UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 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 Center
No. 27 Dong San Huan North Road
Chaoyang District, Beijing, China 100020
(Address of Principal Executive Office, Including Zip Code)
+86 (10) 5775 7691
(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. Yesx 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). Yesx 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) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes¨ Nox
As of August 1, 2014, 58,314,688May 14, 2015, 62,486,282 (excluding 2,472,306 shares of treasury stock) shares of common stock, par value $0.001 per share, were outstanding.
EXPLANATORY NOTE
This Quarterly Report on Form 10-Q/A is being filed as Amendment No. 1 to our Quarterly Report on Form 10-Q (“Amendment No. 1”), to amend and restate our Quarterly Report on Form 10-Q for the interim period ended March 31, 2014 (the “Original 10-Q”), which was originally filed with the Securities and Exchange Commission (the “Commission”) on May 15, 2014.
This Amendment No. 1 restates the following items:
Except for the Items noted above, no other information included in the Original 10-Q is being amended or updated by this Amendment No. 1. This Amendment No. 1 continues to describe the conditions as of the date of the Original 10-Q and, except as expressly contained herein, we have not updated or modified the disclosures contained in the Original 10-Q. Accordingly, this Amendment No. 1 should be read in conjunction with our periodic reports filed with the Commission subsequent to the filing of the Original 10-Q, including any amendment to those filings.
This Amendment No. 1 contains restatements related to the display and disclosure of our profit sharing liability (which, since its inception during the interim period ended June 30, 2011, has been accounted for at fair value as a derivative instrument liability), which we concluded to be incomplete and inconsistent after communications with the Staff of the Commission following the Staff’s review of certain of our prior quarterly and annual reports, and based on subsequent communications between the Staff and us. We are amending the previously filed quarterly report as discussed above that was materially affected by these incomplete and inconsistent disclosures, although the restatements do not impact our previously reported consolidated balance sheets, consolidated statements of operations and comprehensive income (loss), or our consolidated statements of cash flows for any period presented.
A summary of the effects of this restatement on our financial statements included in this Amendment No. 1 is presented under Part I, Item 1 – Unaudited Financial Statements at Note 2, “Restatement”.
This Amendment No. 1 includes new officer certifications, which are filed as exhibits to this Amendment No. 1.
Table of Contents
PART I – FINANCIAL INFORMATION
ITEM 1. UNAUDITED FINANCIAL STATEMENTS
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands)
March 31, | December 31, | March 31, | December 31, | |||||||||||||
2014 | 2013 | 2015 | 2014 | |||||||||||||
ASSETS | ||||||||||||||||
CURRENT ASSETS: | ||||||||||||||||
Cash | $ | 36,378 | $ | 31,967 | $ | 9,736 | $ | 11,641 | ||||||||
Restricted cash | 428,615 | 399,333 | 249,820 | 355,685 | ||||||||||||
Notes receivable | 81,998 | 60,054 | 1,606 | 10,290 | ||||||||||||
Restricted notes receivable | 261,220 | 395,589 | 80,889 | 111,801 | ||||||||||||
Loans receivable - related parties | 4,540 | 4,540 | ||||||||||||||
Loans receivable | 42,569 | 36,001 | ||||||||||||||
Loans receivable - related party | 6,728 | 34,713 | ||||||||||||||
Accounts receivable, net | 4,388 | 4,078 | 10,686 | 9,321 | ||||||||||||
Accounts receivable - related parties | 4,474 | 2,942 | ||||||||||||||
Accounts receivable - related parties, net | 59,057 | 8,498 | ||||||||||||||
Other receivables, net | 54,078 | 54,716 | 103,291 | 63,746 | ||||||||||||
Other receivables - related parties | 57,854 | 54,106 | ||||||||||||||
Other receivables - related parties, net | 23,079 | 39,670 | ||||||||||||||
Inventories | 210,761 | 212,921 | 148,295 | 156,327 | ||||||||||||
Advances on inventory purchase | 44,338 | 44,897 | ||||||||||||||
Advances on inventory purchase, net | 49,440 | 73,819 | ||||||||||||||
Advances on inventory purchase - related parties | 120,426 | 83,003 | 95,757 | 45,617 | ||||||||||||
Prepaid expense and other | 1,890 | 1,388 | 5,279 | 4,803 | ||||||||||||
Prepaid taxes | 23,238 | 28,407 | 5,851 | 5,789 | ||||||||||||
Short-term investment | 2,597 | 2,783 | 7,503 | 2,688 | ||||||||||||
TOTAL CURRENT ASSETS | 1,336,795 | 1,380,724 | 899,586 | 970,409 | ||||||||||||
PLANT AND EQUIPMENT, net | 1,269,199 | 1,271,907 | 1,561,511 | 1,543,136 | ||||||||||||
OTHER ASSETS: | ||||||||||||||||
Advances on equipment purchase | 54,690 | 6,409 | 5,270 | 11,438 | ||||||||||||
Investment in unconsolidated entities | 16,635 | 16,943 | 16,705 | 16,823 | ||||||||||||
Long-term deferred expense | 606 | 668 | 452 | 458 | ||||||||||||
Intangible assets, net of accumulated amortization | 23,587 | 23,707 | 22,885 | 22,960 | ||||||||||||
TOTAL OTHER ASSETS | 95,518 | 47,727 | 45,312 | 51,679 | ||||||||||||
TOTAL ASSETS | $ | 2,701,512 | $ | 2,700,358 | $ | 2,506,409 | $ | 2,565,224 | ||||||||
LIABILITIES AND DEFICIENCY | ||||||||||||||||
CURRENT LIABILITIES: | ||||||||||||||||
Short term notes payable | $ | 963,357 | $ | 1,017,830 | $ | 448,362 | $ | 661,635 | ||||||||
Accounts payable | 513,397 | 434,979 | 608,678 | 612,801 | ||||||||||||
Accounts payable - related parties | 282,540 | 235,692 | 226,964 | 207,783 | ||||||||||||
Short term loans - bank | 230,118 | 301,917 | ||||||||||||||
Short term loans - banks | 232,148 | 257,502 | ||||||||||||||
Short term loans - others | 48,695 | 62,067 | 51,995 | 60,717 | ||||||||||||
Short term loans - related parties | 105,080 | 126,693 | 217,397 | 46,380 | ||||||||||||
Current maturities of long-term loans - related party | 57,428 | 53,013 | ||||||||||||||
Other payables and accrued liabilities | 60,795 | 45,653 | 51,985 | 55,488 | ||||||||||||
Other payable - related parties | 80,694 | 94,079 | ||||||||||||||
Other payables - related parties | 96,277 | 87,252 | ||||||||||||||
Customer deposits | 107,002 | 87,860 | 139,106 | 92,974 | ||||||||||||
Customer deposits - related parties | 145,366 | 64,881 | 148,176 | 132,616 | ||||||||||||
Deposit due to sales representatives | 23,713 | 24,343 | 19,361 | 17,871 | ||||||||||||
Deposit due to sales representatives - related parties | 1,980 | 1,997 | 2,553 | 2,509 | ||||||||||||
Taxes payable | 7,276 | 4,628 | 9,393 | 5,201 | ||||||||||||
Deferred lease income, current | 2,168 | 2,187 | 2,179 | 2,176 | ||||||||||||
Capital lease obligations, current | 4,774 | 4,321 | 8,678 | 8,508 | ||||||||||||
TOTAL CURRENT LIABILITIES | 2,634,383 | 2,562,140 | 2,263,252 | 2,251,413 | ||||||||||||
NON-CURRENT LIABILITIES: | ||||||||||||||||
Long-term loans - related party | 14,607 | 19,644 | 352,850 | 339,549 | ||||||||||||
Deferred lease income, noncurrent | 74,072 | 75,257 | 72,258 | 72,713 | ||||||||||||
Capital lease obligations, noncurrent | 376,025 | 375,019 | 397,416 | 393,252 | ||||||||||||
Profit sharing liability at fair value | 160,956 | 162,295 | 57,538 | 70,422 | ||||||||||||
TOTAL NON-CURRENT LIABILITIES | 625,660 | 632,215 | 880,062 | 875,936 | ||||||||||||
TOTAL LIABILITIES | 3,260,043 | 3,194,355 | 3,143,314 | 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 March 31, 2014 and December 31, 2013 | 3 | 3 | ||||||||||||||
Common stock, $0.001 par value, 200,000,000 shares authorized, 58,314,688 and 58,234,688 shares issued, 55,842,382 and 55,762,382 shares outstanding as of March 31, 2014 and December 31, 2013, respectively | 58 | 58 | ||||||||||||||
Treasury stock, at cost, 2,472,306 shares as of March 31, 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 March 31, 2015 and December 31, 2014 | 3 | 3 | ||||||||||||||
Common stock, $0.001 par value, 200,000,000 shares authorized, 64,458,588 shares issued and 61,986,282 shares outstanding as of March 31, 2015 and December 31, 2014, respectively | 64 | 64 | ||||||||||||||
Treasury stock, at cost, 2,472,306 shares as of March 31, 2015 and December 31, 2014 | (4,199 | ) | (4,199 | ) | ||||||||||||
Paid-in-capital | 107,028 | 106,878 | 115,563 | 115,494 | ||||||||||||
Statutory reserves | 6,387 | 6,243 | 6,539 | 6,472 | ||||||||||||
Accumulated deficits | (458,362 | ) | (414,798 | ) | (508,674 | ) | (463,521 | ) | ||||||||
Accumulated other comprehensive income | 3,593 | 729 | 163 | 644 | ||||||||||||
TOTAL GENERAL STEEL HOLDINGS, INC. DEFICIENCY | (345,492 | ) | (305,086 | ) | (390,541 | ) | (345,043 | ) | ||||||||
NONCONTROLLING INTERESTS | (213,039 | ) | (188,911 | ) | (246,364 | ) | (217,082 | ) | ||||||||
TOTAL DEFICIENCY | (558,531 | ) | (493,997 | ) | (636,905 | ) | (562,125 | ) | ||||||||
TOTAL LIABILITIES AND DEFICIENCY | $ | 2,701,512 | $ | 2,700,358 | $ | 2,506,409 | $ | 2,565,224 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOMELOSS
FOR THE THREE MONTHS ENDED MARCH 31, 20142015 AND 20132014
(UNAUDITED)
(In thousands, except per share data)
2014 | 2013 | |||||||||||||||
2015 | 2014 | |||||||||||||||
SALES | $ | 512,005 | $ | 502,431 | $ | 270,769 | $ | 512,005 | ||||||||
SALES - RELATED PARTIES | 82,206 | 148,860 | 57,395 | 82,206 | ||||||||||||
TOTAL SALES | 594,211 | 651,291 | 328,164 | 594,211 | ||||||||||||
COST OF GOODS SOLD | 530,744 | 498,626 | 297,565 | 530,744 | ||||||||||||
COST OF GOODS SOLD - RELATED PARTIES | 86,028 | 148,598 | 62,746 | 86,028 | ||||||||||||
TOTAL COST OF GOODS SOLD | 616,772 | 647,224 | 360,311 | 616,772 | ||||||||||||
GROSS (LOSS) PROFIT | (22,561 | ) | 4,067 | |||||||||||||
GROSS LOSS | (32,147 | ) | (22,561 | ) | ||||||||||||
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES | (21,053 | ) | (18,955 | ) | (17,355 | ) | (21,053 | ) | ||||||||
UNALLOCATED OVERHEADS EXPENSES | (19,134 | ) | - | |||||||||||||
CHANGE IN FAIR VALUE OF PROFIT SHARING LIABILITY | (49 | ) | 46,779 | 12,924 | (49 | ) | ||||||||||
(LOSS) INCOME FROM OPERATIONS | (43,663 | ) | 31,891 | |||||||||||||
LOSS FROM OPERATIONS | (55,712 | ) | (43,663 | ) | ||||||||||||
OTHER INCOME (EXPENSE) | ||||||||||||||||
Interest income | 3,192 | 2,439 | 2,331 | 3,192 | ||||||||||||
Finance/interest expense | (28,695 | ) | (24,857 | ) | (20,570 | ) | (28,695 | ) | ||||||||
Gain on disposal of equipment and intangible assets | 46 | 331 | 16 | 46 | ||||||||||||
Income from equity investments | 13 | (42 | ) | |||||||||||||
Foreign currency transaction (loss) gain | (854 | ) | 28 | |||||||||||||
(Loss) income from equity investments | (37 | ) | 13 | |||||||||||||
Foreign currency transaction loss | (873 | ) | (854 | ) | ||||||||||||
Lease income | 546 | 532 | 543 | 546 | ||||||||||||
Other non-operating (expense) income, net | (176 | ) | 269 | |||||||||||||
Other non-operating income (expense), net | 223 | (176 | ) | |||||||||||||
Other expense, net | (25,928 | ) | (21,300 | ) | (18,367 | ) | (25,928 | ) | ||||||||
(LOSS) INCOME BEFORE PROVISION FOR INCOME TAXES AND NONCONTROLLING INTEREST | (69,591 | ) | 10,591 | |||||||||||||
LOSS BEFORE PROVISION FOR INCOME TAXES AND NONCONTROLLING INTEREST | (74,079 | ) | (69,591 | ) | ||||||||||||
PROVISION FOR INCOME TAXES | 30 | 5 | ||||||||||||||
Current | 5 | 71 | ||||||||||||||
Deferred | - | - | ||||||||||||||
Provision for income taxes | 5 | 71 | ||||||||||||||
NET (LOSS) INCOME | (69,596 | ) | 10,520 | |||||||||||||
NET LOSS | (74,109 | ) | (69,596 | ) | ||||||||||||
Less: Net (loss) income attributable to noncontrolling interest | (26,032 | ) | 7,417 | |||||||||||||
Less: Net loss attributable to noncontrolling interest | (28,956 | ) | (26,032 | ) | ||||||||||||
NET (LOSS) INCOME ATTRIBUTABLE TO GENERAL STEEL HOLDINGS, INC. | $ | (43,564 | ) | $ | 3,103 | |||||||||||
NET LOSS ATTRIBUTABLE TO GENERAL STEEL HOLDINGS, INC. | $ | (45,153 | ) | $ | (43,564 | ) | ||||||||||
NET (LOSS) INCOME | $ | (69,596 | ) | $ | 10,520 | |||||||||||
NET LOSS | $ | (74,109 | ) | $ | (69,596 | ) | ||||||||||
OTHER COMPREHENSIVE LOSS | ||||||||||||||||
Foreign currency translation adjustments | 4,670 | (2,526 | ) | (853 | ) | 4,670 | ||||||||||
COMPREHENSIVE (LOSS) INCOME | (64,926 | ) | 7,994 | |||||||||||||
COMPREHENSIVE LOSS | (74,962 | ) | (64,926 | ) | ||||||||||||
Less: Comprehensive (loss) income attributable to noncontrolling interest | (24,226 | ) | 6,455 | |||||||||||||
Less: Comprehensive loss attributable to noncontrolling interest | (29,328 | ) | (24,226 | ) | ||||||||||||
COMPREHENSIVE (LOSS) INCOME ATTRIBUTABLE TO GENERAL STEEL HOLDINGS, INC. | $ | (40,700 | ) | $ | 1,539 | |||||||||||
COMPREHENSIVE LOSS ATTRIBUTABLE TO GENERAL STEEL HOLDINGS, INC. | $ | (45,634 | ) | $ | (40,700 | ) | ||||||||||
WEIGHTED AVERAGE NUMBER OF SHARES | ||||||||||||||||
Basic and Diluted | 55,813 | 54,805 | 61,986 | 55,813 | ||||||||||||
(LOSS) INCOME PER SHARE | ||||||||||||||||
LOSS PER SHARE | ||||||||||||||||
Basic and Diluted | $ | (0.78 | ) | $ | 0.06 | $ | (0.73 | ) | $ | (0.78 | ) |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 20142015 AND 20132014
(UNAUDITED)
(In thousands)
2014 | 2013 | |||||||||||||||
2015 | 2014 | |||||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||||||
Net (loss) income | $ | (69,596 | ) | $ | 10,520 | |||||||||||
Net loss | $ | (74,109 | ) | $ | (69,596 | ) | ||||||||||
Adjustments to reconcile net loss to cash provided by (used in) operating activities: | ||||||||||||||||
Depreciation, amortization and depletion | 24,346 | 21,358 | 25,164 | 24,346 | ||||||||||||
Change in fair value of derivative liabilities – warrants | - | (1 | ) | |||||||||||||
Change in fair value of profit sharing liability | (12,924 | ) | 49 | |||||||||||||
Gain on disposal of equipment and intangible assets | (46 | ) | (331 | ) | (16 | ) | (46 | ) | ||||||||
Provision for doubtful accounts | (251 | ) | (42 | ) | ||||||||||||
Provision (recovery) of doubtful accounts | 1,279 | (251 | ) | |||||||||||||
Reservation of mine maintenance fee | 242 | 45 | 113 | 242 | ||||||||||||
Stock issued for services and compensation | 150 | 245 | 69 | 150 | ||||||||||||
Amortization of deferred financing cost on capital lease | 5,086 | 5,095 | 4,966 | 5,086 | ||||||||||||
(Income) loss from equity investments | (13 | ) | 42 | |||||||||||||
Foreign currency transaction (gain) loss | 854 | (28 | ) | |||||||||||||
(Loss) income from equity investments | 37 | (13 | ) | |||||||||||||
Foreign currency transaction loss | 873 | 854 | ||||||||||||||
Deferred lease income | (546 | ) | (532 | ) | (543 | ) | (546 | ) | ||||||||
Change in fair value of profit sharing liability | 49 | (46,779 | ) | |||||||||||||
Changes in operating assets and liabilities | ||||||||||||||||
Notes receivable | (70,354 | ) | 27,752 | 32,504 | (70,354 | ) | ||||||||||
Accounts receivable | (102 | ) | (9,426 | ) | (1,373 | ) | (102 | ) | ||||||||
Accounts receivable - related parties | (1,569 | ) | 6,808 | (50,361 | ) | (1,569 | ) | |||||||||
Other receivables | 355 | (2,826 | ) | (40,476 | ) | 355 | ||||||||||
Other receivables - related parties | (4,219 | ) | (20,212 | ) | 16,577 | (4,219 | ) | |||||||||
Inventories | (730 | ) | (37,526 | ) | 7,327 | (730 | ) | |||||||||
Advances on inventory purchases | 176 | 22,786 | 24,380 | 176 | ||||||||||||
Advances on inventory purchases - related parties | (38,419 | ) | (46,883 | ) | (55,767 | ) | (38,419 | ) | ||||||||
Prepaid expense and other | (516 | ) | (1,039 | ) | (468 | ) | (516 | ) | ||||||||
Long-term deferred expense | 56 | 260 | 7 | 56 | ||||||||||||
Prepaid taxes | 4,963 | 1,049 | (54 | ) | 4,963 | |||||||||||
Accounts payable | 59,351 | 57,648 | (7,706 | ) | 59,351 | |||||||||||
Accounts payable - related parties | 16,986 | 39,661 | 18,856 | 16,986 | ||||||||||||
Other payables and accrued liabilities | 15,300 | 1,887 | (3,625 | ) | 15,300 | |||||||||||
Other payables - related parties | (12,676 | ) | 8,789 | 8,960 | (12,676 | ) | ||||||||||
Customer deposits | 20,043 | (21,956 | ) | 45,848 | 20,043 | |||||||||||
Customer deposits - related parties | 113,895 | (9,457 | ) | 15,341 | 113,895 | |||||||||||
Taxes payable | 2,708 | (4,427 | ) | 4,171 | 2,708 | |||||||||||
Other noncurrent liabilities | - | 1,370 | ||||||||||||||
Net cash provided by operating activities | 65,523 | 3,850 | ||||||||||||||
Net cash (used in) provided by operating activities | (40,950 | ) | 65,523 | |||||||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||||
Restricted cash | (32,943 | ) | 54,991 | 105,911 | (32,943 | ) | ||||||||||
Loans to unrelated parties | (6,500 | ) | - | |||||||||||||
Repayments from related parties | 33,791 | - | ||||||||||||||
Cash proceeds from short term investment | 164 | - | 81 | 164 | ||||||||||||
Cash proceeds from sales of equipments and intangible assets | 24 | 4 | ||||||||||||||
Payments for short term investment | (4,875 | ) | - | |||||||||||||
Cash proceeds from sales of equipment and intangible assets | - | 24 | ||||||||||||||
Equipment purchase and intangible assets | (56,861 | ) | (24,093 | ) | (31,589 | ) | (56,861 | ) | ||||||||
Net cash (used in) provided by investing activities | (89,616 | ) | 30,902 | |||||||||||||
Net cash provided by (used in) investing activities | 96,819 | (89,616 | ) | |||||||||||||
CASH FLOWS FINANCING ACTIVITIES: | ||||||||||||||||
Restricted notes receivable | 131,971 | 99,224 | 30,934 | 131,971 | ||||||||||||
Borrowings on short term notes payable | 439,342 | 289,548 | 96,525 | 439,342 | ||||||||||||
Payments on short term notes payable | (485,455 | ) | (493,064 | ) | (309,823 | ) | (485,455 | ) | ||||||||
Borrowings on short term loans - bank | 95,120 | 32,563 | 61,023 | 95,120 | ||||||||||||
Payments on short term loans - bank | (165,711 | ) | (63,315 | ) | (87,471 | ) | (165,711 | ) | ||||||||
Borrowings on short term loan - others | 9,853 | 21,296 | 74,517 | 9,853 | ||||||||||||
Payments on short term loans - others | (14,426 | ) | (21,432 | ) | (54,275 | ) | (14,426 | ) | ||||||||
Borrowings on short term loan - related parties | 24,528 | 142,999 | 75,641 | 24,528 | ||||||||||||
Payments on short term loans - related parties | (5,849 | ) | (30,430 | ) | (569 | ) | (5,849 | ) | ||||||||
Deposits due to sales representatives | (425 | ) | 6,411 | 1,462 | (425 | ) | ||||||||||
Deposit due to sales representatives - related parties | - | 526 | ||||||||||||||
Net cash provided by (used in) financing activities | 28,948 | (15,674 | ) | |||||||||||||
Deposits due to sales representatives - related parties | 41 | - | ||||||||||||||
Borrowings on long-term loans - related party | 56,063 | - | ||||||||||||||
Payments on long-term loans - related party | (813 | ) | - | |||||||||||||
Principal payment on capital lease obligation | (1,074 | ) | - | |||||||||||||
Net cash (used in) provided by financing activities | (57,819 | ) | 28,948 | |||||||||||||
EFFECTS OF EXCHANGE RATE CHANGE IN CASH | (444 | ) | 254 | 45 | (444 | ) | ||||||||||
INCREASE IN CASH | 4,411 | 19,332 | ||||||||||||||
(DECREASE) INCREASE IN CASH | (1,905 | ) | 4,411 | |||||||||||||
CASH, beginning of period | 31,967 | 46,467 | 11,641 | 31,967 | ||||||||||||
CASH, end of period | $ | 36,378 | $ | 65,799 | $ | 9,736 | $ | 36,378 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 – Organization and Operations
General Steel Holdings, Inc. (the “Company”) was incorporated on August 5, 2002 in the state of Nevada. The Company through its 100% owned subsidiary, General Steel Investment, 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 newlythe 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, these newthe facilities are expected to 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 has increased by three million tons, or 75%. The Agreement is also expected to improveimproved 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 have agreed to establishestablished the Shaanxi Longmen Iron and Steel Unified Management Supervisory Committee ("Supervisory Committee") to ensure that the facilities and related resources are being operated and managed according to the stipulations set forth in the Agreement. However, theThe Board of Directors of Longmen Joint Venture, of which the Company holds 4 out of 7 seats, requires a simple majority vote. Therefore, the Board of Directors of Longmen Joint Venturevote and remains the controlling decision-making body of Longmen Joint Venture and the Asset Pool. See Note 3(c)2(c) “Consolidation of VIE.”
