UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended December 31, 2009
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 001-33717
General Steel Holdings, Inc.
(Exact Name of Registrant as Specified in its Charter)
Nevada | 41-2079252 | |
(State of Incorporation) | (I.R.S. Employer | |
Level 21, Tower B, Jiaming Center
No. 27 Dong San Huan North Road
Chaoyang District,
Beijing, China, 100020
(Address of Principal Executive Offices, Including Zip Code)
Registrant’s telephone number: +86 (10) 5879-7346
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.001 par value per share | New York Stock Exchange | |
(Title of each class) | (Name of each exchange on which registered) |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes¨ Nox
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes¨ Nox
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes¨Nox No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site,Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes¨ No¨x
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “accelerated filer”, “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large | Accelerated | |
Non-accelerated (Do not check if a smaller reporting company) | Smaller reporting company |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes¨ Nox
The aggregate market value of the voting common equity held by non-affiliates as of June 30, 2009,2011, the last business day of the registrant’s most recently completed second fiscal quarter, based upon the price of $1.49 that was the closing price of the common stock as reported on the New York Stock Exchange under the symbol “GSI” on such date, was approximately $85$49.4 million. General SteelThe registrant has no non-voting common equity.
The number of shares outstanding of capital stock as of March 15, 2010February 7, 2013 was 51,618,595.54,797,532.
TABLE OF CONTENTS
PART I | ||
ITEM 1. | BUSINESS. | |
ITEM 1A. | RISK FACTORS. | |
ITEM 1B. | UNRESOLVED STAFF COMMENTS. | |
ITEM 2. | PROPERTIES. | |
ITEM 3. | LEGAL PROCEEDINGS. | |
ITEM 4. | ||
PART II | ||
ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. | |
ITEM 6. | SELECTED FINANCIAL DATA. | |
ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. | |
ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. | |
ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. | |
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. | |
ITEM 9A. | CONTROLS AND PROCEDURES. | |
ITEM 9B. | OTHER INFORMATION. | |
PART III | ||
ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. | |
ITEM 11. | EXECUTIVE COMPENSATION. | |
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. | |
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. | |
ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES. | |
PART IV | ||
ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES. | |
2 |
Cautionary Statement
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. These statements relate to future events or the Company’s future financial performance. The Company has attempted to identify forward-looking statements by terminology including “anticipates,” “believes,” “expects,” “can,” “continues,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should” or “will” or the negative of these terms or other comparable terminology. Such statements are subject to certain risks and uncertainties, including the matters set forth in this Annual Report on Form 10-K or other reports or documents the Company files with the Securities and Exchange Commission from time to time, which could cause actual results or outcomes to differ materially from those projected. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance or achievements. Undue reliance should not be placed on these forward-looking statements which speak only as of the date hereof. The Company’s expectations are as of the date this Annual Report on Form 10-K is filed, and the Company does not intend to update nor is obligated to update any of the forward-looking statements after the date this Annual Report on Form10-K is filed to confirm these statements to actual results, unless required by law.
3 |
PART I
ITEM 1. BUSINESS.
Overview
We were incorporated on August 5, 2002, in the State of Nevada. We are headquartered in Beijing, China and operate a diverse portfolio of Chinese steel companies. Our companiesWe serve various industries and produce a variety of steel products including:including, but not limited to: reinforced bars (“rebar”), hot-rolled carbon, and silicon sheets, spiral-weld pipes and high-speed wire. Our current aggregate annual production capacity of steel products is 6.37 million metric tons of which the majority is rebar. Individual industry segmentscrude steel. Our individual product categories have uniquea variety of demand drivers, such as rural income, infrastructure construction and energy consumption. Domestic economic conditions are also an overall demand driver for all our products.
Our vision is to become one of the largest and most profitable non-government owned steel companies in China.
Our two-pronged growth strategy isincludes organic growth and mergers and acquisitions (“M&A”). On the organic growth side, we aim to grow through aggressiveoperation optimization, capacity expansion and margin expansion by improving operational efficiency and cost structure. On the M&A side, we aim to expand through mergers, joint ventures and acquisitions targeting state-owned enterprise steel companies and selected entities with outstanding potential. We have executed this strategy into date by acquiring controlling interest positions in three joint ventures. Our business currently operates through four steel-related subsidiaries and one raw material trading subsidiary and we are actively pursuing a planattempting to acquire additional assets.
Unless the context indicates otherwise, as used herein the terms “General Steel”, the “company”“Company”, “we”, “our” and “us” refer to General Steel Holdings, Inc.
Steel Related Subsidiaries
We presently have controlling interests in four steel-related subsidiaries:
· |
· | Baotou Steel - General Steel Special Steel Pipe Joint Venture Company |
· | Shaanxi Longmen Iron and Steel Co., Ltd. (“Longmen Joint Venture”); |
· | Maoming Hengda Steel | |
· | Tianwu General Steel Material Trading Co., Ltd. (“Tianwu Joint Venture”). |
Our Company, together with our subsidiaries, majority owned subsidiaries and variable interest entity, are referred to as the Group.
General Steel (China) Co., Ltd
General Steel (China), formerly known as “Tianjin Daqiuzhuang Metal Sheet Co., Ltd.
On May 14, 2009, Daqiuzhuang MetalGeneral Steel (China) changed its official name from “Tianjin Daqiuzhuang Metal Sheet Co., Ltd.” to “General Steel (China) Co., Ltd.” to better reflect its role as a merger and acquisition platform for steel company investments in China. In some instances, we retainGeneral Steel (China) retains the use of the name Daqiuzhuang Metal“Daqiuzhuang Metal” for brand recognition purposes within the industry.
On March 31, 2010, we expect to finalize theGeneral Steel (China) entered into a lease of ouragreement with Tianjin Daqiuzhuang Steel Plates Co., Ltd. (the “Lessee”), whereby General Steel (China) leased its facility and operationlocated at No. 1, Tonga Street, Daqiuzhuang Town, Jinghai County, Tianjin City to the facility’s current general manager. ChangingLessee (the “Lease Agreement”). The Lease Agreement provides approximately 776,078 square feet of workshops, land, equipment and other facilities to the business model of this facility from a direct operations model to a leased operations model will allow usLessee 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 providethe monthly base rental rate due to General Steel (China) was approximately $0.2 million (RMB1.7 million).On July 28, 2011, General Steel (China) signed a steady revenue streamsupplemental 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 they did not intend to continue with the lease at the end of 2012. There is no penalty for early termination. General Steel (China) currently does not have plans to lease the facility to another company and as such, a write-down in the formcarrying value of fixed monthly lease revenue. We will disclose specific termsproperty, 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 lease agreement when we sign the definitive agreement.
Baotou Steel - General Steel Special Steel Pipe Joint Venture Co., Ltd.
On April 27, 2007, Daqiuzhuang MetalGeneral Steel (China) and Baotou Iron and Steel Group Co., Ltd. (“Baotou Steel”) entered into an Amended and Restated Joint Venture Agreement, amending the Joint Venture Agreement entered into on September 28, 2005, to increase Daqiuzhuang Metal'sGeneral Steel (China)’s ownership interest in the related joint venture to 80%. The joint venture company’sventure’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 government authorities in Chinathe PRC on May 25, 2007, and started its normal 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 mainly in the energy sector primarily 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 China.
Shaanxi Longmen Iron and Steel Co., Ltd.
Effective June 1, 2007, through two subsidiaries, Daqiuzhuang MetalGeneral Steel (China) and Tianjin Qiu Steel Investment Co., Ltd. (“Qiu Steel”), a 99% owned company 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 our two subsidiaries,General Steel (China) and Qiu Steel, we invested approximately $39$39.3 million in cash and collectively hold approximatelyheld a 60% of theownership interest in Longmen Joint Venture.
Long Steel Group, located in Hancheng city, Shaanxi province,Province, in China’s centralwestern region, was founded in 1958 and incorporated in 2002.2002 and is owned by a state owned entity through Shaanxi Steel. Long Steel Group holds the remaining 40% ownership interest in Longmen GroupJoint Venture and operates as a fully-integrated steel production facility. LessFewer than 10% of steel companies in China have fully-integrated steel production capabilities.
Currently, the Longmen Joint Venture has fourfive branch offices, sixfive consolidated subsidiaries under direct control and six entities in which it has a non-controllingnoncontrolling interest. It employs approximately 6,3179,400 full-time workers. In addition to steel production, the Longmen Joint Venture operates transportation services through its Changlong Branch, located atin Hancheng city, Shaanxi province.Province. Changlong Branch owns 154 vehicles and provides transportation services exclusively to the Longmen Joint Venture.
Longmen Joint Venture’s rebar products are categorized within the steel industry as “longs” (referencing 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 provincial 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,Province, located 180km from the Longmen Joint Venture’s main steel production site. Currently, we estimate that we have an approximateapproximately a 72% share of the Xi’an market for rebar.
An established regional network of approximately 100136 distributors and four sales offices sell the Longmen Joint Venture’s products. All products sell under the registered brand name of “Yulong,” which enjoyshas strong regional recognition and awareness. Rebar and billet products carry ISO 9001 and 9002 certificationcertifications and many 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 the Xiang Jia Ba hydropower projects.
On September 24, 2007, Longmen Joint Venture acquired a controlling74.92% ownership interest in two subsidiaries of Longmen Group: Longmen Iron and Steel Group Co., Ltd. Environmental Protection Industry Development Co., Ltd. (“Longmen EPID”) and. 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”).
On January 11, 2008, the Longmen Joint Venture completed itsthe acquisition of a controlling22.76% equity interest in Hancheng Tongxing Metallurgy Co., Ltd. (“Tongxing”). The Longmen Joint Venture contributed its land use right of 21.45 hectares (approximately 53 acres) withat an appraised value of approximately $4.1 million (RMB30 million). Pursuant to the agreement, the land was exchanged in exchange for shares of Tongxing valued at approximately $3.1 million (RMB22.7 million), giving the Longmen Joint Venture a 22.76% ownership stake in Tongxing and making it Tongxing’s largest shareholder. Tongxing has two operating areas: coking coal production and rebar processing. Its coking coal operations have an annual production capacity of 200,000 metric tons. Itsa rebar processing facility haswith an annualized rolling capacity of 300,000 metric tons.
In January 2010, Longmen Joint Venture completed its acquisition of the remaining 25.08% 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 this construction by Shaanxi Steel began in June 2009. At the beginning of the construction in June 2009, Longmen Joint Venture reached an oral agreement with Shaanxi Steel that all costs incurred related 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 signed agreements between the two parties on December 20, 2010. Therefore, to compensate us, in the fourth quarter of 2010, Shaanxi Steel reimbursed Longmen Joint Venture $11.0 million (RMB 70.1 million) related to the value of assets dismantled, $5.8 million (RMB 38.1 million) for various site preparation costs incurred by Longmen Joint Venture and rent under a 40-year property sub-lease that was entered into by the parties in June 2009, and $28.7 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 $14.1 million (RMB 89.5 million) and $14.0 million (RMB 89.3 million), respectively, for trial production costs related to the new equipment.
During the period from June 2010 to March 2011, as construction progressed and certain of the assets came online, Longmen Joint Venture used the assets free of charge to produce saleable units of steel products during this period. As such, the cost of using these assets and therefore the fair value of the free rent received was imputed with reference to what the depreciation charge would have been on these assets had they been owned or under capital lease to Longmen Joint Venture during the free use period. This cost of$6.9 million (RMB 43.9 million) each yearwere 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
Except for the reimbursement for site preparation costs which are reported as other income or a reduction of costs of goods sold in the fourth quarter of 2010, the remaining amount of reimbursement is deferred as lease income and recognized as a component of the property that was sub-leased during the construction and is to be amortized to income over the remaining term of the 40-year sub-lease.
As of December 31, 2011 and 2010, the deferred lease income on the land sub-lease was $78.5 million and $57.6 million, respectively. For the years ended December 31, 2011 and 2010, we recognized lease income of $2.0 million and $0.9 million, respectively.
On April 29, 2011, a 20-year Unified Management Agreement (the “Unified Management Agreement”) was entered into between the Company, Longmen Joint Venture, Shaanxi Coal and Shaanxi Steel. Shaanxi Steel is the controlling shareholder of Long Steel Group which is the non-controlling interest holder in Longmen Joint Venture, and Shaanxi Coal is the parent company of Shaanxi Steel, a state-owned entity. Under the terms of the Unified Management Agreement, all manufacturing machinery of Longmen Joint Venture and $581.4 million (or approximately RMB 3.7 billion) of the newly constructed iron and steel making facilities owned by Shaanxi Steel, which includes one 400m2 sintering machine, two 1,280m3 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 operation of the new and existing facilities.
Furthermore, under the terms of the Unified Management Agreement, Shaanxi Coal has committed to providing Longmen Joint Venture with raw materials, including coke and coal, at a cost not higher than the market rate. In addition, 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 December 2012, Shaanxi Coal has provided bank loan guarantees to Longmen Joint Venture in the amount of RMB 500 million ($77.3 million).In October 2012, Shaanxi Steel agreed that it will not demand capital lease payment from Longmen Joint Venture for next twelve months.
Longmen Joint Venture pays Shaanxi Steel for the use of the newly constructed iron and steel making facilities an amount equaling the depreciation expense on the equipment constructed by Shaanxi Steel in addition to 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, our economic interest in the profits generated by the Asset Pool 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 Agreementis also expected to improve 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.
The parties to the Unified Management Agreement haveagreed to establish 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, the Board of Directors of Longmen Joint Venture remains the controlling decision-making body of Longmen Joint Venture and the Asset Pool.
The Unified Management Agreement constitutes an arrangement that involves a lease which met certain of the criteria of a capital lease and therefore, the lease is accounted for as such by Longmen Joint Venture. See Note 2 - “Summary of significant accounting policies”, Note 13 - “Capital lease obligations” and Note 14 - “Profit sharing liability” of the Notes to 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 are expected to consume less energy when running at maximum efficiency compared to our previous production line.
Maoming Hengda Steel Group Limited
On June 25, 2008, through our subsidiary Qiu Steel, Investment, we paid approximately $7.1 million (RMB50 million) in cash to purchase 99% of Maoming Hengda Steel Group, Ltd. (“Maoming”Maoming Hengda”). The total registered capital of Maoming Hengda is approximately $77.8 million (RMB544.6(RMB 544.6 million).
Maoming Hengda’s core business is the production of high-speed wire and rebar products used in the construction industry. Located on 140 hectares (approximately 346 acres) in Maoming city, Guangdong province,Province, the Maoming Hengda facility haspreviously had two production lines capable of producingannual production capacities of 1.8 million metric tons of 5.5mm to 16mm diameter high-speed wire and 12mm to 38mm diameter rebar annually.rebar. The products arewere sold through nine distributors that targeting customers in Guangxi provinceProvince and the western region of Guangdong province. Previously, the Maoming facility had been operating at approximately 10% of its capacity which we believe was the result of the previous owners focus on matters unrelated to the Maoming facility.
To take advantage of a stronger market demand in Shaanxi Province, in the second quarter of 2009, we relocated the 800,000 metric ton capacity rebar production line from the Maoming Hengda’s facility to the Longmen Joint Venture. InThereafter, in December 2010, we intend to relocaterelocated the 1,000,000 metric ton capacity high-speed wire production line from the Maoming Hengda’s facility to the Longmen Joint Venture. We intendVenture to installmeet increased demand in Shaanxi Province.
In December 2010, we brought online a new 400,000 metric 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 operatethis agreement, Yueyufeng paid in advance $4.4 million in three installments to support the construction of the rebar production line for Maoming facility.
Tianwu General Steel Material Trading Co., Ltd
We formed Tianwu General Steel Material Trading Co., Ltd. (“Tianwu Joint Venture”) with Tianjin Material and Equipment Group Corporation (“TME Group”). The contributed capital of Tianwu Joint Venture was approximately $2.9 million (or RMB20 million), and we hold a 60% controlling interest. TME Group is one of the largest and most diversified commodity trading groups in China.
Tianwu Joint Venture sources raw materials, mainly overseas iron ore, and is targeted to supply approximately 20% to 50% of our imported iron-ore needs, amounting to approximately two to three million metric tons on an annual basis.
8 |
Production Capacity Information Summary by Subsidiaries
Daqiuzhuang Metal | Baotou Steel Pipe Joint Venture | Longmen Joint Venture | Maoming | |||||
Annual Production Capacity (metric tons) | 400,000 | 100,000 | 4.8 million | 1 million | ||||
Main Products | Hot-rolled sheet | Spiral-weld pipe | Rebar/High-speed wire | High-speed wire | ||||
Main Application | Light agricultural vehicles | Energy transport | Infrastructure and construction | Infrastructure and construction |
Annual Production Capacity (metric tons) | General Steel (China) | Baotou Steel Pipe Joint Venture | Longmen Joint Venture | Maoming Hengda | |||||
Crude Steel | - | - | 7 million | - | |||||
Processing | 400,000 | 100,000 | 3.6 million | 400,000 | |||||
Main Products | Hot-rolled sheet | Spiral-weld pipe | Rebar/High-speed wire | Rebar | |||||
Main Application | Light Agricultural vehicles | Energy transport | Infrastructure and construction | Infrastructure and construction |
Marketing and Customers
We sell our products primarily to distributors, and we typically collectingcollect payment from these distributors in advance. Our marketing efforts are mainly directed toward those customers who have exactingdemanding requirements for on-time delivery, customer supportgeneral inquiries and product quality andquality. We believe that these requirements as well as product planning are critical factors in our ability to serve this segment of the market.
Our revenue is dependent, in large part, on significant contracts with a limited number of large customers. For the year ended December 31, 2011, approximately 27% of our sales were to five customers. We believe that revenue derived from our current and future large customers will continue to represent a significant portion of our total revenue.
Moreover, our success will depend in part upon our ability to obtain orders from new customers, as well as the financial condition and success of our customers and general economic conditions in China.
Demand for our products
Overall, domestic economic growth is an important demand driver of demand for our products, especially from construction and infrastructure projects, rural income growth and energy demand.
At Longmen Joint Venture, growth in regional construction and infrastructure projects drives demand for our products. According to the 12th12th Five Year National Economic and Social Development Plan (“NESDP”) (2011-2015), development of China’s western region is one of the top-fivetop five economic priorities of the nation. Shaanxi province,Province, where Longmen Joint Venture is located, has been designated as a focal point for development intoin the western region, and Xi’an, the provincial capital, has been designated as a focal point for this development. Ourdevelopment in China. Longmen Joint Venture is 180 km 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 9.6% for the national GDP, a GDP increase of 13.9% was reported by Shaanxi Province in 2011 over the previous year. Additionally, according to Accounting and Corporate Finance Production Statistics in Chin, Sichuan Province also reported a GDP increase of 14.7% where we have opened a sales office in Chengdu City, Sichuan Province to meet the increasing demand for the construction of steel.
According to the information released byShaanxi provincial government, the total fixed asset investment for the Shaanxi Provincial Development and Reform Commission, total fixed assets investment for Shaanxi provinceProvince was approximately RMB 113 billion1.0 trillion (approximately $157.1 billion) for the year ended December 31, 2009, a 71%2011, an increase of 18% over the same period last year. There are 139 constructionin 2010.
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 infrastructure projects scheduledseven cities from 2009 to begin in2020.
In addition, the province in 2010. Some ofGuanzhong-Tianshui Economic Zone will concentrate on the major projects include: nine new railways, one new airport, expansiondevelopment of the Xi’an area. The metropolitan area construction program focuses on the cities of Xi’an and Xianyang, and their surrounding areas, covering up to 12,000 square kilometers, including the construction of railways, highways, subways, airport twoexpansion 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 RMB260 billion (approximately $40.2 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 central government announced a new ring subway systemslow-income housing policy. Under this policy, 10 million low-income houses will be built in 2011, with a total of 36 million low-income houses to be built over a five-year period. To ensure the construction of the low-income housing, the central government has announced that it will increase its investment in the project by 34.7% over its 2010 investment to approximately RMB103 billion, and 4 new dams. the local governments are expected to increase their investment as well.
As part of this policy, the Shaanxi provincial government also targets to build 470,000 low-income houses in 2011, covering approximately 30 million square meters, which is 2.5 times the amount of low-income houses initiated in 2010. This will generate a stable demand for steel construction within the Shaanxi Province.
In January 2011, the Shaanxi provincial government announced that it will invest RMB80 billion (approximately $12.2 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, 5,000 kilometers of high-speed railway will be built in 2011, with 16,000 total kilometers to 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.
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 government continuescentral 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.
At Maoming Hengda, infrastructure growth and business development in Maoming city, the surrounding GuangdongGuangxi cities and the western region of Guangxi provinceGuangdong Province drive demand for our construction steel products. As a second tier city, the industrialization and urbanization of Maoming city is one of the focal pointsfocuses of economic development in the west Guangdong province.
Supply of raw materials
The primary raw materials we use for steel production are iron ore, coke, hot-rolled steel coil and steel billets. Daqiuzhuang Metal and Baotou Steel Pipe Joint Venture useuses hot-rolled steel coil as theirits 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. As a result,Therefore, the prices of iron ore and coke are the primary raw material cost drivers for our products.
Iron Ore
Longmen Joint Venture accounts for 4.8has 7 million metric tons of our aggregate 6.3 million metric tons annual crude steel production capacity. At Longmen Joint Venture, approximately 90%85% of production costs are associated with is raw materials, with iron ore being the largest component.
In September 2010, we formed Tianwu Joint Venture with TME Group, one of the largest and most diversified commodity trading groups in China.Tianwu Joint Venture sources raw materials, mainly overseas iron ore, and is targeted to supply approximately 20% to 50% of our imported iron-ore needs, amounting to approximately two to three million metric tons on an annual basis. For the year ended December 31, 2011, we sourced approximately 11.3% of our iron ore consumption from Tianwu Joint Venture directly.
According to the China Iron and Steel Association, approximately 60% of the China domestic steel industry demand for iron ore must be filled by imports. At Longmen Joint Venture, we purchase iron ore from four primary sources: the Mulonggou mine (owned by the Longmen Joint Venture), the Daxigou mine (owned by LongmenLong Steel Group, our partner in the Longmen Joint Venture), surrounding local mines and frommines located abroad. The Daxigou mine has 300 million metric tons of proven iron ore reserves. According to the terms of our Longmen Joint VentureVenture‘s Agreement with the LongmenLong Steel Group, we have a first rightsright of refusal for sales from the mine and for its development.Daxigou mine. We presently purchase all of the productionproducts from 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 year ended December 31, 2011 are as follows (1):
Longmen Joint Venture
Name of the Major | Raw Material Purchased | % of Total Raw Material Purchased | Relationship with Company | |||||
Iron Ore | % | Related | ||||||
Shaanxi Haiyan Coal Chemical Industry Co., Ltd. | Coke | % | Related | |||||
Shaanxi Huanghe Material Co., Ltd. | Coke | % | ||||||
% | ||||||||
% | ||||||||
Total | % |
Baotou Steel Pipe Joint Venture
Name of the Major | Raw Material Purchased | % of Total Raw Material Purchased | Relationship with Company | |||||
Steel coil | % | |||||||
Baotou | ||||||||
Steel coil | % | |||||||
Steel coil | % | |||||||
Baotou Jiaxiang Material Trading Co., Ltd. | Steel coil | 5.7 | % | Third Party | ||||
Neimenggu Zhonghou Steel Plate Co., Ltd. | Steel coil | 4.8 | % | Third Party | ||||
Total | % |
Maoming
Name of the Major | Raw Material Purchased | % of Total Raw Material Purchased | Relationship with Company | |||||
% | ||||||||
Heavy oil | % | |||||||
% | ||||||||
Bearing | 1.2 | % | Third Party | |||||
Jiangsu Oriental Wanxiang Heavy | Mechanical accessories | 1.1 | % | |||||
Total | % |
Industry consolidation
The central government has had a long-stated goal to consolidate 50% of domestic steel production among the top ten producers by 2010 and 70% by 2020. Currently, there are approximately over 500 crude steel producers throughout China, and the top ten producers account for approximately 48% of total national output. In September 2009, the central government published an industry target to eliminate 80 million metric tons of inefficient capacity from the steel industry by the end of 2011. Along with this target,In July 2011, the central government added new steel making operational and environmental restrictions and tasked ten government agencies with enforcing these measures. Inreiterated its goal of reducing obsolete iron production capacities by 31.2 million tons in 2011.
On July 12, 2010, the government plansMinistry 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 issue revised steel industry guidelinesthe 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 aggressively look for valued partners which are expectedcould lead to further strengthen measures to minimize old and inefficient steel producing.opportunities for high quality acquisitions for us. We believe the government’s action this year demonstrates increased resolve to bring aboutabove government policy will strengthen our position as an industry consolidation. We see the pace of industry consolidation quickening in the coming years.
Intellectual Property Rights
“Qiu Steel” is the registered trademark under which we sell hot-rolled carbon and silicon steel sheets products produced at Daqiuzhuang Metal.General Steel (China). The “Qiu Steel” logo has been registered with the China National Trademark Bureau under No. 586433. “Qiu Steel” is registered under the GB 912-89 national quality standard and certified under the National Quality Assurance program.
“Baogang Tongyong” is the trademark under which we sell spiral-weld steel pipes products produced at Baotou Steel Pipe Joint Venture. This trademark is currently beingalready registered with China National Trademark Bureau.
“Yu Long” is the registered trademark under which we sell rebar and high-speed wire products produced in Longmen Joint Venture. The trademark is registered under the ISO9001:2000 international quality standard.
“Heng Da” is the registered trademark under which we sell high-speed wire and rebar products produced at our Maoming facility. The trademark is registered under the ISO9001:2000 international quality standard.
Employees
As of December 31, 2009,2011, we had approximately 7,0679,900 full-time employees.
Executive Officers of the Registrant
The following sets forth certain information as of February 15, 2013 concerning our executive officers.
Name | Age | Title | ||
Zuosheng Yu | 47 | Chairman and Chief Executive Officer | ||
John Chen | 40 | Chief Financial Officer |
Mr. Zuosheng Yu, age 47, Chairman of the Board of Directors . Mr. Yu joined our Company in October 2004 and became Chairman of the Board at that time. He also serves as our Chief Executive Officer. Since February 2001, he has been President and Chairman of the Board of Directors of Beijing Wendlar Investment Management Group, Beijing, China. Mr. Yu graduated in 1985 from Sciences and Engineering Institute, Tianjin, China. In July 1994, he received a Bachelor’s degree from Institute of Business Management for Officers. Mr. Yu received the title of “Senior Economist” from the Committee of Science and Technology of Tianjin City in 1994. In July 1997, he received an MBA degree from the Graduate School of Tianjin Party University. Since April 2003, Mr. Yu has held a position as a member of China’s APEC (Asia Pacific Economic Co-operation) Development Council. Mr. Yu’s strong knowledge of, and experience in, the Chinese steel industry, as well as his extensive institutional knowledge of our Company make him well suited to contribute to our Board of Directors..
Mr. John Chen, age 40, Director. Mr. Chen joined our Company in May 2004 and was elected as a director in March 2005. He also serves as our Chief Financial Officer. From August 1997 to July 2003, he served as a senior accountant at Moore Stephens, Wurth, Frazer and Torbet, LLP in Los Angeles, California. Mr. Chen graduated from Norman Bethune University of Medical Science, Changchun city, Jilin province, China in September 1992. He received a B.S. degree in accounting from California State Polytechnic University, Pomona, California, U.S. in July 1997. Mr. Chen’s accounting skills and experience make him well suited to contribute to our Board of Directors. He currently also serves on the board of directors of China Carbon Graphite Group, Inc. (OTCBB: CHGI), SGOCO Group, Ltd. (NASDAQ: SGOC), and China HGS Real Estate Inc. (NASDAQ: HGSH).
ITEM 1A. RISK FACTORS.
Our business, financial condition and results of operations are subject to various risks, including those discussed below, which may affect the value of our securities. The risks discussed below are those that we believe are currently the most significant, although additional risks not presently known to us or that we currently deem less significant may also impact our business, financial condition and results of operations, perhaps materially.
Risks Related to Our Business
We face substantial competition which, among other things, may lead to price pressure and adversely affect our sales.
We compete with other market players on the basis of product quality, responsiveness to customer needs and price. There are two types of steel and iron companies in China: state-owned enterprises (“SOEs”) and privately owned companies.
Criteria important to our customers when selecting a steel supplier include:
We compete with both SOEs and privately owned steel manufacturers. While we believe that our price and quality are superior to other manufacturers, many of our competitors are better capitalized, more experienced, and have deeper ties in the Chinese marketplace. We consider there to be the following ten major competitors of similar size, production capability and product line in the market placemarketplace competing against our four operating subsidiaries as indicated:
• Competitors of Daqiuzhuang MetalGeneral Steel (China) include: Tianjin No. 1 Rolling Steel Plant, Tianjin Yinze Metal Sheet Plant and Tangshan Fengrun Metal Sheet Plant;
• Competitors of Longmen Joint Venture include: Shanxi Haixin Iron and Steel Co., Ltd. and Gansu Jiuquan Iron and Steel Co., Ltd.;
• Competitors of Baotou Steel Pipe Joint Venture include: Tianjin Bo Ai Steel Pipe Co., Hebei Cangzhou Zhong Yuan Steel Pipe Co., and Shanxi Taiyuan Guo Lian Steel Pipe Co.; and
• Competitors of Maoming Hengda include: Guangdong Shao Guan Iron and Steel Group and Zhuhai Yue Yu Feng Iron and Steel Co., Ltd.
In addition, with China’s entry into the World Trade Organization and China’s agreements to lift many of the barriers to foreign competition, we believe that competition will increase as a whole with the entry of foreign companies into this market. This may limit our opportunities for growth, lead to price pressure and reduce our profitability. We may not be able to compete favorably and this increased competition may harm our business, our business prospects and results of operations.
Our inability to fund our capital expenditure requirements may adversely affect our growth and profitability.
Our continued growth is dependent upon our ability to raise additional capital from outside sources. Our strategy is to grow through aggressive mergers, joint ventures and acquisitions targeting SOE steel companies and selected entities withwe believe have outstanding potential. Our growth strategy will require us to obtain additional financing through capital markets. In the future, we may be unable to obtain the necessary financing on a timely basis and on favorable terms, if at all, and our failure to do so may weaken our financial position, reduce our competitiveness, limit our growth and reduce our profitability. Our ability to obtain acceptable financing at any given time may depend on a number of factors, including:
• Our financial condition and results of operations;
• The condition of the PRC economy and the industry sectors in which we operate; and
• Conditions in relevant financial markets in the United States, the PRC and elsewhere in the world.
Disruptions in world financial markets and the resulting governmental action of the United States and other countries could have a material adverse impact on our ability to obtain financing, our results of operations, financial condition and cash flow and could cause the market price of our common sharesstock to decline.
The credit markets worldwide and in the United States have experienced significant contraction, de-leveraging and reduced liquidity, and the United States government and foreign governments have either implemented or are considering a broad variety of governmental action and/or new regulation of the financial markets. Securities and futures markets and the credit markets are subject to comprehensive statutes, regulations and other requirements.
The uncertainty surrounding the future of the global credit markets has resulted in reduced access to credit worldwide. Major market disruptions, the current adverse changes in global market conditions, and the regulatory climate in the United States and worldwide may adversely affect our business or impair our ability to borrow funds as needed. The current market conditions may last longer than we anticipate. These recent and developing economic and governmental factors may have a material adverse effect on our results of operations, financial condition or cash flows and could cause the price of our common stock to decline significantly.
We have made and may continue to make acquisitions which could divert management's attention, cause ownership dilution to our stockholders, or be difficult to integrate, which may adversely affect our financial results.
We have made severala number of acquisitions, and it is our current plan to continue to acquire companies and technologies that we believe are strategic to our future business. Integrating newly acquired businesses or technologies could put a strain on our resources, could be costly and time consuming, and might not be successful. Such acquisitions could divert our management's attention from other business concerns. In addition, we might lose key employees while integrating new organizations. Acquisitions could also result in customer dissatisfaction, performance problems with an acquired company or technology, potentially dilutive issuances of equity securities or the incurrence of debt, the assumption or incurrence of contingent liabilities, possible impairment charges related to goodwill or other intangible assets or other unanticipated events or circumstances, any of which could harm our business. We might not be successful in integrating any acquired businesses, products or technologies, and might not achieve anticipated revenues and cost benefits.
We may not be able to effectively control and manage our growth.
If our business and markets grow and develop, it will be necessary for us to finance and manage such an expansion in an orderly fashion. This growth will lead to an increase in the responsibilities of existing personnel, the hiring of additional personnel and expansion of our scope of operations. It is possible that we may not be able to obtain the required financing under terms that are acceptable to us or hire additional personnel to meet the needs of our expansion.
Our business, revenues and profitability are dependent on a limited number of large customers.
Our revenue is dependent, in large part, on significant contracts with a limited number of large customers. As ofFor the year ended December 31, 2009,2011, approximately 29%27% of our sales were to five customers. These customers accounted for 0% of total account receivables as of December 31, 2009. We believe that revenue derived from our current and future large customers will continue to represent a significant portion of our total revenue. Our inability to continue to secure and maintain a sufficient number of large contracts or the loss of, or significant reduction in purchases by, one or more of our major customers would have the effect of reducing our revenues and profitability.
Moreover, our success will depend in part upon our ability to obtain orders from new customers, as well as the financial condition and success of our customers and general economic conditions in China.
Steel consumption is cyclical and worldwide overcapacity in the steel industry and the availability of alternative products have resulted in intense competition, which may have an adverse effect on profitability and cash flow.
Steel consumption is highly cyclical and follows general economic and industrial conditions both worldwide and in regional markets. The steel industry has historically been characterized by an excess in the world supply, which has led to substantial price decreases during periods of economic weakness. FutureWe currently have an annual steel production capacity of 7 million metric tons of crude steel and if the market for steel cannot support such production levels, the price for our products may go down. In addition, future economic downturns could decrease the demand for our products. Substitute materials are increasingly available for many steel products, which further reduces demand for steel.
We may not be able to pass on to customers the increases in the costs of our raw materials, particularly iron-ore, coke, steel billets and steel coil.
The major raw materials that we purchase for production are iron-ore, coke, steel billets and steel coil. The price and availability of these raw materials are subject to market conditions affecting supply and demand. Our financial condition or results of operations may be impaired by further increases in raw material costs to the extent we are unable to pass those increases to our customers. In addition, if these materials are not available on a timely basis or at all, we may not be able to produce our products and our sales may decline.
The price of steel may declinecontinue declining due to an overproduction by the Chinese steel companies.
According to the China Iron and Steel Association, there are approximately 1,100800 to 1,000 steel companies in China. Each steel company has its own production plan. The Chinese government released new guidance on the steel industry to encourage consolidation within the fragmented steel sector to mitigate problems of low-end repetitive production and inefficient use of resources. The current overproduction may not be solved by these measures enacted by the Chinese government. If the current overproduction continues, our product shipments could decline, our inventory could build up and eventually we may be required to decrease our sales price, which may decrease our profitability.
Disruptions to our manufacturing processes could adversely affect our operations, customer service and financial results.
Steel manufacturing processes are dependent on critical steel-making equipment, such as furnaces, continuous casters, rolling mills and electrical equipment (such as transformers), and such equipment may become temporarily inoperable as a result of unanticipated malfunctions or other events, such as fires or furnace breakdowns. Although our manufacturing plants have not experienced plant shutdowns or periods of reduced production as a result of such equipment failures or other events, we may experience such problems in the future. To the extent that lost production as a result of such a disruption could not be recovered by unaffected facilities, such disruptions could have an adverse effect on our operations, customer service and financial results.
Because we are a holding company with substantially all of our operations conducted through our subsidiaries, our performance will be affected by the performance of such subsidiaries.
We have no operations other than Daqiuzhuang Metal,General Steel (China), Baotou Steel Pipe Joint Venture, Longmen Joint Venture, Maoming Hengda, and Maoming,Tianwu Joint Venture, and our principal assets are our investments in these subsidiaries.subsidiaries and VIE. As a result, we are dependent upon the performance of Daqiuzhuang Metal, Baotou Steel Pipe Joint Venture, Longmen Joint Ventureour subsidiaries and MaomingVIE and we will be subject to the financial, business and other factors affecting them as well as general economic and financial conditions. As substantially all of our operations are and will be conducted through our subsidiaries and VIE, we will be dependent on the cash flow of our subsidiaries to meet our obligations.
Because virtually all of our assets are and will be held by operating subsidiaries and VIE, the claims of our stockholders will be structurally subordinate to all existing and future liabilities and obligations, and trade payables of such subsidiaries.subsidiaries and VIE. In the event of our bankruptcy, liquidation or reorganization, our assets and those of our subsidiaries will be available to satisfy the claims of our stockholders only after all of our subsidiaries’ and VIE’s liabilities and obligations have been paid in full.
Because we have entered into a significant number of related party transactions through the course of our planned growth strategyroutine business operations, there is a risk that we may not be able to control the pursuitvaluation of such transactions, which could then adversely impact our profitability.
In the course of our normal business, we have purchased raw materials and acquisitionssupplies from our related parties and also engaged in sales of other businessesour products to our related parties. Because such related party transactions may not always be completed at arm’s length due to their nature, we may not be able to control the valuation of such transactions and as a result, there is a risk that increasethe value of such related party transactions exceeds market value, which could ultimately impact our existing production capacity. However, integrating businesses involves a number of special risks, including the possibility that management may be distracted from regular business concerns by the need to integrate operations, unforeseen difficulties in integrating operations and systems, problems relating to assimilating and retaining employees of the acquisition, challenges in retaining customers, and potential adverse short-term effects on operation results. If we are unable to successfully complete and integrate strategic acquisitions in a timely manner, our growth strategy may be adversely impacted.
We depend on bank financing for our working capital needs.
We have various financing facilities which are due on demand or within one year. Soyear.So far, we have not experienced any difficulties in repaying such financing facilities. However, we may in the future encounter difficulties in repaying or refinancing such loansfinancings on time and may face severe difficulties in our operations and financial position.
Our bank loans may not be renewed if certain covenants of the loan agreements are not met.
We have various financing facilities with banks which are due on demand or within one year. So far, we have not experienced any difficulties in repaying such financing facilities. As of December 31, 2011, we have not satisfied our financial covenants stipulated by certain loan agreements because of debt to asset ratio. Furthermore, we are party to loan agreements with cross default clause where any breach of other loan covenants will automatically result in default of such loans. According to the loan agreements, the bank could request more collateral or guarantees if the covenant is not satisfied or request early repayment of the loan if we cannot remedy the default within a period of time. As of today, we have not received any notice from the banks to requesting for more collateral, guarantees or early repayment of the short loans due to the breach. However, we may in the future encounter difficulties in repaying or refinancing such loans on time, or providing more collateral or guarantees to the banks or making early repayment of our loans.
We depend on our affiliates financing for our working capital needs. We have various types of financing with our affiliates.
We rely on Mr. Zuosheng Yu for important business leadership.
We depend, to a large extent, on the abilities and operations of our current management team. However, we have a particular reliance upon Mr. Zuosheng Yu, our Chairman, Chief Executive Officer and significant shareholder, for the direction of our business and leadership in our growth effort.efforts. The loss of the services of Mr. Yu, for any reason, may have a material adverse effect on our business and prospects. We cannot guarantee that Mr. Yu will continue to be available to us, or that we will be able to find a suitable replacement for Mr. Yu inon a timely basis.
Failure to achieve and maintain effective internal control over financial reporting could have been historical deficiencies witha material adverse effect on our internal controls which require further improvements,business, results of operations and the trading rice of our common stock. Also, we are exposed to potential risks from legislationregulations requiring companies to evaluate controls under Section 404 of the Sarbanes-Oxley Act of 2002.
We are still exposed to potential risks from legislationregulations requiring companies to evaluate controls under Section 404 of the Sarbanes-Oxley Act of 2002.Ensuring that we have adequate internal financial and accounting controls and procedures in place to produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. Failure on our part to have effective internal financial and accounting controls, including the material weakness described below, has and could in the future cause our financial reporting to be unreliable, has and could in the future have a material adverse effect on our business, operating results, and financial condition, and has and could in the future cause the trading price of our common stock to fall dramatically.
We and our independent registered public accounting firm have identified material weaknesses in our internal control over financial reporting that is described in greater detail in “Item 9A—Controls and Procedures.” Remedying these material weaknesses and maintaining proper and effective internal controls have and will require substantial management time and attention and have resulted in our incurring substantial incremental expenses. Our outside consultants are assisting us with designing and implementing an adequate risk assessment process to identify complex transactions requiring specialized knowledge to ensure the appropriate accounting for and disclosure of such transactions. We cannot be certain that further remedies including accounting restatements will not occur in the future. Such remedies, including accounting restatements, could create a significant strain on our internal resources and cause delays in our release of quarterly or annual financial results and the filing of related reports, increase our costs and cause management distraction.
Under the supervision and with the participation of our management, we have evaluatedand will continue to evaluate our internal controls systems in order to allow management to report on, and our registered independent public accounting firm to attest to, our internal controls, as required by Section 404 of the Sarbanes-Oxley Act. We have performedand will continue to perform the system and process evaluation and testing required in an effort to comply with the management certification and auditor attestation requirements of Section 404. As a result, we have incurredand will continue to incur additional expenses and a diversion of management’s time. If we are not able to continue to meet the requirements of Section 404 in a timely manner or with adequate compliance, we might be subject to sanctions or investigation by regulatory authorities, such as the SEC or the New York Stock Exchange. Any such action could adversely affect our financial results and the market price of our stock.
We do not presently maintain product liability insurance in China, and our property and equipment insurance does not cover the full value of our property and equipment, which leaves us with exposure in the event of loss or damage to our properties or claims filed against us.
We currently do not carry any product liability or other similar insurance in China. We cannot assure you that we would not face liability in the event of the failure of any of our products.
We have purchased automobile insurance with third party liability coverage for our vehicles. In addition, we have purchased property insurance from China United Property Insurance Company to cover real property and plant.production equipment. Except for property and automobile insurance, we do not have other insurance such as business liability or disruption insurance coverage for our operations in China. In the event of a significant product liability claim or other uninsured event, our financial results and the price of our common stock may be adversely affected.
Risks Related to Operating Our Business in China
We face the risk that changes in the policies of the Chinese government could have significant impact upon the business we may be able to conduct in China and the profitability of such business.
The economy of China is transitioning from a planned economy to a market oriented economy, subject to five-year and annual plans adopted by the government that set down national economic development goals. Policies of the Chinese government can have significant effects on the economic conditions of China. The Chinese government has confirmed that economic development will follow a model of a market economy under socialism. Under this direction, we believe that China will continue to strengthen its economic and trading relationships with foreign countries and business development in China will follow market forces. While we believe that this trend will continue, there can be no assurance that such will be the case. A change in policies by the Chinese government could adversely affect our interests through, among other factors: changes in laws; regulations or the interpretation thereof; confiscatory taxation; restrictions on currency conversion; imports or sources of supplies; or the expropriation or nationalization of private enterprises. Although the Chinese government has been pursuing economic reform policies for approximately two decades, the Chinese government may significantly alter such policies, especially in the event of a change in leadership, social or political disruption, or other circumstances affecting China’s political, economic and social climate.
The Chinese laws and regulations governing our current business operations and contractual arrangements are uncertain, and if we are found to be in violation, we could be subject to sanctions. In addition, any changes in such Chinese laws and regulations may have a material and adverse effect on our business.
There are substantial uncertainties regarding the interpretation and application of Chinese laws and regulations, including but not limited to the laws and regulations governing our business, or the enforcement and performance of our arrangements with customers in the event of the imposition of statutory liens, death, bankruptcy and criminal proceedings. Along with our subsidiaries, we are considered foreign persons or foreign funded enterprises under Chinese laws,law, and, as a result, we are required to comply with certain Chinese laws and regulations. These laws and regulations are relatively new and may be subject to future changes, and their official interpretation and enforcement may involve substantial uncertainty. The effectiveness of newly enacted laws, regulations or amendments may be delayed, resulting in detrimental reliance by foreign investors. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively. In addition, the Chinese authorities retain broad discretion in dealing with violations of laws and regulations, including levying fines, revoking business licenses and requiring actions necessary for compliance. In particular, licenses, permits and beneficial treatment issued or granted to us by relevant governmental bodies may be revoked at a later time under contrary findings of higher regulatory bodies. We cannot predict what effect the interpretation of existing or new Chinese laws or regulations may have on our businesses. We may be subject to sanctions, including fines, and could be required to restructure our operations. Such restructuring may not be deemed effective or may encounter similar or other difficulties. As a result of these substantial uncertainties, there is a risk that we may be found in violation of current or future Chinese laws or regulations.
