UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended SeptemberJune 30, 20142015

 

or

 

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________ to __________

 

Commission File Number 001-33717

 

General Steel Holdings, Inc.

(Exact name of registrant as specified in its charter)

 

Nevada 41-2079252
(State or other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)  

 

Level 21, Tower B, Jia Ming 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 Office, Including Zip Code)

 

+86 (10) 5775 76488572 3073

 

(Registrant's Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x   No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files).  Yes x  No ¨

 

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

 

Large accelerated filer¨ Accelerated filer¨ 

Non-accelerated filer¨

Smaller reporting companyx
(Do not check if a smaller reporting company)

Smaller reporting companyx

 

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

 

As of November 7, 2014, 60,922,382August 14, 2015, 69,984,282 (excluding 2,472,306 shares of treasury stock) shares of common stock, par value $0.001 per share, were outstanding.

 

 

Table of Contents

 

  Page
Part I.  FINANCIAL INFORMATION3
   
Item 1.Unaudited Financial Statements.3
   
 Condensed Consolidated Balance Sheets as of SeptemberJune 30, 20142015 and December 31, 2013.2014.3
   
 Condensed Consolidated Statements of Operations and Comprehensive (Loss) IncomeLoss for the Three and Nine months ended SeptemberSix Months Ended June 30, 20142015 and 2013.2014.4
   
 Condensed Consolidated Statements of Cash Flows for the Nine months ended SeptemberSix Months Ended June 30, 20142015 and 2013.2014.5
   
 Notes to Condensed Consolidated Financial Statements.6
   
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations.38
Item 3.Quantitative and Qualitative Disclosures about Market Risk6044
   
Item 4.Controls and Procedures.6068
   
Part II. OTHER INFORMATION69
   
Item 1.Legal Proceedings.6169
   
Item 1A.Risk Factors.6169
   
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.61
Item 3.Defaults Upon Senior Securities.61
Item 4.Mine Safety Disclosure.61
Item 5.Other Information.6169
   
Item 6.Exhibits.6270
   
Signatures6371

2

PART I – FINANCIAL INFORMATION

 

ITEM 1. UNAUDITED FINANCIAL STATEMENTS

  

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(In thousands)

 

 September 30, December 31,  June 30, December 31, 
 2014 2013  2015 2014 
ASSETS             
             
CURRENT ASSETS:             
Cash $22,108  $31,967  $36,250  $11,641 
Restricted cash  383,250   399,333   230,240   355,685 
Notes receivable  66,984   60,054   5,736   10,290 
Restricted notes receivable  109,510   395,589   39,111   111,801 
Loan receivable  14,625   - 
Loan receivable - related party  -   4,540 
Loans receivable  42,595   36,001 
Loans receivable - related party  6,110   34,713 
Accounts receivable, net  8,481   4,078   11,205   9,321 
Accounts receivable - related parties  2,153   2,942 
Accounts receivable - related parties, net  3,198   8,498 
Other receivables, net  77,232   54,716   62,626   63,746 
Other receivables - related parties  71,980   54,106 
Other receivables - related parties, net  7,329   39,670 
Inventories  250,017   212,921   153,129   156,327 
Advances on inventory purchase  43,374   44,897 
Advances on inventory purchase, net  53,389   73,819 
Advances on inventory purchase - related parties  127,899   83,003   13,411   45,617 
Prepaid expense and other  3,943   1,388   6,230   4,803 
Prepaid taxes  11,935   28,407   4,242   5,789 
Short-term investment  2,763   2,783   7,670   2,688 
TOTAL CURRENT ASSETS  1,196,254   1,380,724   682,471   970,409 
                
PLANT AND EQUIPMENT, net  1,516,009   1,271,907   569,477   1,543,136 
                
OTHER ASSETS:                
Advances on equipment purchase  15,655   6,409   2,520   11,438 
Investment in unconsolidated entities  16,742   16,943   16,749   16,823 
Long-term deferred expense  496   668   446   458 
Intangible assets, net of accumulated amortization  23,121   23,707   22,706   22,960 
TOTAL OTHER ASSETS  56,014   47,727   42,421   51,679 
                
TOTAL ASSETS $2,768,277  $2,700,358  $1,294,369  $2,565,224 
                
LIABILITIES AND DEFICIENCY                
                
CURRENT LIABILITIES:                
Short term notes payable $784,323  $1,017,830  $531,869  $661,635 
Accounts payable  589,283   434,979   596,466   612,801 
Accounts payable - related parties  265,744   235,692   211,149   207,783 
Short term loans - bank  248,289   301,917   153,989   257,502 
Short term loans - others  60,340   62,067   65,158   60,717 
Short term loans - related parties  223,460   126,693   279,950   46,380 
Current maturities of long-term loans - related party  67,249   53,013 
Other payables and accrued liabilities  50,568   45,653   61,805   55,488 
Other payable - related parties  101,475   94,079 
Other payables - related parties  80,028   87,252 
Customer deposits  186,807   87,860   86,860   92,974 
Customer deposits - related parties  113,674   64,881   33,923   132,616 
Deposit due to sales representatives  29,917   24,343   15,782   17,871 
Deposit due to sales representatives - related parties  2,308   1,997   2,872   2,509 
Taxes payable  3,930   4,628   7,984   5,201 
Deferred lease income, current  2,171   2,187   2,180   2,176 
Capital lease obligations, current  6,825   4,321   9,942   8,508 
TOTAL CURRENT LIABILITIES  2,736,363   2,562,140   2,139,957   2,251,413 
                
NON-CURRENT LIABILITIES:                
Long-term loans - related party  4,875   19,644   353,067   339,549 
Deferred lease income, noncurrent  73,077   75,257   71,757   72,713 
Capital lease obligations, noncurrent  388,615   375,019   401,283   393,252 
Profit sharing liability at fair value  149,363   162,295   -   70,422 
TOTAL NON-CURRENT LIABILITIES  615,930   632,215   826,107   875,936 
                
TOTAL LIABILITIES  3,352,293   3,194,355   2,966,064   3,127,349 
                
COMMITMENTS AND CONTINGENCIES                
                
DEFICIENCY:                
Preferred stock, $0.001 par value, 50,000,000 shares authorized, 3,092,899 shares issued and outstanding as of September 30, 2014 and December 31, 2013  3   3 
Common stock, $0.001 par value, 200,000,000 shares authorized, 58,394,688 and 58,234,688 shares issued, 55,922,382 and 55,762,382 shares outstanding as of September 30, 2014 and December 31, 2013, respectively  58   58 
Treasury stock, at cost, 2,472,306 shares as of September 30, 2014 and December 31, 2013  (4,199)  (4,199)
Preferred stock, $0.001 par value, 50,000,000 shares authorized, 3,092,899 shares issued and outstanding as of June 30, 2015 and December 31, 2014  3   3 
Common stock, $0.001 par value, 200,000,000 shares authorized, 66,456,588 shares and 64,458,588 shares issued and 63,984,282 shares and 61,986,282 shares outstanding as of June 30, 2015 and December 31, 2014, respectively  66   64 
Treasury stock, at cost, 2,472,306 shares as of June 30, 2015 and December 31, 2014  (4,199)  (4,199)
Paid-in-capital  107,249   106,878   117,274   115,494 
Statutory reserves  6,485   6,243   6,583   6,472 
Accumulated deficits  (472,871)  (414,798)  (1,123,701)  (463,521)
Accumulated other comprehensive income  (189)  729   (1,259)  644 
TOTAL GENERAL STEEL HOLDINGS, INC. DEFICIENCY  (363,464)  (305,086)  (1,005,233)  (345,043)
                
NONCONTROLLING INTERESTS  (220,552)  (188,911)  (666,462)  (217,082)
                
TOTAL DEFICIENCY  (584,016)  (493,997)  (1,671,695)  (562,125)
                
TOTAL LIABILITIES AND DEFICIENCY $2,768,277  $2,700,358  $1,294,369  $2,565,224 

 

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

3

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOMELOSS

FOR THE THREE AND NINESIX MONTHS ENDED SEPTEMBERJUNE 30, 20142015 AND 20132014

(UNAUDITED)

(In thousands, except per share data)

 

  For the three months ended September 30,  For the nine months ended September 30, 
  2014  2013  2014  2013 
             
SALES $456,142  $514,549  $1,476,784  $1,534,330 
                 
SALES - RELATED PARTIES  106,680   95,546   268,262   380,707 
TOTAL SALES  562,822   610,095   1,745,046   1,915,037 
                 
COST OF GOODS SOLD  447,263   511,932   1,460,018   1,550,829 
                 
COST OF GOODS SOLD - RELATED PARTIES  105,949   89,932   269,885   387,446 
TOTAL COST OF GOODS SOLD  553,212   601,864   1,729,903   1,938,275 
                 
GROSS PROFIT (LOSS)  9,610   8,231   15,143   (23,238)
                 
SELLING, GENERAL AND  ADMINISTRATIVE EXPENSES  (16,434)  (19,661)  (56,336)  (59,464)
CHANGE IN FAIR VALUE OF PROFIT SHARING LIABILITY  14,727   39,164   11,758   95,437 
                 
INCOME (LOSS) FROM OPERATIONS  7,903   27,734   (29,435)  12,735 
                 
OTHER INCOME (EXPENSE)                
Interest income  2,767   2,835   10,025   8,657 
Finance/interest expense  (19,422)  (22,842)  (74,736)  (68,915)
Gain (loss) on disposal of equipment and intangible assets  (21)  17   (117)  113 
Income from equity investments  32   47   99   137 
Foreign currency transaction gain (loss)  3,146   322   1,329   448 
Lease income  542   542   1,630   1,613 
Other non-operating (expense) income, net  (18)  770   108   1,560 
Other expense, net  (12,974)  (18,309)  (61,662)  (56,387)
                 
(LOSS) INCOME BEFORE PROVISION FOR INCOME TAXES AND NONCONTROLLING INTEREST  (5,071)  9,425   (91,097)  (43,652)
                 
PROVISION FOR INCOME TAXES                
Current  93   25   205   201 
Deferred  -   -   -   - 
Provision for income taxes  93   25   205   201 
                 
NET (LOSS) INCOME  (5,164)  9,400   (91,302)  (43,853)
                 
Less: Net (loss) income attributable to noncontrolling interest  (1,674)  5,599   (33,229)  (10,939)
                 
NET (LOSS) INCOME ATTRIBUTABLE TO GENERAL STEEL HOLDINGS, INC. $(3,490) $3,801  $(58,073) $(32,914)
                 
NET (LOSS) INCOME $(5,164) $9,400  $(91,302) $(43,853)
                 
OTHER COMPREHENSIVE (LOSS) INCOME                
Foreign currency translation adjustments  (3,232)  (2,547)  509   (12,283)
                 
COMPREHENSIVE (LOSS) INCOME  (8,396)  6,853   (90,793)  (56,136)
                 
Less: Comprehensive (loss) income attributable to noncontrolling interest  (1,701)  4,782   (31,802)  (15,508)
                 
COMPREHENSIVE (LOSS) INCOME ATTRIBUTABLE TO GENERAL STEEL HOLDINGS, INC. $(6,695) $2,071  $(58,991) $(40,628)
                 
WEIGHTED AVERAGE NUMBER OF SHARES                
Basic and Diluted  55,878   55,141   55,845   54,976 
                 
(LOSS) INCOME PER SHARE                
Basic and Diluted $(0.06) $0.07  $(1.04) $(0.60)
  For the three months ended June 30,  For the six months ended June 30, 
  2015  2014  2015  2014 
             
SALES $454,855  $508,637  $725,624  $1,020,642 
                 
SALES - RELATED PARTIES  73,926   79,376   131,321   161,582 
TOTAL SALES  528,781   588,013   856,945   1,182,224 
                 
COST OF GOODS SOLD  509,185   482,011   806,750   1,012,755 
                 
COST OF GOODS SOLD - RELATED PARTIES  83,865   77,908   146,611   163,936 
TOTAL COST OF GOODS SOLD  593,050   559,919   953,361   1,176,691 
                 
GROSS (LOSS) PROFIT  (64,269)  28,094   (96,416)  5,533 
                 
SELLING, GENERAL AND  ADMINISTRATIVE EXPENSES  (22,083)  (18,849)  (39,438)  (39,902)
EXCESS OVERHEAD DURING MAINTENANCE  (5,309)  -   (24,443)  - 
IMPAIRMENT CHARGE  (973,860)  -   (973,860)  - 
CHANGE IN FAIR VALUE OF PROFIT SHARING LIABILITY  57,499   (2,920)  70,423   (2,969)
                 
LOSS FROM OPERATIONS  (1,008,022)  6,325   (1,063,734)  (37,338)
                 
OTHER INCOME (EXPENSE)                
Interest income  2,741   4,066   5,072   7,258 
Finance/interest expense  (29,575)  (26,619)  (50,145)  (55,314)
Loss on disposal of equipment and intangible assets  (44)  (142)  (28)  (96)
Income (loss) from equity investments  34   54   (3)  67 
Foreign currency transaction loss  (249)  (963)  (1,122)  (1,817)
Lease income  545   542   1,088   1,088 
Other non-operating income (expense), net  378   302   601   126 
Other expense, net  (26,170)  (22,760)  (44,537)  (48,688)
                 
LOSS BEFORE PROVISION FOR INCOME TAXES AND NONCONTROLLING INTEREST  (1,034,192)  (16,435)  (1,108,271)  (86,026)
                 
PROVISION FOR INCOME TAXES  111   107   141   112 
                 
NET LOSS  (1,034,303)  (16,542)  (1,108,412)  (86,138)
                 
Less: Net loss attributable to noncontrolling interest  (419,276)  (5,523)  (448,232)  (31,555)
                 
NET LOSS ATTRIBUTABLE TO GENERAL STEEL HOLDINGS, INC. $(615,027) $(11,019) $(660,180) $(54,583)
                 
NET LOSS $(1,034,303) $(16,542) $(1,108,412) $(86,138)
                 
OTHER COMPREHENSIVE LOSS                
Foreign currency translation adjustments  (2,274)  (929)  (3,127)  3,741 
                 
COMPREHENSIVE LOSS  (1,036,577)  (17,471)  (1,111,539)  (82,397)
                 
Less: Comprehensive loss attributable to noncontrolling interest  (420,128)  (5,875)  (449,456)  (30,101)
                 
COMPREHENSIVE LOSS ATTRIBUTABLE TO GENERAL STEEL HOLDINGS, INC. $(616,449) $(11,596) $(662,083) $(52,296)
                 
WEIGHTED AVERAGE NUMBER OF SHARES                
Basic and Diluted  62,777   55,842   62,384   55,828 
                 
LOSS PER SHARE                
Basic and Diluted $(9.80) $(0.20) $(10.58) $(0.98)

 

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

4

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINESIX MONTHS ENDED SEPTEMBERJUNE 30, 20142015 AND 20132014

(UNAUDITED)

(In thousands)

 

  2014  2013 
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net loss $(91,302) $(43,853)
Adjustments to reconcile net loss to cash provided by (used in) operating activities:        
Depreciation, amortization and depletion  71,696   64,955 
Change in fair value of derivative liabilities  -   (1)
Change in fair value of profit sharing liability  (11,758)  (95,437)
(Gain) loss on disposal of equipment and intangible assets  117   (113)
Recovery of doubtful accounts  (324)  (251)
Reservation of mine maintenance fee  403   315 
Stock issued for services and compensation  371   692 
Amortization of deferred financing cost on capital lease  14,585   15,338 
Income from equity investments  (99)  (137)
Foreign currency transaction gain  (1,329)  (448)
Deferred lease income  (1,630)  (1,613)
Changes in operating assets and liabilities        
Notes receivable  49,973   32,138 
Accounts receivable  (4,142)  (483)
Accounts receivable - related parties  768   11,968 
Other receivables  (22,765)  (3,466)
Other receivables - related parties  (18,291)  (55,744)
Inventories  (41,206)  4,191 
Advances on inventory purchases  1,195   1,996 
Advances on inventory purchases - related parties  (45,566)  (27,882)
Prepaid expense and other  (2,567)  (1,016)
Long-term deferred expense  167   373 
Prepaid taxes  16,286   8,250 
Accounts payable  (50,586)  113,592 
Accounts payable - related parties  17,178   54,364 
Other payables and accrued liabilities  4,979   (3,742)
Other payables - related parties  8,089   (12,844)
Customer deposits  99,726   (33,185)
Customer deposits - related parties  49,335   (7,981)
Taxes payable  (665)  (7,317)
Other noncurrent liabilities  -   1,384 
Net cash provided by operating activities  42,638   14,043 
         
CASH FLOWS FROM INVESTING ACTIVITIES:        
Restricted cash  13,174   (72,676)
Loans to related parties  -   1,460 
Cash proceeds from short term investment  -   (80)
Cash proceeds from sales of equipments and intangible assets  43   16 
Equipment purchase and intangible assets  (117,826)  (75,326)
Net cash used in investing activities  (104,609)  (146,606)
         
CASH FLOWS FINANCING ACTIVITIES:        
Capital contributed by noncontrolling interest  -   18,028 
Restricted notes receivable  283,563   10,218 
Borrowings on short term notes payable  1,264,884   1,348,631 
Payments on short term notes payable  (1,491,237)  (1,370,832)
Borrowings on short term loans - bank  286,852   258,357 
Payments on short term loans - bank  (337,007)  (155,390)
Borrowings on short term loan - others  47,755   148,678 
Payments on short term loans - others  (32,389)  (169,558)
Borrowings on short term loan - related parties  47,189   362,202 
Payments on short term loans - related parties  (23,353)  (274,718)
Deposits due to sales representatives  5,761   (6,521)
Deposit due to sales representatives - related parties  325   531 
Payments on long-term loans - related party  -   (22,856)
Principal payment on capital lease obligation  (1,285)  - 
Net cash provided by financing activities  51,058   146,770 
         
EFFECTS OF EXCHANGE RATE CHANGE IN CASH  1,054   1,417 
         
(DECREASE) INCREASE IN CASH  (9,859)  15,624 
         
CASH, beginning of period  31,967   46,467 
         
CASH, end of period $22,108  $62,091 

  2015  2014 
CASH FLOWS FROM OPERATING ACTIVITIES:      
Net loss $(1,108,412) $(86,138)
Adjustments to reconcile net loss to cash provided by (used in) operating activities:        
Depreciation, amortization and depletion  56,596   47,788 
Impairment of plant and equipment  973,860   - 
Change in fair value of profit sharing liability  (70,423)  2,969 
Gain on disposal of equipment and intangible assets  28   96 
Provision (recovery) of doubtful accounts  2,548   (250)
Reservation of mine maintenance fee  187   278 
Stock issued for services and compensation  382   219 
Amortization of deferred financing cost on capital lease  9,765   9,253 
Income (loss) from equity investments  3   (67)
Foreign currency transaction loss  1,122   1,817 
Deferred lease income  (1,088)  (1,088)
Changes in operating assets and liabilities        
Notes receivable  5,238   45,931 
Accounts receivable  (1,888)  (1,008)
Accounts receivable - related parties  5,307   (2,875)
Other receivables  (1,188)  (307)
Other receivables - related parties  32,353   (4,275)
Inventories  2,631   1,286 
Advances on inventory purchases  20,528   (13,968)
Advances on inventory purchases - related parties  39,581   (36,971)
Prepaid expense and other  (19)  (1,947)
Long-term deferred expense  14   111 
Prepaid taxes  1,555   15,747 
Accounts payable  (22,969)  (18,050)
Accounts payable - related parties  2,978   28,204 
Other payables and accrued liabilities  6,223   2,637 
Other payables - related parties  (7,334)  4,824 
Customer deposits  (6,274)  49,187 
Customer deposits - related parties  (191,619)  78,667 
Taxes payable  2,769   (413)
Net cash (used in) provided by operating activities  (247,546)  121,657 
         
CASH FLOWS FROM INVESTING ACTIVITIES:        
Restricted cash  125,868   (51,820)
Loans to unrelated parties  (6,516)  - 
Loans receivable - related party  114,127   - 
Cash proceeds from short term investment  2,606   - 
Payments for short term investment  (7,575)  - 
Cash proceeds from sales of equipment and intangible assets  -   24 
Equipment purchase and intangible assets  (40,174)  (112,713)
Net cash provided by (used in) investing activities  188,336   (164,509)
         
CASH FLOWS FINANCING ACTIVITIES:        
Restricted notes receivable  72,762   286,485 
Borrowings on short term notes payable  497,497   900,202 
Payments on short term notes payable  (628,240)  (1,035,408)
Borrowings on short term loans - bank  97,026   185,023 
Payments on short term loans - bank  (201,944)  (285,100)
Borrowings on short term loan - others  109,420   19,949 
Payments on short term loans - others  (82,814)  (25,417)
Borrowings on short term loan - related parties  223,974   32,576 
Payments on short term loans - related parties  (56,394)  (19,233)
Deposits due to sales representatives  (2,119)  (2,736)
Deposits due to sales representatives - related parties  358   (326)
Borrowings on long-term loans - related party  56,201   - 
Payments on long-term loans - related party  (815)  - 
Principal payment on capital lease obligation  (1,077)  - 
Net cash provided by financing activities  83,835   56,015 
         
EFFECTS OF EXCHANGE RATE CHANGE IN CASH  (16)  (381)
         
INCREASE IN CASH  24,609   12,782 
         
CASH, beginning of period  11,641   31,967 
         
CASH, end of period $36,250  $44,749 

 

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

 

5
 5

  

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1 – Organization and Operations

 

General Steel Holdings, Inc. (the “Company”) was incorporated on August 5, 2002 in the state of Nevada. The Company through its 100% owned subsidiary, General Steel Investment, operates steel companies serving various industries in the People’s Republic of China (“PRC”). The Company’s main operation is manufacturing and sales of steel products such as steel rebar, hot-rolled carbon and silicon sheets and spiral-weld pipes. The Company, together with its subsidiaries, majority owned subsidiaries and variable interest entity, is referred to as the “Group”.

  

On April 29, 2011, a 20-year Unified Management Agreement (“the Agreement”) was entered into between the Company, the Company’s 60%-owned subsidiary Shaanxi Longmen Iron and Steel Co., Ltd. (“Longmen Joint Venture”), Shaanxi Coal and Chemical Industry Group Co., Ltd. (“Shaanxi Coal”) and Shaanxi Iron and Steel Group (“Shaanxi Steel”). Shaanxi Steel is the controlling shareholder of Shaanxi Longmen Iron and Steel Group Co., Ltd (“Long Steel Group”) which is the non-controlling interest holder in Longmen Joint Venture, and Shaanxi Coal, a state owned entity, is the parent company of Shaanxi Steel. Under the terms of the Agreement, all manufacturing machinery and equipment of Longmen Joint Venture and the $605.8 million (or approximately RMB 3.7 billion) of the constructed iron and steel making facilities owned by Shaanxi Steel, which includes one 400 m2 sintering machine, two 1,280 m3 blast furnaces, two 120 ton converters and some auxiliary systems, are managed collectively as a single virtual asset pool (“Asset Pool”). Longmen Joint Venture manages the Asset Pool as the principal operating entity and is responsible for the daily operations of the new and existing facilities. The Agreement leverages each of the parties’ operating strengths, allowing Longmen Joint Venture to derive the greatest benefit from the cooperation and the newly constructed iron and steel making facilities. At the designed efficiency level, the facilities contribute three million tons of crude steel production capacity per year.

 

Longmen Joint Venture pays Shaanxi Steel for the use of the constructed iron and steel making facilities an amount equaling the depreciation expense on the equipment constructed by Shaanxi Steel as well as 40% of the pre-tax profit generated by the Asset Pool. The remaining 60% of the pre-tax profit is allocated to Longmen Joint Venture. As a result, the Company’s economic interest in the profit or loss generated by Longmen Joint Venture decreased from 60% to 36%. However, the overall capacity under the management of Longmen Joint Venture increased by three million tons, or 75%. The Agreement improved Longmen Joint Venture’s cost structure through sustainable and steady sourcing of key raw materials and reduced transportation costs. The distribution of profit is subject to a prospective adjustment after the first two years based on each entity’s actual investment of time and resources into the Asset Pool. There has been no adjustment to the Agreement from its inception to the present time nor intention to make future adjustment by the Company and Shaanxi Steel.

 

The parties to the Agreement established the Shaanxi Longmen Iron and Steel Unified Management Supervisory Committee ("Supervisory Committee") to ensure that the facilities and related resources are operated and managed according to the stipulations set forth in the Agreement. The Board of Directors of Longmen Joint Venture, of which the Company holds 4 out of 7 seats, requires a simple majority vote and remains the controlling decision-making body of Longmen Joint Venture and the Asset Pool. See Note 2(c) “Consolidation of VIE.”

 

The Agreement constitutes an arrangement that involves a lease which meets certain of the criteria of a capital lease and therefore the assets constructed by Shaanxi Steel are accounted for by Longmen Joint Venture as a capital lease. The profit sharing liability portion of the lease obligation, representing 40% of the cumulative pre-tax profit generated by the Asset Pool, is accounted for by Longmen Joint Venture as a derivative financial instrument at fair value. See Notes 2 “Summary of significant accounting policies”, Note 15 “Capital lease obligations” and Note 16 “Profit sharing liability”.

In view of the near-term challenges for the steel sector (see Note 2(d) Liquidity and Going Concern), the Company strategically accelerating the Company’s business transformation. The Company’s transformation strategy is to pursue opportunities that offer compelling benefits to our organization and shareholders, including:

·First, strengthen the Company’s financials while providing the financial flexibility to pursue higher return, higher growth opportunities;
·Second, reduce the complexity of the Company’s business structure, which is consistent with the Company’s objectives for internal simplification and operating efficiency;
·Third, diversify operating risk in order to lower the Company’s high reliance on steel business, while at the same time leverage on the Company’s vast vertical resources in the steel industry; and
·Fourth, pursue opportunities for additional value creation.

6

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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. The formation of this joint venture represents a unique opportunity to accelerate the Company’s expansion into the vibrant logistics and Internet-of-Things sectors. General Shengyuan IoT is still in the development stage and no revenues and significant operating expenses during the three and six months ended June 30, 2015.

 

Note 2 – Summary of significant accounting policies

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The financial statements include the accounts of all directly, indirectly owned subsidiaries and the variable interest entity listed below. All material intercompany transactions and balances have been eliminated in consolidation. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the financial statements have been included. Interim results are not necessarily indicative of results to be expected for the full year. The information included in this Form 10-Q should be read in conjunction with information included in the 20132014 annual report on Form 10-K/A10-K filed on August 19, 2014.April 10, 2015.

(a)Basis of presentation

 

The consolidated financial statements of the Company reflect the activities of the following major directly owned subsidiaries:

 

Subsidiary Percentage
of Ownership
 
General Steel Investment Co., Ltd. British Virgin Islands  100.0%
General Steel (China) Co., Ltd. (“General Steel (China)”) PRC  100.0%
Baotou Steel –Tianjin General Steel Special Steel Pipe Joint VentureShengyuan IoT Technology Co., Ltd. (“General Shengyuan”) PRC  80.070.0%
Yangpu Shengtong Investment Co., Ltd. (“Yangpu Shengtong”) PRC  99.1%
Tianjin Qiu Steel Investment Co., Ltd. (“Qiu Steel”) PRC  98.7%
Longmen Joint Venture PRC  VIE/60.0%
Maoming Hengda Steel Company, Ltd. (“Maoming Hengda”) PRC  99.0%

 

TianwuBaotou Steel

Prior to November 19, 2013,December 31, 2014, the Company held a 60.0%an 80.0% equity interest in TianwuBaotou Steel – General Steel Material TradingSpecial Steel Pipe Joint Venture Co., Ltd. (“Tianwu”Baotou Steel”). 32% interest was held by through General Steel (China) and 28% interest was held by Yangpu Shengtong.. On November 19, 2013,December 31, 2014, the Company sold its 28%80.0% equity interest of Tianwu held by Yangpu Shengtongin Baotou Steel to Tianjin Dazhan IndustryShuangjie Liansheng Rolled Steel Co., Ltd., a relatedan unrelated party through indirect common ownership, for $13.6$0.7 million (RMB 84.34.0 million) while retaining 32% interest held by General Steel (China)., receivable within one year of the sale. As a result of this transaction, the Company met the criteria under ASC 810-10-40-4 to deconsolidate TianwuBaotou Steel at the disposal date and recognized a gain of $1.0 million in the fourth quarter of 2013 in accordance with ASC 810-10-40-5. At

General Shengyuan

On February 13, 2015, the same time,Company formed a joint venture entity, Tianjin General Steel (China)’s remaining 32% interest is accounted for as an investment in unconsolidated subsidiaries usingShengyuan IoT Technology Co., Ltd, with a team of radio-frequency identification (“RFID”) experts (the “Expert Team”), to develop and commercialize RFID technology data solutions. Under the equity method. See Note 2(t) - Investments in unconsolidated entities for details.terms of the Agreement, the Company owned 70% of the joint venture by contributing $1.6 million (RMB 10.0 million), while the Expert Team committed to contribute intellectual property, including proprietary RFID technologies, licensed patents and domain expertise.

 

(b)Principles of consolidation – subsidiaries

 

The accompanying unaudited condensed 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.

7

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

All significant inter-company transactions and balances have been eliminated upon consolidation.

 

(c)Consolidation of VIE

 

Prior to entering into the Unified Management Agreement on April 29, 2011, Longmen Joint Venture had been consolidated as the Company’s 60% direct owned subsidiary. Upon entering into the Unified Management Agreement on April 29, 2011, Longmen Joint Venture was re-evaluated by the Company to determine if Longmen Joint Venture is a VIE and if the Company is the primary beneficiary.

 

Longmen Joint Venture’s equity at risk is considered insufficient to finance its activities and therefore Longmen Joint Venture is considered to be a VIE.

 

The Company would be considered the primary beneficiary of the VIE if it has both of the following characteristics:

 

a.The power to direct the activities of the VIE that most significantly impact the VIE’s economic performance; and
b.The obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.

 

A Supervisory Committee was formed during the negotiation of the Unified Management Agreement. Given there is both a Supervisory Committee and a Board of Directors with respect to Longmen Joint Venture , the powers (rights and roles) of both bodies were considered to determine which party has the power to direct the activities of Longmen Joint Venture, and by extension, whether the Company continues to have the power to direct Longmen Joint Venture’s activities after this Supervisory Committee was formed and the significant investment in plant and equipment by owners of the Longmen Joint Venture partner. The Supervisory Committee, in which the Company holds 2 out of 4 seats, requires a ¾ majority vote, while the Board of Directors, on which the Company holds 4 out of 7 seats, requires a simple majority vote. As the Supervisory Committee’s role is limited to supervising and monitoring management of Longmen Joint Venture and in the event there is any disagreement between the Board and the Supervisory Committee, the Board prevails, the Supervisory Committee is considered subordinate to the Board. Thus, the Board of Directors of Longmen Joint Venture continues to be the controlling decision-making body with respect to Longmen Joint Venture. The Company, which controls 60% of the voting rights of the Board of Directors, has control over the operations of Longmen Joint Venture and as such, has the power to direct the activities of the VIE that most significantly impact Longmen Joint Venture’s economic performance.

In connection with the Unified Management Agreement, the Company, Shaanxi Coal and Shaanxi Steel may provide such support on a discretionary basis or as needed in the future. See Note 2 item (d) Liquidity.2(d) Liquidity and Going Concern.

 

The Company has the obligation to absorb losses and the rights to receive benefits based on the profit allocation as stipulated by the Unified Management Agreement that are significant to the VIE. As both conditions are met, the Company is the primary beneficiary of Longmen Joint Venture and therefore, continues to consolidate Longmen Joint Venture as a VIE.

 

The Company believes that the Unified Management Agreement between Longmen Joint Venture and Shaanxi Coal is in compliance with PRC law and is legally enforceable. However, PRC law and/or uncertainties in the PRC legal system could limit the Company’s ability to enforce the Unified Management Agreement, which in turn, may lead to reconsideration of the VIE assessment and the potential for a different conclusion. If the Unified Management Agreement cannot be enforced, the Company would not consolidate Longmen Joint Venture as a VIE. However, the current PRC legal system has not limited the Company’s ability to enforce the Unified Management Agreement nor does the Company believe it is likely to do so in the future. The Company makes an ongoing assessment to determine whether Longmen Joint Venture is a VIE.

 

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

 

 September 30, 2014 December 31, 2013  June 30, 2015 December 31, 2014 
 (in thousands) (in thousands)  (in thousands) (in thousands) 
Current assets $1,037,052  $1,282,054  $641,541  $837,135 
Plant and equipment, net  1,508,595   1,262,144   565,978   1,537,687 
Other noncurrent assets  37,724   29,014   24,150   33,396 
Total assets  2,583,371   2,573,212   1,231,669   2,408,218 
Total liabilities  3,145,353   (3,040,879)  (2,876,140)  (2,946,126)
Net liabilities $(561,982) $(467,667) $(1,644,471) $(537,908)

8

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

VIE and its subsidiaries’ liabilities consist of the following:

 

  September 30, 2014  December 31, 2013 
  (in thousands)  (in thousands) 
Current liabilities:        
Short term notes payable $776,198  $988,364 
Accounts payable  579,077   393,816 
Accounts payable - related parties  257,548   235,116 
Short term loans - bank  204,576   267,688 
Short term loans - others  54,163   55,844 
Short term loans - related parties  222,792   125,236 
Current maturities of long-term loans – related party  56,199   56,614 
Other payables and accrued liabilities  41,277   37, 028 
Other payables - related parties  96,094   88,914 
Customer deposits  108,340   87,661 
Customer deposits - related parties  17,876   18,359 
Deposit due to sales representatives  29,917   24,343 
Deposit due to sales representatives – related parties  2,308   1,997 
Taxes payable  2,511   3,357 
Deferred lease income  2,171   2,187 
Capital lease obligations, current  6,825   4,321 
Intercompany payable to be eliminated  60,501   21,420 
Total current liabilities  2,518,373   2,412,265 
Non-current liabilities:        
Long term loans - related parties  15,925   16,043 
Deferred lease income - noncurrent  73,077   75,257 
Capital lease obligations, noncurrent  388,615   375,019 
Profit sharing liability at fair value  149,363   162,295 
Total non-current liabilities  626,980   628,614 
Total liabilities of consolidated VIE $3,145,353  $3,040,879 
  Three months ended
September 30, 2014
  Three months ended
September 30, 2013
 
  (in thousands)  (in thousands) 
Sales $559,317  $606,444 
Gross profit $9,010  $8,122 
Income from operations $9,746  $30,306 
Net income attributable to controlling interest $(3,378) $8,284 
  June 30, 2015  December 31, 2014 
  (in thousands)  (in thousands) 
Current liabilities:        
Short term notes payable $510,653  $638,829 
Accounts payable  588,959   605,025 
Accounts payable - related parties  206,777   205,914 
Short term loans – bank  113,352   216,940 
Short term loans – others  83,497   54,524 
Short term loans - related parties  279,280   45,710 
Other payables and accrued liabilities  54,028   47,121 
Other payables - related parties  53,796   78,615 
Customer deposits  83,519   87,372 
Customer deposits - related parties  24,311   34,895 
Deposit due to sales representatives  15,782   17,871 
Deposit due to sales representatives – related parties  2,872   2,509 
Taxes payable  6,816   4,026 
Deferred lease income  2,180   2,176 
Capital lease obligations, current  9,942   8,508 
Intercompany payable to be eliminated  14,269   20,155 
Total current liabilities  2,050,033   2,070,190 
Non-current liabilities:        
Long term loans - related parties  353,067   339,549 
Deferred lease income - noncurrent  71,757   72,713 
Capital lease obligations, noncurrent  401,283   393,252 
Profit sharing liability  -   70,422 
Total non-current liabilities  826,107   875,936 
Total liabilities of consolidated VIE $2,876,140  $2,946,126 

 

 Nine months ended
September 30, 2014
 Nine months ended
September 30, 2013
  Three months
ended
June 30, 2015
 Three months
ended
June 30, 2014
 
 (in thousands) (in thousands)  (in thousands) (in thousands) 
Sales $1,740,645  $1,903,933  $528,778  $587,314 
Gross profit (loss) $15,020  $(23,704)
Gross (loss) profit $(64,220) $28,229 
(Loss) income from operations $(21,420) $20,558  $(1,005,820) $8,128 
Net loss attributable to controlling interest $(49,489) $(18,335) $(613,117) $(8,077)

  Six months
ended
June 30, 2015
  Six months
ended
June 30, 2014
 
  (in thousands)  (in thousands) 
Sales $856,936  $1,181,328 
Gross (loss) profit $(96,367) $6,010 
Loss from operations $(1,059,318) $(31,166)
Net loss attributable to controlling interest $(655,522) $(46,111)

 

Longmen Joint Venture has two 100% owned subsidiaries, Yuxin Trading Co., Ltd. (“Yuxin”) and Yuteng Trading Co., Ltd. (“Yuteng”). Longmen Joint Venture also has two consolidated subsidiaries, Hualong and Huatianyulong, in which it does not hold a controlling interest. Hualong and Huatianyulong are separate legal entities which were established in the PRC as limited liability companies and subsequently invested in by Longmen Joint Venture in June 2007 and July 2008, respectively. However, these two entities do not meet the definition of variable interest entities. Further consideration was given to whether consolidation was appropriate under the voting interest model, specifically where the power of control may exist with a lesser percentage of ownership (i.e. less than 50%), for example, by contract, lease, agreement with other stockholders or by court decree.