The Agreement constitutes an arrangement that involves a lease which metmeets certain of the criteria of a capital lease and therefore the lease isassets constructed by Shaanxi Steel are accounted for as such 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 32 “Summary of significant accounting policies”, 16Note 15 “Capital lease obligations” and 17Note 16 “Profit sharing liability”.
In view of the near-term challenges for the steel sector (see Note 2 – Restatement2(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. |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
These condensed financial statements contain restatements relatedThe 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 the displaydevelop and disclosurecommercialize RFID technologies and data solutions. The formation of this joint venture represents a unique opportunity to accelerate the Company’s profit sharing liability (whichexpansion into the vibrant logistics and Internet-of-Things sectors. General Shengyuan IoT is accounted for at fair value as a derivative instrument liability), whichstill in the Company concluded to be incompletedevelopment stage and inconsistent after communications withno revenues and significant operating expenses during the Staff of the United States Securities and Exchange Commission following the Staff’s review of certain of the Company’s prior quarterly and annual reports and based on subsequent communications between the Staff and the Company. The restatements do not impact the Company’s previously reported condensed consolidated balance sheets, condensed consolidated statements of operations and comprehensive income (loss) or the Company’s condensed consolidated statements of cash flows for the periods presented. The Company has revised and enhanced the disclosure in Note 3(h) – Financial instruments to provide a more complete display and disclosure of the profit sharing liability, which is accounted for at fair value as a derivative instrument liability.three months ended March 31, 2015.
Note 32 – Summary of significant accounting policies (restated– sections 3(h) only)
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 to givefor a fair statementpresentation of the financial statements have been included. Interim results are not necessarily indicative of results to be expected for athe 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 filed on Form 10-K/A 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:
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 | % | |||
PRC | % | |||||
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). Tianwu is in, receivable within one year of the process of registering the ownership change with the local State Administration for Industry and Commerce (“SAIC”) office.sale. As a result of this transaction, the Company met the criteria under ASC 810-10-40-4 to deconsolidate TianwuBaotou Steel at disposal date and recognized a gain 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 3(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 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.
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.
Based on projected profits 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.
The Company would be considered the primary beneficiary of the VIE if it has both of the following characteristics:
a. | The power to direct the activities of the VIE that most significantly impact the VIE’s economic performance; and | |
b. | The obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 ’sVenture’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 ’sVenture’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 3 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. 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. 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:
March 31, 2014 | December 31, 2013 | |||||||
(in thousands) | (in thousands) | |||||||
Current assets | $ | 1,174,775 | $ | 1,282,054 | ||||
Plant and equipment, net | 1,260,199 | 1,262,144 | ||||||
Other noncurrent assets | 77,116 | 29,014 | ||||||
Total assets | 2,512,090 | 2,573,212 | ||||||
Total liabilities | (3,039,135 | ) | (3,040,879 | ) | ||||
Net liabilities | $ | (527,045 | ) | $ | (467,667 | ) |
VIE and its subsidiaries’ liabilities consist of the following:
March 31, 2014 | December 31, 2013 | |||||||
(in thousands) | (in thousands) | |||||||
Current liabilities: | ||||||||
Short term notes payable | $ | 937,389 | $ | 988,364 | ||||
Accounts payable | 479,154 | 393,816 | ||||||
Accounts payable - related parties | 281,899 | 235,116 | ||||||
Short term loans - bank | 189,219 | 267,688 | ||||||
Short term loans - others | 42,525 | 55,844 | ||||||
Short term loans - related parties | 103,635 | 125,236 | ||||||
Current maturities of long-term loans – related party | 56,130 | 56,614 | ||||||
Other payables and accrued liabilities | 51,991 | 37, 028 | ||||||
Other payables - related parties | 76,370 | 88,914 | ||||||
Customer deposits | 106,959 | 87,661 | ||||||
Customer deposits - related parties | 27,020 | 18,359 | ||||||
Deposit due to sales representatives | 23,713 | 24,343 | ||||||
Deposit due to sales representatives – related parties | 1,980 | 1,997 | ||||||
Taxes payable | 6,013 | 3,357 | ||||||
Deferred lease income | 2,168 | 2,187 | ||||||
Capital lease obligations, current | 4,774 | 4,321 | ||||||
Intercompany payable to be eliminated | 21,237 | 21,420 | ||||||
Total current liabilities | 2,412,176 | 2,412,265 | ||||||
Non-current liabilities: | ||||||||
Long term loans - related parties | 15,906 | 16,043 | ||||||
Deferred lease income - noncurrent | 74,072 | 75,257 | ||||||
Capital lease obligations, noncurrent | 376,025 | 375,019 | ||||||
Profit sharing liability | 160,956 | 162,295 | ||||||
Total non-current liabilities | 626,959 | 628,614 | ||||||
Total liabilities of consolidated VIE | $ | 3,039,135 | $ | 3,040,879 |
March 31, 2015 | December 31, 2014 | |||||||
(in thousands) | (in thousands) | |||||||
Current assets | $ | 726,110 | $ | 837,135 | ||||
Plant and equipment, net | 1,557,027 | 1,537,687 | ||||||
Other noncurrent assets | 27,024 | 33,396 | ||||||
Total assets | 2,310,161 | 2,408,218 | ||||||
Total liabilities | (2,920,281 | ) | (2,946,126 | ) | ||||
Net liabilities | $ | (610,120 | ) | $ | (537,908 | ) |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three months ended March 31, 2014 | Three months ended March 31, 2013 | |||||||
(in thousands) | (in thousands) | |||||||
Sales | $ | 594,014 | $ | 646,748 | ||||
Gross (loss) profit | $ | (22,219 | ) | $ | 4,367 | |||
Income (loss) from operations | $ | (39,294 | ) | $ | 34,937 | |||
Net income (loss) attributable to controlling interest | $ | (38,034 | ) | $ | 8,325 |
VIE and its subsidiaries’ liabilities consist of the following:
March 31, 2015 | December 31, 2014 | |||||||
(in thousands) | (in thousands) | |||||||
Current liabilities: | ||||||||
Short term notes payable | $ | 432,052 | $ | 638,829 | ||||
Accounts payable | 596,221 | 605,025 | ||||||
Accounts payable - related parties | 222,595 | 205,914 | ||||||
Short term loans - bank | 191,536 | 216,940 | ||||||
Short term loans - others | 45,795 | 54,524 | ||||||
Short term loans - related parties | 209,553 | 45,710 | ||||||
Other payables and accrued liabilities | 44,286 | 47,121 | ||||||
Other payables - related parties | 69,890 | 78,615 | ||||||
Customer deposits | 129,896 | 87,372 | ||||||
Customer deposits - related parties | 43,654 | 34,895 | ||||||
Deposit due to sales representatives | 19,361 | 17,871 | ||||||
Deposit due to sales representatives – related parties | 2,553 | 2,509 | ||||||
Taxes payable | 8,192 | 4,026 | ||||||
Deferred lease income | 2,179 | 2,176 | ||||||
Capital lease obligations, current | 8,678 | 8,508 | ||||||
Intercompany payable to be eliminated | 13,778 | 20,155 | ||||||
Total current liabilities | 2,040,219 | 2,070,190 | ||||||
Non-current liabilities: | ||||||||
Long term loans - related parties | 352,850 | 339,549 | ||||||
Deferred lease income - noncurrent | 72,258 | 72,713 | ||||||
Capital lease obligations, noncurrent | 397,416 | 393,252 | ||||||
Profit sharing liability | 57,538 | 70,422 | ||||||
Total non-current liabilities | 880,062 | 875,936 | ||||||
Total liabilities of consolidated VIE | $ | 2,920,281 | $ | 2,946,126 |
Three months ended March 31, 2015 | Three months ended March 31, 2014 | |||||||
(in thousands) | (in thousands) | |||||||
Sales | $ | 328,158 | $ | 594,014 | ||||
Gross loss | $ | (32,147 | ) | $ | (22,219 | ) | ||
Loss from operations | $ | (53,498 | ) | $ | (39,294 | ) | ||
Net loss attributable to controlling interest | $ | (42,405 | ) | $ | (38,034 | ) |
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 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 March 31, 20142015 and December 31, 20132014 and for the three months ended March 31, 2015 and 2014, and 2013, respectively.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 March 31, 20142015 and December 31, 20132014 and for the three months ended March 31, 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.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(d) | Liquidity and going concern |
The Company’s accounts have been prepared in accordance with U.S. GAAP onassuming that the company will continue as a going concern basis. The going concern basis assumes that assets are realized and liabilities are extinguished in the ordinary course of business at amounts disclosed in the financial statements. The Company’s ability to continue as a going concern depends upon aligning its sources of funding (debt and equity) with the expenditure requirements of the Company and repayment of the short-term debt facilities as and when they fall due.
The steel business is capital intensive and as a normal industry practice in PRC, the Company is highly leveraged. Debt financing in the form of short term bank loans, loans from related parties, financing sales, bank acceptance notes, and capital leases have been utilized to finance the working capital requirements and the capital expenditures of the Company. As a result, the Company’s debt to equity ratio as of March 31, 20142015 and December 31, 20132014 were (5.8)(4.9) and (6.5)(5.6), respectively. As of March 31, 2014,2015, the Company’s current liabilities exceed current assets (excluding non-cash item) by $1.3 billion.$1.4 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. |
Management has implemented the following plans that are intended to mitigate the conditions or events that raise substantial doubt about the Company’s ability to continue as a going concern.
Longmen Joint Venture, as the most important entity of the Company, accounted for majority of total sales of the Company. As such, the majority of the Company’s working capital needs come from Longmen Joint Venture. The Company’s ability to continue as a going concern depends heavily on Longmen Joint Venture’s operations. Longmen Joint Venture has obtained different types of financial supports, which are listed below by category:
10 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Line of credit
The Company receivedhas lines of credit from the listed major banks totaling $229.0$142.0 million with expiration dates ranging from March 23, 2015January 21, 2016 to July 17, 2015.October 14, 2016.
Banks | Amount of Line of Credit (in millions) | Repayment Date | ||||
Bank of Chongqing | 48.7 | March 23, 2015* | ||||
Industrial Bank Co., Ltd. | 48.7 | May 5, 2015 | ||||
China Merchant Bank | 48.7 | May 19, 2015 | ||||
China CITIC Bank | 32.5 | June 16, 2015 | ||||
Bank of Communication | 17.9 | July 17, 2015 | ||||
Bank of Jinzhou | 32.5 | March 23, 2015* | ||||
Total | $ | 229.0 |
Banks | Amount of Line of Credit (in millions) | Repayment Date | ||||
China Everbright Bank | 19.6 | January 21, 2016* | ||||
Huaxia Bank | 24.5 | January 30, 2016* | ||||
Bank of Beijing | 81.6 | October 14, 2016 | ||||
Bank of Xi’an | 16.3 | February 4, 2016* | ||||
Total | $ | 142.0 |
*Management expects the lines of credit will be extended after the repayment dates.
As of the date of this report, the Company utilized $181.0$39.5 million of these lines of credit.
Vendor financing
Longmen Joint Venture signed additional vendor financing agreements, which will provide liquidity to the Company in a total amount of $811.5$897.1 million with the following companies:
Company | Financing period covered | Financing Amount (in millions) | Financing Period | Financing Amount (in millions) | ||||||||
Company A – related party | July 1, 2013 – June 30, 2015 | $ | 162.3 | July 30, 2014 – July 30, 2019 | $ | 244.7 | ||||||
Company B – third party | January 22, 2014 – January 22, 2017 | 162.3 | January 22, 2014 – January 22, 2017 | 163.1 | ||||||||
Company C – third party | October 1, 2013 – March 31, 2015 | 486.9 | October 1, 2013 – March 31, 2016 | 489.3 | ||||||||
Total | $ | 811.5 | $ | 897.1 |
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 January 6, 2013,July 30, 2014, Company A signed a two-yearfive-year agreement with Longmen Joint Venture to finance its coke purchasepurchases up to $81.9$244.7 million. On July 1, 2013, Company A agreed to increase the financing amount to $162.3 million and extend the financing period to June 30, 2015. Company B signed a two-yearthree-year agreement with Longmen Joint Venture on November 7, 2013January 22, 2014 to finance its coke purchasepurchases up to $162.3 million and agreed to extend the financing period for another three years effective on January 22, 2014.$163.1 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, ourthe Company’s payables to Company A and Company B were approximately $67.2$77.6 million and $94.9$63.4 million, respectively.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 $486.9$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. 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, ourthe Company’s payable to Company C iswas approximately $5.8 million.$16.2 million
Other financing
On February 20, 2014, March 5, 2014, April 22, 2014, and April 23, 2014, and April 30, 2015, Longmen Joint Venture signed two-to-three-year payment extension agreements with each companyCompany D, E, F, G and H listed below. In total, Longmen Joint Venture can obtain $362.0$412.8 million in financial support from two-year and three-year balancing payment extensions granted by the following five companies:
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
Company | Financing period covered | Financing Amount (in millions) | ||||
Company D – related party | April 22, 2014 – April 22, 2017 | $ | 81.2 | |||
Company E – related party | April 23, 2014 – April 23, 2017 | 86.0 | ||||
Company F – related party | April 22, 2014 – April 22, 2017 | 81.2 | ||||
Company G – related party | March 5, 2014 – March 5, 2016 | 56.8 | ||||
Company H – related party | March 5, 2014 – March 5, 2016 | 56.8 | ||||
Total | $ | 362.0 |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
According to the contract terms, Company D, Company E, Company F, Company G and Company H have agreed to grant payment extensions in the amounts of $81.2 million, $86.0 million, $81.2 million, $56.8 million and $56.8 million respectively.
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 | 86.4 | ||||
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 | $ | 412.8 |
As of the date of this report, our payables to Company D, Company E, Company F, Company G, and Company H are approximately $20.3$8.3 million, $14.2$30.1 million, $16.1$42.7 million, $7.5 million$0, and $9.6$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 March 31, 2014,2015, Longmen Joint Venture has collected a total amount of $25.7$21.9 million. Historically, this amount is quite stable and we do not expect a big fluctuation in this amount for the next twelve months from March 31, 20142015 onwards.
With the financial support from the banks and the companies above, management is of the opinion that the Company has sufficient funds to meet its future operations, working capital requirements and debt obligations until the end of March 31, 2015.2016. However, this opinion is based on the demand of the Company's products, economic conditions, the overcapacity issue in the steel industry and the Company's operating results not continuing to deteriorate and on our vendors and related parties being able to provide continued liquidity, as summarized below. The detailed breakdown of Longmen Joint Venture’s estimated cash flows items are listed below.
Cash inflow (outflow) (in millions) | ||||
For the twelve months ended March 31, 2015 | ||||
Current liabilities over current assets (excluding non-cash items) as of March 31, 2014 (unaudited) | $ | (1,295.4 | ) | |
Projected cash financing and outflows: | ||||
Cash provided by line of credit from banks | 229.0 | |||
Cash provided by vendor financing | 811.5 | |||
Cash provided by other financing | 362.0 | |||
Cash provided by sales representatives | 25.7 | |||
Cash projected to be used in operations in the twelve months ended March 31, 2015 | (29.5 | ) | ||
Cash projected to be used for financing cost in the twelve months ended March 31, 2015 | (74.0 | ) | ||
Net projected change in cash for the twelve months ended March 31, 2015 | $ | 29.3 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As a result, the consolidated financial statements for the three months ended March 31, 2014 have been prepared on a going concern basis.
Cash inflow (outflow) (in millions) | ||||
For the twelve months ended March 31, 2016 | ||||
Current liabilities over current assets (excluding deferred lease income) as of March 31, 2015 (unaudited) | $ | (1,361.5 | ) | |
Projected cash financing and outflows: | ||||
Cash provided by line of credit from banks | 142.0 | |||
Cash provided by vendor financing | 897.1 | |||
Cash provided by other financing | 412.8 | |||
Cash provided by sales representatives | 21.9 | |||
Cash projected to be used in operations in the twelve months ended March 31, 2016 | (39.3 | ) | ||
Cash projected to be used for financing cost in the twelve months ended March 31, 2016 | (46.2 | ) | ||
Net projected change in cash for the twelve months ended March 31, 2016 | $ | 26.8 |
(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 impairment for property, plant and equipment, and potential losses on uncollectible receivables, allowance for inventory valuation, the interest rate used in the financing sales, the fair value of the assets recorded under capital lease and the present value of the net minimum lease payments of the capital lease. Actual results could differ from these estimates.
One of the Company’s most significant estimates 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 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.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Through the quarterly ended March 31, 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 2017 and expected to make a turning point and become profitable in year 2018 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 2018 and beyond and the Company’s assets pool of its long-lived assets may become impaired.
The Company has significant exposure to the price fluctuation of raw materials and energy prices as part of its normal operations. As of March 31, 20142015 and December 31, 2013,2014, the Company did not have any open commodity contracts to mitigate such risks.
Cash includes demand deposits in accounts maintained with banks within the PRC, Hong Kong and the United States. Total cash (including restricted cash balances) in these banks on March 31, 20142015 and December 31, 20132014 amounted to $465.0$259.6 million and $431.3$367.2 million, including $0.4$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 March 31, 2014, $0.22015, $0.01 million cash in the bank was covered by insurance. The Company has not experienced any losses in other bank accounts and believes it is not exposed to any risks on its cash in bank accounts.
The Company’s five major customers are all distributors and collectively represented approximately 20.4% and 20.4%Two of the Company’s customers individually accounted for 12.1% and 10.5% of total sales for the three months ended March 31, 2014 and 2013,2015, respectively. One customer individually accounted for 81.7% of total accounts receivable, including related parties as of March 31, 2015. None of the five majorCompany’s customers accounted for more than 10% of total sales for the three months ended March 31, 2014 and 2013, respectively. These five major2014. Two customers individually accounted for 0%32.1% and 20.5% of total accounts receivable, including related parties as of MarchDecember 31, 2014, and December 31, 2013. respectively.
None of the five major customers accounted for more than 10% of total accounts receivable as of March 31, 2014 and December 31, 2013.
For the three months ended March 31, 2014 and 2013, the Company purchased approximately 43.9% and 32.6% of its raw materials from five major suppliers, respectively. One of the five majorCompany’s suppliers individually accounted for more than 10% of the total purchases for the three months ended March 31, 2014,2015 and noneone of the five majorCompany’s suppliers individually accounted for more than 10%15.4% of the total purchases for the three months ended March 31, 2013. These five vendors accounted for 39.6% and 29.1% of total accounts payable, including related parties, as of March 31, 2014 and December 31, 2013, respectively. Two2014. None of the five majorCompany’s suppliers individually accounted for more than 10% of total accounts payable as March 31, 2014,2015 and none of the five major suppliers individually accounted for more than 10% of total accounts payable as 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 statement of operations accounts are translated at the average translation rates and the equity accounts are translated at historical rates. Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statement of equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Translation adjustments included in accumulated other comprehensive income amounted to $3.6$0.2 million and $0.7$0.6 million as of March 31, 20142015 and December 31, 2013,2014, respectively. The balance sheet amounts, with the exception of equity at March 31, 20142015 and December 31, 20132014 were translated at 6.166.13 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 statement of operations accounts for the three months ended March 31, 2015 and 2014 and 2013 were 6.126.15 RMB and 6.286.12 RMB, respectively. Cash flows are also translated at average translation rates for the periods, therefore, amounts reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheet.
The PRC government imposes significant exchange restrictions on fund transfers out of the PRC that are not related to business operations. These restrictions have not had a material impact on the Company because it has not engaged in any significant transactions that are subject to the restrictions.
(h) | Financial instruments |
The accounting standardsstandard 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 investment,investments, accounts receivable, other receivables, accounts payable and accrued liabilities, to approximate their fair values because of the short period of time between the origination of such instruments and their expected realization. For short term loans and notes payable, the Company concluded the carrying values are a reasonable estimate of fair values because of the short period of time between the origination and repayment and as their stated interest rates approximate current rates available. The carrying value of the long term loans-related party approximates its fair value as of the reporting date as their stated interest rates approximate current market rates available.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 changeAs described 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.