A slowdown or other adverse developments in the Chinese economy may materially and adversely affect our customers, demand for our services and our business.
Substantially all of our operationsassets, and the assets of our operating subsidiary, are conductedlocated in China and our revenue is derived from our operations in China. We anticipate that our revenues generated in China will continue to represent all of our revenues in the near future. Accordingly, our results of operations and prospects are generated from salessubject, to businesses operatinga significant extent, to the economic, political and legal developments in China. Although the ChinesePRC economy has grown significantly in recent years, we cannot assure you that such growth may notwill continue. We do not know how sensitive we are to a slowdown inIn addition, the Chinese government also exercises significant control over Chinese economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or other adverse changes incompanies. Efforts by the Chinese government to slow the pace of growth of the Chinese economy which may affectcould result in reduced demand for our products. A slowdown in overall economic growth, an economic downturn or recession or other adverse economic developments in Chinathe PRC may materially reduce the demand for our products and in turnmaterially and adversely affect our business.
The PRC government’s recent measures to curb inflation rates could adversely affect future results of operations and our productivity.
In recent years, the Chinese economy has experienced periods of rapid growth, such growth has been uneven among various sectorsexpansion and high rates of the economy and in different geographical areas of the country.inflation. Rapid economic growth can lead to growth in the money supply and rising inflation. IfChina’s Consumer Price Index increased by 3.3% for full year of 2010 according to the National Bureau of Statistics of China, or the NBS.If prices for our products rise at a rate that is insufficient to compensate for the rise in the costs of supplies, it may have an adverse effect on profitability. In orderThese factors have led to control inflation in the past,adoption by the Chinese government, has imposedfrom time to time, of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation. High inflation may in the future cause the Chinese government to impose controls on bank credits, limitscredit and/or prices, or to take other action, which could inhibit economic activity in China, and thereby harm the market for our products.
In recent years, the government of China has undertaken various measures to alleviate the effects of inflation, especially with respect to key commodities. From time to time, the PRC National Development and Reform Commission announces national price controls on loans for fixed assetsvarious products. The government of China has also encouraged local governments to institute price controls products. Such price controls could adversely affect our future results of operations and, restrictions on state bank lending. Such policy can lead to a slowingaccordingly, the price of economic growth.
If relations between the United States and China deteriorate, our stock price may decrease and we may experience difficulties accessing the United States capital markets.
At various times during recent years, the United States and China have had disagreements over political and economic issues. Controversies may arise in the future between these two countries. Any political or trade controversies between the United States and China could impact the market price of our common stock and our ability to access United States capital markets.
The Chinese Government could change its policies toward private enterprises, which could result in the total loss of our investments in China.
Our business is subject to political and economic uncertainties in China and may be adversely affected by its political, economic and social developments. Over the past several years, the Chinese government has pursued economic reform policies including the encouragement of private economic activity and greater economic decentralization. The Chinese government may not continue to pursue these policies or may alter them to our detriment. Conducting our business might become more difficult or costly due to changes in policies, laws and regulations, or in their interpretation or the imposition of confiscatory taxation, restrictions on currency conversion, restrictions or prohibitions on dividend payments to stockholders, devaluations of currency or the nationalization or other expropriation of private enterprises. In addition, nationalization or expropriation could result in the total loss of our investments in China.
The Chinese State Administration of Foreign Exchange, or SAFE, requires Chinese residents to register with, or obtain approval from SAFE regarding their direct or indirect offshore investment activities.
China’s State Administration of Foreign Exchange Regulations regarding offshore financing activities by Chinese residents has undertaken continuous changes which may increase the administrative burden we face and create regulatory uncertainties that could adversely affect the implementation of our acquisition strategy. A failure by our shareholders who are Chinese residents to make any required applications and filings pursuant to such regulations may prevent us from being able to distribute profits and could expose us and our Chinese resident shareholders to liability under Chinese law.
Our business, results of operations and overall profitability are linked to the economic, political and social conditions in China.
All of our business, assets and operations are located in China. The economy of China differs from the economies of most developed countries in many respects, including government involvement, level of development, growth rate, control of foreign exchange, and allocation of resources. The economy of China has been transitioning from a planned economy to a more market-oriented economy. Although the Chinese government has recently implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the Chinese government. In addition, the Chinese government continues to play a significant role in regulating industry by imposing industrial policies. It also exercises significant control over China’s economic growth through the allocation of resources, controlling payment of foreign currency denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Therefore, the Chinese government’s involvement in the economy may negatively affect our business operations, results of operations and our financial condition.
If there will be any changes in PRC Law, the PRC legal system could limit our Company’s ability to enforce the Unified Management Agreement, which in turn may lead to reconsideration of the VIE assessment with respect to Longmen Joint Venture.
Prior to entering into the Unified Management Agreement, Longmen Joint Venture had been consolidated as our 60% directly owned subsidiary. Upon entering into the Unified Management Agreement on April 29, 2011, Longmen Joint Venture was considered to be a variable interest entity (“VIE”) of which we are the primary beneficiary and therefore we continue to consolidate Longmen Joint Venture.
We believe that the Unified Management Agreement between Longmen Joint Venture andShaanxi 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 LongmenJoint Venture. We control 60% of the voting rights of the Board of Directors, and have control over the operations of Longmen Joint Venture. As such, we believe we have the power to control the activities of the VIE. However, uncertainties in the PRC legal system could limit our ability to enforce the Unified Management Agreement, which in turn, may lead to reconsideration of, and a different conclusion under the VIE assessment.
Governmental control of currency conversion may cause the value of your investment in our common stock to decrease.
The Chinese government imposes controls on the conversion of Renminbi or RMB into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all of our revenues in Renminbi, which is currently not a freely convertible currency. Shortages in the availability of foreign currency may restrict our ability to remit sufficient foreign currency to pay dividends, or otherwise satisfy foreign currency denominated obligations. Under existing Chinese foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from thea transaction, can be made in foreign currencies without prior approval from China’s State Administration of Foreign Exchange by complying with certain procedural requirements. However, approval from appropriate governmental authorities is required where Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of bank loans denominated in foreign currencies.
The Chinese government may also at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay certain of our expenses as they come due.
Currency fluctuations and restrictions on currency exchanges may adversely affect our business, including limiting our ability to convert RMB into foreign currencies and, if RMB were to decline in value, reducing our revenue in U.S. dollar terms.
Our reporting currency is the U.S. dollar and our operations in China use their local currency as their functional currencies. Substantially all of our revenue and expenses are in Renminbi, or RMB. We are subject to the Renminbi may causeeffects of exchange rate fluctuations with respect to local currencies. For example, the value of your investmentthe RMB depends to a large extent on Chinese government policies and China’s domestic and international economic and political developments, as well as supply and demand in our common stockthe local market. Prior to decrease.
We are subject to environmental and safety regulations, which may increase our compliance costs and reduce our overall profitability.
We are subject to the requirements of environmental and occupational safety and health laws and regulations in China. We may incur substantial costs or liabilities in connection with these requirements. Additionally, these regulations may become stricter, which will increase our costs of compliance in a manner that could reduce our overall profitability. The capital requirements and other expenditures that may be necessary to comply with environmental requirements could increase and become a significant expense linked to the conduct of our business.
Our operating subsidiaries must comply with environmental protection laws that could adversely affect our profitability.
We are required to comply with the environmental protection laws and regulations promulgated by the national and local governments of China. Yearly inspections of waste treatment systems require the payment of a license fee which could become a penalty fee if standards are not maintained. If we fail to comply with any of these environmental laws and regulations in China, depending on the types and seriousness of the violation, we may be subject to, among other things, warning from relevant authorities, imposition of fines, specific performance and/or criminal liability, forfeiture of profits made, being ordered to close down our business operations and suspension of relevant permits.
Because the Chinese legal system is not fully developed, our legal protections may be limited.
The Chinese legal system is based upon written statutes. Prior court decisions may be cited for reference but are not binding on subsequent cases and have limited value as precedent. Since 1979, China’s legislative bodies have promulgated laws and regulations dealing with economic matters such as foreign investment, corporate organization and governance, commerce, taxation and trade. However, China has not developed a fully integrated legal system and the array of new laws and regulations may not be sufficient to cover all aspects of economic activities in China. In particular, because these laws and regulations are relatively new, and because of the limited volume of published decisions and their non-binding nature, the interpretation and enforcement of these laws and regulations involves uncertainties. In addition, published government policies and internal rules may have retroactive effects and, in some cases, the policies and rules are not published at all. As a result, we may be unaware of our violation of these policies and rules until some timesometime later. The laws of China govern our contractual arrangements with our affiliated entities and the enforcement of these contracts and the interpretation of the laws governing these relationships are subject to uncertainty.
The PRC State Administration of Foreign Exchange, or SAFE, restrictions on currency exchange may limit our ability to receive and use our sales revenue effectively and to pay dividends.
All of our sales revenues and expenses are denominated in RMB. Under PRC law, RMB is currently convertible under the “current account,” which includes dividends and trade and service-related foreign exchange transactions, but not under the “capital account,” which includes foreign direct investment and loans. Currently, our PRC operating subsidiaries may purchase foreign currencies for settlement of current account transactions, including payments of dividends to us, without the approval of SAFE, by complying with certain procedural requirements. However, the relevant PRC government authorities may limit or eliminate our ability to purchase foreign currencies in the future. Since substantially all of our future revenue will be denominated in RMB, any existing and future restrictions on currency exchange may limit our ability to utilize revenue generated in RMB to fund our business activities outside China that are denominated in foreign currencies.
Foreign exchange transactions by PRC operating subsidiaries under the capital account continue to be subject to significant foreign exchange controls and require the approval of or need to register with PRC government authorities, including SAFE. In particular, if our PRC operating subsidiaries borrow foreign currency through loans from us or other foreign lenders, these loans must be registered with SAFE, and if we finance our PRC operating subsidiaries by means of additional capital contributions, these capital contributions must be approved by certain government authorities, including the Ministry of Commerce People’s Republic of China, or their respective local counterparts. These limitations could affect our PRC operating subsidiaries’ ability to obtain foreign exchange through debt or equity financing.
The PRC government also may at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining foreign currency, we may be unable to meet obligations that may be incurred in the future that require payment in foreign currency.
Under the New EIT Law, as defined below, we may be classified as a “resident enterprise” of China, which would likely result in unfavorable tax consequences to us and our non-PRC shareholders.
Under China’s Enterprise Income Tax Law, or the “EIT Law”, and its implementing rules, which became effective in 2008, an enterprise established with “de facto management bodies” within China is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. Under the implementing rules of the New EIT Law, de facto management means substantial and overall management and control over the production and operations, personnel, accounting, and properties of the enterprise. Because the New EIT Law and its implementing rules are new, it is unclear how tax authorities will determine tax residency based on the facts of each case.
In April 2009, the State Administration of Taxation (“SAT”) issued a new circular to clarify the criteria for recognizing the resident enterprise status for Chinese controlled foreign companies. According to the Circular Regarding the Determination Criteria on Chinese Controlled Offshore Companies as Resident Enterprises (Circular Guoshuifa 2009 No. 82), if a foreign company simultaneously satisfies the following four criteria:
· | It constitutes a Chinese controlled foreign company and shall be deemed to be a PRC resident enterprise. |
· | The premises where the senior management and the senior management bodies responsible for the routine production and business management of the enterprise perform their functions are mainly located within China. |
· | The financial decisions (including, borrowing, lending, financing, financial risk management, etc.) and the personnel decisions (for example, appointment, dismissal, remuneration, etc.) of the enterprise are made by the bodies or persons within China or are subject to the approval of the bodies or persons within China. |
· | The enterprise’s primary properties, accounting books, company seals, minutes and archives of the meetings of the board of directors and shareholders are located or preserved within China. The enterprise’s directors or senior management with fifty percent or more of the voting rights usually live in China. |
Despite the issuance of the new clarifying circular referenced above, the application of these standards remains uncertain. If the PRC tax authorities determine that we are a “resident enterprise” for PRC enterprise income tax purposes, unfavorable PRC tax consequences could follow. First, we will be subject to enterprise income tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations. Second, although under the EIT Law and its implementing rules dividends paid to us from our PRC subsidiaries would qualify as “tax-exempt income,” such dividends may be subject to a 10% withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax, have not yet issued guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise income tax purposes. Finally, it is possible that future guidance issued with respect to the new “resident enterprise” classification would result in a situation in which a 10% withholding tax is imposed on dividends we pay to our non-PRC shareholders and with respect to gains derived by our non-PRC shareholders from transferring our shares. We are actively monitoring the possibility of “resident enterprise” treatment for the 2008 and 2009 tax years and are evaluating appropriate organizational changes to avoid this treatment, to the extent possible.
If we were treated as a “resident enterprise” by PRC tax authorities, we would be subject to tax in both the U.S. and China, and our PRC tax may not be creditable against our U.S. tax. In addition, we have not accrued any tax liability associated with the possible payment of dividends to our U.S. parent company. Such a tax would be an added expense appearing on our income statement, which would reduce our net income.
The PRC legal system embodies uncertainties which could limit the legal protections available to us and you, or could lead to penalties on us.
The PRC legal system is a civil law system based on written statutes. Unlike common law systems, it is a system in which decided legal cases have little precedential value. In 1979, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters in general. Our PRC operating subsidiaries are subject to laws and regulations applicable to foreign investment in China. In addition, our VIE and all of our subsidiaries that are incorporated in China are subject to all applicable Chinese laws and regulations. Because of the relatively short period for enacting such a comprehensive legal system, the laws, regulations and legal requirements are relatively recent, and their interpretation and enforcement involve uncertainties. These uncertainties could limit the legal protections available to us and other foreign investors, including you, and may lead to penalties imposed on us because of the different understanding between the relevant authority and us. For example, according to current tax laws and regulations, we are responsible to pay business tax on a “Self-examination and Self-application” basis. However, since there is no clear guidance as to the applicability of certain preferential tax treatments, we may be found in violation of the interpretation of local tax authorities with regard to the scope of taxable services and the percentage of tax rate and therefore might be subject to penalties, including but not limited to, monetary penalties.In addition, we cannot predict the effect of future developments in the PRC legal system, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement thereof, or the preemption of local regulations by national laws
We may have limited legal recourse under PRC law if disputes arise under our contracts with third parties.
The Chinese government has enacted significant laws and regulations dealing with matters, such as corporate organization and governance, foreign investment, commerce, taxation and trade. However, the PRC’s experience in implementing, interpreting and enforcing these laws and regulations is limited, and our ability to enforce commercial claims or to resolve commercial disputes is unpredictable. If our new business ventures are unsuccessful, or other adverse circumstances arise from these transactions, we face the risk that the parties to these ventures may seek ways to terminate the transactions, or may hinder or prevent us from accessing important information regarding the financial and business operations of these acquired companies. The resolution of these matters may be subject to the exercise of considerable discretion by agencies of the Chinese government, and forces unrelated to the legal merits of a particular matter or dispute may influence their determination. Any rights we may have to specific performance or to seek an injunction under PRC law, in either of these cases, are severely limited, and without a means of recourse by virtue of the Chinese legal system, we may be unable to prevent these situations from occurring. The occurrence of any such events could have a material adverse effect on our business, financial condition and results of operations. Although legislation in China over the past 30 years has significantly improved the protection afforded to various forms of foreign investment and contractual arrangements in China, these laws, regulations and legal requirements are relatively new and their interpretation and enforcement involve uncertainties, which could limit the legal protection available to us and foreign investors, including you. The inability to enforce or obtain a remedy under any of our future agreements could result in a significant loss of business, business opportunities or capital and could have a material adverse effect on our results of operations.
Failure to comply with the U.S. Foreign Corrupt Practices Act could subject us to penalties and other adverse consequences.
We are subject to the U.S. Foreign Corrupt Practices Act, or FCPA, which generally prohibits United States companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. In addition, we are required to maintain records that accurately and fairly represent our transactions and have an adequate system of internal accounting controls. Foreign companies, including some that may compete with us, are not subject to these prohibitions, and therefore may have a competitive advantage over us. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time-to-time in the PRC. We can make no assurance that our employees or other agents will not engage in such conduct for which we might be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations.
If we become subject to the recent scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we may have to expend significant resources to investigate and resolve such allegations, which could harm our business operations, stock price and reputation, especially if such matter cannot be addressed and resolved favorably.
Recently, U.S. public companies that have substantially all of their operations in China, particularly companies like us which have completed so-called reverse merger transactions, have been the subject of intense scrutiny, criticism and negative publicity by investors, financial commentators and regulatory agencies, such as the SEC. Much of the scrutiny, criticism and negative publicity has centered around financial and accounting irregularities and mistakes, a lack of effective internal controls over financial accounting, inadequate corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result of the scrutiny, criticism and negative publicity, the publicly traded stock of many U.S. listed Chinese companies has sharply decreased in value and, in some cases, has become virtually worthless. Many of these companies are now subject to shareholder lawsuits, SEC enforcement actions and are conducting internal and external investigations into the allegations. It is not clear what effect this sector-wide scrutiny, criticism and negative publicity will have on our Company, our business and our stock price. If we become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, we will have to expend significant resources to investigate such allegations and/or defend our Company. This situation will be costly and time consuming and distract our management from growing our Company. If such allegations are not proven to be groundless, our Company and business operations will be severely impacted and your investment in our stock could be rendered worthless.
The disclosures in our reports and other filings with the SEC and our other public pronouncements are not subject to the scrutiny of any regulatory bodies in the PRC. Accordingly, our public disclosure should be reviewed in light of the fact that no governmental agency that is located in China where substantially all of our operations and business are located had conducted any due diligence on our operations or reviewed or cleared any of our disclosure.
We are regulated by the SEC and our reports and other filings with the SEC are subject to SEC review in accordance with the rules and regulations promulgated by the SEC under the Securities Act of 1933 and the Securities Exchange Act of 1934. Unlike public reporting companies whose operations are located primarily in the United States, substantially all of our operations are located in China. Since substantially all of our operations and business takes place in China, it may be more difficult for the SEC to overcome the geographic and cultural obstacles that are present when reviewing our disclosure. These same obstacles are not present for similar companies whose operations or business take place entirely or primarily in the United States. Furthermore, our SEC reports and other disclosure and public pronouncements are not subject to the review or scrutiny of any PRC regulatory authority. For example, the disclosure in our SEC reports and other filings are not subject to the review of the Chinese Securities Regulatory Commission, a PRC regulator that is tasked with oversight of the capital markets in China. Accordingly, you should review our SEC reports, filings and our other public pronouncements with the understanding that no local regulator has done any due diligence on our Company and with the understanding that none of our SEC reports, other filings or any of our other public pronouncements has been reviewed or otherwise been scrutinized by any local regulator.
If we make equity compensation grants to persons who are PRC citizens, they may be required to register with SAFE. We may also face regulatory uncertainties that could restrict our ability to adopt equity compensation plans for our directors and employees and other parties under PRC laws.
On March 28, 2007, SAFE issued the “Operating Procedures for Administration of Domestic Individuals Participating in the Employee Stock Ownership Plan or Stock Option Plan of An Overseas Listed Company,” also known as “Circular 78.” It is not clear whether Circular 78 covers all forms of equity compensation plans or only those which provide for the granting of stock options. For any plans which are so covered and are adopted by a non-PRC listed company, such as our Company, after March 28, 2007, Circular 78 requires all participants who are PRC citizens to register with and obtain approvals from SAFE prior to their participation in the plan. In addition, Circular 78 also requires PRC citizens to register with SAFE and make the necessary applications and filings if they participated in an overseas listed company’s covered equity compensation plan prior to March 28, 2007. We believe that the registration and approval requirements contemplated in Circular 78 are burdensome and time consuming.
In the future, we may adopt an equity incentive plan and make numerous stock option grants under the plan to our officers, directors and employees, some of whom are PRC citizens and may be required to register with SAFE. If it is determined that any of our equity compensation plans are subject to Circular 78, failure to comply with relevant provisions may subject us and participants of any such equity incentive plan who are PRC citizens to fines and legal sanctions and prevent us from being able to grant equity compensation to our PRC employees. In that case, our ability to compensate our employees and directors through equity compensation and to attract and retain employees and directors may be hindered and our business operations may be adversely affected.
Due to various restrictions under PRC law on the distribution of dividends by our PRC operating companies, we may not be able to pay dividends to our shareholders.
The Wholly-Foreign Owned Enterprise Law (1986)(“WFOE”), as amended and the Wholly-Foreign Owned Enterprise Law Implementing Rules (1990), as amended and the Company Law of the PRC (2006) contain the principal regulations governing dividend distributions by wholly foreign owned enterprises. Under these regulations WFOE’s may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. Additionally, a WFOE is required to set aside a certain amount of its accumulated profits each year, if any, to fund certain reserve funds. These reserves are not distributable as cash dividends, except in the event of liquidation, and cannot be used for working capital purposes.
Furthermore, if any of our consolidated subsidiaries in China incurs debt in the future, the instruments governing the debt may restrict our ability to pay dividends or make other payments. If we or our consolidated subsidiaries are unable to receive all of the revenues from our operations due to these contractual or dividend arrangements, we may be unable to pay dividends on our common stock. In addition, under WFOE regulations mentioned above, we must retain a reserve equal to 10 percent of net income after taxes, not to exceed 50 percent of registered capital. Accordingly, this reserve will not be available to be distributed as dividends to our shareholders. We presently do not intend to pay dividends in the foreseeable future. Our management intends to follow a policy of retaining all of our earnings to finance the development and execution of our strategy and the expansion of our business.
We may have difficulty establishing adequate management, legal and financial controls in the PRC.
The PRC historically has been deficient in western style management and financial reporting concepts and practices, as well as in modern banking and other control systems. We may have difficulty in hiring and retaining a sufficient number of qualified employees to work in the PRC. As a result of these factors, and especially given that we are an exchange listed company in the U.S. and subject to regulation as such, we may experience difficulty in establishing management, legal and financial controls, collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet western standards. As there is a shortage of well-educated and experienced professionals who have bilingual and bicultural backgrounds in China, especially in remote areas where our factories are located, we may experience high turnover in our staff. Therefore, we may, in turn, experience difficulties in implementing and maintaining adequate internal controls as required under Section 404 of the Sarbanes-Oxley Act and other applicable laws, rules and regulations. This may result in significant deficiencies or material weaknesses in our internal controls which could impact the reliability of our financial statements and prevent us from complying with SEC rules and regulations and the requirements of the Sarbanes-Oxley Act. Any such deficiencies, weaknesses or lack of compliance could have a material adverse effect on our results of operations and the public announcement of such deficiencies could adversely impact our stock price.
Risks Related to Our Common Stock
Our officers, directors and affiliates control us through their positions and stock ownership and their interests may differ from other stockholders.
Our officers, directors and affiliates beneficially own approximately 41.3%40.3% of our common stock. Mr. Zuosheng Yu, our major stockholder, beneficially owns approximately 40.9%39.8% of our common stock. Mr. Yu can effectively control us and his interests may differ from other stockholders.
All of our subsidiaries and substantially all of our assets are located outside the United States.
All our subsidiaries are located in China and substantially all of our assets are located outside the United States. It may therefore be difficult for investors in the United States to enforce their legal rights based on the civil liability provisions of the U.S. federal securities laws against us in the courts of either the United States andor China and, even if civil judgments are obtained in United States courts, such judgments may not be enforceable in Chinese courts. AllMost of our directors and officers reside outside of the United States. It is unclear if extradition treaties now in effect between the United States and China would permit effective enforcement against us or our officers and directors of criminal penalties under the U.S. federal securities laws or otherwise.
We have never paid cash dividends and are not likely to do so in the foreseeable future.
We currently intend to retain any future earnings for use in the operation and expansion of our business. We do not expect to pay any cash dividends in the foreseeable future but will review this policy as circumstances dictate.
Our common stock is subject to price volatility unrelated to our operations.
The market price of our common stock could fluctuate substantially due to a variety of factors, including market perception of our ability to achieve our planned growth, quarterly operating results of other steel makers, trading volume in our common stock, changes in general conditions in the economy and the financial markets or other developments affecting our competitors or us. In addition, the stock market is subject to extreme price and volume fluctuations. This volatility has had a significant effect on the market price of securities issued by many companies for reasons unrelated to their operating performance and could have the same effect on our common stock.
Investors may experience dilution from any conversion of the senior convertible notes or exercise of warrants we issued in December 2007 and December 2009.
Shares of our common stock are issuable upon conversion of senior convertible notes and warrants to purchase common stock issued in a private placement that closed on December 13, 2007. The senior convertible notes were initially convertible into 4,170,009 shares of our common stock based on a conversion price of $12.47 per share and applicable interest rates. As of the date of this report, all of the convertible notes had been converted. Prior to the adjustments described below, upon the exercise of the warrants, an additional aggregate amount of 1,154,958 shares of our common stock were issuable based upon the then exercise price of $13.51 per share. The senior convertible notes have a five year term through December 12, 2012, and the warrants are exercisable from May 13, 2008, to May 13, 2013. The conversion price of the notes and the exercise price of the warrants (and the number of shares issuable under the warrants) are each subject to adjustment under certain customary circumstances, including, among others, if the sale price of securities issued by us in subsequent offerings is less than the conversion or exercise pricesprice then in effect. The conversion price of the notes was adjusted and reset to $4.2511, the market price (as defined in the notes) on May 7, 2009. As of December 31, 2009, approximately $36.7 million of the convertible notes had been converted, resulting in the issuance of 9,578,518 shares of our common stock. As discussed below, the warrants have been adjusted such that upon their exercise, an aggregate of 3,900,871 shares of our common stock are now issuable based upon the current adjusted exercise price of $5.00 per share.
In addition to the notes and warrants issued in December 2007, we issued 5,555,556 shares of our common stock and warrants to purchase 2,777,778 shares of our common stock in a registered direct offering that closed on December 30, 2009. The warrants issued as part of the December 2009 transaction are exercisable beginning six months from the date of issuance for a period of two years from the initial exercise date, and carry an initial exercise price per share equal to $5.00. Certain anti-dilution adjustment provisions contained in the warrants issued in 2007 may have been triggered by the December 2009 transaction. Rather than giving full effect to the anti-dilution provisions, we entered into warrant reset agreements with investors from our December 2007 financing whereby the aggregate number of shares of common stock issuable upon exercise of the warrants issued in the December 2007 transaction is increased from 1,154,958 shares to 3,900,871 shares, and the exercise price of the December 2007 Warrants was reduced from $13.51 per share to $5.00 per share.
The issuance of shares of our common stock upon conversion of the notes which remain outstanding and exercise of any of our outstanding warrants (including any increased amount of shares that may be issued in the future because of reductions in exercise price and conversion price)thereof) will dilute our current shareholders.
Our failure to comply with conditions required for our common stock to be listed on the New York Stock Exchange (“NYSE”) could result in delisting of our common stock from the NYSE and have asignificant negative effect on the value and liquidity of our securities as well as other matters.
As a result of our failure to timely file this Annual Report on Form 10-K for the fiscal year ended December 31, 2011 (“Annual Report”), we were not in full compliance with NYSE Listed Company Manual, Section 802.01E, which requires us to file our Annual Report on or before April 16, 2012 (the “Filing Due Date”). We initially had six months from the Filing Due Date to cure this deficiency. On October 12, 2012, we received a notification from the NYSE granting us an extension until February 15, 2013 to file our Annual Report. We are required to comply with NYSE Listed Company Manual to file this Annual Report as a condition for our common stock to continue to be listed on the NYSE. If we are unable to comply with such conditions, then our shares of common stock are subject to immediate delisting from the NYSE. We intend to appeal any decision to delist our shares from the NYSE, but cannot provide any assurance that our appeal will be successful. Any such appeal will not stay the decision to delist our shares.
If our common stock is delisted from the NYSE, such securities may be traded over-the-counter on the “pink sheets.” The alternative market, however, is generally considered to be less efficient than, and not as broad as, the NYSE. Accordingly, delisting of our common stock from the NYSE could have a significant negative effect on the value and liquidity of our securities. In addition, the delisting of such stock could adversely affect our ability to raise capital on terms acceptable to us or at all. In addition, delisting of our common stock may preclude us from using exemptions from certain state and federal securities regulations, including the SEC’s “penny stock” rules.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not Applicable.
ITEM 2. PROPERTIES.
General Steel (China)
The properties of Daqiuzhuang MetalGeneral Steel (China) consist of manufacturing sites and office buildings located in Jinghai county, about 20 miles (45 kilometers) southwest of the Tianjin city center on a total of 17.81 acres (7.21 hectares) of land, which includes 320,390 sq. ft.square feet (29,667 sq. m.)square meters) of building space.
Under ChinesePRC law, all land in China is owned by the government, which grants a “land use right” to an individual or entity after a purchase price for such “land use right” is paid to the government. The land use right allows the holder the right to use the land for a specified long-term period of time and enjoy all the ownership incidents to the land. We are the registered owner of the land use rights for the parcels of land identified in the chart below.
Registered Owner of Land Use Right | Location & Certificate of Land Use Right | Usage | Space (acres) | |||||||||
Use Right | Life | |||||||||||
Tianjin Daqiuzhuang Metal Sheet Co., | No. | Industrial Use | 50 years | |||||||||
Tianjin Daqiuzhuang Metal Sheet Co., | No. 35 Baiyi Road, Daqiuzhuang, Jinghai County, Tianjin | Industrial Use | 9.89 | 50 years | 40 years | |||||||
Tianjin Daqiuzhuang Metal Sheet Co., Ltd | Ying | Commercial Use | 1.14 | 50 years |
Baotou Steel Pipe Joint Venture
The properties of Baotou Steel Pipe Joint Venture consist of our production and administrative sites located on the main production campus of the Baotou Steel Pipe Joint Venture located in Baotou, Inner Mongolia Autonomous Region. The land is leased from Baotou Iron and Steel Group Co., Ltd., our strategic partner in the Baotou Steel Pipe Joint Venture.
Longmen Joint Venture
The properties of Longmen Joint Venture consist of production and administrative sites located in various locations throughout the southern half of Shaanxi province on land totaling approximately 301307 acres (121.5(124.4 hectares).
Longmen Joint Venture is the registered owner of the land use rights for the parcels of land identified in the chart below.
Registered Owner of Land Use Right | Location & Certificate Of Land Use Right | Usage | Space (acres) | Life of Land Use Right | Remaining Life | |||||||
North Huanyuan Road, Weiyang District, Xi'an, Shaanxi | Industrial Use | 19.1 | 50 Years | |||||||||
Longmen Town, Hancheng, Shaanxi | Industrial Use | 40-48 Years | ||||||||||
Sanping Village, Shipo Town, Zhashui County, Shaanxi | Industrial Use | 103.2 | 50 Years | |||||||||
Zhaikouhe Village, Xunjian Town, Zhashui County, Shaanxi | Industrial Use | 1.9 | 50 Years | |||||||||
East Taishi Avenue, Xincheng District, Hancheng, Shaanxi | Commercial Use | 3.6 | 40 Years |
*This location consists of six land use rights with various remaining useful lives.
Maoming
The properties of Maoming Hengda consist of our production and administrative sites located in two separated sites inside Maoming city, Guangdong province, on land totaling approximately 239.6240 acres (96.9 hectares).
Maoming Hengda is the registered owner of the land use rights for the parcels of land identified in the chart below.
Registered Owner of Land Use Right | Location & Certificate Of Land Use Right | Usage | Space (acres) | Life of Land Use Right | Remaining Life | |||||||
Maoming Hengda | Diancheng Town, Dianbai County, Maoming City, Industrial Zone of Bohe Port, Guangdong | Industrial Use | 50 Years | 44 Years |
ITEM 3. LEGAL PROCEEDINGS.
From time to time, we are subject to certain legal proceedings, claims and disputes that arise in the ordinary course of our business. Although we cannot predict the outcomes of these legal proceedings, we do not believe these actions, in the aggregate, will have a material adverse impact on our financial position, results of operations or liquidity. We are currently not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The information required by Item 4 is not applicable to us, as we have no mining operations in the United States.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Our common stock wasis listed on the American StockNew York Exchange and from March 6, 2008 to August 7, 2008 our common stock was traded onunder the NYSE Arca exchange. On August 8, 2008, our common stock began trading on the NYSE. Our ticker symbol is "GSI."“GSI”. The high and low closing common stock price for each quarter of the last two years is as follows:
HIGH AND LOW STOCK PRICES | 1ST QTR | 2ND QTR | 3RD QTR | 4TH QTR | ||||||||||||
2009 | ||||||||||||||||
High | $ | 4.59 | $ | 7.35 | $ | 5.74 | $ | 5.79 | ||||||||
Low | $ | 1.85 | $ | 2.77 | $ | 3.32 | $ | 3.62 | ||||||||
2008 | ||||||||||||||||
High | $ | 9.08 | $ | 15.70 | $ | 15.50 | $ | 7.16 | ||||||||
Low | $ | 6.23 | $ | 6.66 | $ | 7.14 | $ | 2.53 |
HIGH AND LOW SALES PRICES | 1ST QTR | 2ND QTR | 3RD QTR | 4TH QTR | ||||||||||||
2010 | ||||||||||||||||
High | $ | 5.04 | $ | 4.22 | $ | 3.54 | $ | 3.15 | ||||||||
Low | $ | 3.78 | $ | 2.35 | $ | 2.28 | $ | 2.38 | ||||||||
2011 | ||||||||||||||||
High | $ | 2.93 | $ | 2.41 | $ | 1.73 | $ | 1.50 | ||||||||
Low | $ | 2.28 | $ | 1.42 | $ | 1.13 | $ | 0.99 |
As of March 5, 2010,February 7, 2013, there were approximately 10,000316 holders of record of our common stock.
Dividend Policy
Our boardBoard of directorsDirectors currently does not intend to declare dividends or make any other distributions to our shareholders. Any determination to pay dividends in the future will be at our board’s discretion and will depend upon our results of operations, financial condition and prospects as well as other factors deemed relevant by our boardBoard of directors.
Recent Sales of Unregistered Sale Securities
On September 1, 2009,June 16, 2011, our Company, Maoming Hengda Steel Co., Ltd and Tianjin Qiu Gang Investment Co. Ltd. entered into a Debt Repayment Agreement with Guangzhou Hengda Industrial Group Ltd. (“Guangzhou Hengda”) and its sole shareholder Ms. Yumei Ding whereby we granted Huamei 21st Century Limited, 170,000issued 974,571 shares of our common stock to Ms. Ding to partially repay the outstanding balance owed to Guangzhou Hengda. We issued such shares at $3.60a price of $5.00 per share for consulting services.thereby to repay the loan balance of $4.8 million. As of December 31, 2011, the unpaid balance was $1.3 million to be due on demand. The Company relied on the exemptionissuance of these shares was exempted from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”) provided underpursuant to Section 4(2) of the Securities Act in granting the shares to Huamei 21st Century Limited.
ITEM 6. SELECTED FINANCIAL DATA.
SUMMARY OF OPERATIONS | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||
(USD and number of shares in thousands, except per share amounts) | ||||||||||||||||||||
Revenues | $ | 1,668,446 | $ | 1,351,203 | $ | 772,440 | $ | 139,495 | $ | 89,740 | ||||||||||
Cost of Revenues | $ | 1,579,892 | $ | 1,343,275 | $ | 715,751 | $ | 135,324 | $ | 81,166 | ||||||||||
Selling, General, and Administrative Expenses | $ | 41,074 | $ | 36,942 | $ | 16,164 | $ | 2,421 | $ | 2,781 | ||||||||||
Income (Loss) from operations | $ | 47,480 | $ | (29,014 | ) | $ | 40,525 | $ | 1,749 | $ | 5,793 | |||||||||
Net Income | ||||||||||||||||||||
(Loss) Attributable to Controlling Interest | $ | (25,244 | ) | $ | (11,323 | ) | $ | 22,426 | $ | 1,033 | $ | 2,740 | ||||||||
(Loss) Earnings per Share, Basic | $ | (0.60 | ) | $ | (0.32 | ) | $ | 0.69 | $ | 0.03 | $ | 0.09 | ||||||||
(Loss) Earnings per Share, Diluted | $ | (0.60 | ) | $ | (0.32 | ) | $ | 0.69 | $ | 0.03 | $ | 0.09 | ||||||||
Basic Weighted Average Shares Outstanding | 41,860 | 35,381 | 32,425 | 31,250 | 31,250 | |||||||||||||||
Diluted Weighted Average Shares Outstanding | 41,860 | 35,381 | 32,558 | 31,250 | 31,250 | |||||||||||||||
LONG TERM OBLIGATIONS | ||||||||||||||||||||
Convertible Notes Payables | $ | 1,050 | $ | 7,155 | $ | 5,440 | ||||||||||||||
Derivative Liabilities | $ | 23,340 | $ | 9,903 | $ | 28,483 |
As of DECEMBER 31 | ||||||||||||||||||||
FINANCIAL DATA | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||
(USD in thousands, except the ratios) | ||||||||||||||||||||
Total Assets | $ | 1,228,064 | $ | 865,714 | $ | 478,407 | $ | 73,822 | $ | 58,993 | ||||||||||
Depreciation and Amortization | $ | 33,107 | $ | 22,414 | $ | 10,337 | $ | 1,917 | $ | 1,344 | ||||||||||
Current Ratio | 0.59 | 0.43 | 0.67 | 0.87 | 0.96 |
Three months ended December 31 | ||||||||||||||||||||
STATEMENT OF | (Unaudited) | |||||||||||||||||||
OPERATIONAL DATA | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||
(USD in thousands, except share and per share amounts) | ||||||||||||||||||||
Statement of Operations Data | ||||||||||||||||||||
Revenues | $ | 451,953 | $ | 261,087 | $ | 268,192 | $ | 42,496 | $ | 17,719 | ||||||||||
Cost of Revenues | $ | 438,554 | $ | 282,662 | $ | 247,239 | $ | 42,838 | $ | 17,509 | ||||||||||
Gross Profit | $ | 13,399 | $ | (21,575 | ) | $ | 20,953 | $ | (342 | ) | $ | 210 | ||||||||
Selling, General, and Administrative Expenses | $ | 11,855 | $ | 8,578 | $ | 5,894 | $ | 266 | $ | 1,017 | ||||||||||
Income (Loss) form Operations | $ | 1,544 | $ | (30,153 | ) | $ | 15,059 | $ | (607 | ) | $ | (808 | ) | |||||||
Net income (Loss) Attributable to Controlling Interest | $ | (11,085 | ) | $ | (9,705 | ) | $ | 12,057 | $ | 514 | $ | 386 | ||||||||
(Loss) Earnings per share | ||||||||||||||||||||
Basic | $ | (0.26 | ) | $ | (0.27 | ) | $ | 0.36 | $ | 0.01 | $ | 0.01 | ||||||||
Diluted | $ | (0.26 | ) | $ | (0.27 | ) | $ | 0.36 | $ | 0.01 | $ | 0.01 | ||||||||
Balance Sheet Data | ||||||||||||||||||||
Current Assets | $ | 615,278 | $ | 315,445 | $ | 232,608 | $ | 44,670 | $ | 37,017 | ||||||||||
Total Assets | $ | 1,228,064 | $ | 865,714 | $ | 478,407 | $ | 73,822 | $ | 58,993 | ||||||||||
Total Liabilities | $ | 1,061,735 | $ | 751,476 | $ | 382,974 | $ | 53,575 | $ | 41,256 | ||||||||||
Noncontrolling interest | $ | 72,598 | $ | 54,330 | $ | 42,044 | $ | 6,186 | $ | 5,387 |
Not Applicable.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Forward-Looking Statements:
The following discussion of the financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes thereto.thereto included elsewhere in this Annual Report. The following discussion contains forward-looking statements. General Steel Holdings, Inc. is referred to herein as “we” or “our., “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 China,PRC, including regulatory factors that may affect such economic conditions; (b) whether we are able to manage our planned growth efficiently and operate profitable operations, including whether our management will be able to identify, hire, train, retain, motivate and manage required personnel or that management will be able to successfully manage and exploit existing and potential market opportunities; (c) whether we are able to generate sufficient revenues or obtain financing to sustain and grow our operations; and (d) whether we are able to successfully fulfill our primary requirements for cash which are explained below under “Liquidity and Capital Resources”. as well as other factors described in “Item 1A: Risk Factors” in this Annual Report. You should carefully review all of these factors, as well as the comprehensive discussion of forward-looking statements on page 4 of this Annual Report. Unless otherwise required by applicable law, we do not undertake, and we specifically disclaim any obligation, to update any forward-looking statements to reflect occurrences, developments, unanticipated events or circumstances after the date of such statement.
OVERVIEW
We were founded on the strategy to aggressively merge, partner with, and acquire State-owned enterprises and privateselected steel companies with great growth potential within China’s highly fragmented steel industry. As of December 31, 2009,2011, we were comprised of four operating subsidiariessteel producing and processing subsidiaries/VIE of which the Longmen Joint Venture is the largest.largest, and one raw material trading company subsidiary. Located in Shaanxi province, the Longmen Joint Venture contributed approximately 92%97.9% and 98.1% of our total revenue for the 20092011 and 2010 fiscal year.
Fiscal year 20092011 was highlighted by recordincreased sales revenue, shipmentdriven from both increased sales volume and incomeaverage selling prices, and capacity expansion from operations.
· |
· |
· | On June1, 2011, we announced an increase of additional 1,000,000 shares of our common stock which will be purchased under our share repurchase program launched in December 2010 (the “Share Repurchase Program”), bringing the total authorized shares of our common stock available for purchase to 2,000,000. As of December 31, 2011, we had repurchased 1,090,978 shares of common stock in open market transactions at an average price of $2.56 per share pursuant to the above mentioned expansion of the Share Repurchase Program. |
· | In July 2011, we completed the installation and started testing the 1,000,000 metric ton capacity high speed wire production line, which was re-located from Maoming facility to |
Our continued growth demonstrates the following strengths:
· | Our two-pronged growth strategy of upgrading our existing operations and growing through merger and acquisition activities has continued to be successful. |
· | We |
· | Because of our |
Industry Environment
Despite demand growth witnessed during 2010 and 2011, the overall nationwide steelmaking capacity still exceeds steel demand. There is significant over-capacity in China steel sector which is putting pressure on operators’ profitability which became the most significant challenge in the steel manufacturing business. Chinese crude steel capacity is expected to be around 840 million tons in 2012, which would be 22.1% in excess of the expected 688 million tons of consumption, according to HIS Global Insight daily analysis, January 2012.
For steelmakers, operating performance depends on the volatility of the cost of raw materials. The record results reflectshortage 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 two years, we have witnessedperseverance 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.
The central government has had a long-stated goal to consolidate 50% of domestic steel production among the top ten producers by 2010 and 70% by 2020. Currently, there are approximately over 500 crude steel producers throughout China, and the top ten producers account for approximately 48% of total national output. In September 2009, the central government published an industry target to eliminate 80 million metric tons of inefficient capacity from the steel industry by the end of 2011. In July 2011, the central government announced its goal of reducing obsolete iron production capacities by 31.22 million ton in 2011. However, we continue to see a strong demand for our products and believe significant growth opportunities in the industry and market we service.
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 aggressively look for valued partners which could lead to opportunities for high quality acquisitions. We believe the above-mentioned policy will strengthen our position as an industry consolidator by creating numerous qualified potential acquisition targets.
