ | 1,245 |
d. | Advances on inventory purchase – related |
Name of related parties | Relationship | December 31, 2014 | December 31, 2013 | Relationship | December 31, 2015 | December 31, 2014 | ||||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | $ | 7,139 | $ | 9,123 | Noncontrolling shareholder of Longmen Joint Venture | $ | - | $ | 7,139 | ||||||||||
Shaanxi Shenganda Trading Co., Ltd. | Significant influence by Long Steel Group | 27,549 | 25,607 | Significant influence by Long Steel Group | - | 27,549 | ||||||||||||||
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 | Partially owned by CEO through indirect shareholding | - | 3,807 | ||||||||||||||
Tianjin General Qiugang Pipe Co., Ltd | Partially owned by CEO through indirect shareholding | 7,091 | 555 | Partially owned by CEO through indirect shareholding | - | 7,091 | ||||||||||||||
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 | Entities either owned or have significant influence by our affiliates or management | - | 31 | ||||||||||||||
Total | $ | 45,617 | $ | 83,003 | $ | - | $ | 45,617 |
105 |
e. | Accounts payable - related |
Name of related parties | Relationship | December 31, 2014 | December 31, 2013 | Relationship | December 31, 2015 | December 31, 2014 | ||||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||||||
Hancheng Haiyan Coking Co., Ltd | Noncontrolling shareholder of Longmen Joint Venture | $ | 64,276 | $ | 58,163 | Noncontrolling shareholder of Longmen Joint Venture | $ | - | $ | 64,276 | ||||||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | 79,886 | 134,758 | Noncontrolling shareholder of Longmen Joint Venture | - | 79,886 | ||||||||||||||
Shaanxi Coal and Chemical Industry Group Co., Ltd. | Shareholder of Shaanxi Steel | 23,726 | 29,990 | Shareholder of Shaanxi Steel | - | 23,726 | ||||||||||||||
Tianjin Dazhan Industry Co., Ltd | Partially owned by CEO through indirect shareholding | 869 | 958 | Partially owned by CEO through indirect shareholding | - | 869 | ||||||||||||||
Xi’an Pinghe Metallurgical Raw Material Co., Ltd | Noncontrolling shareholder of Long Steel Group | 11,035 | 8,714 | Noncontrolling shareholder of Long Steel Group | - | 11,035 | ||||||||||||||
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 | Noncontrolling shareholder of Longmen Joint Venture’s subsidiary | - | 746 | ||||||||||||||
Beijing Daishang Trading Co., Ltd | Noncontrolling shareholder of Longmen Joint Venture’s subsidiary | 36 | 1,004 | Noncontrolling shareholder of Longmen Joint Venture’s subsidiary | - | 36 | ||||||||||||||
Tianjin General Qiugang Pipe Co., Ltd | Partially owned by CEO through indirect shareholding | 2,462 | - | Partially owned by CEO through indirect shareholding | - | 2,462 | ||||||||||||||
Tianwu General Steel Material Trading Co., Ltd. | Investee of General Steel (China) | 22,916 | 759 | Investee of General Steel (China) | - | 22,916 | ||||||||||||||
Maoming Shengze Trading Co., Ltd | Partially owned by CEO through indirect shareholding | 1,773 | - | Partially owned by CEO through indirect shareholding | - | 1,773 | ||||||||||||||
Others | Entities either owned or have significant influence by our affiliates or management | 57 | 629 | Entities either owned or have significant influence by our affiliates or management | - | 58 | ||||||||||||||
Total | $ | 207,783 | $ | 235,692 | $ | - | $ | 207,783 |
f. | Short-term loans - related |
Name of related parties | Relationship | December 31, 2014 | December 31, 2013 | Relationship | December 31, 2015 | December 31, 2014 | ||||||||||||||
(in thousands) | (in thousands) | (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 | Shareholder of Shaanxi Steel | $ | - | $ | 34,460 | ||||||||||||
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 | Partially owned by CEO through indirect shareholding | - | 3,039 | ||||||||||||||
Tianjin Dazhan Industry Co., Ltd | Partially owned by CEO through indirect shareholding | 8,211 | 6,548 | Partially owned by CEO through indirect shareholding | - | 8,211 | ||||||||||||||
Yangpu Capital Automobile | Partially owned by CEO through indirect shareholding | 670 | 1,458 | Partially owned by CEO through indirect shareholding | - | 670 | ||||||||||||||
Total | $ | 46,380 | $ | 126,693 | $ | - | $ | 46,380 |
106 |
See Note 10 – Debt for the loan details.