PaymentsNote 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.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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%6.7%.
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 the following assumptions:6.7%.
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 toThe above assumptions were reviewed by the Company at March 31, 2015 and December 31, 2012, the assumptions underlying the estimated fair value did not change significantly. Beginning in the first quarter of 2013,2014 and the assumptions related to unit selling pricesthe projected growth in the steel market and costs were revised, resulting in a further reduction of the estimated profit sharing liability. These assumptions
The major drivers of the change in our estimate were further revised during 2013. The above assumptions were again reviewed by the Company at Marchcontinuing 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 but no major change was deemed necessaryfinancial statement issuance we had lowered our projected growth in the steel market for approximately ten years as compared to the assumptions usedour previous estimates at December 31, 2013. ForThe variables and the three monthsimpact 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. |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- | 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 MarchDecember 31, 2014, the Company recognized a lossgain on the change in the fair value of the profit sharing liability of $0.05$91.0 million due to a $2.81$110.6 million reduction in the presentfair value discount offset byof profit sharing liability resulting from the change in estimates of future operating profits and a $2.76$0.1 million gainreduction resulting from the Asset Pool’s operating results for the three monthsyear ended MarchDecember 31, 2014 being slightly lowerless favorable than previously estimated as of December 31, 2013.2013, offset by a $8.1 million loss resulting from the 0.4% reduction of the present value discount rate and a $11.5 million loss from the present value discount.
For the three months ended March 31, 2015, the Company recognized a $12.9 million reduction in the fair value of profit sharing liability resulting from the change in estimates of future operating profits based on the April 2015 actual operating results and consideration for 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 estimated fair value of the profit sharing liability at March 31, 2015 is $57.5 million.
The variables and the impact on our inputs to the first quarter of 2015 valuation of profit sharing fair value, as compared to the 2014 is $161.0 million. 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. |
Changes in any of the assumptions used to estimate the fair value of the profit sharing liability will change the liability accordingly. If we were to reduce the projected bank borrowings rate used to discount the liability to a present value by 1.0% and other factors remained unchanged, our profit sharing liability as of March 31, 20142015 would have been $184.2$66.2 million and we would increase the loss from the change in the fair value of the profit sharing liability by $23.2$8.7 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 March 31, 20142015 would have been $158.4$53.1 million and we would reduceincrease the lossgain from the change in the fair value of the profit sharing liability by $2.6$4.4 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 March 31, 2014:2015:
(in thousands) | Carrying Value as of March 31, 2014 | Fair Value Measurements at March 31, 2014 Using Fair Value Hierarchy |
| |||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||
Profit sharing liability | $ | 160,956 | $ | - | $ | - | $ | 160,956 | ||||||||
Total | $ | 160,956 | $ | - | $ | - | $ | 160,956 |
(in thousands) | Carrying Value as of March 31, 2015 | Fair Value Measurements at March 31, 2015 Using Fair Value Hierarchy | ||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||
Profit sharing liability | $ | 57,538 | $ | - | $ | - | $ | 57,538 | ||||||||
Total | $ | 57,538 | $ | - | $ | - | $ | 57,538 |
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 | ||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||
Profit sharing liability | $ | 162,295 | $ | - | $ | - | $ | 162,295 | ||||||||
Total | $ | 162,295 | $ | - | $ | - | $ | 162,295 |
(in thousands) | Carrying Value as of December 31, 2014 | Fair Value Measurements at December 31, 2014 Using Fair Value Hierarchy | ||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||
Profit sharing liability | $ | 70,422 | $ | - | $ | - | $ | 70,422 | ||||||||
Total | $ | 70,422 | $ | - | $ | - | $ | 70,422 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 three months ended March 31, 20142015 and for the year ended December 31, 2013:2014:
March 31, 2014 | December 31, 2013 | |||||||
(in thousands) | (in thousands) | |||||||
Beginning balance | $ | 162,295 | $ | 328,828 | ||||
Change in fair value of profit sharing liability: | ||||||||
Change in estimate of future operating profits | - | (174,821 | ) | |||||
Change in discount rate | - | - | ||||||
Change in the number of future periods over which the present value of future cash flows is estimated | 2,810 | 16,872 | ||||||
Difference between the previously estimated operating results for the current period and actual results | (2,761 | ) | (16,620 | ) | ||||
Change in derivative liabilities - warrants | - | 1 | ||||||
Exchange rate effect | (1,388 | ) | 8,035 | |||||
Ending balance | $ | 160,956 | $ | 162,295 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2015 | December 31, 2014 | |||||||
(in thousands) | (in thousands) | |||||||
Beginning balance | $ | 70,422 | $ | 162,295 | ||||
Change in fair value of profit sharing liability: | ||||||||
Change in preset value of estimate of future operating profits | (16,569 | ) | (110,589 | ) | ||||
Change in discount rate | 2,454 | 8,106 | ||||||
Interest expense - present value discount amortization | 1,220 | 11,544 | ||||||
Difference between the previously estimated operating results for the current period and actual results | - | (79 | ) | |||||
Exchange rate effect | 11 | (855 | ) | |||||
Ending balance | $ | 57,538 | $ | 70,422 |
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 request for payment to the customer’s bank earlier than the scheduled payment date, but will incur an interest charge and a processing fee.
Restricted notes receivable represents notes receivable pledged as collateral for short-term loans and short-term notes payable issued by banks.
Interest expenses for early submission request of payment amounted to $14.1$8.0 million and $10.8$14.1 million for the three months ended March 31, 20142015 and 2013,2014, 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 Improvements | 10-40 Years | ||
Machinery | 10-30 Years | ||
Machinery and equipment under capital lease | 10-20 Years | ||
Other equipment | 5 Years | ||
Transportation Equipment | 5 Years |
The Company assesses all significant leases for purposes of classification as either operating or capital. At lease inception, if the lease meets any of the four following criteria, the Company will classify it as a capital lease; otherwise it will be treated as an operating lease: a) transfer of ownership to lessee at the end of the lease term, b) bargain purchase option, c) lease term is equal to 75% or more of the estimated economic life of the leased property, d) the present value of the minimum lease payments is 90% or more of the fair value of the leased asset.
Construction in progress represents the costs incurred in connection with the construction of buildings or new additions to the Company’s plant facilities. No depreciation is provided for construction in progress until such time as the assets are completed and are placed into service, maintenance, repairs and minor renewals are charged directly to expense as incurred. Major additions and betterment to buildings and equipment are capitalized. Interest incurred during construction is capitalized into construction in progress. All other interest is expensed as incurred.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Long lived assets, including buildings and improvements, equipment and intangible assets are reviewed if events and changes in circumstances indicate that its carrying amount may not be recoverable, to determine whether their carrying value has become impaired. The Company considers assets to be impaired if the carrying value exceeds the future projected cash flows from related operations. The Company also re-evaluates the periods of depreciation and amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives.
Due to the recurring losses in the Longmen Joint Venture’s operations, the Company has considered it is a triggering event that Longmen Joint Venture’s carrying amount may not be recoverable, to determine whether its carrying value has become impaired. The Company uses the undiscounted cash flow estimation approach for the purpose of performing a recoverability test which includes future cash inflows less associated cash outflows that are directly associated with and that are expected to arise as a direct result of the use and eventual disposition of the assets. For purposes of assessment, the long lived assets were grouped at the lowest level for which there is identifiable cash flows. The major groupings analyzed include Longmen Joint Venture, Maoming Hengda and General Steel (China). Further, our estimate of future cash flows includes estimated future cash flows necessary to maintain our existing production potential over the entire period and within the various groups. The projections are based on a best estimate approach as opposed to a probability weighted approach based on the likelihood of possible outcomes. When the Company identifies an impairment, the Company reduces the carrying amount of the asset to its estimated fair value based on a discounted cash flows method. As of March 31, 2015, the Company expects its long-lived assets to be fully recoverable (see Note 2(f.)).
(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 March 31, 2014,2015, the Company expects these assets to be fully recoverable.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Land use rights
All land in the PRC is owned by the government. However, the government grants “land use rights.” General Steel (China) acquired land use rights in 2001 for a total of $3.9 million (RMB 23.7 million). These land use rights are for 50 years and expire in 2050 and 2053. The Company amortizes the land use rights over the twenty-year business term because its business license had a twenty-year term.
Long Steel Group contributed land use rights for a total amount of $24.1$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 on | Original Cost | Expires on | ||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
General Steel (China) | $ | 3,851 | 2050 & 2053 | $ | 3,870 | 2050 & 2053 | ||||||||||
Longmen Joint Venture | $ | 24,075 | 2048 & 2052 | $ | 24,187 | 2048 & 2052 | ||||||||||
Maoming Hengda | $ | 2,694 | 2054 | $ | 2,706 | 2054 |
Mining right
Mining rights are capitalized at cost when acquired, including amounts associated with any value beyond proven and probable reserves, and amortized to operations as depletion expense using the units-of-production method over the estimated proven and probable recoverable tons. Longmen Joint Venture has iron ore mining right amounting to $2.4 million (RMB 15.0 million), which is amortized over the estimated recoverable reserve of 4.2 million tons.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(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 March 31, 20142015 and December 31, 2013.2014.
Unconsolidated entities | Year acquired | March 31, 2014 Net investment (In thousands) | Owned % | December 31, 2013 Net investment (In thousands) | Owned % | |||||||||||||||
Xi’an Delong Powder Engineering Materials Co., Ltd. | 2007 | $ | 1,042 | 24.1 | $ | 1,215 | 24.1 |
Unconsolidated entities | Year acquired | March 31, 2015 Net investment (In thousands) | Owned % | December 31, 2014 Net investment (In thousands) | Owned % | |||||||||||||||
Xi’an Delong Powder Engineering Materials Co., Ltd. | 2007 | $ | 1,014 | 24.1 | $ | 1,153 | 24.1 |
The table below summarizes General Steel (China)’s investment holding (see Note 3(a)2(a) - Basis of presentation) as of March 31, 20142015 and December 31, 2013.2014.
Unconsolidated entities | Year acquired | March 31, 2014 Net investment (In thousands) | Owned % | December 31, 2013 Net investment (In thousands) | Owned % | |||||||||||||||
Tianwu General Steel Material Trading Co., Ltd. | 2010 | $ | 15,593 | 32.0 | $ | 15,728 | 32.0 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Unconsolidated entities | Year acquired | March 31, 2015 Net investment (In thousands) | Owned % | December 31, 2014 Net investment (In thousands) | Owned % | |||||||||||||||
Tianwu General Steel Material Trading Co., Ltd. | 2010 | $ | 15,691 | 32.0 | $ | 15,670 | 32.0 |
Total investment income (loss) in unconsolidated subsidiaries amounted to $0.01$(0.04) million and $(0.04)$0.01 million for the three months ended March 31, 20142015 and 2013,2014, respectively, which was included in “Income from equity investments” in the condensed consolidated statements of operations and comprehensive (loss) income.
loss.
(m) | Revenue recognition |
Sales is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, the Company has no other significant obligations and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are recorded as customer deposits. Sales represent the invoiced value of goods, net of value-added tax (VAT). All of the Company’s products sold in the PRC are subject to a Chinese value-added tax at a rate of 13% or 17% of the gross sales price. This VAT may be offset by VAT paid by the Company on raw materials and other materials included in the cost of producing the finished product.
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 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 $107.7 million and $38.2 million for the three months ended March 31, 2015 and 2014, respectively. The net amount in gross loss amounted to $64,994 and $288,513 during the respective periods.
(n) |
Certain prior year amounts have been reclassified to conformIn February 2015, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2015-02, Amendments to the Consolidation Analysis. Under both current year presentation. These reclassifications have no effectGAAP 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. Underthe 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 accompanying condensedbasis 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 authoritative guidance on accounting for Interest-Imputation of Interest (Subtopic 835-30); Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). This update requires that debt issuance cost related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts, without changing existing recognition and measurement guidance for debt issuance costs. The new guidance is required to be applied on a retrospective basis and to be accounted for as a change in an accounting principle. The amendments in this update are effective for financial statements issued for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years and early adoption of the amendments in this update is permitted. The Company will apply early adoption of this standard in the second quarter of 2015. The implementation of this standard will result 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 statements of operations and cash flows.balance sheets.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 43 – Loans receivable – related parties
Loans receivable, –including to related parties representsrepresent amounts the Company expects to collect from unrelated and related parties upon maturity.
The Company had the following loan receivable due within one year as of:
March 31, 2015 | December 31, 2014 | |||||||
(in thousands) | (in thousands) | |||||||
Loan to unrelated party; due on demand; interest rate is 8.0%. | $ | 42,569 | $ | 36,001 |
The Company has the following loans receivable – related parties due within one year as of:
March 31, 2014 | December 31, 2013 | March 31, 2015 | December 31, 2014 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
Loan to Teamlink Investment Co., Ltd; due in June, July and December 2014; interest rate was 4.75% | $ | 4,540 | $ | 4,540 | ||||||||||||
Loan to Tianjin Hengying Trading Co., Ltd.; due on demand; interest rate is 10.0%. | $ | 622 | $ | 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%. | 6,106 | 6,099 | ||||||||||||||
Total loans receivable – related parties | $ | 4,540 | $ | 4,540 | $ | 6,728 | $ | 34,713 |
See Note 2119 “Related party transactions and balances” for the nature of the relationship of related parties.
Total interest income for the loans amounted to $0.1$0.5 million and $0.1 million for the three months ended March 31, 20142015 and 2013,2014, respectively.
Note 54 – Accounts receivable (including related parties), net
Accounts receivable, including related party receivables, net of allowance for doubtful accounts consists of the following:
March 31, 2014 | December 31, 2013 | March 31, 2015 | December 31, 2014 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
Accounts receivable | $ | 5,188 | $ | 5,131 | $ | 11,194 | $ | 9,804 | ||||||||
Less: allowance for doubtful accounts | (800 | ) | (1,053 | ) | (508 | ) | (483 | ) | ||||||||
Accounts receivable – related parties | 4,474 | 2,942 | 59,183 | 8,624 | ||||||||||||
Less: allowance for doubtful accounts – related parties | (126 | ) | (126 | ) | ||||||||||||
Net accounts receivable | $ | 8,862 | $ | 7,020 | $ | 69,743 | $ | 17,819 |
Movement of allowance for doubtful accounts is as follows:
March 31, 2014 | December 31, 2013 | |||||||
(in thousands) | (in thousands) | |||||||
Beginning balance | $ | 1,053 | $ | 1,367 | ||||
Charge to expense | - | 96 | ||||||
Less: recovery | (245 | ) | (449 | ) | ||||
Exchange rate effect | (8 | ) | 39 | |||||
Ending balance | $ | 800 | $ | 1,053 |
March 31, 2015 | December 31, 2014 | |||||||
(in thousands) | (in thousands) | |||||||
Beginning balance | $ | 609 | $ | 1,053 | ||||
Charge to expense | 25 | 368 | ||||||
Less: recovery | - | (8 | ) | |||||
Deconsolidation of Baotou Steel | - | (798 | ) | |||||
Exchange rate effect | - | (6 | ) | |||||
Ending balance | $ | 634 | $ | 609 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 5 – Other receivables (including related parties), net
Other receivables, including related party receivables, net of allowance for doubtful accounts consists of the following:
March 31, 2015 | December 31, 2014 | |||||||
(in thousands) | (in thousands) | |||||||
Other receivables | $ | 114,761 | $ | 73,944 | ||||
Less: allowance for doubtful accounts | (11,470 | ) | (10,198 | ) | ||||
Other receivables – related parties | 23,143 | 39,734 | ||||||
Less: allowance for doubtful accounts – related parties | (64 | ) | (64 | ) | ||||
Net other receivables | $ | 126,370 | $ | 103,416 |
Movement of allowance for doubtful accounts, including related parties, is as follows:
March 31, 2015 | December 31, 2014 | |||||||
(in thousands) | (in thousands) | |||||||
Beginning balance | $ | 10,262 | $ | 2,606 | ||||
Charge to expense | 1,260 | 7,670 | ||||||
Less: recovery | (5 | ) | (6 | ) | ||||
Exchange rate effect | 17 | (8 | ) | |||||
Ending balance | $ | 11,534 | $ | 10,262 |
Note 6 – Inventories
Inventories consist of the following:
March 31, 2014 | December 31, 2013 | March 31, 2015 | December 31, 2014 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
Supplies | $ | 23,172 | $ | 21,040 | $ | 17,327 | $ | 18,838 | ||||||||
Raw materials | 130,356 | 164,301 | 100,509 | 143,563 | ||||||||||||
Finished goods | 72,611 | 42,977 | 43,086 | 12,301 | ||||||||||||
Less: allowance for inventory valuation | (15,378 | ) | (15,397 | ) | (12,627 | ) | (18,375 | ) | ||||||||
Total inventories | $ | 210,761 | $ | 212,921 | $ | 148,295 | $ | 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.
The Company values its inventory at the lower of cost or market, determined on a weighted average method, or net realizable value. As of March 31, 20142015 and December 31, 2013,2014, the Company had provided allowance for inventory valuation in the amounts of $15.4$12.6 million and $15.4$18.4 million, respectively.
Movement of allowance for inventory valuation is as follows:
March 31, 2014 | December 31, 2013 | |||||||
(in thousands) | (in thousands) | |||||||
Beginning balance | $ | 15,397 | $ | 9,585 | ||||
Addition | 15,493 | 15,194 | ||||||
Less: write-off | (15,380 | ) | (9,757 | ) | ||||
Exchange rate effect | (132 | ) | 375 | |||||
Ending balance | $ | 15,378 | $ | 15,397 |
March 31, 2015 | December 31, 2014 | |||||||
(in thousands) | (in thousands) | |||||||
Beginning balance | $ 18, 375 | $ | 15,397 | |||||
Addition | 12,581 | 18,362 | ||||||
Less: write-off | (18,329 | ) | (15,311 | ) | ||||
Exchange rate effect | - | (73 | ) | |||||
Ending balance | $ | 12,627 | $ | 18,375 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 7 – 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:
March 31, 2015 | December 31, 2014 | |||||||
(in thousands) | (in thousands) | |||||||
Advances on inventory purchases | $ | 51,944 | $ | 76,320 | ||||
Less: allowance for doubtful accounts | (2,504 | ) | (2,501 | ) | ||||
Advances on inventory purchases – related parties | 95,757 | 45,617 | ||||||
Net advances on inventory purchases | $ | 145,197 | $ | 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 $164.8 million and $127.9 million as of March 31, 2014 and December 31, 2013, respectively.
March 31, 2015 | December 31, 2014 | |||||||
(in thousands) | (in thousands) | |||||||
Beginning balance | $ | 2,501 | $ | 105 | ||||
Charge to expense | - | 2,395 | ||||||
Exchange rate effect | 3 | 1 | ||||||
Ending balance | $ | 2,504 | $ | 2,501 |
Note 8 – Plant and equipment, net
Plant and equipment consist of the following:
March 31, 2014 | December 31, 2013 | |||||||
(in thousands) | (in thousands) | |||||||
Buildings and improvements | $ | 287,617 | $ | 274,402 | ||||
Machinery | 663,902 | 667,093 | ||||||
Machinery under capital lease | 618,559 | 623,895 | ||||||
Transportation and other equipment | 23,220 | 22,991 | ||||||
Construction in progress | 24,920 | 11,412 | ||||||
Subtotal | 1,618,218 | 1,599,793 | ||||||
Less: accumulated depreciation | (349,019 | ) | (327,886 | ) | ||||
Total | $ | 1,269,199 | $ | 1,271,907 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2015 | December 31, 2014 | |||||||
(in thousands) | (in thousands) | |||||||
Buildings and improvements | $ | 437,477 | $ | 279,776 | ||||
Machinery | 887,292 | 669,427 | ||||||
Machinery under capital lease | 627,505 | 626,735 | ||||||
Transportation and other equipment | 23,101 | 22,765 | ||||||
Construction in progress | 9,835 | 342,660 | ||||||
Subtotal | 1,985,210 | 1,941,363 | ||||||
Less: accumulated depreciation | (423,699 | ) | (398,227 | ) | ||||
Total | $ | 1,561,511 | $ | 1,543,136 |
Construction in progress consisted of the following as of March 31, 2014:2015:
Construction in progress | Value | Completion | Estimated additional cost to | Value | Completion | Estimated additional cost to complete | ||||||||||||||
description | (In thousands) | date | (In thousands) | (In thousands) | date | (In thousands) | ||||||||||||||
Factory wall remodel | 1,021 | June 2014 | 77 | |||||||||||||||||
Equipment updates | 696 | May 2014 | 1,332 | |||||||||||||||||
Sintering machine construction | 3,923 | November 2014 | 141,580 | |||||||||||||||||
#5 blast furnace construction | 10,654 | December 2014 | 166,253 | |||||||||||||||||
Electrical substation construction | 5 | August 2014 | 24,523 | |||||||||||||||||
Restructuring of ventilation system | 2 | December 2015 | 979 | |||||||||||||||||
Energy management system | 326 | April 2015 | 1,925 | |||||||||||||||||
Reconstruction of miscellaneous factory buildings | 5,272 | June 2014 | 4,405 | 6,959 | December 2015 | 7,023 | ||||||||||||||
Project materials | 2,136 | - | 2,145 | - | ||||||||||||||||
Others | 1,213 | - | 403 | - | ||||||||||||||||
Total | $ | 24,920 | $ | 338,170 | $ | 9,835 | $ | 9,927 |
The Company is obligated under a capital lease for the iron and steel making facilities, including one sintering machine, two converters, two blast furnaces and some auxiliary systems that expire on April 30, 2031. During 2013, Longmen Joint Venture entered into a number of capital lease agreements for energy-saving equipment installed throughout the steel production line. The Company is obligated under the capital lease for the equipment upon the confirmation of the energy-saving rate between the Company and its vendors.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The carrying value of assets acquired under the capital lease consists of the following:
March 31, 2014 | December 31, 2013 | March 31, 2015 | December 31, 2014 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
Machinery | $ | 618,559 | $ | 623,895 | $ | 627,505 | $ | 626,735 | ||||||||
Less:accumulated depreciation | (84,250 | ) | (77,086 | ) | (116,075 | ) | (107,782 | ) | ||||||||
Carrying value of leased assets | $ | 534,309 | $ | 546,809 | $ | 511,430 | $ | 518,953 |
The Company assessed the recoverability of all of its remaining long lived assets at March 31, 20142015 and December 31, 2013,2014, respectively, and such assessment did not result in any impairment charges.