RESULTS OF OPERATIONS
Statements of Operations for the years ended December 31, 2011 and 2010:
(In thousands except share data) | 2011 | 2010 | Change | Percentage Change | ||||||||||||
Sales | $ | 3,563,896 | $ | 1,882,140 | $ | 1,681,756 | 89.4 | % | ||||||||
Cost of Goods Sold | 3,652,110 | 1,850,725 | 1,801,385 | 97.3 | % | |||||||||||
Gross Profit (loss) | (88,214 | ) | 31,415 | (119,629 | ) | (380.8 | )% | |||||||||
Gross Profit Margin % | (2.5 | )% | 1.7 | % | ||||||||||||
Selling, General and Administrative Expenses | 91,827 | 52,577 | 39,250 | 74.7 | % | |||||||||||
Loss from Operations | (180,041 | ) | (21,162 | ) | (158,879 | ) | 750.8 | % | ||||||||
Other Expense, net | (87,664 | ) | (33,891 | ) | (53,773 | ) | 158.7 | % | ||||||||
Loss Before Provision for Income Taxes and Noncontrolling Interest | (267,705 | ) | (55,053 | ) | (212,652 | ) | 386.3 | % | ||||||||
Provision (Benefit) for Income Taxes | 15,594 | (8,782 | ) | 24,376 | (277.6 | )% | ||||||||||
Net Loss | (283,299 | ) | (46,271 | ) | (237,028 | ) | 512.3 | % | ||||||||
Less: Net Loss Attributable to Noncontrolling Interest | (106,112 | ) | (16,265 | ) | (89,847 | ) | 552.4 | % | ||||||||
Net Loss Attributable to General Steel Holdings, Inc. | $ | (177,187 | ) | $ | (30,006 | ) | $ | (147,181 | ) | 490.5 | % | |||||
Loss Per Share | ||||||||||||||||
Basic | $ | (3.24 | ) | $ | (0.56 | ) | $ | (2.68 | ) | 478.6 | % | |||||
Diluted | $ | (3.24 | ) | $ | (0.56 | ) | $ | (2.68 | ) | 478.6 | % |
Revenue
Fiscal year ended December 31, 2011 compared to fiscal year ended December 31, 2010
Revenue by Subsidiary and Product
(in thousands) | 2011 | 2010 | Change | Percentage Change | ||||||||||||||
Subsidiary | Product | |||||||||||||||||
Longmen Joint Venture | Rebar | $ | 3,487,636 | $ | 1,845,577 | $ | 1,642,059 | 89.0 | % | |||||||||
Others | 76,260 | 36,563 | 39,697 | 108.6 | % | |||||||||||||
Total Revenue | $ | 3,563,896 | $ | 1,882,140 | $ | 1,681,756 | 89.4 | % |
(In thousands metric tons) | 2011 | 2010 | Change | Percentage Change | ||||||||||||||
Subsidiary | Product | |||||||||||||||||
Longmen Joint Venture | Rebar | 5,496 | 3,511 | 1,985 | 56.5 | % | ||||||||||||
Others | 711 | 415 | 296 | 71.3 | % | |||||||||||||
Total Production | 6,207 | 3,926 | 2,281 | 58.1 | % |
Total Sales Revenue for the fiscal year 2011 increased $1.7 billion or 89.4% to $3.6 billion from $1.9 billion in 2010. The increase in sales revenue compared to 2010 was predominantly due to the combined effect of increased production volume and average selling price of our rebar products. Sales volume increased 2.3 million metric tons, or 58.1% to 6.2million metric tons, compared to 3.9 million metric tons in 2010. The average selling price of rebar increased 20.7% to approximately $635 per ton in 2011 from approximately $526 per ton in 2010.
Longmen Joint Venture comprised 97.9% of total sales for 2011. Production volume of rebar at Longmen Joint Venture reached 5.5 million metric tons in 2011, which increased 56.5% compared with 3.5 million metric tons for of the same period in 2010. The increase of Longmen Joint Venture’s production was mainly due to the additional capacity contributed from the new blast furnaces brought online in January 2011 through our cooperation with Shaanxi Steel and Shaanxi Coal under the Unified Management Agreement. Our current total monthly production volume is approximately 555,000 tons of crude steel.
Our product demands and prices have been on a rise in the first three quarters of 2011 until the end of the third quarter. In the fourth quarter of 2011, as a result of the China and global steel industry over-capacity, Chinese economic control polices and the financial crisis, global demand stalled and commodity prices abruptly plummeted. With weakened demand, market forces kicked-in and the price of steel dropped substantially. As such, both our selling volume and prices have dropped in the fourth quarter of 2011 in comparison to the previous quarters after the launch of our new blast furnaces.
Longmen Joint Venture comprised 98.1% of total sales for 2010. We operated at about 89% of our total capacity in 2010 due to a stable market demand for our construction steel products inproducts.
Our five major customers are all distributors and collectively represented approximately 27.1% of our principal markets of Shaanxi and western China. Our Longmen Joint Venture continued to benefit from a large number of infrastructure projects in the region fueled by the national stimulus plan and the national “Go West” economic development initiative.
Cost of the financial crisis in late 2008. During this time, demand for our construction steel products in our principal market of Shaanxi and western China grew rapidly as downstream infrastructure and construction projects boomed as the national $586 billion national stimulus plan gained traction. As a result of this strong demand, in the third quarter, the Shaanxi provincial GDP exceeded 18%.
Fiscal year ended December 31, 20092011 compared with fiscal year ended December 31, 2008 and 2007
Income Statement | Percentage Change | |||||||||||||||||||
Unit-thousands except share data | 2009 | 2008 | 2007 | 2009 VS 2008 | 2008 VS 2007 | |||||||||||||||
Revenues | $ | 1,668,446 | $ | 1,351,203 | $ | 772,440 | 23 | % | 75 | % | ||||||||||
Cost of Revenues | $ | 1,579,892 | $ | 1,343,275 | $ | 715,751 | 18 | % | 88 | % | ||||||||||
Gross Profit | $ | 88,554 | $ | 7,928 | $ | 56,689 | 1017 | % | -86 | % | ||||||||||
Gross Profit Margin % | 5.31 | % | 0.59 | % | 7.34 | % | ||||||||||||||
Selling, General and Administrative Expenses | $ | 41,074 | $ | 36,492 | $ | 16,164 | 13 | % | 126 | % | ||||||||||
Income (Loss) from Operations | $ | 47,480 | $ | (29,014 | ) | $ | 40,525 | |||||||||||||
Total Other Income (expense), net | $ | (45,008 | ) | $ | 3,738 | $ | (1,262 | ) | ||||||||||||
Income (Loss) Before Provision for Income Tax and Noncontrolling Interest | $ | 2,472 | $ | (25,276 | ) | $ | 39,263 | |||||||||||||
Total Provision (Benefit) for Income Taxes | $ | 6,153 | $ | (5,411 | ) | $ | 4,836 | |||||||||||||
Income (Loss) before the Noncontrolling Interest | $ | (3,681 | ) | $ | (19,865 | ) | $ | 34,427 | ||||||||||||
Less: Net Income (loss) Attributable to the Noncontrolling Interest | $ | 21,563 | $ | (8,542 | ) | $ | 12,001 | |||||||||||||
Net Income (Loss) Attributable to Controlling Interest | $ | (25,244 | ) | $ | (11,323 | ) | $ | 22,426 | ||||||||||||
(Loss) Earnings Per Share | ||||||||||||||||||||
Basic | $ | (0.603 | ) | $ | (0.320 | ) | $ | 0.690 | ||||||||||||
Diluted | $ | (0.603 | ) | $ | (0.320 | ) | $ | 0.690 |
Three months ended December 31 | ||||||||||||
(Unaudited) | ||||||||||||
Income Statement | Percentage Change | |||||||||||
Unit-thousands except share data | 2009 Q4 | 2008 Q4 | 2009 Q4 VS 2008 Q4 | |||||||||
Revenues | $ | 451,953 | $ | 261,087 | 73 | % | ||||||
Cost of Revenues | $ | 438,554 | $ | 282,662 | 55 | % | ||||||
Gross Profit (loss) | $ | 13,399 | $ | (21,575 | ) | |||||||
Gross Profit Margin % | 2.96 | % | (8.26 | )% | ||||||||
Selling, General and Administrative Expenses | $ | 11,855 | $ | 8,578 | 38 | % | ||||||
Income (Loss) from Operations | $ | 1,544 | $ | (30,153 | ) | |||||||
Total Other Income (expense), net | $ | (13,520 | ) | $ | 6,926 | |||||||
Loss Before Provision for Income Tax and Noncontrolling Interest | $ | (11,976 | ) | $ | (23,227 | ) | ||||||
Total Benefit for Income Taxes | $ | (1,033 | ) | $ | (4,864 | ) | ||||||
Loss before the Noncontrolling Interest | $ | (10,943 | ) | $ | (18,363 | ) | ||||||
Less: Net Income (loss) Attributable to the Noncontrolling Interest | $ | 142 | $ | (8,658 | ) | |||||||
Net Loss Attributable to Controlling Interest | $ | (11,085 | ) | $ | (9,705 | ) | ||||||
(Loss) Earnings Per Share | ||||||||||||
Basic | $ | (0.26 | ) | $ | (0.27 | ) | ||||||
Diluted | $ | (0.26 | ) | $ | (0.27 | ) |
Production by Subsidiary and Product (in thousand metric tons) | |||||||||||||
Subsidiary | Product | 2009 | 2008 | 2007 | |||||||||
Longmen Joint Venture | Rebar | 3,395 | 2,030 | 1,441 | |||||||||
Daqiuzhuang Metal | Hot-Rolled Sheets | 156 | 196 | 323 | |||||||||
Maoming | High-Speed Wire | 254 | 48 | ||||||||||
Baotou Steel Pipe | Spiral-Welded Steel Pipes | 29 | 34 | 13 | |||||||||
Total Production | 3,834 | 2,308 | 1,777 |
Revenue by Subsidiary and Product (USD in thousands) | |||||||||||||
Subsidiary | Product | 2009 | 2008 | 2007 | |||||||||
Longmen Joint Venture | Rebar | 1,534,696 | 1,182,433 | 618,315 | |||||||||
Daqiuzhuang Metal | Hot-Rolled Sheets | 58,833 | 132,458 | 147,727 | |||||||||
Maoming | High-Speed Wire | 62,487 | 23,280 | ||||||||||
Baotou Steel Pipe | Spiral-Welded Steel Pipes | 12,430 | 13,032 | 6,397 | |||||||||
Total Revenue | 1,668,446 | 1,351,203 | 772,439 |
Three months ended December 31 | |||||||||||||
(Unaudited) | |||||||||||||
Production by Subsidiary and Product (in thousand metric tons) | Percentage Change | ||||||||||||
Subsidiary | Product | 2009 Q4 | 2008 Q4 | 2009 Q4 VS 2008 Q4 | |||||||||
Longmen Joint Venture | Rebar | 944 | 507 | 86 | % | ||||||||
Daqiuzhuang Metal | Hot-Rolled Sheets | 74 | 29 | 155 | % | ||||||||
Maoming | High-Speed Wire | 94 | 26 | 262 | % | ||||||||
Baotou Steel Pipe | Spiral-Welded Steel Pipes | 12 | 13 | -8 | % | ||||||||
Total Production | 1,124 | 575 | 95 | % |
Three months ended December 31 | |||||||||||||
(Unaudited) | |||||||||||||
Revenue by Subsidiary and Product (USD in thousands) | Percentage Change | ||||||||||||
Subsidiary | Product | 2009 Q4 | 2008 Q4 | 2009 Q4 VS 2008 Q4 | |||||||||
Longmen Joint Venture | Rebar | 422,165 | 234,262 | 80 | % | ||||||||
Daqiuzhuang Metal | Hot-Rolled Sheets | 17,274 | 14,461 | 19 | % | ||||||||
Maoming | High-Speed Wire | 8,480 | 8,904 | -5 | % | ||||||||
Baotou Steel Pipe | Spiral-Welded Steel Pipes | 4,034 | 3,460 | 17 | % | ||||||||
Total Revenue | 451,953 | 261,087 | 73 | % |
Cost of Revenues
(USD in thousand) | 2009 | 2008 | 2007 | |||||||||
Cost of Revenues | $ | 1,139,630 | $ | 999,318 | $ | 389,615 | ||||||
Cost of Revenues - Related Parties | $ | 440,262 | $ | 343,957 | $ | 326,136 | ||||||
Total Cost of Revenues | $ | 1,579,892 | $ | 1,343,275 | $ | 715,751 |
(in thousands) | 2011 | 2010 | Change | Percentage Change | ||||||||||||
Subsidiary | ||||||||||||||||
Longmen Joint Venture | $ | 3,502,109 | $ | 1,813,170 | $ | 1,688,939 | 93.1 | % | ||||||||
Others | 150,001 | 37,555 | 112,446 | 299.4 | % | |||||||||||
Total Cost of Goods Sold | $ | 3,652,110 | $ | 1,850,725 | $ | 1,801,385 | 97.3 | % |
Our primary cost of revenuesgoods sold is the cost of raw materialmaterials such as iron ore, coke, alloy and scrap steel. The costcosts of iron ore and coke accountsaccount for approximately 75%90.1% of our total cost of sales. As a result, the cost of goods sold increased by $1.8 billion or 97.3% to $3.7 billion, in 2011 from $1.9 billion in 2010. The increase was mainly driven by the increasing sales volume of 56.5% in rebar and unit costs of raw materials as a result of the rise in iron ore and coke purchase prices until the end of third quarter of 2011 before the market started getting weaker in the fourth quarter of 2011. The rise in iron ore and coke purchases of approximately 10.7% and 15.6%, respectively, for the year ended December 31, 2011 as compared to the same period in 2010 increased our period over period costs. As our operating strategy is to maintain competitiveness and to produce quality products, we have previously entered into some import raw material purchase contracts prior to September 2011, which generally have a higher quality and price compared to domestic raw materials. As such, this also contributed to our unit costs of raw materials being higher in the fourth quarter of 2011. In addition, we incurred depreciation of $18.1 million during the year ended December 31, 2011 related to the new blast furnaces brought online in April 2011 through our cooperation with Shaanxi Steel and Shaanxi Coal under the Unified Management Agreement, while we did not have such cost during the same period of 2010. Furthermore, we also wrote off approximately $37.5 million of inventory for impairment at the end of 2011 for both of our raw materials and finished goods due to the drop in market price of iron ore, coke and coke areour rebar products during the primary raw material cost drivers for our products. In 2009, we were able to control our costs with the two new blast furnaces at Longmen Joint Venture which are more efficient with lower coke usage in production. In addition, we successfully increased our raw material inventory, especially iron ore, at relatively low prices throughout the year which helped us to control our costfourth quarter of revenues.
Gross Profit
Fiscal year ended December 31, 20092011 compared to fiscal year ended December 31, 2010
(in thousands) | 2011 | 2010 | Change | Percentage Change | ||||||||||||
Gross Profit (Loss) | $ | (88,214 | ) | $ | 31,415 | $ | (119,629 | ) | (380.8 | )% | ||||||
Gross Profit (Loss) Margin | (2.5 | )% | 1.7 | % | (4.2 | )% |
Gross profit for 2011 decreased by $119.6 million or 380.8% which resulted in a gross loss of $(88.2) million from $31.4 million in 2010. The gross margin for 2011 decreased by 4.2% to a gross loss margin of (2.5)% compared to 1.7% of gross profit margin for 2010. The decrease was primarily attributable to a drop in gross profit at Longmen Joint Venture. As discussed above, in the fourth quarter of 2011, as a result of the China and global steel industry over-capacity and Chinese economic control polices and the financial crisis, global demand stalled and commodity prices abruptly plummeted. With weakened demand, market forces kicked-in and the price of steel dropped substantially. We, like many other steel producers in China, experienced significant losses in the fourth quarter as we were forced to manufacture with high priced raw material inventories that we had previously purchased while the market selling prices for finished goods had dropped below the cost of goods. This resulted in negative margins.
Selling, General and Administrative Expenses
Fiscal year ended December 31, 2011 compared with fiscal year ended December 31, 2008
(USD in thousand) | 2009 | 2008 | 2007 | |||||||||
Gross Profit | $ | 88,554 | $ | 7,928 | $ | 56,689 | ||||||
Gross Profit Margin | 5.31 | % | 0.59 | % | 7.34 | % |
Selling, General and Administrative (“SG&A”) Expenses | Percentage | |||||||||||||||
(in thousands) | 2011 | 2010 | Change | Change | ||||||||||||
Selling, General and Administrative expenses | $ | 91,827 | $ | 52,577 | $ | 39,250 | 74.7 | % | ||||||||
SG&A expenses as percentage of total revenue | 2.6 | % | 2.8 | % | (0.2 | )% |
Selling, general and administrative (“SG&A”) expenses increased $39.3 million, or 74.7% to $91.8 million for the year ended December 31, 2011, compared to $7.9$52.6 million for of the same period in 2008. 2010.
The increase was mainly due to our Longmen Joint Venturethe rise of transportation and its 67.3% increase in sales volume in 2009.
SG&A expenses as a percentage of revenue decreased to 2.6% in 2011 from 2.8% in 2010. The decrease in percentage of revenue was due to the increase of sales revenue as a result of expanded production capacity when comparing to some of the fixed SG&A expenses.
Loss from Operations
Fiscal year ended December 31, 20092011 compared to fiscal year ended December 31, 2010
( in thousands) | 2011 | 2010 | Change | Percentage Change | ||||||||||||
Loss from Operations | $ | (180,041 | ) | $ | (21,162 | ) | $ | (158,879 | ) | 750.8 | % |
Loss from operations was $180.0 million for the year ended December 31, 2011, as compared to loss of $21.2 million for the same period in 2010. The increase in loss of $158.9 million is predominantly due to negative profit margins and increased in SG&A expenses as discussed above.
Total Other Income (Expense), Net
Fiscal year ended December 31, 2011 compared with fiscal year ended December 31, 2008
Three months ended December 31 | |||||||||
(Unaudited) | |||||||||
(USD in thousand) | Percentage Change | ||||||||
2009 Q4 | 2008 Q4 | 2009 Q4 VS 2008 Q4 | |||||||
Gross Profit (loss) | $ | 13,399 | $ | (21,575 | ) | ||||
Gross Profit Margin | 2.96 | % | (8.26 | )% |
Other Income (Expense)
(in thousands) | 2011 | 2010 | Change | Percentage Change | ||||||||||||
Interest Income | $ | 7,892 | $ | 6,154 | $ | 1,738 | 28.2 | % | ||||||||
Finance/Interest Expense | (87,245 | ) | (51,283 | ) | (35,962 | ) | 70.1 | % | ||||||||
Financing Cost on Capital Lease | (27,704 | ) | - | (27,704 | ) | - | ||||||||||
Change in Fair Value of Derivative Liabilities | 5,563 | 15,055 | (9,492 | ) | (63.0 | )% | ||||||||||
Gain on Debt Settlement | 3,430 | - | 3,430 | - | ||||||||||||
Gain (Loss) on Disposal of Fixed Assets | 693 | (9,447 | ) | 10,140 | (107.3 | )% | ||||||||||
Realized Income from Future Contract | 415 | 1,424 | (1,009 | ) | (70.9 | )% | ||||||||||
Income from Equity Investments | 5,302 | 6,383 | (1,081 | ) | (16.9 | )% | ||||||||||
Foreign Currency Transaction Gain | 3,424 | - | 3,424 | - | ||||||||||||
Lease Income | 2,008 | 943 | 1,065 | 112.9 | % | |||||||||||
Other Non-operating Expense, net | (1,442 | ) | (3,120 | ) | 1,678 | (53.8 | )% | |||||||||
Total Other Expense, Net | $ | (87,664 | ) | $ | (33,891 | ) | $ | (53,773 | ) | 158.7 | % |
Total other expenses, net for the year ended December 31, 2011 were $87.7 million compared to $33.9 million in 2010. The increase of $53.8 million or 158.7% in total other expenses, was mainly a result of the combined effect of an increase of $63.7 million in financial expenses, of which, $27.7 million was interest expense on capital lease, and Administrative Expenses
The foreign currency transaction gain was due to the loans proceeds we received in the second quarter of 2011 which wasdenominated in U.S. Dollars. Prior to the second quarter of 2011, there were no other transactions denominated in U.S. Dollars and therefore we did not incur any foreign currency gains or losses.
According to U.S. GAAP, our December 2007 convertible notes, December 2007 warrants and the December 2009 warrants were considered derivatives and therefore are carried at their fair market value at each financial reporting date with any changes in the fair value reported as gains or losses in our income statements. One of the major drivers used to calculate the value of the derivatives is our stock price.
The change in fair value of derivative liabilities for the year ended December 31, 2011 was a gain of $5.6 million compared to a gain of $15.1 million for the same period last year. This gain was mainly due to a change of stock price of our common stock as of December 31, 2011 compared to the one as of December 31, 2010.
Income Taxes
For the years ended December 31, 2011 and 2010, we had a total tax provision of $15.6 million and a tax benefit of $8.8 million, respectively.
For the years ended December 31, 2011 and 2010, we had effective tax rates of -5.8% and 16.0%, respectively. The negative effective tax rate for the year ended December 31, 2011 was mainly due to a consolidated loss before income tax while we provided 100% valuation allowance for the deferred tax assets at Longmen Joint Venture and we incurred income tax expenses in our profitable subsidiaries. The positive effective tax rate for the year ended December 31, 2010 was mainly due to a consolidated loss before income tax while we recognized the deferred tax assets that were incurred from the net operating losses to be carrying forwards.
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.Our losses carried forward of $309.0 million will begin to expire in 2014. Originally, management believed the deferred tax asset was fully realizable.After the filing of the Annual Report on Form 10-K/A for the year ended December 31, 2010, management reevaluated our future operating forecast based on the current steel market condition. In 2011, the Chinese government announced several policies to curb the real estate prices across the country which led to a slowdown in demand for construction steel products and a decrease in their average selling price starting in the fourth quarter of 2011. Additionally due to the continued global economic slowdown and the overcapacity issue in China's steel market, management expected there would be 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 considerations of 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 asset 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 at Longmen Joint Venture, which represent approximately 99% of the total deferred tax assets of our Company as of December 31, 2011.
Deferred taxes assets – U.S.
We were incorporated in the United States and have incurred net operating losses for income tax purposes for the year ended December 31, 2011. The net operating loss carry forwards for United States income taxes amounted to $1.8 million, which may be available to reduce future years’ taxable income. These carry forwards will expire, if not utilized, through 2031. Management believes that the realization of the benefits from these losses appears uncertain due to our Company’s limited operating history and continuing losses for United States income tax purposes. Accordingly, our Company has provided a 100% valuation allowance on the deferred tax asset benefit to reduce the asset to zero. The valuation allowance at December 31, 2011 was $0.6 million. The net change in the valuation allowance for the year ended December 31, 2011 was $0.2 million. Management will review this valuation allowance periodically and make adjustments as warranted.
We had cumulative undistributed retained earnings from profitable subsidiaries of approximately$0.7 million as of December 31, 2011. 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.
Net Loss
Fiscal year ended December 31, 20092011 compared with fiscal year ended December 31, 2008 and 2007
(USD in thousand) | 2009 | 2008 | 2007 | |||||||||
Selling, General and Administrative expenses | $ | 41,074 | $ | 36,942 | $ | 16,164 | ||||||
SG&A / Revenue % | 2.46 | % | 2.73 | % | 2.09 | % |
Net Loss
( in thousands) | 2011 | 2010 | 2011 vs 2010 | Percentage Change | ||||||||||||
Net loss | $ | (283,299 | ) | $ | (46,271 | ) | $ | (237,028 | ) | 512.3 | % |
Net Loss attributable to General and Administrative Expenses (“SG&A”), which includes costs such as executive compensation, office expense, legal and accounting charges, travel charges, and various taxes, also increased 11.2% to $41.1 million in 2009 from $36.9 million in 2008. SG&A as a percentage of revenue decreased to 2.5% in fiscal year 2009 from 2.7% in year 2008.
Three months ended December 31 | ||||||||||||
(Unaudited) | ||||||||||||
(USD in thousand) | Percentage Change | |||||||||||
2009 Q4 | 2008 Q4 | 2009 Q4 VS 2008 Q4 | ||||||||||
Selling, General and Administrative expenses | $ | 11,855 | $ | 8,578 | 38 | % | ||||||
SG&A/Revenue % | 2.62 | % | 3.29 | % |
Fiscal year ended December 31, 20092011 compared withto fiscal year ended December 31, 2008 and 2007
(USD in thousand) | 2009 | 2008 | 2007 | |||||||||
Income (Loss) form Operations | $ | 47,480 | $ | (29,014 | ) | $ | 40,525 |
Net Loss
( in thousands) | 2011 | 2010 | 2011 vs 2010 | Percentage Change | ||||||||||||
Net loss | $ | (283,299 | ) | $ | (46,271 | ) | $ | (237,028 | ) | 512.3 | % | |||||
Less: Net loss attributable to noncontrolling interest | (106,112 | ) | (16,265 | ) | (89,847 | ) | 552.4 | % | ||||||||
Net loss attributable to General Steel Holdings, Inc. | $ | (177,187 | ) | $ | (30,006 | ) | $ | (147,181 | ) | 490.5 | % |
Net loss attributable to us for the year ended December 31, 2011 increased to $177.2 million compared to an operating loss in 2008 of $29.0 million.
Three months ended December 31 | |||||||||
(Unaudited) | |||||||||
(USD in thousand) | Percentage Change | ||||||||
2009 Q4 | 2008 Q4 | 2009 Q4 VS 2008 Q4 | |||||||
Income (Loss) from Operations | $ | 1,544 | $ | (30,153 | ) |
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.
Loss Per Share
Fiscal year ended December 31, 20092011 compared with fiscal years ended December 31, 2008 and 2007
OTHER INCOME (EXPENSE), NET (USD in thousand) | 2009 | 2008 | 2007 | |||||||||
Interest Income | $ | 3,334 | $ | 4,251 | $ | 871 | ||||||
Finance/interest expense | $ | (27,843 | ) | $ | (23,166 | ) | $ | (9,297 | ) | |||
Change in Fair Value of Derivative Liabilities | $ | (33,159 | ) | $ | 12,821 | $ | 6,236 | |||||
Gain from Debt Extinguishment | $ | 7,331 | $ | 7,169 | ||||||||
Government Grant | $ | 3,430 | ||||||||||
Loss on Disposal of Fixed Assets | $ | (4,643 | ) | |||||||||
Income from Investment | $ | 4,730 | $ | 1,896 | ||||||||
Other Non-operating Income (Expense), net | $ | 1,812 | $ | 767 | $ | 928 | ||||||
Total other income (expense), net | $ | (45,008 | ) | $ | 3,738 | $ | (1,262 | ) |
Three months ended December 31 | ||||||||||||
(Unaudited) | ||||||||||||
OTHER INCOME(EXPENSE), NET (USD in thousand) | Percentage Change | |||||||||||
2009 Q4 | 2008 Q4 | 2009 Q4 VS 2008 Q4 | ||||||||||
Interest Income | $ | 866 | $ | 2,147 | -60 | % | ||||||
Finance/interest Expense | $ | (9,421 | ) | $ | (4,017 | ) | ||||||
Change in Fair Value of Derivative Liabilities | $ | (9,931 | ) | $ | 8,052 | |||||||
Gain from Debt Extinguishment | $ | 4,399 | $ | 0 | ||||||||
Government Grant | ||||||||||||
Loss on Disposal of Fixed Assets | ||||||||||||
Income from Investment | $ | 1,069 | $ | 1,896 | -44 | % | ||||||
Other Non-operating Expense, net | $ | (502 | ) | $ | (1,152 | ) | ||||||
Total Other Income (Expense), net | $ | (13,520 | ) | $ | 6,926 |
(in thousands, except earnings per share) | 2011 | 2010 | Change | Percentage Change | ||||||||||||
Net loss attributable to General Steel Holding, Inc. | $ | (177,187 | ) | $ | (30,006 | ) | $ | (147,181 | ) | 490.5 | % | |||||
Weighted average number of shares | ||||||||||||||||
Basic | 54,750 | 53,113 | 1,637 | 3.1 | % | |||||||||||
Diluted | 54,750 | 53,113 | 1,637 | 3.1 | % | |||||||||||
Loss per share | ||||||||||||||||
Basic | $ | (3.24 | ) | $ | (0.56 | ) | $ | (2.68 | ) | 478.6 | % | |||||
Diluted | $ | (3.24 | ) | $ | (0.56 | ) | $ | (2.68 | ) | 478.6 | % |
Basic and 2007
(USD in thousand) | 2009 | 2008 | 2007 | |||||||||
Income (Loss) Before Provision Income Taxes and Noncontrolling Interest | $ | 2,472 | $ | (25,276 | ) | $ | 39,263 | |||||
LESS: Total Provision for Income Taxes | $ | 6,153 | $ | (5,411 | ) | $ | 4,836 | |||||
Net Income (Loss) Attributable to the Noncontrolling Interest | $ | 21,563 | $ | (8,542 | ) | $ | 12,001 | |||||
Net Income (Loss) attributable to Controlling Interest | $ | (25,244 | ) | $ | (11,323 | ) | $ | 22,426 |
Three months ended December 31 | |||||||||
(Unaudited) | |||||||||
(USD in thousand) | Percentage Change | ||||||||
2009 Q4 | 2008 Q4 | 2009 Q4 VS 2008 Q4 | |||||||
Loss Before Provision Income Taxes and Noncontrolling Interest | $ | (11,976 | ) | $ | (23,227 | ) | |||
LESS: Total Benefit for Income Taxes | $ | (1,033 | ) | $ | (4,864 | ) | |||
Net Income (Loss) Attributable to the Noncontrolling Interest | $ | 142 | $ | (8,658 | ) | ||||
Net Loss Attributable to Controlling Interest | $ | (11,085 | ) | $ | (9,705 | ) |
There is no dilutive effect for our earnings per share arising from the total 6,678,649 outstanding warrants for the years ended December 31, 20082011 and 2007
(USD in thousand, except EPS) | 2009 | 2008 | 2007 | |||||||||
Net Income (Loss) Attributable to Controlling Interest | $ | (25,244 | ) | $ | (11,323 | ) | $ | 22,426 | ||||
Weighted Average Number of Shares | ||||||||||||
Basic | 41,860,238 | 35,381,210 | 32,424,652 | |||||||||
Diluted | 41,860,238 | 35,381,210 | 32,558,350 | |||||||||
(Loss) Earnings Per Share | ||||||||||||
Basic | $ | (0.603 | ) | $ | (0.320 | ) | $ | 0.692 | ||||
Diluted | $ | (0.603 | ) | $ | (0.320 | ) | $ | 0.689 |
Three months ended December 31 | ||||||||||||
(Unaudited) | ||||||||||||
(USD in thousand, except EPS) | Percentage Change | |||||||||||
2009 Q4 | 2008 Q4 | 2009 Q4 VS 2008 Q4 | ||||||||||
Net Loss Attributable to Controlling Interest | $ | (11,085 | ) | $ | (9,705 | ) | ||||||
Weighted Average Number of Shares | ||||||||||||
Basic | 41,860,238 | 35,381,210 | 18 | % | ||||||||
Diluted | 41,860,238 | 35,381,210 | 18 | % | ||||||||
(Loss) Earnings Per Share | ||||||||||||
Basic | $ | (0.265 | ) | $ | (0.274 | ) |
Adjusted (Loss) Earnings and Adusted (Loss) Earnings per Share | ||||||||||||
(USD in thousands) | 2009 | 2008 | 2007 | |||||||||
GAAP Net Income (Loss) | $ | (25,244 | ) | $ | (11,323 | ) | $ | 22,426 | ||||
Change in Fair Value of Derivative Liabilities | $ | (33,159 | ) | $ | 12,821 | $ | 6,236 | |||||
Adjusted Net Income (Loss) | $ | 7,915 | $ | (24,144 | ) | $ | 16,190 | |||||
Weighted Average Number of Shares | ||||||||||||
Basic | 41,860,238 | 35,381,210 | 32,424,652 | |||||||||
Diluted | 41,860,238 | 35,381,210 | 32,558,350 | |||||||||
(Loss) Earnings Per Share | ||||||||||||
Basic | $ | 0.189 | $ | (0.682 | ) | $ | 0.499 | |||||
Diluted | $ | 0.189 | $ | (0.682 | ) | $ | 0.497 |
Three months ended December 31 | ||||||||||||
(Unaudited) | ||||||||||||
Adjusted (Loss) Earnings and Adusted (Loss) Earnings per Share | 2009 Q4 VS | |||||||||||
(USD in thousands) | 2009 | 2008 | 2008 Q4 | |||||||||
GAAP Net Loss | $ | (11,085 | ) | $ | (9,705 | ) | ||||||
Change in Fair Value of Derivative Liabilities | $ | (9,931 | ) | $ | 8,052 | |||||||
Adjusted Net Loss | $ | (1,154 | ) | $ | (17,757 | ) | ||||||
Weighted Average Number of Shares | ||||||||||||
Basic | 41,860,238 | 35,381,210 | 18 | % | ||||||||
Diluted | 41,860,238 | 35,381,210 | 18 | % | ||||||||
Loss Per Share | ||||||||||||
Basic | $ | (0.028 | ) | $ | (0.502 | ) |
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2009, $36.7 million2011, our current liabilities exceeded the current assets by approximately $717.3 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, our December 2007 Notes had been converted into our common stock in advanceBoard of Directors is of the note maturity dateopinion that we have sufficient funds to meet our working capital requirements and resulted indebt obligations as they become due. As a make whole expense of $2.8 million in 2009. As of December 31, 2009, $3.3 million of the December 2007 Notes remained outstanding. This expense will no longer be incurred once all the December 2007 Notes have been fully converted.
Year Ended December 31, | First | Second | Third | Fourth | ||||||||||||||||
(In thousands except per share data) | Quarter | Quarter | Quarter | Quarter | Full Year | |||||||||||||||
Unaudited | Unaudited | Unaudited | Unaudited | |||||||||||||||||
2009 | ||||||||||||||||||||
Revenues | $ | 322,794 | $ | 408,947 | $ | 484,752 | $ | 451,953 | $ | 1,668,446 | ||||||||||
Gross profit | $ | 12,922 | $ | 22,499 | $ | 39,735 | $ | 13,399 | $ | 88,554 | ||||||||||
Net income (Loss) Attributable to Controlling Interest | $ | 7,335 | $ | (31,789) | $ | 10,295 | $ | (11,085) | $ | (25,244) | ||||||||||
Basic Earnings per Share | $ | 0.20 | $ | (0.80) | $ | 0.23 | $ | (0.26) | $ | (0.60) | ||||||||||
Diluted Earnings per Share | $ | 0.20 | $ | (0.80) | $ | 0.23 | $ | (0.26) | $ | (0.60) | ||||||||||
2008 | ||||||||||||||||||||
Revenues | $ | 291,566 | $ | 387,029 | $ | 411,521 | $ | 261,087 | $ | 1,351,203 | ||||||||||
Gross profit | $ | 12,982 | $ | 22,869 | $ | (6,348) | $ | (21,575) | $ | 7,928 | ||||||||||
Net income (Loss) Attributable to Controlling Interest | $ | 2,188 | $ | (24,270) | $ | 20,464 | $ | (9,705) | $ | (11,323) | ||||||||||
Basic Earnings per Share | $ | 0.06 | $ | (0.69) | $ | 0.57 | $ | (0.27) | $ | (0.32) | ||||||||||
Diluted Earnings per Share | $ | 0.06 | $ | (0.69) | $ | 0.57 | $ | (0.27) | $ | (0.32) |
As of December 31, 2011, we used cash flow from continuing operations, borrowings,had cash and restricted cash equivalentsaggregating $518.2 million, of which $398.2 million was restricted. As compared to fund working capital requirements, pay interest payments, capital expenditures and to make investments.
We believe our cash flows from operations, (whichwhich include customer prepaymentprepayments and vendor financing),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, customer deposits and others.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 its revenues are denominated in Renminbi (RMB). RMB is subject to the exchange control regulation in China, and, as a result, we may have difficulty distributing any dividends outside of China due to PRC exchange control regulations that restrict its ability to convert RMB into U.S. Dollars.
Under applicable PRC regulations, foreign-invested enterprises in China may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, a foreign-invested enterprise in China is required to set aside at least 10.0% of its after-tax profit based on PRC accounting standards each year to its general reserves until the accumulative amount of such reserves reaches 50.0% of its registered capital. These reserves are not distributable as cash dividends. The board of directors of a foreign-invested enterprise has the discretion to allocate a portion of its after-tax profits to staff welfare and bonus funds, which may not be distributed to equity owners except in the event of liquidation. Under PRC law, RMB is currently convertible into U.S. Dollars under a company’s “current account,” which includes dividends, trade and service-related foreign exchange transactions, without prior approval of the State Administration of Foreign Exchange (SAFE), but is not from a company’s “capital account,” which includes foreign direct investments and loans, without the prior approval of the SAFE.
As of December 31, 2009,2011, restricted items including the accumulated retained earnings from profitable subsidiaries of $0.7 million and statutory reserves of $6.4 million are included in our accumulated deficits.
As of the December 31, 2011, the amount of our restricted net assets was $21.3 million from subsidiaries that have positive net assets.
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.
Short-term Notes Payable
As of December 31, 2011, we had $254.6$1,114 million in short-term notes payables, liabilities, which are secured by restricted cash of $192.0$363.3 million and restricted notes receivable of $451.1 million and other assets. These are lines of credit extended by banks for a maximum of 6six months and are used to finance working capital. The short-term notes payablespayable must be paid in full at maturity and credit availability is continued upon payment at maturity. There are no additional significant financial covenants.
Short-term loansLoans – banks
As of December 31, 2009,2011, we had $149.0$254.0 million in short-term bank loans. These are bank loans with a one year termmaturity and must be paid in full upon maturity. There are no additional significant financial covenants tied to these loans. ChinesePRC banks have not been impacted as heavily by the financial crisis as U.S. banks and we believe our current creditors will renew their lendingloans to us after our loans mature as they havedid in the past.
As of December 31, 2011 and 2010, we breached certain financial covenant, debt to equity ratio, on outstanding short term loans and due to the breach of covenant, a loan with cross default clause was automatically considered as breached, the affected loan amounted to $12.6 million and $12.1 million, respectively. According to the loan agreements, the bank will have the rights to request for more collateral or guarantees if the covenant is breached or request for early repayment of the loan if we could not remedy the breach within a period of time. As of today, we have not received any notice from the banks to request for more collateral or guarantee or early repayment of the short term loans due to the breach.
We are able to repay our short-term notes payables and short-termshort term bank loans upon maturity using available capital resources.
For more details about our debts, please see noteNote 8 in our notesNotes to the consolidated financial statements.
For more details about our related party debt financing, see Note 18 in our Notes
As part of our working capital management, Longmen Joint Venture has entered into a Securities Purchase Agreement (the “December 2007 Securities Purchase Agreement”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”)(this transaction is referred to as “financing sales”). Pursuant to the Contracts, Longmen Joint Venture sells rebar to the third party companies at a certain institutional investors (the “December 2007 Purchasers”) issuing convertible promissory notesprice, and within the same month, Yuxin and Yuteng will purchase back the rebar from the third party companies at a price of 0.6% to 3.2% 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 0.6% to 3.2% 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 principal amountconsolidated financial statements.
Total financing sales for the year ended December 31, 2011 and 2010 amounted to $998.9 million and $761.8 million, respectively,which were eliminated in our consolidated financial statements. The financial cost related to financing sales for the year ended December 31, 2011 and 2010, accounted to $10.7 million and $7.0 million, respectively.
Liquidity
Our accounts have been preparedin accordance with U.S. GAAP on a going concern basis. The going concern basis assumes that assets are realized and liabilities are extinguished in the ordinary course of $40 million (the December 2007 Notes,business at amounts disclosed in the financial statements. Our ability to continue as defined above),a going concern depends upon aligning our sources of funding (debt and warrantsequity) with our expenditure requirements 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, our Company is highly leveraged. Debt financing in the form of short term bank loans, loans from related parties, financing sales, bank acceptance notes, and capital leases have been utilized to purchase 1,154,958 sharesfinance the working capital requirements and the capital expenditures of our common stock (theCompany. As a result, our debt to equity ratio as of December 2007 Warrants, as define above). The31, 2011 and December 2007 Warrants can be exercised to purchase common stock through May 13, 201331, 2010 were (19.8) and had an initial exercise price of $13.51 per share, subject to customary anti-dilution adjustments. The exercise price of the December 2007 Warrants was reduced to $5.00 per share as described in further detail below in “Registered Private Offering and Warrant Reset Agreements.”
Longmen Joint Venture, (which provides approximately 92%as our most important subsidiary, accounted for majority of our total revenue), thus, thissales. As such, the majority of our working capital needs 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, played an important role in executingcustomer financing, financing sales, other financing and sales representative financing.
With the financial support from the banks and the companies above, management is of the opinion that we have sufficient funds to meet our growth strategy.future operations, working capital requirements and debt obligations until the end of December 31, 2013. The acquisitiondetailed breakdown of Longmen Joint Venture was transformational to our company.
Cash inflow (outflow) (in millions) | ||||
For the twelve months ended December 31, 2013 | ||||
Current liabilities over current assets (excluding non-cash items) as of December 31, 2012 | $ | (784.8 | ) | |
Cash provided by line of credit from banks | 367.4 | |||
Cash provided by vendor financing | 316.7 | |||
Cash provided by customer financing | 158.3 | |||
Cash provided by financing sales | 79.2 | |||
Cash provided by other financing | 43.5 | |||
Cash provided by sales representatives | 35.0 | |||
Cash used in operations for the twelve months ended December 31, 2013 | (30.3 | ) | ||
Net projected change in cash for the twelve months ended December 31, 2013 | $ | 185.0 |
As a registered direct offering.
Cash-flow
Operating activities
Net cash provided byused in operating activities for the year ended December 31, 20092011 was $6.5an outflow $296.5 million compared to cash provided by operating activitiesan outflow of $113.7$397.2 million for the year ended December 31, 2008.2010. This change was mainly due to the combination of the following factors:
The impact of certain non-cash items included in net loss of $135.8 in year ended December 31, 2011, compared to $28.8 million in the same period in 2010. The non-cash items are the following:
- | impairment of |
- | change in fair value of derivative liabilities; |
- | gain on debt |
- | gain/loss on disposal of |
- | bad debt allowance; |
- | inventory written-off; |
- | stock issued for |
- | income from compensation; |
- | make whole shares interest expense on notes conversion; |
- | amortization of deferred note issuance cost |
- | amortization of |
- | income from |
- | deferred tax |
- | deferred lease income; and |
- | foreign currency transaction gain. |
The primary reasons for the material fluctuations in cash inflow are as follows:
1. | Accounts receivable: The decrease in accounts receivable is mainly due to the better collection effort of |
3. | Prepaid expense: The decrease in prepaid expense is mainly due to the amortization of the other miscellaneous local tax during 2011 and we did not prepay such taxes in 2011. |
4. | Prepaid value added tax: The decrease in prepaid value added tax is mainly due to the decrease in purchase of inventory. As a result, we have fewer value added tax credits pending to be offset with value added tax payables resulting from sales in the future. |
5. | Accounts payable, including related parties: The increase in accounts |
6. | Other payables, including related parties: The increase in other |
7. | Customer deposits – related parties: The increase in customer deposits – related parties is mainly to our related parties customers making prepayment to us prior to the |
8. | Tax payable: The increase is mainly due to |
The primary reasons for the material fluctuations in cash outflows are as follows:
2. | Notes Receivable-Restricted: In 2011, we collected more notes receivable resulting from our sales transactions and more of our notes receivable were pledged when settling with our supplies with notes payable, which resulted in the increase in our total restricted notes receivable in 2011. |
3. | Account receivable – related parties: The increase is due to the sales transactions occurred right before the year ended December 31, 2011. The receivable balances were subsequently collected in the beginning of 2012. |
4. | Other receivables, including related parties: The increase of other receivables is mainly due to the payment of $7.8 million that we made to the Bureau of Land and Resource in Zhashui County for the land use rights deposit made on behalf of another party. The increase of other receivables – related parties in 2011 is mainly due to the increase |
5. | Advances on inventory purchases, including related parties: The increase is mainly due to |
6. | Customer deposits: The decrease of customer deposits is due to the change in deposit requirements for our medium and small size customers. As the market demand of products has dropped in the fourth quarter of 2011, in order to retain our medium and small customers, we managed to require our customers to deposit on |
Investing activities
Net cash used in investing activities was $65.4$302.7 million for the year ended December 31, 20092011 compared to $206.6net cash used in investing activities of $88.3 million for the year ended December 31, 2008. This decrease2010. Fluctuation in cash outflow isbetween the two periods was mainly due to fewer equipment purchases relatedthe increase in restricted cash and the capital expenditures. Restricted cash is used as a pledge for our notes payable as required by the banks. In 2011, such balance increased because we pledged more cash to the banks in order for them to issue notes payables to settle with our two 1,280 cubic meter blast furnaces atsuppliers. In addition, the cash used in capital expenditures in 2011 was mainly for the relocation of production line which was completed in the fourth quarter of 2011 from Maoming Hengda to Longmen Joint Venture.
Financing activities
Net cash provided by financing activities was $126.1$653.1 million for the year ended December 31, 20092011 compared to $62.5net cash provided by financing activities of $466.8 million for the year ended December 31, 2008.