9

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Hualong

 

Longmen Joint Venture, the single largest shareholder, holds a 36.0% equity interest in Hualong. The other two shareholders, who own 34.67% and 29.33% respectively, assigned their voting rights to Longmen Joint Venture in writing at the time of the acquisition of Hualong. The voting rights have been assigned through the date Hualong ceases its business operations or the other two shareholders sell their interest in Hualong. Hualong’s main business is to supply refractory. The assets, liabilities and the operating results of Hualong are immaterial to the Company’s consolidated financial statements as of SeptemberJune 30, 20142015 and December 31, 2013, respectively,2014 and for the three and ninesix months ended SeptemberJune 30, 20142015 and 2013,2014, respectively.

 

Huatianyulong

 

Longmen Joint Venture holds a 50.0% equity interest in Huatianyulong and the other unrelated shareholder holds the remaining 50.0%. The other shareholder assigned its voting rights to Longmen Joint Venture in writing at the time of acquisition of Huatianyulong. The voting rights have been assigned through the date Huatianyulong ceases its business operation or the other unrelated shareholder sells its interest in Huatianyulong. Huatianyulong mainly sells imported iron ore. The assets, liabilities and the operating results of Huatianyulong are immaterial to the Company’s consolidated financial statements as of SeptemberJune 30, 20142015 and December 31, 2013, respectively,2014 and for the three and ninesix months ended SeptemberJune 30, 20142015 and 2013,2014, respectively.

 

The Company has determined that it is appropriate for Longmen Joint Venture to consolidate Hualong and Huatianyulong with appropriate recognition in the Company’s financial statements of the non-controlling interests in each entity, beginning on the acquisition dates as these were also the effective dates of the agreements with other stockholders granting a majority voting rights in each entity, and thereby, the power of control, to Longmen Joint Venture.

 

(d)Liquidity and going concern

 

The Company’s accounts have been prepared underassuming 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 options (debt and equity) with the expenditure requirements of the Company and repayment of the short-term debt facilities as and when they fall due.

 

The steel business is capital intensive and as a normal industry practice in the PRC, the Company is highly leveraged. Debt financing in the form of short term bank loans, loans from related parties, financing sales, bank acceptance notes, and capital leases have been utilized to finance the working capital requirements and the capital expenditures of the Company. As a result, the Company’s debt to equity ratio as of SeptemberJune 30, 20142015 and December 31, 20132014 were (5.7)(1.8) and (6.5)(5.6), respectively. As of SeptemberJune 30, 2014,2015, the Company’s current liabilities exceed current assets (excluding non-cash item) by $1.5 billion.billion, which together with the gross loss from operations raises substantial doubt about its ability to continue as a going concern.

Our steel business has faced very tough market conditions and challenging profitability over the last several years, and based on current trends, we think the near-term challenges for the steel sector will likely linger. In reaction to this challenging market, we are proactively reviewing our strategy and asset portfolio and seeking to restructure low-efficient, non-core assets, as well as idle land resources to unlock hidden fair value.

The Company aims to transform into a leaner and fitter organization with better profitability. As such, the Company is strategically accelerating its business transformation to pursue opportunities that offer compelling benefits to the Company and shareholders, including:

·First, strengthen the Company’s financials while providing the financial flexibility to pursue higher return, higher growth opportunities;
·Second, reduce the complexity of the Company’s business structure, which is consistent with our objectives for internal simplification and operating efficiency;
·Third, diversify operating risk in order to lower the Company’s high reliance on steel business, while at the same time leverage on the Company’s vast vertical resources in the steel industry; and
·Fourth, pursue opportunities for additional value creation.

10

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Management has implemented the following plans that are intended to mitigate the conditions or events that raise substantial doubt about the Company’s ability to continue as a going concern.

Longmen Joint Venture, as the most important entity of the Company, accounted for a majority of the total sales of the Company. As such, the majority of the Company’s working capital needs come from Longmen Joint Venture. The Company’s ability to continue as a going concern depends heavily on Longmen Joint Venture’s operations, as well as its ability to obtain external financial supports, including but not limited to lines of credit from banks and vendor financing. If Longmen Joint Venture does not maintain a sufficient level of financial support by renewing its financing terms with existing financing sources or obtaining new sources of financial support, there may be an immediate negative impact on the Company’s operations and its ability to continue as a going concern.operations. Longmen Joint Venture has obtained different types of financial support,supports, which are listed below by category:

 

LinesLine of credit

 

The Company has lines of credit from the listed major banks totaling $141.4$150.2 million with expiration dates ranging from November 28, 2015October 14, 2016 to January 30,December 26, 2016.

 

Banks Amount of
Line of Credit
(in millions)
  Repayment Date
China Minsheng Bank  97.5  November 28, 2015
China Everbright Bank  19.5  January 21, 2016
Huaxia Bank  24.4  January 30, 2016
Total $141.4   
Banks Amount of
Line of Credit
(in millions)
  Repayment Date
Bank of China  19.6  December 3, 2016
Bank of Beijing  81.6  October 14, 2016
Bank of Chongqing  49.0  December 26, 2016
Total $150.2   

 

As of the date of this report, the Company utilized $80.0 million$nil of these lines of credit.

 

Vendor financing

 

Longmen Joint Venture signed additional vendor financing agreements, which will provide liquidity to the Company in a total amount of $893.8$1,060.8 million with the following companies:

 

Company Financing Period Financing Amount
(in millions)
  Financing Period Financing Amount
(in millions)
 
         
Company A – related party July 30, 2014 – July 30, 2019 $243.8  July 30, 2014 – July 30, 2019 $244.8 
Company B – third party January 22, 2014 – January 22, 2017  162.5  January 22, 2014 – January 22, 2017  163.2 
Company C – third party October 1, 2013 – March 31, 2016  487.5  October 1, 2013 – September 30, 2017  652.8 
Total   $893.8    $1,060.8 

 

Company A, a related party company and Company B, a third party company, are both Longmen Joint Venture’s major coke suppliers. They have been doing business with Longmen Joint Venture for many years. On July 30, 2014, Company A signed a five-year agreement with Longmen Joint Venture to finance its coke purchases up to $243.8$244.8 million. Company B signed a three-year agreement with Longmen Joint Venture on January 22, 2014 to finance its coke purchases up to $162.5$163.2 million. According to the above signed agreements, both Company A and B will not demand any cash payments during their respective financing periods. As of the date of this report, the Company’s payables to Company A and Company B were approximately $72.2$41.7 million and $78.6$55.0 million, respectively.

 

Company C is a Fortune 500 Company. On June 28, 2013, Company C signed an agreement with Longmen Joint Venture to finance Longmen Joint Venture’s purchase of iron ore for an amount up to $487.5$489.3 million to commence on October 1, 2013 and end on March 31, 2015. On August 1, 2014, Company C signed an extension agreement with the Company and extended the financing terms to March 31, 2016. On August 1, 2015, Company C signed another extension agreement with the Company and extended the financing terms to September 30, 2017 with amount up to $652.8 million. Subject to the terms of the agreement, Longmen Joint Venture is subject to a penalty of 0.05% of the daily outstanding balance owed to Company C in an event of late payment. As of the date of this report, the Company did not haveCompany’s payable to Company C.C was approximately $nil.

11

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Other financing

 

On March 5, 2014, April 22, 2014, April 23, 2014, and OctoberApril 30, 2014,2015, Longmen Joint Venture signed two-to-three-year payment extension agreements with Company D, E, F, G H and IH listed below. In addition, Shaanxi Steel, a related party, agreed to finance the construction of Longmen Joint Venture’s #5 blast furnace, which commenced in March 2013, for construction-related payments up to $321.8 million (RMB 1.98 billion) and would not demand payment from Longmen Joint Venture until it would have available funds for repayment. As of September 30, 2014, Longmen Joint Venture’s payable related to the construction of the #5 blast furnace amounted to $218.9 million. In total, Longmen Joint Venture can obtain $662.6$412.9 million in financial support from payment extensions granted by the following sevenfive companies:

Company Financing Period Financing Amount
(in millions)
 
      
Company D – related party April 22, 2014 – April 22, 2017 $81.3 
Company E – related party April 23, 2014 – April 23, 2017  86.0 
Company F – related party April 22, 2014 – April 22, 2017  81.3 
Company G – related party March 5, 2014 – March 5, 2016  56.9 
Company H – related party March 5, 2014 – March 5, 2016  56.9 
Company I – related party October 30, 2014 – October 30, 2017  81.3 
Shaanxi Steel – related party Extended until funds available for repayment  218.9 
Total   $662.6 

Company Financing Period Financing Amount
(in millions)
 
      
Company D – related party April 22, 2014 – April 22, 2017 $81.6 
Company E – related party April 23, 2014 – April 23, 2017  86.5 
Company F – related party April 22, 2014 – April 22, 2017  81.6 
Company G – related party April 30, 2015 – April 30, 2018  81.6 
Company H – related party April 30, 2015 – April 30, 2018  81.6 
Total   $412.9 

 

As of the date of this report, our payables to Company D, Company E, Company F, Company G, and Company H Company I and Shaanxi Steel are approximately $16.3$0.2 million, $41.4$2.4 million, $11.6$21.6 million, $0, $0, $0$3.3 million, and $81.3$0.9 million, respectively.

 

Amount due to sales representatives

 

Longmen Joint Venture entered into agreements with various entities to act as the Company’s exclusive sales agents in specified geographic areas.  These exclusive sales agents must meet certain criteria and are required to deposit a certain amount of money with the Company. In return, the sales agents receive exclusive sales rights in a specified area and discounted prices on products they order. These deposits bear no interest and are required to be returned to the sales agent once the agreement is terminated. As of SeptemberJune 30, 2014,2015, Longmen Joint Venture has collected a total amount of $32.2$18.7 million. Historically, this amount is quite stable and we do not expect a big fluctuation in this amount for the next twelve months from SeptemberJune 30, 20142015 onwards.

 

With the financial support from the banks and the companies above and management’s continued effort in obtaining additional financial supports from banks and other companies, management is of the opinion that the Company hasplans outlined above and summarized below are expected to provide sufficient funds to meet its future operations, working capital requirements and debt obligations until the end of SeptemberJune 30, 2015.2016. However, these plans are based on the demand of the Company's products, economic conditions, the overcapacity issue in the steel industry and the Company's operating results not continuing to deteriorate and on our continued significant reliance on 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
ending September 30,
2015
 
Current liabilities over current assets (excluding deferred lease income) as of September 30, 2014 (unaudited) $(1,537.9)
Projected cash financing and outflows:    
Cash provided by lines of credit from banks  141.4 
Cash provided by vendor financing  893.8 
Cash provided by other financing  662.6 
Cash provided by sales representatives  32.2 
Cash projected to be used in operations in the twelve months ending September 30, 2015  (33.5)
Cash projected to be used for financing cost in the twelve months ending September 30, 2015  (58.0)
Net projected change in cash for the twelve months ending September 30, 2015 $100.6 

As a result, the unaudited condensed consolidated financial statements as of September 30, 2014 have been prepared on a going concern basis.

  Cash inflow (outflow)
(in millions)
 
  For the twelve months
ended June 30, 2016
 
Current liabilities over current assets (excluding deferred lease income) as of June 30, 2015 (unaudited) $(1,455.3)
Projected cash financing and outflows:    
Cash provided by line of credit from banks  150.2 
Cash provided by vendor financing  1,060.8 
Cash provided by other financing  412.9 
Cash provided by sales representatives  18.7 
Cash projected to be used in operations in the twelve months ended June 30, 2016  (58.3)
Cash projected to be used for financing cost in the twelve months ended June 30, 2016  (59.6)
Net projected change in cash for the twelve months ended June 30, 2016 $69.4 

 

(e)Use of estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the accompanying consolidated financial statements and footnotes. 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 offor property, plant and equipment, and potential losses on uncollectible receivables, the allowance for inventory valuation, the interest rate used in the financing sales, the fair value of the assets recorded under capital leaseslease and the present value of the net minimum lease payments of the capital leases.lease. Actual results could differ from these estimates.

12

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Impairment

One of the Company’s most significant estimates is 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 or that significant adjustments won’t be required in the future.

 

(f)Concentration of risks and uncertainties

 

The Company’s operations are carried out in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC’s economy. The Company’s operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in North America and Western Europe. The Company’s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

Through the quarter ended June 30, 2015, the Company has incurred recurring losses from the Company’s operations from the last several years as the Company’s steel business has faced very tough market conditions and challenging profitability. Management has continued its effort to implementing cost savings on our manufacturing overhead costs and to reduce our unit production cost. The Company has forecasted its loss will be continued until year 2021 and expected to make a turning point and become profitable in year 2022 and beyond. The Company’s forecast is based on current market condition, if the future market condition is different from its forecast, the Company might continue to incur additional loss in 2022 and beyond and the Company’s assets pool of its long-lived assets may become further impaired see note 2(j).

The Company has significant exposure to the price fluctuation of raw materials and energy prices as part of its normal operations. TheAs of June 30, 2015 and December 31, 2014, the Company doesdid not utilizehave any open commodity contracts to mitigate such risks.

 

Cash includes demand deposits in accounts maintained with banks within the PRC, Hong Kong and the United States. Total cash (including restricted cash balances) in these banks on SeptemberJune 30, 20142015 and December 31, 20132014 amounted to $405.4$266.5 million and $431.3$367.2 million, including $ 5.1$0.6 million and $ 2.0$1.0 million that were deposited in Shaanxi Coal and Chemical Industry Group Financial Co., Ltd., a related party, respectively. As of SeptemberJune 30, 2014, $ 0.12015, $0.02 million cash in the bank was covered by insurance. The Company has not experienced any losses in itsother bank accounts and depositsbelieves it is not exposed to any risks on its cash in a number of different banks to minimize its exposure to credit risk.bank accounts.

 

The Company’s five major customers are all distributors and collectively represented 16.0% and 16.9%One of the Company’s customers individually accounted for 11.6% and 11.2% of total sales for the three and ninesix months ended SeptemberJune 30, 2014,2015 respectively. Two of the Company’s customers individually accounted for 28.3% and 10.7% of total accounts receivable, including related parties as of June 30, 2015. None of the five majorCompany’s customers accounted for more than 10% of the total sales for the three and ninesix months ended SeptemberJune 30, 2014. The Company’s five major customers represented 25.5% and 23.4% of the Company’s total sales for the three and nine months ended September 30, 2013, respectively. None of the five majorTwo customers individually accounted for more than 10%32.1% and 20.5% of the total sales for the three months or the nine months ended September 30, 2013. None of the five major customers has accounts receivable, including related parties with the Company as of September 30, 2014 and December 31, 2013,2014, respectively.

 

ForOne of the company’s supplier individually accounted for 16.6% and 10.5% of the total purchases for the three months and ninesix months ended SeptemberJune 30, 2014, the Company purchased 18.8% and 29.5% of its raw materials from five major suppliers,2015, respectively. NoneOne of the five majorCompany’s suppliers individually accounted for more than 10%12.8% and 12.7% of the total purchases for the three and nine months end September 30, 2014. Purchases from the five major suppliers represented 15.3% and 29.3% of the Company’s total purchases for the three months and ninesix months ended SeptemberJune 30, 2013, respectively.2014. None of the five major suppliers individually accounted for more than 10% of the total purchases for the three months or nine months ended September 30, 2013, respectively. These five suppliers accounted for 25.7% and 29.1% of total accounts payable, including related parties, as of September 30, 2014 and December 31, 2013, respectively. None of the five majorCompany’s suppliers individually accounted for more than 10% of total accounts payable as SeptemberJune 30, 20142015 and December 31, 2013.2014.

 

(g)Foreign currency translation and other comprehensive income

 

The reporting currency of the Company is the U.S. dollar. The Company’s subsidiaries and VIE in China use the local currency, Renminbi (“RMB”), as their functional currency. Assets and liabilities are translated at the unified exchange rate as quoted by the People’s Bank of China at the end of the period. The statementsstatement of operations accounts are translated at the average translation rates and the equity accounts are translated at historical rates. Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statement of equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.

13

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Translation adjustments included in accumulated other comprehensive income amounted to $(0.2)$(1.3) million and $0.7$0.6 million as of SeptemberJune 30, 20142015 and December 31, 2013,2014, respectively. The balance sheet amounts, with the exception of equity at SeptemberJune 30, 20142015 and December 31, 20132014 were translated at 6.156.13 RMB and 6.116.14 RMB to $1.00, respectively. The equity accounts were stated at their historical rate. The average translation rates applied to the statementsstatement of operations accounts for the three months ended SeptemberJune 30, 2015 and 2014 and 2013 were 6.166.12 RMB and 6.16 RMB, respectively. The average translation rates applied to the statementsstatement of operations accounts for the ninesix months ended SeptemberJune 30, 2015 and 2014 and 2013 were 6.156.14 RMB and 6.216.14 RMB, respectively. Cash flows are also translated at average translation rates for the periods; as a result,periods, therefore, amounts reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances inon the consolidated balance sheet.

 

The PRC government imposes significant exchange restrictions on fund transfers out of the PRC that are not related to business operations. These restrictions have not had a material impact on the Company because it has not engaged in any significant transactions that are subject to the restrictions.

 

(h)Financial instruments

 

The accounting standard regarding fair value of financial instruments and related fair value measurements defines financial instruments and requires disclosure of the fair value of financial instruments held by the Company. The Company considers the carrying amount of cash, short term investments, accounts receivable, other receivables, accounts payable and accrued liabilities, to approximate their fair values because of the short period of time between the origination of such instruments and their expected realization. For short term loans and notes payable, the Company concluded the carrying values are a reasonable estimate of fair values because of the short period of time between the origination and repayment and as their stated interest rates approximate current rates available. The carrying value of the long term loans-related party approximates its fair value as of the reporting date as their stated interest rates approximate current market rates available.

 

The accounting standards define fair value, establish a three-level valuation hierarchy for disclosures of fair value measurement and enhance disclosure requirements for fair value measures. The three levels are defined as follow:

·Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
·Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.
·Level 3 inputs to the valuation methodology are unobservable and significant to the fair value.

The Company analyzes all financial instruments with features of both liabilities and equity, pursuant to which warrants previously issued by the Company were required to be recorded as a liability at fair value and marked to market each reporting period. The warrants were accounted for as derivative liabilities and recorded at their fair value, with the change in fair value charged or credited to income each period.  The warrants expired unexercised on May 13, 2013. Prior to their expiration, the fair value of the warrants was estimated using a binomial lattice model, using level 3 inputs.

 

As described in Note 15 - Capital lease obligations, payments related to the capital lease of the Asset Pool consist of two components: (1) a fixed monthly payment of $2.3 million (RMB 14.6 million), based on Shaanxi Steel’s cost to construct the assets, to be paid for the 20 year term of the Unified Management Agreement; and (2) 40% of any remaining pre-tax profits from the Asset Pool, which includes Longmen Joint Venture and the constructed iron and steel making facilities. The aforementioned profit sharing component meets the definition of a derivative instrument under ASC 815-10-15-83 and, accordingly, the profit sharing liability is accounted for separately as a derivative liability. It was recognized initially at its estimated fair value at inception. The estimated fair value is adjusted each reporting period, with changes in the estimated fair value of the profit sharing liability charged or credited to operating income each period.

 

The Company determines the fair value of the profit sharing liability using Level 3 inputs by considering the present value of Longmen Joint Venture’s projected profits/losses, discounted based on our average borrowing rate, which is currently 7.3%6.5%.

 

The fair value of the profit sharing liability will change each period as a result of (a) any changes in our estimate of Longmen Joint Venture’s projected profits/losses over the remaining term of the Agreement, (b) any change in the discount rate used, based on changes in our current or expected borrowing rate, (c) the change in fair value related to the passage of time and change in the number of future periods over which the present value of future cash flows is estimated and (d) any difference between the previously estimated operating results for the current period and actual results.

 

Each period, the Company considers whether the discount rate based on the Company’s average borrowing rate should be adjusted based upon the current and expected future financial condition of the Company. To date,On November 22, 2014, the People’s Bank of China decreased standard bank borrowing rate across the board by 0.4%. Accordingly, the Company has not considered any adjustmentadjusted down the present value discount rate for profit sharing liability by 0.4% from 7.3% to be necessary based upon, but not limited6.9%. On May 11, 2015, the People’s Bank of China decreased the standard bank borrowing rate again across the board by 0.25%. Accordingly, the Company adjusted down the present value discount rate for profit sharing liability by 0.25% from 6.9% to 6.7%. On June 27, 2015 the following assumptions:People’s Bank of China decreased the standard bank borrowing rate again across the board by 0.25%. Accordingly, the Company adjusted down the present value discount rate for profit sharing liability by 0.25% from 6.7% to 6.5%.

 

 ·because the joint venture partner of Longmen Joint Venture is a state-owned enterprise with an excellent credit history, PRC banks grant similar credit treatment to Longmen Joint Venture in terms of credit availability
·the current average borrowing rate of enterprises in the steel industry in the PRC is similar to this borrowing rate
·the current new/renewal borrowing rates of the Company’s bank loans are similar to prior periods
·the People’s Bank of China has not recently adjusted any borrowing rate14 
·PRC bank interest rates are not industry specific. The downtrend in the steel industry did not materially impact the bank borrowing rates for steel companies
·the bank interest rates are assessed by each individual bank and governed by the Chinese banking regulatory bodies. Reports from credit rating research firms are not commonly used by PRC banks

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The projected profits/losses in Longmen Joint Venture are based upon, but not limited to, the following assumptions:

 

·projected selling units and growth in the steel market
·projected unit selling price in the steel market
·projected unit purchase cost in the coal and iron ore markets
·selling and general and administrative expenses to be in line with the growth in the steel market
·projected bank borrowings
·interest rate index
·gross national product index
·industry index
·government policy

 

From inception to December 31, 2012, the assumptions underlying the estimated fair value did not change significantly. Beginning in the first quarter of 2013, the assumptions related to unit selling prices and costs were revised, resulting in a reduction of the estimated profit sharing liability. These assumptions were further revised during 2013. The above assumptions were again reviewed by the Company at SeptemberJune 30, 2015 and December 31, 2014 and the assumptions related to the projected growth in the steel market and costs were revised, resulting in a further reduction of the estimated profit sharing liability. For

The major drivers of the nine monthschange in our estimate were the continuing decrease in the selling price of our products as well as a continuing downtrend in the sluggish infrastructure investment and consumption growth for the next ten years or so. As such, as of December 31, 2014 financial statement issuance we had lowered our projected growth in the steel market for approximately ten years as compared to our previous estimates at December 31, 2013. The variables and the impact on our inputs to the 2014 valuation of profit sharing fair value, as compared to the 2013 valuation of the profit sharing fair value can be summarized as follows:

-Volume Inputs: The most recent 5 year China GDP forecast and Shaanxi GDP forecast decreased on average by 0.4% and 1.4% of GDP, respectively, versus the forecast used in 2013.
-Steel Sales Price Inputs: The most recent China Steel Association price index, together with our actual result decreased, on average, by 5.6% versus the same forecast used in 2013.
-Raw Material Cost Inputs: The most recent China Steel Association price index, together with the our actual result decreased, on average, by 4.7% versus the same forecast used in 2013

The above reduced our Gross Profit % over the next 5 years by, on average, 0.4% from the 2013 valuation. In addition, the above reduced our Gross Profit % over the remaining profit sharing period of 11.33 years by, on average, 1.75% from the 2013 valuation at December 31, 2014.

As a result of the changes in valuation inputs noted above for the year ended September 30,December 31, 2014, the Company recognized a gain on the change in the fair value of the profit sharing liability of $11.8$91.0 million due to a $17.1$110.6 million reduction in the fair value of profit sharing liability resulting from the change in estimates of future operating profits and a $3.4$0.1 million reduction resulting from the Asset Pool’s operating results for the nine monthsyear ended September 30,December 31, 2014 being slightly less favorable than previously estimated as of December 31, 2013, offset by a $8.8$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:

-Volume Inputs: the Company reduced our projected sales volume in 2015 by 3% versus the forecast used in 2014.
-Steel Sales Price Inputs: the Company reduced our projected selling price in 2015 by 12% versus the forecast used in 2014 and reduced our projected selling price in 2016 by 7% versus the forecast used in 2014.

15

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 SeptemberJune 30, 2014 is $149.4 million.2015 was reduced to $0. At the same time, the reduction in the estimated future cash flows expected to be generated from Longmen Joint Venture’s operations caused the value of the Assets Pool to fall below the carrying value of Longmen Joint Venture’s long-lived assets, which triggered an impairment of $973.9 million (see Note 2(j)).

The variables and the impact on the Company’s inputs to the second quarter of 2015 valuation of profit sharing fair value, as compared to the first quarter valuation of the profit sharing fair value can be summarized as follows:

-Volume Inputs: the Company increased our projected sales volume between 2015 and 2031 in response to recent policy initiatives from the Chinese government to boost infrastructure investment and further steel industry consolidation.
-Steel Sales Price Inputs: the Company reduced our projected selling price in 2015 by 19% versus the forecast used in the first quarter of 2015 and reduced our projected selling price between 2016 and 2031 proportionally based on the reduction for 2015.
-Raw Material Cost Inputs: based on the actual results in the second quarter of 2015 and the latest market trends, the Company reduced cost of goods sold in 2015 by 12% versus the forecast used in the first quarter of 2015 and reduced our projected cost of goods sold between 2016 and 2031 proportionally based on the reduction for 2015.

Changes in any of the assumptions used to estimate the fair value of the profit sharing liability and to determine whether and how much the carrying value of Longmen Joint Venture’s long-lived assets has been impaired will change the liabilitydiscounted cash flows of Longmen Joint Venture and the impairment value accordingly. If we were to reduce the projected bank borrowingborrowings rate used to discount the liability to a present value by 1.0% and other factors remained unchanged, our profit sharing liability as of SeptemberJune 30, 20142015 would have been $170.5 million$0 and we would decrease the gain from the change in the fair value of the profit sharing liabilityimpairment expense by $21.2$95.7 million. If we were to reduce the projected selling units and growth in the steel market rate by 1.0% and other factors remained unchanged, our profit sharing liability as of SeptemberJune 30, 20142015 would have been $142.6 million$0 and we would increase the gain from the change in the fair value of the profit sharing liabilityimpairment expense by $6.8$54.6 million.

The following table sets forth by level within the fair value hierarchy, the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2014:

(in thousands) Carrying Value as
of September 30,
2014
  Fair Value Measurements at September 30,
2014
Using Fair Value Hierarchy
 
     Level 1  Level 2  Level 3 
Profit sharing liability $149,363  $-  $-  $149,363 
Total $149,363  $-  $-  $149,363 

 

The following table sets forth by level within the fair value hierarchy, the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2013:2014:

 

(in thousands) Carrying Value as
of December 31,
2013
 Fair Value Measurements at December 31,
2013
Using Fair Value Hierarchy
  Carrying Value
as of
December 31, 2014
 Fair Value Measurements at December 31, 2014
Using Fair Value Hierarchy
 
   Level 1 Level 2 Level 3    Level 1 Level 2 Level 3 
Profit sharing liability $162,295  $-  $-  $162,295  $70,422  $-  $-  $70,422 
Total $162,295  $-  $-  $162,295 

 

The following is a reconciliation of the beginning and ending balance of the assets and liabilities measured at fair value on a recurring basis for the ninesix months ended SeptemberJune 30, 20142015 and for the year ended December 31, 2013:2014:

 

 September 30, 2014 December 31, 2013  June 30, 2015 December 31, 2014 
 (in thousands) (in thousands)  (in thousands) (in thousands) 
Beginning balance $162,295  $328,828  $70,422  $162,295 
Change in fair value of profit sharing liability:                
Change in estimate of future operating profits  (17,146)  (183,528)
Change in preset value of estimate of future operating profits  (71,395)  (110,589)
Change in discount rate  -   -   5,012   8,106 
Interest expense - present value discount amortization  8,795   16,872   2,443   11,544 
Difference between the previously estimated operating results for the current period and actual results  (3,407)  (7,913)  (6,483)  (79)
Change in derivative liabilities - warrants  -   1 
Exchange rate effect  (1,174)  8,035   1   (855)
Ending balance $149,363  $162,295  $-  $70,422 

16

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Except for the derivative liabilities related to the profit sharing liability and to the warrants issued by the Company, which expired on May 13, 2013, theThe Company did not identify any other assets or liabilities that are required to be presented on the balance sheet at fair value.

 

(i)Notes receivable

 

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 requestsrequest 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 expenseexpenses for early submission requests forrequest of payment amounted to $8.3 million and $12.8 million for the three months ended SeptemberJune 30, 2015 and 2014 and 2013respectively.

Interest expenses for early submission request of payment amounted to $10.2 million and 9.6 million, respectively, and amounted to $37.1$16.3 million and $26.9 million respectively, for the ninesix months ended SeptemberJune 30, 2015 and 2014, and 2013.respectively.

 

(j)Plant and equipment, net

 

Plant and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets with a 3%-5% residual value. The depreciation expense on assets acquired under capital leases is included with depreciation expense on owned assets. The estimated useful lives are as follows:

 

Buildings and improvementsImprovements 10-40 Years
Machinery 10-30 Years
Machinery and equipment under capital lease 10-20 Years
Other equipment 5 Years
Transportation equipmentEquipment 5 Years

 

The Company assesses all significant leases for purposes of classification as either operating or capital. At lease inception, if the lease meets any of the four following criteria, the Company will account forclassify it as a capital lease; otherwise it will be treated as an operating lease: a) transfer of ownership to lessee at the end of the lease term, b) bargain purchase option, c) lease term is equal to 75% or more of the estimated economic life of the leased property, d) the present value of the minimum lease payments is 90% or more of the fair value of the leased asset.

 

Construction in progress represents the costs incurred in connection with the construction of buildings or new additions to the Company’s plant facilities. No depreciation is provided for construction in progress until such time as the assets are completed and are placed into service. Maintenance,service, maintenance, repairs and minor renewals are charged directly to expense as incurred. Major additions and bettermentsbetterment 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 theirits 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 has considered Longmen Joint Venture’s carrying amount for property and equipment not being recoverable. The Company uses the undiscounted cash flow approach for the purpose of performing a recoverability test, which includes future cash inflows less associated cash outflows that are directly associated with and that are expected to arise as a direct result of the use and eventual disposition of the assets. For purposes of assessment, the long lived assets were grouped at the lowest level for which there is identifiable cash flows. The major groupings analysis include Longmen Joint Venture, Maoming Hengda and General Steel (China). Further, our estimate of future cash flows includes estimated future cash flows necessary to maintain our existing production potential over the entire period and within the various groups. The projections are based on a best estimate approach of likely outcomes. When the Company identifies an impairment, the Company reduces the carrying amount of the asset to its estimated fair value based on a discounted cash flows method. As of June 30, 2015, the Company expects its long-lived assets to be not fully recoverable and recognized an impairment loss of $973.9 million to reduce its carrying value to its fair value. See note 8

17

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(k)Intangible assets

 

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 SeptemberJune 30, 2014,2015, the Company expects these assets to be fully recoverable.

 

Land use rights

 

All land in the PRC is owned by the government. However, the government grants “land use rights.”  General Steel (China) acquired land use rights in 2001 for a total of $3.9 million (RMB 23.7 million). These land use rights are for 50 years and expire in 2050 and 2053. The Company amortizes the land use rights over the twenty-year business term because its business license hashad a twenty-year term.

 

Long Steel Group contributed land use rights for a total amount of $24.1$24.2 million (RMB 148.3 million) to the Longmen Joint Venture. The contributed land use rights are for 50 years and expire in 2048 to 2052.

 

Maoming Hengda has land use rights amounting to $2.7 million (RMB 16.6 million) for 50 years that expire in 2054.

 

Other than the land use rights that General Steel (China) acquired in 2001, the Company amortizes the land use rights over their 50 year term.

  

Entity Original Cost Expires in  Original Cost Expires on 
 (in thousands)    (in thousands)   
General Steel (China) $3,856   2050 & 2053  $3,872 2050 & 2053 
Longmen Joint Venture $24,097   2048 & 2052  $24,201 2048 & 2052 
Maoming Hengda $2,697   2054  $2,709 2054 

Mining right

 

Mining rights are capitalized at cost when acquired, including amounts associated with any value beyond proven and probable reserves, and amortized to operations as depletion expense using the units-of-production method over the estimated proven and probable recoverable tons. Longmen Joint Venture has iron ore mining rightsright amounting to $2.4$2.5 million (RMB 15.0 million), which is amortized over the estimated recoverable reserve of 4.2 million tons.

 

(l)Investments in unconsolidated entities

 

Entities in which the Company has the ability to exercise significant influence, but does not have a controlling interest, are accounted for using the equity method. Significant influence is generally considered to exist when the Company has an ownership interest in the voting stock between 20% and 50%, and other factors, such as representation on the Board of Directors, voting rights and the impact of commercial arrangements, are considered in determining whether the equity method of accounting is appropriate. The Company accounts for investments with ownership less than 20% using the cost method.

 

The table below summarizes Longmen Joint Venture’s investment holdings as of SeptemberJune 30, 20142015 and December 31, 2013.2014.

 

Unconsolidated entities Year
acquired
 September 30,
2014
Net investment
(In thousands)
 Owned
%
 December 31,
2013
Net investment
(In thousands)
 Owned
%
  Year
acquired
 June 30, 2015
Net
investment
(In thousands)
 Owned % December 31, 2014
Net
investment
(In thousands)
 Owned
%
 
Xi’an Delong Powder Engineering Materials Co., Ltd.  2007  $1,130   24.1  $1,215   24.1   2007  $1,056   24.1  $1,153   24.1 

18

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The table below summarizes General Steel (China)’s investment holding (see Note 2(a) - Basis of presentation) as of SeptemberJune 30, 20142015 and December 31, 2013.2014.