Depreciation expense for the three months ended March 31, 20142015 and 20132014 amounted to $24.1$24.9 million and $21.1$24.1 million, respectively. These amounts include depreciation of assets held under capital leases for the three months ended March 31, 20142015 and 2013,2014, which amounted to $8.1 million and $7.9 million, respectively (See Notes 2(j.) and $7.0 million, respectively.2(f.)).
Note 9 – Intangible assets, net
Intangible assets consist of the following:
March 31, 2014 | December 31, 2013 | March 31, 2015 | December 31, 2014 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
Land use rights | $ | 30,620 | $ | 30,884 | $ | 30,763 | $ | 30,726 | ||||||||
Mining right | 2,438 | 2,459 | 2,450 | 2,447 | ||||||||||||
Software | 1,047 | 743 | 1,059 | 1,058 | ||||||||||||
Subtotal | 34,105 | 34,086 | 34,272 | 34,231 | ||||||||||||
Less: | ||||||||||||||||
Accumulated amortization – land use rights | (8,595 | ) | (8,498 | ) | (9,308 | ) | (9,127 | ) | ||||||||
Accumulated amortization – mining right | (1,322 | ) | (1,320 | ) | (1,339 | ) | (1,431 | ) | ||||||||
Accumulated amortization – software | (601 | ) | (561 | ) | (740 | ) | (713 | ) | ||||||||
Subtotal | (10,518 | ) | (10,379 | ) | (11,387 | ) | (11,271 | ) | ||||||||
Intangible assets, net | $ | 23,587 | $ | 23,707 | $ | 22,885 | $ | 22,960 |
The gross amount of the intangible assets amounted to $34.1$34.3 million and $34.1$34.2 million as of March 31, 20142015 and December 31, 2013,2014, respectively. The remaining weighted average amortization period is 33.332.5 years as of March 31, 2014.2015.
Total amortization expense for the three months ended March 31, 20142015 and 20132014 amounted to $0.2 million and $0.2 million, respectively.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Total depletion expense for the three months ended March 31, 20142015 and 20132014 amounted to $0.01$0.04 million and $0.1$0.01 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 | Estimated amortization and depletion expenses | Gross carrying amount | ||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
March 31, 2015 | $ | 917 | 22,669 | |||||||||||||
March 31, 2016 | 917 | 21,752 | $ | 946 | 21,939 | |||||||||||
March 31, 2017 | 917 | 20,835 | 946 | 20,993 | ||||||||||||
March 31, 2018 | 917 | 19,918 | 946 | 20,047 | ||||||||||||
March 31, 2019 | 917 | 19,001 | 946 | 19,101 | ||||||||||||
March 31, 2020 | 946 | 18,155 | ||||||||||||||
Thereafter | 19,002 | - | 18,155 | - | ||||||||||||
Total | $ | 23,587 | $ | 22,885 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 10 – Debt
Short-term notes payable
Short-term notes payable are lines of credit extended by banks. Banks in turn issue the Company a bank acceptance note, which can be endorsed and assigned to vendors as payments for purchases. The notes payable are generally payable within three to six months. This short-term note payable is guaranteed by the bank for its complete face value. The banks do not charge interest on these notes, but usually charge a transaction fee of 0.05% of the notes value. In addition, the banks usually require the Company to deposit either a certain amount of cash at the bank as a guarantee deposit, which is classified on the balance sheet as restricted cash, or provide notes receivable as security, which are classified on the balance sheet as restricted notes receivable. Restricted cash as a guarantee for the notes payable amounted to $419.8$222.2 million and $399.4$339.4 million as of March 31, 20142015 and December 31, 2013,2014, respectively. Restricted notes receivable as a guarantee for the notes payable amounted to $133.0$1.6 million and $231.7 million$0 as of March 31, 20142015 and December 31, 2013,2014, respectively.
The Company had the following short-term notes payable as of:
March 31, 2014 | December 31, 2013 | |||||||
(in thousands) | (in thousands) | |||||||
General Steel (China): Notes payable to various banks in China, due various dates from April to July 2014. Restricted cash required of $13.0 million and $16.4 million as of March 31, 2014 and December 31, 2013, respectively; guaranteed by third parties. These notes payable were either repaid or renewed subsequently on the due dates. | $ | 25,968 | $ | 29,466 | ||||
Longmen Joint Venture: Notes payable to various banks in China, due various dates from April to September 2014. $406.8 million restricted cash and $133.0 million notes receivable are secured for notes payable as of March 31, 2014, and comparatively $383.0 million restricted cash and $231.7 million notes receivable secured as of December 31, 2013, respectively; some notes are further guaranteed by third parties. These notes payable were either repaid or renewed subsequently on the due dates. | 937,389 | 988,364 | ||||||
Total short-term notes payable | $ | 963,357 | $ | 1,017,830 |
March 31, 2015 | December 31, 2014 | |||||||
(in thousands) | (in thousands) | |||||||
General Steel (China): Notes payable to various banks in China, due June 2015. Restricted cash required of $8.2 million and $14.7 million as of March 31, 2015 and December 31, 2014, respectively; guaranteed by third parties. These notes payable were either repaid or renewed subsequently on the due dates. | $ | 16,310 | $ | 22,806 | ||||
Longmen Joint Venture: Notes payable to various banks in China, due various dates from May to October 2015. $214.0 million restricted cash and $1.6 million notes receivable are secured for notes payable as of March 31, 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. | 432,052 | 638,829 | ||||||
Total short-term notes payable | $ | 448,362 | $ | 661,635 |
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.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Short term loans due to banks, related parties and other parties consisted of the following as of:
Due to banks
March 31, 2014 | December 31, 2013 | |||||||
(in thousands) | (in thousands) | |||||||
General Steel (China): Loans from various banks in China, due various dates from May 2014 to January 2015. Weighted average interest rate was 7.1% per annum and 7.2% per annum as of March 31, 2014 and December 31, 2013, respectively; some are guaranteed by third parties. These loans were either repaid or renewed subsequently on the due dates. | $ | 40,899 | $ | 34,229 | ||||
Longmen Joint Venture: Loans from various banks in China, due various dates from April 2014 to January 2015. Weighted average interest rate was 6.1% per annum and 6.3% per annum as of March 31, 2014 and December 31, 2013, respectively; some are guaranteed by third parties, restricted cash or notes receivables. $128.2 million and $163.9 million restricted notes receivable were secured for the loans as of March 31, 2014 and December 31, 2013, respectively; These loans were either repaid or renewed subsequently on the due dates. | 189,219 | 267,688 | ||||||
Total short-term loans - bank | $ | 230,118 | $ | 301,917 |
March 31, 2015 | December 31, 2014 | |||||||
(in thousands) | (in thousands) | |||||||
General Steel (China): Loans from various banks in China, due various dates from June 2015 to January 2016. Weighted average interest rate was 7.3% per annum and 7.2% per annum as of March 31, 2015 and December 31, 2014, respectively; some are guaranteed by third parties. These loans were either repaid or renewed subsequently on the due dates. | $ | 40,612 | $ | 40,562 | ||||
Longmen Joint Venture: Loans from various banks in China, due various dates from May to November 2015. Weighted average interest rate was 7.8% per annum and 7.1% per annum as of March 31, 2015 and December 31, 2014, respectively; some are guaranteed by third parties, $27.3 million restricted cash and $66.2 notes receivable and comparatively $16.3 million restricted cash and $111.8 notes receivable were secured for the loans as of March 31, 2015 and December 31, 2014, respectively; These loans were either repaid or renewed subsequently on the due dates. | 191,536 | 216,940 | ||||||
Total short-term loans - bank | $ | 232,148 | $ | 257,502 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As of March 31, 20142015 and December 31, 2013,2014, the Company had not met its financial covenants stipulated by certain loan agreements related to the Company’s debt to asset ratio. As of March 31, 2014, twoTwo of General Steel (China)’s bank loans contained financial covenants stipulating debt to asset ratios below 20%70%. However, as ofAt March 31, 2015, General Steel (China)’s debt to asset ratio was 94.0%. At December 31, 2014, General Steel (China)’s debt to asset ratio was 93.5%. As of December 31, 2013, three of General Steel (China)’s bank loans contained financial covenants stipulating debt to asset ratios below 20% and 70%. However, as of December 31, 2013, General Steel (China)’s debt to asset ratio was 89.7%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 March 31, 20142015 and December 31, 20132014 was $5.2$4.7 million and $6.4$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
March 31, 2014 | December 31, 2013 | March 31, 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 April to September 2014, and weighted average interest rate was 5.6% per annum and 5.2% per annum as of March 31, 2014 and December 31, 2013, respectively. These loans were either repaid or renewed subsequently on the due dates. | $ | 17,987 | $ | 22,720 | ||||||||||||
Longmen Joint Venture: Loans from various unrelated companies and individuals, due various dates from May to September 2015, and weighted average interest rate was 10.2% per annum and 5.7% per annum as of March 31, 2015 and December 31, 2014, respectively. These loans were either repaid or renewed subsequently on the due dates. | $ | 37,337 | $ | 16,999 | ||||||||||||
Longmen Joint Venture: Loans from financing sales. | 24,538 | 33,124 | 8,458 | 37,525 | ||||||||||||
Maoming Hengda: Loans from one unrelated parties and one related party, due on demand, none interest bearing. | 6,170 | 6,223 | 6,200 | 6,193 | ||||||||||||
Total short-term loans – others | $ | 48,695 | $ | 62,067 | $ | 51,995 | $ | 60,717 |
The Company had various loans from unrelated companies amounting to $48.7$52.0 million and $62.1$60.7 million as of March 31, 20142015 and December 31, 2013,2014, respectively. Of the $48.7$52.0 million, $6.2 million loans carry no interest, $24.5$8.5 million of financing sales are subject to interest rates ranging between 4.2%4.6% and 5.9%12.0%, and the remaining $18.0$37.3 million are subject to interest rates ranging from 5.0% to 12.0%24.0%. All short term loans from unrelated companies are payable on demand and unsecured.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As part of its working capital management, Longmen Joint Venture has entered into a number of sale and purchase back contracts ("contracts") with third party companies and Yuxin and Yuteng. According to the contracts, Longmen Joint Venture sells rebar to the third party companies at a certain price, and within the same month, Yuxin and Yuteng will purchase back the rebar from the third party companies at a price of 4.2%4.6% to 5.9%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 4.2%4.6% to 5.9%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 March 31, 20142015 and 20132014 amounted to $230.5$118.4 million and $165.2$230.5 million, respectively, which are eliminated in the Company’s consolidated financial statements. The financial cost related to financing sales for the three months ended March 31, 20142015 and 20132014 amounted to $0.7 million and $0.9 million, and $1.6 million, respectively.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Short term loans due to related parties
March 31, 2014 | December 31, 2013 | March 31, 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 rates is 10% per annum. | $ | 1,445 | $ | 1,458 | $ | 670 | $ | 670 | ||||||||
General Steel China: Loans from Tianjin Dazhan Industry Co., Ltd, due on demand, and interest rates is 10% per annum. | 7,174 | - | ||||||||||||||
Longmen Joint Venture: Loan from Shaanxi Coal and Chemical Industry Group Co., Ltd., due on demand, and interest rate is 7.0% per annum. | 22,169 | 28,216 | 128 | 128 | ||||||||||||
Longmen Joint Venture: Loan from Shaanxi Steel Group due on various dates from November 2014 to March 2015, and interest rate is 6.6% and 7.0% per annum. | 73,035 | 49,110 | ||||||||||||||
Longmen Joint Venture: Loan from Shaanxi Steel Group due on December 2015, and interest rate is 6.9% and 8.0% per annum. The Company repaid $9,489 subsequent to March 31, 2015. | 91,173 | - | ||||||||||||||
Longmen Joint Venture: Loan from Shaanxi Steel Group Hanzhong Steel Co., Ltd. due on April 2015, and interest rate is 8.0% per annum. Full balance becomes due on demand in April 2015. | 8,155 | - | ||||||||||||||
Longmen Joint Venture: Loan from Long Steel Group due on April 2015, and interest rate is 12.0% per annum. The Company repaid $4,924 subsequent to March 31, 2015. Remaining balance becomes due on demand. | 8,155 | - | ||||||||||||||
Longmen Joint Venture: Loan from Tianjin General Qiugang Pipe Co., Ltd due on September 2015, and interest rate is 5.4% per annum. | 3,262 | - | ||||||||||||||
Longmen Joint Venture: Loans from financing sales. | 8,431 | 47,909 | 98,680 | 45,582 | ||||||||||||
Total short-term loans - related parties | $ | 105,080 | $ | 126,693 | $ | 217,397 | $ | 46,380 |
Long-term loans due to related party
March 31, 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 are 5.6% - 5.9% per annum. | $ | 72,035 | $ | 72,657 | ||||
Less: Current maturities of long-term loans – related party | (57,428 | ) | (53,013 | ) | ||||
Long-term loans - related party | $ | 14,607 | $ | 19,644 |
March 31, 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. | $ | 352,850 | $ | 339,549 |
As of March 31, 2015 and December 31, 2014, total assets used by the Company as collateral for the aforementioned debts were $110.1 million and $96.9 million, respectively.
Total interest expense, net of capitalized interest, amounted to $9.5$7.4 million and $8.0$9.5 million for the three months ended March 31, 20142015 and 2013,2014, respectively.
Capitalized interest amounted to $0.6 million$0 and $0.2$0.6 million for the three months ended March 31, 2015 and 2014, and 2013, respectively.
Note 11 – Customer deposits
Customer deposits represent amounts advanced by customers on product orders. The product normally is shipped within one month after receipt of the advance payment, and the related sale is recognized in accordance with the Company’s revenue recognition policy. As of March 31, 20142015 and December 31 2013,2014, customer deposits amounted to $252.4$287.3 million and $152.7$225.6 million, respectively, including deposits received from related parties, which amounted to $145.4$148.2 million and $64.9$132.6 million, respectively.
Note 12 – Deposits due to sales representatives
Longmen Joint Venture entered into agreements with various entities to act as the Company’s exclusive sales agent in a specified geographic area. These exclusive sales agents must meet certain criteria and are required to deposit a certain amount of money with the Company. In return the sales agents receive exclusive sales rights in a specified area and at discounted prices on products they order. These deposits bear no interest and are required to be returned to the sales agent once the agreement is terminated. The agreement is normally entered/or renewed on an annual basis. Termination of the agreement can be mutually agreed to by both parties at any time. The Company had $25.7$21.9 million and $26.3$20.4 million in deposits due to sales representatives, including deposits due to related parties, as of March 31, 20142015 and December 31, 2013,2014, respectively.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 13 – Warrants
The Company had 3,900,871 outstanding warrants in connection with the $40 million convertible notes issued in 2007, which expired on May 13, 2013. The aforementioned warrants met the definition of a derivative instrument in the accounting standards and were recorded at their fair value on each reporting date. The change in the value of the derivative liabilities is charged against or credited to income each period.
The Company had the following warrants outstanding:
Note 1413 - Supplemental disclosure of cash flow information
Interest paid, net of capitalized, amounted to $5.7$2.6 million and $3.6$5.7 million for the three months ended March 31, 20142015 and 2013,2014, respectively.
The Company paid income tax amounted to $0.01$0.1 million and $0.1$0.01 million for the three months ended March 31, 20142015 and 2013,2014, respectively.
During the three months ended March 31, 20142015 and 2013,2014, the Company had receivables of $0.01converted $0.03 million and $1.0$0.05 million respectively, as a result of the disposal of equipment that has not been collected.into inventory productions, respectively.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
During the three months ended March 31, 20142015 and 2013,2014, the Company used $1.0$0.9 million $4.1$1.0 million inventory, respectively, in plant and equipment constructions.
During the three months ended March 31, 2015 and 2014, the Company incurred $2.8 million and $23.4 million accounts payable, respectively, to be paid for the purchase of equipment and construction in progress.
The Company had $23.8 million notes receivable from financing sales loans to be converted to cash as of March 31, 2015.
The Company reclassified $5.9 million purchase deposits - related parties that carried interest to loan receivable - related parties as of March 31, 2015.
The Company had $47.7 million notes receivable from financing sales loans to be converted to cash as of March 31, 2014.
During the three months ended March 31, 2014, the Company incurred $23.4had receivables of $0.01 million accounts payable to be paid foras a result of the purchasedisposal of equipment and construction in progress.that has not been collected.
During the three months ended March 31, 2014, and 2013, one of the Company’s unconsolidated entities declared dividend and the Company was entitled for the dividend amounted to $0.2 million, and $0.2 million, respectively, which was not yet collected.
During the three months ended March 31, 2013, the Company converted $0.5 million of equipment into inventory productions.
Note 1514 - Deferred lease income
To compensate the Company for costs and economic losses incurred during construction of the iron and steel making facilities owned by Shaanxi Steel, Shaanxi Steel reimbursed Longmen Joint Venture $11.4 million (RMB 70.1 million) in the fourth quarter of 2010 for the value of assets dismantled and rent under a 40-year property sub-lease that was entered into by the parties in June 2009 (the "Longmen Sub-lease"), and $29.7$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 $14.5$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.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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) each year were deferred and will be recognized over the term of the land sub-lease similar to the other charges and credits related to the construction of these assets.
The deferred lease income is amortized to income over the remaining term of the 40-year land sub-lease. For the three months ended March 31, 20142015 and 2013,2014, the Company recognized $0.5 million and $0.5 million, respectively. As of March 31, 20142015 and December 31, 2013,2014, the balance of deferred lease income amounted to $76.2$74.4 million and $77.4$74.9 million, respectively, of which $2.2 million and $2.2 million represents balance to be amortized within one year. See Note 2119 – Related party transactions and balances (m)(k) – Deferred lease income for details.
Note 1615 - 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 payment from Longmen Joint Venture until February 2017. The profit sharing component does not meet the definition of contingent rent because it is based on future revenue and is therefore considered part of the financing for the capital leased assets which is related to the Unified Management Agreement. For purposes of determining the value of the leased asset and obligation at the inception of the lease, the lease liability is then reduced by the value of the profit sharing component, which is recognized as a derivative liability, which is carried at fair value. See Note 1716 – “Profit sharing liability”.
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 pay themake additional lease paymentpayments based on the additional energy cost saved during the lease period and will recognize the additional lease payments as contingent rent expense. For the three months endedAs of March 31, 20142015, $23.9 million (RMB $146.5 million) energy-saving equipment under these lease agreements have been capitalized and 2013, no contingent rent expense has incurred under these lease agreements.been incurred.
Presented below is a schedule of estimated minimum lease payments on the capital lease obligation for the next five years as of March 31, 2014:2015:
Year ending March 31, | Capital Lease Obligations Minimum Lease Payments | |||
(in thousands) | ||||
2015 | $ | 5,755 | ||
2016 | 4,211 | |||
2017 | 172,982 | |||
2018 | 31,906 | |||
2019 | 30,345 | |||
Thereafter | 345,697 | |||
Total minimum lease payments | 590,896 | |||
Less:amounts representing interest | (210,097 | ) | ||
Ending balance | $ | 380,799 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Year ending March 31, | Capital Lease Obligations Minimum Lease Payments | |||
(in thousands) | ||||
2016 | $ | 10,665 | ||
2017 | 175,427 | |||
2018 | 33,657 | |||
2019 | 30,685 | |||
2020 | 29,621 | |||
Thereafter | 317,780 | |||
Total minimum lease payments | 597,835 | |||
Less: amounts representing interest | (191,741 | ) | ||
Ending balance | $ | 406,094 |
Interest expense for the three months ended March 31, 20142015 and 20132014 on the capital lease obligations was $5.2 million and $5.4 million, and $5.1 million, respectively.
Note 1716 –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 1615 - “Capital lease obligation”) and is accounted for as a derivative instrument in accordance with ASC 815-10-15-83. The estimated fair value of the profit sharing liability is reassessed at the end of each reporting period, with any change in fair value charged or credited to income as “Change in Fair Value of Profit Sharing Liability”. See Note 3(h)2(h) – “Financial instruments”(restated) for details.
Payments to Shaanxi Steel for the profit sharing liability are not required until net cumulative profits are achieved. Based on the performance of the Asset Pool, no profit sharing payment was made during the three months ended March 31, 2014 and 2013.from inception to date.
27 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1817 – Other income (expense)
Lease income
The deferred lease income from the reimbursement from Shaanxi Steel for the net book value of the fixed assets that were demolished and for the inefficiency costs caused by the construction and loss incurred in the beginning stages of the system production is amortized to income over the remaining sub-lease term. For the three months ended March 31, 20142015 and 2013,2014, the Company recognized lease income of $0.5 million and $0.5 million, respectively.
Note 1918 – Taxes
Income tax
Significant components of the provision for income taxes on earnings and deferred taxes on net operating losses from operations for the three months ended March 31, 20142015 and 20132014 are as follows:
(In thousands) | The three months ended March 31, 2014 | The three months ended March 31, 2013 | The three months ended March 31, 2015 | The three months ended March 31, 2014 | ||||||||||||
Current | $ | 5 | $ | 71 | $ | 30 | $ | 5 | ||||||||
Deferred | - | - | - | - | ||||||||||||
Total provision for income taxes | $ | 5 | $ | 71 | $ | 30 | $ | 5 |
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.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Deferred taxes assets – China
According to Chinese tax regulations, net operating losses can be carried forward to offset operating income for the next five years. The Group’s losses carried forward of $533.0$665.9 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 are eliminated. Management took into consideration this potential negative impact on average selling price and gross margin of its products, re-performed an operating forecast for the next five years and concluded that the beginning-of-the-year balance of deferred tax assets mainly relating to the net operating loss carry forward may not be fully realizable due to the reduction in the projection of income to be available in the next 5 years. Management therefore decided to provide 100% valuation allowance for the deferred tax assets. The valuation allowance as of March 31, 20142015 and December 31, 20132014 was $100.7$123.7 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 in various items, such as receivable allowances, inventory allowances, impairments on fixed assets and deferred lease income.