1. | Treasury stock: During 2011, we repurchased 774,218 shares of our treasury stock with $1.9 million pursuant to our Shares Repurchase Program. |
2. | Short term and long term loans from various banks and others, including related parties: We have repaid our loans of $844.6 million and obtained additional borrowings of $923.1 million throughout 2011. We have net borrowings of $78.5 million to finance our working capital. |
3. | Notes payables: We increased notes borrowing from the bank to settle the payables with suppliers. |
4. | Deposits due to sales representative: The decrease in deposits collected from sales representatives is a result of changing our deposit policy.Longmen Joint Venture entered into agreements with various entities to act as our 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 our Company. In return, the sales agents receive exclusive sales rights in a specified area and discounted prices on products they order. The sales agents proposed to start charging us interest on their deposits if we continue to keep a significant amount of deposits. In order to avoid such interest expenses, we changed the deposit policy at the beginning of 2011 by reducing the deposit amount from $9-12 million to $2 million for four to five large strategic distributors, which resulted in a decrease in the deposits due to sales representatives. After the change in the deposit policy, our sales representatives are no longer required to start charging us interest on their deposits. |
Restrictions on our ability to distribute dividends
Substantially all of our assets are located within the PRC. Under the laws of the PRC governing foreign invested enterprises, dividend distribution and other funds transfers are allowed but subject to special procedures under relevant rules and regulations. Foreign-invested enterprises in China may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, a foreign-invested enterprise in China is required to set aside at least 10.0% of its after-tax profit based on PRC accounting standards each year to its general reserves until the accumulative amount of such reserves reaches 50.0% of its registered capital. These reserves are not distributable as cash dividends. The board of directors of a foreign-invested enterprise has the discretion to allocate a portion of its after-tax profits to staff welfare and bonus funds, which may not be distributed to equity owners except in the event of liquidation. Under PRC regulations, RMB is currently convertible into U.S. Dollars under a company’s “current account” which includes dividends, trade and service-related foreign exchange transactions, without prior approval of the State Administration of Foreign Exchange (SAFE). Transfers from a company’s “capital account,” which includes foreign direct investments and loans, can’t be executed without the prior approval of the SAFE.
There are no restrictions to distribute or transfer other funds from General Steel Investment to us.
We have never declared or paid any cash dividends to our shareholders. We do not plan to pay any dividends out of our retained earnings for the year ended December 31, 2009,2011. With respect to retained earnings accrued after such date, our short-term bank loans totaled $149.0 million comparedBoard of Directors may declare dividends after taking into account our operations, earnings, financial condition, cash requirements and availability and other factors as it may deem relevant at such time. Any declaration and payment, as well as the amount, of dividends will be subject to $67.8 million asour By-Laws, charter and applicable Chinese and U.S. state and federal laws, including the approval from the shareholders of December 31, 2008. Overalleach subsidiary which intends to declare such dividends, if applicable.
We have previously raised money in the U.S. capital markets which has provided the capital needed for our bank borrowing increased utilizing short-term notes payables. As of December 31, 2009, short-term notes payables were $254.6 million which is collateralized by restricted cash of $192.0 million.
Shelf Registration SEC Form S-3
On October 22, 2009, our shelf registration statement on Form S-3, for an aggregate offering amount of $60 million, was declared effective by the Securities and Exchange Commission (SEC). From time to time we may sell common stock, preferred stock, warrants, debt securities, rights and units in one or more offerings, for an aggregate offering price of up to $60 million. We may sell the securities registered on the Form S-3 shelf registration statement to or through underwriters, directly to investors, through agents or any combination of the foregoing.
Impact of inflation
We are subject to commodity price risks arising from price fluctuations in the market prices of the raw materials. We have generally been able to pass on cost increases through price adjustments. However, the ability to pass on these increases depends on market conditions influenced by the overall economic conditions in China. We manage our price risks through productivity improvements and cost-containment measures. We do not believe that inflation risk is material to our business or our financial position, our results of operations or our cash flows.
Compliance with environmental laws and regulations
Longmen Joint Venture:
Together with our joint venture partner,partners Long Steel Group hasand Shaanxi Steel, we have invested $76RMB580 million (RMB580 million) in a series of comprehensive projects to reduce itsour waste emissions of coal gas, water, and solid waste. In 2005, itwe received ISO 14001 certification for itsour overall environmental management system. Long Steel Group hasWe have received several awards from the Shaanxi provincial government for its increasingas a result of our increased effort in environmental protection.
We have spent more than $4.3in excess of $8.8 million (RMB33(RMB57 million) on a comprehensive waste water recycling and water treatment system.system as of December 31, 2011. The 2,000 cubic meter/h treatment capacity system wassystems were implemented at the end of 2005. In 2009, 1.12011, 0.91 metric tons of new water was consumed per metric ton of steel produced.
We have one 10,000 cubic meter coke-oven gas tank, and one 50,000 cubic meter blast furnace coal gas tank and one 80,000 cubic meter converter furnace coal gas tank to collect the residual coal gas produced from its ownour facility and that of surrounding enterprises. Long Steel GroupWe also hashave spent $35.6 million (RMB230 million) on a thermal power plant with two 25 Kilowatt dynamosgenerators that usesuse the residual coal gas from the blast furnaces and converters as fuel to generate power.
We have several plants to further process solid waste generated from the steel making process into useful products such as construction materials, building blocks, porcelain tiles, curb tops, ornamental tiles, etc. The plants are capable of processing 400,000 metricas well as other products.
In 2009, we treated and recycled about 6.8 million tons of solid waste water, 335,320 tons of slag, 130 million m³ of gas from the converters and generate revenue6.1 billion m³ of gas from the blast furnaces. We also reused 855,714 tons of hot steam and generated 433 million KWH of electricity.
During 2010 and 2011, more than $2.6$9.3 million (RMB20(RMB60 million) each year.
OFF-BALANCE SHEET ARRANGEMENTS
There were no off-balance sheet arrangements for the 20092011 fiscal year.
Payment due by period | ||||||||||||||||
Less than | ||||||||||||||||
Contractual obligations | Total | 1 year | 1-3 years | 4- 5 years | ||||||||||||
USD in thousands | ||||||||||||||||
Bank loans (1) | $ | 149 | $ | 149 | $ | - | $ | - | ||||||||
Notes payable | 255 | 255 | - | |||||||||||||
Deposits due to sales representatives | 50 | 50 | - | - | ||||||||||||
Lease with Bao Gang | 660 | 264 | 396 | - | ||||||||||||
Blast Furnace construction | 14,550 | 14,550 | - | - | ||||||||||||
Purchase of TRT system | 4,973 | 3,315 | 1,658 | - | ||||||||||||
Convertible notes ( Principal plus Interest ) | 5,992 | 706 | 5,286 | - | ||||||||||||
Total | $ | 26,629 | $ | 19,289 | $ | 7,340 | $ | - |
Guarantee | |||||
Nature of | amount | ||||
guarantee | In thousands | Guaranty period | |||
Importation L/C | $ | 17,604 | July 2009 to July 2010 | ||
Domestic L/C | 1,467 | July 2009 to July 2010 | |||
Bank loan | 156,382 | Various from March 2009 to December 2010 | |||
Notes payable | 11,003 | Various from March 2009 to July 2010 | |||
Total | $ | 186,456 |
Guarantee | |||||
Nature of | amount | ||||
guarantee | In thousands | Guaranty period | |||
Bank loan | $ | 5,868 | Various from June 2009 to October 2010 |
Critical Accounting Policies
Management’s discussion and analysis of its financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. Our financial statements reflect the selection and application of accounting policies which require management to make significant estimates and judgments. See Note 2 to our consolidated financial statements, “Summary of Significant Accounting Policies.” Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
We believe that the following reflect the more critical accounting policies that currently affect our financial condition and results of operations.
Principles of consolidation – subsidiaries
The accompanying consolidated financial statements include the financial statements of our Company, our subsidiaries, our variable interest entity (“VIE”) for which we are the ultimate primary beneficiary, and the VIE’s subsidiaries.
The consolidated financial statements have been prepared on a historical cost basis to reflect the financial position and results of operations of the Company in accordance with the accounting principles generally accepted in the United States of America (“U.S. GAAP”).
Subsidiaries are those entities in which our Company, directly or indirectly, controls more than one half of the voting power; or has the power to govern the financial and operating policies, to appoint or remove the majority of the members of the board of directors, or to cast a majority of votes at the meeting of directors.
A VIE is an entity in which our Company, or our subsidiary, through contractual arrangements, bears the risks of, and enjoys the rewards normally associated with, ownership of the entity, and therefore our Company or our subsidiary is the primary beneficiary of the entity.
All significant inter-company transactions and balances have been eliminated upon consolidation.
Consolidation of VIE
Prior to entering into the Unified Management Agreement on April 29, 2011, Longmen Joint Venture had been consolidated as our 60% directly owned subsidiary. Upon entering into the Unified Management Agreement, Longmen Joint Venture was evaluated by our Company to determine if Longmen Joint Venture is a VIE and if we are the primary beneficiary.
Based on the projected profit in this entity and future operating plans, LongmenJoint Venture’s equity at risk is considered insufficient to finance its activities and therefore LongmenJoint Venture is considered to be a VIE.
We would be considered the primary beneficiary of the VIE if we have both of the following characteristics:
a. | The power to direct the activities of the VIE that most significantly impact the VIE’s economic performance; and |
b. | The obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. |
A Supervisory Committee was formed during the negotiation of the Unified Management Agreement. Given there is both a Supervisory Committee and a board of directors with respect to LongmenJoint Venture, the powers rights and roles of both bodies were considered to determine which has the power to direct the activities of LongmenJoint Venture, and by extension, whether we continue to have the power to direct LongmenJoint Venture’s activities after this Supervisory Committee was formed. The Supervisory Committee, for which we hold 2 out of 4 seats, requires a ¾ majority vote, while the board of directors, on which we hold 4 out of 7 seats, requires a simple majority vote. As the Supervisory Committee’s role is limited to supervising and monitoring management of LongmenJoint Venture and in the event there is any disagreement between the board of directors and the Supervisory Committee, the board of directors prevails. In other words, the Supervisory Committee is considered to be subordinate to the board of directors. Thus, the board of directors of LongmenJoint Venture continues to be the controlling decision-making body with respect to LongmenJoint Venture. We control 60% of the voting rights of the board of directors, have control over the operations of LongmenJoint Venture and as such, have the power to direct the activities of the VIE that most significantly impact LongmenJoint Venture’s economic performance.
In connection with the Unified Management Agreement, Shaanxi Coal, Shaanxi Steel and us may provide such support on a discretionary basis in the future, which could expose us to a loss.
As discussed in Note 1 to the consolidated financial statements - Background, we have the obligation to absorb losses and the rights to receive benefits based on the profit allocation as stipulated by the Unified Management Agreement. As both conditions are met, we are the primary beneficiary of LongmenJoint Venture and therefore, continue to consolidate LongmenJoint Venture.
We believe that the Unified Management Agreement between Longmen Joint Venture and Shaanxi Coal is in compliance with PRC law and is legally enforceable. The board of directors of Longmen Joint Venture continues to be the controlling decision-making body with respect to Longmen Joint Venture. We control 60% of the voting rights of the board of directors, has control over the operations of Longmen Joint Venture and as such, has the power to direct the activities of the VIE. However, uncertainties in the PRC legal system could limit our ability to enforce the Unified Management Agreement, which in turn, may lead to reconsideration of the VIE assessment.
Longmen Joint Venture has two 100% owned subsidiaries, Yuxin Trading Co., Ltd. (“Yuxin”) and Yuteng Trading Co., Ltd (“Yuteng”). In addition, Longmen Joint Venture has three consolidated subsidiaries, Hualong Fire Retardant Material Co., Ltd. (“Hualong”), Hancheng Tongxing Metallurgy Co., Ltd. (“Tongxing”) and Beijing Huatianyulong International Steel Trading Co., Ltd. (“Huatianyulong”), in which Longmen Joint Venture does not hold a controlling interest. Hualong, Tongxing and Huatianyulong are separate legal entities which were established in the PRC as limited liability companies and subsequently acquired by Longmen Joint Venture in June 2007, January 2008 and July 2008, respectively. Prior to and subsequent to their acquisition by Longmen Joint Venture, these three entities have been operating as self-sustaining integrated sets of activities and assets conducted and managed for the purpose of providing a return to shareholders consisting of all the inputs, processes and outputs of a business. However, these three entities do not meet the definition of variable interest entities. Further consideration was given to whether consolidation was appropriate under the voting interest model, specifically where the power of control may exist with a lesser percentage of ownership (i.e. less than 50%), for example, by contract, lease, agreement with other stockholders or by court decree.
Hualong
Longmen Joint Venture, the single largest shareholder, holds a 36.0% equity interest in Hualong. The other two shareholders, who own 34.67% and 29.33% respectively, assigned their voting rights to Longmen Joint Venture in writing at the time of the acquisition of Hualong. The voting rights have been assigned through the date Hualong ceases its business operation or the other two shareholders sell their interest in Hualong. Hualong’s main business is to supply refractory.
48 |
Tongxing
Longmen Joint Venture holds a 22.76% equity interest in Tongxing and hundreds of employees of Longmen Joint Venture own the remaining 77.24%. Each individual employee shareholder comprising the remaining 77.24% assigned its voting rights to Longmen Joint Venture in writing at the time of the acquisition of Tongxing. The voting rights have been assigned through the date Tongxing ceases its business operation or the employees sell their interest in Tongxing. Tongxing’s business is highly reliant on Longmen Joint Venture. Tongxing’s main business is to process rebar.
On March 1, 2012, we sold our 22.76% equity interest in Tongxing for approximately $9.2 million to a related party. In connection with this transaction, we will receive land use rights at the fair market value of approximately $9.5 million and payable in cash of approximately $0.3 million. The result of this transaction has no material impact on our sales and operating income.
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.
We have determined that it is appropriate for Longmen Joint Venture to consolidate these three entities with appropriate recognition in our financial statements of the non-controlling interests in each entity, beginning on the acquisition dates as these were also the effective dates of the agreements with other stockholders granting a majority voting rights in each entity, and thereby, the power of control, to Longmen Joint Venture.
Revenue recognition
We follow the generally accepted accounting principles ofin the United States regarding revenue recognition. Sales revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, we have no other significant obligations of us exist and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are recorded as customer deposits. Sales revenue represents the invoiced value of goods, net of value-added tax (VAT). All our products sold in the PRC are subject to a Chinese value-added taxVAT at a rate of 13% to 17% of the gross sales price. This VAT may be offset by VAT paid by us on raw materials and other materials included in the cost of producing the finished product.
Accounts receivable, other receivables and allowance for doubtful accounts
Accounts receivable include trade accounts due from customers and other receivables from cash advances to employees, related parties or third parties. An allowance for doubtful accounts is established and recorded based on managements’ assessment of potential losses based on the credit history and relationships with the customers. Management reviews its receivable on a regular basis to determine if the bad debt allowance is adequate, and adjusts the allowance when necessary. Delinquent account balances are written-off against allowance for doubtful accounts after management has determined that the likelihood of collection is not probable.
Useful lives of plant and equipment
Plant and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets with a 3%-5% residual value. The depreciation expense on assets acquired under capital leases is included with depreciation expense on owned assets.
The estimated useful lives are as follows:
Buildings and Improvements | 10-40 Years | |||
Machinery | 10-30 Years | |||
Machinery under capital lease | 20 Years | |||
Other equipment | 5 Years | |||
Transportation Equipment | 5 Years |
We have re-evaluated the useful lives of depreciation and amortization to determine whether subsequent events and circumstances warrant any revisions.
Impairment of long-lived assets
The carrying values of long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Based on the existence of one or more indicators of impairment, we measure any impairment of long-lived assets using the projected discounted cash flow method. The estimation of future cash flows requires significant management judgment based on our historical results and anticipated results and is subject to many factors.
The discount rate that is commensurate with the risk inherent in our business model is determined by our management. An impairment charge would be recorded if we determined that the carrying value of long-lived assets may not be recoverable. The impairment to be recognized is measured by the amount by which the carrying values of the assets exceed the fair value of the assets.
Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles of the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant accounting estimates reflected in our financial statements include the useful lives of and impairment for property, plant and equipment, potential losses on uncollectible receivables, the recognition of contingent liabilities, the interest rate used in financing sales, the fair value of the assets recorded under capital lease, the present value of the net minimum lease payments of the capital lease and convertible notes.the fair value of the profit share liability. Actual results could differ from these estimates.
Financial instruments
The accounting standard regarding “Disclosures about fair value of financial instruments” defines financial instruments and requires disclosure of the fair value of financial instruments held by us. We consider the carrying amount of cash, accounts receivable, other receivables, accounts payable and accrued liabilities to approximate their fair values because of the short period of time between the origination of such instruments and their expected realization. For short-term loans and notes payable, we concluded the carrying values are a reasonable estimate of fair value because of the short period of time between the origination and repayment and their stated interest rate approximates current rates available.
We also analyze all financial instruments with features of both liabilities and equity under the accounting standard establishing, “accounting for certain financial instruments with characteristics of both liabilities and equity,” the accounting standard regarding “accounting for derivative instruments and hedging activities” and “accounting for derivative financial instruments indexed to, and potentially settled in, a company’s own stock.” Additionally, we analyze registration rights agreements associated with any equity instruments issued to determine if penalties triggered for late filing should be accrued under accounting standard establishing “accounting for registration payment arrangements.”
Fair value measurements
The accounting standards regarding fair value of financial instruments and related fair value measurement define fair value, establish a three-level valuation hierarchy for disclosures of fair value measurement and enhance disclosures requirements for fair value measures. The three levels are defined as follow:
Level 1: inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2: inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.
Level 3: inputs to the valuation methodology are unobservable and significant to the fair value.
The determination of the fair value was based on the capital investment that we contributed and income from investment. The carrying value of the long term investments approximated the fair value as of December 31, 2009.
We determined that the carrying value of the December 2007 Notes amounted to $1.1 million. We usedprofit sharing liability using Level 3 inputs by taking consideration of the present value of our projected profits/losses with the discount interest rate of 7.3% based on our average borrowing rate. The projected profits/losses in Longmen Joint Venture were based upon, but not limited to, the following assumptions in the next 20 years:
· | 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 |
Income Taxes
Income tax
We did not conduct any business and did not maintain any branch office in the United States during the years ended December 31, 2011 and 2010. Therefore, no provision for our valuation methodology for the December 2007 Notes, and their fair values are determined using cash flows discounted at relevant market interest rates in effect at the period close sincewithholding of U.S. federal or state income taxes has been made. The tax impact from undistributed earnings from overseas subsidiaries is not recognized as there is no observable market price. The December 2007 Warrantsintension for future repatriation of these earnings.
General Steel (China) is located in Tianjin Costal Economic Development Zone and their conversion feature are valuedis subject to an income tax rate of 25%.
Longmen Joint Venture is located in the Mid-West Region of China. It qualifies for the “Go-West” tax rate of 15% promulgated by using level 2 inputs to the Binomial Model and we determinedgovernment. In 2010, the central government announced that the fair value amounted“Go-West” tax initiative was extended for 10 years, and thus, the preferential tax rate of 15% will be in effect until 2020. This special tax treatment will be evaluated on a year-to-year basis by the local tax bureau.
Baotou Steel Pipe Joint Venture is located in Inner Mongolia autonomous region and is subject to approximately $4.9an income tax rate of 25%.
Maoming Hengda is located in Guangdong Province and is subject to an income tax rate of 25%.
Tianwu Joint Venture is located in Tianjin Coastal Economic Development Zone and is subject to an income tax rate at 25%.
For the years ended December 31, 2011 and 2010, we had a total tax provision of $15.6 million due to the decrease in our common stock price.
Non-controlling Interest
Effective January 1, 2009, we adopted generally accepted accounting principalsprinciples regarding noncontrolling interests in our consolidated financial statements. Certain provisions of this statement are required to be adopted retrospectively for all periods presented. Such provisions include a requirement that the carrying value of noncontrolling interests (previously referred to as minority interests) be removed from the mezzanine section of the balance sheet and reclassified as equity.
Further, as a result of the adoption of this accounting standard, net income attributable to noncontrolling interests is now excluded from the determination of consolidated net income. In addition, the foreign currency translation adjustment is allocated between controlling and noncontrollingnon-controlling interests.
Deferred lease income
From June 2009 to March 2011, we reclassified noncontrolling interestsworked with Shaanxi Steel to build the new state-of-the-art equipment at the site of Longmen Joint Venture. To compensate Longmen Joint Venture for costs and economic losses incurred during construction of the new iron and steel making facilities owned by Shaanxi Steel, Shaanxi Steel reimbursed Longmen Joint Venture $11.0 million (RMB 70.1 million) in the amountsfourth quarter of $72.62010 for the value of assets dismantled, $5.8 million (RMB 38.1 million) for various site preparation costs incurred by Longmen Joint Venture and rent under a 40-year property sub-lease that was entered into by the parties in June 2009 , and $28.7 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 $14.1 million (RMB 89.5 million) and $14.0 million (RMB 89.3 million), respectively, for trial production costs related to the new iron and steel making facilities.
During the period June 2010 to March 2011, as construction progressed and certain of the assets came online, Longmen Joint Venture used the assets free of charge to produce saleable units of steel products during this period. As such, the cost of using these assets was imputed with reference to what the depreciation charge would have been on these assets had they been owned or under capital lease to Longmen Joint Venture during the free use period. This cost of $6.9 million (RMB 43.9 million) each year were deferred and will be recognized over the term of the land sub-lease similar to the other charges and credits related to the construction of these assets.
The deferred lease income is amortized to income over the remaining term of the 40-year land sub-lease. For the years ended December 31, 2011 and 2010, the Company recognized lease income of $2.0 million and $54.3$0.9 million, from the mezzanine section to equity on December 31, 2009 and December 31, 2008 balance sheets, respectively.
Capital lease obligations
On April 29, 2011, we, along with Longmen Joint Venture, entered into a Unified Management Agreement with Shaanxi Steel and Shaanxi Coal under which Longmen Joint Venture uses the new iron and steel making facilities including one sintering machine, two converters, two blast furnaces and other auxiliary systems constructed by Shaanxi Steel. As the 20-year term of the agreement exceeds 75% of the assets’ useful lives, this arrangement is accounted for as a capital lease. The ongoing lease payments are comprised of two elements: (1) a monthly payment based on Shaanxi Steel’s cost to construct the new iron and steel making facilities of $2.3 million (RMB 14.6 million) to be paid over the term of the Unified Management Agreement of 20 years and (2) 40% of any remaining pre-tax profit from the asset pool which includes Longmen Joint Venture and the newly constructed iron and steel making facilities. The profit sharing component does not meet the definition of contingent rent because it is based on future revenue and is therefore considered part of the minimum lease payment for purposes of determining the value of the leased asset and obligation at the inception of the lease, however, the standard does not have material effect on our consolidatedlease liability is then reduced by the value of the profit sharing component, which is recognized as a separate financial statements.
Profit sharing liability
The profit sharing liability is recognized initially at its estimated fair value at the lease commencement date and included in the initial measurement and recognition of the capital lease in addition to the fixed payment component of the minimum lease payments. Subsequently, this financial instrument is accounted for separately from the lease accounting standard amending(Note 13 – “Capital lease obligations” to the accounting and disclosure requirements for the consolidation of variable interest entities (“VIEs”Notes to Consolidated Financial Statements). The eliminationinitial fair value of the conceptexpected payments under the profit sharing component of a QSPE, as discussed above, removes the exception from applyingUnified Management Agreement is accreted over the consolidation guidance within this accounting standard. Further, this accounting standard requires a company to perform a qualitative analysis when determining whether or not it must consolidate a VIE. It also requires a company to continuously reassess whether it must consolidate a VIE. Additionally, it requires enhanced disclosures about a company’s involvement with VIEs and any significant change in risk exposure due to that involvement, as well as how its involvement with VIEs impactsterm of the company’s financial statements. Finally, a companyagreement using the effective interest method. The value of the profit sharing liability will be required to disclose significant judgments and assumptions used to determine whether or not to consolidate a VIE. This accounting standard is effective for financial statements issued for fiscal years beginning after November 15, 2009. We adopted this standard as of December 31, 2009; however, the standard does not have material effect on our consolidated financial statements.
Based on the Codification asperformance of the sole source of authoritative literature.
Recent Accounting Standards Board issued an ASU regarding accounting for own-share lending arrangements in contemplation of convertible debt issuance or other financing. This ASU requires that at the date of issuancePronouncements
See Note 2 of the shares in a share-lending arrangement entered into in contemplation of a convertible debt offering or other financing, the shares issued shall be measured at fair value and be recognized as an issuance cost, with an offsetNotes to additional paid-in capital. Further, loaned shares are excluded from basic and diluted earnings per share unless default of the share-lending arrangement occurs, at which time the loaned shares would be included in the basic and diluted earnings-per-share calculation. This ASU is effective for fiscal years beginning on or after December 15, 2009, and interim periods within those fiscal years for arrangements outstanding as of the beginning of those fiscal years. We adopted this standard and has determined the standard does not have material effect on our consolidated financial statements.
Segments
Our 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 date the amendments in this update are includedgroup’s four regional divisions in the Accounting Standards Codification,PRC: Longmen Joint Venture in Shaanxi Province, Maoming Hengda in Guangdong Province, Baotou Steel Pipe Joint Venture in Inner Mongolia Autonomous Region and General Steel (China) & Tianwu Joint Venture in Tianjin City.
The group operates in one business segment that includes four different divisions. These reportable divisions are consistent with the amendmentsway we manage our business, each division operates under separate management groups and produces discrete financial information. The accounting principles applied at the operating division level in this update are effective beginning indetermining income from operations is the first interim or annual reporting period ending on or after December 15, 2009. The amendments in this update should besame as those applied retrospectively toat the first period that an entity adopted SFAS No. 160. We do not expect the adoption of this ASU to have a material impact on our consolidated financial statements
The following represents results of Levels 1 and 2. A reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasonsdivisions operations for the transfers. 2) Activity in Level 3 fair value measurements. In the reconciliation for fair value measurements using significant unobservable inputs (Level 3), a reporting entity should present separately information about purchases, sales, issuances,years ended December 31, 2011 and settlements (that is, on a gross basis rather than as one net number).This update provides amendments to Subtopic 820-10 that clarify existing disclosures as follows: 1) Level of disaggregation. A reporting entity should provide fair value measurement disclosures for each class of assets and liabilities. A class is often a subset of assets or liabilities within a line item in the statement of financial position. A reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities. 2) Disclosures about inputs and valuation techniques. A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. Those disclosures are required for fair value measurements that fall in either Level 2 or Level 3.The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. We do not expect the adoption of this ASU to have a material impact on our consolidated financial statements
(In thousands) | For the year ended December 31, | |||||||
Sales: | 2011 | 2010 | ||||||
Longmen Joint Venture | $ | 3,496,551 | $ | 1,846,080 | ||||
Maoming Hengda | 9,946 | 10,011 | ||||||
Baotou Steel Pipe Joint Venture | 8,036 | 12,315 | ||||||
General Steel (China) & Tianwu Joint Venture | 267,543 | 68,918 | ||||||
Total sales | 3,782,076 | 1,937,324 | ||||||
Interdivision sales | (218,180 | ) | (55,184 | ) | ||||
Consolidated sales | $ | 3,563,896 | $ | 1,882,140 |
Gross profit: | 2011 | 2010 | ||||||
Longmen Joint Venture | $ | (86,308 | ) | $ | 32,751 | |||
Maoming Hengda | (392 | ) | (2,726 | ) | ||||
Baotou Steel | 491 | 562 | ||||||
General Steel (China) & Tianwu Joint Venture | (3,845 | ) | 2,589 | |||||
Total gross profit | (90,054 | ) | 33,176 | |||||
Interdivision gross profit | 1,840 | (1,761 | ) | |||||
Consolidated gross profit | $ | (88,214 | ) | $ | 31,415 |
Income (loss) from operations: | 2011 | 2010 | ||||||
Longmen Joint Venture | $ | (161,057 | ) | $ | (8,073 | ) | ||
Maoming Hengda | (2,568 | ) | (5,782 | ) | ||||
Baotou Steel | (2,516 | ) | (862 | ) | ||||
General Steel (China) & Tianwu Joint Venture | (10,902 | ) | 1,133 | |||||
Total loss from operations | (177,043 | ) | (13,584 | ) | ||||
Interdivision income (loss) from operations | 1,840 | (1,762 | ) | |||||
Reconciling item (1) | (4,838 | ) | (5,816 | ) | ||||
Consolidated loss from operations | $ | (180,041 | ) | $ | (21,162 | ) |
Net income (loss) attributable to General Steel Holdings, Inc.: | 2011 | 2010 | ||||||
Longmen Joint Venture | $ | (161,897 | ) | $ | (32,668 | ) | ||
Maoming Hengda | 3,763 | (5,450 | ) | |||||
Baotou Steel | (1,861 | ) | (744 | ) | ||||
General Steel (China) & Tianwu Joint Venture | (17,120 | ) | (330 | ) | ||||
Total net loss attributable to General Steel Holdings, Inc. | (177,115 | ) | (39,192 | ) | ||||
Interdivision net loss | (1,501 | ) | (1,762 | ) | ||||
Reconciling item (1) | 1,429 | 10,948 | ||||||
Consolidated net loss attributable to General Steel Holdings, Inc. | $ | (177,187 | ) | $ | (30,006 | ) |
Depreciation and amortization: | 2011 | 2010 | ||||||
Longmen Joint Venture | $ | 54, 755 | $ | 34,131 | ||||
Maoming Hengda | 205 | 3,411 | ||||||
Baotou Steel | 246 | 281 | ||||||
General Steel (China) & Tianwu Joint Venture | 3,125 | 3,330 | ||||||
Consolidated depreciation and amortization | $ | 58,331 | $ | 41,153 |
Finance/interest expenses: | 2011 | 2010 | ||||||
Longmen Joint Venture | $ | 104,372 | $ | 49,180 | ||||
Maoming Hengda | 262 | 109 | ||||||
Baotou Steel | (10 | ) | 14 | |||||
General Steel (China) & Tianwu Joint Venture | 6,655 | 1,955 | ||||||
Interdivision interest expenses | (709 | ) | - | |||||
Reconciling item (1) | 4,379 | 25 | ||||||
Consolidated interest expenses | $ | 114,949 | $ | 51,283 |
Capital expenditures: | 2011 | 2010 | ||||||
Longmen Joint Venture | $ | 108,885 | $ | 80,718 | ||||
Maoming Hengda | 1,978 | 8,735 | ||||||
Baotou Steel | 32 | 44 | ||||||
General Steel (China) & Tianwu Joint Venture | 44 | 419 | ||||||
Consolidated capital expenditures | $ | 110,939 | $ | 89,916 |
Total Assets as of December 31, 2011 and 2010 | December 31, 2011 | December31, 2010 | ||||||
Longmen Joint Venture | $ 2, 937,271 | $ | 1,694,895 | |||||
Maoming Hengda | 48,350 | 47,839 | ||||||
Baotou Steel Pipe Joint Venture | 8,093 | 31,852 | ||||||
General Steel (China) & Tianwu Joint Venture | 146,150 | 194,966 | ||||||
Interdivision assets | (88,326 | ) | (173,076 | ) | ||||
Reconciling item (2) | 2,583 | 2,904 | ||||||
Total Assets | $ | 3,054,121 | $ | 1,799,380 |
(1) | Reconciling item represents the unallocated income or expenses of our Company, arising from General Steel Investment Co., Ltd, Yangpu Shengtong Investment Co., Ltd. and Qiu Steel for the years ended December 31, 2011 and 2010. |
(2) | Reconciling item represents assets held at General Steel Holdings, Inc., General Steel Investment Co., Ltd., Yangpu Shengtong Investment Co., Ltd. and Qiu Steel as of December 31, 2011 and 2010. |
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
GENERAL STEEL HOLDINGS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
Index to consolidated financial statements
Page Number | |
Report of Independent Registered Public Accounting Firm – Friedman LLP | 57 |
Report of Independent Registered Public Accounting Firm – Frazer Frost, LLP | 58 |
Consolidated Balance Sheets as of December 31, 2011 and 2010 | 59 |
Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2011 and 2010 | 60 |
Consolidated Statements of Changes in Equity for the years ended December 31, 2011 and 2010 | 61 |
Consolidated Statements of Cash Flows for the years ended December 31, 2011 and 2010 | 62 |
Notes to Consolidated Financial Statements | 63 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
General Steel Holdings, Inc.
We have audited the accompanying consolidated balance sheet of General Steel Holdings, Inc. and Subsidiaries as of December 31, 2011, and the related consolidated statements of operations and comprehensive loss, changes in equity and cash flows for the year then ended. General Steel Holdings, Inc.’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of General Steel Holdings, Inc. and Subsidiaries as of December 31, 2011, and the consolidated results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ Friedman LLP
New York, New York
February 15, 2013
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of General Steel Holdings, Inc.
We have audited the accompanying consolidated balance sheets of General Steel Holdings, Inc. and subsidiaries as of December 31, 20092010 and 2008,2009, and the related consolidated statements of operations and other comprehensive income, changes in equity, and cash flows for each of the years in the three-year period ended December 31, 2009.2010. General Steel Holdings, Inc.’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of General Steel Holdings, Inc. and subsidiaries as of December 31, 20092010 and 2008,2009, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 20092010 in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), General Steel Holdings, Inc. and subsidiaries’’s internal control over financial reporting as of December 31, 2009,2010, based on criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 16, 20102011, except for the effects of the material weakness described in the ninth paragraph of that report, as to which the date is August 29, 2012, expressed an unqualified opinion.
/s/ Frazer Frost, LLP (Successor Entity of Moore Stephens Wurth Frazer and Torbet, LLP, see Form 8-K filed on January 7, 2010)
Brea, California
March 16, 2010
2009 | 2008 | |||||||
ASSETS | ||||||||
CURRENT ASSETS: | ||||||||
Cash | $ | 82,118 | $ | 14,895 | ||||
Restricted cash | 192,041 | 130,700 | ||||||
Notes receivable | 29,185 | 38,207 | ||||||
Accounts receivable, net of allowance for doubtful accounts of $490 and $401 as of December 31, 2009 and 2008, respectively | 8,525 | 8,329 | ||||||
Other receivables, net of allowance for doubtful accounts of $14 and $685 as of December 31, 2009 and 2008, respectively | 5,357 | 5,101 | ||||||
Other receivables - related parties | 32,670 | 523 | ||||||
Dividend receivable | 2,372 | 631 | ||||||
Inventories | 208,087 | 59,549 | ||||||
Advances on inventory purchases | 28,407 | 47,154 | ||||||
Advances on inventory purchases - related parties | 2,995 | 2,375 | ||||||
Prepaid expense - current | 692 | 494 | ||||||
Prepaid value added tax | 19,488 | - | ||||||
Deferred tax assets | 3,341 | 7,487 | ||||||
Total current assets | 615,278 | 315,445 | ||||||
PLANT AND EQUIPMENT, net | 555,111 | 491,705 | ||||||
OTHER ASSETS: | ||||||||
Advances on equipment purchases | 7,361 | 8,965 | ||||||
Investment in unconsolidated subsidiaries | 20,022 | 13,959 | ||||||
Prepaid expense - non-current | 900 | 1,195 | ||||||
Prepaid expense related parties - non-current | 158 | 211 | ||||||
Long-term deferred expense | 2,069 | - | ||||||
Long-term other receivable | - | 4,873 | ||||||
Intangible assets, net of accumulated amortization | 23,733 | 24,556 | ||||||
Note issuance cost | 406 | 4,218 | ||||||
Equipment to be disposed | 3,026 | 587 | ||||||
Total other assets | 57,675 | 58,564 | ||||||
Total assets | $ | 1,228,064 | $ | 865,714 | ||||
LIABILITIES AND EQUITY | ||||||||
CURRENT LIABILITIES: | ||||||||
Short term notes payable | $ | 254,608 | $ | 206,040 | ||||
Accounts payable | 158,126 | 149,239 | ||||||
Accounts payable - related parties | 48,151 | 15,327 | ||||||
Short-term loans - bank | 148,968 | 67,840 | ||||||
Short-term loans - others | 110,358 | 87,834 | ||||||
Short-term loans - related parties | 11,751 | 7,350 | ||||||
Other payables | 5,627 | 3,183 | ||||||
Other payables - related parties | 3,706 | 677 | ||||||
Accrued liabilities | 10,595 | 7,779 | ||||||
Customer deposits | 208,765 | 141,102 | ||||||
Customer deposits - related parties | 3,791 | 7,216 | ||||||
Deposit due to sales representatives | 49,544 | 8,149 | ||||||
Taxes payable | 6,921 | 13,917 | ||||||
Distribution payable to former shareholders | 16,434 | 18,765 | ||||||
Total current liabilities | 1,037,345 | 734,418 | ||||||
CONVERTIBLE NOTES PAYABLE, net of debt discount of $2,250 and $26,095 as of December 31, 2009 and 2008, respectively | 1,050 | 7,155 | ||||||
DERIVATIVE LIABILITIES | 23,340 | 9,903 | ||||||
Total liabilities | 1,061,735 | 751,476 | ||||||
COMMITMENTS AND CONTINGENCIES | ||||||||
EQUITY: | ||||||||
Preferred stock, $0.001 par value, 50,000,000 shares authorized, 3,092,899 shares issued and outstanding as of December 31, 2009 and 2008, respectively | 3 | 3 | ||||||
Common Stock, $0.001 par value, 200,000,000 shares authorized, 51,618,598 and 36,128,833 shares issued and outstanding as of December 31, 2009 and 2008, respectively | 52 | 36 | ||||||
Paid-in-capital | 95,588 | 37,128 | ||||||
Statutory reserves | 6,162 | 4,902 | ||||||
Retained (deficits) earnings | (16,410 | ) | 10,094 | |||||
Contribution receivable | - | (960 | ) | |||||
Accumulated other comprehensive income | 8,336 | 8,705 | ||||||
Total shareholders' equity | 93,731 | 59,908 | ||||||
NONCONTROLLING INTERESTS | 72,598 | 54,330 | ||||||
Total equity | 166,329 | 114,238 | ||||||
Total liabilities and equity | $ | 1,228,064 | $ | 865,714 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES | |||||||
CONSOLIDATED BALANCE SHEETS | |||||||
AS OF DECEMBER 31, 2011 AND 2010 | |||||||
(In thousands) |
ASSETS | ||||||||||||||
2011 | 2010 | |||||||||||||
CURRENT ASSETS: | ||||||||||||||
Cash | $ | 120,016 | $ | 65,271 | ||||||||||
Restricted cash | 398,216 | 197,797 | ||||||||||||
Notes receivable | 92,910 | 49,147 | ||||||||||||
Restricted notes receivable | 584,241 | 240,298 | ||||||||||||
Accounts receivable, net | 12,601 | 18,500 | ||||||||||||
Accounts receivable - related parties | 20,593 | 4,160 | ||||||||||||
Other receivables, net | 22,411 | 11,150 | ||||||||||||
Other receivables - related parties | 87,679 | 10,938 | ||||||||||||
Inventories | 297,729 | 453,636 | ||||||||||||
Advances on inventory purchase | 63,585 | 24,577 | ||||||||||||
Advances on inventory purchase - related parties | 20,244 | 6,187 | ||||||||||||
Prepaid expense | 364 | 5,018 | ||||||||||||
Prepaid value added tax | 24,189 | 37,323 | ||||||||||||
Short-term investment | 2,906 | - | ||||||||||||
Deferred tax assets | 167 | 15,301 | ||||||||||||
TOTAL CURRENT ASSETS | 1,747,851 | 1,139,303 | ||||||||||||
PLANT AND EQUIPMENT, net | 1,257,236 | 602,612 | ||||||||||||
OTHER ASSETS: | ||||||||||||||
Advances on equipment purchase | 10,420 | 14,898 | ||||||||||||
Investment in unconsolidated entities | 12,840 | 17,456 | ||||||||||||
Long-term deferred expense | 631 | 1,439 | ||||||||||||
Intangible assets, net of accumulated amortization | 25,143 | 23,672 | ||||||||||||
TOTAL OTHER ASSETS | 49,034 | 57,465 | ||||||||||||
TOTAL ASSETS | $ | 3,054,121 | $ | 1,799,380 | ||||||||||
LIABILITIES AND EQUITY | ||||||||||||||
CURRENT LIABILITIES: | ||||||||||||||
Short term notes payable | $ | 1,113,504 | $ | 480,152 | ||||||||||
Accounts payable | 413,345 | 241,367 | ||||||||||||
Accounts payable - related parties | 121,828 | 79,694 | ||||||||||||
Short term loans - bank | 253,954 | 285,198 | ||||||||||||
Short term loans - others | 246,657 | 127,712 | ||||||||||||
Short term loans - related parties | 15,710 | 14,548 | ||||||||||||
Other payables and accrued liabilities | 49,538 | 30,087 | ||||||||||||
Other payable - related parties | 28,873 | 18,214 | ||||||||||||
Customer deposit | 90,556 | 133,464 | ||||||||||||
Customer deposit - related parties | 68,277 | 54,922 | ||||||||||||
Deposit due to sales representatives | 22,890 | 51,624 | ||||||||||||
Deposit due to sales representatives - related parties | 943 | 455 | ||||||||||||
Taxes payable | 11,374 | 6,237 | ||||||||||||
Deferred lease income, current | 2,099 | 1,971 | ||||||||||||
Capital lease obligations, current | 25,607 | - | ||||||||||||
TOTAL CURRENT LIABILITIES | 2,465,155 | 1,525,645 | ||||||||||||
NON-CURRENT LIABILITIES: | ||||||||||||||
Long-term loans - related party | 92,035 | 91,020 | ||||||||||||
Deferred lease income, noncurrent | 76,425 | 55,620 | ||||||||||||
Capital lease obligations, noncurrent | 280,743 | - | ||||||||||||
Profit sharing liability, noncurrent | 303,233 | - | ||||||||||||
TOTAL NON-CURRENT LIABILITIES | 752,436 | 146,640 | ||||||||||||
DERIVATIVE LIABILITIES | 10 | 5,573 | ||||||||||||
TOTAL LIABILITIES | 3,217,601 | 1,677,858 | ||||||||||||
COMMITMENT AND CONTINGENCIES | ||||||||||||||
EQUITY: | ||||||||||||||
Preferred stock, $0.001 par value, 50,000,000 shares authorized, 3,092,899 shares | ||||||||||||||
issued and outstanding as of December 31, 2011 and 2010 | 3 | 3 | ||||||||||||
Common stock, $0.001 par value, 200,000,000 shares authorized, 56,601,988 | ||||||||||||||
and 54,678,083 shares issued, 55,511,010 and 54,522,973 shares outstanding | ||||||||||||||
as of December 31, 2011 and 2010, respectively | 56 | 55 | ||||||||||||
Treasury stock, at cost, 1,090,978 and 316,760 shares as of | ||||||||||||||
December 31, 2011 and 2010, respectively | (2,795 | ) | (871 | ) | ||||||||||
Paid-in-capital | 107,940 | 104,970 | ||||||||||||
Statutory reserves | 6,388 | 6,202 | ||||||||||||
Accumulated deficits | (229,083 | ) | (51,793 | ) | ||||||||||
Accumulated other comprehensive income | 10,200 | 10,987 | ||||||||||||
TOTAL GENERAL STEEL HOLDINGS, INC. EQUITY | (107,291 | ) | 69,553 | |||||||||||
NONCONTROLLING INTERESTS | (56,189 | ) | 51,969 | |||||||||||
TOTAL EQUITY | (163,480 | ) | 121,522 | |||||||||||
TOTAL LIABILITIES AND EQUITY | $ | 3,054,121 | $ | 1,799,380 |
The accompanying notes are an integral part of these consolidated financial statements.