 

Unconsolidated entities Year
acquired
 September 30,
2014
Net investment
(In thousands)
 Owned
%
 December 31,
2013
Net investment
(In thousands)
 Owned
%
  Year
acquired
 June 30, 2015
Net
investment
(In thousands)
 Owned % December 31, 2014
Net
investment
(In thousands)
 Owned
%
 
Tianwu General Steel Material Trading Co., Ltd.  2010  $15,612   32.0  $15,728   32.0   2010  $15,693   32.0  $15,670   32.0 

 

Total investment income in unconsolidated subsidiaries amounted to $0.03 million$34 thousand and $0.05 million$54 thousand for the three months ended SeptemberJune 30, 20142015 and 2013, respectively, and $0.1 million and $0.1 million for the nine months ended September 30, 2014, and 2013, respectively, which was included in “Income from equity investments” in the condensed consolidated statements of operations and comprehensive loss. Total investment income (loss) income.in unconsolidated subsidiaries amounted to $(3) thousand and $67 thousand for the six months ended June 30, 2015 and 2014, respectively, which was included in “Income from equity investments” in the condensed consolidated statements of operations and comprehensive loss.

 

(m)Revenue recognition

 

Sales areis recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, the Company has no other significant obligations and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are met are recorded as customer deposits. Sales represent the invoiced value of goods, net of value-added tax (VAT). All of the Company’s products sold in the PRC are subject to a Chinese value-added tax at a rate of 13% or 17% of the gross sales price. This VAT may be offset by VAT paid by the Company on raw materials and other materials included in the cost of producing the finished product.

 

The Company infrequently engages in trading transactions in which the Company acts as an agent between the suppliers and the customers. The trading arrangements are such that the suppliers are the primary obligors,obligators, the Company does not have any general inventory risk, physical inventory loss risk or credit risk, and the Company does not have latitude in establishing price. Sales and cost of goods sold from these trading arrangements are recorded at the net amount retained in accordance with ASC 605-45. Sales in trading transactions, which were netted against corresponding cost of goods sold, amounted to $127.1 million and $80.9 million for the three months ended June 30, 2015 and 2014, respectively, and $234.8 million and $119.1 million for the six months ended June 30, 2015 and 2014, respectively. The net gain (loss) in gross loss amounted to $(63,151) and $(159,258) for the three months ended June 30, 2015 and 2014, respectively, and $1,843 and $(447,771) for the six months ended June 30, 2015 and 2014, respectively.

 

(n)Recently issued accounting pronouncements

 

In June 2014,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.

In April 2015, the FASB issued Accounting Standards Update (ASU) No. 2014-12 Compensation – Stock Compensation (Topic 718), Accountingauthoritative guidance on accounting for Share-Based Payments WhenInterest-Imputation of Interest (Subtopic 835-30); Simplifying the TermsPresentation of an Award Provide ThatDebt Issuance Costs (“ASU 2015-03”). This update requires that debt issuance cost related to a Performance Target Could Be Achieved afterrecognized debt liability be presented in the Requisite Service Period.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 amendments stipulate thatnew guidance is required to be applied on a performance target in a share-based payment that affects vestingretrospective basis and that could be achieved after the requisite service period shouldto be accounted for as a performance condition under Accounting Standards Codification (ASC) 718, Compensation — Stock Compensation. As a result, the target is not reflectedchange in the estimation of the award’s grant date fair value. Compensation cost should be recognized over the required service period, if it is probable that the performance condition would be achieved.an accounting principle. The amendments in this Accounting Standards Updateupdate are effective for annual periodsfinancial statements issued for fiscal years beginning after December 15, 2015 and interim periods within those annual periods. Earlyfiscal years and early adoption of the amendments in this update is permitted. The Company has 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 the Company’s consolidated balance sheets.

19

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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. The Company does not expect the adoption of ASU 2014-12 to have a material impact on the Company’s condensed consolidated financial statements.

In August 2014, FASB issued Accounting Standards Update (ASU) No. 2014-15 Preparation of Financial Statements - Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern. Under generally accepted accounting principles (GAAP), continuation of a reporting entity as a going concern is presumed as the basis for preparing financial statements unless and until the entity's liquidation becomes imminent. Preparation of financial statements under this presumption is commonly referred to as the going concern basis of accounting. If and when an entity's liquidation becomes imminent, financial statements should be prepared under the liquidation basis of accounting in accordance with Subtopic 205-30, Presentation of Financial Statements-Liquidation Basis of Accounting. Even when an entity's liquidation is not imminent, there may be conditions or events that raise substantial doubt about the entity's ability to continue as a going concern. In those situations, financial statements should continue to be prepared under the going concern basis of accounting, but the amendments in this Update should be followed to determine whether to disclose information about the relevant conditions and events. The amendments in this Accounting Standards Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The Company does not expect the adoption of ASU 2014-152015-11 to have material impact on the Company’s condensed consolidated financial statements, although there may be additional disclosures upon adoption.

In November 2014, the FASB issued Accounting Standard Update (ASU) No. 2014-16, Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity, to clarify how current U.S. GAAP should be interpreted in evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. Specifically, the amendments clarify that an entity should consider all relevant terms and features, including the embedded derivative feature being evaluated for bifurcation, in evaluating the nature of the host contract. The assessment of the substance of the relevant terms and features should incorporate a consideration of: (1) the characteristics of the terms and features themselves; (2) the circumstances under which the hybrid financial instrument was issued or acquired; and (3) the potential outcomes of the hybrid financial instrument, as well as the likelihood of those potential outcomes. The amendments in this ASU apply to all entities that are issuers of, or investors in, hybrid financial instruments that are issued in the form of a share. The amendments in this ASU are effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period. Early adoption is permitted. The Company does not expect the adoption of ASU 2014-16 to have a material impact on the Company’s condensed consolidated financial statements.

 

Note 3 – Loans receivable (including related parties)

 

Loans receivable, including to related parties represent amounts the Company expects to collect from third partiesunrelated and related parties upon maturity.

 

The Company had the following loan receivable due within one year as of:

 

  September 30, 2014  December 31, 2013 
  (in thousands)  (in thousands) 
Loan to third party; due on demand and non-interest bearing. $14,625  $- 
Total loan receivable $14,625  $- 
  June 30, 2015  December 31, 2014 
  (in thousands)  (in thousands) 
Loan to unrelated party; due on demand; interest rate is 8.0%. $42,595  $36,001 

 

The Company hadhas the following loanloans receivable – related partyparties due within one year as of:

 

  September 30, 2014  December 31, 2013 
  (in thousands)  (in thousands) 
Loan to Teamlink Investment Co., Ltd; due in June, July and December 2014; interest rate is 4.75% $-  $4,540 
Total loan receivable – related party $-  $4,540 
  June 30, 2015  December 31, 2014 
  (in thousands)  (in thousands) 
Loan to Tianjin Hengying Trading Co., Ltd.; due on demand; interest rate is 10.0%. $-  $13,997 
Loan to Tianjin Dazhan Industry Co., Ltd.; due on demand; interest rate is 10.0%.  -   14,617 
Loan to Beijing Shenghua Xinyuan Metal Materials Co., Ltd.; due on demand; interest rate is 10.0%.  6,110   6,099 
Total loans receivable – related parties $6,110  $34,713 

 

See Note 1819 “Related party transactions and balances” for the nature of the relationship of related parties.

 

Total interest income for the loans amounted to $0.1$0.7 million and $0.1$0.05 million for the three months ended SeptemberJune 30, 20142015 and 2013,2014, respectively.

 

Total interest income for the loans amounted to $0.2$1.2 million and $0.2$0.1 million for the ninesix months ended SeptemberJune 30, 2015 and 2014, and 2013, respectively.

Note 4 – Accounts receivable (including related parties), net

 

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

 

 September 30, 2014 December 31, 2013  June 30, 2015 December 31, 2014 
 (in thousands) (in thousands)  (in thousands) (in thousands) 
Accounts receivable $9,209  $5,131  $11,713  $9,804 
Less: allowance for doubtful accounts  (728)  (1,053)  (508)  (483)
Accounts receivable – related parties  2,153   2,942   3,325   8,624 
Less: allowance for doubtful accounts – related parties  (127)  (126)
Net accounts receivable $10,634  $7,020  $14,403  $17,819 

20

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Changes in theMovement of allowance for doubtful accounts areis as follows:

 

 September 30, 2014 December 31, 2013  June 30, 2015 December 31, 2014 
 (in thousands) (in thousands)  (in thousands) (in thousands) 
Beginning balance $1,053  $1,367  $609  $1,053 
Charge to expense  -   96   25   368 
Less: recovery  (317)  (449)  -   (8)
Deconsolidation of Baotou Steel  -   (798)
Exchange rate effect  (8)  39   1   (6)
Ending balance $728  $1,053  $635  $609 

 

Note 5 – Other receivables (including related parties), net

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

  June 30, 2015  December 31, 2014 
  (in thousands)  (in thousands) 
Other receivables $75,372  $73,944 
Less: allowance for doubtful accounts  (12,746)  (10,198)
Other receivables – related parties  7,393   39,734 
Less: allowance for doubtful accounts – related parties  (64)  (64)
Net other receivables $69,955  $103,416 

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

  June 30, 2015  December 31, 2014 
  (in thousands)  (in thousands) 
Beginning balance $10,262  $2,606 
Charge to expense  2,531   7,670 
Less: recovery  (7)  (6)
Exchange rate effect  24   (8)
Ending balance $12,810  $10,262 

Note 6 – Inventories

 

Inventories consist of the following:

 

 September 30, 2014 December 31, 2013  June 30, 2015 December 31, 2014 
 (in thousands) (in thousands)  (in thousands) (in thousands) 
Supplies $22,459  $21,040  $15,704  $18,838 
Raw materials  157,872   164,301   87,125   143,563 
Finished goods  86,762   42,977   78,157   12,301 
Less: allowance for inventory valuation  (17,076)  (15,397)  (27,857)  (18,375)
Total inventories $250,017  $212,921  $153,129  $156,327 

 

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.

 

21

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The Company values its inventory at the lower of cost or market, determined on a weighted average method, or net realizable value. As of SeptemberJune 30, 20142015 and December 31, 2013,2014, the Company had provided allowance for inventory valuation in the amounts of $17.1$27.8 million and $15.4$18.4 million, respectively.

 

Changes in theMovement of allowance for inventory valuation areis as follows:

 

 September 30, 2014 December 31, 2013  June 30, 2015 December 31, 2014 
 (in thousands) (in thousands)  (in thousands) (in thousands) 
Beginning balance $15,397  $9,585   18,375  $15,397 
Addition  17,099   15,194   27,805   18,362 
Less: write-off  (15,304)  (9,757)  (18,374)  (15,311)
Exchange rate effect  (116)  375   51   (73)
Ending balance $17,076  $15,397  $27,857  $18,375 

 

Note 67 – Advances on inventory purchases

 

Advances on inventory purchases, are monies deposited or advanced to outside vendors orincluding related party, net of allowance for doubtful accounts consists of the following:

  June 30, 2015  December 31, 2014 
  (in thousands)  (in thousands) 
Advances on inventory purchases $55,895  $76,320 
Less: allowance for doubtful accounts  (2,506)  (2,501)
Advances on inventory purchases – related parties  13,411   45,617 
Net advances on inventory purchases $66,800  $119,436 

Movement of allowance for doubtful accounts, including related parties, on future inventory purchases. Most of the Company’s vendors require a certain amount of money to be deposited with themis as a guarantee that the Company will complete its purchases on a timely basis.follows:

 

This amount is refundable and bears no interest. The Company has legally binding contracts with its vendors, which require the deposit to be returned to the Company or netted against accounts payable due to its vendors to the extent there are unpaid balances when the contract ends. The inventory is normally delivered within one month after the monies have been advanced. The total outstanding amount, including advances to related parties, was $171.3 million and $127.9 million as of September 30, 2014 and December 31, 2013, respectively.

  June 30, 2015  December 31, 2014 
  (in thousands)  (in thousands) 
Beginning balance $2,501  $105 
Charge to expense  -   2,395 
Exchange rate effect  5   1 
Ending balance $2,506  $2,501 

Note 78 – Plant and equipment, net

 

Plant and equipment consist of the following:

 

 September 30, 2014 December 31, 2013  June 30, 2015 December 31, 2014 
 (in thousands) (in thousands)  (in thousands) (in thousands) 
Buildings and improvements $311,562  $274,402  $223,872  $279,776 
Machinery  657,680   667,093   464,127   669,427 
Machinery under capital lease  625,196   623,895   305,968   626,735 
Transportation and other equipment  23,177   22,991   16,271   22,765 
Construction in progress  294,062   11,412   14,219   342,660 
Subtotal  1,911,677   1,599,793   1,024,457   1,941,363 
Less: accumulated depreciation  (395,668)  (327,886)  (454,980)  (398,227)
Total $1,516,009  $1,271,907  $569,477  $1,543,136 

22

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Construction in progress consisted of the following as of SeptemberJune 30, 2014:2015:

 

Construction in progress Value  Completion Estimated
additional cost to
complete
 
description (In thousands)  date (In thousands) 
Equipment updates  1,992  December 2014  12,869 
Sintering machine construction  84,831  November 2014  59,875 
#5 blast furnace construction  185,354  December 2014  32,709 
Reconstruction of miscellaneous factory buildings  5,649  September 2015  5,242 
Project materials  2,139     - 
Others  14,097     - 
Total $294,062    $110,695 
  Value  Completion Estimated additional
cost to complete
 
Description (In thousands)  Date (In thousands) 
Restructuring of ventilation system  2  December 2015  980 
Energy management system  3,856  September 2015  1,926 
Reconstruction of miscellaneous factory buildings  7,773  December 2015  6,346 
Project materials  2,146     - 
Others  442     - 
Total $14,219    $9,252 

 

The Company is obligated under a capital lease for the iron and steel making facilities, including one sintering machine, two converters, two blast furnaces and some auxiliary systems that expire on April 30, 2031. During 2013, and 2014, Longmen Joint Venture entered into a number of capital lease agreements for energy-saving equipment installed throughout the steel production line. The Company is obligated under the capital lease for the equipment upon the confirmation of the energy-saving rate between the Company and its vendors.

 

The carrying value of assets acquired under the capital lease consists of the following:

 

 September 30, 2014 December 31, 2013  June 30, 2015 December 31, 2014 
 (in thousands) (in thousands)  (in thousands) (in thousands) 
Machinery $625,196  $623,895  $305,968  $626,735 
Less: accumulated depreciation  (99,777)  (77,086)  (123,917)  (107,782)
Carrying value of leased assets $525,419  $546,809  $182,051  $518,953 

 

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 long livedlong-lived assets at SeptemberJune 30, 20142015 and December 31, 2013, respectively, and2014, respectively. While such assessment did not result in any impairment charges.charges as of December 31, 2014, as the Chinese steel industry conditions continued to worsen during the three and six months ended June 30, 2015, which deviated from the Company’s previous anticipated industry environment improvement, the sum of the discounted cash flows expected to generate from the long-lived assets and their disposition were less than the carrying value by $973.9 million (RMB 6.0 billion). As a result, an impairment was recorded and included in operating expenses for the three and six months ended June 30, 2015 (see Note 2(j)). The discounted cash flows were determined using certain expected changes to the current operational assumptions using the average of three possible cash flow scenarios (see Note 2(j)). If those expectations are not met, the Company may be required to record additional impairment charges in future periods.

 

Depreciation expense for the three months ended SeptemberJune 30, 20142015 and 20132014 amounted to $23.7$31.3 million and $21.6 million, respectively, and for the nine months ended September 30, 2014 and 2013, amounted to $71.0 and $64.1$23.2 million, respectively. These amounts include depreciation of assets held under capital leases for the three months ended SeptemberJune 30, 20142015 and 2013,2014, which amounted to $7.8 million and $7.7 million, and $7.1 million, respectively, andrespectively.

Depreciation expense for the ninesix months ended SeptemberJune 30, 20142015 and 2013,2014 amounted to $23.3$56.2 million and $21.2$47.3 million, respectively. These amounts include depreciation of assets held under capital leases for the six months ended June 30, 2015 and 2014, which amounted to $15.9 million and $15.6 million, respectively.

 

Note 89 – Intangible assets, net

 

Intangible assets consist of the following:

 

 September 30, 2014 December 31, 2013  June 30, 2015 December 31, 2014 
 (in thousands) (in thousands)  (in thousands) (in thousands) 
Land use rights $30,650  $30,884  $30,782  $30,726 
Mining right  2,441   2,459   2,451   2,447 
Software  1,049   743   1,070   1,058 
Subtotal  34,140   34,086   34,303   34,231 
Less:                
Accumulated amortization – land use rights  (8, 931)   (8,498)  (9,484)  (9,127)
Accumulated amortization – mining right  (1,396)  (1,320)  (1,347)  (1,431)
Accumulated amortization – software  (692)  (561)  (766)  (713)
Subtotal  (11,019)  (10,379)  (11,597)  (11,271)
Intangible assets, net $23,121  $23,707  $22,706  $22,960 

23

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The gross amount of the intangible assets amounted to $34.1$34.3 million and $34.1$34.2 million as of SeptemberJune 30, 20142015 and December 31, 2013,2014, respectively. The remaining weighted average amortization period is 32.932.3 years as of SeptemberJune 30, 2014.2015.

 

Total amortization expense for the three months ended SeptemberJune 30, 20142015 and 20132014 amounted to $0.1$0.2 million and $0.2$0.3 million, respectively, andrespectively.

Total amortization expense for the ninesix months ended SeptemberJune 30, 20142015 and 2013,2014 amounted to $0.6$0.4 million and $0.7$0.5 million, respectively.

 

Total depletion expense for the three months ended SeptemberJune 30, 20142015 and 20132014 amounted to $0.04 million and $0.02$0.04 million, respectively, andrespectively.

Total depletion expense for the ninesix months ended SeptemberJune 30, 20142015 and 2013,2014 amounted to $0.1$0.08 million and $0.1$0.05 million, respectively.

 

The estimated aggregate amortization and depletion expenses for each of the five succeeding years is as follows:

 

Year ending Estimated
amortization and
depletion expenses
  Gross carrying
amount
 
  (in thousands)  (in thousands) 
September 30, 2015 $966   22,155 
September 30, 2016  966   21,189 
September 30, 2017  966   20,223 
September 30, 2018  966   19,257 
September 30, 2019  966   18,291 
Thereafter  18,291   - 
Total $23,121     
Year ending Estimated
amortization and
depletion expenses
  Gross carrying
amount
 
  (in thousands)  (in thousands) 
June 30, 2016 $949   21,757 
June 30, 2017  949   20,808 
June 30, 2018  949   19,859 
June 30, 2019  949   18,910 
June 30, 2020  949   17,961 
Thereafter  17,961   - 
Total $22,706     

 

Note 910 – Debt

 

Short-term notes payable

 

Short-term notes payable are lines of credit extended by banks. Banks in turn issue the Company a bank acceptance note, which can be endorsed and assigned to vendors as payments for purchases. The notes payable are generally payable within three to six months. This short-term note payable is guaranteed by the bank for its complete face value. The banks do not charge interest on these notes, but usually charge a transaction fee of 0.05% of the notes value. In addition, the banks usually require the Company to deposit either a certain amount of cash at the bank as a guarantee deposit, which is classified on the balance sheet as restricted cash, or provide notes receivable as security, which are classified on the balance sheet as restricted notes receivable. Restricted cash as a guarantee for the notes payable amounted to $371.0$210.1 million and $399.4$339.4 million as of SeptemberJune 30, 20142015 and December 31, 2013,2014, respectively. Restricted notes receivable as a guarantee for the notes payable amounted to $26.0$16.3 million and $231.7 million$0 as of SeptemberJune 30, 20142015 and December 31, 2013,2014, respectively.

 

The Company had the following short-term notes payable as of:

 

  September 30, 2014  December 31, 2013 
  (in thousands)  (in thousands) 
General Steel (China): Notes payable to various banks in China, due various dates from December 2014 to January 2015. Restricted cash required of $8.1 million and $16.4 million as of September 30, 2014 and December 31, 2013, respectively; guaranteed by third parties. These notes payable were either repaid or renewed subsequently on the due dates. $8,125  $29,466 
Longmen Joint Venture: Notes payable to various banks in China, due various dates from October 2014 to September 2015. $362.9 million restricted cash and $26.0 million notes receivable are secured for notes payable as of September 30, 2014, and comparatively $383.0 million restricted cash and $231.7 million notes receivable secured as of December 31, 2013, respectively; some notes are further guaranteed by third parties. These notes payable were either repaid or renewed subsequently on the due dates.  776,198   988,364 
Total short-term notes payable $784,323  $1,017,830 
  June 30, 2015  December 31, 2014 
  (in thousands)  (in thousands) 
General Steel (China): Notes payable to various banks in China, due various dates from October to December 2015. Restricted cash required of $13.1 million and $14.7 million as of June 30, 2015 and December 31, 2014, respectively; guaranteed by third parties. These notes payable were either repaid or renewed subsequently on the due dates. $21,216  $22,806 
Longmen Joint Venture: Notes payable to various banks in China, due various dates from July to December 2015. $197.0 million restricted cash and $16.3 million notes receivable are secured for notes payable as of June 30, 2015, and comparatively $324.7 million restricted cash and $0 notes receivable are secured for notes payable as of December 31, 2014, respectively; some notes are further guaranteed by third parties. These notes payable were either repaid or renewed subsequently on the due dates.  510.653   638,829 
Total short-term notes payable $531,869  $661,635 

24

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Short-term loans

 

Short-term loans represent amounts due to various banks, other companies and individuals, including related parties, normally due within one year. The principal of the loans are due at maturity but can be renewed at the bank’s option. Accrued interest is due either monthly or quarterly.

 

Short term loans due to banks, related parties and other parties consisted of the following as of:

 

Due to banks

 

  September 30,
2014
  December 31, 2013 
  (in thousands)  (in thousands) 
General Steel (China): Loans from various banks in China, due various dates from November 2014 to August 2015. Weighted average interest rate was 7.2% per annum and 7.2% per annum as of September 30, 2014 and December 31, 2013, respectively; some are guaranteed by third parties and related parties. These loans were either repaid or renewed subsequently on the due dates. $43,713  $34,229 
Longmen Joint Venture: Loans from various banks in China, due various dates from December 2014 to July 2015. Weighted average interest rate was 6.9% per annum and 6.3% per annum as of September 30, 2014 and December 31, 2013, respectively; some are guaranteed by third parties, accounts receivable, restricted cash or notes receivables. $82.5 million and $163.9 million restricted notes receivable were secured for the loans as of September 30, 2014 and December 31, 2013, respectively; $12.2 million and $0 restricted cash were secured for the loans as of September 30, 2014 and December 31, 2013, respectively; These loans were either repaid or renewed subsequently on the due dates.  204,576   267,688 
Total short-term loans - bank $248,289  $301,917 
  June 30, 2015  December 31, 2014 
  (in thousands)  (in thousands) 
General Steel (China): Loans from various banks in China, due various dates from August 2015 to April 2016. Weighted average interest rate was 7.3% per annum and 7.2% per annum as of June 30, 2015 and December 31, 2014, respectively; some are guaranteed by third parties and related parties. These loans were either repaid or renewed subsequently on the due dates. $40,637  $40,562 
Longmen Joint Venture: Loans from various banks in China, due various dates from July 2015 to May 2016. Weighted average interest rate was 7.7% per annum and 7.1% per annum as of June 30, 2015 and December 31, 2014, respectively; some are guaranteed by third parties and related parties, $19.8 million restricted cash and $22.8 million notes receivable and comparatively $16.3 million restricted cash and $111.8 million notes receivable were secured for the loans as of June 30, 2015 and December 31, 2014, respectively; These loans were either repaid or renewed subsequently on the due dates.  113,352   216,940 
Total short-term loans – bank $153,989  $257,502 

As of June 30, 2015 and December 31, 2014, the Company had not met its financial covenants stipulated by certain loan agreements related to the Company’s debt to asset ratio. Two of General Steel (China)’s bank loans contained financial covenants stipulating debt to asset ratios below 70%. At June 30, 2015, General Steel (China)’s debt to asset ratio was 89.6%. At December 31, 2014, General Steel (China)’s debt to asset ratio was 90.8%.

Furthermore, the Company is a party to a loan agreement with a cross default clause whereby any breach of loan covenants will automatically result in default of the loan. The outstanding balance of the short term loans affected by the above breach of covenants and cross default as of June 30, 2015 and December 31, 2014 was $4.7 million and $4.7 million, respectively. According to the Company’s short term loan agreements, the banks have the rights to request for more collateral or additional guarantees if the breach of covenant is not remedied or request early repayment of the loan if the Company does not cure such breach within a certain period of time. As of the date of this report, the Company has not received any notice from the banks to request more collateral, additional guarantees or early repayment of the short term loans due to the breach of covenant.

 

Due to unrelated parties

 

 September 30, 2014 December 31, 2013  June 30, 2015 December 31, 2014 
 (in thousands) (in thousands)  (in thousands) (in thousands) 
Longmen Joint Venture: Loans from various unrelated companies and individuals, due various dates from December 2014 to September 2015, and weighted average interest rate was 5.6% per annum and 5.2% per annum as of September 30, 2014 and December 31, 2013, respectively. These loans were either repaid or renewed subsequently on the due dates. $37,899  $22,720 
Longmen Joint Venture: Loans from various unrelated companies and individuals, due various dates from July to November 2015, and weighted average interest rate was 13.6% per annum and 5.7% per annum as of June 30, 2015 and December 31, 2014, respectively. These loans were either repaid or renewed subsequently on the due dates. $43,686  $16,999 
Longmen Joint Venture: Loans from financing sales.  16,264   33,124   15,268   37,525 
Maoming Hengda: Loans from one unrelated party and one related party, due on demand, none interest bearing.  6,177   6,223 
Maoming Hengda: Loans from one unrelated parties and one related party, due on demand, none interest bearing.  6,204   6,193 
Total short-term loans – others $60,340  $62,067  $65,158  $60,717 

25

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The Company had various loans from unrelated companies amounting to $60.3$65.2 million and $62.1$60.7 million as of SeptemberJune 30, 20142015 and December 31, 2013,2014, respectively. Of the $60.3$65.2 million, $6.2 million of loans carry no interest, $16.3$15.3 million of financing sales are subject to interest rates ranging between 4.6% and 9.6%12.0%, and the remaining $37.9$43.7 million are subject to interest rates ranging from 5.0% to 14.4%24.0%. All short term loans from unrelated companies are payable on demand and unsecured.

 

As part of its working capital management, Longmen Joint Venture has entered into a number of sale and purchase back contracts ("contracts") with third party companies and Longmen Joint Venture’s subsidiaries, Yuxin and Yuteng. According to the contracts, Longmen Joint Venture sells rebar to the third party companies at a certain price, and within the same month, Yuxin and Yuteng will purchase back the rebar from the third party companies at a price of 4.6% to 9.6%12.0% higher than the original selling price from Longmen Joint Venture. Based on the contract terms, Longmen Joint Venture is paid in advance for the rebar sold to the third party companies and Yuxin and Yuteng are given a credit period of several months to one year from the third party companies. There is no physical movement of the inventory during the sale and purchase back arrangement. The margin of 4.6% to 9.6%12.0% is determined by reference to the bank loan interest rates at the time when the contracts are entered into, plus an estimated premium based on the financing sale amount, which represents the interest charged by the third party companies for financing Longmen Joint Venture through the above sale and purchase back arrangement. The revenue and cost of goods sold arising from the above transactions are eliminated and the incremental amounts paid by Yuxin and Yuteng to purchase back the goods are treated as financing costs in the consolidated financial statements.

 

Total financing sales for the three months ended SeptemberJune 30, 20142015 and 20132014 amounted to $259.7$107.1 million and $166.2 million, respectively, and for the nine months ended September 30, 2014 and 2013, amounted to $719.3 million and $519.5$229.1 million, respectively, which are eliminated in the Company’s consolidated financial statements. The financial cost related to financing sales for the three months ended SeptemberJune 30, 20142015 and 20132014 amounted to $1.4$0.6 million and $1.1$0.8 million, respectively.

Total financing sales for the six months ended June 30, 2015 and 2014 amounted to $225.8 million and $459.6 million, respectively, andwhich are eliminated in the Company’s consolidated financial statements. The financial cost related to financing sales for the ninesix months ended SeptemberJune 30, 20142015 and 2013,2014 amounted to $3.1$1.3 million and $4.2$1.7 million, respectively.

 

Short term loans due to related parties

 

 September 30,
2014
 December 31,
2013
  June 30, 2015 December 31, 2014 
 (in thousands) (in thousands)  (in thousands) (in thousands) 
General Steel China: Loans from Yangpu Capital Automobile, due on demand, and interest rate is 10% per annum. $668  $1,458 
General Steel China: Loans from Yangpu Capital Automobile, due on demand, and interest rates is 10% per annum. $670  $670 
Longmen Joint Venture: Loan from Shaanxi Coal and Chemical Industry Group Co., Ltd., due on demand, and interest rate is 7.0% per annum.  5,467   28,216   128   128 
Longmen Joint Venture: Loan from Shaanxi Steel Group due on various dates from November 2014 to July 2015, and interest rate is 8.0% per annum.  95,875   49,110 
Longmen Joint Venture: Loan from Shaanxi Steel Group due on December 2015, and interest rate is between 6.9% and 8.0% per annum.  159,316   - 
Longmen Joint Venture: Loan from Shaanxi Steel Group Hanzhong Steel Co., Ltd. due on demand, and interest rate is 8.0% per annum.  8,160   - 
Longmen Joint Venture: Loan from Long Steel Group due on demand, and interest rate is between 5.1% and 22.4% per annum.  32,609   - 
Longmen Joint Venture: Loan from Xi’an Pinghe Metallurgical Raw Material Co., Ltd. due in July 2015, and interest rate is 14.4% per annum.  8,160   - 
Longmen Joint Venture: Loan from Tianjin Hengying Trading Co., Ltd. due in July 2015, and interest rate is 5.0% per annum.  2,239   - 
Longmen Joint Venture: Loans from financing sales.  121,450   47,909   68,668   45,582 
Total short-term loans - related parties $223,460  $126,693  $279,950  $46,380 

26

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Long-term loans due to related party

 

  September 30, 2014  December 31, 2013 
  (in thousands)  (in thousands) 
Longmen Joint Venture: Loans from Shaanxi Steel Group, due on various dates through November 2015 and interest rate is 5.6% per annum. $72,124  $72,657 
Less: Current maturities of long-term loans – related party  (67,249)  (53,013)
Long-term loans - related party $4,875  $19,644 
  June 30, 2015  December 31, 2014 
  (in thousands)  (in thousands) 
Longmen Joint Venture: Loans from Shaanxi Steel Group, due on various dates through March 2018 and interest rate are 5.6% - 8.0% per annum. $353,067  $339,549 

 

Total interest expense, netAs of capitalized interest, amounted to $4.0June 30, 2015 and December 31, 2014, total assets used by the Company as collateral for the aforementioned debts were $103.2 million and $8.2$96.9 million, for the three months ended September 30, 2014 and 2013, respectively.

 

Total interest expense, net of capitalized interest, amounted to $21.6$16.1 million and $26.7 million for the nine months ended September 30, 2014 and 2013, respectively.

Capitalized interest included in construction in progress amounted to $1.3 million and $1.3$8.2 million for the three months ended SeptemberJune 30, 2015 and 2014, respectively.

Total interest expense, net of capitalized interest, amounted to $23.5 million and 2013, respectively. $17.7 million for the six months ended June 30, 2015 and 2014, respectively

 

Capitalized interest included in construction in progress amounted to $2.1 million$nil and $2.1$0.2 million for the ninethree months ended SeptemberJune 30, 2015 and 2014, respectively.

Capitalized interest amounted to $nil and 2013,$0.8 million for the six months ended June 30, 2015 and 2014, respectively.

 

Note 1011 – Customer deposits

 

Customer deposits represent amounts advanced by customers on product orders. The product normally is shipped within one month after receipt of the advance payment, and the related sale is recognized in accordance with the Company’s revenue recognition policy. As of SeptemberJune 30, 20142015 and December 31 2013,2014, customer deposits amounted to $300.5$120.8 million and $152.7$225.6 million, respectively, including deposits received from related parties, which amounted to $113.7$33.9 million and $64.9$132.6 million, respectively.

 

Note 1112 – Deposits due to sales representatives

 

Longmen Joint Venture entered into agreements with various entities to act as the Company’s exclusive sales agent in a specified geographic area.  These exclusive sales agents must meet certain criteria and are required to deposit a certain amount of money with the Company. In return the sales agents receive exclusive sales rights in a specified area and at discounted prices on products they order. These deposits bear no interest and are required to be returned to the sales agent once the agreement is terminated. The agreement is normally entered/or renewed on an annual basis. Termination of the agreement can be mutually agreed to by both parties at any time. The Company had $32.2$18.7 million and $26.3$20.4 million in deposits due to sales representatives, including deposits due to related parties, as of SeptemberJune 30, 20142015 and December 31, 2013,2014, respectively.

Note 12 – Warrants

The Company had 3,900,871 common stock warrants outstanding, which were issued in connection with $40 million of convertible notes issued by the Company in 2007. The warrants, which were accounted for as a derivative liability at fair value, expired unexercised on May 13, 2013. 

 

Note 13 - Supplemental disclosure of cash flow information

 

Interest paid, net of amounts capitalized, amounted to $12.6$4.9 million and $11.5$12.4 million for the ninesix months ended SeptemberJune 30, 20142015 and 2013,2014, respectively.

 

The Company paid income taxes oftax amounted to $0.2 million and $0.1 million for the six months ended June 30, 2015 and 2014, respectively.

During the six months ended June 30, 2015 and 2014, the Company converted $0.3 million during the nine months ended September 30, 2014 and 2013,$0.05 million of equipment into inventory productions, respectively.

 

During the ninesix months ended SeptemberJune 30, 20142015 and 2013, the Company had receivables of $0.01 million and $1.0 million, respectively, as a result of the disposal of equipment that had not been collected.

During the nine months ended September 30, 2014, and 2013, the Company converted $0.05 million and $1.0 million of equipment, respectively, into inventory productions.

During the nine months ended September 30, 2014 and 2013, the Company used $2.4$1.2 million and $37.3$1.1 million of inventory, respectively, in plant and equipment construction.constructions.

During the six months ended June 30, 2015 and 2014, the Company incurred $5.5 million and $4.7 million accounts payable, respectively, to be paid for the purchase of equipment and construction in progress.

 

The Company had $57.4$0.7 million notes receivable from financing sales loans to be converted to cash as of SeptemberJune 30, 2015.

The Company transferred $7.4 million purchase deposits - related parties from loan receivables – related parties as of June 30, 2015.

27

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The Company offset $92.9 million customer deposits – related parties with loan receivables – related parties for the six months ended June 30, 2015.

The Company had $2.3 million notes receivable from financing sales loans to be converted to cash as of June 30, 2014.

 

During the ninesix months ended SeptemberJune 30, 2014, the Company incurred $208.3had receivables of $0.01 million as a result of accounts payable for the purchasedisposal of equipment and construction in progress.that has not been collected.

 

During the ninesix months ended SeptemberJune 30, 2014, and 2013, one of the Company’s unconsolidated entities declared a dividend and the Company is entitled to a dividend of $0.2 million, and $0.2 million, respectively, which has not yet been collected.

 

During the ninesix months ended SeptemberJune 30, 2014, the Company acquired $5.9 million of equipment through capital leases.

During the nine months ended September 30, 2013, the Company offset $ 64.2 million of accounts payable to related party as loan receivable – related party repayment.

During the nine months ended September 30, 2013, the Company offset $ 119.9 million of advance on inventory purchases and other receivables to related parties as short-term loan repayments.