Movement of valuation allowance:
March 31, 2014 | December 31, 2013 | March 31, 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 | 4,129 | 23,293 | 10,040 | 18,951 | ||||||||||||
Current period reversal | (155 | ) | (1,206 | ) | (1,317 | ) | (614 | ) | ||||||||
Deconsolidation of Tongxing | - | - | ||||||||||||||
Deconsolidation of Baotou Steel | - | (625 | ) | |||||||||||||
Exchange difference | (865 | ) | 2,591 | 173 | (461 | ) | ||||||||||
Ending balance | $ | 100,678 | $ | 97,569 | $ | 123,716 | $ | 114,820 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Deferred taxes assets – U.S.
General Steel Holdings, Inc. was incorporated in the United States and has incurred net operating losses for income tax purposes for the three months ended March 31, 2014.2015. The net operating loss carry forwards for United States income taxes amounted to $2.3$3.2 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 March 31, 20142015 was $0.8$1.1 million. The net change in the valuation allowance for the three months ended March 31, 20142015 was $0.1 million.$0. Management will review this valuation allowance periodically and make adjustments as warranted.
The Company has no cumulative proportionate retained earnings from profitable subsidiaries as of March 31, 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 March 31, 20142015 and December 31, 2013,2014, the Company had $12.1$2.0 million and $3.5$3.2 million in value added tax credit which are available to offset future VAT payables, respectively.
Sales and purchases are recorded net of VAT collected and paid as the Company acts as an agent for the government for VAT collection. VAT on sales and VAT on purchases amounted to $139.1 million and $132.2 million, respectively, for the three months ended March 31, 2015 and $152.9 million and $151.9 million, respectively, for the three months ended March 31, 2014 and $183.2 million and $183.8 million, respectively, for the three months ended March 31, 2013.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)2014.
Taxes payable consisted of the following:
March 31, 2014 | December 31, 2013 | |||||||
(in thousands) | (in thousands) | |||||||
VAT taxes payable | $ | 4,472 | $ | 2,211 | ||||
Income taxes payable | 164 | 173 | ||||||
Misc. taxes | 2,640 | 2,244 | ||||||
Totals | $ | 7,276 | $ | 4,628 |
Note 20 – Income (loss) per share
The computation of income (loss) per share is as follows:
(in thousands, except per share data) | The three months ended March 31, 2014 | The three months ended March 31, 2013 | ||||||
Income (loss) attributable to holders of common stock | $ | (43,564 | ) | $ | 3,103 | |||
Basic and diluted weighted average number of common shares outstanding | 55,813 | 54,805 | ||||||
Earnings (loss) per share | ||||||||
Basic and diluted | $ | (0.78 | ) | $ | 0.06 |
The Company had warrants exercisable for 0 and 3,900,871 shares of the Company’s common stock at March 31, 2014 and 2013, respectively. For the three months ended March 31, 2014 and 2013, all outstanding warrants were excluded from the diluted earnings per share calculation since they are anti-dilutive.
Other than the aforementioned potentially dilutive securities, there were no other potentially dilutive securities outstanding for the three months ended March 31, 2014 and 2013.
March 31, 2015 | December 31, 2014 | |||||||
(in thousands) | (in thousands) | |||||||
VAT taxes payable | $ | 6,847 | $ | 3,147 | ||||
Income taxes payable | 209 | 243 | ||||||
Misc. taxes | 2,337 | 1,811 | ||||||
Totals | $ | 9,393 | $ | 5,201 |
Note 2119 – Related party transactions and balances
Related party transactions
a. | Capital lease |
As disclosed in Notes 1615 – “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:
March 31, 2014 | December 31, 2013 | March 31, 2015 | December 31, 2014 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
Machinery | $ | 600,658 | $ | 605,839 | $ | 603,618 | $ | 602,878 | ||||||||
Less: accumulated depreciation | (83,216 | ) | (76,740 | ) | (112,298 | ) | (105,001 | ) | ||||||||
Carrying value of leased assets | $ | 517,442 | $ | 529,099 | $ | 491,320 | $ | 497,877 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
b. The following chart summarized sales to related parties for the three months ended March 31, 20142015 and 2013.2014.
Name of related parties | Relationship | Three months ended March 31, 2014 | Three months ended March 31, 2013 | Relationship | Three months ended March 31, 2015 | Three months ended March 31, 2014 | ||||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | $ | 44,800 | $ | 80,675 | Noncontrolling shareholder of Longmen Joint Venture | $ | 11,270 | $ | 44,800 | ||||||||||
Sichuan Yutai Trading Co., Ltd | Significant influence by Long Steel Group* | - | 72 | |||||||||||||||||
Shaanxi Yuchang Trading Co., Ltd | Significant influence by Long Steel Group | - | 14,435 | |||||||||||||||||
Shaanxi Haiyan Trade Co., Ltd | Significant influence by Long Steel Group | 15 | 10,592 | Significant influence by Long Steel Group* | 9,578 | 15 | ||||||||||||||
Shaanxi Shenganda Trading Co., Ltd | Significant influence by Long Steel Group | 20,736 | 18,286 | Significant influence by Long Steel Group | 15,998 | 20,736 | ||||||||||||||
Shaanxi Steel | Majority shareholder of Long Steel Group | 471 | 963 | Majority shareholder of Long Steel Group | 481 | 471 | ||||||||||||||
Shaanxi Coal and Chemical Industry Group Co., Ltd. | Shareholder of Shaanxi Steel | 4,969 | 1,834 | Shareholder of Shaanxi Steel | 20,068 | 4,969 | ||||||||||||||
Shaanxi Long Steel Group Baoji Steel Rolling Co., Ltd | Subsidiary of Long Steel Group | 6,618 | 1,999 | Subsidiary of Long Steel Group | - | 6,618 | ||||||||||||||
Shaanxi Junlong Rolling Co., Ltd | Investee of Long Steel Group | 4,597 | 20,004 | Investee of Long Steel Group | - | 4,597 | ||||||||||||||
Total | $ | 82,206 | $ | 148,860 | $ | 57,395 | $ | 82,206 |
Sales to related parties in trading transactions, which were netted against the corresponding cost of goods sold, amounted to $91.0 million and $33.3 million for the three months ended March 31, 2014.2015 and 2014, respectively. See Note 3(m)2(m) Revenue Recognition for details.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
*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.
c. The following charts summarize purchases from related parties for the three months ended March 31, 20142015 and 2013.2014.
Name of related parties | Relationship | Three months ended March 31, 2014 | Three months ended March 31, 2013 | |||||||
(in thousands) | (in thousands) | |||||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | $ | 151,772 | $ | 104,493 | |||||
Hancheng Haiyan Coking Co., Ltd | Noncontrolling shareholder of Long Steel Group | 44,088 | 63,798 | |||||||
Xi’an Pinghe Metallurgical Raw Material Co., Ltd | Noncontrolling shareholder of Long Steel Group | 904 | 11,755 | |||||||
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 | - | 210 | |||||||
Shaanxi Huafu New Energy Co., Ltd | Significant influence by the Long Steel Group | 6,660 | 9,529 | |||||||
Beijing Daishang Trading Co., Ltd. | Noncontrolling shareholder of Longmen Joint Venture’s subsidiary | - | 3,477 | |||||||
Tianwu General Steel Material Trading Co., Ltd. | Investee of General Steel (China) | 23,339 | - | |||||||
Tianjin General Quigang Pipe Co., Ltd | Partially owned by CEO through indirect shareholding | 4,275 | - | |||||||
Tianjin Hengying Trading Co., Ltd | Partially owned by CEO through indirect shareholding | 27,919 | - | |||||||
Others | Entities either owned or have significant influence by our affiliates or management | 47 | 70 | |||||||
Total | $ | 259,004 | $ | 193,385 |
Related party balances
Name of related parties | Relationship | March 31, 2014 | December 31, 2013 | Relationship | Three months ended March 31, 2015 | Three months ended March 31, 2014 | ||||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||||||
Teamlink Investment Co., Ltd | Partially owned by CEO through indirect shareholding** | 4,540 | 4,540 | |||||||||||||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | $ | 5,993 | $ | 151,772 | |||||||||||||||
Hancheng Haiyan Coking Co., Ltd | Noncontrolling shareholder of Long Steel Group | 48,147 | 44,088 | |||||||||||||||||
Xi’an Pinghe Metallurgical Raw Material Co., Ltd | Noncontrolling shareholder of Long Steel Group | 1,072 | 904 | |||||||||||||||||
Shaanxi Coal and Chemical Industry Group Co., Ltd | Shareholder of Shaanxi Steel | 1,505 | - | |||||||||||||||||
Shaanxi Huafu New Energy Co., Ltd | Significant influence by the Long Steel Group | 5,960 | 6,660 | |||||||||||||||||
Tianwu General Steel Material Trading Co., Ltd. | Investee of General Steel (China) | 36,174 | 23,339 | |||||||||||||||||
Tianjin General Quigang Pipe Co., Ltd | Partially owned by CEO through indirect shareholding** | 3,287 | 4,275 | |||||||||||||||||
Tianjin Hengying Trading Co., Ltd | Partially owned by CEO through indirect shareholding | - | 27,919 | |||||||||||||||||
Others | Entities either owned or have significant influence by our affiliates or management | 331 | 47 | |||||||||||||||||
Total | $ | 4,540 | $ | 4,540 | $ | 102,469 | $ | 259,004 |
**The CEO is referred to herein as the chief executive officer of General Steel Holdings, Inc.
See Note 4 – loans receivable – related parties for loan details.
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 | March 31, 2015 | December 31, 2014 | |||||||
(in thousands) | (in thousands) | |||||||||
Tianjin Hengying Trading Co., Ltd.* | Partially owned by CEO through indirect shareholding | $ | 622 | $ | 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 | 6,106 | 6,099 | |||||||
Total | $ | 6,728 | $ | 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 | March 31, 2014 | December 31, 2013 | Relationship | March 31, 2015 | December 31, 2014 | ||||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | $ | 2,633 | $ | 548 | Noncontrolling shareholder of Longmen Joint Venture | $ | 151 | $ | 148 | ||||||||||
Shaanxi Coal and Chemical Industry Group Co., Ltd. | Shareholder of Shaanxi Steel | 56,982 | - | |||||||||||||||||
Shaanxi Shenganda Trading Co., Ltd. | Significant influence by Long Steel Group | - | 5,715 | |||||||||||||||||
Tianjin Daqiuzhuang Steel Plates | Partially owned by CEO through indirect shareholding | 19 | 19 | Partially owned by CEO through indirect shareholding | 19 | 19 | ||||||||||||||
Shaanxi Steel | Majority shareholder of Long Steel Group | 1,816 | 1,741 | Majority shareholder of Long Steel Group | 2,031 | 2,101 | ||||||||||||||
Others | 6 | 634 | - | 641 | ||||||||||||||||
Total | $ | 4,474 | $ | 2,942 | $ | 59,183 | $ | 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 | March 31, 2014 | December 31, 2013 | Relationship | March 31, 2015 | December 31, 2014 | ||||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | $ | 702 | $ | 406 | Noncontrolling shareholder of Longmen Joint Venture | $ | 1,219 | $ | 165 | ||||||||||
Shaanxi Steel | Majority shareholder of Long Steel Group | 47,238 | 46,439 | Majority shareholder of Long Steel Group | 1,141 | 35,669 | ||||||||||||||
Tianjin General Quigang Pipe Co., Ltd | Partially owned by CEO through indirect shareholding | 1,237 | 1,247 | |||||||||||||||||
Tianjin Dazhan Industry Co, Ltd | Partially owned by CEO through indirect shareholding | 484 | 491 | |||||||||||||||||
Beijing Shenhua Xinyuan Metal Materials Co., Ltd. | Partially owned by CEO through indirect shareholding | 4,859 | 4,901 | |||||||||||||||||
Victory Energy Resource Co., Ltd | Partially owned by CEO through indirect shareholding | 2,531 | - | |||||||||||||||||
Tianjin General Quigang Pipe Co., Ltd* | Partially owned by CEO through indirect shareholding | 17,939 | 1,237 | |||||||||||||||||
Tianjin Hengying Trading Co., Ltd | Partially owned by CEO through indirect shareholding | 927 | 721 | |||||||||||||||||
Beijing Shenghua Xinyuan Metal Materials Co., Ltd. | Partially owned by CEO through indirect shareholding | 466 | 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 | 803 | 622 | Entities either owned or have significant influence by our affiliates or management | 350 | 528 | ||||||||||||||
Total | $ | 57,854 | $ | 54,106 | $ | 23,143 | $ | 39,734 |
Name of related parties | Relationship | March 31, 2014 | December 31, 2013 | |||||||
(in thousands) | (in thousands) | |||||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | $ | - | $ | 9,123 | |||||
Shaanxi Shenganda Trading Co., Ltd. | Significant influence by Long Steel Group | - | 25,607 | |||||||
Tianjin Dazhan Industry Co., Ltd | Partially owned by CEO through indirect shareholding | 26,049 | 10,343 | |||||||
Tianjin Hengying Trading Co., Ltd | Partially owned by CEO through indirect shareholding | 60,849 | 16,158 | |||||||
Tianjin General Qiugang Pipe Co., Ltd | Partially owned by CEO through indirect shareholding | 30,018 | 555 | |||||||
Maoming Shengze Trading Co., Ltd | Partially owned by CEO through indirect shareholding | - | 21,197 | |||||||
Tianwu General Steel Material Trading Co., Ltd. | Investee of General Steel (China) | 3,490 | - | |||||||
Others | Entities either owned or have significant influence by our affiliates or management | 20 | 20 | |||||||
Total | $ | 120 ,426 | $ | 83,003 |
* Full balance has been repaid subsequently to March 31, 2015 by this entity.
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 | March 31, 2015 | December 31, 2014 | |||||||
(in thousands) | (in thousands) | |||||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | $ | 7,269 | $ | 7,139 | |||||
Shaanxi Shenganda Trading Co., Ltd. | Significant influence by Long Steel Group | - | 27,549 | |||||||
Tianjin Hengying Trading Co., Ltd | Partially owned by CEO through indirect shareholding | 3,873 | 3,807 | |||||||
Tianjin General Qiugang Pipe Co., Ltd* | Partially owned by CEO through indirect shareholding | 84,547 | 7,091 | |||||||
Others | Entities either owned or have significant influence by our affiliates or management | 68 | 31 | |||||||
Total | $ | 95,757 | $ | 45,617 |
*During the three months ended March 31, 2015, the Company entered into a purchase agreement with this entity to purchase steel related products to resell to Tianwu General Steel Material Trading Co., Ltd. (see Note 19 (h) Customer deposit – related parties). The term of the agreement is expected to be fulfilled within three months after deposits were made. The purchase advances are refundable. For the three months ended March 31, 2015, the Company made $61.9 million of purchase advances of which $3.3 million were utilized. The entity also acts as a customer in the Company’s trading transactions. During the three months ended March 31, 2015, the Company sold approximately $16.0 million to this entity. For the three months ended March 31, 2014, the Company made $29.5 million of purchase advances of which $4.3 million was utilized. The entity also acts as a customer in the Company’s trading transactions. During the three months ended March 31, 2014, the Company sold $1.4 million to this entity.
e. | Accounts payable - related parties: |
Name of related parties | Relationship | March 31, 2014 | December 31, 2013 | |||||||
(in thousands) | (in thousands) | |||||||||
Hancheng Haiyan Coking Co., Ltd | Noncontrolling shareholder of Longmen Joint Venture | $ | 71,047 | $ | 58,163 | |||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | 176,347 | 134,758 | |||||||
Shaanxi Coal and Chemical Industry Group Co., Ltd. | Shareholder of Shaanxi Steel | 21,814 | 29,990 | |||||||
Tianjin Dazhan Industry Co., Ltd | Partially owned by CEO through indirect shareholding | 7,528 | 958 | |||||||
Xi’an Pinghe Metallurgical Raw Material Co., Ltd | Noncontrolling shareholder of Long Steel Group | 4,429 | 8,714 | |||||||
Henan Xinmi Kanghua Fire Refractory Co., Ltd | Noncontrolling shareholder of Longmen Joint Venture’s subsidiary | 641 | 716 | |||||||
Beijing Daishang Trading Co., Ltd | Noncontrolling shareholder of Longmen Joint Venture’s subsidiary | 36 | 1,004 | |||||||
Tianwu General Steel Material Trading Co., Ltd. | Investee of General Steel (China) | - | 759 | |||||||
Others | Entities either owned or have significant influence by our affiliates or management | 696 | 630 | |||||||
Total | $ | 282,540 | $ | 235,692 |
Name of related parties | Relationship | March 31, 2014 | December 31, 2013 | |||||||
(in thousands) | (in thousands) | |||||||||
Shaanxi Steel | Majority shareholder of Long Steel Group | $ | 73,035 | $ | 49,110 | |||||
Shaanxi Coal and Chemical Industry Group Co., Ltd | Shareholder of Shaanxi Steel | 22,169 | 28,216 | |||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | - | 33,183 | |||||||
Tianjin Hengying Trading Co., Ltd | Partially owned by CEO through indirect shareholding | 8,431 | 8,178 | |||||||
Tianjin Dazhan Industry Co., Ltd | Partially owned by CEO through indirect shareholding | - | 6,548 | |||||||
Yangpu Capital Automobile | Partially owned by CEO through indirect shareholding | 1,445 | 1,458 | |||||||
Total | $ | 105,080 | $ | 126,693 |
See Note 10 – Debt for the loan details.
Name of related party | Relationship | March 31, 2014 | December 31, 2013 | |||||||
(in thousands) | (in thousands) | |||||||||
Shaanxi Steel | Majority shareholder of Long Steel Group | $ | 57,428 | $ | 53,013 | |||||
Total | $ | 57,428 | $ | 53,013 |
Name of related parties | Relationship | March 31, 2015 | December 31, 2014 | |||||||
(in thousands) | (in thousands) | |||||||||
Hancheng Haiyan Coking Co., Ltd | Noncontrolling shareholder of Longmen Joint Venture | $ | 77,617 | $ | 64,276 | |||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | 94,006 | 79,886 | |||||||
Shaanxi Coal and Chemical Industry Group Co., Ltd. | Shareholder of Shaanxi Steel | 14,828 | 23,726 | |||||||
Tianjin Dazhan Industry Co., Ltd | Partially owned by CEO through indirect shareholding | 870 | 869 | |||||||
Xi’an Pinghe Metallurgical Raw Material Co., Ltd | Noncontrolling shareholder of Long Steel Group | 10,829 | 11,035 | |||||||
Tianjin Hengying Trading Co., Ltd | Partially owned by CEO through indirect shareholding | - | 1 | |||||||
Henan Xinmi Kanghua Fire Refractory Co., Ltd | Noncontrolling shareholder of Longmen Joint Venture’s subsidiary | 1,002 | 746 | |||||||
Beijing Daishang Trading Co., Ltd | Noncontrolling shareholder of Longmen Joint Venture’s subsidiary | 28 | 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) | 7,986 | 22,916 | |||||||
Maoming Shengze Trading Co., Ltd | Partially owned by CEO through indirect shareholding | 4,274 | 1,773 | |||||||
Shaanxi Steel | Majority shareholder of Long Steel Group | 683 | - | |||||||
Shaanxi Shenganda Trading Co, Ltd. | Significant influence by Long Steel Group | 14,834 | - | |||||||
Others | Entities either owned or have significant influence by our affiliates or management | 7 | 57 | |||||||
Total | $ | 226,964 | $ | 207,783 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Short-term loans - related parties: |
Name of related parties | Relationship | March 31, 2015 | December 31, 2014 | |||||||
(in thousands) | (in thousands) | |||||||||
Shaanxi Steel Group Hanzhong Steel Co., Ltd. | Subsidiary of Shaanxi Steel | $ | 8,155 | $ | - | |||||
Shaanxi Steel | Majority shareholder of Long Steel Group | 91,173 | - | |||||||
Shaanxi Coal and Chemical Industry Group Co., Ltd | Shareholder of Shaanxi Steel | 68,754 | 34,460 | |||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | 30,533 | - | |||||||
Tianjin Hengying Trading Co., Ltd | Partially owned by CEO through indirect shareholding | 7,610 | 3,039 | |||||||
Tianjin General Quigang Pipe Co., Ltd. | Partially owned by CEO through indirect shareholding | 3,262 | ||||||||
Tianjin Dazhan Industry Co., Ltd | Partially owned by CEO through indirect shareholding | 7,240 | 8,211 | |||||||
Yangpu Capital Automobile | Partially owned by CEO through indirect shareholding | 670 | 670 | |||||||
Total | $ | 217,397 | $ | 46,380 |
See Note 9 – Debt for the loan details.