59 |
For the years ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
REVENUES | $ | 1,202,708 | $ | 1,004,848 | $ | 416,901 | ||||||
REVENUES - RELATED PARTIES | 465,738 | 346,355 | 355,539 | |||||||||
TOTAL REVENUES | 1,668,446 | 1,351,203 | 772,440 | |||||||||
COST OF REVENUES | 1,139,630 | 999,318 | 389,615 | |||||||||
COST OF REVENUES - RELATED PARTIES | 440,262 | 343,957 | 326,136 | |||||||||
TOTAL COST OF REVENUES | 1,579,892 | 1,343,275 | 715,751 | |||||||||
GROSS PROFIT | 88,554 | 7,928 | 56,689 | |||||||||
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES | 41,074 | 36,942 | 16,164 | |||||||||
INCOME (LOSS) FROM OPERATIONS | 47,480 | (29,014 | ) | 40,525 | ||||||||
OTHER INCOME (EXPENSE), NET | ||||||||||||
Interest income | 3,334 | 4,251 | 871 | |||||||||
Finance/interest expense | (27,843 | ) | (23,166 | ) | (9,297 | ) | ||||||
Change in fair value of derivative liabilities | (33,159 | ) | 12,821 | 6,236 | ||||||||
Gain from debt extinguishment | 7,331 | 7,169 | - | |||||||||
Government grant | 3,430 | - | - | |||||||||
Loss on disposal of fixed assets | (4,643 | ) | - | - | ||||||||
Income from equity investments | 4,730 | 1,896 | - | |||||||||
Other non-operating income, net | 1,812 | 767 | 928 | |||||||||
Total other (expense) income, net | (45,008 | ) | 3,738 | (1,262 | ) | |||||||
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES AND NONCONTROLLING INTEREST | 2,472 | (25,276 | ) | 39,263 | ||||||||
PROVISION (BENEFIT) FOR INCOME TAXES | ||||||||||||
Current | 2,155 | 1,424 | 5,225 | |||||||||
Deferred | 3,998 | (6,835 | ) | (389 | ) | |||||||
Total provision (benefit) for income taxes | 6,153 | (5,411 | ) | 4,836 | ||||||||
NET (LOSS) INCOME BEFORE NONCONTROLLING INTEREST | (3,681 | ) | (19,865 | ) | 34,427 | |||||||
Less: Net income (loss) attributable to noncontrolling interest | 21,563 | (8,542 | ) | 12,001 | ||||||||
NET (LOSS) INCOME ATTRIBUTABLE TO CONTROLLING INTEREST | (25,244 | ) | (11,323 | ) | 22,426 | |||||||
OTHER COMPREHENSIVE INCOME (LOSS) : | ||||||||||||
Foreign currency translation adjustments | (369 | ) | 5,420 | 1,656 | ||||||||
Comprehensive income (loss) attributable to noncontrolling interest | 303 | 3,654 | (978 | ) | ||||||||
COMPREHENSIVE (LOSS) INCOME | $ | (25,310 | ) | $ | (2,249 | ) | $ | 23,104 | ||||
WEIGHTED AVERAGE NUMBER OF SHARES | ||||||||||||
Basic | 41,860,238 | 35,381,210 | 32,424,652 | |||||||||
Diluted | 41,860,238 | 35,381,210 | 32,558,350 | |||||||||
(LOSS) EARNINGS PER SHARE | ||||||||||||
Basic | $ | (0.60 | ) | $ | (0.32 | ) | $ | 0.69 | ||||
Diluted | $ | (0.60 | ) | $ | (0.32 | ) | $ | 0.69 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES | ||||
CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE LOSS | ||||
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010 | ||||
(In thousands, except per share data) |
2011 | 2010 | |||||||
SALES | $ | 2,452,127 | $ | 1,392,770 | ||||
SALES - RELATED PARTIES | 1,111,769 | 489,370 | ||||||
TOTAL SALES | 3,563,896 | 1,882,140 | ||||||
COST OF GOODS SOLD | 2,519,183 | 1,369,523 | ||||||
COST OF GOODS SOLD - RELATED PARTIES | 1,132,927 | 481,202 | ||||||
TOTAL COST OF GOODS SOLD | 3,652,110 | 1,850,725 | ||||||
GROSS PROFIT (LOSS) | (88,214 | ) | 31,415 | |||||
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES | 91,827 | 52,577 | ||||||
LOSS FROM OPERATIONS | (180,041 | ) | (21,162 | ) | ||||
OTHER INCOME (EXPENSE) | ||||||||
Interest income | 7,892 | 6,154 | ||||||
Finance/interest expense | (114,949 | ) | (51,283 | ) | ||||
Change in fair value of derivative liabilities | 5,563 | 15,055 | ||||||
Gain on debt settlement | 3,430 | - | ||||||
Gain (loss) on disposal of equipment | 693 | (9,447 | ) | |||||
Realized income from future contracts | 415 | 1,424 | ||||||
Income from equity investments | 5,302 | 6,383 | ||||||
Foreign currency transaction gain | 3,424 | - | ||||||
Lease income | 2,008 | 943 | ||||||
Other non-operating expense, net | (1,442 | ) | (3,120 | ) | ||||
Other expense, net | (87,664 | ) | (33,891 | ) | ||||
LOSS BEFORE PROVISION FOR INCOME TAXES | ||||||||
AND NONCONTROLLING INTEREST | (267,705 | ) | (55,053 | ) | ||||
PROVISION FOR INCOME TAXES | ||||||||
Current | 175 | 1,267 | ||||||
Deferred | 15,419 | (10,049 | ) | |||||
Provision (benefit) for income taxes | 15,594 | (8,782 | ) | |||||
NET LOSS | (283,299 | ) | (46,271 | ) | ||||
Less: Net loss attributable to noncontrolling interest | (106,112 | ) | (16,265 | ) | ||||
NET LOSS ATTRIBUTABLE TO GENERAL STEEL HOLDINGS, INC. | $ | (177,187 | ) | $ | (30,006 | ) | ||
NET LOSS | (283,299 | ) | (46,271 | ) | ||||
OTHER COMPREHENSIVE LOSS | ||||||||
Foreign currency translation adjustments | (587 | ) | 4,623 | |||||
COMPREHENSIVE LOSS | (283,886 | ) | (41,648 | ) | ||||
Less: Comprehensive loss attributable to noncontrolling interest | (105,912 | ) | (14,511 | ) | ||||
COMPREHENSIVE LOSS ATTRIBUTABLE TO GENERAL STEEL HOLDINGS, INC. | $ | (177,974 | ) | $ | (27,137 | ) | ||
WEIGHTED AVERAGE NUMBER OF SHARES | ||||||||
Basic and Diluted | 54,750 | 53,113 | ||||||
LOSS PER SHARE | ||||||||
Basic and Diluted | $ | (3.24 | ) | $ | (0.56 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
Accumulated | ||||||||||||||||||||||||||||||||||||||||||||
Preferred stock | Common stock | Retained earnings (deficits) | other | |||||||||||||||||||||||||||||||||||||||||
Paid-in | Statutory | Contribution | comprehensive | Noncontrolling | ||||||||||||||||||||||||||||||||||||||||
Shares | Par value | Shares | Par value | capital | reserves | Unrestricted | receivable | income | interests | Totals | ||||||||||||||||||||||||||||||||||
BALANCE, January 1, 2008 | 3,092,899 | $ | 3 | 34,634,765 | $ | 35 | $ | 23,429 | $ | 3,632 | $ | 22,687 | $ | (960 | ) | $ | 3,285 | $ | 43,322 | $ | 95,433 | |||||||||||||||||||||||
Net loss | (11,323 | ) | (8,542 | ) | (19,865 | ) | ||||||||||||||||||||||||||||||||||||||
Adjustment to statutory reserve | 1,270 | (1,270 | ) | - | ||||||||||||||||||||||||||||||||||||||||
Common stock issued for compensation, $7.16 | 76,600 | 0.08 | 548 | 548 | ||||||||||||||||||||||||||||||||||||||||
Common stock issued for compensation, $10.43 | 150,000 | 0.15 | 1,564 | 1,564 | ||||||||||||||||||||||||||||||||||||||||
Common stock issued for compensation, $6.66 | 87,400 | 0.09 | 582 | 582 | ||||||||||||||||||||||||||||||||||||||||
Common stock issued for compensation, $10.29 | 90,254 | 0.09 | 929 | 929 | ||||||||||||||||||||||||||||||||||||||||
Common stock issued for consulting fee, $3.60 | 100,000 | 0.10 | 360 | 360 | ||||||||||||||||||||||||||||||||||||||||
Common stock issued for public relations, $3.60 | 25,000 | 0.03 | 90 | 90 | ||||||||||||||||||||||||||||||||||||||||
Common stock issued for compensation, $3.50 | 87,550 | 0.09 | 306 | 306 | ||||||||||||||||||||||||||||||||||||||||
Common stock transferred by CEO for compensation, $6.91 | 207 | 207 | ||||||||||||||||||||||||||||||||||||||||||
Common stock issued at $5/share | 140,000 | 0.14 | 700 | 700 | ||||||||||||||||||||||||||||||||||||||||
Acquired noncontrolling interest | 15,896 | 15,896 | ||||||||||||||||||||||||||||||||||||||||||
Notes converted to common stock | 541,299 | 0.54 | 6,103 | 6,104 | ||||||||||||||||||||||||||||||||||||||||
Make whole shares issued on notes conversion | 195,965 | 0.18 | 2,310 | 2,310 | ||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustments | 5,420 | 3,654 | 9,074 | |||||||||||||||||||||||||||||||||||||||||
BALANCE, December 31, 2008 | 3,092,899 | $ | 3 | 36,128,833 | $ | 36 | $ | 37,128 | $ | 4,902 | $ | 10,094 | $ | (960 | ) | $ | 8,705 | $ | 54,330 | $ | 114,238 | |||||||||||||||||||||||
Net loss attributable to controlling interest | (25,244 | ) | (25,244 | ) | ||||||||||||||||||||||||||||||||||||||||
Net income attributable to noncontrolling interest | 21,563 | 21,563 | ||||||||||||||||||||||||||||||||||||||||||
Disposal of subsidiaries | (293 | ) | (293 | ) | ||||||||||||||||||||||||||||||||||||||||
Distribution of dividend to noncontrolling shareholders | (3,305 | ) | (3,305 | ) | ||||||||||||||||||||||||||||||||||||||||
Adjustment to statutory reserve | 1,260 | (1,260 | ) | - | ||||||||||||||||||||||||||||||||||||||||
Common stock issued for compensation | 596,650 | 0.77 | 1,875 | 1,876 | ||||||||||||||||||||||||||||||||||||||||
Common stock issued for interest payments | 196,305 | 0.20 | 745 | 745 | ||||||||||||||||||||||||||||||||||||||||
Common stock issued for repayment of debt, $6.00 | 300,000 | 0.30 | 1,800 | 1,800 | ||||||||||||||||||||||||||||||||||||||||
Notes converted to common stock | 7,045,274 | 7.05 | 32,072 | 32,079 | ||||||||||||||||||||||||||||||||||||||||
Make whole shares issued on notes conversion | 1,795,977 | 1.80 | 7,085 | 7,087 | ||||||||||||||||||||||||||||||||||||||||
Common stock transferred by CEO for compensation, $6.91 | 276 | 276 | ||||||||||||||||||||||||||||||||||||||||||
Reduction of registered capital | 960 | 960 | ||||||||||||||||||||||||||||||||||||||||||
Common stock issued for private placement | 5,555,556 | 5.56 | 14,607 | 14,613 | ||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustments | (369 | ) | 303 | (66 | ) | |||||||||||||||||||||||||||||||||||||||
BALANCE, December 31, 2009 | 3,092,899 | $ | 3 | 51,618,595 | $ | 52 | $ | 95,588 | $ | 6,162 | $ | (16,410 | ) | $ | - | $ | 8,336 | $ | 72,598 | $ | 166,329 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES | |||||||||||||||||||||||||||
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY | |||||||||||||||||||||||||||
(In thousands) |
Preferred stock | Common stock | Treasury stock | Retained earnings / Accumulated deficits | Accumulated other | ||||||||||||||||||||||||||||||||||||||||||||
Shares | Par value | Shares | Par value | Shares | At cost | Paid-in capital | Statutory reserves | Unrestricted | comprehensive income | Noncontrolling interest | Total | |||||||||||||||||||||||||||||||||||||
BALANCE, December 31, 2009 | 3,093 | $ | 3 | 51,619 | $ | 52 | - | $ | - | $ | 95,588 | $ | 6,162 | $ | (21,787 | ) | $ | 8,118 | $ | 70,148 | $ | 158,284 | ||||||||||||||||||||||||||
Net loss attributable to General Steel Holdings, Inc. | (30,006 | ) | (30,006 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Net loss attributable to noncontrolling interest | (16,265 | ) | (16,265 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Distribution of dividend to noncontrolling shareholders | (3,934 | ) | (3,934 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Noncontrolling interest acquired | (1,270 | ) | (1,270 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Registered capital received from noncontrolling shareholders | 1,182 | 1,182 | ||||||||||||||||||||||||||||||||||||||||||||||
Adjustment to special reserve | 40 | 354 | 394 | |||||||||||||||||||||||||||||||||||||||||||||
Common stock issued for compensation | 733 | 0.73 | 2,201 | 2,202 | ||||||||||||||||||||||||||||||||||||||||||||
Common stock issued for debt settlement | 928 | 0.93 | 2,403 | 2,404 | ||||||||||||||||||||||||||||||||||||||||||||
Common stock transferred by CEO for compensation | 276 | 276 | ||||||||||||||||||||||||||||||||||||||||||||||
Notes converted to common stock | 1,209 | 1.21 | 3,544 | 3,545 | ||||||||||||||||||||||||||||||||||||||||||||
Make whole shares issued on notes conversion | 272 | 0.27 | 741 | 741 | ||||||||||||||||||||||||||||||||||||||||||||
Common stock issued for accrued interest on notes | 79 | 0.08 | 217 | 217 | ||||||||||||||||||||||||||||||||||||||||||||
Treasury stock purchased | (317 | ) | (0.32 | ) | 317 | (871 | ) | (871 | ) | |||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustments | 2,869 | 1,754 | 4,623 | |||||||||||||||||||||||||||||||||||||||||||||
BALANCE, December 31, 2010 | 3,093 | $ | 3 | 54,523 | $ | 55 | 317 | $ | (871 | ) | $ | 104,970 | $ | 6,202 | $ | (51,793 | ) | $ | 10,987 | $ | 51,969 | $ | 121,522 | |||||||||||||||||||||||||
Net loss attributable to General Steel Holdings, Inc. | (177,187 | ) | (177,187 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Net loss attributable to noncontrolling interest | (106,112 | ) | (106,112 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Adjustment to statutory reserve | 104 | (103 | ) | 608 | 609 | |||||||||||||||||||||||||||||||||||||||||||
Adjustment to special reserve | 82 | 128 | 210 | |||||||||||||||||||||||||||||||||||||||||||||
Common stock issued for compensation | 788 | 0.79 | 1,253 | 1,254 | ||||||||||||||||||||||||||||||||||||||||||||
Common stock issued for debt settlement | 974 | 0.97 | 1,441 | 1,442 | ||||||||||||||||||||||||||||||||||||||||||||
Common stock transferred by CEO for compensation | 276 | 276 | ||||||||||||||||||||||||||||||||||||||||||||||
Treasury stock purchased | (774 | ) | (0.77 | ) | 774 | (1,924 | ) | (1,925 | ) | |||||||||||||||||||||||||||||||||||||||
Dividend declared to noncontrolling shareholders | (2,982 | ) | (2,982 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustments | (787 | ) | 200 | (587 | ) | |||||||||||||||||||||||||||||||||||||||||||
BALANCE, December 31, 2011 | 3,093 | $ | 3 | 55,511 | $ | 56 | 1,091 | $ | (2,795 | ) | $ | 107,940 | $ | 6,388 | $ | (229,083 | ) | $ | 10,200 | $ | (56,189 | ) | $ | (163,480 | ) | |||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
2009 | 2008 | 2007 | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||
Net (loss) income attributable to controlling interest | $ | (25,244 | ) | $ | (11,323 | ) | $ | 22,426 | ||||
Net income (loss) attributable to noncontrolling interest | 21,563 | (8,542 | ) | 12,001 | ||||||||
Consolidated net (loss) income | (3,681 | ) | (19,865 | ) | 34,427 | |||||||
Adjustments to reconcile net (loss) income to cash provided by operating activities: | ||||||||||||
Depreciation | 32,102 | 21,506 | 9,740 | |||||||||
Amortization | 1,005 | 908 | 597 | |||||||||
Gain on debt extinguishment | (7,331 | ) | (7,169 | ) | - | |||||||
Bad debt allowance (write-off) | (714 | ) | 704 | 2 | ||||||||
Inventory allowance | (1,533 | ) | 2,204 | - | ||||||||
Loss (gain) on disposal of equipment | 1,213 | (598 | ) | 10 | ||||||||
Stock issued for services and compensation | 1,639 | 2,723 | 596 | |||||||||
Interest expense accrued on mandatory redeemable stock | - | - | 114 | |||||||||
Make whole shares interest expense on notes conversion | 2,892 | 2,310 | - | |||||||||
Income from investment | (4,730 | ) | (1,896 | ) | - | |||||||
Amortization of Professional Fee-Consulting Fee | 424 | - | - | |||||||||
Amortizaiton of deferred notes issuance cost and discount on covertible notes. | 60 | 833 | 189 | |||||||||
Change in fair value of derivative instrument | 33,159 | (12,821 | ) | (6,236 | ) | |||||||
Change in deferred tax assets | 4,403 | (6,937 | ) | (384 | ) | |||||||
Changes in operating assets and liabilities: | ||||||||||||
Notes receivable | 9,017 | (33,064 | ) | (9,492 | ) | |||||||
Accounts receivable | 19,526 | 2,091 | 16,248 | |||||||||
Accounts receivable - related parties | (19,604 | ) | (18,275 | ) | (543 | ) | ||||||
Other receivables | 5,253 | (4,124 | ) | (453 | ) | |||||||
Other receivables - related parties | (49,637 | ) | 2,423 | (990 | ) | |||||||
Loan receivable | - | 1,297 | (1,185 | ) | ||||||||
Inventories | (146,914 | ) | 29,220 | (8,854 | ) | |||||||
Advances on inventory purchases | 52,655 | 19,916 | (45,013 | ) | ||||||||
Advances on inventory purchases - related parties | (13,341 | ) | 7,814 | (9,550 | ) | |||||||
Prepaid expense | 393 | 401 | (880 | ) | ||||||||
Accounts payable | 10,421 | 11,975 | 88,356 | |||||||||
Accounts payable - related parties | 55,445 | 44,725 | 13,736 | |||||||||
Other payables | 13,010 | (1,752 | ) | 823 | ||||||||
Other payables - related parties | (13,346 | ) | (1,482 | ) | (76,864 | ) | ||||||
Accrued liabilities | (825 | ) | 214 | 2,440 | ||||||||
Customer deposits | 66,465 | 95,132 | 2,560 | |||||||||
Customer deposits - related parties | (13,569 | ) | (2,287 | ) | 8,847 | |||||||
Taxes payable | (27,332 | ) | (22,443 | ) | 20,800 | |||||||
Net cash provided by operating activities | 6,525 | 113,683 | 39,041 | |||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||
Increase in long term investment | (6,597 | ) | - | (790 | ) | |||||||
Increase in investment payable | - | - | 6,320 | |||||||||
Dividend receivable | (1,727 | ) | - | - | ||||||||
Cash proceeds from sale of subsidiaries | 4,912 | 2,782 | 509 | |||||||||
Deposits due to sales representatives | 41,370 | 4,782 | 840 | |||||||||
Advances on equipment purchases | 1,604 | (8,029 | ) | (713 | ) | |||||||
Cash proceeds from sale of equipment | 7,231 | 598 | 63 | |||||||||
Long term other receivable | - | (4,788 | ) | - | ||||||||
Equipment purchase | (112,011 | ) | (194,399 | ) | (21,524 | ) | ||||||
Intangible assets purchase | (183 | ) | (245 | ) | - | |||||||
Payment to the original shareholders | - | (7,290 | ) | - | ||||||||
Net cash used in investing activities | (65,401 | ) | (206,589 | ) | (15,295 | ) | ||||||
CASH FLOWS FINANCING ACTIVITIES: | ||||||||||||
Restricted cash | (61,303 | ) | (87,121 | ) | 237 | |||||||
Notes receivable - restricted | - | 13,158 | - | |||||||||
Dividend payable | (2,343 | ) | (815 | ) | - | |||||||
Borrowings on short term loans - bank | 174,290 | 71,057 | 56,813 | |||||||||
Payments on short term loans - bank | (93,212 | ) | (103,641 | ) | (53,112 | ) | ||||||
Borrowings on short term loans - related parties | 4,398 | 7,222 | - | |||||||||
Payments on short term loans - related parties | - | (7,693 | ) | (17 | ) | |||||||
Borrowings on short term loans - others | 159,296 | 87,207 | 5,230 | |||||||||
Payments on short term loans - others | (126,650 | ) | (53,031 | ) | (12,640 | ) | ||||||
Borrowings on short term notes payable | 636,136 | 335,870 | 14,563 | |||||||||
Payments on short term notes payable | (587,598 | ) | (200,416 | ) | (38,211 | ) | ||||||
Cash received on stock issuance | 23,090 | 700 | - | |||||||||
Cash received from issuance of convertible note | - | 36,856 | ||||||||||
Cash contribution received from minority shareholders | - | 790 | ||||||||||
Cash received from warrants conversion | - | 5,300 | ||||||||||
Payment to minority shareholders | - | (2,814 | ) | |||||||||
Net cash provided by financing activities | 126,104 | 62,497 | 12,995 | |||||||||
EFFECT OF EXCHANGE RATE CHANGE ON CASH | (5 | ) | 1,591 | 140 | ||||||||
INCREASE (DECREASE) IN CASH | 67,223 | (28,818 | ) | 36,881 | ||||||||
CASH, beginning of period | 14,895 | 43,713 | 6,832 | |||||||||
CASH, end of period | $ | 82,118 | $ | 14,895 | $ | 43,713 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES | ||||||||
CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||||
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010 | ||||||||
(In thousands) |
2011 | 2010 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net loss | $ | (283,299 | ) | $ | (46,271 | ) | ||
Adjustments to reconcile net loss to cash provided by (used in) operating activities: | ||||||||
Depreciation, amortization and depletion | 58,331 | 41,153 | ||||||
Impairment of plant and equipment | 5,424 | 1,747 | ||||||
Change in fair value of derivative liabilities | (5,563 | ) | (15,055 | ) | ||||
Gain on debt settlement | (3,430 | ) | - | |||||
(Gain) loss on disposal of equipment | (693 | ) | 8,257 | |||||
Bad debt allowance | 3,529 | 326 | ||||||
Inventory written-off | 37,512 | 1,061 | ||||||
Stock issued for services and compensation | 1,530 | 2,479 | ||||||
Income from compensation | - | (1,377 | ) | |||||
Make whole shares interest expense on notes conversion | - | 1,130 | ||||||
Amortization of deferred note issuance cost and discount on convertible notes | - | 17 | ||||||
Amortization of deferred financing cost on capital lease | 27,704 | - | ||||||
Income from equity investments | (5,302 | ) | (6,383 | ) | ||||
Deferred tax assets | 15,419 | (10,058 | ) | |||||
Deferred lease income | 4,782 | 5,549 | ||||||
Foreign currency transaction gain | (3,424 | ) | - | |||||
Changes in operating assets and liabilities | ||||||||
Notes receivable | (41,318 | ) | (18,498 | ) | ||||
Notes receivable - restricted | (329,839 | ) | (234,342 | ) | ||||
Accounts receivable | 4,761 | (8,647 | ) | |||||
Accounts receivable - related parties | (16,015 | ) | 14,065 | |||||
Other receivables | (12,638 | ) | (3,210 | ) | ||||
Other receivables - related parties | (50,562 | ) | (2,968 | ) | ||||
Inventories | 131,695 | (270,046 | ) | |||||
Advances on inventory purchases | (37,674 | ) | 4,681 | |||||
Advances on inventory purchases - related parties | (13,608 | ) | 13,782 | |||||
Prepaid expense | 4,753 | - | ||||||
Long-term deferred expense | 845 | - | ||||||
Prepaid value added tax | 14,223 | - | ||||||
Accounts payable | 160,657 | 76,003 | ||||||
Accounts payable - related parties | 38,647 | 45,480 | ||||||
Other payables and accrued liabilities | 18,076 | (1,527 | ) | |||||
Other payables - related parties | 9,845 | 30,618 | ||||||
Customer deposits | (46,870 | ) | (24,433 | ) | ||||
Customer deposits - related parties | 11,211 | 18,855 | ||||||
Taxes payable | 4,834 | (19,543 | ) | |||||
Net cash used in operating activities | (296,457 | ) | (397,155 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Restricted cash | (190,178 | ) | 741 | |||||
Acquired long term investment | - | (2,021 | ) | |||||
Cash proceeds from disposal of long-term investment | - | 8,137 | ||||||
Cash made to short term investment | (2,858 | ) | - | |||||
Cash proceeds from sales of equipment | 1,306 | 1,828 | ||||||
Advance on equipment purchases | - | (7,106 | ) | |||||
Equipment purchase and intangible assets | (110,939 | ) | (89,916 | ) | ||||
Net cash used in investing activities | (302,669 | ) | (88,337 | ) | ||||
CASH FLOWS FINANCING ACTIVITIES: | ||||||||
Payments made to dividend distribution | - | (2,855 | ) | |||||
Payments made for treasury stock acquired | (1,923 | ) | (870 | ) | ||||
Capital contributed by noncontrolling interest | - | 1,184 | ||||||
Borrowings on short term loans - bank | 563,007 | 327,807 | ||||||
Payments on short term loans - bank | (600,294 | ) | (199,905 | ) | ||||
Borrowings on short term loan - others | 330,037 | 152,517 | ||||||
Payments on short term loans - others | (212,661 | ) | (174,913 | ) | ||||
Borrowings on short term loan - related parties | 15,450 | 71,714 | ||||||
Payments on short term loans - related parties | (14,817 | ) | (11,850 | ) | ||||
Borrowings on short term notes payable | 1,655,741 | 905,124 | ||||||
Payments on short term notes payable | (1,049,680 | ) | (693,633 | ) | ||||
Deposits due to sales representatives | (30,066 | ) | 987 | |||||
Deposit due to sales representatives - related parties | 464 | 444 | ||||||
Borrowings on long term loan - related parties | 14,677 | 91,020 | ||||||
Payments on long term loan - related parties | (16,865 | ) | - | |||||
Net cash provided by financing activities | 653,070 | 466,771 | ||||||
EFFECTS OF EXCHANGE RATE CHANGE IN CASH | 801 | 1,874 | ||||||
INCREASE (DECREASE) IN CASH | 54,745 | (16,847 | ) | |||||
CASH, beginning of year | 65,271 | 82,118 | ||||||
CASH, end of year | $ | 120,016 | $ | 65,271 |
The accompanying notes are an integral part of these consolidated financial statements.
62 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Background
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 a portfolio of 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, presently has four production subsidiaries: General Steel (China) Co. Ltd. (f/k/together with its subsidiaries, majority owned subsidiaries and variable interest entity, is referred to as the “Group”.
Recent developments
On April 29, 2011, a Tianjin Daqiuzhuang Metal Co. Ltd.20-year Unified Management Agreement (“the Agreement”) (“Daqiuzhuang Metal”), Baotou Steel – General Steel Special Steel Pipe Joint Venture Co., Ltd., (“Baotou Steel Pipe Joint Venture”),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 Maoming HengdaChemical 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.Ltd (“Maoming”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 $581.4 million (or approximately RMB 3.7 billion) of newly constructed iron and steel making facilities owned by Shaanxi Steel, which includes one 400m2 sintering machine, two 1,280m3 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 the 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 new 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 newly 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 generated by the Asset Pool 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 Company’s main operation Agreementis manufacturingalso expected to improve Longmen Joint Venture’s cost structure through sustainable and salessteady sourcing of steel productskey 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.
The parties to the Agreement haveagreed to establish 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, the 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 Venture remains the controlling decision-making body of Longmen Joint Venture and the Asset Pool.
The Agreement constitutes an arrangement that involves a lease which met certain of the criteria of a capital lease and therefore, the lease is accounted for as such by Longmen Joint Venture as rebar, hot-rolled carbona capital lease. See Notes 2 “Summary of significant accounting policies”, 13 “Capital lease obligations” and silicon sheets and spiral-weld pipes.
Note 2 – Summary of significant accounting policies
(a) | Basis of presentation |
The consolidated financial statements of the Company reflect the activities of the following major directly and indirectly owned subsidiaries:
Subsidiary | Percentage of Ownership | ||||
General Steel Investment Co., Ltd. | British Virgin Islands | 100.0 | % | ||
General Steel (China) Co., Ltd. (“General Steel (China)”) | PRC | 100.0 | % | ||
Baotou Steel – General Steel Special Steel Pipe Joint Venture Co., Ltd. | PRC | 80.0 | % | ||
Yangpu Shengtong Investment Co., Ltd. | PRC | 99.1 | % | ||
Tianjin Qiu Steel Investment Co., Ltd. (“Qiu Steel”) | PRC | 98.7 | % | ||
PRC | VIE/60.0 | % | |||
Maoming Hengda Steel Company, Ltd. (“Maoming Hengda”) | PRC | 99.0 | % | ||
Tianwu General Steel Material Trading Co. | PRC | 60.0 | % | ||
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and include the accounts of all directly, and indirectly owned subsidiaries and the variable interest entity listed above. All material intercompany transactions and balances have been eliminated in consolidation.
(b) | Principles of consolidation – subsidiaries |
The accompanying consolidated financial statements include the financial statements of estimates
Subsidiaries are those entities in which the Company, directly or indirectly, controls more than one half of the voting power; or has the power to govern the financial and operating policies, to appoint or remove the majority of the members of the board of directors, or to cast a majority of votes at the meeting of directors.
A VIE is an entity in which the Company, or its subsidiary, through contractual arrangements, bears the risks of, and enjoys the rewards normally associated with, ownership of the entity, and therefore the Company or its subsidiary is the primary beneficiary of the entity.
All significant inter-company transactions and balances have been eliminated upon consolidation.
(c) | Consolidation of VIE |
Prior to enter 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 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, LongmenJoint Venture’s equity at risk is considered insufficient to finance its activities and therefore LongmenJoint Venture is considered to be a VIE.
The Company would be considered the primary beneficiary of the VIE if it has both of the following characteristics:
a. | The power to direct the activities of the VIE that most significantly impact the VIE’s economic performance; and |
b. | The obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. |
A Supervisory Committee was formed during the negotiation of the Unified Management Agreement. Given there is both a Supervisory Committee and a Board with respect to LongmenJoint Venture, the powers (rights and roles) of both bodies were considered to determine which party has the power to direct the activities of LongmenJoint Venture, and by extension, whether the Company continues to have the power to direct LongmenJoint Venture’s activities after this Supervisory Committee was formed and the significant investment in plant and equipment by owners of the Longmen Joint Venture partner, as discussed in Note 1- “Recent Developments”. The Supervisory Committee, on which the Company holds 2 out of 4 seats, requires a ¾ majority vote, while the Board, 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 LongmenJoint 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 LongmenJoint Venture continues to be the controlling decision-making body with respect to LongmenJoint Venture. The Company, which controls 60% of the voting rights of the Board of Directors, has control over the operations of LongmenJoint Venture and as such, has the power to direct the activities of the VIE that most significantly impact LongmenJoint Venture’s economic performance.
In connection with the Unified Management Agreement, the Company, Shaanxi Coal and Shaanxi Steel may provide such support on a discretionary basis or as needed in the future. See Note 2 item (d) Liquidity.
As discussed in Note 1 - “Background”, 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 LongmenJoint Venture and therefore, continues to consolidate LongmenJoint 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, in the 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. The Company is making ongoing assessment to determine whether Longmen Joint Venture is a VIE.
The carrying amount of the VIE and its subsidiaries’ consolidated assets and liabilities are as follows:
December 31, 2011 | December 31, 2010 | |||||||
(in thousands) | (in thousands) | |||||||
Current assets | $ | 1,674,171 | $ | 1,087,108 | ||||
Plant and equipment, net | 1,217,264 | 553,688 | ||||||
Other noncurrent assets | 45,836 | 54,099 | ||||||
Total assets | 2,937,271 | 1,694,895 | ||||||
Total liabilities | (3,131,823 | ) | (1,612,925 | ) | ||||
Net assets (net liabilities) | $ | (194,552 | ) | $ | 81,970 |
VIE and its subsidiaries’ liabilities consist of the following:
December 31, 2011 | December 31, 2010 | |||||||
(in thousands) | (in thousands) | |||||||
Current liabilities: | ||||||||
Short term notes payable | $ | 1,105,570 | $ | 447,992 | ||||
Accounts payable | 401,158 | 230,753 | ||||||
Accounts payable - related parties | 81,403 | 56,742 | ||||||
Short term loans - bank | 209,234 | 260,977 | ||||||
Short term loans - others | 240,684 | 113,328 | ||||||
Short term loans - related parties | 15,710 | 14,548 | ||||||
Other payables and accrued liabilities | 31,249 | 27,932 | ||||||
Other payables - related parties | 20,677 | 2,132 | ||||||
Customer deposits | 84,767 | 129,832 | ||||||
Customer deposits - related parties | 66,932 | 53,624 | ||||||
Deposit due to sales representatives | 22,890 | 52,079 | ||||||
Taxes payable | 5,386 | 5,159 | ||||||
Deferred lease income - current | 2,099 | 1,971 | ||||||
Capital lease obligations, current portion | 25,607 | - | ||||||
Intercompany payable to be eliminated | 66,021 | 69,216 | ||||||
Total current liabilities | 2,379,387 | 1,466,285 | ||||||
Non-current liabilities: | ||||||||
Long term loans - related parties | 92,035 | 91,020 | ||||||
Deferred lease income - noncurrent | 76,425 | 55,620 | ||||||
Capital lease obligations, noncurrent portion | 280,743 | - | ||||||
Profit sharing liability, noncurrent | 303,233 | - | ||||||
Total non-current liabilities | 752,436 | 146,640 | ||||||
Total liabilities of consolidated VIE | $ | 3,131,823 | $ | 1,612,925 |
VIE and its subsidiaries’ statements of operations are as follows:
December 31, 2011 | December 31, 2010 | |||||||
(in thousands) | (in thousands) | |||||||
Sales | $ | 3,496,551 | $ | 1,846,080 | ||||
Gross profit (loss) | $ | (86,308 | ) | $ | 32,751 | |||
Loss from operations | $ | (161,057 | ) | $ | (8,073 | ) | ||
Net loss attributable to controlling interest | $ | (161,897 | ) | $ | (32,668 | ) |
Longmen Joint Venture has two 100% owned subsidiaries, Yuxin Trading Co., Ltd. (“Yuxin”) and Yuteng Trading Co., Ltd. (“Yuteng”). In addition, Longmen Joint Venture has three consolidated subsidiaries, Hualong Fire Retardant Material Co., Ltd. (“Hualong”), Hancheng Tongxing Metallurgy Co., Ltd. (“Tongxing”) and Beijing Huatianyulong International Steel Trading Co., Ltd. (“Huatianyulong”), in which Longmen Joint Venture does not hold a controlling interest. Hualong, Tongxing and Huatianyulong are separate legal entities which were established in the PRC as limited liability companies and subsequently acquired by Longmen Joint Venture in June 2007, January 2008 and July 2008, respectively. Prior to and subsequent to their acquisition by Longmen Joint Venture, these three entities have been operating as self-sustaining integrated sets of activities and assets conducted and managed for the purpose of providing a return to shareholders consisting of all the inputs, processes and outputs of a business. However, these three 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.
Tongxing
Longmen Joint Venture holds a 22.76% equity interest in Tongxing and hundreds of employees of Longmen Joint Venture own the remaining 77.24%. Each individual employee shareholder comprising the remaining 77.24% assigned its voting rights to Longmen Joint Venture in writing at the time of the acquisition of Tongxing. The voting rights have been assigned through the date Tongxing ceases its business operation or the employees sell their interest in Tongxing. Tongxing’s business is highly reliant on Longmen Joint Venture. Tongxing’s main business is to process rebar (See Note 24).
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 Company has determined that it is appropriate for Longmen Joint Venture to consolidate these three entities with appropriate recognition in the Company’s financial statements of the non-controlling interests in each entity, beginning on the acquisition dates as these were also the effective dates of the agreements with other stockholders granting a majority voting rights in each entity, and thereby, the power of control, to Longmen Joint Venture.
(d) | Liquidity |
The Company’s accounts have been preparedin accordance with U.S. GAAP on 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 at of December 31, 2011 and 2010 were (19.7) and 13.8, respectively. As of December 31, 2011, the Company’s current liabilities exceed current assets (excluding non-cash item) by $689.6 million. And as of December 31, 2012, the Company’s current liabilities exceed current assets (excluding non-cash item) by $784.8 million.
Longmen Joint Venture, as the most important subsidiary of the Company, accounted for majority of total sales of the Company. As such, the majority of the Company’s working capital needs come from Longmen Joint Venture. The Company’s ability to continue as a going concern depends heavily on Longmen Joint Venture’s operations. Longmen Joint Venture has obtained different types of financial supports, which are listed below by category:
Line of credit
The Company received lines of credit from seven major banks totaling $367.4 million with expiration dates ranging from December 28, 2013 to May 4, 2014.
Banks | Amount of Line of Credit (in millions) | Repayment Date | ||||
Bank of Jinzhou | $ | 31.7 | January 7, 2014 | |||
China Merchants Bank | 47.5 | February 1, 2014 | ||||
Bank of Chongqing | 47.5 | January 8, 2014 | ||||
Bank of Communications | 31.7 | December 28, 2013* | ||||
Bank of Lanzhou | 31.7 | January 3, 2014 | ||||
Industrial Bank | 34.8 | January 23, 2014 | ||||
China Minsheng Bank | 142.5 | May 4, 2014 | ||||
Total | $ | 367.4 |
*Management expects the line of credit will be extended after December 28, 2013.
Vendor financing
Longmen Joint Venture signed additional vendor financing agreements, which will provide liquidity to the Company in a total amount of $316.7 million with the following companies:
Company |
Financing period covered | Financing Amount | ||||
(in millions) | ||||||
Company A – related party | January 6, 2013 – January 5, 2015 | $ | 79.2 | |||
Company B – third party | January 6, 2013 – January 5, 2015 | 79.2 | ||||
Company C – related party | October 1, 2012 – October 1, 2013 | 158.3 | ||||
Total | $ | 316.7 |
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 years. Each company has signed a two-year agreement with Longmen Joint Venture which was effective on January 6, 2013 to finance Longmen Joint Venture for its coke purchase for two-year. According to the above signed agreement, both Company A and B will not demand any cash payments for next two years. As of the date of this report, our payables to Company A and Company B were approximately $54.7 million and $31.1 million, respectively.
As a critical business stakeholder to the Company’s Tianwu Joint Venture, Company C is a Fortune 500 Company. Its total iron ore sales in 2011 were over 16 million metric tons. In October 2012, Company C signed a one year agreement which is effective and payables from October 2012 to finance Longmen Joint Venture up to $158.3 million for its iron ore purchase. According to the agreement, during the contract period, Longmen Joint Venture agrees to purchase iron ore from Company C in an amount not less than 3 million metric ton. Company C agrees to provide the amount of not less than $158.3 million in iron ore for Longmen Joint Venture. During the contract term, Longmen Joint Venture also needs to pay a monthly interest expense based on a variable interest rate equal to 110% of the one year benchmark rates of similar loans published by the Peoples Bank of China. This agreement would also help secure Company C’s iron ore sales to Longmen Joint Venture. The Company had not made any purchases from Company C as of the date of this report.
Customer financing
Longmen Joint Venture also obtained customer financing support from Company D, a related party. Company D, a subsidiary of one of the largest state-owned enterprise in its province signed a one year agreement which is effective from the October 1, 2012 to finance Longmen Joint Venture $158.3 million by a way of payment in advance.There is no customer financing yet as of the date of this report.
Financing sales
As part of our working capital management, Longmen Joint Venture has entered into an additional financing sales agreement with a third party company, Company E and two 100% owned subsidiaries of Longmen Joint Venture, named Yuxin Trading Co., Ltd. (“Yuxin”) and Yuteng Trading Co., Ltd. (“Yuteng”)(“financing sales”) to provide liquidity to the Company in the total amount of $79.2 million.
According to the financing sales agreements, Longmen Joint Venture sells rebar to Company E at a certain price, and Yuxin and Yuteng will purchase back the rebar from Company E at a higher price than the original selling price from Longmen Joint Venture. Based on the contract terms, Longmen Joint Venture is paid in advance for at least $7.9 million for the rebar sold. From December 31, 2012 till the expiration date of the contract or December 31, 2013, the advance payment balance cannot be less than $79.2 million. The remaining financing sales balance can be paid by installment based on Longmen Joint Venture’s goods delivery volume. As of the date of this report, our payable to Company E was approximately $23.7 million.
Other financing
On January 7, 2013, Longmen Joint Venture signed a payment extension agreement with each company listed below. In total, Longmen Joint Venture can get $43.5 million in financial support from a two-year balancing payment extension granted by the following three companies:
Company |
Financing period covered | Financing Amount | ||||
(in millions) | ||||||
Company F – related party | January 7, 2013 – January 6, 2015 | $ | 15.8 | |||
Company G – related party | January 7, 2013 – January 6, 2015 | 20.6 | ||||
Company H – related party | January 7, 2013 – January 6, 2015 | 7.1 | ||||
Total | $ | 43.5 |
According to the contract terms, Company F, Company G and Company H, have agreed to grant a two year payment extension in the amounts of $15.8 million, $20.6 million and $7.1 million respectively. As of the date of this report, our payables to Company F, Company G and Company H were approximately $17.1 million, $20.9 million and $8.4 million, respectively.
Amount due to sales representatives
Longmen Joint Venture entered into agreements with various entities to act as the Company’s exclusive sales agents in specified geographic areas. These exclusive sales agents must meet certain criteria and are required to deposit a certain amount of money with the Company. In return the sales agents receive exclusive sales rights in a specified area and discounted prices on products they order. These deposits bear no interest and are required to be returned to the sales agent once the agreement is terminated. As of December 31, 2012, Longmen Joint Venture has collected a total amount of $35.0 million. Historically, this amount is quite stable and we do not expect a big fluctuation in this amount for the next twelve months from December 31, 2012 onwards.
With the financial support from the banks and the companies above, management is of the opinion that the Company has sufficient funds to meet its future operations, working capital requirements and debt obligations until the end of December 31, 2013. Management does not expect the result of our analysis will be significantly different from December 31, 2012 to the date of this report. The detailed breakdown of Longmen Joint Venture’s estimated cash flows items are listed below.
Cash inflow (outflow) (in millions) | ||||
For the twelve months ended December 31, 2013 | ||||
Current liabilities over current assets (excluding non-cash items) as of December 31, 2012 | $ | (784.8 | ) | |
Cash provided by line of credit from banks | 367.4 | |||
Cash provided by vendor financing | 316.7 | |||
Cash provided by customer financing | 158.3 | |||
Cash provided by financing sales | 79.2 | |||
Cash provided by other financing | 43.5 | |||
Cash provided by sales representatives | 35.0 | |||
Cash used in operations for the twelve months ended December 31, 2013 | (30.3 | ) | ||
Net projected change in cash for the twelve months ended December 31, 2013 | $ | 185.0 |
As a result, the consolidated financial statements for the year ended December 31, 2011 have been prepared on a going concern basis.
(e) | Use of estimates |
The preparation of financial statements in conformity with generally accepted accounting principles of the United StatesU.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the accompanying consolidated financial statements and accompanying notes.footnotes. Significant accounting estimates reflected in the Company’s consolidated financial statements include the fair value of financial instruments, the useful lives of and impairment for property, plant and equipment, and potential losses on uncollectible receivables.receivables, the recognition of contingent liabilities, the interest rate used in the financing sales, the fair value of the assets recorded under capital lease, the present value of the net minimum lease payments of the capital lease and the fair value of the profit share liability. Actual results could differ from these estimates.
(f) | Concentration of risks and uncertainties |
The Company'sCompany’s operations are carried out in the PRC. Accordingly, the Company'sCompany’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'sPRC’s economy. The Company'sCompany’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'sCompany’s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.
The Company has significant exposure to the fluctuation of independent registered public accounting firm.
Cash includes cash on hand and 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 December 31, 20092011 and 20082010 amounted to $274.2$518.2 million and $145.6$263.1 million, respectively. As of December 31, 2009, $22.52011, $0.1 million cash in the bank was covered by insurance. The Company has not experienced any losses in suchother bank accounts and believes it is not exposed to any risks on its cash in bank accounts.
The Company hadCompany’s five major customers whichare all distributors and collectively represented approximately 29%, 34%27.1% and 59%28.6% of the Company’s total sales for the years ended December 31, 2009, 20082011 and 2007,2010, respectively. FiveThese five major customers accounted for 0%, 1%27.2% and 0% of total accounts receivable as of December 31, 2009, 20082011 and 2007,2010, respectively.
For years ended December 31, 2011 and 2010, the Company purchased approximately 48.6% and 48.0% of its raw materials from five major suppliers, represented approximately 42%, 30% and 40% of Company’s total purchases for the years ended December 31, 2009, 2008 and 2007, respectively. FiveThese five vendors accounted for 10%, 7%16.9% and 11%28.3% of total accounts payable as of December 31, 2009, 20082011 and 2007,2010, respectively.