During the nine months ended September 30, 2013, the Company reclassified $ 3.8 million of refundable advances on inventory purchase – related parties to other receivables – related parties.

 

Note 14 - Deferred lease income

 

To compensate the Company for the costs and economic losses incurred during construction of the iron and steel making facilities owned by Shaanxi Steel, which are leased by the Longmen Joint Venture, Shaanxi Steel reimbursed Longmen Joint Venture $11.4 million (RMB 70.1 million) in the fourth quarter of 2010 for the value of assets dismantled and rent under a 40-year property sub-lease that was entered into by the parties in June 2009 (the "Longmen Sub-lease"), and $29.8$29.9 million (RMB 183.1 million) for the reduced production efficiency caused by the construction. In addition, in 2010 and 2011, Shaanxi Steel reimbursed Longmen Joint Venture $14.6 million (RMB 89.5 million) and $14.5$14.6 million (RMB 89.3 million), respectively, for trial production costs related to the new equipment.

 

During the period from June 2010 to March 2011, as construction progressed and certain of the assets came online, Longmen Joint Venture used the assets free of charge to produce saleable units of steel products during this period. As such, the cost of using these assets and therefore the fair value of the free rent received was imputed with reference to what the depreciation charge would have been on these assets had they been owned or under capital lease to Longmen Joint Venture during the free use period. This cost of $7.1$7.2 million (RMB 43.9 million) waseach year were deferred and is beingwill be recognized over the term of the land sub-lease similar to the other charges and credits related to the construction of these assets.

 

The deferred lease income is amortized to income over the remaining term of the 40-year land sub-lease. For the three months ended SeptemberJune 30, 20142015 and 2013,2014, the Company recognized $0.5 million and $0.5 million, respectively. For the ninesix months ended SeptemberJune 30, 20142015 and 2013,2014, the Company recognized $1.6$1.1 million and $1.6$1.1 million, respectively. As of SeptemberJune 30, 20142015 and December 31, 2013,2014, the balance of deferred lease income amounted to $75.2$73.9 million and $77.4$74.9 million, respectively, of which $2.2 million and $2.2 million represents amountsbalance to be amortized within one year. See Note 1819 – Related party transactions and balances (m)(k) – Deferred lease income for details.

Note 15 - Capital lease obligations

 

Iron and steel production facilities

 

On April 29, 2011, the Company’s subsidiary, Longmen Joint Venture entered into a Unified Management Agreement with Shaanxi Steel and Shaanxi Coal under which Longmen Joint Venture uses new iron and steel making facilities including one sintering machine, two converters, two blast furnaces and other auxiliary systems constructed by Shaanxi Steel. As the 20-year term of the agreement exceeds 75% of the assets’ useful lives, this arrangement is accounted for as a capital lease. The ongoing lease payments are comprised of two elements: (1) a monthly payment of $2.3 million (RMB 14.6 million), based on Shaanxi Steel’s cost to construct the assets of $2.3 million (RMB 14.6 million) to be paid over the term of the Unified Management Agreement of 20 years and (2) 40% of any remaining pre-tax profits from the Asset Pool which includes Longmen Joint Venture and the newly constructed iron and steel making facilities. In February 2014, Shaanxi Steel agreed that it will not demand capital lease paymentspayment from Longmen Joint Venture until February 2017. The profit sharing component does not meet the definition of contingent rent because it is based on future revenue and wasis therefore considered part of the financing for the capital leased assets. The initial fair valueassets which is related to the Unified Management Agreement. For purposes of the profit sharing liability was included in determining the value of the leased assetsasset and obligation at inception. Thethe inception of the lease, the lease liability is then reduced by the value of the profit sharing liabilitycomponent, which is accounted for separately from the monthly lease payments and is accounted forrecognized as a derivative liability, which is carried at fair value, with changes in the fair value charged or credited to income each period.value. See Note 2(h) – “Financial instruments” and Note 16 – “Profit sharing liability”.

28

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Energy-saving equipment

 

During 2013 and 2014, the Company’s subsidiary, Longmen Joint Venture, entered into capital lease agreements for energy-saving equipment to be installed throughout the production chain. Under these agreements, Longmen Joint Venture uses the energy-saving equipment for which the vendors are responsible for the design, purchase, installation, and on-site testing, as well as the ownership rights to the equipment during the lease periods. The lease periods, which vary between four to six years, begin upon the completion of the equipment installation, testing, and the issuance of the energy-saving rate reports to be agreed upon by both the vendors and Longmen Joint Venture. As the ownership rights of the equipment transfer to Longmen Joint Venture at the end of the lease periods, these agreements are accounted for as capital leases.

 

The minimum lease payments are based on the energy cost saved during the lease periods, which is determined by the estimated annual equipment operating hours per the lease agreements. If the actual annual equipment operating hours are less than the estimated amount, the lease periods may be extended, subject to further negotiation and agreement between the Company and the vendors. If the actual annual equipment operating hours exceed the estimated amount, the Company is obligated to make additional lease payments based on the additional energy cost saved during the lease period and will recognize the additional lease payments as contingent rent expense. For the threeAs of June 30, 2015, $23.9 million (RMB $146.5 million) energy-saving equipment under these lease agreements have been capitalized and nine months ended September 30, 2014 and 2013, no contingent rent expense was incurred under these lease agreements.has been incurred.

 

Presented below is a schedule of estimated minimum lease payments on the capital lease obligationsobligation for the next five years as of SeptemberJune 30, 2014:2015:

 

Year ending September 30, Capital Lease Obligations
Minimum Lease Payments
 
  (in thousands) 
2015 $8,320��
2016  5,804 
2017  188,812 
2018  32,510 
2019  29,957 
Thereafter  331,209 
Total minimum lease payments  596,612 
Less: amounts representing interest  (201,172)
Ending balance $395,440 

The above amounts do not include the profit sharing liability, which is accounted for separately as a derivative instrument at fair value.

Year ending June 30, Capital Lease Obligations
Minimum Lease Payments
 
  (in thousands) 
2016 $11,937 
2017  182,668 
2018  33,086 
2019  30,194 
2020  29,323 
Thereafter  310,802 
Total minimum lease payments  598,010 
Less: amounts representing interest  (186,785)
Ending balance $411,225 

 

Interest expense for the three months ended SeptemberJune 30, 20142015 and 20132014 on the capital lease obligations was $5.2 million and $5.1$5.7 million, respectively.

 

Interest expense for the ninesix months ended SeptemberJune 30, 20142015 and 20132014 on the capital lease obligations was $16.0$10.4 million and $15.3$10.8 million, respectively.

Note 16 –Profit sharing liability

 

The profit sharing liability component of the capital lease obligation was recognized initially at its estimated fair value at the lease commencement date and included in the initial measurement and recognition of the capital lease, in addition to the fixed payment component of the minimum lease payments. The profit sharing liability is accounted for separately from the fixed portion of the capital lease obligation (see Note 15 - “Capital lease obligation”) and is accounted for as a derivative instrument in accordance with ASC 815-10-15-83. The estimated fair value of the profit sharing liability is reassessed at the end of each reporting period, with any change in fair value charged or credited to income as “Change in Fair Value of Profit Sharing Liability”. As of June 30, 2015, the profit sharing liability is reduced to $0. See Note 2(h) – “Financial instruments” for details.

 

29

Payments toGENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 17 – Other income (expense)

Lease income

The deferred lease income from the reimbursement from Shaanxi Steel for the profit sharing liability are not required until net cumulative profits are achieved. Based on the performancebook value of the Asset Pool, no profit sharing payment was made from inceptionfixed 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 date.income over the remaining sub-lease term. For the three months ended June 30, 2015 and 2014, the Company recognized lease income of $0.5 million and $0.5 million, respectively. For the six months ended June 30, 2015 and 2014, the Company recognized lease income of $1.1 million and $1.1 million, respectively.

 

Note 1718 – Taxes

 

Income tax

 

Significant components of the provision for income taxes on earnings and deferred taxes on net operating losses from operations for the three and nine months ended SeptemberJune 30, 20142015 and 20132014 are as follows:

 

(In thousands) Three months ended
September 30, 2014
 Three months ended
September 30, 2013
  The three months
ended
June 30, 2015
 The three months
ended
June 30, 2014
 
Current $93  $25  $111  $107 
Deferred  -   -   -   - 
Total provision for income taxes $93  $25  $111  $107 

 

(In thousands) Nine months ended
September 30, 2014
  Nine months ended
September 30, 2013
 
Current $205  $201 
Deferred  -   - 
Total provision for income taxes $205  $201 

(In thousands) The six months
ended
June 30, 2015
  The six months
ended
June 30, 2014
 
Current $141  $112 
Deferred  -   - 
Total provision for income taxes $141  $112 

 

Under the Income Tax Laws of the PRC, General Steel (China), Baotou Steel Pipe Joint Venture (located in Inner Mongolia province), and Maoming Hengda (located in Guangdong province) and Tianwu Joint Venture (located in Tianjin Port Free Trade Zone) are subject to income tax at a rate of 25%.

 

Longmen Joint Venture is located in the Mid-West region of China and as such, qualifies for the “Go-West” tax rate of 15% promulgated by the government. In 2010, the Chinese government announced that the “Go-West” tax initiative would be extended for 10 years, and thus, the preferential tax rate of 15% will be in effect until 2020. This special tax treatment for Longmen Joint Venture will be evaluated on a year-to-year basis by the local tax bureau. The special tax treatment has not changed to date as a result of the evaluations by the local tax bureau.

 

Deferred taxtaxes assets – China

 

According to Chinese tax regulations, net operating losses can be carried forward to offset operating income for the next five years. The Group’s losses carry forwardscarried forward of $531.8$754.1 million will begin to expire in 2015.2016. The Chinese government recently announced several policies to curb the real estate price increases across the country which led to a slowdown in demand for construction steel products. Additionally due to the continued global economic slowdown and the overcapacity issues in China's steel market, management expected there would be a sustained increase in margin pressure in the next five years until all the existing but outdated steel capacity across the whole industry isare eliminated. Management took into consideration this potential negative impact on average selling price and gross margin of its products, re-performed an operating forecast for the next five years and concluded that the beginning-of-the-year balance of deferred tax assets mainly relating to the net operating loss carry forward may not be fully realizable due to the reduction in the projection of income to be available in the next 5 years. Management therefore decided to provide a 100% valuation allowance for the deferred tax assets. The valuation allowance as of SeptemberJune 30, 20142015 and December 31, 20132014 was $101.0$236.8 million and $97.6$114.8 million, respectively. Management will review this valuation allowance periodically and make adjustments as warranted. Temporary differences represent tax and book differences forin various items, such as receivable allowances, inventory allowances, impairments on fixed assets and deferred lease income.

 

30

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Movement of valuation allowance:

 

 September 30, 2014 December 31, 2013  June 30, 2015 December 31, 2014 
 (in thousands) (in thousands)  (in thousands) (in thousands) 
Beginning balance $97,569  $72,891  $114,820  $97,569 
Current period addition  4,567   23,293   122,132   18,951 
Current period reversal  (214)  (1,206)  (627)  (614)
Deconsolidation of Baotou Steel  -   (625)
Exchange difference  (721)  2,591   436   (461)
Ending balance $101,201  $97,569  $236,761  $114,820 

Deferred taxtaxes 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 ninesix months ended SeptemberJune 30, 2014.2015. The net operating loss carry forwards for United States income taxes amounted to $3.0$3.7 million, which may be available to reduce future years’ taxable income. These carry forwards will expire, if not utilized, starting from 20262027 through 2033.2034. Management believes that the realization of the benefits from these losses appears uncertain due to the Company’s limited operating history and continuing losses for United States income tax purposes. Accordingly, the Company has provided a 100% valuation allowance on the deferred tax asset benefit to reduce the asset to zero. The valuation allowance as of SeptemberJune 30, 20142015 was $1.0$1.2 million. The net change in the valuation allowance for the ninesix months ended SeptemberJune 30, 20142015 was $0.3$0.1 million. Management will review this valuation allowance periodically and make adjustments as warranted.

 

The Company has no cumulative proportionate retained earnings from profitable subsidiaries as of SeptemberJune 30, 2014.2015. Accordingly, no provision has been made for U.S. deferred taxes related to future repatriation of these earnings, nor is it practicable to estimate the amount of income taxes that would have to be provided if we concluded that such earnings will be remitted in the future.

 

Value added tax

 

Enterprises or individuals who sell commodities, engage in repair and maintenance or import and export goods in the PRC are subject to a value added tax in accordance with PRC laws. The value added tax (“VAT”) standard rates are 13% to 17% of the gross sales price. A credit is available whereby VAT paid on the purchases of semi-finished products or raw materials used in the production of the Company’s finished products can be used to offset the VAT due on sales of the finished product. As of SeptemberJune 30, 20142015 and December 31, 2013,2014, the Company had $4.8$1.5 million and $3.5$3.2 million in value added tax creditscredit which are available to offset future VAT payables, respectively.

 

Sales and purchases are recorded net of VAT collected and paid as the Company acts as an agent for the government for VAT collection. VAT on sales and VAT on purchases amounted to $217.6$209.5 million and $210.8$203.4 million, respectively, for the three months ended SeptemberJune 30, 20142015 and $ 160.5$178.6 million and $156.2$174.5 million, respectively, for the three months ended SeptemberJune 30, 2013.2014. VAT on sales and VAT on purchases amounted to $549.1$348.6 million and $537.2$335.6 million, respectively, for the ninesix months ended SeptemberJune 30, 20142015 and $513.7$331.5 million and $494.4$326.4 million, respectively, for the ninesix months ended SeptemberJune 30, 2013. 2014.

 

Taxes payable consisted of the following:

 

 September 30, 2014 December 31, 2013  June 30, 2015 December 31, 2014 
 (in thousands) (in thousands)  (in thousands) (in thousands) 
VAT taxes payable $1,731  $2,211  $5,656  $3,147 
Income taxes payable  256   173   215   243 
Other taxes  1,943   2,244 
Misc. taxes  2,113   1,811 
Totals $3,930  $4,628  $7,984  $5,201 

31

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1819 – Related party transactions and balances

 

Related party transactions

 

a.  Capital lease

a.Capital lease

 

As disclosed in NoteNotes 15 – “Capital lease obligations”, Longmen Joint Venture entered into a capital lease arrangement on April 29, 2011, with Shaanxi Coal and Shaanxi Steel, which are related parties of the Group. The following is an analysis of the leased assets under the capital lease:

 

  September 30, 2014  December 31, 2013 
  (in thousands)  (in thousands) 
Machinery $601,398  $605,839 
Less: accumulated depreciation  (97,602)  (76,740)
Carrying value of leased assets $503,796  $529,099 

b.  The following chart summarizes sales to related parties for the three and nine months ended September 30, 2014 and 2013. 

  June 30, 2015  December 31, 2014 
  (in thousands)  (in thousands) 
Machinery $294,538  $602,878 
Less: accumulated depreciation  (119,539)  (105,001)
Carrying value of leased assets $174,999  $497,877 

 

Name of related parties Relationship Three months ended
September 30, 2014
  Three months ended
September 30, 2013
 
    (in thousands)  (in thousands) 
Long Steel Group Noncontrolling shareholder of Longmen Joint Venture $45,200  $63,793 
Shaanxi Yuchang Trading Co., Ltd Significant influence by Long Steel Group*  -   1,081 
Shaanxi Haiyan Trade Co., Ltd Significant influence by Long Steel Group*  22,126   85 
Shaanxi Shenganda Trading Co., Ltd Significant influence by Long Steel Group*  22,216   19,866 
Shaanxi Steel Majority shareholder of Long Steel Group  734   979 
Shaanxi Coal and Chemical Industry Group Co., Ltd. Shareholder of Shaanxi Steel  14,406   7,951 
Shaanxi Long Steel Group Baoji Steel Rolling Co., Ltd Subsidiary of Long Steel Group  1,998   9 
Shaanxi Junlong Rolling Co., Ltd Investee of Long Steel Group  -   1,782 
Total   $106,680  $95,546 
b.The following chart summarized sales to related parties for the three and six months ended June 30, 2015 and 2014.

Name of related parties Relationship Three months
ended
June 30, 2015
  Three months
ended
June 30, 2014
 
    (in thousands)  (in thousands) 
Long Steel Group Noncontrolling shareholder of Longmen Joint Venture $38,260  $25,150 
Shaanxi Haiyan Trade Co., Ltd Significant influence by Long Steel Group*  18,822   805 
Shaanxi Shenganda Trading Co., Ltd Significant influence by Long Steel Group  860   26,967 
Shaanxi Steel Majority shareholder of Long Steel Group  238   626 
Shaanxi Coal and Chemical Industry Group Co., Ltd. Shareholder of Shaanxi Steel  15,746   16,420 
Shaanxi Long Steel Group Baoji Steel Rolling Co., Ltd Subsidiary of Long Steel Group  -   5,117 
Shaanxi Junlong Rolling Co., Ltd Investee of Long Steel Group  -   4,291 
Total   $73,926  $79,376 

 

*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.

 

Name of related parties Relationship Nine months ended
September 30, 2014
 Nine months ended
September 30, 2013
  Relationship Six months
ended
June 30, 2015
 Six months
ended
June 30, 2014
 
   (in thousands) (in thousands)    (in thousands) (in thousands) 
Long Steel Group Noncontrolling shareholder of Longmen Joint Venture $115,150  $226,754  Noncontrolling shareholder of Longmen Joint Venture $49,530  $69,950 
Sichuan Yutai Trading Co., Ltd Significant influence by Long Steel Group  -   72 
Shaanxi Yuchang Trading Co., Ltd Significant influence by Long Steel Group  -   21,491 
Shaanxi Haiyan Trade Co., Ltd Significant influence by Long Steel Group  22,946   15,681  Significant influence by Long Steel Group  28,400   820 
Shaanxi Shenganda Trading Co., Ltd Significant influence by Long Steel Group  69,919   56,545  Significant influence by Long Steel Group  16,858   47,703 
Shaanxi Steel Majority shareholder of Long Steel Group  1,831   2,390  Majority shareholder of Long Steel Group  719   1097 
Shaanxi Coal and Chemical Industry Group Co., Ltd. Shareholder of Shaanxi Steel  35,795   22,577  Shareholder of Shaanxi Steel  35,814   21,389 
Shaanxi Long Steel Group Baoji Steel Rolling Co., Ltd Subsidiary of Long Steel Group  13,733   2,122  Subsidiary of Long Steel Group  -   11,735 
Shaanxi Junlong Rolling Co., Ltd Investee of Long Steel Group  8,888   33,075  Investee of Long Steel Group  -   8,888 
Total   $268,262  $380,707    $131,321  $161,582 

 

Sales to related parties in trading transactions, which were netted against the corresponding cost of goods sold, amounted to $49.2$104.0 million and $141.1$58.7 million for the three and nine months ended SeptemberJune 30, 2015 and 2014, respectively. See Note 2(m) Revenue Recognition for details.

c. The following charts summarize purchases from

Sales to related parties in trading transactions, which were netted against the corresponding cost of goods sold, amounted to $195.0 million and $91.9 million for the ninesix months ended threeJune 30, 2015 and nine months ended September 30, 2014, and 2013.respectively. See Note 2(m) Revenue Recognition for details.

 

Name of related parties Relationship Three months
ended
September 30,
2014
  Three months
ended
September 30,
2013
 
    (in thousands)  (in thousands) 
Long Steel Group Noncontrolling shareholder of Longmen Joint Venture $27,649  $101,606 
Hancheng Haiyan Coking Co., Ltd Noncontrolling shareholder of Long   Steel Group  41,690   31,331 
Xi’an Pinghe Metallurgical Raw
Material Co., Ltd
 Noncontrolling shareholder of Long Steel Group  32,536   1,181 
Shaanxi Junlong Rolling Co., Ltd Investee of Long Steel Group  -   1 
Shaanxi Huafu New Energy Co., Ltd Significant influence by the Long Steel Group  7,636   10,529 
Beijing Daishang Trading Co., Ltd. Noncontrolling shareholder of Longmen Joint Venture’s subsidiary  -   1,726 
Tianjin General Quigang Pipe Co., Ltd Partially owned by CEO through indirect shareholding**  5,090   - 
Maoming Shengze Trading Co., Ltd. Partially owned by CEO through indirect shareholding  16,764   - 
Shaanxi Coal and Chemical Industry Group Co., Ltd. Shareholder of Shaaxi Steel  13,441   - 
Others Entities either owned or have significant influence by our affiliates or management  -   64 
Total   $144,806  $146,438 
32

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

c.The following charts summarize purchases from related parties for the three and six months ended June 30, 2015 and 2014.

Name of related parties Relationship Three months
ended
June 30, 2015
  Three months
ended
June 30, 2014
 
    (in thousands)  (in thousands) 
Long Steel Group Noncontrolling shareholder of Longmen Joint Venture $176,807  $100,504 
Hancheng Haiyan Coking Co., Ltd Noncontrolling shareholder of Long   Steel Group  8,919   40,179 
Xi’an Pinghe Metallurgical Raw Material Co., Ltd Noncontrolling shareholder of Long Steel Group  2   5,016 
Shaanxi Coal and Chemical Industry Group Co., Ltd Shareholder of Shaanxi Steel  1,146   - 
Shaanxi Huafu New Energy Co., Ltd Significant influence by the Long Steel Group  8,140   7,561 
Tianwu General Steel Material Trading Co., Ltd. Investee of General Steel (China)  37,472   73,940 
Tianjin General Quigang Pipe Co., Ltd Partially owned by CEO through indirect shareholding**  5,198   4,253 
Tianjin Dazhan Industry Co., Ltd Partially owned by CEO through indirect shareholding  6,283   - 
Wendlar Tianjin Industry CO., Ltd Partially owned by CEO through indirect shareholding  14,794   - 
Tianjin Hengying Trading Co., Ltd Partially owned by CEO through indirect shareholding  -   17,721 
Others Entities either owned or have significant influence by our affiliates or management  380   1,037 
Total   $259,141  $250,211 

 

**The CEO is referred to herein isas the chief executive officer of General Steel Holdings, Inc. as of June 30, 2015, but Mr. Henry Yu has resigned and is no longer the CEO, although remains Chairman of the Board, as of the date of this filing. Ms. Yunshan Li is the current CEO.

 

Name of related parties Relationship Nine months ended
September 30, 2014
  Nine months ended
September 30, 2013
 
    (in thousands)  (in thousands) 
Long Steel Group Noncontrolling shareholder of Longmen Joint Venture $279,925  $376,104 
Hancheng Haiyan Coking Co., Ltd Noncontrolling shareholder of Long   Steel Group  125,957   148,322 
Xi’an Pinghe Metallurgical Raw
Material Co., Ltd
 Noncontrolling shareholder of Long Steel Group  38,456   13,678 
Shaanxi Long Steel Group Baoji
Steel Rolling Co., Ltd
 Subsidiary of Long Steel Group  -   53 
Shaanxi Junlong Rolling Co., Ltd Investee of Long Steel Group  -   212 
Shaanxi Huafu New Energy Co., Ltd Significant influence by the Long Steel Group  21,857   28,618 
Beijing Daishang Trading Co., Ltd. Noncontrolling shareholder of Longmen Joint Venture’s subsidiary  -   6,635 
Tianwu General Steel Material Trading Co., Ltd. Investee of General Steel (China)  83,649   - 
Tianjin General Quigang Pipe Co., Ltd Partially owned by CEO through indirect shareholding  13,618   - 
Tianjin Hengying Trading Co., Ltd Partially owned by CEO through indirect shareholding  45,604   - 
Maoming Shengze Trading Co., Ltd. Partially owned by CEO through indirect shareholding  16,764   - 
Shaanxi Coal and Chemical Industry Group Co., Ltd. Shareholder of Shaaxi Steel  14,385   - 
Others Entities either owned or have significant influence by our affiliates or management  140   300 
Total   $640,355  $573,922 

Name of related parties Relationship Six months
ended
June 30, 2015
  Six months
ended
June 30, 2014
 
    (in thousands)  (in thousands) 
Long Steel Group Noncontrolling shareholder of Longmen Joint Venture $182,800  $252,276 
Hancheng Haiyan Coking Co., Ltd Noncontrolling shareholder of Long   Steel Group  57,066   84,267 
Xi’an Pinghe Metallurgical Raw Material Co., Ltd Noncontrolling shareholder of Long Steel Group  1,074   5,920 
Shaanxi Coal and Chemical Industry Group Co., Ltd Shareholder of Shaanxi Steel  2,651   - 
Tianjin Dazhan Industry Co., Ltd Partially owned by CEO through indirect shareholding  6,283   - 
Wendlar Tianjin Industry CO., Ltd Partially owned by CEO through indirect shareholding  14,794   - 
           
Shaanxi Huafu New Energy Co., Ltd Significant influence by the Long Steel Group  14,100   14,221 
Tianwu General Steel Material Trading Co., Ltd. Investee of General Steel (China)  73,646   97,279 
Tianjin General Quigang Pipe Co., Ltd Partially owned by CEO through indirect shareholding  8,485   8,528 
Tianjin Hengying Trading Co., Ltd Partially owned by CEO through indirect shareholding  -   45,640 
Others Entities either owned or have significant influence by our affiliates or management  711   1,084 
Total   $361,610  $509,215 

33

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Related party balances

 

a.Loans receivable – related parties:

 

Name of related parties Relationship September 30, 2014 December 31, 2013  Relationship June 30, 2015 December 31, 2014 
   (in thousands) (in thousands)    (in thousands) (in thousands) 
Teamlink Investment Co., Ltd Partially owned by CEO through indirect shareholding  -   4,540 
Tianjin Hengying Trading Co., Ltd.* Partially owned by CEO through indirect shareholding $-  $13,997 
Tianjin Dazhan Industry Co., Ltd.* Partially owned by CEO through indirect shareholding  -   14,617 
Beijing Shenghua Xinyuan Metal Materials Co., Ltd. Partially owned by CEO through indirect shareholding  6,110   6,099 
Total   $-  $4,540    $6,110  $34,713 

*The Company reclassified advances for inventory purchase - related parties related to trading transactions, as noted in note 2(g), to loans receivable - related parties due to their interest-bearing nature.

The Company issued loans to these related parties for cash flow purposes to earn interest income, which have a higher interest rate than the bank financing interest rates.

 

See Note 3 – loans receivable – related parties for loan details.

 

b.Accounts receivables – related parties:

 

Name of related parties Relationship September 30, 2014 December 31, 2013  Relationship June 30, 2015 December 31, 2014 
 (in thousands) (in thousands)    (in thousands) (in thousands) 
Long Steel Group Noncontrolling shareholder of Longmen Joint Venture $173  $548  Noncontrolling shareholder of Longmen Joint Venture $570  $148 
Shaanxi Coal and Chemical Industry Group Co., Ltd. Shareholder of Shaanxi Steel  651   - 
Shaanxi Shenganda Trading Co., Ltd. Significant influence by Long Steel Group  325   5,715 
Tianjin Daqiuzhuang Steel Plates Partially owned by CEO through indirect shareholding  19   19  Partially owned by CEO through indirect shareholding  19   19 
Shaanxi Steel Majority shareholder of Long Steel Group  1,961   1,741  Majority shareholder of Long Steel Group  1,760   2,101 
Others   -   634     -   641 
Total  $2,153  $2,942    $3,325  $8,624 

 

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 September 30,
2014
 December 31, 2013  Relationship June 30, 2015 December 31, 2014 
   (in thousands) (in thousands)    (in thousands) (in thousands) 
Long Steel Group Noncontrolling shareholder of Longmen Joint Venture $16,549  $406  Noncontrolling shareholder of Longmen Joint Venture $166  $165 
Shaanxi Steel Majority shareholder of Long Steel Group  1,137   46,439  Majority shareholder of Long Steel Group  1,142   35,669 
Tianjin General Quigang Pipe Co., Ltd Partially owned by CEO through indirect shareholding  9,391   1,247 
Tianjin Dazhan Industry Co, Ltd Partially owned by CEO through indirect shareholding  24,311   491 
Beijing Shenhua Xinyuan Metal Materials Co., Ltd. Partially owned by CEO through indirect shareholding  5,840   4,901 
Tianjin Hengying Trading Co., Ltd. Partially owned by CEO through indirect shareholding  13,299   - 
Victory Energy Resource Co., Ltd Partially owned by CEO through indirect shareholding  1,131   - 
Tianjin General Qiugang Pipe Co., Ltd Partially owned by CEO through indirect shareholding  1,225   1,237 
Tianjin Dazhan Industry Co., Ltd Partially owned by CEO through indirect shareholding  1,582   - 
Tianjin Hengying Trading Co., Ltd Partially owned by CEO through indirect shareholding  1,213   721 
Beijing Shenghua Xinyuan Metal Materials Co., Ltd. Partially owned by CEO through indirect shareholding  619   313 
Victory Energy Resource Co., Ltd. Partially owned by CEO through indirect shareholding  1,101   1,101 
Others Entities either owned or have significant influence by our affiliates or management  322   622  Entities either owned or have significant influence by our affiliates or management  345   528 
Total  $71,980  $54,106    $7,393  $39,734 

34

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

d.Advances on inventory purchase – related parties:

 

Name of related parties Relationship September 30, 2014 December 31, 2013  Relationship June 30, 2015 December 31, 2014 
 (in thousands) (in thousands)    (in thousands) (in thousands) 
Long Steel Group Noncontrolling shareholder of Longmen Joint Venture $87  $9,123  Noncontrolling shareholder of Longmen Joint Venture $2,395  $7,139 
Shaanxi Shenganda Trading Co., Ltd. Significant influence by Long Steel Group  -   25,607  Significant influence by Long Steel Group  -   27,549 
Tianjin Dazhan Industry Co., Ltd Partially owned by CEO through indirect shareholding  11,721   10,343 
Tianjin Hengying Trading Co., Ltd Partially owned by CEO through indirect shareholding  51,304   16,158  Partially owned by CEO through indirect shareholding  4,015   3,807 
Tianjin General Qiugang Pipe Co., Ltd Partially owned by CEO through indirect shareholding  20,868   555  Partially owned by CEO through indirect shareholding  33   7,091 
Maoming Shengze Trading Co., Ltd Partially owned by CEO through indirect shareholding  43,888   21,197 
Shaanxi Coal and Chemical Industry Group Co., Ltd. Shareholder of Shaanxi Steel  6,947   - 
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  21   31 
Total  $127,899  $83,003    $13,411  $45,617 

 

e.Accounts payable - related parties:

 

Name of related parties Relationship September 30,
2014
 December 31,
2013
  Relationship June 30, 2015 December 31, 2014 
 (in thousands) (in thousands)    (in thousands) (in thousands) 
Hancheng Haiyan Coking Co., Ltd Noncontrolling shareholder of Longmen Joint Venture $72,240  $58,163  Noncontrolling shareholder of Longmen Joint Venture $41,724  $64,276 
Long Steel Group Noncontrolling shareholder of Longmen Joint Venture  106,480   134,758  Noncontrolling shareholder of Longmen Joint Venture  100,927   79,886 
Shaanxi Coal and Chemical Industry Group Co., Ltd. Shareholder of Shaanxi Steel  25,066   29,990  Shareholder of Shaanxi Steel  31,266   23,726 
Tianjin Dazhan Industry Co., Ltd Partially owned by CEO through indirect shareholding  945   958  Partially owned by CEO through indirect shareholding  -   869 
Xi’an Pinghe Metallurgical Raw Material Co., Ltd Noncontrolling shareholder of Long Steel Group  31,990   8,714  Noncontrolling shareholder of Long Steel Group  8,206   11,035 
Tianjin Hengying Trading Co., Ltd Partially owned by CEO through indirect shareholding  -   1  Partially owned by CEO through indirect shareholding  -   1 
Henan Xinmi Kanghua Fire Refractory Co., Ltd Noncontrolling shareholder of Longmen Joint Venture’s subsidiary  799   716  Noncontrolling shareholder of Longmen Joint Venture’s subsidiary  1,411   746 
Shaanxi Shenganda Trading Co., Ltd. Significant influence by Long Steel Group  1,353   - 
Beijing Daishang Trading Co., Ltd Noncontrolling shareholder of Longmen Joint Venture’s subsidiary  36   1,004  Noncontrolling shareholder of Longmen Joint Venture’s subsidiary  899   36 
Tianjin General Qiugang Pipe Co., Ltd Partially owned by CEO through indirect shareholding  -   2,462 
Tianwu General Steel Material Trading Co., Ltd. Investee of General Steel (China)  19,207   759  Investee of General Steel (China)  13,919   22,916 
Tianjin General Qiugang Pipe Co., Ltd. Partially owned by CEO through indirect shareholding  8,136   - 
Maoming Shengze Trading Co., Ltd Partially owned by CEO through indirect shareholding  4,276   1,773 
Shaanxi Steel Majority shareholder of Long Steel Group  7,168   - 
Others Entities either owned or have significant influence by our affiliates or management  845   629  Entities either owned or have significant influence by our affiliates or management  -   57 
Total   $265,744  $235,692    $211,149  $207,783 

35

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

f.Short-term loans - related parties:

 

Name of related parties Relationship September 30,
2014
 December 31,
2013
  Relationship June 30, 2015 December 31, 2014 
 (in thousands) (in thousands)    (in thousands) (in thousands) 
Shaanxi Steel Group Hanzhong Steel Co., Ltd. Subsidiary of Shaanxi Steel $8,160  $- 
Shaanxi Steel Majority shareholder of Long Steel Group $95,875  $49,110  Majority shareholder of Long Steel Group  159,316   - 
Shaanxi Coal and Chemical Industry Group Co., Ltd Shareholder of Shaanxi Steel  74,171   28,216  Shareholder of Shaanxi Steel  68,796   34,460 
Long Steel Group Noncontrolling shareholder of Longmen Joint Venture  52,746   33,183  Noncontrolling shareholder of Longmen Joint Venture  32,609   - 
Xi’an Pinghe Metallurgical Raw Material Co., Ltd. Noncontrolling shareholder of Long Steel Group  8,160   - 
Tianjin Hengying Trading Co., Ltd Partially owned by CEO through indirect shareholding  -   8,178  Partially owned by CEO through indirect shareholding  2,239   3,039 
Tianjin Dazhan Industry Co., Ltd Partially owned by CEO through indirect shareholding  -   6,548  Partially owned by CEO through indirect shareholding  -   8,211 
Yangpu Capital Automobile Partially owned by CEO through indirect shareholding  668   1,458  Partially owned by CEO through indirect shareholding  670   670 
Total  $223,460  $126,693    $279,950  $46,380 

See Note 910 – Debt for the loan details.

 

g.Current maturities of long-term loans – related parties

Name of related party Relationship September 30, 2014  December 31, 2013 
    (in thousands)  (in thousands) 
Shaanxi Steel Majority shareholder of Long Steel Group $67,249  $53,013 
Total   $67,249  $53,013 

h.Other payables – related parties:

 

Other payables – related parties are those nontrade payables arising from transactions between the Company and its related parties, such as advances or payments from these related parties on behalf of the Group.