g. | 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 | March 31, 2014 | December 31, 2013 | |||||||
(in thousands) | (in thousands) | |||||||||
Tianjin Hengying Trading Co, Ltd | Partially owned by CEO through indirect shareholding | $ | 377 | $ | 380 | |||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | 31,861 | 43,636 | |||||||
Shaanxi Steel | Majority shareholder of Long Steel Group | 43,983 | 44,363 | |||||||
Wendlar Investment & Management Group Co., Ltd | Common control under CEO | 900 | 895 | |||||||
Yangpu Capital Automobile | Partially owned by CEO through indirect shareholding | 325 | 291 | |||||||
Tianjin Dazhan Industry Co., Ltd | Partially owned by CEO through indirect shareholding | 469 | 473 | |||||||
Maoming Shengze Trading Co., Ltd | Partially owned by CEO through indirect shareholding | 2,248 | 1,745 | |||||||
Victory Energy Resource Co., Ltd | Partially owned by CEO through indirect shareholding | - | 1,375 | |||||||
Others | Entities either owned or have significant influence by our affiliates or management | 531 | 921 | |||||||
Total | $ | 80,694 | $ | 94,079 |
Name of related parties | Relationship | March 31, 2014 | December 31, 2013 | |||||||
(in thousands) | (in thousands) | |||||||||
Shaanxi Yuchang Trading Co., Ltd | Significant influence by Long Steel Group | $ | 10 | $ | 10 | |||||
Shaanxi Coal and Chemical Industry Group Co., Ltd | Shareholder of Shaanxi Steel | 1,967 | - | |||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | 20,978 | 15,038 | |||||||
Shaanxi Junlong Rolling Co., Ltd | Investee of Long Steel Group | 4,065 | 2,748 | |||||||
Shaanxi Shenganda Trading Co., Ltd | Significant influence by Long Steel Group | - | 275 | |||||||
Tianwu General Steel Material Trading Co., Ltd. | Investee of General Steel (China) | 118,346 | 46,521 | |||||||
Others | Entities either owned or have significant influence by our affiliates or management | - | 289 | |||||||
Total | $ | 145,366 | $ | 64,881 |
Name of related parties | Relationship | March 31, 2014 | December 31, 2013 | |||||||
(in thousands) | (in thousands) | |||||||||
Gansu Yulong Trading Co., Ltd. | Significant influence by Long Steel Group | $ | 1,396 | $ | 1,408 | |||||
Shaanxi Yuchang Trading Co., Ltd | Significant influence by Long Steel Group | 584 | 589 | |||||||
Total | $ | 1,980 | $ | 1,997 |
Name of related parties | Relationship | March 31, 2015 | December 31, 2014 | |||||||
(in thousands) | (in thousands) | |||||||||
Tianjin Hengying Trading Co, Ltd | Partially owned by CEO through indirect shareholding | $ | 378 | $ | 378 | |||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | 28,277 | 33,968 | |||||||
Shaanxi Steel | Majority shareholder of Long Steel Group | 27,745 | 44,146 | |||||||
Wendlar Investment & Management Group Co., Ltd | Common control under CEO | 1,180 | 1,196 | |||||||
Yangpu Capital Automobile | Partially owned by CEO through indirect shareholding | 416 | 399 | |||||||
Tianjin Dazhan Industry Co., Ltd | Partially owned by CEO through indirect shareholding | 3,750 | 3,883 | |||||||
Maoming Shengze Trading Co., Ltd | Partially owned by CEO through indirect shareholding | 157 | 2,775 | |||||||
Shaanxi Shenganda Trading Co., Ltd. | Significant influence by Long Steel Group | 13,350 | - | |||||||
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 | 524 | 507 | |||||||
Total | $ | 96,277 | $ | 87,252 | ||||||
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Customer deposits – related parties: |
Name of related parties | Relationship | March 31, 2015 | December 31, 2014 | |||||||
(in thousands) | (in thousands) | |||||||||
Shaanxi Yuchang Trading Co., Ltd | Significant influence by Long Steel Group | $ | 10 | $ | 10 | |||||
Shaanxi Coal and Chemical Industry Group Co., Ltd | Shareholder of Shaanxi Steel | 7,414 | 4,467 | |||||||
Shaanxi Haiyan Trade Co, Ltd | Significant influence by Long Steel Group | 5,391 | 6,844 | |||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | 28,863 | 23,517 | |||||||
Shaanxi Junlong Rolling Co., Ltd | Investee of Long Steel Group | 16 | 57 | |||||||
Shaanxi Shenganda Trading Co., Ltd | Significant influence by Long Steel Group | 1,960 | - | |||||||
Tianwu General Steel Material Trading Co., Ltd.* | Investee of General Steel (China) | 104,522 | 97,721 | |||||||
Total | $ | 148,176 | $ | 132,616 |
*This entity is one of the Company’s trading partners and sells or purchases the steel related products to or from the Company. During three months ended March 31, 2015 and 2014, the Company received $6.7 million and $71.8 million of deposits from this entity, of which, no trading sales transactions were utilized. During the year ended December, 31 2014 and the first quarter of 2015, the Company received a total deposits of RMB 600 million (approximately $104.0 million) from this entity. The deposits are refundable.
i. | Deposits due to sales representatives – related parties |
Name of related parties | Relationship | March 31, 2015 | December 31, 2014 | |||||||
(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 | 1,076 | 1,075 | |||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | 196 | 196 | |||||||
Shaanxi Yuchang Trading Co., Ltd | Significant influence by Long Steel Group | 587 | 586 | |||||||
Shaanxi Junlong Rolling Co., Ltd. | Investee of Long Steel Group | 42 | - | |||||||
Total | $ | 2,553 | $ | 2,509 |
j. | Long-term loans – related party: |
Name of related party | Relationship | March 31, 2014 | December 31, 2013 | Relationship | March 31, 2015 | December 31, 2014 | ||||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||||||
Shaanxi Steel | Majority shareholder of Long Steel Group | $ | 14,607 | $ | 19,644 | Majority shareholder of Long Steel Group | $ | 352,850 | $ | 339,549 | ||||||||||
Total | $ | 14,607 | $ | 19,644 | $ | 352,850 | $ | 339,549 |
The Company also provided guarantee on related parties’ bank loans amounting to $190.1$49.0 million and $205.8$82.3 million as of March 31, 20142015 and as of December 31, 2013,2014, respectively.
Deferred lease income |
March 31, 2014 | December 31, 2013 | March 31, 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 | (546 | ) | (2,158 | ) | (544 | ) | (2,176 | ) | ||||||||
Exchange rate effect | (658 | ) | 2,403 | 92 | (379 | ) | ||||||||||
Ending balance | 76,240 | 77,444 | 74,437 | 74,889 | ||||||||||||
Current portion | (2,168 | ) | (2,187 | ) | (2,179 | ) | (2,176 | ) | ||||||||
Noncurrent portion | $ | 74,072 | $ | 75,257 | $ | 72,258 | $ | 72,713 |
For the three months ended March 31, 20142015 and 2013,2014, the Company realized lease income from Shaanxi Steel, a related party, amounted to $0.5 million and $0.5 million, respectively.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
On November 19, 2013, the Company sold its 28% equity interest of Tianwu held by Yangpu Shengtong to Tianjin Dazhan Industry Co., Ltd., a related party through indirect common ownership by the CEO, for $13.6 million (RMB 84.3 million) while retaining the 32% interest held by General Steel (China). As a result of this transaction, the Company met the criteria under ASC 810-10-40-4 to deconsolidate Tianwu as of the ownership disposal date and recognize a gain, which amounted to $1.0 million. After the deconsolidation of Tianwu, General Steel (China)’s 32% interest in Tianwu was accounted for as an equity method investment, which amounted to $15.6 million and $15.8 million as of March 31, 2014 and December 31, 2013, respectively.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 22 – Equity
2014 Equity Transactions
On February 3, 2014, the Company granted 80,000 shares of common stock at $1.01 per share as service fees for investor relations consulting services under two service agreements dated January 14, 2014. The shares were valued at the quoted market price on the grant date.
Note 2320 – 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 March 31, 20142015 and 20132014 amounted to $2.8 million and $2.2$2.8 million, respectively.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 2421 – 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 three months ended March 31, 20142015 and 2013,2014, the Company did not make any contributions to these reserves.
Special reserve
The Company is required by the PRC government to reserve safety and maintenance expense to the cost of production based on the actual quantity of mineral exploited. The amount of reserves is determined within the unit price range provided by Ministry of Finance of PRC. For the three months ended March 31, 20142015 and 2013,2014, the Company made contributions of $0.3$0.2 million and $0.2$0.3 million to these reserves, respectively and used $0.1$0.04 million and $0.1 million of safety and maintenance expense, respectively.
Note 2522 – 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 March 31, 20142015 is as follows:
Year ending March 31, | Minimum lease payment | Minimum lease payment | ||||||
(in thousands) | (in thousands) | |||||||
2015 | $ | 1,243 | ||||||
2016 | 568 | $ | 2,126 | |||||
2017 | 568 | 1,946 | ||||||
2018 | 568 | 1,885 | ||||||
2019 | 568 | 1,206 | ||||||
2020 | 1,206 | |||||||
Years after | 19,744 | 40,152 | ||||||
Total minimum payments required | $ | 23,259 | $ | 48,521 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Total rental expense was $0.9$0.1 million and $0.8$0.9 million for the three months ended March 31, 20142015 and 2013,2014, respectively.
Contractual Commitments
Longmen Joint Venture has $338.2$9.9 million contractual obligations related to construction projects as of March 31, 20142015 estimated to be fulfilled between MayApril and December 2014.2015.
Contingencies
As of March 31, 2014,2015, Longmen Joint Venture provided guarantees to related parties’ and third parties’ bank loans, including lines of credit and others, amounting to $274.5$55.4 million.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Nature of guarantee | Guarantee amount | Guaranty Due Date | ||||
(In thousands) | ||||||
Line of credit | $ | 52,274 | Various from April 2015 to August 2017 | |||
Financing by the rights of goods delivery in future | 3,099 | June 2015 | ||||
Total | $ | 55,373 |
Nature of guarantee | Guarantee amount | Guaranty Due Date | ||||
(In thousands) | ||||||
Line of credit | $ | 177,353 | Various from April 2014 to August 2015 | |||
Three-party financing agreements | 4,869 | July 2014 | ||||
Confirming storage | 41,549 | Various from April to September 2014 | ||||
Financing by the rights of goods delivery in future | 50,719 | Various from April to October 2014 | ||||
Total | $ | 274,490 |
Name of parties being guaranteed | Guarantee amount | Guaranty Due Date | ||||
(In thousands) | ||||||
Long Steel Group | $ | 19,654 | Various from April to September 2015 | |||
Shaanxi Haiyan Coke Group Co., Ltd. | 13,048 | September 2015 | ||||
Long Steel Group Fuping Rolling Steel Co., Ltd | 3,099 | June 2015 | ||||
Xi’an Laisheng Logistics Co., Ltd | 3,262 | May 2015 | ||||
Gansu Yulong Trading Co., Ltd | 16,310 | August 2017 | ||||
Total | $ | 55,373 |
Name of parties being guaranteed | Guarantee amount | Guaranty Due Date | ||||
(In thousands) | ||||||
Long Steel Group | $ | 55,182 | Various from September 2014 to August 2015 | |||
Hancheng Haiyan Coking Co., Ltd | 44,795 | Various from April to December 2014 | ||||
Shaanxi Xingyuan Materials Co., Ltd. | 2,435 | July 2014 | ||||
Long Steel Group Fuping Rolling Steel Co., Ltd | 6,938 | Various from April to June 2014 | ||||
Shaanxi Tianyi Metal Materials Co., Ltd | 6,492 | December 2014 | ||||
Xi’an Laisheng Logistics Co., Ltd | 11,767 | Various from May to August 2014 | ||||
Xi'an Kaiyuan Steel Sales Co., Ltd | 6,492 | January 2015 | ||||
Shaanxi Anlin Logistics Co., Ltd | 6,492 | April 2014 | ||||
Shaanxi Longan Industry Co., Ltd. | 8,115 | December 2014 | ||||
Hancheng Sanli Furnace Burden Co., Ltd. | 16,230 | March 2015 | ||||
Tianjin Dazhan Industry Co., Ltd | 44,633 | Various from June 2014 to March 2015 | ||||
Tianjin Hengying Trading Co., Ltd | 40,575 | Various from July 2014 to January 2015 | ||||
Tianjin Qiu Steel Pipe Industry Co., Ltd | 4,869 | April 2014 | ||||
Jinmen Desheng Metallurgy Co., Ltd | 19,475 | Various from August to September 2014 | ||||
Total | $ | 274,490 |
As of March 31, 2014,2015, the Company did not accrue any liability for the amounts the Group has guaranteed for third and related parties because those parties are current in their payment obligations and the Company has not experienced any losses from providing guarantees. The Company has evaluated the debt guarantees and concluded that the likelihood of having to make payments under the guarantees is remote and that the fair value of the stand-ready obligation under these commitments is not material.
Note 2623 – 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.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following represents results of division operations for three months ended March 31, 20142015 and 2013: 2014:
(In thousands) | ||||||||
Sales: | 2014 | 2013 | ||||||
Longmen Joint Venture | $ | 594,014 | $ | 646,748 | ||||
Maoming Hengda | 36 | 1,523 | ||||||
Baotou Steel Pipe Joint Venture | 162 | 9 | ||||||
General Steel (China) & Tianwu Joint Venture | 53 | 48,726 | ||||||
Total sales | 594,265 | 697,006 | ||||||
Interdivision sales | (54 | ) | (45,715 | ) | ||||
Consolidated sales | $ | 594,211 | $ | 651,291 |
(In thousands) | ||||||||
Sales: | 2015 | 2014 | ||||||
Longmen Joint Venture | $ | 328,158 | $ | 594,014 | ||||
Maoming Hengda | 6 | 36 | ||||||
Baotou Steel Pipe Joint Venture | - | 162 | ||||||
General Shengyuan | - | - | ||||||
General Steel (China) | - | 53 | ||||||
Total sales | 328,164 | 594,265 | ||||||
Interdivision sales | - | (54 | ) | |||||
Consolidated sales | $ | 328,164 | $ | 594,211 |
Gross profit (loss): | 2014 | 2013 | 2015 | 2014 | ||||||||||||
Longmen Joint Venture | $ | (22,219 | ) | $ | 4,367 | $ | (32,147 | ) | $ | (22,219 | ) | |||||
Maoming Hengda | 24 | (228 | ) | - | 24 | |||||||||||
Baotou Steel | (23 | ) | (78 | ) | - | (23 | ) | |||||||||
General Steel (China) & Tianwu Joint Venture | (343 | ) | 6 | |||||||||||||
Total gross profit (loss) | (22,561 | ) | 4,067 | |||||||||||||
General Shengyuan | - | - | ||||||||||||||
General Steel (China) | - | (343 | ) | |||||||||||||
Total gross loss | (32,147 | ) | (22,561 | ) | ||||||||||||
Interdivision gross profit | - | - | - | - | ||||||||||||
Consolidated gross profit (loss) | $ | (22,561 | ) | $ | 4,067 | |||||||||||
Consolidated gross loss | $ | (32,147 | ) | $ | (22,561 | ) |
Income (loss) from operations: | 2014 | 2013 | 2015 | 2014 | ||||||||||||
Longmen Joint Venture | $ | (39,294 | ) | $ | 34,937 | $ | (53,498 | ) | $ | (39,294 | ) | |||||
Maoming Hengda | (522 | ) | (797 | ) | (561 | ) | (522 | ) | ||||||||
Baotou Steel | (44 | ) | (361 | ) | - | (44 | ) | |||||||||
General Steel (China) & Tianwu Joint Venture | (2,566 | ) | (808 | ) | ||||||||||||
Total income (loss) from operations | (42,426 | ) | 32,971 | |||||||||||||
Interdivision income (loss) from operations | - | - | ||||||||||||||
General Shengyuan | - | - | ||||||||||||||
General Steel (China) | (734 | ) | (2,566 | ) | ||||||||||||
Total loss from operations | (54,793 | ) | (42,426 | ) | ||||||||||||
Reconciling item (1) | (1,237 | ) | (1,080 | ) | (919 | ) | (1,237 | ) | ||||||||
Consolidated income (loss) from operations | $ | (43,663 | ) | $ | 31,891 | |||||||||||
Consolidated loss from operations | $ | (55,712 | ) | $ | (43,663 | ) |
Net income (loss) attributable to General Steel Holdings, Inc.: | 2014 | 2013 | 2015 | 2014 | ||||||||||||
Longmen Joint Venture | $ | (38,034 | ) | $ | 8,325 | $ | (42,405 | ) | $ | (38,034 | ) | |||||
Maoming Hengda | (537 | ) | (771 | ) | (666 | ) | (537 | ) | ||||||||
Baotou Steel | (35 | ) | (289 | ) | - | (35 | ) | |||||||||
General Steel (China) & Tianwu Joint Venture | (3,843 | ) | (3,156 | ) | ||||||||||||
Total net income (loss) attributable to General Steel Holdings, Inc. | (42,449 | ) | 4,109 | |||||||||||||
Interdivision net income | - | - | ||||||||||||||
General Shengyuan | - | - | ||||||||||||||
General Steel (China) | (1,163 | ) | (3,843 | ) | ||||||||||||
Total net loss attributable to General Steel Holdings, Inc. | (44,234 | ) | (42,449 | ) | ||||||||||||
Reconciling item (1) | (1,115 | ) | (1,006 | ) | (919 | ) | (1,115 | ) | ||||||||
Consolidated net loss attributable to General Steel Holdings, Inc. | $ | (43,564 | ) | $ | 3,103 | $ | (45,153 | ) | $ | (43,564 | ) |
Depreciation, amortization and depletion: | 2014 | 2013 | 2015 | 2014 | ||||||||||||
Longmen Joint Venture | $ | 23,530 | $ | 20,431 | $ | 24,186 | $ | 23,530 | ||||||||
Maoming Hengda | 304 | 311 | 310 | 304 | ||||||||||||
Baotou Steel | 62 | 97 | - | 62 | ||||||||||||
General Steel (China) & Tianwu Joint Venture | 450 | 519 | ||||||||||||||
General Shengyuan | - | - | ||||||||||||||
General Steel (China) | 668 | 450 | ||||||||||||||
Consolidated depreciation, amortization and depletion | $ | 24,346 | $ | 21,358 | $ | 25,164 | $ | 24,346 |
Finance/interest expenses: | 2014 | 2013 | ||||||
Longmen Joint Venture | $ | 26,990 | $ | 22,150 | ||||
Maoming Hengda | - | |||||||
Baotou Steel | 1 | - | ||||||
General Steel (China) & Tianwu Joint Venture | 1,609 | 2,706 | ||||||
Interdivision interest expenses | - | - | ||||||
Reconciling item (1) | 95 | 1 | ||||||
Consolidated interest expenses | $ | 28,695 | $ | 24,857 |
Capital expenditures: | 2014 | 2013 | ||||||||||||||
Finance/interest expenses: | 2015 | 2014 | ||||||||||||||
Longmen Joint Venture | $ | 56,747 | $ | 24,083 | $ | 19,148 | $ | 26,990 | ||||||||
Maoming Hengda | 32 | 2 | - | - | ||||||||||||
Baotou Steel | - | 7 | - | 1 | ||||||||||||
General Steel (China) & Tianwu Joint Venture | 82 | 1 | ||||||||||||||
General Shengyuan | - | - | ||||||||||||||
General Steel (China) | 1,421 | 1,609 | ||||||||||||||
Reconciling item (1) | - | - | 1 | 95 | ||||||||||||
Consolidated capital expenditures | $ | 56,861 | $ | 24,093 | ||||||||||||
Consolidated interest expenses | $ | 20,570 | $ | 28,695 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Total Assets as of: | March 31, 2014 | December 31, 2013 | ||||||
Longmen Joint Venture | $ | 2,512,090 | $ | 2,573,212 | ||||
Maoming Hengda | 28,278 | 29,211 | ||||||
Baotou Steel Pipe Joint Venture | 4,122 | 4,448 | ||||||
General Steel (China) & Tianwu Joint Venture | 182,641 | 121,883 | ||||||
Interdivision assets | (33,930 | ) | (34,213 | ) | ||||
Reconciling item (2) | 8,311 | 5,817 | ||||||
Total Assets | $ | 2,701,512 | $ | 2,700,358 |
Capital expenditures: | 2015 | 2014 | ||||||
Longmen Joint Venture | $ | 30,625 | $ | 56,747 | ||||
Maoming Hengda | 296 | 32 | ||||||
Baotou Steel | - | - | ||||||
General Shengyuan | - | - | ||||||
General Steel (China) | 668 | 82 | ||||||
Reconciling item (1) | - | - | ||||||
Consolidated capital expenditures | $ | 31,589 | $ | 56,861 |
Total Assets as of: | March 31, 2015 | December 31, 2014 | ||||||
Longmen Joint Venture | $ | 2,310,161 | $ | 2,408,218 | ||||
Maoming Hengda | 22,555 | 25,933 | ||||||
General Shengyuan | 1,142 | - | ||||||
General Steel (China) | 249,013 | 158,606 | ||||||
Interdivision assets | (79,743 | ) | (30,486 | ) | ||||
Reconciling item (2) | 3,281 | 2,953 | ||||||
Total Assets | $ | 2,506,409 | $ | 2,565,224 |
(1) | Reconciling item represents |
(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 March 31, |
Note 24 – Subsequent event
On April 14, 2015, the Company granted 500,000 shares of common stock for investor relations consulting services under a service agreements dated April 14, 2015. The shares were valued at $0.98 per share, the quoted market price at the time the services were provided.
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”, to 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.
Recent Developments and First Quarter Highlights
The first quarter of 20142015 was highlighted with the following:
· | Sales in the first quarter of |
· | Gross loss in the first quarter of | |
· | Total finance expense in the first quarter of |
· | Loss per share |
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.