(g) | Revenue recognition |
Sales revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, the Company has no other significant obligations of the Company exist and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are recorded as customer deposits. Sales revenue represents the invoiced value of goods, net of value-added tax (VAT). All 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.
(h) | Foreign currency translation and other comprehensive income |
The reporting currency of the Company is the US dollar. The Company usesCompany’s subsidiaries in China use the local currency, Renminbi (RMB), as itstheir 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. TranslationThe 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 changes in equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.
Translation adjustments included in accumulated other comprehensive income amounted to $8.3$10.2 million and $8.7$11.0 million as of December 31, 20092011 and 2008,2010, respectively. The balance sheet amounts, with the exception of equity at December 31, 20092011 and 20082010 were translated at 6.826.37 RMB and 6.826.59 RMB to $1.00, respectively. The equity accounts were stated at their historical rate. The average translation rates applied to income statement of operations accounts for the years ended December 31, 2009, 20082011 and 20072010 were 6.82 RMB, 7.076.47 RMB and 7.596.76 RMB, respectively. Cash flows are also translated at average translation rates for the period,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 independent registered public accounting firm.
(i) | Financial instruments |
The accounting standards 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, 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 valuevalues because of the short period of time between the origination and repayment and as their stated interest rate approximatesrates approximate current rates available.
The Company analyzes all financial instruments with features of both liabilities and equity, pursuant to which the Company’s warrants were required to be recorded as a liability at fair value and marked to market each reporting period.
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. |
On December 31, 2009. Since there is no quoted or observable market price for the fair value of similar long term investments, the Company then used the level 3 inputs for its valuation methodology. The determination of the fair value was based on the capital investment that the Company contributed and income from investment. The carrying value of the long term investments approximated the fair value as of December 31, 2009.
On December 24, 2009, the holders of the existing warrants of 1,154,958 shares entered into an agreement with the Company that reset the exercise price from $13.51 to $5 per share and increased the number of warrants from 1,154,958 to 3,900,871.
In December 2009, the Company issued 2,777,778 warrants in connection with a registered direct offering.
The aforementioned warrants and the conversion option embedded in the Notes meet the definition of a derivative instrument in the accounting standards. Therefore these instruments are accounted for as derivative liabilities and marked-to-marketrecorded at their fair value as of each reporting period. As all of the Notes were converted to common stocks by the end of 2010, the derivative instruments include only the outstanding warrants of 6,678,649 as of December 31, 2011 and 2010. The change in the value of the derivative liabilities is charged against or credited to income. The fair value was determined using the Cox Rubenstein Binomial Model, defined in the accounting standard as levelLevel 2 inputs, and recorded the change in earnings. As a result,See Note 10– “Convertible notes and derivative liabilities” for the derivative liabilities are carried on the consolidated balance sheet at their fair value.
The Company determined the carrying value of the convertible note amounted to approximately $1.1 million. Company usedprofit sharing liability using Level 3 inputs by considering the present value of Longmen Joint Venture’s projected profits/losses with a discount rate of 7.3% based on the Company’s average borrowing rate. The projected profits/losses in Longmen Joint Venture were based upon, but not limited to, the following assumptions in the next 20 years:
· | 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 |
The following table sets forth by level within the fair value hierarchy, the Company’s financial assets and liabilities that were accounted for its valuation methodologyat fair value on a recurring basis as of December 31, 2011:
(in thousands) | Carrying Value as of December 31, 2011 | Fair Value Measurements at December 31, 2011 Using Fair Value Hierarchy | ||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||
Derivative liabilities | $ | 10 | $ | - | $ | 10 | $ | - | ||||
Profit sharing liability | 303,233 | - | - | 303,233 | ||||||||
Total | $ | 303,243 | $ | - | $ | 10 | $ | 303,233 |
We re-measured the fair value of the 40% profit sharing liability as of December 31, 2011 and the difference is immaterial in comparing to the initial value.
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, 2010:
(in thousands) | Carrying Value as of December 31, 2010 | Fair Value Measurements at December 31, 2010 Using Fair Value Hierarchy | ||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||
Derivative liabilities | $ | 5,573 | $ | - | $ | 5,573 | $ | - | ||||||||
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 convertible note, and their fair values are determined using cash flows discounted at relevant market interest rates in effect at the period close since there is no observable market price.
(in thousands) | Carrying Value as of December 31, 2009 | Fair Value Measurements at December 31, 2009 Using Fair Value Hierarchy | |||||||||||
Level 1 | Level 2 | Level 3 | |||||||||||
Long term investments | $ | 20,022 | $ | 20,022 | |||||||||
Derivative liabilities | $ | 23,340 | $ | 23,340 | |||||||||
Convertible notes payable | $ | 1,050 | $ | 820 |
December 31, 2011 | December 31, 2010 | |||||||
(in thousands) | (in thousands) | |||||||
Beginning balance | $ | 5,573 | $ | 24,390 | ||||
Initial measurement and recognition of the 40% profit sharing liability on April 29, 2011 | 280,857 | - | ||||||
Current period interest expense accreted | 14,047 | 389 | ||||||
Current period payments made for principal and stated interest | - | (217 | ) | |||||
Current period note converted carrying value | - | (3,934 | ) | |||||
Change of derivative liabilities charged to earnings | (5,563 | ) | (15,055 | ) | ||||
Exchange rate effect | 8,329 | - | ||||||
Ending balance | $ | 303,243 | $ | 5,573 | ||||
Except for the investments, convertible notes payablederivative liabilities and derivative liabilities,profit sharing liability, the Company did not identify any other assets or liabilities that are required to be presented on the balance sheet at fair value in accordance with the accounting standard.
Long term Investment | ||||
(in thousands) | ||||
Balance, December 31, 2008 | $ | 13,959 | ||
Current period additional investments | 7,983 | |||
Current period dispositions | (2,035 | ) | ||
Dividend entitled | (3,146 | ) | ||
Current period investment gain | 3,261 | |||
Balance, December 31, 2009 | $ | 20,022 |
Convertible Notes | ||||
(in thousands) | ||||
Balance, December 31, 2008 | $ | 7,155 | ||
Current period effective interest charges on notes | 2,273 | |||
Current period share issuance made for principal and stated interest | (745 | ) | ||
Current period note converted carrying value | (7,633 | ) | ||
Balance, December 31, 2009 | $ | 1,050 |
(j) | Cash |
Cash includes cash on hand and demand deposits in banks with original maturities of less than three months.
(k) | Restricted cash |
The Company has notes payable outstanding with various banks and is required to keep certain amounts on deposit that are subject to withdrawal restrictions. The notes payable are generally short term in nature due to its short maturity period of six to nine months or less, thus restricted cash is classified as a current asset.
(l) | Accounts receivable and allowance for doubtful accounts |
Accounts receivable include trade accounts due from customers and other receivables from cash advances to employees, related parties or third parties. An allowance for doubtful accountaccounts is established and recorded based on managements’ assessment of potential losses based on the credit history and relationships with the customers. Management reviews its receivablereceivables on a regular basis to determine if the bad debt allowance is adequate, and adjusts the allowance when necessary. Delinquent account balances are written-off against allowance for doubtful accounts after management has determined that the likelihood of collection is not probable.
(m) | Notes receivable |
Notes receivable represents trade accounts receivable due from various customers where the customers’ banks have guaranteed the payment of the receivables.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. As of December 31, 2011 and 2010, restricted notes receivable amounted to $584.2 million and $240.3 million, respectively.
(n) | Advances on inventory purchase |
Advances on inventory purchases are monies deposited or advanced to outside vendors or related parties on future inventory purchases. Due to the high shortage of steel in China, most of the Company’s vendors require a certain amount of money to be deposited with them as a guarantee that the Company will complete its purchases on a timely basis.
This amount is refundable and bears no interest. The Company has legally binding contracts with its vendors, which required the deposit to be returned to the Company when the contract ends. The inventory is normally delivered within one month after the monies have been advanced. The total outstanding amount, including advances to related parties, was $83.8 million and $30.8 million as of December 31, 2011 and 2010, respectively.
(o) | Inventories |
Inventories
(p) | Shipping and handling |
Shipping and handling for raw materials purchased are included in cost of goods sold. Shipping and handling cost incurred to ship finished products to customers are included in selling expenses. Shipping and handling expenses for finished goods for the years ended December 31, 2009, 20082011 and 20072010 amounted to $6.8 million, $4.9$30.1 million and $2.8$9.5 million, respectively.
(q) | Plant and equipment, net |
Plant and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the People’s Republic of China is owned by the government. However, the government grants “land use rights”. Daqiuzhuang Metal acquired land use rights in 2001 for a total of $3.5 million. These land use rights are for 50 years and expire in 2050 and 2053. However, Daqiuzhuang Metal's initial business license had a ten-year term. Therefore, management elected to amortize the land use rightsstraight-line method over the ten-year business term. Daqiuzhuang Metal becameestimated useful lives of the assets with a Sino-Foreign Joint Venture in 2004, and obtained a new business license3%-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 | 20 Years | ||
Other equipment | 5 Years | ||
Transportation Equipment | 5 Years |
The Company assesses all significant leases for twenty years; however,purposes of classification as either operating or capital. At lease inception, if the lease meets any of the four following criteria, the Company decidedwill classify it as a capital lease; otherwise it will be treated as an operating lease: a) transfer of ownership to continue amortizinglessee at the land use rights overend of the original ten-year business term.
Construction in progress represents the costs incurred in connection with the construction of buildings or new additions to the Longmen Joint Venture.Company’s plant facilities. No depreciation is provided for construction in progress until such time as the assets are completed and are placed into service, maintenance, repairs and minor renewals are charged directly to expense as incurred. Major additions and betterment to buildings and equipment are capitalized. Interest incurred during construction is capitalized into construction in progress. All other interest is expensed as incurred.
Long lived assets, including buildings and improvements, equipment and intangible assets are reviewed if events and changes in circumstances indicate that its carrying amount may not be recoverable, to determine whether their carrying value has become impaired. The land use rights are for 50 yearsCompany considers assets to be impaired if the carrying value exceeds the future projected cash flows from related operations (See Note 6). The Company also re-evaluates the periods of depreciation and expire in 2048amortization to 2052.
Entity | Original Cost | Years of Expiration | |||
(in thousands) | |||||
General Steel (China) Co., Ltd | $ | 3,481 | 2051 | ||
Longmen Joint Venture | $ | 21,803 | 2045 & 2054 | ||
Maoming Hengda Steel Group Co., Ltd | $ | 2,235 | 2054 |
(r) | Intangible assets |
Intangible assets of the Company are reviewed at least annually, more often when circumstances require, to determinedetermining 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 amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives. As of December 31, 2009,2011, the Company expects these assets to be fully recoverable.
Land use rights
All land in the PRC is owned by the government. However, the government grants “land use rights.” General Steel (China) acquired land use rights in 2001 for a total of independent registered public accounting firm.
Long Steel Group contributed land use rights for a total amount of $23.4 million (RMB $148.6 million) to the Longmen Joint Venture. The contributed land use rights are statedfor 50 years and expire in 2048 to 2052.
Maoming Hengda has land use rights amounting to $2.6 million (RMB $16.6 million) for 50 years that expire in 2054.
Other than the land use rights that General Steel (China) acquired in 2001, the Company amortizes the land use rights over their 50 year term.
Entity | Original Cost | Expires on | ||||||
(in thousands) | ||||||||
General Steel (China) | $ | 3,727 | 2050 & 2053 | |||||
Longmen Joint Venture | $ | 23,351 | 2048 & 2052 | |||||
Maoming Hengda | $ | 2,607 | 2054 |
Mining right
Mining rights are capitalized at cost less accumulated depreciation. Depreciation is computedwhen acquired, including amounts associated with any value beyond proven and probable reserves, and amortized to operations as depletion expense using the straight-lineunits-of-production method over the estimated useful livesproven and probable recoverable tons. In October 2011, Longmen Joint Venture acquired iron ore mining right amounting to $2.3 million (RMB $14.9 million), which is amortized over the estimated recoverable reserve of the assets with a 3%-5% residual value.
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.
Longmen Joint Venture and its subsidiary - Hancheng Tongxing Metallurgy Co., Ltd. and Environmental Protection Industry Company(“Tongxing”) invested in several companies from 20042003 to 2009.
Unconsolidated subsidiary | Year acquired | Amount invested (In thousands) | % owned | ||||||||
Shaanxi Daxigou Mining Co., Ltd | 2004 | $ | 2,761 | 22.0 | |||||||
Shaanxi Xinglong Thermoelectric Co., Ltd | 2004-2007 | 7,790 | 20.7 | ||||||||
Shaanxi Longgang Group Xian steel Co., Ltd | 2005 | 146 | 10.0 | ||||||||
Huashan Metallurgical Equipment Co. Ltd. | 2003 | 1,730 | 25.0 | ||||||||
Shanxi Longmen Coal Chemical Industry Co., Ltd | 2009 | 6,602 | 15.0 | ||||||||
Xian Delong Powder Engineering Materials Co., Ltd. | 2006 | 993 | 27.0 | ||||||||
Total | $ | 20,022 |
Unconsolidated subsidiaries | Year acquired | 2011 Net investment (In thousands) | Owned % | 2010 Net investment (In thousands) | Owned % | ||||||||||||
Shaanxi Daxigou Mining Co., Ltd | 2004 | $ | 8,304 | 22.1 | $ | 4,779 | 22.1 | ||||||||||
Shaanxi Xinglong Thermoelectric Co. Ltd. | 2004- 2007 | - | - | 8,534 | 20.7 | ||||||||||||
Huashan Metallurgical Equipment Co., Ltd. | 2003 | 3,067 | 25.0 | 2,907 | 25.0 | ||||||||||||
Shaanxi Long Steel Group Baoji Steel Rolling Co., Ltd | 2003 | 428 | 23.8 | - | 25.0 | ||||||||||||
Xian Delong Powder Engineering Materials Co., Ltd. | 2007 | 1,041 | 24.1 | 1,236 | 27.0 | ||||||||||||
Total | $ | 12,840 | $ | 17,456 |
Total investment income in unconsolidated subsidiaries amounted to $20.0$3.9 million and $14.0$6.4 million as offor the years ended December 31, 20092011 and 2008, respectively.
On April 30, 2011, a share transfer agreement was signed with the Labor Union Trust of Long Steel Group, transferring Tongxing’s 20.7% share of Shaanxi Xinglong (“Xinglong”) Thermoelectric Co., Ltd to the Labor Union Trust of Long Steel Group for $11.3 million (RMB 72.9 million) on April 30, 2011. As of April 30, 2011, our investment in Xinglong was approximately $9.9 million and this transaction resulted in a gain of $1.4 million, which is included in “Income from equity investments” in the consolidated statements of operations and other comprehensive income (loss).
(t) | Short-term notes payable |
Short-term notes payable are lines of credit extended by banks. The banks in-turn issue the Company a bankers acceptance note, which can be endorsed and assigned to vendors as payments for purchases. The notes payable are generally payable at a determinable period, generally three to six months. This short-term note payable bears no interest and is guaranteed by the bank for its complete face value and usually matures within three to six-month period. The banks usually require the Company to deposit a certain amount of cash at the bank as a guarantee deposit, which is classified on the balance sheet as restricted cash.
(u) | Customer deposits |
Customer deposits represent amounts advanced by customers on product orders. The product normally is shipped within one month after receipt of the advance payment, and the related sale is recognized in accordance with the Company’s revenue recognition policy. As of December 31, 2011 and 2010, customer deposits amounted to $158.8 million and $188.4 million, respectively, including deposits received from relate parties, amounting to $68.3 million and $54.9 million, respectively.
(v) | Deferred lease income |
To reimburse Longmen Joint Venture for certain construction costs incurred as well as economic losses on suspended production to accommodate the construction of the new iron and steel making facilities on behalf of Shaanxi Steel, in the fourth quarter of 2010, Shaanxi Steel reimbursed Longmen Joint Venture for the value of assets dismantled, various site preparation costs incurred and rent under a 40-year land sub-lease that was entered into by the parties in June 2009 (the "Longmen Sub-lease"), and for the reduced production efficiency caused by the construction. Applying thelease accounting guidance, the Company has concluded that, except for the reimbursement for site preparation costs incurred, the amount of reimbursement should be deferred and recognized as a component of the land that was sub-leased during the construction, to be amortized to income over the remaining term of the 40-year sub-lease. Deferred lease income represents the remaining balance of compensation being deferred. See Note 12–“Deferred lease income”.
(w) | Non-controlling Interest |
Non-controlling interest mainly consists of Long Steel Group’s 40% interest in Longmen Joint Venture, Baotou Iron and Steel Group’s 20% interest in Baotou Steel Pipe Joint Venture, an individuals’ 0.9% interest in Yangpu Shengtong Investment Co., Ltd. , two individuals’ 1.3% interest in Qiu Steel, an individual’s 1% interest in Maoming Hengda, and TME Group’s 40% interest in Tianwu Joint Venture. The non-controlling interests are presented in the consolidated balance sheets, separately from equity attributable to the shareholders of the Company. Non-controlling interests in the results of the Company are presented on the face of the consolidated statement of operations as an allocation of the total income or loss for the year between non-controlling interest holders and the shareholders of the Company.
(x) | Earnings per share |
The Company has adopted the accounting principles generally accepted accounting principles in the United States regarding earnings per share (“EPS”), which requires presentation of basic and diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings per share.
Basic earnings per share are computed by dividing income available to common stockholders by the weighted average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock.
(y) | Treasury Stock |
Treasury stock consists of shares repurchased by the Company that are no longer outstanding and are held by the Company. Treasury stock is accounted for under the cost method.
As of December 31, 2011, the Company had repurchased 1,090,978 total shares of its common stock under the share repurchase plan approved by the Board of Directors in December 2010.
(z) | Income taxes |
The Company accounts for income taxes in accordance with the accounting principles generally accepted accounting principles in the United States for income taxes. Under the asset and liability method as required by this accounting standard, the recognition of deferred income tax liabilities and assets for the expected future tax consequences of temporary differences between the income tax basis and financial reporting basis of assets and liabilities. Provision for income taxes consists of taxes currently due plus deferred taxes. The accounting principles generally accepted accounting principles in the United States for accounting for uncertainty in income taxes clarify the accounting and disclosure for uncertain tax positions. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The adoption had no effect on the Company’s consolidated financial statements.
The charge for taxation is based on the results for the year as adjusted for items, which are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.
Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the consolidated financial statements and the corresponding tax basis used in the computation of assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences. Deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which deductible temporary differences can be utilized. Deferred tax is calculated using tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it is related to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis.
Deferred income taxes are recognized for temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements, net operating loss carry forwards and credits, by applying enacted statutory tax rates applicable to future years. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Current income taxes are provided for in accordance with the laws of the relevant taxing authorities.
Income tax returns for the year prior to 2009 are no longer subject to examination by tax authorities.
(aa) | Share-based compensation |
The Company accounts for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance with the accounting standards regarding accounting for stock-based compensation and accounting for equity instruments that are issued to other than employees for acquiring or in conjunction with selling goods or services. Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably determinable. The value of equity instruments issued for consideration other than employee services is determined on the earlier of a performance commitment or completion of performance by the provider of goods or services as defined by these accounting standards. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement.
(bb) | Comprehensive income |
In June 2011, the Company adopted generally accepted accounting principles in the United States regarding noncontrolling interest inrevised guidance issued by the consolidated financial statements. Certain provisionsFASB on the presentation of this statement are requiredcomprehensive income that requires an entity to be adopted retrospectively for all periods presented. Such provisions include a requirement thatpresent reclassification adjustments on the carrying value of noncontrolling interests (previously referred to as minority interests) be removed from the mezzanine sectionface of the balance sheet and reclassified as equity.
(cc) | Recently issued accounting pronouncements |
In addition, the foreign currency translation adjustment is allocated between controlling and noncontrolling interests.
In January 2010,December 2011, the FASB issued ASU No. 2010-01- Accounting for Distributionsauthoritative guidance on disclosures about offsetting assets and liabilities. The update requires entities to Shareholders with Componentsdisclose information about offsetting and related arrangements of Stockfinancial instruments and Cash.derivative instruments. The amendments require enhanced disclosures by requiring improved information about financial instruments and derivative instruments that are either (i) offset in this Update clarifyaccordance with current literature or (2) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in accordance with current literature. This guidance is effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2013. The Company does not anticipate that the stock portionadoption of this guidance will have a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitationmaterial impact on the total amountconsolidated financial statements.
In December 2011, the FASB issued a deferral of cash that all shareholders can electthe effective date for amendments to receive in the aggregate is considered a share issuance that is reflected in EPS prospectively and is not a stock dividend for purposespresentation of applying Topics 505 and 260 (Equity and Earnings Per Share).reclassifications of items out of accumulated other comprehensive income. The amendments in this update defer those changes in the guidance that relate to the presentation of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. The amendments are effective forduring interim and annual periods ending on orbeginning after December 15, 2009, and should be applied on a retrospective basis. The Company adopted this standard and has determined the standard does not have material effect on the Company’s consolidated financial statements.
(dd) | Reclassifications |
Certain prior periodyear amounts have been reclassified to conform to the current periodyear presentation. These classificationsreclassifications have no effect on net income.
Note 3 – Accounts receivable and allowance for doubtful accounts
Accounts receivable, including related party receivables, net of allowance for doubtful accounts consists of the following:
December 31, 2009 | December 31, 2008 | |||||||
(in thousands) | (in thousands) | |||||||
Accounts receivable | $ | 9,015 | $ | 8,730 | ||||
Less: allowance for doubtful accounts | (490 | ) | (401 | ) | ||||
Net accounts receivable | $ | 8,525 | $ | 8,329 |
December 31, 2011 | December 31, 2010 | |||||||
(in thousands) | (in thousands) | |||||||
Accounts receivable | $ | 14,624 | $ | 18,796 | ||||
Less: allowance for doubtful accounts | (2,023 | ) | (296 | ) | ||||
Accounts receivable – related parties | 20,593 | 4,160 | ||||||
Net accounts receivable | $ | 33,194 | $ | 22,660 |
Movement of allowance for doubtful accounts is as follows:
December 31, 2009 | December 31, 2008 | |||||||
(in thousands) | (in thousands) | |||||||
Beginning balance | $ | 401 | $ | 148 | ||||
Charge to expense | 246 | 124 | ||||||
Addition from acquisition | - | 238 | ||||||
Less Write-off | (157 | ) | (119 | ) | ||||
Exchange rate effect | - | 10 | ||||||
Ending balance | $ | 490 | $ | 401 |
December 31, 2011 | December 31, 2010 | |||||||
(in thousands) | (in thousands) | |||||||
Beginning balance | $ | 296 | $ | 490 | ||||
Charge to expense | 1,972 | 174 | ||||||
Less: write-off | (284 | ) | (386 | ) | ||||
Exchange rate effect | 39 | 18 | ||||||
Ending balance | $ | 2,023 | $ | 296 |
Note 4 – Inventories
Inventories consist of the following:
December 31, 2009 | December 31, 2008 | |||||||
(in thousands) | (in thousands) | |||||||
Supplies | $ | 1,025 | $ | 1,884 | ||||
Raw materials | 146,084 | 41,418 | ||||||
Finished goods | 60,978 | 16,247 | ||||||
Total inventories | $ | 208,087 | $ | 59,549 |
December 31, 2011 | December 31, 2010 | |||||||
(in thousands) | (in thousands) | |||||||
Supplies | $ | 20,869 | $ | 13,733 | ||||
Raw materials | 240,898 | 381,178 | ||||||
Finished goods | 35,962 | 58,725 | ||||||
Total inventories | $ | 297,729 | $ | 453,636 |
Raw materials consist primarily of iron ore and coke at Longmen Joint Venture, steel strip at Daqiuzhuang Metal and billet at Maoming.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 ofFor the years ended December 31, 20092011 and 2008, management determined 2010,the carrying amount of inventory exceeded net realizable value; therefore, $0.7Company had written-off $37.5 million and $2.2$1.1 million had been written down andinventory cost, which was included in “Total cost of goods sold, respectively.
Note 5 –5– Advances on inventory purchase
Advances on inventory purchases are monies deposited or advanced to outside vendors or related parties on future inventory purchases. Due to the high shortage of steel in China, mostMost of the Company’s vendors require a certain amount of money to be deposited with them as a guarantee that the Company will complete its purchases on a timely basis.
This amount is refundable and bears no interest. The Company has legally binding contracts with its vendors, which requiredrequire 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 $31.4$83.8 million and $49.5$30.8 million as of December 31, 20092011 and December 31, 2008,2010, respectively.
Note 6 – Plant and equipment, net
Plant and equipment consist of the following:
December 31 2009 | December 31, 2008 | |||||||
(in thousands) | (in thousands) | |||||||
Buildings and improvements | $ | 121,837 | $ | 118,144 | ||||
Machinery | 467,547 | 226,594 | ||||||
Transportation equipment | 4,759 | 7,299 | ||||||
Other equipment | 3,901 | 2,756 | ||||||
Construction in progress | 31,715 | 199,818 | ||||||
Totals | 629,759 | 554,611 | ||||||
Less accumulated depreciation | (74,648 | ) | (62,906 | ) | ||||
Totals | $ | 555,111 | $ | 491,705 |
December 31, 2011 | December 31, 2010 | |||||||
(in thousands) | (in thousands) | |||||||
Buildings and improvements | $ | 183,343 | $ | 116,294 | ||||
Machinery | 626,978 | 502,958 | ||||||
Machinery under capital lease | 581,413 | - | ||||||
Transportation and other equipment | 18,132 | 13,253 | ||||||
Construction in progress | 8,203 | 65,749 | ||||||
Subtotal | 1,418,069 | 698,254 | ||||||
Less: accumulated depreciation | (155,318 | ) | (95,642 | ) | ||||
Less: impairment of long-lived assets | (5,515 | ) | - | |||||
Total | $ | 1,257,236 | $ | 602,612 |
Construction in progress consisted of the following as of December 31, 2009:
Construction in progress | Value | Estimated completion | Estimated additional cost | ||||||
description | In thousands | date | In thousands | ||||||
Molten iron mixer improvement | $ | 1,206 | March, 2010 | - | |||||
Longmen employees cafeteria | 1,473 | May, 2010 | 2,260 | ||||||
3# lime stone grinding machine | 1,797 | June, 2010 | 366 | ||||||
Iron making facility improvement | 3,163 | April, 2010 | - | ||||||
4# continuous casting | 4,062 | March, 2010 | 880 | ||||||
Rebar line | 16,307 | September, 2010 | 64,108 | ||||||
Others | 3,707 | by end of 2010 | 2,934 | ||||||
Total | $ | 31,715 |
Construction in progress | Value | Completion | |||
description | (In thousands) | date | |||
Thousands tons gas tank piping transformation | $ | 629 | March 2012 | ||
Sintering machine transformation | 470 | January 2012 | |||
Inventory warehouse | 211 | February 2012 | |||
Electricity dispatch center | 158 | June 2012 | |||
Steelmaking system transformation | 96 | June 2012 | |||
Project materials | 5,759 | ||||
Others | 880 | ||||
Total | $ | 8,203 |
The Group is obligated under a capital lease for new iron and steel making facilities, including one sintering machine, two converters, two blast furnaces and a sintering system. All costs related tosome auxiliary systems that expire on April 30, 2031. The carrying value of assets acquired under the furnaces were capitalized ascapital lease consists of the following:
December 31, 2011 | December 31, 2010 | |||||||
(in thousands) | (in thousands) | |||||||
Machinery | $ | 581,413 | $ | - | ||||
Subtotal | 581,413 | - | ||||||
Less: accumulated depreciation | (18,411 | ) | - | |||||
Carrying value of leased assets | $ | 563,002 | $ | - |
Long lived assets, including construction in progress are reviewed if events and amountedchanges in circumstances indicate that its carrying amount may not be recoverable, to $180.5determine whether their carrying value has become impaired.General Steel (China) leases facility to Tianjin Daqiuzhuang Steel Plates Co., Ltd. (“Lessee”) including approximately 776,078 square feet of workshops, land, equipment and other facilities. The term of the original lease is from January 1, 2010 to December 31, 2011 and the monthly base rental rate due to General Steel (China) is approximately $0.3 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 the Company that they did not plan to lease the assets after the end of 2012 and will terminate the supplemental agreement early. There was no penalty for early termination of the lease. General Steel (China) currently does not have plans to lease the facility to another company and as such, a write-down in the carrying value of property, plant and equipment in relation to this event has been assessed and an impairment amount of $5.4 million (RMB 35.1 million) was in the selling, general and administrative expenses.
Due to significant downturn in steel prices in the fourth quarter of 2011and the associated negative impact on the Company’s gross profit and operating loss, the Company assessed the recoverability of all of its remaining long lived assets. Such assessment did not result in any other impairment charges for the year ended December 31, 2011.
The Company determined that the construction in progress in Maoming Hengda was impaired as of June 30, 2010. For the year ended December 31, 2008. The two blast furnaces2010, $1.7 million construction-in-progress has been written off and its facilities cost $248.4 million to constructincluded in selling, general and had been transferred to fixed assets as of December 31, 2009.
Depreciation including amounts in cost of sales,expenses for the years ended December 31, 2009, 20082011 and 20072010 amounted to $32.1 million, $21.5$56.4 million and $9.7$40.1 million, respectively
Note 7 – Intangible assets, net
Intangible assets consist of the following:
December 31, 2009 | December 31, 2008 | |||||||
(in thousands) | (in thousands) | |||||||
Land use rights | $ | 27,519 | $ | 27,467 | ||||
Software | 424 | 293 | ||||||
Subtotal | 27,943 | 27,760 | ||||||
Accumulated Amortization – Land use right | (4,143 | ) | (3,204 | ) | ||||
Accumulated Amortization – software | (67 | ) | - | |||||
Accumulated Amortization subtotal | (4,210 | ) | (3,204 | ) | ||||
Intangible assets, net | $ | 23,733 | $ | 24,556 |
December 31, 2011 | December 31, 2010 | |||||||
(in thousands) | (in thousands) | |||||||
Land use rights | $ | 29,685 | $ | 28,462 | ||||
Mining right | 2,338 | - | ||||||
Software | 685 | 660 | ||||||
Subtotal | 32,708 | 29,122 | ||||||
Less: | ||||||||
Accumulated amortization – land use rights | (6,442 | ) | (5,316 | ) | ||||
Accumulated amortization – mining right | (822 | ) | - | |||||
Accumulated amortization – software | (301 | ) | (134 | ) | ||||
Subtotal | (7,565 | ) | (5,450 | ) | ||||
Intangible assets, net | $ | 25,143 | $ | 23,672 |
The gross amount of the intangible assets amounted to $27.9$32.7 million and $27.8$29.1 million as of December 31, 20092011 and 2008,2010, respectively. The remaining weighted average amortization period is 35.9 years.
Total amortization expense for the years ended December 31, 2009, 20082011 and 2007,2010 amounted to $1 million, $0.9$1.1 million and $0.6$1.1 million, respectively.
Total depletion expense for the years ended December 31, 2011 and 2010 amounted to $0.8 million and $0, respectively.
The estimated aggregate amortization expenseand depletion expenses for each of the five succeeding fiscal years is as follows:
Years | Estimated Amortization Expense | Gross carrying Amount | ||||||
(in thousands) | (in thousands) | |||||||
2010 | $ | 1,000 | $ | 22,733 | ||||
2011 | 1,000 | 21,733 | ||||||
2012 | 1,000 | 20,733 | ||||||
2013 | 1,000 | 19,733 | ||||||
2014 | 1,000 | 18,733 | ||||||
Thereafter | 18,733 | - | ||||||
Total | 23,733 |
Years ended | Estimated amortization and depletion expenses | Gross carrying amount | ||||||
(in thousands) | (in thousands) | |||||||
December 31, 2012 | $ | 1,922 | 23,221 | |||||
December 31, 2013 | 1,922 | 21,299 | ||||||
December 31, 2014 | 1,922 | 19,377 | ||||||
December 31, 2015 | 1,922 | 17,455 | ||||||
December 31, 2016 | 1,922 | 15,533 | ||||||
Thereafter | 15,533 | - | ||||||
Total | $ | 25,143 |
Note 8 – Debt
Short-term notes payable
Short-term notes payable are lines of credit extended by the banks. The banksBanks in turn issue the Company a bankersbank acceptance note, which can be endorsed and assigned to vendors as payments for purchases. The notes payable are generally payable at a determinable period, generallywithin three to six months. This short-term note payable is guaranteed by the bank for its complete face value. The banks usually 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.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 $192.0$363.3 million and $130.7$167.7 million as of December 31, 20092011 and 2010, respectively. Restricted notes receivable as a guarantee for the notes payable amounted to $451.1 million and $159.3 million as of December 31, 2008,2011 and 2010, respectively.
The Company had the following short-term notes payable:
December 31, 2009 | December 31, 2008 | |||||||
(in thousands) | (in thousands) | |||||||
Daqiuzhuang Metal: Notes payable from banks in China, due various dates from January 2010 to April 2010. Restricted cash required of $4.0 million and $15.7 million for December 31, 2009 and December 31, 2008, respectively; guaranteed by third parties. | $ | 7,628 | $ | 18,631 | ||||
Longmen Joint Venture: Notes payable from banks in China, due various dates from January 2010 to August 2010. Restricted cash of $162.3 million and $98.1 million for December 31, 2009 and December 31, 2008, respectively; some notes are guaranteed by third parties while others are secured by equipment. | 216,173 | 159,536 | ||||||
Bao Tou: Notes payable from banks in China, due June 2010.Restricted cash of $5.1 million and $5.1 million for December 31, 2009 and December 31, 2008, respectively; pledged by buildings. | 10,269 | 7,335 | ||||||
Maoming: Notes payable from banks in China, due various dates from February 2010 to March 2010. Restricted cash of $20.6 million and $11.8 million for December 31, 2009 and December 31, 2008, respectively; pledged by buildings and equipment. | 20,538 | 20,538 | ||||||
Total short-term notes payable | $ | 254,608 | $ | 206,040 |
December 31, 2011 | December 31, 2010 | |||||||
(in thousands) | (in thousands) | |||||||
General Steel (China): Notes payable to various banks in China, due June 2012. Restricted cash required of $7.9 million and $11.7 million as of December 31, 2011 and 2010, respectively; guaranteed by third parties. These notes payable were either repaid or renewed subsequently on the due dates. | $ | 7,934 | $ | 21,541 | ||||
Longmen Joint Venture: Notes payable to various banks in China, due various dates from January to June 2012. $355.4 million restricted cash and $451.1 million notes receivable are secured for notes payable as of December 31, 2011, and comparatively $150.7 restricted cash and $159.3 million notes receivable secured as of December 31, 2010, respectively; some notes are further guaranteed by third parties while others are secured by equipment and land use rights. These notes payable were either repaid or renewed subsequently on the due dates. | 1,105,570 | 447,992 | ||||||
Bao Tou: Notes payable to various banks in China, due in April 2011. Restricted cash required of $5.3 million as of December 31, 2010, guaranteed by third parties. | - | 10,619 | ||||||
Total short-term notes payable | $ | 1,113,504 | $ | 480,152 |
Short-term loans
Short-term loans represent amounts due to various banks, other companies and individuals, andincluding related parties, normally due within one year. The principlesprincipal of the loans are due at maturity. However, the loansmaturity but can be renewed withat the banks, related parties and other parties.
Short term loans due to banks, related parties and other parties consisted of the following:
December 31, 2009 | December 31, 2008 | |||||||
(in thousands) | (in thousands) | |||||||
Daqiuzhuang Metal: Loan from banks in China, due various dates on 2010. Weighted average interest rate 5.7% per annum; some are guaranteed by third parties while others are secured by equipment/inventory. | $ | 25,476 | $ | 27,383 | ||||
Longmen Joint Venture: Loan from banks in China, due various dates on 2010. Weighted average interest rate 6.1% per annum; some are guaranteed by third parties while others are secured by equipment/buildings/land use right. | 123,492 | 38,876 | ||||||
Baotou Steel Pipe Joint Venture: Loan from banks in China, due March 2009. Annual interest rate of 12%, Guaranteed by third parties and secured by equipment. | - | 115 | ||||||
Maoming: Loan from banks in China, due January 2009. Annual interest rate of 7.5%, guaranteed by third party. | - | 1,466 | ||||||
Total – short-term loans - bank | $ | 148,968 | $ | 67,840 |
December 31, 2009 | December 31, 2008 | |||||||
(in thousands) | (in thousands) | |||||||
Longmen Joint Venture: Loans from various unrelated companies and individuals, due various dates in 2010, and interest rates up to 12% per annum. | $ | 91,106 | $ | 58,440 | ||||
Maoming: Loans from two unrelated parties, no due date, non interest bearing. | 19,252 | 29,394 | ||||||
Total – short-term loans - others | $ | 110,358 | $ | 87,834 |
December 31, 2009 | December 31, 2008 | |||||||
(in thousands) | (in thousands) | |||||||
Longmen Joint Venture: Loans from Sheng An Da, due on 2010, and interest rates 12% per annum. | $ | 4,401 | $ | - | ||||
Qiu Steel: Related party loans from Tianjin Heng Ying and Tianjin Da Zhan, due June 2010. Annual interest rate of 5%. | 7,350 | 7,350 | ||||||
Total – related party loans | $ | 11,751 | $ | 7,350 |
Due to banks
December 31, 2011 | December 31, 2010 | |||||||
(in thousands) | (in thousands) | |||||||
General Steel (China): Loans from various banks in China, due various dates from January to December 2012. Weighted average interest rate was 7.5% per annum; some are guaranteed by third parties while others are secured by equipment and inventory. These loans were either repaid or renewed subsequently on the due dates. | $ | 43,149 | $ | 24,220 | ||||
Longmen Joint Venture: Loans from various banks in China, due various dates from January to December 2012. Weighted average interest rate was 8.3% per annum; some are guaranteed by third parties, restricted cash or notes receivables while others are secured by equipment, buildings, land use right and inventory. These loans were either repaid or renewed subsequently on the due dates. | 209,234 | 260,978 | ||||||
Tianwu: Loans from Industrial and Commercial Bank of China Limited, due date various from March to August 2012. Interest ratewas 5% additional to standard bank interest rate, andsecured by accounts receivables. These loans were either repaid or renewed subsequently on the due dates | 1,571 | - | ||||||
Total short-term loans - bank | $ | 253,954 | $ | 285,198 |
As of independent registered public accounting firm.
Furthermore, the Company is 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 balances of the short term loans affected by the above breach of covenant and cross default as of December 31, 2011 and December 31, 2010 were $12.6 million and $12.1 million, respectively. According to the Company’s short term loan agreements, the banks have the rights to request for more collateral or additional guarantees if the breach of covenant is not remedied or request early repayment of the loan if the Company does not cure such breach within a certain period of time. As of the date of this report, the Company has not received any notice from the banks to request more collateral, additional guarantees or early repayment of the short term loans due to the breach of covenant.
Due to unrelated parties
December 31, 2011 | December 31, 2010 | |||||||
(in thousands) | (in thousands) | |||||||
Longmen Joint Venture: Loans from various unrelated companies and individuals, due various dates from January to June 2012, and weighted average interest rate was 6.2% per annum. These loans were either repaid or renewed subsequently on the due dates. | $ | 143,102 | $ | 75,380 | ||||
Longmen Joint Venture: Loans from financing sales. | 97,583 | 37,947 | ||||||
Maoming Hengda: Loans from one unrelated parties and one related party, due on demand, none interest bearing. | 5,972 | 14,385 | ||||||
Total short-term loans – others | $ | 246,657 | $ | 127,712 |
The Company had various loans from unrelated companies and individuals. The balances amountedamounting to $110.4$246.7 million and $87.8$127.7 million as of December 31, 20092011 and December 31, 2008,2010, respectively. Of the $110.4$246.7 million, $19.3$6.0 million loans carry no interest, $97.6 million of financing sales are subject to interest rates ranging between 0.6% and 3.2%, and the remaining $91.1$143.1 million are subject to interest rates ranging from 5%3.4% to 12%9.0%. All short term loans from unrelated companies and individuals are duepayable on demand and unsecured.
As part of its working capital management, Longmen Joint Venture has entered into a number of sale and purchase back contracts ("contracts") with third party companies and Yuxin and Yuteng. According to the contracts, LongmenJoint 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 0.6% to 3.2% higher than the original selling price from LongmenJoint Venture. Based on the contract terms, LongmenJoint 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 related parties’ loansmargin of 0.6% to 3.2% is determined by reference to the bank loan interest rates at the time when the contracts are discussedentered into, plus an estimated premium based on the financing sale amount, which represents the interest charged by the third party companies for financing LongmenJoint 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 Note 16.
Total interest expense, excluding capitalized interest,financing sales for the years ended December 31, 2009, 20082011 and 2007 on the debt listed above2010 amounted to $24.7 million, $12.3$998.9 million and $6.6$761.8 million, respectively, which are eliminated in the Company’s consolidated financial statements. The financial cost related to financing sales for the years ended December 31, 2011 and 2010, accounted to $10.7 million and $7.0 million, respectively.
Short term loans due to related parties
December 31, 2011 | December 31, 2010 | |||||||
(in thousands) | (in thousands) | |||||||
Longmen Joint Venture: Loans from Tianjin Hengying Trading Co., Ltd, due in April 2012, and interest rate was 5.2% per annum. This loan was repaid subsequently on the due date. | $ | 15,710 | $ | - | ||||
Longmen Joint Venture: Loans from Shaanxi Steel, due July 2011, and interest rate was 5.6% per annum. | - | 14,548 | ||||||
Total short-term loans - related parties | $ | 15,710 | $ | 14,548 |
Long-term loans due to related parties
December 31, 2011 | December 31, 2010 | |||||||
(in thousands) | (in thousands) | |||||||
Longmen Joint Venture: Loans from Shaanxi Steel Group, due various dates from July 2013 to November 2015 and interest rates 5.6% - 5.9% per annum | $ | 92,035 | $ | 91,020 | ||||
Total long-term loans - related parties | $ | 92,035 | $ | 91,020 |
As of December 31, 2011, the total assets used by the company as collateral were $20.3 million for the aforementioned debts.
Total interest expense, net of capitalized interest, amounted to $13.1 million, $10.6$114.9 million and $1.0$51.3 million for the years ended December 31, 2009, 20082011 and 2007,2010, respectively.
Capitalized interest amounted to $3.0 million and $2.1 million for the advance payment, and the related sale is recognized in accordance with the Company’s revenue recognition policy. As ofyears ended December 31, 20092011 and December 31, 2008, customer deposits amounted to $212.6 million and $148.3 million, including related parties deposits of $3.8 and $7.2 million,2010, respectively.
Note 109 – DepositDeposits due to sales representatives
Longmen Joint Venture’s subsidiaries, Yuxin Trading and Yuteng Trading,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 toin 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 has beenis terminated. The Company had $49.5$23.8 million and $8.1$52.1 million in deposits due to sales representatives, including deposits due to related parties, as of December 31, 20092011 and December 31, 2008,2010, respectively. In 2009 the Company received deposits amounted to $41.4 million from sales representatives to secure the sales quantity. These deposits are refundable in one year based on volume fulfillment of which $22.8 million bear interest at 3%-8% per annum.
Note 1110 – Convertible notes
The Company has 3,900,871 warrants outstanding in connection with the $40 million convertible notes issued in 2007 and 2,777,778 warrants outstanding in connection with a registered direct offering in 2009. The aforementioned warrants met the Company entered intodefinition of a Securities Purchase Agreement (the “Agreement”) with certain institutional investors (the “Buyers”) issuing $40.0 million in promissory notes (“Notes”) and 1,154,958 warrants. The warrants can be converted to common stock through May 13, 2013 at an initial exercise price of $13.51 per share, subject to customary anti-dilution adjustments. On December 24, 2009, the warrant exercise price was reset to $5.00 per share.
The initial conversion price is $12.47, which was reset to $4.25 on May 7, 2009. The Company may redeem the Notes at 100% of the principal amount, plus any accrued and unpaid interest, beginning December 13, 2008, provided the market price of the common stock is at least 150% of the then applicable conversion price for 30 consecutive trading days prior to the redemption.