 

Name of related parties Relationship September 30,
2014
 December 31,
2013
  Relationship June 30,  2015 December 31, 2014 
   (in thousands) (in thousands)    (in thousands) (in thousands) 
Tianjin Hengying Trading Co, Ltd Partially owned by CEO through indirect shareholding $11,731  $380  Partially owned by CEO through indirect shareholding $3,644  $378 
Long Steel Group Noncontrolling shareholder of Longmen Joint Venture  71,671   43,636  Noncontrolling shareholder of Longmen Joint Venture  18,867   33,968 
Shaanxi Steel Majority shareholder of Long Steel Group  3,727   44,363  Majority shareholder of Long Steel Group  30,566   44,146 
Shaanxi Shenganda Trading Co., Ltd. Significant influence by Long Steel Group  1,057   - 
Wendlar Investment & Management Group Co., Ltd Common control under CEO  1,125   895  Common control under CEO  1,203   1,196 
Yangpu Capital Automobile Partially owned by CEO through indirect shareholding  362   291  Partially owned by CEO through indirect shareholding  433   399 
Tianjin Dazhan Industry Co., Ltd Partially owned by CEO through indirect shareholding  9,329   473  Partially owned by CEO through indirect shareholding  3,499   3,883 
Maoming Shengze Trading Co., Ltd Partially owned by CEO through indirect shareholding  2,723   1,745  Partially owned by CEO through indirect shareholding  212   2,775 
Victory Energy Resource Co., Ltd Partially owned by CEO through indirect shareholding  -   1,375 
Teamlink Investment Co., Ltd Partially owned by CEO through indirect shareholding  20,500   - 
Others Entities either owned or have significant influence by our affiliates or management  807   921  Entities either owned or have significant influence by our affiliates or management  47   507 
Total  $101,475  $94,079    $80,028  $87,252 

36

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

i.h.Customer deposits – related parties:

  

Name of related parties Relationship September 30, 2014 December 31, 2013  Relationship June 30, 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  $10 
Shaanxi Coal and Chemical Industry Group Co., Ltd Shareholder of Shaanxi Steel  386   -  Shareholder of Shaanxi Steel  6,938   4,467 
Shaanxi Haiyan Trade Co, Ltd Significant influence by Long Steel Group  7,839   6,844 
Long Steel Group Noncontrolling shareholder of Longmen Joint Venture  17,282   15,038  Noncontrolling shareholder of Longmen Joint Venture  9,465   23,517 
Shaanxi Junlong Rolling Co., Ltd Investee of Long Steel Group  16   2,748  Investee of Long Steel Group  58   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)  95,798   46,521  Investee of General Steel (China)  9,613   97,721 
Shaanxi Haiyan Trade Co., Ltd Significant influence by Long Steel Group  182   - 
Others   -   289 
Total  $113,674  $64,881    $33,923  $132,616 

j.i.Deposits due to sales representatives – related parties

 

Name of related parties Relationship September 30, 2014 December 31, 2013  Relationship June 30, 2015 December 31, 2014 
 (in thousands) (in thousands)    (in thousands) (in thousands) 
Hancheng Haiyan Trade Co., Ltd Significant influence by Long Steel Group $652  $652 
Gansu Yulong Trading Co., Ltd. Significant influence by Long Steel Group $1,073  $1,408  Significant influence by Long Steel Group  1,534   1,075 
Long Steel Group Noncontrolling shareholder of Longmen Joint Venture  -   196 
Chengdu Yusheng Steel Trading Co., Ltd Subsidiary of Long Steel Group  98   - 
Shaanxi Yuchang Trading Co., Ltd Significant influence by Long Steel Group  585   589  Significant influence by Long Steel Group  588   586 
Shaanxi Haiyan Trading Co., Ltd. Significant influence by Long Steel Group  650   - 
Total  $2,308  $1,997    $2,872  $2,509 

  

k.j.Long-term loans – related party:

 

Name of related party Relationship September 30, 2014 December 31, 2013  Relationship June 30, 2015 December 31, 2014 
 (in thousands) (in thousands)    (in thousands) (in thousands) 
Shaanxi Steel Majority shareholder of Long Steel Group $4,875  $19,644  Majority shareholder of Long Steel Group $353,067  $339,549 
Total  $4,875  $19,644    $353,067  $339,549 

 

The Company also provided guaranteesguarantee on related parties’ bank loans amounting to $151.4$63.5 million and $205.8$82.3 million as of SeptemberJune 30, 20142015 and as of December 31, 2013,2014, respectively.

37

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

l.k.Deferred lease income

 

 September 30, 2014 December 31, 2013  June 30, 2015 December 31, 2014 
 (in thousands) (in thousands)  (in thousands) (in thousands) 
Beginning balance $77,444  $77,199  $74,889  $77,444 
Less: Lease income realized  (1,630)  (2,158)  (1,089)  (2,176)
Exchange rate effect  (566)  2,403   137   (379)
Ending balance  75, 248   77,444   73,937   74,889 
Current portion  (2,171)  (2,187)  2,180   (2,176)
Noncurrent portion $73,077  $75,257  $71,757  $72,713 

 

For the three months ended SeptemberJune 30, 20142015 and 2013,2014, the Company realized lease income from Shaanxi Steel, a related party, amountingamounted to $0.5 million and $0.5 million, respectively.

 

For the ninesix months ended SeptemberJune 30, 20142015 and 2013,2014, the Company realized lease income from Shaanxi Steel, a related party, amountingamounted to $1.6$1.1 million and $1.6$1.1 million, respectively.

 

m.Equity

On November 19, 2013, the Company sold its 28% equity interest in Tianwu, held by Yangpu Shengtong, to Tianjin Dazhan Industry Co., Ltd., a related party through indirect common ownership by the CEO, for $13.6 million (RMB 84.3 million) while retaining the 32% interest held by General Steel (China). As a result of this transaction, the Company met the criteria under ASC 810-10-40-4 to deconsolidate Tianwu as of the ownership disposal date and recognize a gain, which amounted to $1.0 million. After the deconsolidation of Tianwu, General Steel (China)’s 32% interest in Tianwu is accounted for as an equity method investment, which amounted to $15.6 million and $15.8 million as of September 30, 2014 and December 31, 2013, respectively.

Note 1920 – Equity

 

20142015 Equity Transactions

 

On February 3, 2014,April 14, 2015, the Company granted 80,000500,000 shares of common stock for investor relations consulting services under twoa service agreements dated JanuaryApril 14, 2014.2015. The shares were valued at $1.01$0.98 per share, the quoted market price at the time the services were provided.

 

On August 21, 2014,June 9, 2015, the Company granted 80,0001,498,000 shares of common stock for investor relations consulting services under two service agreements dated July 10, 2014.to senior management personnel. The shares were valued at $1.04$0.77 per share, the quoted market price at the time the servicesshares were provided.granted.

 

Note 2021 – Retirement plan

 

Regulations in the PRC require the Company to contribute to a defined contribution retirement plan for all employees. All the employees of the Company’s entities in China are entitled to a retirement pension amount calculated based upon their salary at their date of retirement and their length of service in accordance with a government managed pension plan. The PRC government is responsible for the pension liability to the retired staff. The Company’s entities in China are required to contribute based on the higher of 20% of the employees’ monthly base salary or 12% of the minimum social average salary of the city where the facilities are located. Employees are required to contribute 8% of their base salary to the plan. The minimum social average salary is announced by the local Social Security bureau and updated annually. Total pension expense incurred by the Company for the three months ended SeptemberJune 30, 20142015 and 20132014 amounted to $5.0$3.2 million and $2.3$3.0 million, respectively. Total pension expense incurred by the Company for the six months ended June 30, 2015 and 2014 amounted to $6.0 million and $5.8 million, respectively.

Note 22 – 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 six months ended June 30, 2015 and 2014, the Company did not make any contributions to these reserves.

38

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Special reserve

The Company is required by the PRC government to reserve safety and maintenance expense to the cost of production based on the actual quantity of mineral exploited.  The amount of reserves is determined within the unit price range provided by Ministry of Finance of PRC. For the six months ended June 30, 2015 and 2014, the Company made contributions of $0.4 million and $0.6 million to these reserves, respectively and for the nine months ended September 30, 2014 and 2013 amounted to $10.8used $0.2 million and $6.4$0.4 million of safety and maintenance expense, respectively.

 

Note 2123 – Commitment and contingencies

 

Operating Lease Commitments

 

Total operating lease commitments for rental of offices, buildings, equipment and land use rights of the Company’s PRC subsidiaries as of SeptemberJune 30, 20142015 is as follows:

 

Year ending June 30, Minimum lease payment  Minimum lease payment 
 (in thousands)  (in thousands) 
2015 $871 
2016  566  $2,132 
2017  566   1,951 
2018  566   1,704 
2019  566   1,209 
2020  1,209 
Years after  19,644   39,218 
Total minimum payments required $22,779  $47,423 

Total rental expense was $0.8 million and $0.6 million for the three months ended June 30, 2015 and 2014, respectively.

 

Total rental expense was $0.9 million and $0.8$1.5 million for the threesix months ended SeptemberJune 30, 20142015 and 2013, respectively, and $2.4 million and $2.4 million for the nine months ended September 30, 2014, and 2013, respectively.

 

Contractual Commitments

 

Longmen Joint Venture has $110.7$9.3 million contractual obligations related to construction projects as of SeptemberJune 30, 20142015 estimated to be fulfilled between November 2014September and SeptemberDecember 2015.

 

Contingencies

 

As of SeptemberJune 30, 2014,2015, Longmen Joint Venture provided guarantees to related parties’ and third parties’ bank loans, including lines of credit and others, amounting to $196.7$63.5 million.

  

Nature of guarantee Guarantee
amount
  Guaranty Due Date
  (In thousands)   
Line of credit $127,644  Various from December 2014 to September 2015
Three-party financing agreements  14,463  Various from April to June 2015
Confirming storage  41,600  Various from October 2014 to April 2015
Financing by the rights of goods delivery in future  13,000  October 2014
Total $196,707   
Name of parties being guaranteed Guarantee
amount
  Guaranty Due Date
  (In thousands)   
Long Steel Group $79,706  Various from December 2014 to September 2015
Hancheng Haiyan Coking Co., Ltd  25,350  Various from October 2014 to April 2015
Chengdu Zhongyi Steel Co., Ltd  8,125  March 2015
Shaanxi Fuping Steel Co., Ltd  3,088  June 2015
Xi’an Laisheng Logistics Co., Ltd  3,250  May 2015
Xi'an Kaiyuan Steel Sales Co., Ltd  6,500  January 2015
Shaanxi Longan Industry Co., Ltd.  8,125  December 2014
Hancheng Sanli Furnace Burden Co., Ltd.  16,250  March 2015
Tianjin Dazhan Industry Co., Ltd  20,313  Various from January to March 2015
Tianjin Hengying Trading Co., Ltd  26,000  Various from October 2014 to January 2015
Total $196,707   
Nature of guarantee Guarantee
amount
  Guaranty Due Date
  (In thousands)   
Line of credit $51,082  Various from August 2015 to May 2016
Bank loan  12,403  Various from November 2015 to March 2016
Total $63,485   

Name of parties being guaranteed 

Guarantee

amount

  Guaranty Due Date
  (In thousands)   
Long Steel Group $27,255  Various from August 2015 to May 2016
Shaanxi Haiyan Coke Group Co., Ltd.  36,230  Various from September 2015 to April 2016
Total $63,485   

 

As of SeptemberJune 30, 2014,2015, the Company did not accrue any liability for the amounts the Group has guaranteed for third parties and related parties because those parties are current in their payment obligations and the Company has not experienced any losses from providing guarantees. The Company has evaluated the debt guarantees and concluded that the likelihood of having to make payments under the guarantees is remote and that the fair value of the stand-ready obligation under these commitments is not material.

 

39

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 2224 – Segments

 

The Company’s chief operating decision maker evaluates performance and determines resource allocations based on a number of factors, the primary measure being income from operations of the Group’s four regional divisions in the PRC: Longmen Joint Venture in Shaanxi province, Maoming Hengda in Guangdong province, Baotou Steel Pipe Joint Venture in Inner Mongolia province and General Steel (China) & Tianwu Joint VentureGeneral Shengyuan in Tianjin City.

 

The Group operates in two business segments, one business segment that includes fourconsisting of General Shengyuan and one consisting of three different divisions.divisions including Longmen Joint Venture, Maoming Hengda and General Steel (China). These reportable divisions are consistent with the way the Company manages its business, each division operates under separate management groups and produces discrete financial information. The accounting principles applied at the operating division level in determining income from operations is generally the same as those applied at the consolidated financial statement level.

 

The following represents the results of division operations for the three months ended SeptemberJune 30, 20142015 and 2013:2014:

 

(In thousands)          
Sales: 2014 2013  2015 2014 
Longmen Joint Venture $559,317  $606,444  $528,778  $587,314 
Maoming Hengda  1,122   252   3   215 
Baotou Steel Pipe Joint Venture  2,383   2,921   -   483 
General Steel (China) & Tianwu Joint Venture  20,335   4,236 
General Shengyuan  -   - 
General Steel (China)  -   - 
Total sales  583,157   613,853   528,781   588,012 
Interdivision sales  (20,335)  (3,758)      1 
Consolidated sales $562,822  $610,095  $528,781  $588,013 

  

Gross profit (loss): 2014 2013  2015 2014 
Longmen Joint Venture $9,010  $8,122  $(64,220) $28,229 
Maoming Hengda  (80)  (57)  (49)  21 
Baotou Steel  178   160   -   3 
General Steel (China) & Tianwu Joint Venture  502  6 
Total gross profit (loss)  9,610   8,231 
General Shengyuan  -   - 
General Steel (China)  -   (159)
Total gross loss  (64,269)  28,094 
Interdivision gross profit  -   -   -   - 
Consolidated gross profit (loss) $9,610  $8,231 
Consolidated gross (loss) profit $(64,269) $28,094 

 

Income (loss) from operations: 2014  2013 
Longmen Joint Venture $9,746  $30,306 
Maoming Hengda  (248)  (719)
Baotou Steel  (30)  20 
General Steel (China) & Tianwu Joint Venture  841  (695)
Total income (loss) from operations  10,309   28,912 
Interdivision income (loss) from operations  -   - 
Reconciling item (1)  (2,406)  (1,177)
Consolidated income (loss) from operations $7,903  $27,735 
Net income (loss) attributable to General Steel Holdings, Inc.: 2014  2013 
Longmen Joint Venture $(3,378) $8,284 
Maoming Hengda  (318)  (694)
Baotou Steel  (24)  16 
General Steel (China) & Tianwu Joint Venture  2,595  (2,689)
Total net loss attributable to General Steel Holdings, Inc.  (1,125)  4,917 
Interdivision net income  -   - 
Reconciling item (1)  (2,365)  (1,116)
Consolidated net loss attributable to General Steel Holdings, Inc. $(3,490) $3,801 
Income (loss) from operations: 2015  2014 
Longmen Joint Venture $(1,005,820) $8,128 
Maoming Hengda  (270)  (54)
Baotou Steel  -   (133)
General Shengyuan  -   - 
General Steel (China)  (849)  (720)
Total loss from operations  (1,006,939)  7,221 
Reconciling item (1)  (1,083)  (896)
Consolidated (loss) income from operations $(1,008,022) $6,325 

 

Depreciation, amortization and depletion: 2014 2013 
Net loss attributable to General Steel Holdings, Inc.: 2015 2014 
Longmen Joint Venture $22,960  $21,014  $(613,117) $(8,077)
Maoming Hengda  437   307   (255)  (123)
Baotou Steel  64   62   -   (106)
General Steel (China) & Tianwu Joint Venture  447   505 
Consolidated depreciation, amortization and depletion $23,908  $21,888 
General Shengyuan  -   - 
General Steel (China)  (572)  (1,870)
Total net loss attributable to General Steel Holdings, Inc.  (613,944)  (10,176)
Reconciling item (1)  (1,083)  (843)
Consolidated net loss attributable to General Steel Holdings, Inc. $(615,027) $(11,109)

 

Finance/interest expenses: 2014  2013 
Longmen Joint Venture $17,831  $20,591 
Maoming Hengda  1   1 
Baotou Steel  -   - 
General Steel (China) & Tianwu Joint Venture  1,588   2,249 
Interdivision interest expenses  -   - 
Reconciling item (1)  2   1 
Consolidated interest expenses $19,422  $22,842 
40

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Capital expenditures: 2014  2013 
Longmen Joint Venture $5,096  $16,455 
Maoming Hengda  16   - 
Baotou Steel  1   - 
General Steel (China) & Tianwu Joint Venture  -   - 
Reconciling item (1)  -   - 
Consolidated capital expenditures $5,113  $16,455 
Depreciation, amortization and depletion: 2015  2014 
Longmen Joint Venture $30,458  $22,778 
Maoming Hengda  304   158 
Baotou Steel  -   59 
General Shengyuan  -   - 
General Steel (China)  670   447 
Consolidated depreciation, amortization and depletion $31,432  $23,442 

Finance/interest expenses: 2015  2014 
Longmen Joint Venture $28,656  $25,131 
Maoming Hengda  -   - 
Baotou Steel  -   (1)
General Shengyuan  -   - 
General Steel (China)  918   1,488 
Reconciling item (1)  1   1 
Consolidated interest expenses $29,575  $26,619 

Capital expenditures: 2015  2014 
Longmen Joint Venture $8,583  $55,852 
Maoming Hengda  1   - 
Baotou Steel  -   - 
General Shengyuan  -   - 
General Steel (China)  1   - 
Reconciling item (1)  -   - 
Consolidated capital expenditures $8,585  $55,852 

 

The following represents the results of division operations for the ninesix months ended SeptemberJune 30, 20142015 and 2013:2014:

 

(In thousands)          
Sales: 2014 2013  2015 2014 
Longmen Joint Venture $1,740,645  $1,903,933  $856,936  $1,181,328 
Maoming Hengda  1,373   3,124   9   251 
Baotou Steel Pipe Joint Venture  3,028   3,902   -   645 
General Steel (China) & Tianwu Joint Venture  20,388   58,416 
General Shengyuan  -   - 
General Steel (China)  -   53 
Total sales  1,765,434   1,969,375   856,945   1,182,277 
Interdivision sales  (20,388)  (54,338)  -   (53)
Consolidated sales $1,745,046  $1,915,037  $856,945  $1,182,224 

  

Gross profit (loss): 2014  2013 
Longmen Joint Venture $15,020  $(23,704)
Maoming Hengda  (35)  188 
Baotou Steel  158   249 
General Steel (China) & Tianwu Joint Venture  -  29 
Total gross profit (loss)  15,143   (23,238)
Interdivision gross profit  -   - 
Consolidated gross profit (loss) $15,143  $(23,238)
Loss from operations: 2014  2013 
Longmen Joint Venture $(21,420) $20,558 
Maoming Hengda  (824)  (1,741)
Baotou Steel  (207)  (285)
General Steel (China) & Tianwu Joint Venture  (2,445)  (2,293)
Total loss from operations  (24,896)  16,239 
Interdivision loss from operations  -   - 
Reconciling item (1)  (4,539)  (3,504)
Consolidated loss from operations $(29,435) $12,735 
Gross profit (loss): 2015  2014 
Longmen Joint Venture $(96,367) $6,010 
Maoming Hengda  (49)  45 
Baotou Steel  -   (20)
General Shengyuan  -   - 
General Steel (China)  -   (502)
Total gross loss  (96,416)  5,533 
Interdivision gross profit  -   - 
Consolidated gross (loss) profit $(96,416) $5,533 

 

Net loss attributable to General Steel Holdings, Inc.: 2014  2013 
Longmen Joint Venture $(49,489) $(18,335)
Maoming Hengda  (978)  (1,681)
Baotou Steel  (165)  (227)
General Steel (China) & Tianwu Joint Venture  (3,118)  (9,373)
Total net loss attributable to General Steel Holdings, Inc.  (53,750)  (29,616)
Interdivision net income (loss)  -   - 
Reconciling item (1)  (4,323)  (3,298)
Consolidated net loss attributable to General Steel Holdings, Inc. $(58,073) $(32,914)
41

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Depreciation, amortization and depletion: 2014 2013 
Loss from operations: 2015 2014 
Longmen Joint Venture $69,268  $62,295  $(1,059,318) $(31,166)
Maoming Hengda  899   933   (831)  (576)
Baotou Steel  185   185   -   (177)
General Steel (China) & Tianwu Joint Venture  1,344   1,542 
Consolidated depreciation, amortization and depletion $71,696  $64,955 
        
Finance/interest expenses: 2014  2013 
Longmen Joint Venture $69,952  $60,984 
Maoming Hengda  1   1 
Baotou Steel  -   - 
General Steel (China) & Tianwu Joint Venture  4,685   7,927 
Interdivision interest expenses  -   - 
General Shengyuan  -   - 
General Steel (China)  (1,583)  (3,286)
Total loss from operations  (1,061,732)  (35,205)
Reconciling item (1)  98   3   (2,002)  (2,133)
Consolidated interest expenses $74,736  $68,915 
Consolidated loss from operations $(1,063,734) $(37,338)

 

Capital expenditures: 2014 2013 
Net loss attributable to General Steel Holdings, Inc.: 2015 2014 
Longmen Joint Venture $117,695  $60,461  $(655,522) $(46,111)
Maoming Hengda  48   2   (921)  (660)
Baotou Steel  1   8   -   (141)
General Steel (China) & Tianwu Joint Venture  82   3 
General Shengyuan  -   - 
General Steel (China)  (1,735)  (5,713)
Total net loss attributable to General Steel Holdings, Inc.  (658,178)  (52,625)
Reconciling item (1)  -   -   (2,002)  (1,958)
Consolidated capital expenditures $117,826  $60,474 
Consolidated net loss attributable to General Steel Holdings, Inc. $(660,180) $(54,583)

 

Total Assets as of: September 30, 2014  December 31, 2013 
Longmen Joint Venture $2,583,371  $2,573,212 
Maoming Hengda  27,154   29,211 
Baotou Steel Pipe Joint Venture  5,601   4,448 
General Steel (China) & Tianwu Joint Venture  223,517   121,883 
Interdivision assets  (73,311)  (34,213)
Reconciling item (2)  1,945   5,817 
Total Assets $2,768,277  $2,700,358 
Depreciation, amortization and depletion: 2015  2014 
Longmen Joint Venture $54,644  $46,308 
Maoming Hengda  614   462 
Baotou Steel  -   121 
General Shengyuan  -   - 
General Steel (China)  1,338   897 
Consolidated depreciation, amortization and depletion $56,596  $47,788 

Finance/interest expenses: 2015  2014 
Longmen Joint Venture $47,804  $52,121 
Maoming Hengda  -   - 
Baotou Steel  -   - 
General Shengyuan  -   - 
General Steel (China)  2,339   3,097 
Reconciling item (1)  2   96 
Consolidated interest expenses $50,145  $55,314 

Capital expenditures: 2015  2014 
Longmen Joint Venture $39,208  $112,599 
Maoming Hengda  297   32 
Baotou Steel  -   - 
General Shengyuan  -   - 
General Steel (China)  669   820 
Reconciling item (1)  -   - 
Consolidated capital expenditures $40,174  $112,713 

42

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Total Assets as of: June 30,
2015
  December 31,
2014
 
Longmen Joint Venture $1,231,669  $2,408,218 
Maoming Hengda  22,174   25,933 
General Shengyuan  1,142   - 
General Steel (China)  94,338   158,606 
Interdivision assets  (59,364)  (30,486)
Reconciling item (2)  4,410   2,953 
Total Assets $1,294,369  $2,565,224 

 

(1)Reconciling item represents the unallocated income or expenses of the Company, arising from General Steel Investment Co., Ltd, Yangpu Shengtong Investment Co., Ltd and Qiu Steel for the three and ninesix months ended SeptemberJune 30, 2015 and 2014, and 2013.which are non-operating entities.

 

(2)Reconciling item represents assets held at General Steel Holdings, Inc., General Steel Investment Co., Ltd, Yangpu Shengtong Investment Co., Ltd and Qiu Steel as of SeptemberJune 30, 20142015 and December 31, 2013.2014, which are non-operating entities.

Note 2325 – Subsequent events

 

On July 14, 2014,17, 2015, the Company entered into a Subscription Agreement (the "Subscription Agreement") with Zuoshenggranted 6,000,000 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 $0.60 per share, the quoted market price at the time the shares were granted.

On July 23, 2015, Mr. Henry Yu resigned as the Company's Chief Executive Officer and a member of the Company'sCompany and was succeeded by Ms. Yunshan Li. Mr. Henry Yu remains to serve as the Chairman of the Board of Directors relatingof the Company and continues to work closely with Ms. Li to ensure a private placementseamless transition.

On May 7, 2015, the Company was notified by the New York Stock Exchange, Inc. (the "NYSE") that it had fallen below the NYSE's continued listing standard that required a minimum average closing price of $1.00 per share of the Company's common stock par value $0.001 per share. On October 23, 2014, after certain closing conditions contained inover a consecutive 30-trading-day period. Under the Subscription Agreement were satisfied, the transaction closed andNYSE regulations, the Company soldhas a cure period of six months from receipt of the NYSE's notice to Zuosheng Yu 5,000,000 sharesachieve compliance with the continued listing standard. The Company can regain compliance at any time during the six-month cure period through November 2015 if on the last trading day of any calendar month during the cure period, the Company has a closing share price and an average closing share price of at least $1.00 over the 30 trading-day period ending on the last trading day of that month. Subject to compliance with the NYSE's other continued listing standards and ongoing oversight, the Company's common stock at a purchase price of $1.50 per share (the "Purchase Price"), upon receipt of $7,500,000 in gross proceeds in accordance withwill continue to be listed and traded on the terms of the Subscription Agreement. The Purchase Price represents a 23% premium to the volume weighted average closing price of the Common Stock from March 5, 2014 to July 11, 2014, which ranged from $0.90 to $1.47 per share of common stockNYSE during the period. Upon completion of this transaction, Zuosheng Yu beneficially owned 44.7% ofsix-month cure period, under the Company’s common stock.symbol "GSI", but will continue to be assigned a ".BC" indicator.

 

On September 30, 2014, Longmen Joint Venture entered into a short-term loan agreement with Shaanxi Steel, the majority shareholder of Long Steel Group, for $32.5 million (RMB 200.0 million) with annual interest rate of 7.6% and due on March 29, 2015. Longmen Joint Venture subsequently received the loan amount on October 8, 2014 and October 9, 2014.

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

 

Note Regarding Forward-Looking Statements

 

The following discussion of the financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and related notes thereto. The following discussion contains forward-looking statements. General Steel Holdings, Inc. is referred to herein as “we,” “our,” “us” and “the Company.” The words or phrases “would be,” “will allow,” “expect to,” “intends to,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” or similar expressions are intended to identify forward-looking statements. Such statements include those concerning our expected financial performance, our corporate strategy and operational plans. Actual results could differ materially from those projected in the forward-looking statements as a result of a number of risks and uncertainties, including: (a) those risks and uncertainties related to general economic conditions in the People’s Republic of China, including regulatory factors that may affect such economic conditions; (b) whether we are able to manage our planned growth efficiently and operate profitable operations, including whether our management will be able to identify, hire, train, retain, motivate and manage required personnel or that management will be able to successfully manage and exploit existing and potential market opportunities; (c) whether we are able to generate sufficient revenues or obtain financing to sustain and grow our operations; and (d) whether we are able to successfully fulfill our primary requirements for cash which are explained below under “Liquidity and Capital Resources.” Unless otherwise required by applicable law, we do not undertake, and we specifically disclaim any obligation, to update any forward-looking statements to reflect occurrences, developments, unanticipated events or circumstances after the date of such statement. Additional information regarding certain factors which could cause actual results to differ from such forward-looking statements include, but are not limited to, those described in Item 1A, “Risk Factors”, into our Annual Report on Form 10-K/A10-K for the fiscal year ended December 31, 20132014 filed with the SEC on August 19, 2014.April 10, 2015.

 

ThirdRecent Developments and Second Quarter Highlights

 

The thirdsecond quarter of 20142015 was highlighted with the following:

 

·Sales in the thirdsecond quarter of 20142015 decreased by 7.7%10.1% to $562.8$528.8 million, from $610.1$588.0 million in the thirdsecond quarter of 2013,2014, due to the decrease in the averagerebar selling price of our products despite thean increase in our sales volume. For the thirdsecond quarter of 2014,2015, sales volume of rebar in Shaanxi Longmen Iron and Steel Co., Ltd. (“Longmen Joint Venture”) totaled 1.441.7 million metric tons, an increase of 16.3%30.2%, compared with 1.24to 1.3 million metric tons in the thirdsecond quarter of 2013,2014, with an average selling price of $388.1$311.2 per ton, as compared with $489.6to $450.0 per ton in the thirdsecond quarter of 2013.2014.

 

·Gross profitloss in the thirdsecond quarter of 20142015 was $9.6$(64.3) million, or 1.7%(12.2) % of total revenue, as compared with $8.2to a gross profit of $28.1 million, or 1.3%4.8% of total revenue in the thirdsecond quarter of 2013.2014.

·As the Chinese steel industry conditions continued to worsen, and the recent economic down turn, the major sell off of the Chinese stock market and the lacking of government expansion in major infrastructure in the second quarter of 2015, which deviated from our previously anticipated industry environment improvement, the sum of the discounted cash flows expected to result from Longmen Joint Venture’s long-lived assets and their disposition were less than the carrying value by approximately $974 million (RMB 6.0 billion), which was impaired and included in operating expenses in the second quarter of 2015.

·Total finance expense in the thirdsecond quarter of 20142015 was $19.4$29.6 million, as compared with $22.8to $26.6 million for the same period in 2013.2014. Finance expenses mainly consisted of interest expense on capital leases,lease, which was $5.2 million and $5.1$5.7 million in the thirdsecond quarter of 20142015 and 2013,2014, respectively, and interest expense on bank borrowings and discounted notes receivable, which was $14.2$24.4 million and $17.7$20.9 million in the second quarter of 20142015 and 2013,2014, respectively.

 

·Loss per share was $(0.06)$(9.80) and $(0.20) in the thirdsecond quarter of 2015 and 2014, compared to an income per share of $0.07respectively. The increase in the thirdloss in the second quarter of 2013. The decrease of income in 2014 was mainly due to the decrease in the gain fromaverage selling price of rebar decreasing more than the changeaverage cost, leading to an increase in fair valuegross loss, as well as the impairment of profit sharing liability, which led a decrease in the income from operations.Longmen Joint Venture’s long-lived assets.

 

OVERVIEW

 

We were incorporated on August 5, 2002, in the State of Nevada. We are headquartered in Beijing, China and operate a portfolio of Chinese steel companies. We serve various industries and produce a variety of steel products including, but not limited to: reinforced bars (“rebar”), hot-rolled carbon, spiral-weld pipessheets and high-speed wire. Our current aggregate annual production capacity of crude steel products under management, consisting mainly of steel rebar, is 7 million metric tons. Our rebar products have a variety of demand drivers, such as rural income, infrastructure construction and energy consumption.rural income. Domestic economic conditions are also an overall demand driver for all our products.

 

Our vision isIn June 2014, the Board approved our plan to become one of the largest and most profitable non-government controlledtransform from an integrated steel companies in the People’s Republic of Chinaproducer 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 (“PRC”IoT”). Our mission is to grow our business organically, and through the acquisition of Chinese steel companies, increase profitability and efficiency by utilizing western management practices and advanced production technologies, and the infusion of capital resources. opportunities.

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Our two-pronged growth strategy focuses onis a combination of capacity expansion, as well as optimizing operating efficiencies in our steel business and leverage.expanding into other high-growth and high-margin non-steel industries:

 

·We aim to grow revenue by increasing capacity and through continual cooperation and partnerships with leading state-owned enterprises (SOEs).

·We aim to drive profitability through improved operational efficiencies and optimization of our cost structure.structure and continual cooperation and partnerships with leading state-owned enterprises (SOEs).
·We aim to expand into other high-growth and high-margin non-steel industries, such as logistics and Internet-of-Things.

 

Unless the context indicates otherwise, as used herein the terms “General Steel”, the “Company”, “we”, “our” and “us” all refer to General Steel Holdings, Inc.

 

Steel-RelatedSteel Related Subsidiaries and Raw Material TradingIoT Technology Company

 

We presently have controlling interests in fourthree steel-related subsidiaries:subsidiaries and one IoT Technology company:

 

·General Steel (China) Co., Ltd. (“General Steel (China)”);
·Baotou Steel - General Steel Special Steel Pipe Joint Venture Company Limited (“Baotou Steel Pipe Joint Venture”);
·Shaanxi Longmen Iron and Steel Co., Ltd. (“Longmen Joint Venture”);
·Maoming Hengda Steel Co., Ltd. (“Maoming Hengda”); and
·Tianjin General Shengyuan IoT Technology Co., Ltd. (“General Shengyuan IoT”).

 

Our Company, together with our subsidiaries, majority owned subsidiaries and variable interest entity are referred to as the Group.“Group.” Longmen Joint Venture, which is currently consolidated into our Company, represents the majority of our revenue and assets. It was determined to be a variable interest entity in which we are considered the primary beneficiary, as fully explained below.

In view of the near-term challenges for the steel sector, we are strategically accelerating our business transformation. Our transformation strategy is to pursue opportunities that offer compelling benefits to our organization and shareholders, including:

·First, strengthen our financials while providing the financial flexibility to pursue higher return, higher growth opportunities;
·Second, reduce the complexity of our business structure, which is consistent with our objectives for internal simplification and operating efficiency;
·Third, diversify operating risk in order to lower our high reliance on steel business, while at the same time leverage on our vast vertical resources in the steel industry; and
·Fourth, pursue opportunities for additional value creation.

We formed a joint venture in February of 2015 with an RFID Expert team to develop and commercialize RFID technologies and data solutions. The formation of this joint venture represents a unique opportunity to accelerate our expansion into the vibrant logistics and Internet-of-Things sectors.

 

General Steel (China) Co., Ltd

 

General Steel (China), formerly known as “Tianjin Daqiuzhuang Metal Sheet Co., Ltd.” started operations in 1988.

 

On May 14, 2009, General Steel (China) changed its official name from “Tianjin Daqiuzhuang Metal Sheet Co., Ltd.” to better reflect its role as a merger and acquisition platform for steel company investments in China.  In some instances, General Steel (China) retains the use of the name “Daqiuzhuang Metal” for brand recognition purposes within the industry.

 

On MayJanuary 1, 20112010, 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 the facilities its facility located at No. 1, Tonga Street, Daqiuzhuang Town, Jinghai County, Tianjin City to the Lessee for a monthly payment of $0.1 million (RMB 0.5 million). The lease expires in May 2021. Management evaluates the fair value of its long-termGeneral Steel (China) long-lived assets on an annual basis, or upon a triggering event which would require an assessment sooner, andsooner. As of June 30, 2015, Management is of the opinion that the fair value of the property, plant and equipment as supported by the operating lease approximates itsexceed their current carrying value

Baotou Steel - General Steel Special Steel Pipe Joint Venture Company Limited

On April 27, 2007, General Steel (China) and Baotou Iron and Steel Group Co., Ltd. (“Baotou Steel”) entered into an Amended and Restated Joint Venture Agreement, amending the Joint Venture Agreement entered into on September 28, 2005, to increase General Steel (China)’s ownership interest in the related joint venture to 80% by approximately 88.4%. The joint venture’s name is Baotou Steel - General Steel Special Steel Pipe Joint Venture Company Limited, a Chinese limited liability company (“Baotou Steel Pipe Joint Venture”). Baotou Steel Pipe Joint Venture obtained its business license from governmental authorities in the PRC on May 25, 2007, and commenced operations in July 2007. Baotou Steel Pipe Joint Venture has four production lines capable of producing 100,000 metric tons of double spiral-weld pipes primarily used in the energy sector to transport oil and steam. These pipes have a diameter ranging from 219mm to 1240mm, a wall thickness ranging from 6mm to 13mm, and a length ranging from 6m to 12m. Presently, Baotou Steel Pipe Joint Venture sells its products using an internal sales force to customers in the Inner Mongolia Autonomous Region and the northwest region of the PRC.