g. |
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 |
Other payables – related parties: |
Other payables – related parties are those nontrade payables arising from transactions between usthe Company and ourits 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 | Relationship | December 31, 2015 | December 31, 2014 | ||||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||||||
Tianjin Hengying Trading Co, Ltd | Partially owned by CEO through indirect shareholding | $ | 378 | $ | 380 | Partially owned by CEO through indirect shareholding | $ | - | $ | 378 | ||||||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | 33,968 | 43,636 | Noncontrolling shareholder of Longmen Joint Venture | - | 33,968 | ||||||||||||||
Shaanxi Steel | Majority shareholder of Long Steel Group | 44,146 | 44,363 | Majority shareholder of Long Steel Group | - | 44,146 | ||||||||||||||
Wendlar Investment & Management Group Co., Ltd | Common control under CEO | 1,196 | 895 | Common control under CEO | 28 | 1,196 | ||||||||||||||
Yangpu Capital Automobile | Partially owned by CEO through indirect shareholding | 399 | 291 | Partially owned by CEO through indirect shareholding | - | 399 | ||||||||||||||
Tianjin Dazhan Industry Co., Ltd | Partially owned by CEO through indirect shareholding | 3,883 | 473 | Partially owned by CEO through indirect shareholding | - | 3,883 | ||||||||||||||
Maoming Shengze Trading Co., Ltd | Partially owned by CEO through indirect shareholding | 2,775 | 1,745 | Partially owned by CEO through indirect shareholding | 483 | 2,775 | ||||||||||||||
Victory Energy Resource Co., Ltd | Partially owned by CEO through indirect shareholding | - | 1,375 | |||||||||||||||||
Lindenburg Investment & Management Group Co., Ltd | Minority Shareholder of Catalon Chemical | 1,405 | - | |||||||||||||||||
Tianjin Qiu Steel Investment Co., Ltd | Partially owned by CEO through indirect shareholding | 38,987 | - | |||||||||||||||||
General Steel (China) Co., Ltd | Partially owned by CEO through indirect shareholding | 23,660 | - | |||||||||||||||||
Others | Entities either owned or have significant influence by our affiliates or management | 507 | 921 | Entities either owned or have significant influence by our affiliates or management | - | 507 | ||||||||||||||
Total | $ | 87,252 | $ | 94,079 | 64,563 | 87,252 | ||||||||||||||
Less: other payables – related parties - held for sale | (21,807 | ) | (87,227 | ) | ||||||||||||||||
Other payables – related parties – continuing operations | $ | 42,756 | $ | 25 |
h. | Customer deposits – related |
Name of related parties | Relationship | December 31, 2014 | December 31, 2013 | Relationship | December 31, 2015 | December 31, 2014 | ||||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||||||
Shaanxi Yuchang Trading Co., Ltd | Significant influence by Long Steel Group | $ | 10 | $ | 10 | Significant influence by Long Steel Group | $ | - | $ | 10 | ||||||||||
Shaanxi Coal and Chemical Industry Group Co., Ltd | Shareholder of Shaanxi Steel | 4,467 | - | Shareholder of Shaanxi Steel | - | 4,467 | ||||||||||||||
Shaanxi Haiyan Trade Co, Ltd | Significant influence by Long Steel Group | 6,844 | - | Significant influence by Long Steel Group | - | 6,844 | ||||||||||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | 23,517 | 15,038 | Noncontrolling shareholder of Longmen Joint Venture | - | 23,517 | ||||||||||||||
Shaanxi Junlong Rolling Co., Ltd | Investee of Long Steel Group | 57 | 2,748 | Investee of Long Steel Group | - | 57 | ||||||||||||||
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 | Investee of General Steel (China) | - | 97,721 | ||||||||||||||
Others | Entities either owned or have significant influence by our affiliates or management | - | 289 | |||||||||||||||||
Total | $ | 132,616 | $ | 64,881 | $ | - | $ | 132,616 |
i. | Deposits due to sales representatives – related parties - held for sale |
Name of related parties | Relationship | December 31, 2014 | December 31, 2013 | Relationship | December 31, 2015 | December 31, 2014 | ||||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||||||
Hancheng Haiyan Trade Co., Ltd | Significant influence by Long Steel Group | $ | 652 | $ | - | Significant influence by Long Steel Group | $ | - | $ | 652 | ||||||||||
Gansu Yulong Trading Co., Ltd. | Significant influence by Long Steel Group | 1,075 | 1,408 | Significant influence by Long Steel Group | - | 1,075 | ||||||||||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | 196 | - | Noncontrolling shareholder of Longmen Joint Venture | - | 196 | ||||||||||||||
Shaanxi Yuchang Trading Co., Ltd | Significant influence by Long Steel Group | 586 | 589 | Significant influence by Long Steel Group | - | 586 | ||||||||||||||
Total | $ | 2,509 | $ | 1,997 | $ | - | $ | 2,509 |
107 |
Long-term loans – related |
Name of related party | Relationship | December 31, 2014 | December 31, 2013 | Relationship | December 31, 2015 | December 31, 2014 | ||||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||||||
Shaanxi Steel | Majority shareholder of Long Steel Group | $ | 339,549 | $ | 19,644 | Majority shareholder of Long Steel Group | $ | - | $ | 339,549 | ||||||||||
Total | $ | 339,549 | $ | 19,644 |
WeThe Company’s operations held for sale also provided guarantee on related parties’ bank loans amounting to $82.3 million$0 and $205.8$82.3 million as of December 31, 20142015 and 2013,2014, respectively.