2007 Warrants | 2009 Warrants | |||||
Expected volatility | 55% | 50% | ||||
Expected dividend yield | 0% | 0% | ||||
Risk-free interest rate | 0.17% | 0.24% | ||||
Expected lives | 1.37 years | 0.48 years | ||||
Market price | $0.99 | $0.99 | ||||
Strike price | $5.00 | $5.00 |
As of December 31, 2009, in accordance with generally accepted accounting principles of the United States, the fair value of2011 and 2010, derivative liabilities described above was recalculated and increased by $5.3 million during the period, including $9.6 million for the increase in fair value of the warrants and $4.3 million for the decrease in fair value of the conversion option.
The Company has the following warrants outstanding:
Outstanding as of December 31, 2009 | 6,678,649 | |||
Granted | - | |||
Forfeited | - | |||
Exercised | - | |||
Outstanding as of December 31, 2010 | 6,678,649 | |||
Granted | - | |||
Forfeited | - | |||
Exercised | - | |||
Outstanding as of December 31, 2011 | 6,678,649 |
Exercise Price | Quantity |
| Remaining Contractual Life (Years) | |||||
Outstanding and exercisable warrants issued in 2007 | $ | 5.00 | 3,900,871 | 1.37 | ||||
Outstanding and exercisable warrants issued in 2009
| $ | 5.00 | 2,777,778 | 0.48 |
Note 12 –11 - Supplemental disclosure of cash flow information
Interest paid, net of capitalized, amounted to $14.5 million, $12.0$22.5 million and $8.4$20.9 million for the years ended December 31, 2009, 20082011 and 2007,2010, respectively.
The Company paid income tax payments amounted to $3.0 million, $6.6$0.8 million and $0.2$1.8 million for the years ended December 31, 2009, 20082011 and 2007,2010, respectively.
For the year ended December 31, 2011, the Company recognized $0.3 million of $6.0non-operating income that has not been collected. The unpaid amount was included in the other receivables in the consolidated balance sheets.
For the years ended December 31, 2011 and 2010, the Company recognized $13.8 million hasand $35.6 million, respectively, of deferred lease income in related to other receivables – related parties that have not been collected.
The Company capitalized into construction in progress and subsequently transferred toall the fixed assets constructed by Shaanxi Steel for a price of $572.5 million through a 20 year capital lease starting from April 29, 2011 upon the inception of the Unified Management Agreement. See Note 13 – “Capital lease obligations”.
During the year ended December 31, 2011, the Company issued 974,571 shares of common stock for repayment of debt of $4.8 million.
On April 30, 2011, a share transfer agreement was signed with the Labor Union Trust of Shaanxi Long Steel Group, transferring Tongxing’s 20.7% share of Shaanxi Xinglong (“Xinglong”) Thermoelectric Co., Ltd to the Labor Union Trust of Shaanxi Long Steel Group for $11.3 million on April 30, 2011. This transaction resulted in a gain of $1.4 million, which is included in “Income from equity investments” in the consolidated statements of operations and other comprehensive income (loss). As of December 31, 2011, the unpaid amount of $11.4 million was included in the other receivable – related parties.
Note 12 - Deferred lease income
As explained in Note 2(v) - “Deferred lease income”, to compensate the Group for costs and economic losses incurred during construction of the new iron and steel making facilities owned by Shaanxi Steel, Shaanxi Steel reimbursed Longmen Joint Venture $11.0 million (RMB 70.1 million) in the fourth quarter of 2010 for the value of assets dismantled, $5.8 million (RMB 38.1 million) for various site preparation costs incurred by Longmen Joint Venture and rent under a 40-year property sub-lease that was entered into by the parties in June 2009 (the "Longmen Sub-lease"), and $28.7 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 $14.1 million (RMB 89.5 million) and $14.0 million (RMB 89.3 million), respectively, for trial production costs related to the new equipment.
During the period from June 2010 to March 2011, as construction progressed and certain of the assets came online, Longmen Joint Venture used the assets free of charge to produce saleable units of steel products during this period. As such, the cost of using these assets and therefore the fair value of the free rent received was imputed with reference to what the depreciation charge would have been on these assets had they been owned or under capital lease to Longmen Joint Venture during the free use period. This cost of $6.9 million (RMB 43.9 million) each year were deferred and will be recognized over the term of the land sub-lease similar to the other charges and credits related to the construction of these assets.
The deferred lease income is amortized to income over the remaining term of the 40-year land sub-lease. For the years ended December 31, 2011 and 2010, the Company recognized lease income of $2.0 million and $0.9 million, respectively. As of December 31, 2011 and 2010, the balance of deferred lease income amounted to $78.5 million and $57.6 million, respectively, of which $2.1 million and $2.0 million represents balance to be amortized within one year.
December 31, 2011 | December 31, 2010 | |||||||
(in thousands) | (in thousands) | |||||||
Beginning balance | $ | 57,591 | $ | 16,487 | ||||
Add: Reimbursement for dismantled assets | - | 568 | ||||||
Add: Reimbursement for loss of efficiency | - | 20,676 | ||||||
Add: Reimbursement for trial production cost | 14,042 | 13,584 | ||||||
Add: Deferred depreciation cost during free use period | 6,904 | 6,656 | ||||||
Less: Lease income realized | (2,008 | ) | (943 | ) | ||||
Exchange rate effect | 1,995 | 563 | ||||||
Ending balance | 78,524 | 57,591 | ||||||
Ending balance – current portion | (2,099 | ) | (1,971 | ) | ||||
Ending balance - noncurrent portion | $ | 76,425 | $ | 55,620 |
Note 13 - Capital lease obligations
As explained in Note 1- “Background”, 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 based on Shaanxi Steel’s cost to construct the assets of $2.3 million (RMB14.6 million) to be paid over the term of the Unified Management Agreement of 20 years and (2) 40% of any remaining pre-tax profits from the Asset Pool which includes Longmen Joint Venture and the newly constructed iron and steel making facilities. The profit sharing component does not meet the definition of contingent rent because it is based on future revenue and is therefore considered part of the financing for the capital leased assets which is related to the Unified Management Agreement. For purposes of determining the value of the leased asset and obligation at the inception of the lease, the lease liability is then reduced by the value of the profit sharing component, which is recognized as a separate financial liability carried at fair value. See Note 14 – “Profit sharing liability”.
Presented below is a schedule of estimated minimum lease payments on the capital lease obligation as well as payments for the profit sharing liability for the next five years as of December 31, 2011:
(in thousands) | Capital Lease Obligation Minimum Lease Payments | Capital Lease Obligation Profit (Loss) Sharing | Total | |||||||||
Year ended December 31, 2012 | $ | 46,029 | $ | - | $ | 46,029 | ||||||
Year ended December 31, 2013 | 27,617 | - | 27,617 | |||||||||
Year ended December 31, 2014 | 27,617 | - | 27,617 | |||||||||
Year ended December 31, 2015 | 27,617 | - | 27,617 | |||||||||
Year ended December 31, 2016 | 27,617 | - | 27,617 | |||||||||
Thereafter | 395,845 | 854,157 | 1,250,002 | |||||||||
Total minimum lease payments | 552,342 | 854,157 | 1,406,499 | |||||||||
Less: amounts representing interest | (245,992 | ) | (550,924 | ) | (796,916 | ) | ||||||
Ending balance | $ | 306,350 | $ | 303,233 | $ | 609,583 |
Longmen Joint Venture does not expect to make payments on the profit sharing payment until year 2021 when Longmen Joint Venture will start to generating accumulated profit after recovering from theprevious years’ losses.
Interest expense for the years ended December 31, 2009.
As of December 31, 2009,2011 and 2010, the Company recorded gain from debt extinguishment totaling $7.3 million. In 2009, Maoming, a subsidiary entered into a Debt Waiver Agreement with Guangzhou Hengda, pursuantamount payable to which Guangzhou Hengda agreed to waive $7.3Shaanxi Steel was approximately $18.4 million (RMB 50.0 million)and $0, respectively, and was included in the current portion of debt that Maoming Hengda owes to Guangzhou Hengda. capital lease obligation.
Note 14 –Profit sharing liability
The Company determined that the subsequent debt settlement does not constitute a contingencyprofit sharing liability is recognized initially at its estimated fair value at the lease commencement date of purchase as definedand included in the accounting standard - business Combinationsinitial measurement and thus should not result in a reallocationrecognition of the purchase price.capital lease in addition to the fixed payment component of the minimum lease payments. Subsequently, this financial instrument is accounted for separately from the lease accounting (Note 13- “Capital lease obligations”). The waiverinitial fair value of the expected payments under the profit sharing component of the Unified Management Agreement is irrevocable.
Based on the Shaanxi Province Development and Reform Commission provided incentives for local companies to eliminate outdated iron and steel production machineries and equipment. The Company’s subsidiary, Longmen Joint Venture, received $4.3 million (RMB 29.2 million) in government grants for compliance in dismantling two blast furnacesperformance of the Asset Pool, no profit sharing payment was made for the year ended December 31, 2009.2011. Payments to Shaanxi Steel for the profit sharing are made based on net cumulative profits.
Note 15 – Other income (expense)
Gain on debt settlement
On June 16, 2011, the Company and Maoming Hengda entered into a Debt Repayment Agreement with Guangzhou Hengda Industrial Group Ltd. (“Guangzhou Hengda”), an unrelated party, and its sole shareholder Ms Ding Yumei whereby the Company issued 974,571 shares of its common stock (the “Shares”) to Ms Ding Yumei, the designee and sole shareholder of Guangzhou Hengda, to partially repay the outstanding balance due to Guangzhou Hengda by $4.8 million. The Company wrote offrecorded paid-in-capital based on the residual book valuemarket price of its common stock on the furnaces dismantleddate of debt settlement at $1.48 per share, totaling $0.9$1.4 million (RMB 5.8 million), and recorded other income ofa gain from debt settlement totaling $3.4 million for the year ended December 31, 2009.
Realized income from future contracts
On May 2011, the Company entered a forward contract with one unrelated party to minimize the economic impact of price fluctuations of steel rebar. The contract was not material and only represent less than 1% of the company’s anticipated rebar sales in 2011. The Company has not designated the derivative as a hedging instrument, and, as such, includes the realized gain or loss in other income (expense). For the year ended December 31, 2011, the Company realized $0.4 million gain on these contracts. There was no cash deposit held in the brokerage account and no trading financial assets and no open contracts held as of December 31, 2011. There are no required minimum investment amount and no specific contract period requirement on this future brokerage contract. The contract amount may be withdrawn at any time.
On May 2010, the Company entered a forward contract with one unrelated party to minimize the economic impact of price fluctuations of steel rebar. The contract was not material and only represent less than 1% of the Company’s anticipated rebar sales in 2010. The Company has not designated the derivative as a hedging instrument, and, as such, includes the realized gain or loss in other income (expense). For the year ended December 31, 2010, the Company realized $1.4 million gain on these contracts. There was no cash deposit held in the brokerage account and no trading financial assets and no open contacts held as of December 31, 2010. There are no required minimum investment amount and no specific contract period requirement on this future brokerage contract. The contract amount may be withdrawn at any time.
Lease income
The deferred lease income from the reimbursement from Shaanxi Steel for the net book value of the fixed assets that were demolished and for the inefficiency costs caused by the construction and loss incurred in the beginning stages of the system production is amortized to income over the remaining sub-lease term. For the years ended December 31, 2011 and 2010, the Company recognized deferred lease income of $2.0 million and $0.9 million, respectively.
Note 1416 – Taxes
Income tax
Significant components of the provision for income taxes on earnings and deferred taxes on net operating losses from operationoperations for the years ended December 31, 2009, 20082011 and 20072010 are as follows:
December 31, 2009 | December 31, 2008 | December 31, 2007 | ||||||||||
Current | $ | 2,155 | $ | 1,424 | $ | 5,225 | ||||||
Deferred | 3,998 | (6,835 | ) | (389 | ) | |||||||
Total provision (benefit) for income taxes | $ | 6,153 | $ | (5,411 | ) | $ | 4,836 |
December 31, 2009 | December 31, 2008 | |||||||
(in thousands) | (in thousands) | |||||||
Beginning balance | $ | 7,487 | $ | 400 | ||||
Xi’an Rolling Mill’s ,YuXin, YuTeng, HuaLong, TongXing and BaoTou Net operating loss carry-forward | (864 | ) | 4,945 | |||||
Effective tax rate | 25 | % | 25 | % | ||||
Deferred tax asset | $ | (216 | ) | $ | 1,225 | |||
Long Gang Headquarter’s Net operating loss carry-forward | (26,193 | ) | 36,809 | |||||
Effective tax rate | 15 | % | 15.2 | % | ||||
Deferred tax asset | $ | (3,929 | ) | $ | 5,610 | |||
Exchange difference | (1 | ) | 252 | |||||
Totals | $ | 3,341 | $ | 7,487 |
(In thousands) | December 31, 2011 | December 31, 2010 | ||||||
Current | $ | 175 | $ | 1,267 | ||||
Deferred | 15,419 | (10,049 | ) | |||||
Total provision (benefit) for income taxes | $ | 15,594 | $ | (8,782 | ) |
Under the Income Tax Laws of the PRC, the Company’s subsidiary, Daqiuzhuang Metal, is generallyGeneral Steel (China), Baotou Steel Pipe Joint Venture (located in Inner Mongolia province), Maoming Hengda (located in Guangdong province) and Tianwu Joint Venture (located in Tianjin Port Free Trade Zone) are subject to an income tax at an effectivea rate of 25% on income reported in the statutory financial statements after appropriate tax adjustments, unless the enterprise is located in a specially designated region where it allows foreign enterprises a two-year income tax exemption and a 50% income tax reduction for the following three years. Daqiuzhuang Metal became a Chinese Sino-foreign joint venture at the time of the merger on October 14, 2004 and it became eligible for the tax benefit. Daqiuzhuang Metal is located in Tianjin Costal Economic Development Zone and under the Income Tax Laws of Tianjin City of the PRC; it is eligible for an income tax rate of 24%. Therefore, Daqiuzhuang Metal is exempt from income taxes for the years ended December 31, 2005 and 2006 and is entitled to a 50% income tax reduction of the special income tax rate of 24%, which is a rate of 12% for the years ended December 31, 2007, 2008 and 2009.
Longmen Joint Venture is located in the mid-westMid-West region of China. ItChina and as such, qualifies for the “Go-West” tax rebaterate of 15% tax rate promulgated by the government; therefore, incomegovernment. In 2010, the Chinese government announced that the “Go-West” tax is calculated atinitiative would be extended for 10 years, and thus, the preferential tax rate of 15%.
The estimated tax savings (costs) due to the preferential tax rate for the years ended December 31, 2011 and is subject to an income2010 are $0 and $(6.1) million, respectively. The net effect on earnings per share if the preferential tax at an effective rate of 25%.
The following table reconciles the U.S. statutory rates to the Company’s effective tax rate for the years ended December 31, 2009, 20082011 and 20072010 are as follows:
December 31, 2009 | December 31, 2008 | December 31, 2007 | ||||||||||
U.S. Statutory rates | 34.0 | % | 34.0 | % | 34.00 | % | ||||||
Foreign income not recognized in the US | (34.0 | )% | (34.0 | )% | (34.0 | )% | ||||||
China income taxes | 25.0 | % | 25.0 | % | 33.0 | % | ||||||
Tax effect of income not taxable for tax purposes (1) | (1.8 | )% | (4.3 | )% | (3.4 | )% | ||||||
Effect of different tax rate of subsidiaries operating in other jurisdictions | (4.9 | )% | (12.0 | )% | (17.3 | )% | ||||||
Total provision for income taxes | 18.3 | % | 8.7 | % | 12.3 | % |
December 31, 2011 | December 31, 2010 | |||||||
U.S. Statutory rates | 34.0 | % | 34.0 | % | ||||
Foreign income not recognized in the U.S. | (34.0 | )% | (34.0 | )% | ||||
China income taxes | 25.0 | % | 25.0 | % | ||||
Current year tax loss that were not recognized as deferred tax assets | (27.3 | )% | 2.3 | % | ||||
Effect of deferred tax assets valuation allowance | (17.1 | )% | - | |||||
Effect of different tax rate of subsidiaries operating in other jurisdictions | 13.6 | % | (12.3 | )% | ||||
Total provision for income taxes | (5.8 | )% | 15.0 | % |
Deferred taxes assets – China
According to Chinese tax regulations, net operating losses can be carried forward to offset operating income for the next five years. The Company has cumulative undistributed earningsGroup’s losses carried forward of foreign subsidiaries$309.0 million will begin to expire in 2014. Originally, management believed the deferred tax asset is fully realizable.After the filing of the 2010 Form 10-K/A, management reevaluated the Company's future operating forecast based on the current steel market condition. 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 at Longmen Joint Venture, which represent approximately $26.7 million99% of the total deferred tax assets of the Company as of December 31, 2009, and is included in consolidated retained earnings and will continue to be indefinitely reinvested in international operations. Accordingly, no provision has been made for U.S. deferred taxes related to future repatriation2011. The valuation allowance as 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.
The movement of the deferred income tax assets arising from carried forward losses is as follows:
December 31, 2011 | December 31, 2010 | |||||||
(in thousands) | (in thousands) | |||||||
Beginning balance | $ | 15,301 | (A) | $ | 5,044 | (A) | ||
(Tax assets realized) net operating losses carried forward for subsidiaries subject to a 25% tax rate | 920 | 2,343 | ||||||
Effective tax rate | 25 | % | 25 | % | ||||
Deferred tax asset | 230 | (B) | 586 | (B) | ||||
Net operating losses carried forward for Longmen Joint Venture and subsidiaries subject to a 15% tax rate | 211,967 | 65,019 | ||||||
Effective tax rate | 15 | % | 15 | % | ||||
Deferred tax asset | 31,795 | (C) | 9,753 | (C) | ||||
Less: Valuation allowance | (46,914 | )(D) | - | (D) | ||||
Exchange difference | (245 | )(E) | (82 | )(E) | ||||
Total (A+B+C+D+E) | $ | 167 | $ | 15,301 |
Movement of valuation allowance:
December 31, 2011 | December 31, 2010 | |||||||
(in thousands) | (in thousands) | |||||||
Beginning balance | $ | - | $ | - | ||||
Current period addition | 46,914 | - | ||||||
Current period reversal | - | - | ||||||
Exchange difference | 789 | - | ||||||
Ending balance | $ | 47,703 | $ | - |
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 years ended December 31, 2009, 20082011 and 2007, respectively.2010. The net operating loss carry forwards for United States income taxes amounted to $5.3$1.8 million, which may be available to reduce future years’ taxable income. These carry forwards will expire, if not utilized, through 2029.2031. 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 atas of December 31, 20092011 was $1.8$0.6 million. The net change in the valuation allowance for the year ended December 31, 2009 and December 31, 20082011 was an increase of $0.9 million and $0.6 million, respectively.$0.2 million. Management will review this valuation allowance periodically and make adjustments as warranted.
The Company has cumulative proportionate retained earnings from profitable subsidiaries of approximately $0.7 million as of December 31, 2011. 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 rate isrates 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.
Sales and purchases are recorded net of VAT collected and paid as the Company acts as an agent for the government.government for VAT taxes are not impacted bycollection. VAT on sales and VAT on purchases amounted to $985.9 million and $934.2million, respectively, for the income tax holiday.
Taxes payable consisted of the following:
December 31, 2009 | December 31, 2008 | |||||||
(in thousands) | (in thousands) | |||||||
VAT taxes payable | $ | 3,861 | $ | 8,985 | ||||
Income taxes payable | 1,633 | 2,510 | ||||||
Misc taxes | 1,427 | 2,422 | ||||||
Totals | $ | 6,921 | $ | 13,917 |
December 31, 2011 | December 31, 2010 | |||||||
(in thousands) | (in thousands) | |||||||
VAT taxes payable | $ | 4,856 | $ | 3,921 | ||||
Income taxes payable | 96 | 840 | ||||||
Misc. taxes | 6,422 | 1,476 | ||||||
Totals | $ | 11,374 | $ | 6,237 |
Note 1517 – EarningsLoss per share
The calculationcomputation of earningsloss per share is as follows:
2009 | 2008 | 2007 | ||||||||||
(in thousands except per share data) | ||||||||||||
(Loss) Income attributable to holders of common shares | $ | (25,244 | ) | $ | (11,323 | ) | $ | 22,426 | ||||
Basic weighted average number of common shares outstanding | 41,860,238 | 35,381,210 | 32,424,652 | |||||||||
Diluted weighted average number of common shares outstanding | 41,860,238 | 35,381,210 | 32,558,350 | |||||||||
Earnings per share | ||||||||||||
Basic | $ | (0.60 | ) | $ | (0.32 | ) | $ | 0.69 | ||||
Diluted | $ | (0.60 | ) | $ | (0.32 | ) | $ | 0.69 |
(in thousands, except per share data)
December 31, 2011 | December31, 2010 | |||||||
Loss attributable to holders of common stock | $ | (177,187 | ) | $ | (30,006 | ) | ||
Basic and diluted weighted average number of common shares outstanding | 54,750 | 53,113 | ||||||
Loss per share | ||||||||
Basic and diluted | $ | (3.24 | ) | $ | (0.56 | ) |
The Company had warrants exercisable for 6,678,649 shares of independent registered public accounting firm.
Other than the aforementioned potentially dilutive securities, there were no other potentially dilutive securities outstanding for the years ended December 31, 2011 and 2010.
Note 1618 – Related party balancestransactions and balances
Related party transactions
a. | Capital lease |
As disclosed in Notes 1- “Background” and 13 – “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:
Balance at December 31, 2011 | ||||
(in thousands) | ||||
Machinery | $ | 581,413 | ||
Less: accumulated depreciation | (18,411 | ) | ||
Carrying value of leased assets | $ | 563,002 |
b. On April 30, 2011, Tongxing completed its transfer of 20.7% share of Shaanxi Xinglong Thermoelectric Co., Ltd. to the Labor Union Trust of Shaanxi Long Steel Group. The transfer price of $11.3 million (RMB 72.9 million) was considered to be at fair value based on management assessment. As of April 30, 2011, our investment in Xinglong is approximately $9.9 million and this transaction resulted in a gain of $1.4 million, which is included in “Income from equity investments” in the consolidated statements of operations and other comprehensive income (loss).
c. On March 31, 2010, General Steel (China), entered into a lease agreement with Tianjin Daqiuzhuang Steel Plates Co., Ltd. (the “Lessee”), whereby General Steel (China) leases 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, equipments and other facilities to the Lessee and allows the Company to reduce overhead costs while providing a recurring monthly income stream resulting from payments due under the lease. The term of the Lease Agreement is from January 1, 2010 to December 31, 2011 and the monthly base rental rate due to General Steel (China) was approximately $0.2 million (RMB1.7 million).On July 28, 2011, General Steel (China) (lessor) 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 the Company that they do not intend to extend the lease at the end of 2012 and plans to terminate the supplemental agreement early. There is no penalty for early termination.
For the years ended December 31, 2011 and 2010, General Steel (China) realized rental income in each period of $3.1 million which has been included in “other non-operating income (expense), net” in the consolidated statements of operations and other comprehensive income (loss).
.
December 31, 2011 | December 31, 2010 | |||||||
(in thousands) | (in thousands) | |||||||
Original cost of fixed assets leased | $ | 33,903 | $ | 33,385 | ||||
Less: Accumulated depreciation | (17,813 | ) | (15,286 | ) | ||||
Less : Impairment of long-lived assets | (5,515 | ) | - | |||||
Fixed assets leased, net | $ | 10,575 | $ | 18,099 |
The future rental payments to be received associated with the Lease Agreement entered into on March 31, 2010 and the supplemental agreement entered into on July 28, 2011 and ending on December 31, 2012, are as follows:
As at December 31, | Amount | |||||
(in thousands) | ||||||
2012 | $ | 3,115 | ||||
Thereafter | - | |||||
Total | $ | 3,115 |
d. The following chart summarized sales to related parties for the years ended December 31, 2011 and 2010.
Name of related parties | Relationship | December 31, 2011 | December 31, 2010 | |||||||
(in thousands) | (in thousands) | |||||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | $ | 337,359 | $ | 344,556 | |||||
Tianjin Hengying Trading Co., Ltd | Partially owned by CEO* through indirect shareholding | 94,984 | 47,268 | |||||||
Tianjin Dazhan Industry Co, Ltd | Partially owned by CEO through indirect shareholding | 76,130 | 43,778 | |||||||
Sichuan Yutai Trading Co., Ltd | Significant influence by Long Steel Group** | 187,689 | - | |||||||
Shaanxi Yuchang Trading Co., Ltd | Significant influence by Long Steel Group | 160,422 | - | |||||||
Shaanxi Haiyan Trade Co.,Ltd | Significant influence by Long Steel Group | 58,299 | 38,545 | |||||||
Shaanxi Shenganda Trading Co., Ltd | Significant influence by Long Steel Group | 37,432 | - | |||||||
Tianjin General Qiugang Pipe Co., Ltd | Partially owned by CEO through indirect shareholding | 20,014 | - | |||||||
Shaanxi Steel | Majority shareholder of Long Steel Group | 19,735 | 1,152 | |||||||
Beijing Daishang Trading Co., Ltd. | Noncontrolling shareholder of Longmen Joint Venture’s subsidiary | - | 5,503 | |||||||
Tianjin Daqiuzhuang Steel Plates Co., Ltd. | Partially owned by CEO through indirect shareholding | - | 8,385 | |||||||
Shaanxi Long Steel Group Baoji Steel Rolling Co., Ltd | Subsidiary of Long Steel Group | 69,872 | - | |||||||
Shaanxi Junlong Rolling Co., Ltd | Investee of Long Steel Group | 48,991 | - | |||||||
Others | Entities either owned or have significant influence by our affiliates or management | 842 | 183 | |||||||
Total | $ | 1,111,769 | $ | 489,370 |
*The CEO is referred to herein as the chief executive officer of General Steel Holdings, Inc.
**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.
e. The following charts summarize purchases from related parties for the years ended December 31, 2011 and 2010.
Name of related parties | Relationship | December 31, 2011 | December 31, 2010 | |||||||
(in thousands) | (in thousands) | |||||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | $ | 913,850 | 553,752 | ||||||
Hancheng Jinma Coking Co., Ltd | Investee of Longmen Joint Venture’s subsidiary (unconsolidated) | 4,772 | 8,489 | |||||||
Hancheng Haiyan Coking Co., Ltd | Noncontrolling shareholder of Long Steel Group | 391,065 | 234,479 | |||||||
Xi’an Pinghe Metallurgical Raw Material Co., Ltd | Noncontrolling shareholder of Long Steel Group | 37,890 | - | |||||||
Shaanxi Long Steel Group Baoji Steel Rolling Co., Ltd | Subsidiary of Long Steel Group | 19,076 | - | |||||||
Shaanxi Junlong Rolling Co., Ltd | Investee of Long Steel Group | 19,110 | - | |||||||
Shaanxi Huafu New Energy Co., Ltd | Significant influence by the Long Steel Group | 34,810 | - | |||||||
Beijing Daishang Trading Co., Ltd. | Noncontrolling shareholder of Longmen Joint Venture’s subsidiary | 6,509 | 1,984 | |||||||
Others | Entities either owned or have significant influence by our affiliates or management | 1,471 | 1,019 | |||||||
Total Related Party Purchases | $ | 1,428,553 | $ | 799,723 |
Related party balances
a. | Accounts receivables – related parties: |
Name of related parties | Relationship | December 31, 2011 | December 31, 2010 | |||||||
(in thousands) | (in thousands) | |||||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | $ | 9,187 | $ | 3,023 | |||||
Shaanxi Long Steel Group Baoji Steel Rolling Co., Ltd | Subsidiary of Long Steel Group | 3,141 | ||||||||
Hancheng Haiyan Coking Co., Ltd | Noncontrolling shareholder of Long Steel Group | 303 | - | |||||||
Tianjin Daqiuzhuang Steel Plates | Partially owned by CEO through indirect shareholding | 755 | - | |||||||
Tianjin Hengying Trading Co., Ltd. | Partially owned by CEO through indirect shareholding | - | 1,054 | |||||||
Shaanxi Steel | Majority shareholder of Long Steel Group | 7,207 | 83 | |||||||
Total | $ | 20,593 | $ | 4,160 |
b. | 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 on behalf of these related parties.
Name of related parties | Relationship | December 31, 2011 | December 31, 2010 | |||||||
(in thousands) | (in thousands) | |||||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | $ | 15,244 | $ | 993 | |||||
Shaanxi Steel | Majority shareholder of Long Steel Group | 66,869 | - | |||||||
Maoming Shengze Trading Co., Ltd | Partially owned by CEO through indirect shareholding | 937 | 8,095 | |||||||
Tianjin Daqiuzhuang Steel Plates Co., Ltd. | Partially owned by CEO through indirect shareholding | - | 1,078 | |||||||
Shaanxi Huafu New Energy Co., Ltd | Significant influence by Long Steel Group | 2,441 | ||||||||
Teamlink Investment Co., Ltd | Owned by CEO through indirect shareholding | 2,000 | - | |||||||
Tianjin Dazhan Industry Co, Ltd | Partially owned by CEO through indirect shareholding | - | 455 | |||||||
Others | Entities either owned or have significant influence by our affiliates or management | 188 | 317 | |||||||
Total | $ | 87,679 | $ | 10,938 |
c. | Advances on inventory purchase – related parties: |
Name of related parties | Relationship | December 31, 2011 | December 31, 2010 | |||||||
(in thousands) | (in thousands) | |||||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | $ | 1,028 | $ | - | |||||
Tianjin General Qiugang Pipe Co., Ltd | Partially owned by CEO through indirect shareholding | 15,678 | 6,187 | |||||||
Maoming Shengze Trading Co., Ltd | Partially owned by CEO through indirect shareholding | 3,538 | - | |||||||
Total | $ | 20,244 | $ | 6,187 |
d. | Accounts payable - related parties: |
Name of related parties | Relationship | December 31, 2011 | December 31, 2010 | |||||||
(in thousands) | (in thousands) | |||||||||
Hancheng Haiyan Coking Co., Ltd | Noncontrolling shareholder of Longmen Joint Venture | $ | 46,487 | $ | 25,708 | |||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | 11,231 | 28,329 | |||||||
Tianjin Dazhan Industry Co., Ltd | Partially owned by CEO through indirect shareholding | 25,511 | 2,764 | |||||||
Xi’an Pinghe Metallurgical Raw Material Co., Ltd | Noncontrolling shareholder of Long Steel Group | 12,800 | - | |||||||
Tianjin Hengying Trading Co., Ltd | Partially owned by CEO through indirect shareholding | 14,856 | 17,264 | |||||||
Henan Xinmi Kanghua Fire Refractory Co., Ltd | Noncontrolling shareholder of Longmen Joint Venture’s subsidiary | 1,185 | 880 | |||||||
Hancheng Jinma Coking Co., Ltd | Investee of Longmen Joint Venture’s subsidiary (unconsolidated) | - | 1,579 | |||||||
Beijing Daishang Trading Co., Ltd | Noncontrolling shareholder of Longmen Joint Venture’s subsidiary | 1,600 | 1,101 | |||||||
Maoming Shengze Trading Co., Ltd | Partially owned by CEO through indirect shareholding | - | 1,954 | |||||||
Tianjin General Qiugang Pipe Co., Ltd | Partially owned by CEO through indirect shareholding | 8,034 | - | |||||||
Others | Entities either owned or have significant influence by our affiliates or management | 124 | 115 | |||||||
Total Accounts Payable – Related Parties | $ | 121,828 | $ | 79,694 |
e. | Short-term loans - related parties: |
Name of related parties | Relationship | December 31, 2011 | December 31, 2010 | |||||||
(in thousands) | (in thousands) | |||||||||
Shaanxi Steel | Majority shareholder of Long Steel Group | $ | - | $ | 14,548 | |||||
Tianjin Hengying Trading Co., Ltd | Partially owned by CEO through indirect shareholding | 15,710 | - | |||||||
Total | $ | 15,710 | $ | 14,548 |
f. | Other payables – related parties: |
Other payables – related parties are those nontrade payables arising from transactions between the Company and its related parties, such as advances or payments from these related parties on behalf of the Group.
Name of related parties | Relationship | December 31, 2011 | December 31, 2010 | |||||||
(in thousands) | (in thousands) | |||||||||
Tianjin Hengying Trading Co, Ltd | Partially owned by CEO through indirect shareholding | $ | - | $ | 10,168 | |||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | 20,001 | - | |||||||
Wendlar Investment & Management Group Co., Ltd | Common control under CEO | 241 | - | |||||||
Yangpu Capital Automobile | Partially owned by CEO through indirect shareholding | 1,398 | 1,350 | |||||||
Tianjin Daqiuzhuang Steel Plates Co., Ltd. | Partially owned by CEO through indirect shareholding | 5,771 | - | |||||||
Tianjin General Qiugang Pipe Co., Ltd | Partially owned by CEO through indirect shareholding | - | 4,547 | |||||||
Tianjin Hengying Trading Co., Ltd | Partially owned by CEO through indirect shareholding | 1,040 | - | |||||||
Wenchun Han | Director of General Steel (China) | - | 2,124 | |||||||
Others | Entities either owned or have significant influence by our affiliates or management | 422 | 25 | |||||||
Total | $ | 28,873 | $ | 18,214 |
g. | Customer deposits – related parties: |
Name of related parties | Relationship | December 31, 2011 | December 31, 2010 | |||||||
(in thousands) | (in thousands) | |||||||||
Hancheng Haiyan Coking Co., Ltd | Noncontrolling shareholder of Long Steel Group | $ | - | $ | 5,081 | |||||
Shaanxi Yuchang Trading Co., Ltd | Significant influence by Long Steel Group | 24,256 | - | |||||||
Sichuan Yutai Trading Co., Ltd | Significant influence by Long Steel Group | 5,972 | - | |||||||
Tianjin Hengying Trading Co, Ltd | Partially owned by CEO through indirect shareholding | 1,506 | - | |||||||
Tianjin General Qiugang Pipe Co., Ltd | Partially owned by CEO through indirect shareholding | 9,102 | - | |||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | 4,755 | 48,161 | |||||||
Beijing Shenhua Xinyuan Metal Materials Co., Ltd | Partially owned by CEO through indirect shareholding | 1,345 | 1,299 | |||||||
Shaanxi Haiyan Trade Co.,Ltd | Significant influence by Long Steel Group | 6,822 | - | |||||||
Shaanxi Junlong Rolling Co., Ltd | Investee of Long Steel Group | 1,540 | - | |||||||
Tianjin Dazhan Industry Co., Ltd | Partially owned by CEO through indirect shareholding | 11,178 | - | |||||||
Shaanxi Shenganda Trading Co., Ltd | Significant influence by Long Steel Group | 1,750 | - | |||||||
Others | Entities either owned or have significant influence by our affiliates or management | 51 | 381 | |||||||
Total | $ | 68,277 | $ | 54,922 |
h. | Deposits due to sales representatives – related parties |
Name of related parties | Relationship | December 31, 2011 | December 31, 2010 | |||||||
(in thousands) | (in thousands) | |||||||||
Hancheng Haiyan Coking Co., Ltd | Noncontrolling shareholder of Long Steel Group | $ | 471 | $ | 455 | |||||
Shaanxi Junlong Rolling Co., Ltd | Investee of Long Steel Group | 472 | - | |||||||
Total | $ | 943 | $ | 455 |
i. | Long-term loans – related parties: |
Name of related parties | Relationship | December 31, 2011 | December 31, 2010 | |||||||
(in thousands) | (in thousands) | |||||||||
Shaanxi Steel | Majority shareholder of Long Steel Group | $ | 92,035 | $ | 91,020 | |||||
Total | $ | 92,035 | $ | 91,020 |
The Company subleased a portionalso provided guarantee on related parties’ bank loans amounting to $56.6 million and $3.0 million as of its land use rights to Tianjin Jing QiuDecember 31, 2011 and as of December 31, 2010, respectively.
j. | Deferred lease income |
December 31, 2011 | December 31, 2010 | |||||||
(in thousands) | (in thousands) | |||||||
Beginning balance | $ | 57,591 | $ | 16,487 | ||||
Add: Reimbursement for dismantled assets | - | 568 | ||||||
Add: Reimbursement for loss of efficiency | - | 20,676 | ||||||
Add: Reimbursement for trial production costs | 14,042 | 13,584 | ||||||
Add: Deferred depreciation cost during free use period | 6,904 | 6,656 | ||||||
Less: Lease income realized | (2,008 | ) | (943 | ) | ||||
Exchange rate effect | 1,995 | 563 | ||||||
Ending balance | 78,524 | 57,591 | ||||||
Ending balance – current portion | (2,099 | ) | (1,971 | ) | ||||
Ending balance – noncurrent portion | $ | 76,425 | $ | 55,620 |
For the years ended December 31, 2011 and 2010, the Company realized deferred lease income from Shaanxi Steel, Market Company, a related party, amounting $2.0 million and $0.9 million, respectively.
Note 19 - Equity
Preferred Stock
On May 18, 2007, the Company entered into a Purchase Agreement with Victory New Holdings Limited (“Victory New”), a British Virgin Islands registered company under common control. Thethe control of the Company’s Chairman, CEO and majormajority shareholder, Zuosheng Yu (aka Henry Yu), is the chairman and the largest shareholder of Jing Qiuto acquire Victory New’s 30% interest inGeneral Steel Market Company. The lease term is one year and is renewed annually. The income generated from the rental amounted to the following for the year-ended:
2009 | 2008 | 2007 | ||||||||||
in thousands | ||||||||||||
Rental Income | $ | 1,780 | $ | 1,737 | $ | 1,588 |
Through Hengying& Dazhan | 2009 | 2008 | 2007 | |||||||||
(in thousands) | ||||||||||||
Purchase from Hengying and Dazhan | $ | 45,296 | $ | 76,434 | $ | 92,584 | ||||||
Sales to Hengying and Dazhan | $ | 2,334 | $ | 33,413 | $ | 32,743 |
Name of related parties | Relationship | December 31 2009 | December 31, 2008 | ||||||||
(in thousands) | (in thousands) | ||||||||||
Beijing Wendlar | Common control under CEO | $ | $ | 376 | |||||||
Shanxi Longmen Steel Group | General Steel’s joint venture partner | 19,226 | - | ||||||||
Mao Ming Sheng Zhe | Common control under CEO | 3,021 | - | ||||||||
Tianjin Dazhan Industry Co, Ltd | Common control under CEO | 10,268 | - | ||||||||
Tianjin Jin Qiu Steel Market | Common control under CEO | 147 | 147 | ||||||||
Tianjing General Steel Management Service Co., Ltd | Common control under CEO | 8 | - | ||||||||
Total | $ | 32,670 | $ | 523 |
Name of related parties | Relationship | December 31, 2009 | December 31, 2008 | |||||||
(in thousands) | (in thousands) | |||||||||
Li Yuan Xi Mei | Longmen JV’s subsidiary | $ | $ | 502 | ||||||
Tianjin Jin Qiu Steel Market | Common control under CEO | 2,995 | - | |||||||
Baogang Jianan | noncontrolling shareholders of one subsidiary | - | 1,873 | |||||||
Total | $ | 2,995 | $ | 2,375 |
Name of related parties | Relationship | December 31, 2009 | December 31, 2008 | |||||||
(in thousands) | (in thousands) | |||||||||
Tianjin Hengying Trading Co., Ltd | Common control under CEO | $ | 17,256 | $ | 10,630 | |||||
Tianjin Dazhan Industry Co., Ltd | Common control under CEO | 6,047 | - | |||||||
Henan Xinmi Kanghua | Longmen JV’s subsidiary’s joint venture partner | 960 | 1,501 | |||||||
Zhengzhou Shenglong | Longmen JV’s subsidiary’s joint venture partner | 91 | - | |||||||
Baotou Shengda Steel Pipe | Common control under CEO | - | 1,558 | |||||||
ShanXi Fangxin | Longmen JV’s subsidiary’s joint venture partner | 373 | 1,451 | |||||||
Baogang Jianan | Noncontrolling shareholders of one subsidiary | 38 | 187 | |||||||
Jingma Jiaohua | Longmen JV’s subsidiary (unconsolidated) | 1,360 | - | |||||||
Huashan metallurgy | Longmen JV’s subsidiary | 601 | - | |||||||
Beijing Daishang Trading Co., Ltd | Noncontrolling shareholder of one subsidiary of Longmen Joint Venture | 1,315 | - | |||||||
Shanxi Hong guang Steel Logistics | Owned by noncontrolling shareholder of one subsidiary | 329 | - | |||||||
Shanxi Longmen Steel Group Xian Steel | Longmen JV’s subsidiary (unconsolidated) | 14,905 | - | |||||||
Shanxi Xian International Yulong Hotel | Owned by noncontrolling shareholder of one subsidiary | 76 | - | |||||||
Tianjin Tongyong Qiugang Pipe | Common control under CEO | 4,800 | - | |||||||
Total | $ | 48,151 | $ | 15,327 |
Name of related parties | Relationship | December 31, 2009 | December 31, 2008 | |||||||
(in thousands) | (in thousands) | |||||||||
Tianjin Dazhan Industry Co., Ltd | Common control under CEO | $ | 3,946 | $ | 3,946 | |||||
Tianjin Hengying Trading Co., Ltd | Common control under CEO | 3,404 | 3,404 | |||||||
Shaanxi Shenganda Trading Co., Ltd | Owned by noncontrolling shareholder of one subsidiary | 4,401 | - | |||||||
Total | $ | 11,751 | $ | 7,350 |
Name of related parties | Relationship | December 31, 2009 | December 31, 2008 | |||||||
(in thousands) | (in thousands) | |||||||||
Golden Glister | Chairman of General Steel Holdings, Inc. owns more than 5% in this company | $ | - | $ | 600 | |||||
Tianjin Hengying Trading Co, Ltd | Common control under CEO | 2,415 | - | |||||||
Beijing Wendlar | Common control under CEO | 704 | - | |||||||
Yangpu Capital Automobile | Common control under CEO | 587 | - | |||||||
Baotou Shengda Steel Pipe | Common control under CEO | - | 77 | |||||||
Total | $ | 3,706 | $ | 677 |
Name of related parties | Relationship | December 31, 2009 | December 31, 2008 | |||||||
(in thousands) | (in thousands) | |||||||||
Tianjin Dazhan Industry Co., Ltd | Common control under CEO | $ | 1,544 | $ | 2,760 | |||||
Tianjin Hengying Trading Co., Ltd | Common control under CEO | 203 | - | |||||||
Haiyan | Longmen JV’s subsidiary (unconsolidated) | 1,316 | 1,522 | |||||||
Beijing Daishang Trading Co., Ltd | Noncontrolling shareholder of one subsidiary of Longmen Joint Venture | 728 | - | |||||||
Maoming Heng Da Materials | Common control under CEO | - | 2,934 | |||||||
Total | $ | 3,791 | $ | 7,216 |
Assumed by | ||||||||
Tongxing | Book Value | Longmen Joint Venture (22.76%) | ||||||
(in thousands) | (in thousands) | |||||||
Current assets | $ | 55,505 | $ | 12,633 | ||||
Noncurrent assets | 8,088 | 1,841 | ||||||
Total assets | 63,593 | 14,474 | ||||||
Total liabilities | 50,782 | 11,558 | ||||||
Net assets | $ | 12,811 | $ | 2,916 |
Maoming | Assumed by | |||||||
(in thousands) | Fair Value | The Company (99%) | ||||||
Current assets | $ | 45,314 | $ | 44,861 | ||||
Non-current assets | 81,780 | 78,291 | ||||||
Total assets | 127,094 | 123,152 | ||||||
Total liabilities | 117,027 | 115,857 | ||||||
Net assets | $ | 10,067 | $ | 7,295 |
2010 Equity Transactions
The Company issuedgranted senior management and directors 76,600733,300 shares of common stock as compensation in 2010. The shares were valued at the quoted market price on the grant date. The Company recorded compensation expense of $2.2 million for the year ended December 31, 2010.
On June 7, 2010, the Company issued 928,163 shares of common stock to one of Maoming Hengda’s creditors to settle certain short-term loans.
On August 4, 2010, $3.5 million of the Notes were converted to 1,208,791 shares of common stock. According to the Notes agreement, the Company incurred make-whole amount of $0.7 million and accrued interest expense of $0.2 million settled in shares on conversion and 350,885 shares of common stock were issued.
On December 21, 2010, the Company’s Board of Directors authorized to repurchase up to an aggregate of 1,000,000 shares of the Company’s common stock as part of a share repurchase program (the “Share Repurchase Program”). The Share Repurchase Program does not have an expiration date and these repurchases may be made from time to time in the open market or in privately negotiated transactions in accordance with applicable laws. As of December 31, 2010, the Company has repurchased 316,760 shares for a total cost of $0.9 million.