 

Shaanxi Longmen Iron and Steel Co., Ltd

 

Effective June 1, 2007, through General Steel (China) and Tianjin Qiu Steel Investment Co., Ltd. (“Qiu Steel”), a 99% owned subsidiary of General Steel (China), we entered into a Joint Venture Agreement with Shaanxi Longmen Iron & Steel Group Co., Ltd. (“Long Steel Group”) to form Shaanxi Longmen Iron and Steel Co., Ltd. (“Longmen Joint Venture”). Through General Steel (China) and Qiu Steel, we invested approximately $39.3 million in cash and collectively held a 60% ownership interest in Longmen Joint Venture until April 29, 2011, when a 20-year Unified Management Agreement (the “Unified Management Agreement”) was entered into between our Company, Longmen Joint Venture, Shaanxi Coal and Shaanxi Steel. Longmen Joint Venture was determined to beas a Variable Interest Entity (“VIE”) and we are the primary beneficiary.

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Currently, Longmen Joint Venture has five branch offices, four consolidated subsidiariessubsidiaries/VIE and one entity in which it has a noncontrolling interest. It employs approximately 8,1008,400 full-time workers.  In addition to steel production, Longmen Joint Venture operates transportation services through its Changlong Branch, located in Hancheng city, Shaanxi Province. Changlong Branch owns 177 vehicles and provides transportation services exclusively to Longmen Joint Venture.Venture

 

Longmen Joint Venture’s rebar products are categorized within the steel industry as “longs” (in reference to their shape). Rebar is generally considered a regional product because its weight and dimension make it ill-suited for cost-effective long-haul ground transportation. By our estimates, the market demand for rebar in Shaanxi Province is six to eight million metric tons per year. Slightly more than half of this demand comes from Xi’an, the capital of Shaanxi Province, located 180km from Longmen Joint Venture’s main steel production site. Currently, we estimate that we have approximately a 72% share of the Xi’an market for rebar.

 

An established regional network of approximately one hundred and twelvetwenty-eight distributors, together with smaller distributors and eleventhree 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 Condensed Consolidated Financial Statements included hereinherein.

 

On April 29, 2011, a 20-year Unified Management Agreement (“the Agreement”) was entered into between the Company, the Company’s 60%-owned subsidiary Shaanxi Longmen Iron and Steel Co., Ltd. (“Longmen Joint Venture”), Shaanxi Coal and Chemical Industry Group Co., Ltd. (“Shaanxi Coal”) and Shaanxi Iron and Steel Group (“Shaanxi Steel”). Shaanxi Steel is the controlling shareholder of Shaanxi Longmen Iron and Steel Group Co., Ltd (“Long Steel Group”) which is the non-controlling interest holder in Longmen Joint Venture, and Shaanxi Coal, a state owned entity, is the parent company of Shaanxi Steel. Under the terms of the Agreement, all manufacturing machinery and equipment of Longmen Joint Venture and the $605.8 million (or approximately RMB 3.7 billion) of the constructed iron and steel making facilities owned by Shaanxi Steel, which includes one 400 m2 sintering machine, two 1,280 m3 blast furnaces, two 120 ton converters and some auxiliary systems, are managed collectively as a single virtual asset pool (“Asset Pool”). Longmen Joint Venture manages the Asset Pool as the principal operating entity and is responsible for the daily operations of the new and existing facilities. The Agreement leverages each of the parties’ operating strengths, allowing Longmen Joint Venture to derive the greatest benefit from the cooperation and the newly constructed iron and steel making facilities. At the designed efficiency level, the facilities contribute three million tons of crude steel production capacity per year.

 

Longmen Joint Venture pays Shaanxi Steel for the use of the constructed iron and steel making facilities an amount equaling the depreciation expense on the equipment constructed by Shaanxi Steel as well as 40% of the pre-tax profit generated by the Asset Pool. The remaining 60% of the pre-tax profit is allocated to Longmen Joint Venture. As a result, the Company’s economic interest in the profit or loss generated by Longmen Joint Venture decreased from 60% to 36%. However, the overall capacity under the management of Longmen Joint Venture increased by three million tons, or 75%. The Agreement improved Longmen Joint Venture’s cost structure through sustainable and steady sourcing of key raw materials and reduced transportation costs. The distribution of profit is subject to a prospective adjustment after the first two years based on each entity’s actual investment of time and resources into the Asset Pool. There has been no adjustment to the Agreement from its inception to the present time, nor intention to make future adjustment by the Company and Shaanxi Steel.

 

The parties to the Agreement established the Shaanxi Longmen Iron and Steel Unified Management Supervisory Committee ("Supervisory Committee") to ensure that the facilities and related resources are operated and managed according to the stipulations set forth in the Agreement. The Board of Directors of Longmen Joint Venture, of which the Company holds 4 out of 7 seats, requires a simple majority vote and remains the controlling decision-making body of Longmen Joint Venture and the Asset Pool. See Note 2(c) “Consolidation of VIE.”

 

The Agreement constitutes an arrangement that involves a lease which meets certain of the criteria of a capital lease and therefore the assets constructed by Shaanxi Steel are accounted for by Longmen Joint Venture as a capital lease. The profit sharing liability portion of the lease obligation, representing 40% of the pre-tax profit generated by the Asset Pool, is accounted for by Longmen Joint Venture as a derivative financial instrument at fair value. See Notes 2 “Summary of significant accounting policies”, 15 “Capital lease obligations” and 16 “Profit sharing liability”.

 

In November 2010, we brought online a 1,200,000 metric ton capacity rebar production line, which was renovated based on an existing 800,000 metric ton capacity rebar production line. In July 2011, we brought online a 1,000,000 metric ton capacity high speed wire production line. These two newly installed production lines were both relocated from the Maoming Hengda (as defined below) facility and consume less energy when running at maximum efficiency compared to our previous production line.

 

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Due to recurring losses and the deterioration of steel industry conditions in the second quarter of 2015, Management downgraded the evaluated fair value of Longmen Joint Venture’s long-lived assets as of June 30, 2015, and an impairment charge of approximately $974 million was recorded (Also see critical accounting policies – impairment of long-lived assets below). As of June 30, 2015, Management is of the opinion that the fair value of the property, plant and equipment approximates their current carrying value net of impairment.

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 whichthat 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.

 

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 June 30, 2015, Management is of the opinion that the fair value of the property, plant and equipment exceed their current carrying value by approximately 4.1%.

Tianjin General Shengyuan IoT Technology Co., Ltd

On February 10, 2015, we reached a definitive agreement (“the Agreement”) to form a joint venture with a team of RFID experts (the “Expert Team”), to develop and commercialize RFID technology data solutions. The joint venture entity named Tianjin General Shengyuan IoT Technology Co., Ltd. (“General Shengyuan IoT”) obtained its business license on February 13, 2015.

The Expert Team includes several forerunners in the data integration and logistics industries, led by Mr. Michael Au, a veteran with over 17 years of experience and more than a dozen patents in RFID technology. In 1997, Mr. Au developed and patented the first non-contact RFID device for moving vehicles that is still being used today for highway toll collections in the Guangdong Province. In 2005, Mr. Au co-founded Xindeco IoT (formerly Xinda Huicong Technology Company), the first China-based company specializing in the development and production of UHF RFID tags. Supporting Mr. Au and acting as the Expert Team’s chief technical adviser will be Dr. Changyu Wu, a member of the US Institute of Electrical and Electronics Engineers with over 20 years of experience in the development of data-integration devices. Michael Au was appointed as CEO of General Shengyuan IoT.

The joint venture brings together the strength and expertise of each partner in developing and commercializing RFID technologies and a cloud-based, Internet-of-Things platform. We own 70% of General Shengyuan IoT by contributing $1.6 million (RMB 10.0 million), while the Expert Team contributes intellectual property, including proprietary RFID technologies, licensed patents and domain expertise. The venture’s proprietary RFID tags and related applications can effectively track supplies, inventories, and goods throughout the manufacturing process, as well as, finished goods and merchandises in transit. Meanwhile, the venture’s cloud-based Internet-of-Things platform for bulk commodity logistics provides real-time data on supplies, inventory, and goods, thereby greatly enhancing its customers’ administration and planning processes, as well as, asset tracking and supply chain management. General Shengyuan IoT is still in the development stage and did not incur revenues or significant operating expenses during the period.

Production Capacity Information Summary by Subsidiary

 

Annual Production

Capacity (metric tons)

 General Steel
(China) (1)
  Baotou Steel Pipe
Joint Venture
 Longmen Joint
Venture 
 Maoming
Hengda (1)
  General Steel
(China) (1)
 Longmen Joint
Venture
 Maoming
Hengda (1)
 
Crude Steel - - 7 million -  - 7 million - 
         
Processing 400,000 100,000 5 million 400,000  400,000 5 million 400,000 
  
Main Products Hot-rolled sheet Spiral-weld pipe Rebar/High-speed wire Rebar  Hot-rolled sheet Rebar/High-speed wire Rebar 
  
Main Application Light Agricultural vehicles Energy transport 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 currently are leased to unrelated parties.

 

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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 three and ninesix months ended SeptemberJune 30, 2014, 16.0%2015, approximately 33.0% and 16.9%29.3% of our sales were to five customers, respectively. We believe that revenue derived from our current and future large customers will continue to represent a significant portion of our total revenue.

 

Moreover, our success will depend in part upon our ability to obtain orders from new customers, as well as the financial condition and success of our customers and general economic conditions in China.

 

Demand for our Products

For the three months ended September 30, 2014 and 2013, rebar, our major product, comprised more than 99.4% of our sales. For the nine months ended September 30, 2014 and 2013, rebar, our major product, comprised more than 99.7% and 99.4% of our sales, respectively. Overall, domestic economic growth is an important driver of demand for our major product, especially from construction and infrastructure projects.

 

At Longmen Joint Venture, growth in regional construction and infrastructure projects drives demand for our products. According to the 12th Five Year National Economic and Social Development Plan (“NESDP”) (2011-2015), development of China’s western region is one of China’s top five economic priorities. Shaanxi Province, where Longmen Joint Venture is located, has been designated as a focal point for development in the Western region, and Xi’an, the provincial capital, has been designated as a focal point for this development in China. Longmen Joint Venture is 180 kilometers from Xi’an and it does not have a major competitor within a 250 km radius.

 

The Western region of China, where our major sales market is located, has experienced a higher rate of growth than other Chinese regions in recent years. Compared to an increase of 7.7%7.4% for the national GDP, a GDP increase of 11%9.7% was reported by Shaanxi Province in 2013 over the previous year. As the national GDP increased by 7.4% for the first nine months of 2014, Shaanxi Province reported a higher-than-national-average GDP growth of 9.6% in the same period.2014. Additionally, according to Accounting and Corporate Finance Production Statistics in China, Sichuan Province also reported a healthy GDP increase of 10%.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 $257.4approximately $299 billion (RMB 1.591.84 trillion) for the year ended December 31, 2013,2014, an increase of 24.1%17.8% over the same period in 2012.2013.

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$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 will invest approximately $13 billion (RMB 80 billion) in the construction of hydro projects, which is three times the amount invested during the 11th Five Year National Economic and Social Development Plan. In addition to hydro projects, according to the central government, 16,000 kilometers of high speed railway will be built by 2020. 

In May 2011, the central government passed the Cheng-Yu Economic Zone Plan focusing on Chongqing City and Sichuan Province, covering 206,000 square kilometers, to further accelerate the development of the western region of China.  We anticipate that in the near future, the demand for our products will increase in those areas, and we expect that our expanded production capacity will be able to successfully meet the increase in demand. Furthermore, we have a sales office located in Chengdu to help facilitate such increased demand.

In February 2012, the government approved the Western Development 12th Five Year Plan, which continues the efforts to develop the Western areas. The Plan is centered on 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, the 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.

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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 other construction and infrastructure projects. We believe there will be sustained regional demand for several years as both the central and provincial governments continue to drive western region development efforts.

 

At Baotou Steel Pipe Joint Venture, energy sector growth, which spurs the need to transport oil, natural gas and steam, drives demand for spiral-weld steel pipe. Presently, demand is fueled by smaller pipeline projects and municipal energy infrastructure projects within the Inner Mongolia Autonomous Region.

Supply of Raw Materials

 

The primary raw materials we use for steel production are iron ore, coke, hot-rolled steel coil and steel billets.  Baotou Steel Pipe Joint Venture uses hot-rolled steel coil as its main raw material.  Longmen Joint Venture uses iron ore and coke as its main raw materials.  Maoming Hengda uses steel billets as its main raw material. Iron ore is the main raw material used to produce hot-rolled steel coil and steel billets. Therefore, the prices of iron ore and coke are the primary raw material cost drivers for our products.

Iron Ore

 

Longmen Joint Venture has 7 million tons of annual crude steel production capacity. At Longmen Joint Venture, approximately 76%73% 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 three months ended September 30, 2014 are as follows:

Name of Major SupplierRaw Material
Purchased
% of Total Raw
Material
Purchased
Relationship with
Company
Jiahui Mining Industry Co., Ltd.Iron Ore5.5%Third Party
Shaanxi Haiyan Coal Chemical Industry Co., Ltd.Coke4.8%Related Party
Shaaxi Longmen Coal Chemical Industry Co., LtdCoke4.4%Third Party
Long Steel GroupIron Ore2.4%Related Party
Baotou Bangli Industry Co., Ltd.Iron Ore1.7%Third Party
Total18.8%

The sources and/or our top five major suppliers of our raw materials for the nine months ended September 30, 2014 are as follows:

Name of Major SupplierRaw Material
Purchased
% of Total Raw
Material
Purchased
Relationship with
Company
Long Steel Group Import & Export Co., LtdIron Ore7.4%Related Party
Shaanxi Longmen Coal Chemical Industry Co., LtdCoke6.9%Third Party
Shaanxi Haiyan Coal Chemical Industry Co., Ltd.Coke6.1%Related Party
Long Steel GroupIron Ore5.0%Related Party
Tianwu General Steel Material Trading Co., Ltd.Iron Ore4.1%Related Party
Total29.5%

 

Industry Environment

 

Despite demand growth experienced throughout the past years, the overall nationwide steelmaking capacity still exceeds steel demand. There is significant over-capacity in the Chinese steel sector which is putting pressure on operators’ profitability and has become the most significant challenge in the steel manufacturing business. Chinese crude steel production was 618reached a record high of 823 million tons from January to September in 2014, an increase of 2.34% compared with the same period last year,0.89% over 2013, while the total consumption of crude steel reached 560was only 738 million tons from January to September in 2014, ana decrease of 0.9%3.4% from the same period last year, according to the China Iron and Steel Association.

 

For steelmakers, operating performance depends on the volatility of the cost of raw materials. The shortage of these raw materials in the market has allowed suppliers of iron ore and metallurgical coal to rebuild the pricing mechanisms through the shift from annual to shorter-term price contracts. This has created numerous challenges for steelmakers as they must now deal with volatility in raw material prices, as well as maintain margins with fluctuating demand. Over the past few years, we have witnessed perseverance in steel prices that has given iron ore producers an opportunity to increase the prices in the next contract; however the reverse may not be true as steel companies cannot always pass on the rise in iron ore prices to end consumers due to the market overcapacity and fragmentation.

 

China’s steel industry is highly fragmented, and the Chinese government continues to encourage industry consolidation. The Chinese central government has had a long-stated goal to consolidate 70%60% of domestic steel production among the top ten producers by 2015, and expanding to 70% by 2020. Currently, there are over 500 crude steel producers throughout China, and theThe top ten producers accountproducers’ output fell to 39% of the national output in 2013 from 49% in 2010, which is still below the 60% target for approximately 48%2015 set in the 12th year plan.

Meanwhile, the Ministry of total national output.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 MarchMay 2014, the government reaffirmed its determination of industry consolidation, and announced that it plans to eliminate 2728.7 million tons of obsolete iron and steel capacity in order2014 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 reach the industry goal of 12th five-year plan ahead of schedule in 2014. However,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 serveserve.

49

Despite the government’s initiatives to encourage industry consolidation and such consolidationcut over-capacity, it is not expectedestimated 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 directly impact our Company.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.  As the operational conditions become more stringent, more small and medium sized companies will likely aggressively look for valued partners which could lead to opportunities for high quality acquisitions for us.  We believe the above government policy will strengthen our position as an industry consolidator by creating qualified potential acquisition targets.

 

Since 2013, the government has exerted a more stringent environment protection policy on the steel industry. In January 2014, the Ministry of Industry and Information Technology of the People's Republic of China (the "MIIT") announced a List of Enterprises Fulfilling the Iron and Steel Industry Specification (the "List").  The List includes a highly-selected group of large and medium steel manufacturers that have met or exceeded more stringent national requirements and standards on product quality, environmental protection, energy consumption, workmanship and equipment, production scale, as well as work safety and social responsibility. The MIIT will collaborate with China's other governmental agencies to provide support to the List's members and to speed up the steel industry's restructuring and consolidation. Steel makers omitted from the List will most likely face higher electricity costs, more restrictive administrative measures, and adverse effects of forceful regulations intent on reducing the nation's overcapacity. Longmen Joint Venture, the major facility of General Steel, has been included on the List as one of the only enterprisekey steel enterprises in China’s Shaanxi Province.

43

 

Results of Operations for the Three and Nine Months Ended SeptemberJune 30, 20142015

 

Sales

 

Three months ended SeptemberJune 30, 20142015 compared with three months ended SeptemberJune 30, 20132014

 

The following table sets forth sales and volume in metric tons.

 

  Three months ended       
  September 30, 2014  September 30, 2013  Change  Change 
in thousands, except metric
tons
 Volume  Sales  %  Volume  Sales  %  Volume
%
  Sales
%
 
                         
Longmen Joint Venture  1,441,094  $559,317   99.4%  1,238,689  $606,446   99.4%  16.3%  (7.8)%
Others  5,436   3,505   0.6%  18,132   3,649   0.6%  (70.0)%  (3.9)%
Total Sales  1,446,530  $562,822   100.0%  1,256,821  $610,095   100.0%  15.1%  (7.7)%

  Three months ended       
in thousands, June 30, 2015  June 30, 2014  Change  Change 
except metric tons Volume  Sales  %  Volume  Sales  %  Volume %  Sales % 
                         
Longmen Joint Venture  1,699,265  $528,778   100.0%  1,305,127  $587,314   99.9%  30.2%  (10.0)%
Others  17   3   0.0%  1,312   699   0.1%  (98.7)%  (99.6)%
Total Sales  1,699,282  $528,781   100.0%  1,306,439  $588,013   100.0%  30.1%  (10.1)%

  

Total sales for the three months ended SeptemberJune 30, 20142015 decreased by 7.7%10.1% to $562.8$528.8 million from $610.1$588.0 million for the same period in 2013.2014. The decrease in sales compared withto the same period in 20132014 was predominantly due to the decrease in thedecreased average selling price of our rebar products.despite the increase in sales volume. Longmen Joint Venture comprised 99.4%approximately 100.0% and 99.4%99.9% of total sales for the thirdsecond quarter of 20142015 and 2013,2014, respectively. Sales volume of rebar increased by 16.3%30.2% to 1.441.7 million metric tons as compared with 1.24to 1.3 million metric tons in the same period in 2013.2014. The average selling price of rebar decreased by 20.7%30.8% to approximately $388.1$311.2 per ton in the thirdsecond quarter of 20142015 compared withto approximately $489.6$450.0 per ton in the same period of 2013.2014.

 

Our product demands and prices had been rising in the first two quarters of 2012. As a result of the China and global steel industry over-capacity, Chinese economic control polices and slowdown in the financial crisis,China’s economic growth, commodity prices declined significantly in the third quarter of 2012. With weakened demand, market forces kicked-indropped, and the price of steel dropped substantially. As such,had been on a declining trend from the third quarter of 2012 to 2015. The over-capacity issue impacted our sales prices have droppedresults since the third quarter of 2012 evidencing a continued decline. The over-capacity issueand continued to impact our results during the year of 2013do so in 2014 and into 2014. Further, the gradual slowdown2015. While rebar selling prices rebounded quarter-over-quarter by 8.8% to $422.2 per ton in the Chinese economic growth indirectly impactedfourth quarter of 2014, which led us to have a more optimistic outlook on our industry,future operations at the time, the declining trend continued in 2015 and our rebar selling prices decreased by 18.6% in the sellingfirst quarter of 2015 to $343.8 per ton and decreased further by 9.5% quarter-over-quarter to $311.2 per ton in the second quarter of 2015. Given the uncertainty in future steel price, we increased our sales volume in the second quarter of our products continued2015 compared to decrease during this period2014 to prevent future inventory loss in comparison with the same periodevent of further steel price decline in 2013.the second half of the year.

50

  

Our five major customers arewere distributors and collectively represented 16.0%approximately 33.0% of our total sales for the three months ended SeptemberJune 30, 20142015 as compared with 25.5%to 31.8% of our total sales for the three months ended SeptemberJune 30, 2013. As we are the largest supplier in Shaanxi Province, we maintain a good relationship with these five customers to stabilize our sales channel. 

Nine months ended September 30, 2014 compared with nine months ended September 30, 2013

The following table sets forth sales and volume in metric tons.

  Nine months ended       
  September 30, 2014  September 30, 2013  Change  Change 
in thousands, except metric
tons
 Volume  Sales  %  Volume  Sales  %  Volume
%
  Sales
%
 
                         
Longmen Joint Venture  4,063,761  $1,740,645   99.7%  3,841,985  $1,903,933   99.4%  5.8%  (8.6)%
Others  7,472   4,401   0.3%  104,163   11,104   0.6%  (92.8)%  (60.4)%
Total Sales  4,071,233  $1,745,046   100.0%  3,946,148  $1,915,037   100.0%  3.2%  (8.9)%

Total sales for the nine months ended September 30, 2014 decreased by 8.9% to $1.7 billion from $1.9 billion for the same period in 2013. The decrease in sales compared with the same period in 2013 was predominantly due to the decreased average selling price. Longmen Joint Venture comprised 99.7% and 99.4% of total sales for the nine months ended September 30, 2014 and 2013, respectively. Sales volume of rebar increased by 5.8% to 4.06 million metric tons, compared with 3.84 million metric tons in the same period in 2013. The average selling price of rebar decreased by 13.6% to approximately $428.3 per ton in the nine months ended September 30, 2014 compared with approximately $495.6 per ton in the same period of 2013.

Our product demands and prices had been rising in the first two quarters of 2012. As a result of the China and global steel industry over-capacity, Chinese economic control polices and the financial crisis, commodity prices declined significantly in the third quarter of 2012. With weakened demand, market forces kicked-in and the price of steel dropped substantially. As such, our sales prices have dropped since the third quarter of 2012, evidencing a continued decline. The over-capacity issue continued to impact our results during the year of 2013 and into 2014. Further, the gradual slowdown in the Chinese economic growth indirectly impacted our industry, and the selling price of our products continued to decrease during this period in comparison with the same period in 2013.

Our five major customers are distributors and collectively represented 16.9% of our total sales for the nine months ended September 30, 2014 compared with 23.4% of our total sales for the nine months ended September 30, 2013. These five customers included related parties and major distributors owned by the central government. As we are the largest supplier in Shaanxi Province, we maintain a good relationship with these five customers to stabilize our sales channel.

Six months ended June 30, 2015 compared with six months ended June 30, 2014

The following table sets forth sales and volume in metric tons.

  Six months ended       
in thousands, June 30, 2015  June 30, 2014  Change  Change 
except metric tons Volume  Sales  %  Volume  Sales  %  Volume %  Sales % 
                         
Longmen Joint Venture  2,653,831  $856,936   100.0%  2,622,667  $1,181,328   99.9%  1.2%  (27.5)%
Others  46   9   0.0%  2,035   896   0.1%  (97.7)%  (99.0)%
Total Sales  2,653,877  $856,945   100.0%  2,624,702  $1,182,224   100.0%  1.1%  (27.5)%

Total sales for the six months ended June 30, 2015 decreased by 27.5% to $0.9 billion from $1.2 billion for the same period in 2014. The decrease in sales compared to the same period in 2014 was predominantly due to the decreased average selling price. Longmen Joint Venture comprised approximately 100.0% and 99.9% of total sales for the six months ended June 30, 2015 and 2014, respectively. Sales volume of rebar increased by 1.1% to 2.7 million metric tons as compared to 2.6 million metric tons in the same period in 2014.  The average selling price of rebar decreased by 28.3% to approximately $322.9 per ton in the six months ended June 30, 2015 compared to approximately $450.4 per ton in the same period of 2014.

As a result of the China and global steel industry over-capacity, Chinese economic control polices and slowdown in the China’s economic growth, commodity prices dropped, and the price of steel had been on a declining trend from the third quarter of 2012 to 2015. The over-capacity issue impacted our results since the third quarter of 2012 and continued to do so in 2014 and 2015.

Our five major customers were distributors and collectively represented approximately 29.3% of our total sales for the six months ended June 30, 2015 as compared to 24.4% of our total sales for the six months ended June 30, 2014. These five customers included related parties and major distributors owned by the central government. As we are the largest supplier in Shaanxi Province, we maintain a good relationship with these five customers to stabilize our sales channel.

 

Cost of Goods Sold

 

Three months ended SeptemberJune 30, 20142015 compared with three months ended SeptemberJune 30, 20132014

  Three months ended       
  September 30, 2014  September 30, 2013  Change  Change 
in thousands, except metric
tons
 Volume  Cost of
Goods Sold
  %  Volume  Cost of
Goods Sold
  %  Volume
%
  Cost of
Goods Sold
%
 
                         
Longmen Joint Venture  1,441,094  $550,307   99.5%  1,238,689  $598,324   99.4%  16.3%  (8.0)%
Others  5,436   2,905   0.5%  18,132   3,540   0.6%  (70.0)%  (17.9)%
Total Cost of Goods Sold  1,446,530  $553,212   100.0%  1,256,821  $601,864   100.0%  15.1%  (8.1)%

  Three months ended       
  June 30, 2015  June 30, 2014  Change  Change 
in thousands,
except metric tons
 Volume  Cost of
Goods Sold
  %  Volume  Cost of
Goods Sold
  %  Volume
%
  Cost of
Goods Sold
 %
 
                         
Longmen Joint Venture  1,699,265  $592,999   100.0%  1,305,127  $559,084   99.9%  30.2%  6.1%
Others  17   51   0.0%  1,312   835   0.1%  (98.7)%  (93.9)%
Total Cost of Goods Sold  1,699,282  $593,050   100.0%  1,306,439  $559,919   100.0%  30.1%  5.9%

 

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 accountedaccount for 61.2%approximately 55.0% of our total cost of sales. The cost of goods sold decreasedincreased by 8.1%5.9% to $553.2$593.1 million in the thirdsecond quarter of 20142015 from $601.9$559.9 million in the same period of 2013.2014. The decreaseincrease was mainly driven by the 30.1% increase in sales volume despite the decreased unit costs of raw materials as a result of the decline in ironmaterials. Iron ore and coke purchase prices of 25.3%declined by approximately 39.4% and 15.8%20.9%, respectively, for the three months ended SeptemberJune 30, 20142015 as compared withto the same period in 2013.2014. As such, the average costs of rebar manufactured decreased 20.9%18.5% to $381.9approximately $349.0 per ton in the thirdsecond quarter of 20142015 from $483.0approximately $428.4 per ton in the same period of 2013.2014.

51

  

NineSix months ended SeptemberJune 30, 20142015 compared with Ninesix months ended SeptemberJune 30, 20132014

  Nine months ended       
  September 30, 2014  September 30, 2013  Change  Change 
in thousands, except metric
tons
 Volume  Cost of
Goods Sold
  %  Volume  Cost of
Goods Sold
  %  Volume
%
  Cost of
Goods Sold
%
 
                         
Longmen Joint Venture  4,063,761  $1,725,625   99.8%  3,841,985  $1,927,639   99.5%  5.8%  (10.5)%
Others  7,472   4,278   0.2%  104,163   10,636   0.5%  (92.8)%  (59.8)%
Total Cost of Goods Sold  4,071,233  $1,729,903   100.0%  3,946,148  $1,938,275   100.0%  3.2%  (10.8)%

  Six months ended       
  June 30, 2015  June 30, 2014  Change  Change 
in thousands,
except metric tons
 Volume  Cost of
Goods Sold
  %  Volume  Cost of
Goods Sold
  %  Volume
%
  Cost of
Goods Sold
 %
 
                         
Longmen Joint Venture  2,653,831  $953,304   100.0%  2,622,667  $1,175,318   99.9%  1.2%  (18.9)%
Others  46   57   0.0%  2,035   1,373   0.1%  (97.7)%  (95.8)%
Total Cost of Goods Sold  2,653,877  $953,361   100.0%  2,624,702  $1,176,691   100.0%  1.1%  (19.0)%

 

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 accountedaccount for 70.3%approximately 57.3% of our total cost of sales. CostThe cost of goods sold decreased by 10.8%19.0% to $1.7 billion$953.4 million in the ninesix months ended SeptemberJune 30, 20142015 from $1.9$1.2 billion in the same period of 2013.2014. The decrease was mainly driven by the decreased unit costs of raw materials as a result of the decline in iron ore and coke purchase prices of 13.2%approximately 43.7% and 17.1%26.3%, respectively, for the ninesix months ended SeptemberJune 30, 20142015 as compared withto the same period in 2013.2014. As such, the average costs of rebar manufactured decreased 15.4%19.8% to $424.6approximately $359.2 per ton in the nine months ended September 30, 2014second quarter of 2015 from $501.7approximately $448.1 per ton in the same period of 2013.2014.

Gross (Loss) Profit (Loss)

 

Three months ended SeptemberJune 30, 20142015 compared with three months ended SeptemberJune 30, 20132014

  Three months ended    
  September 30, 2014  September 30, 2013  Change 
in thousands, except metric
tons
 Volume  Gross Profit  Margin
%
  Volume  Gross Profit  Margin
%
  Gross Profit 
                      
Longmen Joint Venture  1,441,094  $9,010   1.6%  1,238,689  $8,122   1.3%  10.9%
Others  5,436   600   17.1%  18,132   109   3.0%  450.5%
Total Gross Profit  1,446,530  $9,610   1.7%  1,256,821  $8,231   1.3%  16.8%

  Three months ended    
  June 30, 2015  June 30, 2014  Change 
in thousands,
except metric tons
 Volume  

Gross

Loss

  Margin
%
  Volume  

Gross

Profit (Loss)

  Margin
%
  Gross
(Loss)
Profit
 
                      
Longmen Joint Venture  1,699,265  $(64,221)  (12.1)%  1,305,127  $28,230   4.8%  (327.5)%
Others  17   (48)  (1,600.0)%  1,312   (136)  (19.5)%  (64.7)%
Total Gross (Loss) Profit  1,699,282  $(64,269)  (12.2)%  1,306,439  $28,094   4.8%  (328.8)%

Gross profitloss for the thirdsecond quarter of 20142015 was $9.6$(64.3) million, or 1.7%(12.2)% of total sales, as compared with $8.2to a gross profit of $28.1 million, or 1.3%4.8% of total sales infor the same period in 2013.2014. The increasedecrease in gross margin percentage was mainly attributable to the percentage decrease inof average rebar selling price of 30.8% being higher than the percentage decrease of costs of rebar manufactured of 20.9%, which was higher than18.5% for the percentage decrease in the average rebar selling pricesecond quarter of 20.7%2015 as compared withto the same period of 2013.2014.

 

NineSix months ended SeptemberJune 30, 20142015 compared with ninesix months ended SeptemberJune 30, 20132014

  Nine months ended    
  September 30, 2014  September 30, 2013  Change 
in thousands, except metric
tons
 Volume  Gross
Profit
(Loss)
  Margin
%
  Volume  Gross
Profit
(Loss)
  Margin
%
  Gross
Profit
 
                      
Longmen Joint Venture  4,063,761  $15,020   0.9%  3,841,985  $(23,706)  (1.2)%  (163.4)%
Others  7,472   123   2.8%  104,163   468   4.2%  (73.7)%
Total Gross Profit (Loss)  4,071,233  $15,143   0.9%  3,946,148  $(23,238)  (1.2)%  (165.2)%

  Six months ended    
  June 30, 2015  June 30, 2014  Change 
in thousands,
except metric tons
 Volume  

Gross

Loss

  Margin
%
  Volume  

Gross

Profit (Loss)

  Margin
%
  Gross
(Loss)
Profit
 
                      
Longmen Joint Venture  2,653,831  $(96,368)  (11.2)%  2,622,667  $6,010   0.5%  (1,703.5)%
Others  46   (48)  (533.3)%  2,035   (477)  (53.2)%  (89.9)%
Total Gross Loss  2,653,877  $(96,416)  (11.3)%  2,624,702  $5,533   0.5%  (1,842.6)%

 

Gross profitloss for the ninesix months ended SeptemberJune 30, 20142015 was $15.1$(96.4) million, or 0.9% of total sales, compared with a gross loss of $23.2 million, or (1.2)(11.3)% of total sales, inas compared to a gross profit of $5.5 million, or 0.5% of total sales for the same period in 2013.2014. The increasedecrease in gross margin percentage was mainly attributable to the percentage decrease inof average rebar selling price of 28.3% being higher than the percentage decrease of costs of rebar manufactured of 15.4%, which was higher than19.8% for the percentage decrease in the average rebar selling price of 13.6%six months ended June 30, 2015 as compared withto the same period of 2013.2014.

52

 

Selling, General and Administrative Expenses (“SG&A”)

 

Three months ended SeptemberJune 30, 20142015 compared with three months ended SeptemberJune 30, 20132014

(in thousands) Three months ended    Three months ended   
 September 30,
2014
 September 30,
2013
 Change %  June 30, 2015 June 30, 2014 Change % 
              
Selling, general and administrative expenses $(16,434) $(19,661)  (16.4)% $(22,083) $(18,849)  17.2%
SG&A expenses as a percentage of total revenue  (2.9)%  (3.2)%    
Excess overhead during maintenance $(5,309) $-   100.0%
Impairment charge $(973,860) $-   100.0%
SG&A expenses, excess overhead during maintenance and impairment charge as a percentage of total revenue  (189.4)%  (3.2)%    

 

SG&A expenses, such as travel expenses and transportation fees, entertainment, employee benefits,benefit, training, and trainingtravel expenses decreasedincreased by 16.4%17.2% to $16.4$22.1 million for the three months ended SeptemberJune 30, 2014,2015, compared with $19.7to $18.8 million for the same period in 2013.2014.

Selling expenses increased by 7.1% to $10.4 million for three months ended June 30, 2015 as compared to $9.7 million in the same period of 2014. The increase was mainly due to the $1.7 million or 25.1% increase in freight expenses along with the 30.1% increase in sales volume, which was offset by the $0.8 million or 52.5% decrease in the sales tax along with the decrease in sales revenue.

General and administrative (“G&A”) expenses were approximately $11.7 million and $9.1 million for three months ended June 30, 2015 and 2014, respectively. The increase was mainly due to Longmen Joint Venture’s increased waste and water treatment expenses to comply with the government’s increasingly stringent environmental regulations and increased local taxes in the second quarter of 2015 compared to the same period in 2014.

We had abnormally low production in May 2015 due to the temporary shutdown of one of our furnaces to perform maintenance and mechanical adjustments. As a result, we reallocated the corresponding fixed overheads expenses from cost of goods sold to G&A expense in accordance with ASC 330-10-30-6 as the amount of fixed overhead allocated to each unit of production shall not be increased as a consequent of abnormally low production or idle plant due to our plant and machinery maintenance.