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 drive profitability through improved operational efficiencies and optimization of our cost | |
· | 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)”); |
· | 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 January 1, 2010, General Steel (China) entered into a lease agreement with Tianjin DaqiuzhuangShuangjie Liansheng Rolled Steel Plates Co., Ltd. (the “Lessee”), an unrelated third party, whereby General Steel (China) leased parts of its facility located at No. 1, Tonga Street, Daqiuzhuang Town, Jinghai County, Tianjin City to the Lessee (the “Lease Agreement”). The Lease Agreement provides approximately 776,078 square feet of workshops, land, equipment and other facilities to the Lessee and allows our Company to reduce overhead costs while providing a recurring monthly income stream resulting from payments due under the lease. The initial term of the Lease Agreement was from January 1, 2010 to December 31, 2011 and the monthly base rental rate due to General Steel (China) was approximately $0.2 million (RMB 1.7 million). On July 28, 2011, General Steel (China) signed a supplemental agreement with the Lessee to extend the lease for an additional five years to December 31, 2016. However, due to current steel market conditions, the Lessee has informed us that it did not intend to continue with the lease at June 30, 2012. There was no penalty for early termination. Subsequently, General Steel (China) leased parts of its facilities to Tianjin Shuangjie Liansheng Rolled Steel Co., Ltd. for a monthly payment of $0.1 million (RMB 0.5 million). The lease expires in May 2021. A write-down in the carrying value of property, plant and equipment in relation to this event has been assessed and an impairment of $5.4 million (RMB 35.1 million) was recorded in the selling, general and administrative expenses in the second quarter of 2011 and an additional $3.9 million (RMB 24.3 million) was recorded in the selling, general and administrative expenses for the year ended December 31, 2012. Management also re-evaluatesevaluates the fair value of its long-term assets on an annual basis, or upon a triggering event which would require an assessment sooner.
Baotou Steel - General Steel Special Steel Pipe Joint Venture Company Limited
On April 27, 2007, General Steel (China)sooner, 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%. 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.opinion that the fair value of the property, plant and equipment as supported by the operating lease approximates its current carrying value.
Shaanxi Longmen Iron and Steel Co., Ltd
Effective June 1, 2007, through General Steel (China) and Tianjin Qiu Steel Investment Co., Ltd. (“Qiu Steel”), a 99% owned subsidiary of General Steel (China), we entered into a Joint Venture Agreement with Shaanxi Longmen Iron & Steel Group Co., Ltd. (“Long Steel Group”) to form Shaanxi Longmen Iron and Steel Co., Ltd. (“Longmen Joint Venture”). Through General Steel (China) and Qiu Steel, we invested approximately $39.3 million in cash and collectively held a 60% ownership interest in Longmen Joint Venture until April 29, 2011, when a 20-year Unified Management Agreement (the “Unified Management Agreement”) was entered into between our Company, Longmen Joint Venture, Shaanxi Coal and Shaanxi Steel. Longmen Joint Venture was determined as a Variable Interest Entity (“VIE”) and we are the primary beneficiary.
Long Steel Group, located in Hancheng city, Shaanxi Province, in China’s Western region, was founded in 1958 and incorporated in 2002, and is owned by a state owned entity through Shaanxi Steel. Long Steel Group holds the remaining 40% ownership interest in Longmen Joint Venture and operates as a fully-integrated steel production facility. Fewer than 10% of steel companies in China have fully-integrated steel production capabilities.
Currently, Longmen Joint Venture has five branch offices, four consolidated subsidiaries/VIE and fiveone entities in which it has a noncontrolling interest. It employs approximately 8,7008,400 full-time workers. In addition to steel production, Longmen Joint Venture operates transportation services through its Changlong Branch, located in Hancheng city, Shaanxi Province. Changlong Branch owns 177 vehicles and provides transportation services exclusively to Longmen Joint Venture.
Longmen Joint Venture’s rebar products are categorized within the steel industry as “longs” (in reference to their shape). Rebar is generally considered a regional product because its weight and dimension make it ill-suited for cost-effective long-haul ground transportation. By our estimates, the market demand for rebar in Shaanxi Province is six to eight million metric tons per year. Slightly more than half of this demand comes from Xi’an, the capital of Shaanxi Province, located 180km from Longmen Joint Venture’s main steel production site. Currently, we estimate that we have approximately a 72% share of the Xi’an market for rebar.
An established regional network of approximately one hundred twenty-eight distributors, together with smaller distributors and three 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.
On September 24, 2007, Longmen Joint Venture acquired a 74.9% ownership interest in Longmen Iron and Steel Group Environmental Protection Industry Development Co., Ltd. (“Longmen EPID”). At the same time, Longmen Joint Venture entered into an equity transfer agreement with Long Steel Group to acquire a 36% ownership interest in its subsidiary, Longmen Iron and Steel Group Co., Ltd. Hualong Fire Retardant Materials Co., Ltd. (“Hualong”). Longmen Joint Venture paid $0.4 million (RMB 3.3 million) in exchange for the ownership interest and is the largest shareholder in Hualong. Hualong’s facility produces fire-retardant materials used in various steel making processes.
In January 2010, Longmen Joint Venture completed its acquisition of the remaining 25.1% interest in Longmen EPID pursuant to an equity transfer agreement with Shaanxi Fangxin Industrial Co., Ltd. (“Shaanxi Fangxin”), the other shareholder of Longmen EPID, for $1.3 million (RMB 8.7 million). Longmen EPID then became a branch of Longmen Joint Venture.
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.
Dismantling of certain assets and a sub-lease of Longmen Joint Venture’s land associated with the construction by Shaanxi Steel began in June 2009. At the beginning See Note 14 - “Deferred lease income” of the construction in June 2009, Longmen Joint Venture reached an oral agreement with Shaanxi Steel that all costs incurred relatedNotes to the construction would be reimbursed by Shaanxi Steel. From that point forward through construction and testing until completion of the project in March 2011, Longmen Joint Venture recorded the related costs as they were incurred according to the nature of these costs and recognized the related receivable from Shaanxi Steel. In December 2010, Shaanxi Steel and Longmen Joint Venture were able to finalize the amount of costs incurred by the Longmen Joint Venture to be reimbursed and executed two agreements between the two parties on December 20, 2010. To compensate us, in the fourth quarter of 2010, Shaanxi Steel reimbursed Longmen Joint Venture $11.4 million (RMB 70.1 million) relating to the value of assets dismantled and rent under a 40-year property sub-lease that was entered into by the parties in June 2009, and $29.7 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 $14.5 million (RMB 89.5 million) and $14.5 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. 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 period. Costs of $7.1 million (RMB 43.9 million) each year were deferred and will be recognized over the term of the land sub-lease similar to the other charges and credits related to the construction of these assets
The amount of reimbursement was deferred as lease income and is being recognized and amortized to income over the remaining terms of the 40-year sub-lease. For the three months ended March 31, 2014 and 2013, we recognized lease income of $2.2 million and $2.2 million, respectively. As of March 31, 2014 and December 31, 2013, the deferred lease income on the land sub-lease was $76.2 million and $77.4 million, respectively. The remaining life of amortization is 35.0 years as of March 31, 2014.Consolidated Financial Statements included herein
On April 29, 2011, we entered into a 20-year Unified Management Agreement (the “Unified Management(“the Agreement”) with was entered into between the Company, the Company’s 60%-owned subsidiary Shaanxi Longmen Iron and Steel Co., Ltd. (“Longmen Joint Venture,Venture”), Shaanxi Coal and Chemical Industry Group Co., Ltd. (“Shaanxi Steel.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 GroupGroup”) 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, a state-owned entity.Steel. Under the terms of the Unified Management Agreement, all manufacturing machinery and equipment of Longmen Joint Venture and $600.7the $605.8 million (or approximately RMB 3.7 billion) of the newly constructed iron and steel making facilities owned by Shaanxi Steel, which includes one 400m400 m2 sintering machine, two 1,280m1,280 m3 blast furnaces, two 120 ton converters and some auxiliary systems, are managed collectively as a single virtual asset pool (the “Asset(“Asset Pool”). Longmen Joint Venture manages the Asset Pool as the principal operating entity and is responsible for the daily operationoperations of the new and existing facilities.
Furthermore, under the terms The Agreement leverages each of the Unified Management Agreement, Shaanxi Coal has committed to providingparties’ operating strengths, allowing Longmen Joint Venture with raw materials, including coketo derive the greatest benefit from the cooperation and coal, at a cost not higher than the market rate. In addition,newly constructed iron and steel making facilities. At the Unified Management Agreement includes provisions pursuant to which both Shaanxi Coal and Shaanxi Steel are expected to provide financial support, including credit guarantees, as needed for operations by Longmen Joint Venture. In February 2014, Shaanxi Steel agreed that it will not demand capital lease payments from Longmen Joint Venture until February 2017.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 that equalsequaling the depreciation expense on the equipment constructed by Shaanxi Steel in addition toas 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, ourthe Company’s economic interest in the profitsprofit or loss generated by the Asset PoolLongmen Joint Venture decreased from 60% to 36%. However, the overall capacity under the management of Longmen Joint Venture has increased by three million tons, or 75%. The Unified Management Agreement is also expected to improveimproved 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 Unified Management Agreement have agreed to establishestablished the Shaanxi Longmen Iron and Steel Unified Management Supervisory Committee ("Supervisory Committee") to ensure that the facilities and related resources are being operated and managed according to the stipulations set forth in the Unified Management Agreement. However, theThe 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 Unified Management Agreement constitutes an arrangement that involves a lease which metmeets 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 derivativecapital lease. The profit sharing liability and therefore,portion of the lease obligation, representing 40% of the pre-tax profit generated by the Asset Pool, is accounted for as such by Longmen Joint Venture.Venture as a derivative financial instrument at fair value. See Note 3 -Notes 2 “Summary of significant accounting policies”, Note 16 -15 “Capital lease obligations” and Note 17 -16 “Profit sharing liability” of the Notes to Condensed Consolidated Financial Statements included herein..
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. In July and November of 2013, we brought online two advanced continuous-rebar-rolling production lines with processing capacities of 900,000 metric tons and 1,200,000 metric tons of rebar respectively. Longmen Joint Venture now has a total processing capacity of 5.2 million metric tons.
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, in the second quarter ofbetween 2009 and 2010, we relocated the 800,0001.8 million metric ton capacity rebar production line from Maoming Hengda’s facility to Longmen Joint Venture. Thereafter, in December 2010, we relocated the 1,000,000 metric ton capacityand high-speed wire production line from Maoming Hengda’sHengda's facility to Longmen Joint Venture to meet increased demand in Shaanxi Province.Venture.
In December 2010, we brought online a new 400,000 ton capacity rebar production line. The new rebar line was constructed as a result of a strategic alliance agreement between Maoming Hengda and Zhuhai Yueyufeng Iron and Steel Co., Ltd. (“Yueyufeng”), executed on February 3, 2010. According to this agreement, Yueyufeng paid in advance $4.4 million in three installments to support the construction of the rebar production line for Maoming Hengda, and charged Maoming Hengda interest at a rate of 10% annually. The interest expense incurred was recorded in finance expenses.
On December 15, 2013, Maoming Hengda entered into a lease agreement with Zhongshan Baohua Rebar Factory, with which Maoming Hengda leased the 400,000 ton capacity rebar production line and various other buildings and equipment to Zhongshan Baohua Rebar Factory, for an annual payment of $1.2 million (RMB 7.2 million) for eight years between March 2014 and February 2022.
Tianjin General Shengyuan IoT Technology Co., Ltd
On February 10, 2015, we reached a definitive agreement (“the Agreement”) to form a joint venture with a team of RFID experts (the “Expert Team”), to develop and commercialize RFID technology data solutions. The joint venture entity named Tianjin General Shengyuan IoT Technology Co., Ltd. (“General Shengyuan IoT”) obtained its business license on February 13, 2015.
The Expert Team includes several forerunners in the data integration and logistics industries, led by Mr. Michael Au, a veteran with over 17 years experience and more than a dozen patents in RFID technology. In 1997, Mr. Au developed and patented the first non-contact RFID device for moving vehicles that is still being used today for highway toll collections in the Guangdong Province. In 2005, Mr. Au co-founded Xindeco IoT (formerly Xinda Huicong Technology Company), the first China-based company specializing in the development and production of UHF RFID tags. Supporting Mr. Au and acting as the Expert Team’s chief technical adviser will be Dr. Changyu Wu, a member of the US Institute of Electrical and Electronics Engineers with over 20 years 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 no revenues and significant operating expenses during the period.
Production Capacity Information Summary by Subsidiary
Annual Production Capacity (metric tons) | General Steel (China) | 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 | 4.3 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. |
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, general inquiriestimeliness 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 months ended March 31, 2014,2015, approximately 20.4%39.2% of our sales were to five customers. We believe that revenue derived from our current and future large customers will continue to represent a significant portion of our total revenue.
Moreover, our success will depend in part upon our ability to obtain orders from new customers, as well as the financial condition and success of our customers and general economic conditions in China.
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Demand for our Products
For the three months ended March 31, 2014 and 2013, rebar, our major product, comprised of more than 99% and 99% of our sales, respectively. Overall, domestic economic growth is an important driver of demand for our major product, especially from construction and infrastructure projects.
At Longmen Joint Venture, growth in regional construction and infrastructure projects drives demand for our products. According to the 12th Five Year National Economic and Social Development Plan (“NESDP”) (2011-2015), development of China’s western region is one of China’s top five economic priorities. Shaanxi Province, where Longmen Joint Venture is located, has been designated as a focal point for development in the Western region, and Xi’an, the provincial capital, has been designated as a focal point for this development in China. Longmen Joint Venture is 180 kilometers from Xi’an and it does not have a major competitor within a 250 km radius.
The Western region of China, where our major sales market is located, has experienced a higher rate of growth than other Chinese regions in recent years. Compared to an increase of 7.7%7.4% for the national GDP, a GDP increase of 11%9.7% was reported by Shaanxi Province in 2013 over the previous year.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 approximately $257.4$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 $40.2 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 $13.0 billion (RMB 80 billion) in the construction of hydro projects, which is three times the amount invested during the 11th Five Year National Economic and Social Development Plan. In addition to hydro projects, according to the central government, 16,000 total kilometers of high speed railway will be built by 2020.
In May 2011, the central government passed the Cheng-Yu Economic Zone Plan focusing on Chongqing City and Sichuan Province, covering 206,000 square kilometers, to further accelerate the development of the western region of China. We anticipate that in the near future, the demand for our products will increase in those areas, and we expect that our expanded production capacity will be able to successfully meet the increase in demand. Furthermore, we have a sales office located in Chengdu to help facilitate such increased demand.
In February 2012, the government approved the Western Development 12th Five Year Plan, which continues the efforts to develop the Western areas. The Plan is centered on the infrastructure and construction, highlighted by the development of economic zones, construction of roads/railway and hydro projects, which drive the local demand for steel products.
In February 2014, National Development and Reform Commission (“NDRC”) announced nine focal points of the western development, which will speed up the major infrastructure construction in the western areas, including the construction of railway, highway and hydro-projects.
China’s central government also introduced the One Belt and One Road (“OBAOR”) strategy, with an aim to create new markets for China’s products by promoting China’s infrastructure investments in less-developed countries. “One Road” refers to the 21st century Maritime Silk Road initiative, which seeks to extend China’s trading and infrastructure investments into Southeast Asian nations and further afield to south Asia and Africa. “One Belt” refers to the Silk Road Economic Belt, which extends into central Asian nations.
According to figures released by China’s National Development and Reform Commission, 33 infrastructure projects kicked off in 2014 in Western China, worth a total investment of RMB 835.3 billion ($134.7 billion), more than doubled from a total investment of RMB 326.5 billion on 20 projects in 2013.
We anticipate strong demand for our products driven by these and many other construction and infrastructure projects. We believe there will be sustained regional demand for several years as both the central and provincial governments continue to drive western region development efforts.
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 80%71% 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. According to the terms of Longmen Joint Venture‘s Agreement with the Long Steel Group, we have a first right of refusal for sales from the Daxigou mine. We presently purchase all of the iron ore produced by this mine.
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 March 31, 2014 are as follows:
Industry Environment
Despite demand growth experienced during 2010 and 2011,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 whichand has become the most significant challenge in the steel manufacturing business. Chinese crude steel production was 202.7reached a record high of 823 million tons from January to March in 2014, an increase of 2.37% compared to the same period last year,0.89% over 2013, while the total consumption of crude steel reached 160was only 738 million tons from January to March in 2014, increased by 0.75%a decrease of 3.4% from the same period last year, according to the China Iron and Steel Association.
For steelmakers, operating performance depends on the volatility of the cost of raw materials. The shortage of these raw materials in the market has allowed suppliers of iron ore and metallurgical coal to rebuild the pricing mechanisms through the shift from annual to shorter-term price contracts. This has created numerous challenges for steelmakers as they must now deal with volatility in raw material prices, as well as maintain margins with fluctuating demand. Over the past few years, we have witnessed perseverance in steel prices that has given iron ore producers an opportunity to increase the prices in the next contract; however the reverse may not be true as steel companies cannot always pass on the rise in iron ore prices to end consumers due to the market overcapacity and fragmentation.
China’s steel industry is highly fragmented, and the Chinese government continues to encourage industry consolidation. The Chinese central government has had a long-stated goal to consolidate 70%60% of domestic steel production among the top ten producers by 2015, and expanding to 70% by 2020. Currently, there are approximately 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 ofby 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 service and such consolidation is not expected to directly impact our Company.serve.
Despite the government’s initiatives to encourage industry consolidation and cut over-capacity, it is estimated that new capacity of approximately 20~25 million metric tons was added in 2014. Excess supply, weakening economic growth, and sagging prices have resulted in depressed margins and operating losses. According to statistics by China Iron and Steel Association, the blended net margin of China steel enterprises in 2014 was only 0.85%, with approximately 15% of major steel companies monitored by China Iron and Steel Association still incurring operating losses.
On July 12, 2010, the Ministry of Industry & Information Technology Commission enacted the Steel Industry Admittance and Operation Qualifications standards. 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. While the operational conditions become more stringent, more small and medium sized companies will likely to 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 quantitative 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.
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Results of Operations for the Three Months Ended March 31, 20142015
Sales
Three months ended March 31, 20142015 compared with three months ended March 31, 20132014
The following table sets forth sales and volume in metric tons.
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March 31, 2014 | March 31, 2013 | Change | Change | March 31, 2015 | March 31, 2014 | Change | Change | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
in thousands, except metric tons | Volume | Sales | % | Volume | Sales | % | Volume % | Sales % | Volume | Sales | % | Volume | Sales | % | Volume % | Sales % | ||||||||||||||||||||||||||||||||||||||||||||||||
Longmen Joint Venture | 1,317,540 | $ | 594,014 | 100.0 | % | 1,255,123 | $ | 646,748 | 99.3 | % | 5.0 | % | (8.2 | )% | 954,566 | $ | 328,158 | 100.0 | % | 1,317,540 | $ | 594,014 | 100.0 | % | (27.5 | )% | (44.8 | )% | ||||||||||||||||||||||||||||||||||||
Others | 723 | 197 | 0.0 | % | 49,300 | 4,543 | 0.7 | % | (98.5 | )% | (95.7 | )% | 29 | 6 | 0.0 | % | 723 | 197 | 0.0 | % | (96.0 | )% | (97.0 | )% | ||||||||||||||||||||||||||||||||||||||||
Total Sales | 1,318,263 | $ | 594,211 | 100.0 | % | 1,304,423 | $ | 651,291 | 100.0 | % | 1.1 | % | (8.8 | )% | 954,595 | $ | 328,164 | 100.0 | % | 1,318,263 | $ | 594,211 | 100.0 | % | (27.6 | )% | (44.8 | )% |
Total sales for the three months ended March 31, 20142015 decreased by 8.8%44.8% to $594.2$328.2 million from $651.3$594.2 million for the same period in 2013.2014. The decrease in sales compared to the same period in 20122014 was predominantly due to the decreased average selling price. Longmen Joint Venture comprised approximately 100.0% and 99.3%100.0% of total sales for the first quarter of 20142015 and 2013,2014, respectively. Sales volume of rebar increaseddecreased by 5.0%27.6% to 1.321.0 million metric tons as compared to 1.261.3 million metric tons in the same period in 2013.2014. The average selling price of rebar decreased by 12.5%23.7% to approximately $343.8 per ton in the first quarter of 2015 compared to approximately $450.9 per ton in the first quarter of 2014 compared to approximately $515.3 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 the financial crisis,weakened global economy, 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 impactdo so in 2014 and 2015. At the same time, we strategically decreased our results duringsales volume in the yearfirst quarter of 2013 and into 2014. Further,2015 to avoid selling our rebar products at prices significantly below cost as rebar selling prices declined. As a result, our finished goods inventory also increased from $12.3 million at December 31, 2014 to $43.1 million as we intended to sell the Chinese economy remained weak, which had an indirect impact of affecting our industry, andrebar when we expected the selling price will be recovered at higher selling prices in the second and third quarter of 2015 as the two quarters normally were our products continued to decrease during this periodbest quarters in comparison to the same period in 2013.term of financial performance.
Our five major customers were distributors and collectively represented approximately 20.4%39.2% of our total sales for the three months ended March 31, 20142015 as compared to 20.4% of our total sales for the three months ended March 31, 2013.2014. 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 March 31, 20142015 compared with three months ended March 31, 20132014
Three months ended | Three months ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
March 31, 2014 | March 31, 2013 | Change | Change | March 31, 2015 | March 31, 2014 | Change | Change | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
in thousands, except metric tons | Volume | Cost of Goods Sold | % | Volume | Cost of Goods Sold | % | Volume % | Cost of Goods Sold % | Volume | Cost of Goods Sold | % | Volume | Cost of Goods Sold | % | Volume % | Cost of Goods Sold % | ||||||||||||||||||||||||||||||||||||||||||||||||
Longmen Joint Venture | 1,317,540 | $ | 616,234 | 99.9 | % | 1,255,123 | $ | 642,381 | 99.3 | % | 5.0 | % | (4.1 | )% | 954,566 | $ | 360,305 | 100.0 | % | 1,317,540 | $ | 616,234 | 99.9 | % | (27.5 | )% | (41.5 | )% | ||||||||||||||||||||||||||||||||||||
Others | 723 | 538 | 0.1 | % | 49,300 | 4,843 | 0.7 | % | (98.5 | )% | (88.9 | )% | 29 | 6 | 0.0 | % | 723 | 538 | 0.1 | % | (96.0 | )% | (98.9 | )% | ||||||||||||||||||||||||||||||||||||||||
Total Cost of Goods Sold | 1,318,263 | $ | 616,772 | 100.0 | % | 1,304,423 | $ | 647,224 | 100.0 | % | 1.1 | % | (4.7 | )% | 954,595 | $ | 360,311 | 100.0 | % | 1,318,263 | $ | 616,772 | 100.0 | % | (27.6 | )% | (41.6 | )% |
Our primary cost of goods sold is the cost of raw materials such as iron ore, coke, alloy and scrap steel. The costs of iron ore and coke account for approximately 67.4%66.6% of our total cost of sales. The cost of goods sold decreased by 4.7%41.6% to $616.8$360.3 million in the first quarter of 20142015 from $647.2$616.8 million 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 approximately 3.0%39.2% and approximately 17.0%19.0%, respectively, for the three months ended March 31, 20142015 as compared to the same period in 2013.2014. As such, the average costs of rebar manufactured decreased 8.6%19.3% to approximately $467.7$377.5 per ton in the first quarter of 20142015 from approximately $511.8$467.7 per ton in the same period of 2013.2014.