k. | Deferred lease income held for sale |
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 |
Deferred lease income | December 31, 2015 | December 31, 2014 | ||||||
(in thousands) | (in thousands) | |||||||
Beginning balance | $ | 74,889 | $ | 77,444 | ||||
Less: Lease income realized | (2,145 | ) | (2,176 | ) | ||||
Exchange rate effect | (2,278 | ) | (379 | ) | ||||
Disposed on December 30, 2015 | (70,466 | ) | - | |||||
Ending balance | $ | - | 74,889 | |||||
Current portion | (2,176 | ) | ||||||
Noncurrent portion | $ | 72,713 |
For the years ended December 31, 2015 and 2014, and 2013, wethe Company’s operations disposed realized lease income from Shaanxi Steel, a related party, amountedamounting to $2.2$2.1 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 | 2015 | 2014 | |||||||||||||
Audit fees | $ | 870,000 | $ | 870,000 | $ | 1,010,000 | $ | 870,000 | ||||||||
Audit-related fees | $ | - | $ | - | $ | - | $ | - | ||||||||
Tax fees | $ | 29,000 | $ | 29,000 | $ | 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 $870,000were $1,010,000 and $870,000 in fiscal year 20142015 and 2013,2014, 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 20142015 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.
108 |
The Audit Committee discussed with Friedman LLP, our independent registered public accounting firm (independent auditors) for the fiscal year ended December 31, 2014,2015, 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 2014,2015, the Audit Committee held four meetings,[four meetings][Please confirm.], 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 |
Tong Yin, Member (Appointed on February 28, 2016 to fill the vacancy caused by resignation of Ms. Angela | |
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.
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: |
• | Consolidated Balance Sheets —December 31, | |
• | Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, | |
• | Consolidated Statements of Changes in | |
• | Consolidated Statements of Cash Flows for the years ended December 31, | |
• | 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). | |
10.6 | Share Exchange Agreement, dated September 16, 2015, by and among General Steel Holdings, Inc., Catalon Chemical Corp., Anyuan Zhu, Lindenburg Ventures Ltd., and Honghui Du (included as Exhibit 10.1 to the Form 8-K filed with the Commission on September 22, 2015 and incorporated herein by reference). | |
10.7 | Debt Cancellation Agreement, by and among the Registrant, Tongyong Shengyuan (Tianjin) Technology Development Co., Ltd. and General Steel (China) Co., Ltd., dated August 19, 2016 (included as Exhibit 10.1 to the Form 8-K filed with the Commission on August 25, 2016 and incorporated by reference herein) | |
10.8 | Debt Cancellation Agreement, by and among the Registrant, General Steel Investment Co., Ltd. and Oriental Ace Limited, dated August 19, 2016 (included as Exhibit 10.2 to the Form 8-K filed with the Commission on August 25, 2016 and incorporated by reference herein) | |
21 | Subsidiaries of the registrant (filed herewith). |
110 |
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 the CFO (Principal Financial Officer) pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as filed herewith. |
101.INS | XBRL Instance Document | |
XBRL Taxonomy Extension Schema Document | ||
XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
XBRL Taxonomy Extension Label Linkbase Document | ||
XBRL Taxonomy Extension Presentation Linkbase Document |
* Filed herewith
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: |
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 | |||
YU, Zuosheng | (Principal Executive Officer) | |||
/s/ John Chen | Chief Financial Officer and Director | |||
CHEN, John | (Principal Accounting and Financial Officer) | |||
/s/ James Hu | Independent Director | |||
HU, James | ||||
/s/ | Independent Director | |||
/s/ Zhong Kui Cao | Independent Director | |||
CAO, Zhong Kui | ||||
112 |