We used the undiscounted cash flow approach for the purpose of performing a recoverability test on Longmen Joint Venture’s long-lived assets to determine whether the total undiscounted cash flows are greater than the carrying value of those assets as of June 30, 2015. As a result of the China and global steel industry over-capacity and slowdown in China’s economic growth, commodity prices dropped, and the price of steel had been on a declining trend from the third quarter of 2012 to 2015. The over-capacity issue impacted our results since the third quarter of 2012 and continued to do so in 2014 and 2015. While rebar selling prices rebounded quarter-over-quarter by 8.8% to $422.2 per ton in the fourth quarter of 2014 and our gross loss per ton narrowed to $(7.0), which led us to have a more optimistic outlook on our future operations at the time, the declining trend continued in 2015 and our rebar selling prices decreased by 18.6% in the first quarter of 2015 to $343.8 per ton and the gross loss per ton increased to $(33.7). With the second and third quarters historically being the best-performing quarters in our experience, we expected previously that the gross profit (loss) would begin to improve in the second quarter. However, as the Chinese steel industry conditions continued to worsen in the second quarter of 2015 with our average rebar selling prices decreasing further by 9.5% quarter-over-quarter to $311.2 per ton and gross loss per ton decreasing to $(37.8), which deviated from our previously anticipated industry environment improvement, we downgraded our previously forecasted operating profits (loss) for future periods. Accordingly, the sum of the discounted cash flows expected to be generated from Longmen Joint Venture’s long-lived assets became less than the carrying value by $973.9 million (RMB 6.0 billion), which was impaired and included in operating expenses for the second quarter of 2015. The discounted cash flows were determined using certain expected changes to the current operational assumptions using the average of three possible cash flow scenarios (Also see critical accounting policies - fair value measurements below).

Through the quarterly ended June 30, 2015, we have incurred recurring losses from our operations from the last several years as our steel business has faced very tough market conditions and challenging profitability. We have continued our effort to implementing cost savings on our manufacturing overhead costs and to reduce our unit production cost. We have forecasted our loss will be continued until year 2021 and expected to make a turning point and become profitable in year 2022 and beyond. Our forecast is based on current market condition, if the future market condition is different from our forecast, we might continue to incur additional loss in 2022 and beyond and we may be required to record additional impairment charges in future periods.

Six months ended June 30, 2015 compared with six months ended June 30, 2014

(in thousands) Six months ended    
  June 30, 2015  June 30, 2014  Change % 
          
Selling, general and administrative expenses $(39,438) $(39,902)  (1.2)%
Excess overhead during maintenance $(24,443) $-   100.0%
Impairment charge $(973,860) $-   100.0%
SG&A expenses, excess overhead during maintenance and impairment charge as a percentage of total revenue  (121.1)%  (3.4)%    

53

SG&A expenses, such as travel expenses and transportation fees, entertainment, employee benefit, training, and travel expenses decreased by 1.2% to $39.4 million for the six months ended June 30, 2015, compared to $39.9 million for the same period in 2014.

 

Selling expenses decreased by 7.6%7.0% to $6.7$16.8 million for the threesix months ended SeptemberJune 30, 20142015 as compared with $7.3to $18.0 million in the same period of 2013.2014. The decrease was mainly due to the decrease in sales tax expenses along with the 7.7% decrease in sales in the third quarter of 2014.revenue.

 

In addition, generalGeneral and administrative (“G&A”) expenses were approximately $9.7$22.7 million and $12.4$21.9 million for threesix months ended SeptemberJune 30, 2015 and 2014, and 2013, respectively. The 21.6% decrease was mainly due to the decrease in salary expenses, union expenses, employee education and training expenses, and depreciation expense in the third quarter of 2014 compared with the same period in 2013.

Nine months ended September 30, 2014 compared with Nine months ended September 30, 2013

(in thousands) Nine months ended    
  September 30,
2014
  September 30,
2013
  Change % 
          
Selling, general and administrative expenses $(56,336) $(59,464)  (5.3)%
SG&A expenses as a percentage of total revenue  (3.2)%  (3.1)%    

SG&A expenses, such as travel expenses and transportation fees, entertainment, employee benefit, and training expenses decreased by 5.3% to $56.3 million for the nine months ended September 30, 2014, compared to $59.5 million for the same period in 2013.

Selling expenses increased by 0.6% to $24.7 million for nine months ended September 30, 2014 as compared to $24.6 million in the same period of 2013. The increase was mainly due to Longmen Joint Venture’s increased waste and water treatment expenses to comply with the increasegovernment’s increasingly stringent environmental regulations and increased local taxes in freight expenses as a resultthe first six months of 2015 compared to the PRC government’s policy to increase freight train feessame period in early 2014.

 

In addition, generalWe had abnormally low production between February and administrative (“G&A”)May 2015 due to our annual plant and machinery maintenance in an effort to prevent substantial loss from the significant decrease in rebar selling prices during the quarter. As a result, we reallocated the corresponding fixed overheads expenses were approximately $31.6 millionfrom cost of goods sold to G&A expense in accordance with ASC 330-10-30-6 as the amount of fixed overhead allocated to each unit of production shall not be increased as a consequent of abnormally low production or idle plant due to our annual plant and $34.9 million for ninemachinery maintenance.

As the Chinese steel industry conditions continued to worsen in the six months ended SeptemberJune 30, 2014 and 2013, respectively.2015, which deviated from our previously anticipated industry environment improvement beginning in the second quarter, we used the undiscounted cash flow estimation approach for the purpose of performing a recoverability test on Longmen Joint Venture’s long-lived assets to determine whether the total undiscounted cash flows are greater than the carrying value of those assets as of June 30, 2015. As a result, we discounted the sum of the cash flows expected to generate from Longmen Joint Venture’s long-lived assets .The total discounted cash flows were less than the carrying value by $973.9 million (RMB 6.0 billion), which we recorded an impairment charge included in operating expenses for the six months ended June 30, 2015. The 9.4% decrease was mainly duediscounted cash flows were determined using certain expected changes to the decreasecurrent operational assumptions using the average of three possible cash flow scenarios (Also see critical accounting policies - fair value measurements below).

Through the quarterly ended June 30, 2015, we have incurred recurring losses from our operations from the last several years as our steel business has faced very tough market conditions and challenging profitability. We have continued our effort to implementing cost savings on our manufacturing overhead costs and to reduce our unit production cost. We have forecasted our loss will be continued until year 2021 and expected to make a turning point and become profitable in salary expensesyear 2022 and water treatment expenses.beyond. Our forecast is based on current market condition, if the future market condition is different from our forecast, we might continue to incur additional loss in 2022 and beyond and we may be required to record additional impairment charges in future periods.

Change in Fair Value of Profit Sharing Liability

 

Three months ended SeptemberJune 30, 20142015 compared with three months ended SeptemberJune 30, 20132014

(in thousands) Three months ended    Three months ended   
 September 30,
2014
 September 30,
2013
 Change %  June 30, 2015 June 30, 2014 Change % 
                        
Change in fair value of profit sharing liability $14,727  $39,164   (62.4)% $57,499  $(2,920)  (2,069.1)%

 

Our profit sharing liability relates to equipment operated by Longmen Joint Venture under a capital lease arrangement. Part of the payments under the capital lease is a portion of our future operating profits. Our estimate of those future profit sharing payments are accounted for as a derivative liability at fair value. In 2013, we considered the recent changes in China’s economic situation, which included a new estimation and downgrade of 2014 GDP by major investment bankers in June 2013, and steel industry outlook reports issued for 2014. As a result, we re-evaluated our projected operating profit (loss) taking into consideration the macroeconomic events in China, as well as our most recent operating results. Due to the continued decrease in our rebar selling price, the market slow-down in the first quarter of 2013, and the lack of gross profit recovery as quickly as expected in 2012, we foresaw a greater downward trend in 2014 through 2016 than previously anticipated in 2012. As our projected profit (loss) decreased in 2013, the fair value of our profit sharing liability was reduced compared with our previous estimates in 2012 and we recognized a gain of $39.2 million in our income from operations forFor the three months ended SeptemberJune 30, 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. As a result, we recognized a gain of $14.7 millionloss on the change in fair value of profit sharing liability of $(2.9) million in our loss from operations primarily due to change in fair value related to the passage of time and change in the number of future periods over which the present value of future cash flows was estimated. The fair value of the profit sharing liability primarily due toat June 30, 2014 was not materially different from the reductionprevious reporting period.

For the three months ended June 30, 2015, we recognized a gain on change in the fair value of profit sharing liability of $57.5 million in our loss from operations. Of the $57.5 million gain, $54.8 million gain was associated with the change in present value of estimate of future operating profits as a result of the changere-evaluation of our projected operating profit (loss) based on our second quarter actual operating result and the latest Chinese steel industry information, with which we had lowered our 2015 through 2031 estimated unit selling price and raw material cost as compared to our evaluation at March 31, 2015, as well as increased our estimated sales volume in estimateresponse to the Chinese government’s RMB 1 trillion infrastructure investment initiative announced in August 2015. In addition, we incurred $1.2 million loss from present value discount amortization for the three months ended June 30, 2015, $2.6 million loss from lowering the discount rate by 0.25% as the Chinese central bank had lower the borrowing rate by 0.25% on June 27, 2015, and $6.5 million gain from the difference between the previously estimated operating results for the current period as of future operating results.March 31, 2015 and actual results for the second quarter of 2015.

54

Six months ended June 30, 2015 compared with six months ended June 30, 2014

Nine

(in thousands) Six months ended    
  June 30, 2015  June 30, 2014  Change % 
             
Change in fair value of profit sharing liability $70,423  $(2,969)  (2,471.9)%

For the six months ended SeptemberJune 30, 2014, compared with Nine months ended September 30, 2013

(in thousands) Nine months ended    
  September 30,
2014
  September 30,
2013
  Change % 
             
Change in fair value of profit sharing liability $11,758  $95,437   (87.7)%

As discussed above, our projected profit (loss) decreased in 2013, and as a result, the fair value of our profit sharing liability was reduced compared with our previous estimates in 2012 and we recognized a gain of $95.4 millionloss on change in our income (loss) from operations for the nine months ended September 30, 2013. In 2014, the fair value of profit sharing liability was further reduced, and we recognized a gain of $11.8$3.0 million in our loss from operations primarily as a result of thedue to change in estimatefair value related to the passage of time and change in the number of future operating results based onperiods over which the downgraded GDP for China through 2017 published by Goldman Sachs in September 2014. Thus we recognized a gain on the change in thepresent value of future cash flows was estimated. The fair value of the profit sharing liability at June 30, 2014 was not materially different from the previous reporting period.

For the six months ended June 30, 2015, we recognized a gain on change in fair value of $11.8 million.profit sharing liability of $70.4 million in our loss from operations. Of the $70.4 million gain, $71.4 million gain was associated with the change in present value of estimate of future operating profits as a result of the re-evaluation of our projected operating profit (loss) based on our June actual operating result and the latest Chinese steel industry information, with which we had lowered our 2015 to 2031 estimated unit selling price and raw material cost as compared to our evaluation at December 31, 2014, as well as increased our estimated sales volume in response to the Chinese government’s RMB 1 trillion infrastructure investment initiative announced in August 2015. In addition, we incurred $2.4 million loss from present value discount amortization for the six months ended June 30, 2015, $5.0 million loss from lowering the discount rate by 0.50% as the Chinese central bank lowered the borrowing rate by 0.25% twice on May 11, 2015 and June 27, 2015, and $6.5 million gain from the difference between the previously estimated operating results for the current period as of December 31, 2014 and actual results for the six months ended June 30, 2015.

 

(Loss) Income (Loss) from Operations

 

Three months ended SeptemberJune 30, 20142015 compared with three months ended SeptemberJune 30, 20132014

(in thousands) Three months ended    Three months ended   
 September 30,
2014
 September 30,
2013
 Change %  June 30, 2015 June 30, 2014 Change % 
                        
Income from operations $7,903  $27,734   (71.5)%
(Loss) income from operations $(1,008,022) $6,325   (16,037.1)%

 

IncomeLoss from operations for the three months ended SeptemberJune 30, 20142015 was $7.9 million,$(1.0) billion as compared to $27.7an income of $6.3 million for the same period in 2013. The decrease in income from operations was predominantly due to the decrease in the gain from the change in fair value of the profit sharing liability, offset by the increase in gross profit and the decrease in SG&A expenses.

Nine months ended September 30, 2014 compared with Nine months ended September 30, 2013

(in thousands) Nine months ended    
  September 30,
2014
  September 30,
2013
  Change % 
             
(Loss) income from operations $(29,435) $12,735   (331.1)%

Loss from operations for the nine months ended September 30, 2014 was $29.4 million, compared with an income of $12.7 million for the same period in 2013.2014. The increase in the loss from operations was predominantly due to the decreaseincrease in gross loss, excess overhead during maintenance and impairment charge.

Six months ended June 30, 2015 compared with six months ended June 30, 2014

(in thousands) Six months ended    
  June 30, 2015  June 30, 2014  Change % 
             
Loss from operations $(1,063,734) $(37,338)  2,748.9%

Loss from operations for the gainsix months ended June 30, 2015 was $(1.1) billion as compared to $(37.3) million for the same period in 2014. The increase in loss from the change in fair value of the profit sharing liability, offset byoperations was predominantly due to the increase in gross profitloss, excess overhead during maintenance and the decrease in SG&A expenses.impairment charge.

 

Other Income (Expense)

 

Three months ended SeptemberJune 30, 20142015 compared with three months ended SeptemberJune 30, 20132014

(in thousands) Three months ended    Three months ended   
 September 30,
2014
 September 30,
2013
 Change %  June 30, 2015 June 30, 2014 Change % 
              
Interest income $2,767  $2,835   (2.4)% $2,741  $4,066   (32.6)%
Finance/interest expense  (14,194)  (17,721)  (19.9)%  (24,413)  (20,950)  16.5%
Financing cost on capital lease  (5,228)  (5,121)  2.1%  (5,162)  (5,669)  (8.9)%
(Loss) gain on disposal of equipment  (21)  17   (223.5)%
Loss on disposal of equipment  (44)  (142)  (69.0)%
Income from equity investment  32   47   (31.9)%  34   54   (37.0)%
Foreign currency transaction gain  3,146   322   877.0%
Foreign currency transaction loss  (249)  (963)  (74.1)%
Lease income  542   542   0.0%  545   542   0.6%
Other non-operating (expense) income, net  (18)  770   (102.3)%
Other non-operating income (expense), net  378   302   25.2%
Total other expense, net $(12,974) $(18,309)  (29.1)% $(26,170) $(22,760)  15.0%

55

 

Total other expense, net, for the three months ended SeptemberJune 30, 20142015 was $13.0$26.2 million, a 29.1% decrease15% increase compared with $18.3to $22.8 million for the same period in 2013.2014. The increase was mainly a result of the $3.5 million increase in finance/interest expenses, which was mainly due to the increase in the amount of borrowings from unrelated and related parties in the second quarter of 2015 as compared to the same period in 2014. As a result, interest expense on loan borrowings for the three months ended June 30, 2015 amounted to $16.1 million, a $7.9 million or 96.2% increase from $8.2 million for the same period in 2014 while notes receivable early redemption expenses for the three months ended June 30, 2015 amounted to $8.3 million, a $4.5 million or 35.2% decrease from $12.8 million for the same period in 2014.

Six months ended June 30, 2015 compared with six months ended June 30, 2014

(in thousands) Six months ended    
  June 30, 2015  June 30, 2014  Change % 
          
Interest income $5,072  $7,258   (30.1)%
Finance/interest expense  (39,790)  (44,559)  (10.7)%
Financing cost on capital lease  (10,355)  (10,755)  (3.7)%
Loss on disposal of equipment  (28)  (96)  (70.8)%
(Loss) income from equity investment  (3)  67   (104.5)%
Foreign currency transaction loss  (1,122)  (1,817)  (38.2)%
Lease income  1,088   1,088   -%
Other non-operating income (expense), net  601   126   377.0%
Total other expense, net $(44,537) $(48,688)  (8.5)%

Total other expense, net, for the six months ended June 30, 2015 was $44.5 million, an 8.5% decrease compared to $48.7 million for the same period in 2014. The decrease was mainly a result of the $3.5$4.8 million decrease in finance/interest expense and $2.8expenses, which was offset by the $2.2 million increasedecrease in foreign currency transaction gain frominterest income along with the appreciation of our USD loans.decrease in notes receivable. The decrease in finance/interest expenseexpenses was mainly a result of the decrease in the amount borrowed from third parties and related parties inof bank notes receivable redeemed early for the third quarter of 2014six month ended June 30, 2015 as compared withto the same period in 2013.

Nine months ended September 30, 2014 compared with Nine months ended September 30, 2013

(in thousands) Nine months ended    
  September 30,
2014
  September 30,
2013
  Change % 
          
Interest income $10,025  $8,657   15.8%
Finance/interest expense  (58,753)  (53,577)  9.7%
Financing cost on capital lease  (15,983)  (15,338)  4.2%
Gain (loss) on disposal of equipment  (117)  113   (203.5)%
Income from equity investment  99   137   (27.7)%
Foreign currency transaction gain  1,329   448   (196.7)%
Lease income  1,630   1,613   1.1%
Other non-operating income, net  108   1,560   (93.1)%
Total other expense, net $(61,662) $(56,387)  9.4%

Total other expense, net, for the nine months ended September 30, 2014 was $61.7 million, a 9.4% increase compared with $56.4 million for the same period in 2013. The increase was mainly a result of the $5.2 million increase in finance/interest expense. The increase in finance/interest expense was mainly a result of the increase in finance charges from bank notes receivable redemptions prior to maturity offset by the decrease in the amount borrowed from third parties and related parties for the nine months ended September 30, 2014 compared with the same period in 2013.2014. As a result, notes receivable early redemption expenses for the ninesix months ended SeptemberJune 30, 20142015 amounted to $37.1$16.3 million, a $10.2$10.6 million or 37.9% increase39.4% decrease from $26.9 million for the same period in 2013, and2014 while interest expense on loan borrowings for the ninesix months ended SeptemberJune 30, 20142015 amounted to $21.6$23.5 million, a $5.1$5.8 million or 19.1% decrease32.7% increase from $26.7$8.2 million for the same period in 2013.2014

 

Income Taxes

 

For the three months ended SeptemberJune 30, 20142015 and 2013,2014, we had a total tax provision of $93,000 and $25,000, respectively, from our profitable subsidiaries.subsidiaries of $111 thousand and $107 thousand, respectively. For the three months ended SeptemberJune 30, 2014,2015, we evaluated the deferred tax assets of Longmen Joint Venture and Baotou Steel Pipe Joint Venture and concluded the net operating loss may not be fully realizable and thus we provided ato provide 100% valuation allowance for the deferred tax assets. No deferred income tax provisionbenefit was recorded for the three months ended SeptemberJune 30, 20142015 as the deferredresulting deferral of tax assets had beenbeing fully reserved.reserved because the benefit was not considered to be realizable due to recent historical experience.

 

For the three months ended SeptemberJune 30, 20142015 and 2013,2014, we had effective tax rates of (1.8)(0.01)% and 0.3%(0.7)%, respectively.

 

For the ninesix months ended SeptemberJune 30, 20142015 and 2013,2014, we had a total tax provision of $205,000 and $201,000, respectively, from our profitable subsidiaries.subsidiaries of $141 thousand and $112 thousand, respectively. For the ninesix months ended SeptemberJune 30, 2014,2015, we evaluated the deferred tax assets of Longmen Joint Venture and Baotou Steel Pipe Joint Venture and concluded the net operating loss may not be fully realizable and thus we provided ato provide 100% valuation allowance for the deferred tax assets. As a result, noNo deferred income tax provisionbenefit was recorded for the ninethree months ended SeptemberJune 30, 20142015 as the deferredresulting deferral of tax assets had beenbeing fully reserved.reserved because the benefit was not considered to be realizable due to recent historical experience.

 

For the ninesix months ended SeptemberJune 30, 20142015 and 2013,2014, we had effective tax rates of (0.2)(0.01)% and (0.5)(0.1)%, respectively.

 

Net (Loss) IncomeLoss

 

Three months ended SeptemberJune 30, 20142015 compared with three months ended SeptemberJune 30, 20132014

(in thousands) Three months ended    Three months ended   
 September 30,
2014
 September 30,
2013
 Change %  June 30, 2015 June 30, 2014 Change % 
                        
Net (loss) income $(5,164) $9,400   (154.9)%
Net loss $(1,034,303) $(16,542)  6,152.6%

56

 

NineSix months ended SeptemberJune 30, 20142015 compared with Ninesix months ended SeptemberJune 30, 20132014

(in thousands) Nine months ended    Six months ended   
 September 30,
2014
 September 30,
2013
 Change %  June 30, 2015 June 30, 2014 Change % 
                        
Net Loss $(91,302) $(43,853)  108.2%
Net loss $(1,108,412) $(86,138)  1,186.8%

 

Net (Loss) Income AttributableLoss attributable to General Steel Holdings, Inc.

 

Three months ended SeptemberJune 30, 20142015 compared with three months ended SeptemberJune 30, 20132014

 

(in thousands) Three months ended    
  September 30,
2014
  September 30,
2013
  Change % 
             
Net (loss) income $(5,164) $9,400   (154.9)%
Less: Net (loss) income attributable to the non-controlling interest  (1,674)  5,599   (129.9)%
Net (loss) income attributable to General Steel Holdings, Inc. $(3,490) $3,801   (191.8)%
(in thousands) Three months ended    
  June 30, 2015  June 30, 2014  Change % 
          
Net loss $(1,034,303) $(16,542)  6,152.6%
Less: Net loss attributable to the noncontrolling interest  (419,276)  (5,523)  7,491.5%
Net loss attributable to General Steel Holdings, Inc. $(615,027) $(11,019)  5,481.5%

 

Net loss attributable to us for the three months ended SeptemberJune 30, 20142015 was $3.5$(615.0) million as compared with a net income of $3.8to $(11.0) million for the same period in 2013.2014. The increase in net loss attributable to us for the three months ended SeptemberJune 30, 20142015 was mainly a result of the $24.4$92.4 million increase in gross loss, $3.2 million increase in SG&A expenses, $5.3 million increase in excess overhead during maintenance and $973.9 million impairment charge being offset by the $57.5 million increase in gain from change in fair value of profit sharing liability and the $3.5 million decrease in the gain from the change in the fair value of our profit sharing liability offset by the $3.2 million decrease in SG&A expense and the $5.3 million decrease in other expenses, net.finance/interest expenses.

 

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.

 

NineSix months ended SeptemberJune 30, 20142015 compared with Ninesix months ended SeptemberJune 30, 20132014

 

(in thousands) Nine months ended    Six months ended   
 September 30,
2014
 September 30,
2013
 Change %  June 30, 2015 June 30, 2014 Change % 
                   
Net loss $(91,302) $(43,853)  108.2% $(1,108,412) $(86,138)  1,186.8%
Less: Net loss attributable to the non-controlling interest  (33,229)  (10,939)  203.8%
Less: Net loss attributable to the noncontrolling interest  (448,232)  (31,555)  1,320.5%
Net loss attributable to General Steel Holdings, Inc. $(58,073) $(32,914)  76.4% $(660,180) $(54,583)  1,109.5%

Net loss attributable to us for the ninesix months ended SeptemberJune 30, 20142015 was $58.1$(660.2) million as compared with $32.9to $(54.6) million for the same period in 2013.2014. The increase in net loss attributable to us for the ninesix months ended SeptemberJune 30, 20142015 was mainly a result of the $38.4$101.9 million increase in gross profitloss, $24.4 million increase in excess overhead during maintenance and $973.9 million impairment charge being offset by an $83.7the $70.4 million decreaseincrease in the gain from the change in the fair value of our profit sharing liability and a $5.2the $4.8 million increasedecrease in finance/interest expense.expenses.

 

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 SeptemberJune 30, 2014,2015, our current liabilities exceeded ourthe current assets by approximately $1.5 billion.$1,457.5 million. Given our expected capital expenditure in the foreseeable future, we have comprehensively considered our available sources of funds as follows:

 

·Financial support and credit guaranteesguarantee from related parties; and

·Other available sources of financing from domestic banks and other financial institutions given our credit history.

57

  

Based on the above considerations, Management and our Board of Directors areis of the opinion that we have a plan to obtain sufficient funds to meet our working capital requirements and debt obligations as they become due for at leastdue. However, this plan is based on the next year fromdemand of our products, economic conditions, the reporting date. As a result,overcapacity issue in the steel industry and our unaudited condensed consolidated financial statements foroperating results not continuing to deteriorate and on our continued heavy reliance on our vendors and related parties being able to provide continued liquidity.  Therefore, as noted in the period ended September 30, 2014 have been prepared onLiquidity and Going Concern section below, this raises substantial doubt about our ability to continue as a going concern basis.concern.

 

As of SeptemberJune 30, 2014,2015, we had cash and restricted cash aggregating $405.4$266.5 million, of which $383.3$230.2 million was restricted.

We believe our cash flows generated from operations and financing, which include customer prepayments and vendor financing, existing cash balances, and credit facilities will be adequate to finance our working capital requirements, fund capital expenditures, make required debt and interest payments, pay taxes, and support our operating strategies.

 

The steel business is capital intensive and we utilize leverage greater than our industry peers, which we believe enables us to generate revenue compared to our shareholder equity at a rate higher than our industry peers. We utilize leverage in the form of credit from banks, vendor financing, and customer deposits and from other sources. This blended form of financing reduces our reliance on any single source.

 

Substantially all our operations are conducted in China and all of our revenues are denominated in Renminbi (“RMB”)(RMB). 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 ourits 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%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%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 convertible from a company’s “capital account,” which includes foreign direct investments and loans, without the prior approval of the SAFE.

 

We have previously raised money in the U.S. capital markets which provided the capital needed for our operations and for General Steel Investment Co, Ltd. (“General Steel Investment”). Thus the foreign currency restrictions and regulations in the PRC on dividend distributionsthe 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 ofon 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 ourthe Maoming Hengda (as defined below) facility and willare expected to consume less energy when running at maximum efficiencies compared withto 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 linelines was completed and put into test production in February 2014.November 2013. Any future facility expansion will require additional financing and/or equity capital and will be dependent upon the availability of financing arrangements and capital at the time.

 

Short-term Notes Payable

 

As of SeptemberJune 30, 2014,2015, we had $784.3$531.9 million in short-term notes payable liabilities, which were secured by restricted cash of $371.0$210.1 million and restricted notes receivable of $26.0$16.3 million. These are lines of credit extended by banks for a maximum of six months and are used to finance working capital. The short-term notes payable must be paid in full at maturity and credit availability is continued upon payment at maturity. There are no additional significant financial covenants. We pay zero interest on this type of credit as this is a monetary tool used by China’s central bank to control liquidity over the Chinese monetary system. However, we are requiredsubject 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 SeptemberJune 30, 2014,2015, we had $248.3$154.0 million in short-term bank loans. These were bank loans with a one year maturity and must be paid in full upon maturity. WePRC banks have not been impacted as heavily by the financial crisis as U.S. banks and we believe our current creditors will renew their loans to us after our loans mature as they did in the past.

 

We are able to repay our short-term notes payables and short term bank loans upon maturity using available capital resources.

 

For more details about our debt, see Note 910 in our Notes to the unaudited condensed consolidated financial statements included in this report.

58

  

For more details about our related party debt financing, see Note 19 in our Notes to the unaudited condensed consolidated financial statements included in this report.

 

As part of our working capital management, Longmen Joint Venture has entered into a number of sale and purchase back contracts (“Contracts”) with third party companies and two 100% owned subsidiaries of Longmen Joint Venture, named Yuxin Trading Co., Ltd. (“Yuxin”) and Yuteng Trading Co., Ltd. (“Yuteng”). Pursuant to the Contracts, Longmen Joint Venture sells rebar to the third party companies at a certain price, and within the same month, Yuxin and Yuteng will purchase back the rebar from the third party companies at a price between 4.6% to 9.6%12.0% higher than the original selling price from Longmen Joint Venture. Based on the Contract terms, Longmen Joint Venture is paid in advance for the rebar sold to the third party companies and Yuxin and Yuteng are given a credit period of several months to one year for the purchase back of the inventory from the third party companies. There is no physical movement of the inventory during the sale and purchase back arrangement. The margin between 4.6% to 9.6%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 three months ended SeptemberJune 30, 20142015 and 20132014 amounted to $259.7$107.1 million and $166.2$229.1 million, respectively, which wereare eliminated in ourthe Company’s consolidated financial statements. The financial cost related to financing sales for the three months ended SeptemberJune 30, 20142015 and 20132014 amounted to $1.4$0.6 million and $1.1$0.8 million, respectively.

 

Total financing sales for the ninesix months ended SeptemberJune 30, 20142015 and 20132014 amounted to $719.3$225.8 million and $519.5$459.6 million, respectively, which wereare eliminated in ourthe Company’s consolidated financial statements. The financial cost related to financing sales for the Ninesix months ended SeptemberJune 30, 20142015 and 20132014 amounted to $3.1$1.3 million and $4.2$1.7 million, respectively.

 

Liquidity and Going Concern

 

Our accounts have been prepared in accordance with U.S. GAAP onassuming that we will continue as a going concern basis. The going concern basis assumes that assets are realized and liabilities are extinguished in the ordinary course of business at amounts disclosed in the financial statements. Our ability to continue as a going concern depends upon aligning our sources of funding (debt and equity) with our expenditure requirements and repayment of the short-term debt facilities as and when they fallbecome due.

The steel business is capital intensive and as a normal industry practice in PRC, we areour 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 SeptemberJune 30, 20142015 and December 31, 20132014 were (5.7)(1.8) and (6.5)(5.6), respectively. As of SeptemberJune 30, 2014,2015, our current liabilities exceed current assets (excluding deferred lease income) by $1.5 billion.billion, which raises substantial doubt about our ability to continue as a going concern.

Our steel business has faced very tough market conditions and challenging profitability over the last several years, and based on current trends, we think the near-term challenges for the steel sector will likely linger. In reaction to this challenging market, we are proactively reviewing our strategy and asset portfolio and seeking to restructure low-efficient, non-core assets, as well as idle land resources to unlock hidden fair value.

We aim to transform into a leaner and fitter organization with better profitability. As such, we are strategically accelerating our business transformation to pursue opportunities that offer compelling benefits to our organization and shareholders, including:

·First, strengthen our financials while providing the financial flexibility to pursue higher return, higher growth opportunities;
·Second, reduce the complexity of our business structure, which is consistent with our objectives for internal simplification and operating efficiency;
·Third, diversify operating risk in order to lower our high reliance on steel business, while at the same time leverage on our vast vertical resources in the steel industry; and
·Fourth, pursue opportunities for additional value creation.

Management has implemented the following plans that are intended to mitigate the conditions or events that raise substantial doubt about the Company’s ability to continue as a going concern.

 

Longmen Joint Venture, as our most important subsidiary, accounted for a majority of our total sales. As such, the majority of our working capital needs to come from Longmen Joint Venture. Our ability to continue as a going concern depends heavily on Longmen Joint Venture’s operations, as well as its ability to obtain external financial supports, including but not limited to lines of credit from banks and vendor financing. If Longmen Joint Venture does not maintain a sufficient level of financial support by renewing its financing terms with existing financing sources or obtaining new sources of financial support, there may be an immediate negative impact on our operations and ability to continue as a going concern.operations. Longmen Joint Venture has obtained different types of financial support,supports, which include linesline of credit from banks, vendor financing, financing sales, other financing and sales representative financing.

 

59

For more details and terms about our financial support,supports, see Note 2(d) in our Notes to the unaudited condensed consolidated financial statements.

 

With the financial support from the banks and the companies, discussed in Note 2(d) in our Notes to the unaudited condensed consolidated financial statements, management is of the opinion that we have sufficient funds to meet our future operations, working capital requirements and debt obligations until the end of SeptemberJune 30, 2015.2016. 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 flowflows items are listed below.

 

  Cash inflow (outflow)
(in millions)
 
  For the twelve months ending
September 30, 2015
 
Estimated current liabilities over current assets (excluding deferred lease income) as of September 30, 2014 (unaudited) $(1,537.9)
Projected cash financing and outflows:    
Cash provided by lines of credit from banks  141.4 
Cash provided by vendor financing  893.8 
Cash provided by other financing  662.6 
Cash provided by sales representatives  32.2 
Cash projected to be used in operations in the twelve months ending September 30, 2015  (33.5)
Cash projected to be used for financing cost in the twelve months ending September 30, 2015  (58.0)
Net projected change in cash for the twelve months ending September 30, 2015 $100.6 

As a result, the unaudited condensed consolidated financial statements for the nine months ended September 30, 2014 have been prepared on a going concern basis.

  Cash inflow (outflow)
(in millions)
 
  For the twelve months
ended June 30, 2016
 
Current liabilities over current assets (excluding deferred lease income) as of June 30, 2015 (unaudited) $(1,455.3)
Projected cash financing and outflows:    
Cash provided by line of credit from banks  150.2 
Cash provided by vendor financing  1,060.8 
Cash provided by other financing  412.9 
Cash provided by sales representatives  18.7 
Cash projected to be used in operations in the twelve months ended June 30, 2016  (58.3)
Cash projected to be used for financing cost in the twelve months ended June 30, 2016  (59.6)
Net projected change in cash for the twelve months ended June 30, 2016 $69.4 

 

Cash-flow

 

Operating Activities

 

Net cash provided byused in operating activities for the ninesix months ended SeptemberJune 30, 2015 and 2014 and 2013 were $42.6was $(247.5) million and 14.0compared to $121.7 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 income (loss)loss of $72.0$973.0 million for the ninesix months ended SeptemberJune 30, 2014,2015, compared with $(16.7)to $61.0 million in the same period in 2013.2014. The non-cash items include the following:

 

-Depreciation, amortization and depletion;
-Change in fair valueImpairment of derivative liabilities - warrants;plant and equipment;
-Gain on disposal of equipment and intangible assets;
-Provision (recovery) for doubtful accounts;
-Reservation of mine maintenance fee;
-Stock issued for service and compensation;
-Amortization of deferred financing cost on capital lease;
-(Loss) income from equity investments;
-Foreign currency transaction loss;
-Deferred lease income; and
-Change in fair value of profit sharing liability.
-(Gain) loss on disposal of equipment and intangible assets;
-Provision for doubtful accounts;
-Reservation of mine maintenance fee;
-Stock issued for service and compensation;
-Amortization of deferred financing cost on capital lease;
-Income from equity investments;
-Foreign currency transaction gain; and
-Deferred lease income.

 

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

 

-Notes receivable: The decrease of notes receivable was mainly due to our acceptance of fewer notes receivables as a substitute for cash receipts during the six months ended June 30, 2015;
-Accounts receivable – related parties: The decrease was mainly due to less notes receivable being received as a form of payment incredit sales to related parties were incurred that were not yet collected for the first ninesix months of 2014 compared with the same period in 2013;ended June 30, 2015;
-Prepaid taxes:Other receivables - related parties: The decrease in other receivables – related parties was mainly due to the increase in business related expenses imbursement and advances returned to the Company with related parties during the six months ended June 30, 2015;
-Inventories: The decrease in inventories during the six months ended June 30, 2015 was mainly due to the decrease in prepaid VAT purchase taxesthe price of raw materials during the year, which also decreased finished goods cost;
-Advance on inventory purchases, including related parties: The decrease in advance on inventory purchases, including related parties, was offset bymainly due to the increasedecrease in VAT sales taxraw material prices leading to less payments being made to suppliers for raw material purchases to meet future production capacity. Advance payment is a prevailing requirement on iron ore purchases in the first nine months of 2014 compared with the same period in 2013;steel production industry;

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-Accounts payable - related parties: The increase in accounts payable - related parties was mainly due to Longmen Joint Venture making more purchases frompaying less to its related partiesparty suppliers as compared to the same period in 2014. Pursuant to the supplier financing agreements signed between Longmen Joint Venture and its suppliers, those suppliers agreed not to demand certain cash payment for a period of time under the agreements;
-Other payables and accrued liabilities: The increase in other payables and accrued liabilities was mainly due to an decrease in payments for the six months ended June 30, 2015 compared to the same period in 2014; and
-Taxes payable: The increase in taxes payable was mainly due to the VAT taxes payable as less VAT purchase tax was incurred during the ninesix months ended SeptemberJune 30, 20142015 to offset the VAT sales tax payable.