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Gross Profit (Loss)Loss
Three months ended March 31, 20142015 compared with three months ended March 31, 20132014
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March 31, 2014 | March 31, 2013 | Change | March 31, 2015 | March 31, 2014 | Change | |||||||||||||||||||||||||||||||||||||||||||||||||||
in thousands, except metric tons | Volume | Gross Profit (Loss) | Margin % | Volume | Gross Profit (Loss) | Margin % | Gross Profit | Volume | Gross Loss | Margin % | Volume | Gross Loss | Margin % | Gross Loss | ||||||||||||||||||||||||||||||||||||||||||
Longmen Joint Venture | 1,317,540 | $ | (22,220 | ) | (3.7 | )% | 1,255,123 | $ | 4,367 | 0.7 | % | (608.8 | )% | 954,566 | $ | (32,147 | ) | (9.8 | )% | 1,317,540 | $ | (22,220 | ) | (3.7 | )% | 44.7 | % | |||||||||||||||||||||||||||||
Others | 723 | (341 | ) | (173.1 | )% | 49,300 | (300 | ) | (6.6 | )% | 13.7 | % | 29 | - | 0.0 | % | 723 | (341 | ) | (173.1 | )% | (100.0 | )% | |||||||||||||||||||||||||||||||||
Total Gross Profit (Loss) | 1,318,263 | $ | (22,561 | ) | (3.8 | )% | 1,304,423 | $ | 4,067 | 0.6 | % | (654.7 | )% | |||||||||||||||||||||||||||||||||||||||||||
Total Gross Loss | 954,595 | $ | (32,147 | ) | (9.8 | )% | 1,318,263 | $ | (22,561 | ) | (3.8 | )% | 42.5 | % |
Gross loss for the first quarter of 20142015 was $(32.1) million, or (9.8)% of total sales, as compared to $(22.6) million, or (3.8)% of total sales as compared to a gross profit of $4.1 million, or 0.6% of total sales infor the same period in 2013.2014. The decrease in gross margin percentage was mainly attributable to the percentage decrease of average rebar selling price of 12.5% was slightly23.7% being higher tothan the percentage decrease of costs of rebar manufactured of 8.6%19.3% for the first quarter of 20142015 as compared to the same period of 2013.2014.
Selling, General and Administrative Expenses (“SG&A”)
Three months ended March 31, 20142015 compared with three months ended March 31, 20132014
(in thousands) | Three months ended | Three months ended | ||||||||||||||||||||||
March 31, 2014 | March 31, 2013 | Change % | March 31, 2015 | March 31, 2014 | Change % | |||||||||||||||||||
Selling, general and administrative expenses | $ | (21,053 | ) | $ | (18,955 | ) | 11.1 | % | $ | (17,355 | ) | $ | (21,053 | ) | (17.6 | )% | ||||||||
SG&A expenses as a percentage of total revenue | (3.5 | )% | (2.9 | )% | ||||||||||||||||||||
Unallocated overheads expenses | $ | (19,134 | ) | - | 100.0 | % | ||||||||||||||||||
SG&A expenses and Unallocated overheads expenses as a percentage of total revenue | (11.1 | )% | (3.5 | )% |
SG&A expenses, such as travel expenses and transportation fees, entertainment, employee benefit, training, and travel expenses increaseddecreased by 11.1%17.6% to $21.1$17.4 million for the three months ended March 31, 2014,2015, compared to $19.0$21.1 million for the same period in 2013.2014.
Selling expenses increaseddecreased by 3.4%23.5% to $8.3$6.4 million for three months ended March 31, 20142015 as compared to $8.1$8.3 million in the same period of 2013.2014. The increasedecrease was mainly due to the increase$1.9 million or 27.2% decrease in freight expenses along with the 5.0% increase27.6% decrease in the sales volume of our rebar products.
In addition, generalGeneral and administrative (“G&A”) expenses were approximately $12.7$11.0 million and $10.9$12.7 million for three months ended March 31, 20142015 and 2013,2014, respectively. The 16.7% increasedecrease was mainly due to Longmen Joint Venture decreased employee base salaries and employee benefit expense starting in the risethird quarter of benefit2014 and the decrease in utilities expenses, consulting expenses, and waste managementlegal expenses.
In March of 2015, we had abnormally low production in the first quarter of 2015 due to our annual plant and environmental protection expenses.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 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 annual plant and machinery maintenance.
Change in Fair Value of Profit Sharing Liability
Three months ended March 31, 20142015 compared with three months ended March 31, 20132014
(in thousands) | Three months ended | Three months ended | ||||||||||||||||||||||
March 31, 2014 | March 31, 2013 | Change % | March 31, 2015 | March 31, 2014 | Change % | |||||||||||||||||||
Change in fair value of profit sharing liability | $ | (49 | ) | $ | 46,779 | (100.1 | )% | $ | 12,924 | $ | (49 | ) | (26,475.5 | )% |
We have considered the recent changes in China’s economic situation, which included a new estimation and downgrade of 2014 GDP by major investment bankers in June 2013, and a steel industry outlook reports issued for 2014. As a result, we have 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 as compared to our previous estimates in 2012 and we recognized a gain of $46.8 million in our income (loss) from operations forFor the three months ended March 31, 2013. We2014, we recognized a loss on change in fair value of profit sharing liability of $0.05 million in our income (loss)loss from operations for the three months ended March 31, 2014 primarily due to the change in fair value related to the passageamortization of time and change in the number of future periods over which the present value of future cash flows was estimated.discount. The fair value of the profit sharing liability at March 31, 2014 was not materially different from the previous reporting period.
For the three months ended March 31, 2015, we recognized a gain on change in fair value of profit sharing liability of $12.9 million in our loss from operations. The $12.9 million gain comprised of $16.6 million gain 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 April actual operating result and the latest Chinese steel industry information in April 2015 which we had lowered our 2015 and 2016 unit selling price and our 2015 sales volume projection as compared to our evaluation at December 31, 2014, which we were expected a higher selling during the second quarter of 2015 as compared to the actual result in April 2015 and through the date of this report, $1.2 million loss from present value discount amortization for the three months ended March 31, 2015, and $2.5 million loss as we lowered 0.25% in the discount rate as the Chinese central bank has lower the borrowing rate of 0.25% on May 11, 2015.
Through the quarterly ended March 31, 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. Management has 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 2017 and expected to make a turning point and become profitable in year 2018 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 2018 and beyond and our assets pool of our long-lived assets may become impaired.
Income (Loss)Loss from Operations
Three months ended March 31, 20142015 compared with three months ended March 31, 20132014
(in thousands) | Three months ended | Three months ended | ||||||||||||||||||||||
March 31, 2014 | March 31, 2013 | Change % | March 31, 2015 | March 31, 2014 | Change % | |||||||||||||||||||
Income (loss) from operations | $ | (43,663 | ) | $ | 31,891 | (236.9 | )% | |||||||||||||||||
Loss from operations | $ | (55,712 | ) | $ | (43,663 | ) | 27.6 | % |
Loss from operations for the three months ended March 31, 20142015 was $(43.7)$(55.7) million as compared to $31.9$(43.7) million income from operations for the same period in 2013.2014. The increase in loss from operations was predominantly due to the increase in gross loss and the decrease in the change in fair value of profit sharing liability.unallocated overhead expenses.
Other Income (Expense)
Three months ended March 31, 20142015 compared with three months ended March 31, 20132014
(in thousands) | Three months ended | Three months ended | ||||||||||||||||||||||
March 31, 2014 | March 31, 2013 | Change % | March 31, 2015 | March 31, 2014 | Change % | |||||||||||||||||||
Interest income | $ | 3,192 | $ | 2,439 | 30.9 | % | $ | 2,331 | $ | 3,192 | (27.0 | )% | ||||||||||||
Finance/interest expense | (23,609 | ) | (19,762 | ) | 19.5 | % | (15,377 | ) | (23,609 | ) | (34.9 | )% | ||||||||||||
Financing cost on capital lease | (5,086 | ) | (5,095 | ) | (0.2 | )% | (5,193 | ) | (5,086 | ) | 2.1 | % | ||||||||||||
Gain on disposal of equipment | 46 | 331 | (86.1 | )% | 16 | 46 | (65.2 | )% | ||||||||||||||||
Income from equity investment | 13 | (42 | ) | (131.0 | )% | |||||||||||||||||||
Foreign currency transaction gain (loss) | (854 | ) | 28 | (3,150.0 | )% | |||||||||||||||||||
(Loss) income from equity investment | (37 | ) | 13 | (384.6 | )% | |||||||||||||||||||
Foreign currency transaction loss | (873 | ) | (854 | ) | 2.2 | % | ||||||||||||||||||
Lease income | 546 | 532 | 2.6 | % | 543 | 546 | (0.5 | )% | ||||||||||||||||
Other non-operating income (expense), net | (176 | ) | 268 | (165.4 | )% | 223 | (176 | ) | (226.7 | )% | ||||||||||||||
Total other expense, net | $ | (25,928 | ) | $ | (21,300 | ) | 21.7 | % | $ | (18,367 | ) | $ | (25,928 | ) | (29.2 | )% |
Total other expense, net, for the three months ended March 31, 20142015 was $25.9$18.4 million, a 21.7% increase29.2% decrease compared to $21.3$25.9 million for the same period in 2013.2014. The increasedecrease was mainly a result of the $3.8$8.2 million increasedecrease in finance/interest expenses, andwhich was offset by the $0.9 million increasedecrease in foreign currency transaction loss frominterest income along with the appreciation of our USD bank loans.decrease in notes receivable. The increasedecrease in finance/interest expenses was mainly a result of the increasedecrease in the amount of bank notes receivable redeemed early and the amount borrowed from banks and third parties in the first quarter of 20142015 as compared to the same period in 2013.2014. As a result, notes receivable early redemption expenses for the three months ended March 31, 20142015 amounted to $14.1$8.0 million, a $3.3$6.1 million or 30.6% increase43.3% decrease from $10.8$14.1 million for the same period in 2013,2014, and interest expense on loan borrowings for the three months ended March 31, 20142015 amounted to $9.5$7.4 million, a $1.5$2.1 million or 18.8% increase22.3% decrease from $8.0$9.5 million for the same period in 2013.2014.
Income Taxes
For the three months ended March 31, 20142015 and 2013,2014, we had a total tax provision from our profitable subsidiaries of $5$30 thousand and $71$5 thousand, respectively. For the three months ended March 31, 2014 and 2013, we had current income tax provisions for our profitable subsidiaries, amounting to $0 and $0.1 million, respectively. For the three months ended March 31, 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 to provide 100% valuation allowance for the deferred tax assets. No deferred income tax provisionbenefit was recorded for the three months ended March 31, 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 March 31, 20142015 and 2013,2014, we had effective tax rates of 0.0% and 0.7%0.0%, respectively.
Net Income (Loss)Loss
Three months ended March 31, 20142015 compared with three months ended March 31, 20132014
(in thousands) | Three months ended | Three months ended | ||||||||||||||||||||||
March 31, 2014 | March 31, 2013 | Change % | March 31, 2015 | March 31, 2014 | Change % | |||||||||||||||||||
Net income (loss) | $ | (69,596 | ) | $ | 10,520 | (761.6 | )% | |||||||||||||||||
Net loss | $ | (74,109 | ) | $ | (69,596 | ) | 6.5 | % |
Net Income (Loss)Loss attributable to General Steel Holdings, Inc.
Three months ended March 31, 20142015 compared with three months ended March 31, 20132014
(in thousands) | Three months ended | |||||||||||
March 31, 2014 | March 31, 2013 | Change % | ||||||||||
Net income (loss) | $ | (69,596 | ) | $ | 10,520 | (761.6 | )% | |||||
Less: Net income (loss) attributable to the noncontrolling interest | (26,032 | ) | 7,417 | (451.0 | )% | |||||||
Net income (loss) attributable to General Steel Holdings, Inc. | $ | (43,564 | ) | $ | 3,103 | (1,503.9 | )% |
(in thousands) | Three months ended | |||||||||||
March 31, 2015 | March 31, 2014 | Change % | ||||||||||
Net loss | $ | (74,109 | ) | $ | (69,596 | ) | 6.5 | % | ||||
Less: Net loss attributable to the noncontrolling interest | (28,956 | ) | (26,032 | ) | 11.2 | % | ||||||
Net loss attributable to General Steel Holdings, Inc. | $ | (45,153 | ) | $ | (43,564 | ) | 3.6 | % |
Net loss attributable to us for the three months ended March 31, 20142015 was $(43.6)$(45.2) million as compared to $3.1$(43.6) million income for the same period in 2013.2014. The increase in net loss attributable to us for the three months ended March 31, 20142015 was mainly a result of the $26.3$9.6 million increase in gross loss $46.8and $19.1 million decreaseincrease in unallocated overheads expenses being offset by the $12.9 million increase in gain from change in fair value of profit sharing liability, the $3.7 million decrease in SG&A expenses and a $3.8the $8.2 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 March 31, 2014,2015, our current liabilities exceeded the current assets by approximately $1,297.6$1,363.7 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 guarantee from related parties; and |
· | Other available sources of financing from domestic banks and other financial institutions given our credit history. |
Based on the above considerations, Management and our Board of Directors is of the opinion that we have sufficient funds to meet our working capital requirements and debt obligations as they become due. As a result,However, this opinion is based on the demand of our unaudited condensed consolidated financial statements forproducts, economic conditions, the period ended March 31, 2014 have been preparedovercapacity issue in the steel industry and our operating results not continuing to deteriorate and on our vendors and related parties being able to provide continued liquidity. Therefore, as noted in the Liquidity and Going Concern section below, this raises substantial doubt about our ability to continue as a going concern basis.concern.
As of March 31, 2014,2015, we had cash and restricted cash aggregating $465.0$259.6 million, of which $428.6$249.8 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 its ability to convert RMB into U.S. Dollars.
Under applicable PRC regulations, foreign-invested enterprises in China may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, a foreign-invested enterprise in China is required to set aside at least 10.0% of its after-tax profit based on PRC accounting standards each year to its general reserves until the accumulative amount of such reserves reaches 50.0% of its registered capital. These reserves are not distributable as cash dividends. The board of directors of a foreign-invested enterprise has the discretion to allocate a portion of its after-tax profits to staff welfare and bonus funds, which may not be distributed to equity owners except in the event of liquidation. Under PRC law, RMB is currently convertible into U.S. Dollars under a company’s “current account,” which includes dividends, trade and service-related foreign exchange transactions, without prior approval of the State Administration of Foreign Exchange (SAFE), but is not from a company’s “capital account,” which includes foreign direct investments and loans, without the prior approval of the SAFE.
We have previously raised money in the U.S. capital markets which provided the capital needed for our operations and for General Steel Investment Co, Ltd. (“General Steel Investment”). Thus the foreign currency restrictions and regulations in the PRC on the dividends distribution will not have a material impact on the liquidity, financial condition and results of operations of General Steel Holdings, Inc. and General Steel Investment.
Although the steel industry is slowing down due to over-capacity issues in the PRC, in order for us to stay competitive, we continue to look for opportunities to improve the efficiency on our production lines. In addition to the 1,200,000 metric ton capacity rebar production renovation of an existing 800,000 metric ton capacity rebar production line that we brought online in November 2010, in July 2011, we also brought online a 1,000,000 metric ton capacity high speed wire production line. These two newly installed production lines were both relocated from the Maoming Hengda (as defined below) facility and are expected to consume less energy when running at maximum efficiencies compared to our previous production line. In September 2012 we began the construction of a 900,000 metric ton capacity rebar production line, which was completed and put into production in September 2013. In March 2013, we began the construction of a 1,200,000 metric ton capacity rebar production line for the purpose of reducing our reprocessing cost and to increase our profit margin. The 1,200,000 metric ton capacity rebar production lines was completed and put into test production in November 2013. Any future facility expansion will require additional financing and/or equity capital and will be dependent upon the availability of financing arrangements and capital at the time.
Short-term Notes Payable
As of March 31, 2014,2015, we had $963.4$448.4 million in short-term notes payable liabilities, which were secured by restricted cash of $419.8$222.2 million and restricted notes receivable of $133.0$1.6 million. These are lines of credit extended by banks for a maximum of six months and are used to finance working capital. The short-term notes payable must be paid in full at maturity and credit availability is continued upon payment at maturity. There are no additional significant financial covenants. We pay zero interest on this type of credit as this is a monetary tool used by China’s central bank to control liquidity over the Chinese monetary system. However, we are subject to pay a transaction fee of 0.05% of the notes’ value. In addition, the banks usually require us to deposit either a certain amount of cash at the bank as a guarantee deposit or provide notes receivable as security.
Short-term Loans – Banks
As of March 31, 2014,2015, we had $230.1$232.1 million in short-term bank loans. These were bank loans with a one year maturity and must be paid in full upon maturity. PRC 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 10 in our Notes to the unaudited condensed consolidated financial statements included in this report.
For more details about our related party debt financing, see Note 2119 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 4.2%4.6% to 5.9%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 4.2%4.6% to 5.9%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 March 31, 20142015 and 20132014 amounted to $230.5$118.4 million and $165.2$230.5 million, respectively, which were eliminated in our consolidated financial statements. The financial cost related to financing sales for the three months ended March 31, 20142015 and 20132014 amounted to $0.9$0.7 million and $1.6$0.9 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 March 31, 20142015 and December 31, 20132014 were (5.8)(4.9) and (6.5)(5.6), respectively. As of March 31, 2014,2015, our current liabilities exceed current assets (excluding non-cash item)deferred lease income) by $1.3 billion.$1.4 billion, which raises substantial doubt about our ability to continue as a going concern.
Our steel business has faced very tough market conditions and challenging profitability over the last several years, and based on current trends, we think the near-term challenges for the steel sector will likely linger. In reaction to this challenging market, we are proactively reviewing our strategy and asset portfolio and seeking to restructure low-efficient, non-core assets, as well as idle land resources to unlock hidden fair value.
We aim to transform into a leaner and fitter organization with better profitability. As such, we are strategically accelerating our business transformation to pursue opportunities that offer compelling benefits to our organization and shareholders, including:
· | First, strengthen our financials while providing the financial flexibility to pursue higher return, higher growth opportunities; | |
· | Second, reduce the complexity of our business structure, which is consistent with our objectives for internal simplification and operating efficiency; | |
· | Third, diversify operating risk in order to lower our high reliance on steel business, while at the same time leverage on our vast vertical resources in the steel industry; and | |
· | Fourth, pursue opportunities for additional value creation. |
Management has implemented the following plans that are intended to mitigate the conditions or events that raise substantial doubt about the Company’s ability to continue as a going concern.
Longmen Joint Venture, as our most important subsidiary, accounted for a majority of our total sales. As such, the majority of our working capital needs to come from Longmen Joint Venture. Our ability to continue as a going concern depends heavily on Longmen Joint Venture’s operations. Longmen Joint Venture has obtained different types of financial supports, which include line of credit from banks, vendor financing, financing sales, other financing and sales representative financing.
For more details and terms about our financial supports, see Note 3(d)2(d) in our Notes to the condensed consolidated financial statements.
With the financial support from the banks and the companies, discussed in Note 3(d) in our Notes to the 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 March 31, 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 flows items are listed below.
Cash inflow (outflow) (in millions) | Cash inflow (outflow) (in millions) | |||||||
For the twelve months ended March 31, 2015 | For the twelve months ended March 31, 2016 | |||||||
Estimated current liabilities over current assets (excluding non-cash items) as of March 31, 2014 (unaudited) | $ | (1,295.4 | ) | |||||
Current liabilities over current assets (excluding deferred lease income) as of March 31, 2015 (unaudited) | $ | (1,361.5 | ) | |||||
Projected cash financing and outflows: | ||||||||
Cash provided by line of credit from banks | 229.0 | 142.0 | ||||||
Cash provided by vendor financing | 811.5 | 897.1 | ||||||
Cash provided by other financing | 362.0 | 412.8 | ||||||
Cash provided by sales representatives | 25.7 | 21.9 | ||||||
Cash projected to be used in operations in the twelve months ended March 31, 2015 | (29.5 | ) | ||||||
Cash projected to be used for financing cost in the twelve months ended March 31, 2015 | (74.0 | ) | ||||||
Net projected change in cash for the twelve months ended March 31, 2015 | $ | 29.3 | ||||||
Cash projected to be used in operations in the twelve months ended March 31, 2016 | (39.3 | ) | ||||||
Cash projected to be used for financing cost in the twelve months ended March 31, 2016 | (46.2 | ) | ||||||
Net projected change in cash for the twelve months ended March 31, 2016 | $ | 26.8 |
As a result, the unaudited condensed consolidated financial statements for the three month period ended March 31, 2014 have been prepared on a going concern basis.
50 |
Cash-flow
Operating Activities
Net cash provided byused in operating activities for the three months ended March 31, 2015 and 2014 and 2013 was $(41.0) million compared to $65.5 million and $3.9 million,net cash provided by operating activities, respectively. This change was mainly due to the combination of the following factors:
The impact of some non-cash items included in net income (loss) of $29.9 million for the three months ended March 31, 2014, compared to $20.9 million in the same period in 2013.