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

-Accounts receivable: The increase was mainly due to more credit sales to third parties were incurred that have not yet been collected for the six months ended June 30, 2015 compared with the same period in 2013.2014;
-Other receivables: The increase was mainly due to an increase in receivables incurred with third parties for cash flow purpose for doing business on our behalf;
-Accounts payable: The decrease in accounts payable was mainly due to Longmen Joint Venture making fewer purchases from third parties during the six months ended June 30, 2015 compared with the same period in 2014. Pursuant to the supplier financing agreements signed between Longmen Joint Venture and its suppliers, those suppliers agreed not to demand certain cash payments for a certain period; and
-Other payables and accrued liabilities, including related parties: The increasedecrease in other payables – related parties was mainly due to Longmen Joint Venture incurring more payables to third parties and related partiesan increase in payments made for cash flow purposes during the ninesix months ended SeptemberJune 30, 20142015 compared withto the same period in 2013.2014; and
-

Customer deposits, including related parties: The increase in customer deposits, including related parties,decrease was mainly due to ourless of customers making more prepayments to us in the nine months ended Septemberprior to June 30, 2014.2015. These deposits were subsequently recognized as sales or netted against the corresponding cost of goods sold in our trading transactions after SeptemberJune 30, 20142015 in accordance with our salesrevenue recognition policy.

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

-Accounts receivable: The increase was mainly due to more credit sales to both third parties and related parties were incurred that have not yet been collected for the nine months ended September 30, 2014 compared with the same period in 2013;
-Other receivables, including related parties: The increase was mainly due to mainly due to less miscellaneous receivables were collected from third parties and related parties in the first nine months of 2014 compared with the same period in 2013;
-Inventories: The increase was mainly due to more finished goods being produced than sold during the nine months ended September 30, 2014 compared to the same period in 2013 as a result of the 20.7% decrease in average rebar sales price;

-Advance on inventory purchases - related parties: The increase was mainly due to more advance payments made to related parties for raw material purchases to meet future production requirements. Advance payments are a prevailing requirement on iron ore purchases in the steel production industry; and
-Accounts payable: The decrease in accounts payable was mainly due to Longmen Joint Venture making fewer purchases from third parties during the nine months ended September 30, 2014 compared with the same period in 2013.

 

Investing activities

 

Net cash provided by investing activities was $188.3 million for the six months ended June 30, 2015 compared to net cash used in investing activities was $104.6of $(164.5) million for the ninesix months ended SeptemberJune 30, 2014 compared with $146.6 million for the nine months ended September 30, 2013. Fluctuations2014. Fluctuation in cash outflowinflow between the two periods was mainly due to the decrease of restricted cash. Restricted cash was used as a pledge for our notes payable as required by the bank. In the first six months of 2015, such balance decreased because we needed less notes payable to settle with suppliers. The increase in cash used for equipmentinflow was also due to $114.1 million net loan repayment from related parties and intangible asset purchases$2.6 million proceeds from short term investments during the six months ended June 30, 2015. The increase in cash provided was partially offset by the decreaseincrease in restricted cash along with the decrease in notes payable, which cash deposits were restricted for, for the nine months ended September 30, 2014 comparedloan to the same period in 2013. Cash used forunrelated parties, short-term investments, and equipment and intangible asset purchases amounted to $117.8 million for the nine months ended September 30, 2014, compared with $75.3 million in the same period in 2013.purchase.

Financing activities

 

Net cash provided by financing activities was $51.1$83.8 million for the ninesix months ended SeptemberJune 30, 20142015 compared with $146.8to $56.0 million for the ninesix months ended SeptemberJune 30, 2013.2014. Compared withto the same period in 2013,2014, the decreaseincrease of cash inflow from financing activities was mainly driven by the following:

 

·RestrictedNotes receivable - restricted: The decrease in notes receivable: We borrowed less notes payablesreceivable – restricted was mainly due to banks for the nine months ended September 30, 2014 compared with the same period in 2013 and thus required less notes receivable to be restricted;was used as guarantee for notes payable and bank loans during the six months ended June 30, 2015;

·Short term loans – others: We borrowed and repaid fewer loansmore from thirdunrelated parties duringfor the ninesix months ended SeptemberJune 30, 20142015 compared withto the same period in 2013; and2014;

·Short term loans – related parties: We borrowed more and repaid fewer loans from related parties duringfor the ninesix months ended SeptemberJune 30, 20142015 as compared withto the same period in 2013.2014; and
·Deposits due to sales representatives, includingLong-term loans – related parties: We receivedparty: we borrowed more depositslong-term loans from sales representativesrelated party during the ninesix months ended SeptemberJune 30, 2014 compared with the same period in 2013.2015.

 

The cash inflow was offset by the following cash outflow:

 

·Short term notes payable: We borrowed lessrepaid more short term notes payables to banks to pay suppliers forpayable during the ninesix months ended SeptemberJune 30, 20142015 compared withto the same period in 2013 and repaid more notes payable from the banks during the quarter;2014; and
·Short term loans - bank: We repaid more money toloans from banks duringfor the ninesix months ended SeptemberJune 30, 20142015 as they became due than we borrowed compared withto the same period in 2013 and borrowed more short term loans from banks during the quarter as we generated positive operating cash flows in 2014 allowing us to repay more short term bank loans than borrowed.2014.

 

Impact of Inflation

 

We are subject to commodity price risks arising from price fluctuations in the market prices of ourthe 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.

 

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Compliance with Environmental Laws and Regulations

 

Longmen Joint Venture:

 

Together with our joint venture partners Long Steel Group and Shaanxi Steel, we have invested RMB 580 million in a series of comprehensive projects to reduce our waste emissions of coal gas, water, and solid waste. In 2005, we received ISO 14001 certification for our overall environmental management system. We have received several awards from the Shaanxi provincial government as a result of our increased effort in environmental protection.

 

We have spent in excess of $9.1 million (RMB 57 million) on a comprehensive waste water recycling and water treatment system. The 2,000 cubic meter/h treatment capacity systems were implemented at the end of 2005. In 2010, 1.080.9 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 $36.6$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 2012,2011, more than $9.6 million (RMB 60 million) was spentused 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.

 

In January 2014, Longmen Joint Venture was elected by the Ministry of Industry and Information Technology of the People's Republic of China (the "MIIT") as the only qualified enterprise in Shaanxi Priovince and was included in the MIIT's List of Enterprises Fulfilling the Iron and Steel Industry Specifications. This List includes a highly-selected group of large and medium steel manufacturers that have met or exceeded more stringent national requirements and standards on environmental protection and energy consumption.

Off-balance Sheet Arrangements

 

There were no off-balance sheet arrangements for the period ended SeptemberJune 30, 20142015 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. WeBelow, we have presented in the tables below 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 SeptemberJune 30, 20142015 and the effect these obligations are expected to have on our liquidity and cash flows in future periods.

 

  Payment due by period    
     Less than          
Contractual obligations Total  1 year  1-3 years  3- 5 years  5 years after 
  (in thousands)    
Notes payable $784,323  $784,323  $-  $-  $- 
Bank loans (1)  248,289   248,289   -   -   - 
Other loans, including related parties  283,800   283,800   -   -   - 
Deposits due to sales representatives, including related parties  32,226   32,226   -   -   - 
Lease obligations  22,779   871   1,132   1,132   19,644 
Construction obligations - Longmen Joint Venture (2)  110,695   110,695   -   -   - 
Long term loan – Shaanxi Steel  72,124   67,249   4,875   -   - 
Capital lease obligations  395,440   6,825   136,548   28,137   223,930 
Profit sharing liability  149,363   -   -   -   149,363 
Total $2,099,039  $1,534,278  $142,555  $29,269  $392,937 

  Payment due by period 
     Less than          
Contractual obligations Total  1 year  1-3 years  3- 5 years  5 years after 
     (in thousands)          
Notes payable $531,869  $531,869  $-  $-  $- 
Bank loans  153,989   153,989   -   -   - 
Other loans, including related parties  345,108   345,108   -   -   - 
Deposits due to sales representatives, including related parties  18,654   18,654   -   -   - 
Operating lease commitments  47,423   2,132   3,655   2,418   39,218 
Construction obligations - Longmen Joint Venture  9,252   9,252   -   -   - 
Long term loan – Shaanxi Steel  353,067   -   353,067   -   - 
Capital lease obligation  411,225   9,942   159,713   26,603   214,967 
Total $1, 870,587  $1,070,946  $516,435  $29,021  $254,185 

 

 (1)62Bank loans in the PRC are due either on demand or, more typically, within one year. These loans can be renewed with the banks subject to the bank’s credit reevaluation. These loans amount includes estimated interest payments as well as principal repayment.

 

(2)Upon completion of the construction obligations – Longmen Joint Venture, if Longmen Joint Venture is unable to repay the obligation when due, Shaanxi Steel will support Longmen Joint Venture for such obligations.

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 SeptemberJune 30, 2014,2015, Longmen Joint Venture guaranteed bank loans for related parties and third parties, including lines of credit, amounting to $196.7$63.5 million, as follows:

 

Nature of guarantee Guarantee
amount
  Guaranty Due Date
  (In thousands)   
Line of credit $127,644  Various from December 2014 to September 2015
Three-party financing agreements  14,463  Various from April to June 2015
Confirming storage  41,600  Various from October 2014 to April 2015
Financing by the rights of goods delivery in future  13,000  October 2014
Total $196,707   

Nature of guarantee Guarantee
amount
  Guaranty Due Date
  (In thousands)   
Line of credit $51,082  Various from August 2015 to May 2016
Bank loan  12,403  Various from November 2015 to March 2016
Total $63,485   

 

As of SeptemberJune 30, 2014,2015, we did not accrue any liability for the amount we havethe Group has guaranteed for third parties and related parties because those parties are current in their payment obligations and we have not experienced any losses from providing guarantees. We evaluated the debt guarantees and concluded that the likelihood of having to make payments under the guarantees is remote and that the fair value of the stand-ready obligation under these commitments is not material.

 

Critical Accounting Policies

 

Management’s discussion and analysis of its financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. Our unaudited condensed consolidated financial statements reflect the selection and application of accounting policies which require management to make significant estimates and judgments. See Note 2 to our unaudited Condensed Consolidated Financial Statements “Summary of Significant Accounting Policies”. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

 

We believe that the following reflect the more critical accounting policies that currently affect our financial condition and results of operations.

 

Principles of consolidation – subsidiaries

 

The accompanying unaudited condensed consolidated financial statements include the financial statements of our Company, our subsidiaries, our variable interest entity (“VIE”) for which our Company is the ultimate primary beneficiary, and the VIE’s subsidiaries.

 

The unaudited condensed consolidated financial statements have been prepared on a historical cost basis to reflect the financial position and results of operations of the Company in accordance with the accounting principles generally accepted in the United States of America (“U.S. GAAP”).

 

Subsidiaries are those entities in which our Company, directly or indirectly, controls more than one half of the voting power; or has the power to govern the financial and operating policies, to appoint or remove the majority of the members of the board of directors, or to cast a majority of votes at athe meeting of directors.

 

A VIE is an entity in which our Company, or our subsidiary, through contractual arrangements, bears the risks of, and enjoys the rewards normally associated with, ownership of the entity, and therefore our Company or our subsidiary is the primary beneficiary of the entity.

 

All significant inter-company transactions and balances have been eliminated upon consolidation.

 

Consolidation of VIE

 

Prior to entering into the Unified Management Agreement on April 29, 2011, Longmen Joint Venture had been consolidated as our 60% directly owned subsidiary. Upon entering into the Unified Management Agreement, Longmen Joint Venture was evaluated by our Company to determine if Longmen Joint Venture is a VIE and if we are the primary beneficiary.

 

Based on the projected profit in this entity and future operating plans, Longmen Joint Venture’sVenture ’s equity at risk is considered insufficient to finance its activities and therefore Longmen Joint Venture is considered to be a VIE.

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We would be considered the primary beneficiary of the VIE if we have both of the following characteristics:

 

a.The power to direct the activities of the VIE that most significantly impact the VIE’s economic performance; and
b.The obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.

 

A Supervisory Committee was formed during the negotiation of the Unified Management Agreement. Given there is both a Supervisory Committee and a Boardboard of Directorsdirectors with respect to Longmen Joint Venture, the powers rights and roles of both bodies were considered to determine which has the power to direct the activities of Longmen Joint Venture, and by extension, whether we continue to have the power to direct Longmen Joint Venture’s activities after this Supervisory Committee was formed. The Supervisory Committee, on which we hold 2 out of 4 seats, requires a ¾ majority vote, whereaswhile the Boardboard of Directors, ondirectors, which we hold 4 out of 7 seats, requires a simple majority vote. TheAs 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 Directorsdirectors and the Supervisory Committee, the Boardboard of Directorsdirectors prevails. In other words, the Supervisory Committee is considered to be subordinate to the Boardboard of Directors.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 control 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. We believe that the Unified Management Agreement between Longmen Joint Venture and Shaanxi Coal is in compliance with PRC law and is legally enforceable. As such, we have the power to direct the activities of the VIE. However, uncertainties in the PRC legal system could limit our ability to enforce the Unified Management Agreement, which in turn, may lead to reconsideration of the VIE assessment.

 

In connection with the Unified Management Agreement, Shaanxi Coal, we and Shaanxi Steel may provide such support on a discretionary basis in the future, which could expose us to a loss.

 

As discussed in Note 2(c) to the consolidated financial statements – Consolidation of VIE, we have the obligation to absorb losses and the rights to receive benefits based on the profit allocation as stipulated by the Unified Management Agreement. As both conditions are met, we are the primary beneficiary of Longmen Joint Venture and therefore, continue to consolidate Longmen Joint Venture.

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, 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.

 

Longmen Joint Venture has two 100% owned subsidiaries, Yuxin Trading Co., Ltd. (“Yuxin”) and Yuteng Trading Co., Ltd. (“Yuteng”). Longmen Joint Venture has two consolidated subsidiaries, Hualong and Huatianyulong, in which it does not hold a controlling interest. Hualong and Huatianyulong are separate legal entities which were established in the PRC as limited liability companies and subsequently invested in by Longmen Joint Venture in June 2007 and July 2008, respectively. However, these two entities do not meet the definition of variable interest entities. Further consideration was given to whether consolidation was appropriate under the voting interest model, specifically where the power of control may exist with a lesser percentage of ownership (i.e. less than 50%), for example, by contract, lease, agreement with other stockholders or by court decree.

 

Hualong

 

Longmen Joint Venture, the single largest shareholder, holds a 36.0% equity interest in Hualong. The other two shareholders, who own 34.67% and 29.33% respectively, assigned their voting rights to Longmen Joint Venture in writing at the time of the acquisition of Hualong. The voting rights have been assigned through the date Hualong ceases its business operation or the other two shareholders sell their interest in Hualong. Hualong’s main business is to supply refractory. The assets, liabilities and the operating results of Hualong are immaterial to our consolidated financial statements as for and during the three and six months ended June 30, 2015 and 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 three and six months ended June 30, 2015 and 2014.

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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 met are recorded as customer deposits. Sales revenue represents the invoiced value of goods, net of value-added tax (VAT). All our products sold in the PRC are subject to a Chinese VAT at a rate of 13% to 17% of the gross sales price. This VAT may be offset by VAT paid by us on raw materials and other materials included in the cost of producing the finished product.

 

We infrequently engage in trading transactions in which we 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 prices.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 allowance for doubtful accounts

 

Accounts receivable include trade accounts due from customers and other receivables from cash advances to employees, related parties or third parties. An allowance for doubtful accounts is established and recorded based on managements’ assessment of potential losses based on the credit history and relationships with the customers. Management reviews its receivablesreceivable on a regular basis to determine if the bad debt allowance is adequate, and adjusts the allowance when necessary. Delinquent account balances are written-off against the allowance for doubtful accounts after management has determined that the likelihood of collection is not probable.

Inventories

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. If our rebar selling price decreased by 10% at June 30, 2015, our finished goods inventories would have been decreased by approximately $7.8 million.

 

Useful lives of plant and equipment

 

Plant and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets with a 3%-5% residual value. The depreciation expense on assets acquired under capital leases is included with depreciation expense on owned assets.

 

The estimated useful lives are as follows:

 

Buildings and improvementsImprovements10-40 Years
Machinery10-30 Years
Machinery and equipment under capital leaseslease2010-20 Years
Other equipment5 Years
Transportation equipmentEquipment5 Years

 

We periodically re-evaluatehave re-evaluated the useful lives of our plantdepreciation and equipmentamortization to determine whether subsequent events subsequent to their acquisition or otherand circumstances warrant any revision of the estimated useful lives.revision.

 

Impairment of long-lived assets

 

The carrying values of long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Based on the existence of one or more indicators of impairment, we determine whethermeasure any impairment of long-lived assets exists using the projected undiscounted cash flow method. The estimation of future cash flows requires significant management judgment based on our historical results and anticipated results and is subject to many factors.

 

The discount rate that is commensurate with the risk inherent in our business model is determined by our management. An impairment charge would be recorded if we determined that the carrying value of long-lived assets may not be recoverable. The impairment to be recognized is measured by the amount by which the carrying values of the assets exceed the fair value of the assets.

 

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As of SeptemberJune 30, 2014,2015, we have recorded an impairment loss of $973.9 million (RMB 6.0 billion) to reduce the faircarrying value of our plant and equipment exceeded our carryingto its fair value. We used the discounted cash flows model to determine the fair value of these assets by approximately 40.4%. We used the estimated discounted cash flow from these assets to determine their fair value.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 believebelieved these assumptions provideprovided us the best estimates of projecting our future cash flows fromon these assets, net of any related cash outflow of our costs,cost, expenses and taxes related to these revenues. In the future, theThe estimated fair value of these assets may be lower than their current fair value, whichthus could result in further future impairment chargescharge if potential events occur to further reduce the current selling price or product demand in the steel market or increase our costscost 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 further future impairment losses.

 

Use of estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant accounting estimates reflected in our financial statements include the useful lives of and impairment for property, plant and equipment, potential losses on uncollectible receivables, the recognition of contingent liabilities, the interest rate used in financing sales, the fair value of the assets recorded under capital leases,lease, the present value of the net minimum lease payments forof the capital leaseslease and the fair value of the profit sharingshare 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. The carrying value of the long term loans-related party approximates its fair value as of the reporting date as their stated interest rates approximate current rates available.

 

We also analyze all financial instruments with features of both liabilities and equity under the accounting standard establishing, “accounting for certain financial instruments with characteristics of both liabilities and equity,” the accounting standard regarding “accounting for derivative instruments and hedging activities” and “accounting for derivative financial instruments indexed to, and potentially settled in, a company’s own stock.” Additionally, we analyze registration rights agreements associated with any equity instruments issued to determine if penalties triggered for late filing should be accrued under the accounting standard establishing “accounting for registration payment arrangements.”

 

Fair value measurements

 

The accounting standards regarding fair value of financial instruments and related fair value measurement define fair value, establish a three-level valuation hierarchy for disclosures of fair value measurement and enhance disclosuredisclosures 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 1: inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

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

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

 

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

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

The warrants issued in conjunction with notes we issued in December 2007 were carried at fair value. The warrants were accounted for as derivative liabilities and recorded at their fair value, with the change in fair value charged or credited to income each period.  The warrants expired unexercised on May 13, 2013. Prior to their expiration, the fair value of the warrants was estimated using a binomial lattice model, using level 3 inputs.

The profit sharing liability associated with our capital lease at Longmen Joint Venture is accounted for as a derivative liability and is recorded at its fair value, with the change in fair value charged or credited to income each period.  We determine the faircarrying value of the profit sharing liability using Level 3 inputs by consideringtaking consideration of the present value of Longmen Joint Venture’sour projected profits/losses discountedwith the discount interest rate of 6.5% based on our average borrowing rate, which is currently 7.3%.

rate. The fair value of the profit sharing liability will change each period as a result of (a) any changesprojected profits/losses in our estimate of Longmen Joint Venture’s projected profits/losses over the remaining term of the agreement, (b) any change in the discount rate used, based on changes in our current or expected borrowing rate, (c) the change in fair value related to the passage of time and change in the number of future periods over which the present value of future cash flows is estimated and (d) any difference between the previously estimated operating results for the current period and actual results.

Each period, we consider whether the discount rate based on our average borrowing rate should be adjusted based upon the current and expected future financial condition of the Company. To date, we have not considered any adjustment to be necessaryVenture were based upon, but not limited to, the following assumptions:assumptions until April 30, 2031:

 

·because the joint venture partner of Longmen Joint Venture is a state-owned enterprise with an excellent credit history, PRC banks grant similar credit treatment to Longmen Joint Venture in terms of credit availability
·the current average borrowing rate of enterprises in the steel industry in the PRC is similar to this borrowing rate
·the current new/renewal borrowing rates of the Company’s bank loans are similar to prior periods
·the People’s Bank of China has not recently adjusted any borrowing rate
·PRC bank interest rates are not industry specific. The downtrend in the steel industry did not materially impact the bank borrowing rates for steel companies
·the bank interest rates are assessed by each individual bank and governed by the Chinese banking regulatory bodies. Reports from credit rating research firms are not commonly used by PRC banks

The projected profits/losses in Longmen Joint Venture are based upon, but not limited to, the following assumptions:

·projected selling units and growth in the steel market;
·projected unit selling price in the steel market;

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·projected unit purchase cost in the coal and iron ore markets;
·selling and general and administrative expenses to be in line with the growth in the steel market;
·projected bank borrowing;
·interest rate index;
·gross nationalnation product index;
·industry index; and
·government policy.

 

Income Taxes

 

We did not conduct any business and did not maintain any branch office in the United States during the Ninethree months ended SeptemberJune 30, 20142015 and 2013.2014. Therefore, no provision for withholding of U.S. federal or state income taxes has been made. The tax impact from undistributed earnings from overseas subsidiaries is not recognized as there is no intention for future repatriation of these earnings.

 

General Steel (China) is located in Tianjin CoastalCostal Economic Development Zone and is subject to an income tax rate of 25%.

 

Longmen Joint Venture is located in the Mid-West Region of China. It qualifies for the “Go-West” tax rate of 15% promulgated by the government. In 2010, the central government announced that the “Go-West” tax initiative was extended for 10 years, and thus, the preferential tax rate of 15% will be in effect until 2020. This special tax treatment will be evaluated on a year-to-year basis by the local tax bureau.

 

Baotou Steel Pipe Joint Venture is located in Inner Mongolia autonomous region and is subject to an income tax rate of 25%.

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

 

Capital lease obligations

 

Iron and steel production facilities

 

On April 29, 2011, we, along with Longmen Joint Venture entered into a Unified Management Agreement with Shaanxi Steel and Shaanxi Coal under which Longmen Joint Venture uses the new iron and steel making facilities constructed by Shaanxi Steel, including one sintering machine, two converters, two blast furnaces and other auxiliary systems.systems constructed by Shaanxi Steel. As the 20-year term of the agreement exceeds 75% of the assets’ useful lives, this arrangement is accounted for as a capital lease. The ongoing lease payments are comprised of two elements: (1) a monthly payment of $2.3 million (RMB 14.6 million), based on Shaanxi Steel’s cost to construct the new iron and steel making facilities of $2.3 million (RMB 14.6 million) to be paid over the term of the Unified Management Agreement of 20 years; and (2) 40% of any remaining pre-tax profits from the Asset Pool which includes Longmen Joint Venture and the newly constructed iron and steel making facilities. The profit sharing component does not meet the definition of contingent rent because it is based on future revenue and wasis therefore considered part of the minimum lease payment for purposes of determining the value of the leased asset and obligation at the inception of the lease. The initiallease, however, the lease liability wasis then reduced by the initial fair value of the profit sharing component, which as discussed above, is recognized as a separate derivative instrument financial liability carried at fair value. See Note 16 – “Profit sharing liability” in the Notes to Condensed Consolidated Financial Statements.

 

Energy-saving equipment

 

During 2013 and 2014, our subsidiary, Longmen Joint Venture, entered into capital lease agreements for energy-saving equipment to be installed throughout the production chain. Under these agreements, Longmen Joint Venture uses the energy-saving equipment for which the vendors are responsible for the design, purchase, installation, and on-site testing, as well as the ownership rights to the equipment during the lease periods. The lease periods, which vary between four to six years, begin upon the completion of the equipment installation, testing, and the issuance of the energy-saving rate reports to be agreed upon by both the vendors and Longmen Joint Venture. As the ownership rights of the equipment transfer to Longmen Joint Venture at the end of the lease periods, these agreements are accounted for as capital leases.

 

The minimum lease payments are based on the energy cost saved during the lease periods, which is determined by the estimated annual equipment operating hours per the lease agreements. If the actual annual equipment operating hours are less than the estimated amount, the lease periods may be extended, subject to further negotiation and agreement between us and the vendors. If the actual annual equipment operating hours exceed the estimated amount, we are obligated to makepay the additional lease paymentspayment based on the additional energy cost saved during the lease period and recognize the additional lease payments as contingent rent expense. For the Ninethree and six months ended SeptemberJune 30, 20142015 and 2013,2014, no contingent rent expense washas incurred under these lease agreements.

 

Profit sharing liability

 

The profit sharing liability component of the capital lease obligation was recognized initially at its estimated fair value at the lease commencement date and included in the initial measurement and recognition of the capital lease, in addition to the fixed payment component of the minimum lease payments. The profit sharing liability is accounted for separately from the fixed portion of the capital lease obligation (see Note 15 - “Capital lease obligation” in the Notes to Condensed Consolidated Financial Statements) and is accounted for as a derivative instrument in accordance with ASC 815-10-15-83. The estimated fair value of the profit sharing liability is reassessed at the end of each reporting period, with any change in fair value charged or credited to income as “Change in Fair Value of Profit Sharing Liability”. See Note 2(h) – “Financial instruments” and Note 16 – “Profit sharing liability” in the Notes to Condensed Consolidated Financial Statements for details.

Payments to Shaanxi Steel for the As of June 30, 2015, we have reduced our profit sharing liability are not required until net cumulative profits are achieved. Basedto $0.

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Recently issued accounting pronouncements

In February 2015, the 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 performancebasis 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 Asset Pool, no profit sharing payment was made duringeconomics criterion if the Nine months ended September 30, 2014fees are both customary and 2013.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.

 

New Accounting Pronouncements

In June 2014,April 2015, the FASB issued Accounting Standards Update (ASU) No. 2014-12 Compensation – Stock Compensation (Topic 718), Accountingauthoritative guidance on accounting for Share-Based Payments WhenInterest-Imputation of Interest (Subtopic 835-30); Simplifying the TermsPresentation of an Award Provide ThatDebt Issuance Costs (“ASU 2015-03”). This update requires that debt issuance cost related to a Performance Target Could Be Achieved afterrecognized debt liability be presented in the Requisite Service Period.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 amendments stipulate thatnew guidance is required to be applied on a performance target in a share-based payment that affects vestingretrospective basis and that could be achieved after the requisite service period shouldto be accounted for as a performance condition under Accounting Standards Codification (ASC) 718, Compensation — Stock Compensation. As a result, the target is not reflectedchange in the estimation of the award’s grant date fair value. Compensation cost should be recognized over the required service period, if it is probable that the performance condition would be achieved.an accounting principle. The amendments in this Accounting Standards Updateupdate are effective for annual periodsfinancial statements issued for fiscal years beginning after December 15, 2015 and interim periods within those annual periods. Earlyfiscal 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 Company doesimplementation 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 2014-12 to have a material impact on the Company’s condensed consolidated financial statements.

In August 2014, FASB issued Accounting Standards Update (ASU) No. 2014-15 Preparation of Financial Statements - Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern. Under generally accepted accounting principles (GAAP), continuation of a reporting entity as a going concern is presumed as the basis for preparing financial statements unless and until the entity's liquidation becomes imminent. Preparation of financial statements under this presumption is commonly referred to as the going concern basis of accounting. If and when an entity's liquidation becomes imminent, financial statements should be prepared under the liquidation basis of accounting in accordance with Subtopic 205-30, Presentation of Financial Statements-Liquidation Basis of Accounting. Even when an entity's liquidation is not imminent, there may be conditions or events that raise substantial doubt about the entity's ability to continue as a going concern. In those situations, financial statements should continue to be prepared under the going concern basis of accounting, but the amendments in this Update should be followed to determine whether to disclose information about the relevant conditions and events. The amendments in this Accounting Standards Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The Company does not expect the adoption of ASU 2014-152015-11 to have material impact on the Company’s condensed consolidated financial statements, although there may be additional disclosures upon adoption.

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In November 2014, the FASB issued Accounting Standard Update (ASU) No. 2014-16, Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity, to clarify how current U.S. GAAP should be interpreted in evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. Specifically, the amendments clarify that an entity should consider all relevant terms and features, including the embedded derivative feature being evaluated for bifurcation, in evaluating the nature of the host contract. The assessment of the substance of the relevant terms and features should incorporate a consideration of: (1) the characteristics of the terms and features themselves; (2) the circumstances under which the hybrid financial instrument was issued or acquired; and (3) the potential outcomes of the hybrid financial instrument, as well as the likelihood of those potential outcomes. The amendments in this ASU apply to all entities that are issuers of, or investors in, hybrid financial instruments that are issued in the form of a share. The amendments in this ASU are effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period. Early adoption is permitted. The Company does not expect the adoption of ASU 2014-16 to have a material impact on the Company’s condensed consolidated financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Our Company, with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the design and operation of our disclosure controls and procedures, as defined under Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of SeptemberJune 30, 2014.2015. Our Company’s disclosure controls and procedures are designed: (i) to ensure that information required to be disclosed by us in the reports that we file or submitsubmits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and (ii) to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

As a result of comments received from the Staff of the United States Securities and Exchange Commission following the Staff’s review of certain of our prior quarterly and annual reports, and based on subsequent communications between the Staff of the Commission and us, we concluded that the classification, display and disclosure of our profit sharing liability (which is accounted for at fair value as a derivative instrument liability) had been incomplete and inconsistent. As a result, we have restated our financial statements and related disclosures for each of the reporting periods from the period ended June 30, 2011 to the period ended March 31,June 30, 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,June 30, 2014. Although the restatements did not result in any restatement of the reported balance sheets nor adjustment of reported net income for any period presented, because of the restatement, management concluded that the restatements resulted from control deficiencies that represent a material weakness in our disclosure controls and procedures.

As During the course of our audit for the year ended December 31, 2014, our auditors proposed numerous audit adjustments related to our year-end closing. Management concluded that these proposed adjustments (both recorded and waived) are a result of suchour control deficiencies that also represent a material weakness in our financial reporting.

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Based on the above material weakness, our Chief Executive Officer and Chief Financial Officer concluded that our Company’s disclosure controls and procedures were not effective as of SeptemberJune 30, 2014.

Despite the existence of the material weakness in our disclosure controls and procedures, we believe that the condensed consolidated financial statements included in this Form 10-Q present, in all material respects, our financial position, results of operations and comprehensive income (loss) and cash flows for the periods presented in conformity with U.S. GAAP.2015.

 

Remediation

 

Our management has dedicated significant resources to correcting the control deficiencies and to ensuring that we take proper steps to improve our internal control over financial reporting in the area of financial statement disclosures.

 

We will take and have taken a number of remediation actions that we believe will improve the effectiveness of our internal control over financial reporting including the following:

 

·We have engaged an outside professional consulting firm to supplement our efforts to improve our internal control over financial reporting;

 

·We have engaged and will continue to engage accounting experts to review complex accounting transactions and our financial statement disclosures related to such transactions.

 

·We have transitioned from the 1992 COSO framework for internal controls to the 2013 framework, which formalized the principles embedded in the original framework more explicitly, incorporated business and operating environment changes over the past two decades, and improved the framework’s ease of use and application.

·We will implement a number of control procedures related to the control process for our year-end closing for each location to ensure the internal control over financial reporting is proper.

Management believes the foregoing efforts willshould effectively remediate the material weakness described above. However, there is no assurance that even we have taken the remediation actions that our Company’s disclosure controls and procedures will be effective or that other internal control deficiencies will not be identified in future reporting periods.

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

 

Changes in Internal Controls over Financial Reporting

 

Except as otherwise noted above, there has not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II – OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

From time to time, we are subject to certain legal proceedings, claims and disputes that arise in the ordinary course of our business. Although we cannot predict the outcomes of these legal proceedings, we do not believe these actions, in the aggregate, will have a material adverse impact on our financial position, results of operations or liquidity. We are currently not a party to any material legal proceedings.

 

ITEM 1A. RISK FACTORS

 

To our knowledge and to the extent additional factual information disclosed in this Quarterly Report on Form 10-Q relates to such risk factors, there have been no other changes in the risk factors described in “ITEM 1A. RISK FACTORS” in our Annual Report on Form 10-K/A10-K for the year ended December 31, 2013,2014, which was filed with the SEC on August 19, 2014.April 10, 2015.

 

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

 

On February 3, 2014, in connection with two services agreements relating to investor relations and consulting services, both dated as of January 14, 2014, we issued 80,000 shares of common stock. The total cost of the stock issuance was $80,800. The shares were valued at $1.01 per share, the quoted market price at the time the services were provided. The recipients are accredited investors and the issuances are exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”) in reliance on an exemption from registration provided pursuant to Section 4(2) of the Securities Act.None.

 

On July 14, 2014, we 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 our 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 we sold to Zuosheng Yu 5,000,000 shares of common stock at a purchase price of $1.50 per share (the "Purchase Price"), upon receipt of $7,500,000 in gross proceeds in accordance with the terms of the Subscription Agreement. The Purchase Price represents a 23% premium to the volume weighted average closing price of the Common Stock from March 5, 2014 to July 11, 2014, which ranged from $0.90 to $1.47 per share of common stock during the period. Upon completion of this transaction, Zuosheng Yu beneficially owned 44.7% of our common stock.

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ITEM 3. DEFAULT UPON SENIOR SECURITIES

Not Applicable.

ITEM 4. MINE SAFETY DISCLOSURE

Not Applicable.

ITEM 5. OTHER INFORMATION

Not Applicable.

ITEM 6. EXHIBITS

 

3.1Articles 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).
31.1* 
3.2Amendment 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).
3.3Amendment 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).
3.4Certificate of Designation of Series A Preferred Stock of the registrant (included as Exhibit 10.6 to the Form 10-K filed June 30, 2008 and incorporated herein by reference).
3.5Bylaws of General Steel Holdings, Inc. (included as Exhibit 3.5 to the Form 10-K filed March 16, 2010 and incorporated herein by reference).
31.1*Certification of the CEO (Principal Executive Officer) pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as filed herewith.
  
31.2*Certification of the CFO (Principal Financial Officer) pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as filed herewith.
  
32.1*Certification of the CEO (Principal Executive Officer) pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as filed herewith.
  
32.2*Certification of the CFO (Principal Financial Officer) pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as filed herewith.

 

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

 

***XBRL (Extensive Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

*Filed herewith.

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 General Steel Holdings, Inc.
  
Date: November 14, 2014August 19, 2015By: /s/ Zuosheng YuYunshan Li
 Zuosheng YuYunshan Li
 Chief Executive Officer and Chairman
  
Date: November 14, 2014August 19, 2015By: /s/ John Chen
 John Chen
 Director and Chief Financial Officer

  

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