2011 Equity Transactions
On March 31, 2011, the Company granted senior management and directors 240,734 shares of common stock at $7.16$2.40 per share, as compensation. The shares were valued at the quoted market price on the date granted.grant date. The Company recorded compensation expense of $0.5 million$0.6 million.
On June 1, 2011, the Company announced an increase of additional 1,000,000 shares of common stock may be purchased under the Share Repurchase Program launched in December 2010, bringing the total authorized shares of its common stock available for purchase to 2,000,000. During the year ended December 31, 2008.
On June 16, 2011, the Company and of Long Men Joint Venture)Maoming Hengda entered into a compensation agreement in which Mr. ZuoSheng Yu agreedDebt Repayment Agreement with Guangzhou Hengda and its sole shareholder Ms Ding Yumei whereby the Company issued 974,571 shares of its common stock to transfer 600,000 sharesMs Ding Yumei, the designee and sole shareholder of Guangzhou Hengda, to Mr. Zhang Dan Li in exchange for 15 yearsrepay loan balance of service in the Company. Pursuant$4.8 million due to Generally accepted accounting principles in the United States regarding (Share-Based Payment) share-based payments awarded to an employee of the reporting entity by a related party or other holder of an economic interest in the entity is treated as compensation as if the shareholder has made a capital contribution. The shares are valued at $6.91 on the grant date for a total of $4.1 million and will be amortized over the life agreement. A total of $0.2 million of compensation expense and additional paid in capital has been recorded in 2008.
On April 15, 2008,June 28, 2011, the Company granted senior management and directors 87,400191,150 shares of common stock at $6.66$1.44 per share, as compensation. The shares were valued at the quoted market price on the date granted.grant date. The Company recorded compensation expense of $0.6 million for the year ended December 31, 2008.
On July 3, 2008,September 26, 2011, the Company granted senior management and directors 90,254189,650 shares of common stock at $10.29 per share, as compensation. The shares were valued at the market price on the date granted. The Company recorded compensation expense of $0.9 million for the year ended December 31, 2008.
On April 7, 2009,December 28, 2011, the Company granted senior management and directors 106,750166,150 shares of common stock at $2.77$1.04 per share, as compensation. The shares were valued at the quoted market price on the date granted.grant date. The Company recorded compensation expense of $0.3$0.2 million.
Note 20 months.
Outstanding Warrants | Exercisable Warrants | ||||||||||||||||||||
Exercise Price | Number | Average Remaining Contractual Life | Average Exercise Price | Number | Average Remaining Contractual Life | ||||||||||||||||
$ | 5 | 6,678,649 | 3.0 | $ | 5 | 3,900,871 | 3.36 |
Regulations in the PRC require the Company to contribute to a defined contribution retirement plan for all employees. All Joint Venturethe 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 isCompany’s entities in China are required to contribute based on the higher of 20% of the employees’ monthly base salary.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 amounted to $3.8 million, $3.0$7.0 million and $1.6$5.1 million for the years ended December 31, 2009, 20082011 and 2007,2010, respectively.
Note 2021 – Statutory reserves
The laws and regulations of the People’s Republic of China require that before anaforeign-invested enterprise distributes profits to its partners,shareholders, it must first satisfy all tax liabilities, provideprovision 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.
Special reserve
The Company is required by the PRC government to reserve safety and maintenance expense to the cost of production based on the actual quantity of mineral exploited. The amount of reserves is determined within the unit price range provided by Ministry of Finance of PRC.For the years ended December 31, 2011 and 2010, The Company made contributions of $ 82.0 thousand and $40.0 thousand to these reserves, respectively
Note 2122 – Commitment and contingencies
Rental Commitments
Baotou Steel Pipe Joint Venture has a 5 yearsyear rental agreement with Bao Gang Jian An forJianan to rent two buildings. The agreement began in June 2007 for $0.3 million (or RMB1.8 million) per year.
As of December 31, 2009,2011, total future minimum lease payments for the unpaid portion under anthis operating lease were as follows:
Year ended December 31, | Amount | |||
(in thousands) | ||||
2010 | $ | 264 | ||
2011 | 264 | |||
2012 | 132 | |||
2013 | - | |||
2014 | - | |||
Thereafter | 661 | |||
Total | $ | 1,321 |
Year ended, | Amount | |||
(in thousands) | ||||
December 31, 2012 | $ | 141 | ||
Total | $ | 141 |
Total rental expense amounted to $0.3 million $0.3 million and $0.2$0.4 million for the years ended December 31, 2009, 20082011 and 2007,2010, respectively.
Longmen Joint Venture is obligatedhas $1.8 million contractual obligations related to contribute $33.0 million (RMB 225 million), as registered capital to Shaanxi Longmen Coal and Chemical Co., Ltd by the end of 2010. Tongxing had contributed $6.6 millionconstruction projects as of December 31 2009.
Purchase Commitments
Longmen Joint Venture has a $14.6signed an annual purchase agreement with its vendor to supply iron ore to be delivered based on the production demand. From October 2012 to October 2013, the minimum purchase commitment is 3 million contractual obligation in its construction project as of December 31 2009.
Year ended December 31, | Amount | |||
(in thousands) | ||||
2010 | $ | 3,315 | ||
2011 | 1,658 | |||
Thereafter | - | |||
Total | $ | 4,973 |
Contingencies
As of December 31, 2009 the Company guaranteed bank loans for2011, Longmen Joint Venture provided guarantees to related partiesparties’ and third partiesparties’ bank loans, including linelines of credit and others, amounting to $192.4$253.5 million.
Nature of guarantee | Guarantee | Guaranty Due Date | |||
(In thousands) | |||||
Line of credit | $ | 202,675 | Various fromFebruary2012 to March 2015 | ||
Bank loans | 36,447 | Various from January 2012 to March 2014 | |||
Confirming storage | 12,018 | Various from March 2012 to May 2012 | |||
Financing by the rights of goods delivery in future | 2,357 | March 2012 | |||
Total | $ | 253,497 |
Name of parties being guaranteed | Guarantee amount | Guaranty Due Date | ||||
(In thousands) | (In thousands) | |||||
Shaanxi Daxigou Mining Co., Ltd. | $ | 39,275 | January 2012 | |||
Hancheng Haiyan Coking Co., Ltd | 17,281 | July 2012, extended to March 2013 | ||||
Long Steel Group Fuping Rolling Steel Co., Ltd | 6,284 | Various from February to July 2012, partial guarantee amount extended to March 2013 | ||||
Yichang Zhongyi Industrial Co., Ltd | 42,574 | Various from February 2012 to April 2013, partial guarantee amount extended to May 2013 | ||||
Jingmen Desheng Metal Co., Ltd | 51,089 | Various from June 2012 to August 2013 | ||||
Chengdu Yusheng Steel Trading Co., Ltd | 3,692 | Various from January to April 2012 | ||||
Xi’an Kaiyuan Steel Co., Ltd | 1,257 | Various from May to September 2012 | ||||
Shaanxi Hongan Material Co., Ltd. | 8,955 | Various from January to October 2012, partial guarantee amounts extended to October and December 2013 | ||||
Shaanxi Anlin Material Co., Ltd. | 2,357 | March 2012 | ||||
Shaanxi Mengxing Trading Co., Ltd. | 8,326 | Various from March to May 2012 | ||||
Chongqing Qiaorui Technology Trading Co., Ltd | 2,969 | Various from November to December 2012 | ||||
Xi’an Zexin Material Co., Ltd. | 4,713 | January 2012 | ||||
Chengdu Zhongyi Steel Co., Ltd. | 1,885 | April 2012, extended to December 2013 | ||||
Shaanxi Huatai Huineng Group, Ltd. | 23,565 | March 2012 | ||||
Hancheng Sanli Furnace Burden Co., Ltd. | 15,710 | March 2015 | ||||
Shaanxi Heimao Coking Co., Ltd | 23,565 | July 2012 | ||||
Total | $ | 253,497 |
As of December 31, 2009.
Nature of | Guarantee | ||||
guarantee | amount | Guaranty period | |||
(In thousands) | |||||
Importation L/C | $ | 17,604 | July 2009 to July 2010 | ||
Domestic L/C | 1,467 | July 2009 to July 2010 | |||
Bank loan | 156,382 | Various from March 2009 to December 2010 | |||
Notes payable | 11,003 | Various from March 2009 to July 2010 | |||
Total | $ | 186,456 |
Nature of | Guarantee | ||||
guarantee | amount | Guaranty period | |||
(In thousands) | |||||
Bank loan | $ | 5,868 | Various from June 2009 to October 2010 |
Note 2223 – Segments
The Company’s chief operating decision-makers (i.e. chief executive officerdecision maker evaluates performance and his direct reports) review financial information presenteddetermines resource allocations based on a consolidated basis, accompanied by disaggregated information about revenues by product lines for purposesnumber of allocating resourcesfactors, 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 evaluatingGeneral Steel (China) & Tianwu Joint Venture in Tianjin City.
The Group operates in one business segment that includes four different divisions. These reportable divisions are consistent with the way the company manages its business, each division operates under separate management groups and produces discrete financial performance. There are no segment managers who are held accountable forinformation. The accounting principles applied at the operating division level in determining income from operations operating results and plans for levels or components belowis generally the same as those applied at the consolidated unitfinancial statement level. Based on qualitative
The following represents results of division operations for years ended December 31, 2011 and quantitative criteria established by the accounting standards, the Company considers itself to be operating within one reportable segment.
December 31, 2009 | December 31, 2008 | December 31, 2007 | ||||||||||
(in thousands) | (in thousands) | (in thousands) | ||||||||||
Products | ||||||||||||
Re-bar | $ | 1,534,696 | $ | 1,182,433 | $ | 618,315 | ||||||
Hot-Rolled Sheets | 58,833 | 132,458 | 147,727 | |||||||||
High Speed Wire | 62,487 | 23,280 | - | |||||||||
Spiral-Welded Steel Pipe | 12,430 | 13,032 | 6,398 | |||||||||
Total sales revenue | $ | 1,668,446 | $ | 1,351,203 | $ | 772,440 |
(In thousands) | For the year ended December 31, | |||||||
Sales: | 2011 | 2010 | ||||||
Longmen Joint Venture | $ | 3,496,551 | $ | 1,846,080 | ||||
Maoming Hengda | 9,946 | 10,011 | ||||||
Baotou Steel Pipe Joint Venture | 8,036 | 12,315 | ||||||
General Steel (China) & Tianwu Joint Venture | 267,543 | 68,918 | ||||||
Total sales | 3,782,076 | 1,937,324 | ||||||
Interdivision sales | (218,180 | ) | (55,184 | ) | ||||
Consolidated sales | $ | 3,563,896 | $ | 1,882,140 | ||||
Gross profit: | 2011 | 2010 | ||||||
Longmen Joint Venture | $ | (86,308 | ) | $ | 32,751 | |||
Maoming Hengda | (392 | ) | (2,726 | ) | ||||
Baotou Steel | 491 | 562 | ||||||
General Steel (China) & Tianwu Joint Venture | (3,845 | ) | 2,589 | |||||
Total gross profit | (90,054 | ) | 33,176 | |||||
Interdivision gross profit | 1,840 | (1,761 | ) | |||||
Consolidated gross profit | $ | (88,214 | ) | $ | 31,415 | |||
Income (loss) from operations: | 2011 | 2010 | ||||||
Longmen Joint Venture | $ | (161,057 | ) | $ | (8,073 | ) | ||
Maoming Hengda | (2,568 | ) | (5,782 | ) | ||||
Baotou Steel | (2,516 | ) | (862 | ) | ||||
General Steel (China) & Tianwu Joint Venture | (10,902 | ) | 1,133 | |||||
Total loss from operations | (177,043 | ) | (13,584 | ) | ||||
Interdivision income (loss) from operations | 1,840 | (1,762 | ) | |||||
Reconciling item (1) | (4,838 | ) | (5,816 | ) | ||||
Consolidated loss from operations | $ | (180,041 | ) | $ | (21,162 | ) | ||
Net income (loss) attributable to General Steel Holdings, Inc.: | 2011 | 2010 | ||||||
Longmen Joint Venture | $ | (161,897 | ) | $ | (32,668 | ) | ||
Maoming Hengda | 3,763 | (5,450 | ) | |||||
Baotou Steel | (1,861 | ) | (744 | ) | ||||
General Steel (China) & Tianwu Joint Venture | (17,120 | ) | (330 | ) | ||||
Total net loss attributable to General Steel Holdings, Inc. | (177,115 | ) | (39,192 | ) | ||||
Interdivision net loss | (1,501 | ) | (1,762 | ) | ||||
Reconciling item (1) | 1,429 | 10,948 | ||||||
Consolidated net loss attributable to General Steel Holdings, Inc. | $ | (177,187 | ) | $ | (30,006 | ) | ||
Depreciation and amortization: | 2011 | 2010 | ||||||
Longmen Joint Venture | $ | 54, 755 | $ | 34,131 | ||||
Maoming Hengda | 205 | 3,411 | ||||||
Baotou Steel | 246 | 281 | ||||||
General Steel (China) & Tianwu Joint Venture | 3,125 | 3,330 | ||||||
Consolidated depreciation and amortization | $ | 58,331 | $ | 41,153 | ||||
Finance/interest expenses: | 2011 | 2010 | ||||||
Longmen Joint Venture | $ | 104,372 | $ | 49,180 | ||||
Maoming Hengda | 262 | 109 | ||||||
Baotou Steel | (10 | ) | 14 | |||||
General Steel (China) & Tianwu Joint Venture | 6,655 | 1,955 | ||||||
Interdivision interest expenses | (709 | ) | - | |||||
Reconciling item (1) | 4,379 | 25 | ||||||
Consolidated interest expenses | $ | 114,949 | $ | 51,283 |
Capital expenditures: | 2011 | 2010 | ||||||
Longmen Joint Venture | $ | 108,885 | $ | 80,718 | ||||
Maoming Hengda | 1,978 | 8,735 | ||||||
Baotou Steel | 32 | 44 | ||||||
General Steel (China) & Tianwu Joint Venture | 44 | 419 | ||||||
Consolidated capital expenditures | $ | 110,939 | $ | 89,916 |
Total Assets as of December 31, 2011 and 2010 | December 31, 2011 | December 31, 2010 | ||||||
Longmen Joint Venture | $ | 2, 937,271 | $ | 1,694,895 | ||||
Maoming Hengda | 48,350 | 47,839 | ||||||
Baotou Steel Pipe Joint Venture | 8,093 | 31,852 | ||||||
General Steel (China) & Tianwu Joint Venture | 146,150 | 194,966 | ||||||
Interdivision assets | (88,326 | ) | (173,076 | ) | ||||
Reconciling item (2) | 2,583 | 2,904 | ||||||
Total Assets | $ | 3,054,121 | $ | 1,799,380 |
(1) | Reconciling item represents the unallocated income or expenses of the Company, arising from General Steel Investment Co., Ltd, Yangpu Shengtong Investment Co., Ltd and Qiu Steel for years ended December 31, 2011 and 2010. |
(2) | Reconciling item represents assets held at General Steel Holdings, Inc., General Steel Investment Co., Ltd, Yangpu Shengtong Investment Co., Ltd and Qiu Steel as of December 31, 2011 and 2010. |
Note 2324 – Subsequent Event
On March 1, 2012, the Company sold its 22.76% equity interest of Tongxing for approximately $9.2 million to a related party. In connection with this transaction, the Company will receive the land use rights at fair market value for approximately $9.5 million and payable in cash of approximately $0.3 million. The Company expects to finalize the lease of Daqiuzhuang facility and operation by the facility’s current general manager. Changing the business modelresult of this facility fromtransaction has no material impact on the Company’s sales and operating income.
On March 26, 2012, the Company granted senior management and directors 165,400 shares of common stock at $0.75 per share, as compensation. The shares were valued at the quoted market price on the grant date.
On March 27, 2012, in order to maximize our shareholder value, the Company announced a direct operations modelnew share repurchase program, which allows the Company to a leased operations model will allow usrepurchase up to reduce overhead costsan aggregate of 2,000,000 shares of its common stock and provide a steady revenue streambrings the total of authorized shares of our common stock available for repurchase to 4,000,000 shares. From April 3, 2012 through September 30, 2012, the Company repurchased an additional 1,381,328 shares at an average price of $1.02 per share. As of the date of this report, the Company has repurchased 2,472,306 shares in total at an average price of $1.70 per share.
On June 28, 2012, the Company granted senior management and directors 165,400 shares of common stock at $0.80 per share, as compensation. The shares were valued at the quoted market price on the grant date.
On September 27, 2012, the Company granted senior management and directors 167,900 shares of common stock at $1.29 per share, as compensation. The shares were valued at the quoted market price on the grant date.
On December 28, 2012, the Company granted senior management and directors 169,150 shares of common stock at $1.00 per share, as compensation. The shares were valued at the quoted market price on the grant date.
GENERAL STEEL HOLDINGS, INC. | |||||||
SCHEDULE 1 - CONDENSED PARENT COMPANY BALANCE SHEETS | |||||||
AS OF DECEMBER 31, 2011 AND 2010 | |||||||
(In thousands) |
ASSETS | ||||||||||||||||||
2011 | 2010 | |||||||||||||||||
CURRENT ASSETS: | ||||||||||||||||||
Cash | $ | 48 | $ | 47 | ||||||||||||||
Restricted cash | 4 | 1,130 | ||||||||||||||||
Other receivables | 1 | 3 | ||||||||||||||||
Prepaid expense | 60 | 205 | ||||||||||||||||
TOTAL CURRENT ASSETS | 113 | 1,385 | ||||||||||||||||
OTHER ASSETS: | ||||||||||||||||||
Intercompany receivable | 85,106 | 84,941 | ||||||||||||||||
TOTAL OTHER ASSETS | 85,106 | 84,941 | ||||||||||||||||
TOTAL ASSETS | $ | 85,219 | $ | 86,326 | ||||||||||||||
LIABILITIES AND EQUITY | ||||||||||||||||||
CURRENT LIABILITIES: | ||||||||||||||||||
Other payables and accrued liabilities | $ | 7 | $ | 8 | ||||||||||||||
TOTAL CURRENT LIABILITIES | 7 | 8 | ||||||||||||||||
OTHER LIABILITIES: | ||||||||||||||||||
Loss in excess of investment in subsidiaries | 192,493 | 11,192 | ||||||||||||||||
TOTAL OTHER LIABILITIES | 192,493 | 11,192 | ||||||||||||||||
DERIVATIVE LIABILITIES | 10 | 5,573 | ||||||||||||||||
TOTAL LIABILITIES | 192,510 | 16,773 | ||||||||||||||||
COMMITMENT AND CONTINGENCIES | ||||||||||||||||||
EQUITY: | ||||||||||||||||||
Preferred stock, $0.001 par value, 50,000,000 shares authorized,3,092,899 shares | ||||||||||||||||||
issued and outstanding as of December 31, 2011 and 2010 | 3 | 3 | ||||||||||||||||
Common stock, $0.001 par value, 200,000,000 shares authorized, 56,601,988 | ||||||||||||||||||
and 54,678,083 shares issued, 55,511,010 and 54,522,973 shares outstanding | ||||||||||||||||||
as of December 31, 2011 and 2010, respectively | 56 | 55 | ||||||||||||||||
Treasury stock, at cost, 1,090,978 and 316,760 shares as of | (2,795 | ) | (871 | ) | ||||||||||||||
December 31, 2011 and 2010, respectively | ||||||||||||||||||
Paid-in-capital | 107,940 | 104,970 | ||||||||||||||||
Statutory reserves | 6,388 | 6,202 | ||||||||||||||||
Accumulated deficits | (229,083 | ) | (51,793 | ) | ||||||||||||||
Accumulated other comprehensive income | 10,200 | 10,987 | ||||||||||||||||
TOTAL SHAREHOLDER'S EQUITY (DEFICIENCY) | (107,291 | ) | 69,553 | |||||||||||||||
TOTAL LIABILITIES AND EQUITY | $ | 85,219 | $ | 86,326 |
GENERAL STEEL HOLDINGS, INC. | ||||
SCHEDULE 1 - CONDENSED PARENT COMPANY STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE LOSS | ||||
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010 | ||||
(In thousands) |
2011 | 2010 | |||||||
OPERATING EXPENSES | ||||||||
General and administrative expenses | $ | (2,149 | ) | $ | (3,057 | ) | ||
Total operating expenses | (2,149 | ) | (3,057 | ) | ||||
OTHER INCOME (EXPENSE) | ||||||||
Finance/interest (expense) income | (1 | ) | 1,714 | |||||
Change in fair value of derivative liabilities | 5,563 | 15,055 | ||||||
Total other income, net | 5,562 | 16,769 | ||||||
EQUITY LOSS OF SUBSIDIARIES | (180,600 | ) | (43,718 | ) | ||||
NET LOSS | (177,187 | ) | (30,006 | ) | ||||
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS | (787 | ) | 2,869 | |||||
COMPREHENSIVE LOSS | $ | (177,974 | ) | $ | (27,137 | ) |
GENERAL STEEL HOLDINGS, INC. | ||||||||
SCHEDULE 1 - CONDENSED PARENT COMPANY STATEMENTS OF CASH FLOWS | ||||||||
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010 | ||||||||
(In thousands) |
2011 | 2010 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net loss | $ | (177,187 | ) | $ | (30,006 | ) | ||
Adjustments to reconcile net loss to cash provided by (used in) operating activities: | ||||||||
Change in fair value of derivative instrument | (5,563 | ) | (15,055 | ) | ||||
Stock issued for services and compensation | 1,530 | 2,479 | ||||||
Make whole shares interest expense on notes conversion | - | 1,130 | ||||||
Amortization of deferred note issuance cost and discount on convertible notes | - | 17 | ||||||
Loss from subsidiaries | 180,600 | 43,718 | ||||||
Changes in operating assets and liabilities | ||||||||
Other receivables | 1 | (3 | ) | |||||
Prepaid expense | 141 | 349 | ||||||
Intercompany receivable | 1,277 | 1,880 | ||||||
Other payables and accrued liabilities | (1 | ) | (2,483 | ) | ||||
Net cash provided by operating activities | 798 | 2,026 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Restricted cash | 1,126 | (1,130 | ) | |||||
Net cash provided by (used in) investing activities | 1,126 | (1,130 | ) | |||||
CASH FLOWS FINANCING ACTIVITIES: | ||||||||
Payments made for treasury stock acquired | (1,923 | ) | (870 | ) | ||||
Net cash used in financing activities | (1,923 | ) | (870 | ) | ||||
INCREASE IN CASH | 1 | 26 | ||||||
CASH, beginning of year | 47 | 21 | ||||||
CASH, end of year | $ | 48 | $ | 47 | ||||
Non-cash transactions of investing and financing activities: | ||||||||
Share issuance for intercompany's debt settlement | $ | 1,442 | $ | 2,404 |
GENERAL STEEL HOLDINGS, INC.
CONDENSED NOTES TO SCHEDULE 1
1. | Basis of presentation |
Certain information and footnote disclosures normally included in financial statements prepared in conformity with generally accepted accounting principles have been condensed or omitted. The Company’s investment in subsidiaries is stated at cost plus equity in undistributed earnings of subsidiaries.
2. | Restricted net assets |
Schedule I of Article 5-04 of Regulation S-X requires the condensed financial information of registrant shall be filed when the restricted net assets of consolidated subsidiaries exceed 25 percent of consolidated net assets as of the end of the most recently completed fiscal year. For purposes of the above test, restricted net assets of consolidated subsidiaries shall mean that amount of the registrant’s proportionate share of net assets of consolidated subsidiaries (after intercompany eliminations) which as of the end of the most recent fiscal year may not be transferred to the parent company by subsidiaries in the form of fixed monthly lease revenue. loans, advances or cash dividends without the consent of a third party (i.e., lender, regulatory agency, foreign government, etc.).
The condensed parent company financial statements have been prepared in accordance with Rule 12-04, Schedule I of Regulation S-X as the restricted net assets of the subsidiaries of General Steel Holdings, Inc. exceed 25% of the consolidated net assets of General Steel Holdings, Inc. The ability of our Chinese operating affiliates to pay dividends may be restricted due to the foreign exchange control policies and availability of cash balances of the Chinese operating subsidiaries. Because a significant portion of our operations and revenues are conducted and generated in China, a significant portion of our revenues being earned and currency received are denominated in Renminbi (RMB). RMB is subject to the exchange control regulation in China, and, as a result, we may be unable to distribute any dividends outside of China due to PRC exchange control regulations that restrict our ability to convert RMB into US Dollars.
3. | Derivative instrument |
The Company will disclose specific termshas 3,900,871 warrants outstanding as a result of the lease agreement$40.0 million convertible notes issued in 2007 and 2,777,778 warrants outstanding in connection with a registered direct offering in 2009. The aforementioned warrants met the definition of a derivative instrument in the accounting standards and are 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.
Refer to Note 10 of the Notes to the Consolidated Financial Statements for the convertible notes and derivative liabilities.
4. | Equity |
Preferred Stock
On May 18, 2007, the Company entered into a Purchase Agreement with Victory New Holdings Limited (“Victory New”), a British Virgin Islands registered company under the control of the Company’s Chairman, CEO and majority shareholder, Zuosheng Yu (aka Henry Yu), to acquire Victory New’s 30% interest in General Steel (China). The Company agreed to issue to Victory New an aggregate of 3,092,899 shares of its Series A Preferred Stock with a fair value of $8,374,000, and these shares of Series A Preferred Stock carry a voting power of 30% of the combined voting power of the Company’s common and preferred stock while outstanding. The holders of preferred stock are entitled to receive noncumulative dividends, when and if declared by the definitive agreement is finalized approximatelyboard of directors. Dividends are not mandatory and shall not accrue. Preferred shares are non-redeemable.
2010 Equity Transactions
The Company granted senior management and directors 733,300 shares of common stock as compensation in 2010. The shares were valued at the end of March 2010.
On June 7, 2010, the Company issued 928,163 shares of common stock to one of Maoming Hengda’s creditors to settle certain short-term loans.
On August 4, 2010, $3.5 million of the Notes were converted to 1,208,791 shares of common stock. According to the Notes agreement, the Company incurred make-whole amount of $0.7 million and accrued interest expense of $0.2 million settled in shares on conversion and 350,885 shares of common stock were issued.
On December 21, 2010, the Company’s Board of Directors authorized to repurchase up to an aggregate of 1,000,000 shares of the Company’s common stock as part of a share repurchase program (the “Share Repurchase Program”). The Share Repurchase Program does not have an expiration date and these repurchases may be made from time to time in the open market or in privately negotiated transactions in accordance with applicable laws. As of December 31, 2010, the Company has repurchased 316,760 shares for a total cost of $0.9 million.
GENERAL STEEL HOLDINGS, INC.
CONDENSED NOTES TO SCHEDULE 1
2011 Equity Transactions
On March 31, 2011, the Company granted senior management and directors 240,734 shares of common stock at $2.40 per share, as compensation. The shares were valued at the quoted market price on the grant date. The Company recorded compensation expense of $0.6 million.
On June 1, 2011, the Company announced an increase of additional 1,000,000 shares of common stock may be purchased under the Share Repurchase Program launched in December 2010, bringing the total authorized shares of its common stock available for purchase to 2,000,000. During the year ended December 31, 2011, the Company has repurchased 774,218 shares with $1.9 million pursuant to the Share Repurchase Program. The Company had a total of 1,090,978 shares of treasury stock as of December 31, 2011.
On June 16, 2011, the Company and Maoming Hengda entered into a Debt Repayment Agreement with Guangzhou Hengda and its sole shareholder Ms. Ding Yumei whereby the Company issued 974,571 shares of its common stock to Ms Ding Yumei, the designee and sole shareholder of Guangzhou Hengda, to repay loan balance of $4.8 million due to Guangzhou Hengda.
On June 28, 2011, the Company granted senior management and directors 191,150 shares of common stock at $1.44 per share, as compensation. The shares were valued at the quoted market price on the grant date. The Company recorded compensation expense of $0.3 million.
On September 26, 2011, the Company granted senior management and directors 189,650 shares of common stock at $1.18 per share, as compensation. The shares were valued at the quoted market price on the grant date. The Company recorded compensation expense of $0.2 million.
On December 28, 2011, the Company granted senior management and directors 166,150 shares of common stock at $1.04 per share, as compensation. The shares were valued at the quoted market price on the grant date. The Company recorded compensation expense of $0.2 million.
5. | Subsequent events |
On March 26, 2012, the Company granted senior management and directors 165,400 shares of common stock at $0.75 per share, as compensation. The shares were valued at the quoted market price on the grant date.
On March 27, 2012, in order to maximize our shareholder value, the Company announced a new share repurchase program, which allows the Company to repurchase up to an aggregate of 2,000,000 shares of its common stock and brings the total of authorized shares of our common stock available for repurchase to 4,000,000 shares. From April 3, 2012 through September 30, 2012, the Company repurchased an additional 1,381,328 shares at an average price of $1.02 per share. As of the date these consolidated financial statementsof this report, the Company has repurchased 2,472,306 shares in total at an average price of $1.70 per share.
On June 28, 2012, the Company granted senior management and directors 165,400 shares of common stock at $0.80 per share, as compensation. The shares were issued.
On September 27, 2012, the Company granted senior management and directors 167,900 shares of independent registered public accounting firm.common stock at $1.29 per share, as compensation. The shares were valued at the quoted market price on the grant date.
On December 28, 2012, the Company granted senior management and directors 169,150 shares of common stock at $1.00 per share, as compensation. The shares were valued at the quoted market price on the grant date
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
a) | Evaluation Disclosure Controls and Procedures |
Our Company, with the participation of our Chief Executive Officer and 15d-15Chief Financial Officer, conducted an evaluation of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), management has evaluated, with the participationas of our Chief Executive Officer and Chief Financial Officer, the effectiveness of ourDecember 31, 2011. Our Company’s disclosure controls and procedures as ofare designed (i) to ensure that information required to be disclosed by us in the end ofreports that we file or submits under the period covered by this report.
In designingconnection with the preparation of our quarterly report on Form 10-Q for the quarter ended June 30, 2011 (the “Quarterly Report”), we revisited the appropriate treatment for certain reimbursements received related to our collaboration with Shaanxi Steel on the construction of equipment by Shaanxi Steel during the period from June 2009 to March 2011. Based on the guidance received from theOffice of the Chief Accountant of the SEC (“OCA”), which provided materially different accounting treatment for the reimbursements, management determined that restatement was necessary and evaluatingmaterial weaknesses existed with respect to the reporting of the complex, non-routine transactions under U.S. GAAP and lack of controls over contract management.
Together, as a result of the material weaknesses identified with respect to our reporting of complex non-routine transactions under U.S. GAAP and lack of controls over contract management, our Chief Executive Officer, our Chief Financial Officer have re-evaluated our disclosure controls and procedures, management recognizesand concluded that anyour disclosure controls and procedures no matter how well designedwere not effective as of December 31, 2011.
Despite the existence of the material weaknesses discussed above and operated, can provide only reasonable assurance of achieving the desired control objectives, andbelow, our management, was required to apply its judgment in evaluating and implementing possible controls and procedures.
b) | Management’s Annual Report on Internal Control over Financial Reporting |
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act.
· | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; |
· | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles of the United States, and that our receipts and expenditures are being made only in accordance with authorizations of our management and members of our board of directors; and |
· | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements. |
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process, and it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
Management conductedIn connection with the above-referenced assessmentpreparation of our Quarterly Report, we revisited the appropriate accounting treatment for certain reimbursements received in relation to the collaboration with Shaanxi Steel on the construction of equipment by Shaanxi Steel from June 2009 to March 2011. We believed that the original accounting treatment for the reimbursement was in accordance with U.S. GAAP, based upon our understanding of the effectivenesseconomic substance and nature of reimbursement and our interpretation of U.S. GAAP. Due to the complexity and the unique structure of the transaction, we sought guidance from the OCA with respect to the appropriate accounting treatment for the compensation. Following its receipt of the guidance from the OCA, we reassessed our disclosure controls and procedures and our internal control over financial reportingreporting. This assessment identified two material weaknesses related to:
1) | Insufficient personnel with appropriate levels of accounting knowledge and experience to address complex U.S. GAAP accounting issues and to prepare and review financial statements and related disclosures under U.S. GAAP. Specifically, our control did not operate effectively to ensure the appropriate and timely analysis of and accounting for unusual and non-routine transactions and certain financial statement accounts. |
2) | Lack of controls over contract management including documentation of all contract terms as well as identifying and analyzing the appropriate treatment of complex and unusual transactions. |
Together, as a result of December 31, 2009 using the framework set forth in the report entitled, “Internal Control—Integrated Framework,” issued by the Committee of Sponsoring Organizations of the Treadway Commission, or the COSO Report. Based on management’s evaluation and the criteria set forth in the COSO Report, managementsuch material weaknesses, we concluded that our internal control over financial reporting waswere not effective as of December 31, 2009.
This Annual Report does not include an attestation report of our company’sregistered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the SEC that permit our Company to provide only management’s report in this Annual Report.
Remediation
We dedicated significant resources to correcting the accounting items discussed with the OCA and to ensuring that we take proper steps to improve our disclosure controls and procedures and our internal control over financial reporting asin the areas of December 31, 2009 has been audited by Frazer Frost, LLP,accounting for complex and non-routing transactions.
We have taken a number of remediation actions that we believe will impact the effectiveness of our company’s independent registered public accountants, as stateddisclosure controls and procedures and our internal control over financial reporting including the following:
· | We have engaged outside professional consulting firms to supplement us with our internal control over financial reporting; |
· | We have engaged accounting experts to assist management in identifying complicated accounting transactions and applying applicable accounting policies thereto; and |
· | We have established an enhanced training program, including, but not limited to, accounting and auditing updates, and review of consolidated guidance of variable interest entities, to update our employees on current accounting pronouncements. |
We believe the foregoing efforts will effectively remediate the material weaknesses described above in its report attached hereto.
c) | Changes in Internal Control over Financial Reporting |
Except as material weaknesses as of December 31, 2008. Our efforts to remediate the weaknesses in our internal controls included:
ITEM 9B. OTHER INFORMATION.
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Directors and executive officers
The following table sets forth the names and ages of our current directors and executive officers, their principal offices and positions and the date each such person became our director or executive officer. Our executive officers are elected annually by the board of directors. Our directors serve one-year terms until they are re-elected or their successors are elected. The executive officers serve by election of the board of directors for one year terms or until their death, resignation, removal or renewal by the board of directors. The executive officers are all full-time employees of General Steel Holdings, Inc.
There are no family relationships between any of the directors and executive officers. In addition, there was no arrangement or understanding between any executive officer and any other person pursuant to which any person was selected as an executive officer. Our Common Stock is listed on the New York Stock Exchange, or “NYSE.” Under NYSE listing standards, the Board of Directors is required to affirmatively determine that each “independent” director has no material relationship with the Company, either directly or as a partner, stockholder or officer of an organization that has a relationship with the Company. Our Board has determined that the following directors are “independent” as required by NYSE listing standards: Yong Tao Si, Angela He, Qinghai Du, Zhongkui Cao, Wenbing Chris Wang, and James Hu. Additionally, all members of our Audit Committee are “independent” as defined in Rule 10A-3(b)(1) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and as required by NYSE listing standards. The non-management directors, all of whom currently are independent, met once during the fiscal year ended December 31, 2011 without management present and James Hu served as the lead independent director at such meeting.
Our directors and executive officers are as follows:
Name | Age | Position | Date of appointment | |||
Zuosheng Yu | 47 | Chairman of the Board of Directors and Chief Executive Officer | 10/14/04 | |||
John Chen | 40 | Director / Chief Financial Officer | 03/07/05 | |||
Xiaozeng Xu | 44 | Director, General Manager of Longmen Joint Venture | 10/13/10 | |||
James Hu | 39 | Independent Director | 02/15/10 | |||
Angela He | 42 | Independent Director | 07/23/10 | |||
Qinghai Du | 74 | Independent Director | 08/28/07 | |||
Zhongkui Cao | 62 | Independent Director | 04/13/07 | |||
Wenbing Chris Wang | 41 | Independent Director | 11/13/07 | |||
Yongtao Si | 56 | Independent Director | 07/23/10 |
On February 25, 2011, James Hu was chosen to preside at the regularly scheduled executive sessions of the independent directors to comply with Section 303A.03 of the corporate governance rules of the New York Stock Exchange. Any stockholder or interested party who wishes to communicate with our Board of Directors or any specific director, including the Presiding Director, any non-management director or the non-management directors as a group, may do so by writing to such direct or directors at: General Steel Holdings, Inc., Level 21, Tower B, Jia Ming Center, No. 27 Dong San Huan North Road, Chaoyang District, Beijing 100020, China. This communication will be forwarded to the director or directors to whom addressed. This information to be includedregarding contacting the board of directors is also posted on our website atwww.gshi-steel.com.
Biographical information
Mr. Zuosheng Yu, age 47, Chairman of the Board of Directors. Mr. Yu joined our Company in October 2004 and became Chairman of the Board at that time. He also serves as our Chief Executive Officer. Since February 2001, he has been President and Chairman of the Board of Directors of Beijing Wendlar Investment Management Group, Beijing, China. Mr. Yu graduated in 1985 from Sciences and Engineering Institute, Tianjin, China. In July 1994, he received a Bachelor’s degree from Institute of Business Management for Officers. Mr. Yu received the title of “Senior Economist” from the Committee of Science and Technology of Tianjin City in 1994. In July 1997, he received an MBA degree from the Graduate School of Tianjin Party University. Since April 2003, Mr. Yu has held a position as a member of China’s APEC (Asia Pacific Economic Co-operation) Development Council. Mr. Yu’s strong knowledge of, and experience in, the sections entitled, “ElectionChinese steel industry, as well as his extensive institutional knowledge of Directors”our Company make him well suited to contribute to our Board of Directors.
Mr. John Chen, age 40, Director. Mr. Chen joined us in May 2004 and “Our Executive Officers,” respectively,was elected as a director in March 2005. He also serves as our Chief Financial Officer. From August 1997 to July 2003, he served as a senior accountant at Moore Stephens, Wurth, Frazer and Torbet, LLP in Los Angeles, California. Mr. Chen graduated from Norman Bethune University of Medical Science, Changchun city, Jilin province, China in September 1992. He received a B.S. degree in accounting from California State Polytechnic University, Pomona, California, U.S. in July 1997. Mr. Chen’s accounting skills and experience make him well suited to contribute to our board. He currently also serves on the board of directors of China Carbon Graphite Group, Inc. (OTCBB: CHGI), SGOCO Group, Ltd. (NASDAQ: SGOC), and China HGS Real Estate Inc. (NASDAQ: HGSH).
108 |
Mr. Xiao Zeng Xu, age 44, Director. Mr. Xu joined General Steel and was elected as a director in October, 2010. He currently serves as the Director and General Manager of Shaanxi Longmen Iron and Steel Co., Ltd., a subsidiary of the Company. Mr. Xu has been working at Shaanxi Longmen Iron and Steel Group Co., Ltd. in various positions for more than 20 years, including as Deputy Director of an iron making factory and Director of the Sales Department. Mr. Xu obtained a Masters in Business Administration from Xi’an Jiaotong University in 1996.
Mr. James Hu, age 39, Independent Director.Mr. Hu was elected as an independent director in February 2009. Since 2006, Mr. Hu has worked at Standard Chartered Bank (China) Limited. Previously, Mr. Hu was a Senior Auditor with Deloitte Touche Tohmatsu in the Definitive Proxy StatementUnited States before moving on to hold management positions at both U.S. and China-based firms. His education includes a Bachelor’s degree in Economics from the University of California at Berkeley and a Masters degree in Business Administration from the Darden Graduate School at the University of Virginia. He is a California licensed certified public accountant. Mr. Hu served on the board of directors of SGOCO Group, Ltd. (NASDAQ: SGOC) and his auditing and consulting experience make him well suited to contribute to our Board of Directors.
Ms. Angela He, age 42, Independent Director. Ms. He was elected as an independent director in July 2010. She currently serves as the Chief Financial Officer of Procell Biotech Asia Corp. in Newport Beach, California and as an SEC reporting and accounting advisor to various publicly traded and private companies in the United States. From 2010 to 2012, she served as the Chief Officer of Aero Technology in Long Beach, California. From 2006 to 2007, she served as a Senior Auditor for PriceWaterhouse Coopers in Los Angeles. From 2003 to 2006, she served as an auditor for Moore Stephens Wurth Frazer and Torbet, LLP (now known as Frazer LLP). Ms. He graduated with a Bachelor of Arts from California State University at Fullerton and is a California Certified Public Accountant.
Mr. Qinghai Du, age 74, Independent Director. Mr. Du was elected as a director in August 2007. From 2007 to 2009, Mr. Du was the General Engineer for Beijing Industrial Design and Research Institute. During the past 40 years, he has served as the Chief Engineer and Section Chief at both Baotou Design and Research Institute of Iron and Steel, and the Design Institute of Capital Iron and Steel. Mr. Du received his Bachelor’s degree in Iron and Steel Metallurgy from the Beijing University of Science and Technology, formerly known as Beijing University of Iron and Steel Technology, in 1963. Mr. Du has considerable experience in and strong knowledge of the Chinese steel industry which makes him well suited to contribute to our Board of Directors.
Mr. Zhongkui Cao, age 62, Independent Director. Mr. Cao was elected as a director in April 2007. From January 1994 to December 1998, Mr. Cao was President and Chairman of the Board at Baotou Metallurgy Machinery State-owned Asset Management Co. Mr. Cao graduated from Baotou Institute of Iron and Steel in 1974. Mr. Cao’s understanding and experience relating to the Chinese steel industry make him well suited to contribute to our Board of Directors.
Mr. Wenbing Chris Wang, age 41, Independent Director. Mr. Wang was elected as an independent director in November 2007. Since September, 2009, Mr. Wang has served as President and a Director of Fushi Copperweld, Inc. (“Fushi”). In addition, Mr. Wang was the Chief Financial Officer of Fushi from December 2005 to August 2009 and served as interim Chief Financial Officer of Fushi from March 2010 to October 2010. Mr. Wang received a degree in English from the Beijing University of Science and Technology in 1994 and an MBA in Finance and Corporate Accounting from the Simon Business School of the University of Rochester in 2002. His strong knowledge of finance and extensive experience in public company operations make him well suited to contribute to our board. In addition to his position as Director of Fushi, Mr. Wang also currently serves on the board of Orient Paper, Inc. (NYSEAmex: ONP).
Mr. Yong Tao Si, age 56, Independent Director. Mr. Si was elected as an independent director in July 2010. From 2000 to April 2010, Mr. Si worked for Baotou Iron and Steel Group Co., Ltd., in the Inner Mongolian Autonomous Region, in various senior management positions including General Manger, Director and Chairman. He also served as Vice President of the China Iron and Steel Association (“CISA”), a national, non-profit organization founded in 1999, formerly known as China Metallurgical Enterprise Management Association. Mr. Si graduated from Beijing Science and Technology University with a degree in steel production.
Board Committees and Meetings of the Board of Directors
Our business is managed under the direction of our Board of Directors, which meets during the year to review significant developments affecting us and acts upon matters requiring its approval. Our Board of Directors met one time during the fiscal year ended December 31, 2011. Our Board of Directors acted by written consent eight times during the fiscal year ended December 31, 2011.
It is our policy to encourage all directors to attend the Annual Meeting. All of our directors attended our 2011 Annual Meeting of StockholdersStockholders.
Our Board of Directors has three standing committees: the Compensation Committee, the Audit Committee and the Governance and Nominating Committee. A brief description of the composition and functions of each committee follows.
Audit Committee
Our Audit Committee consists of James Hu, Angela He and Wenbing Chris Wang. Mr. Hu is the Chairman of the Audit Committee. Each member of our Audit Committee is “independent” within the meaning of the NYSE listing standards and the rules and regulations of the SEC and related federal law. The Audit Committee held four meetings during the fiscal year ended December 31, 2011.
The primary responsibilities of the Audit Committee are to review the results of the annual audit and to discuss the financial statements, including the independent auditors’ judgment about the quality of accounting principles, the reasonableness of significant judgments, and the clarity of the disclosures in the financial statements. Additionally, the Audit Committee meets with our independent auditors to review the interim financial statements prior to the filing of our Quarterly Reports on Form 10-Q, recommends independent auditors to our Board of Directors to be filedretained by us, oversees the independence of the independent auditors, evaluates the independent auditors’ performance, receives and considers the independent auditors’ comments as to controls, adequacy of staff and management performance and procedures in connection with audit and financial controls, including our system to monitor and manage business risks and legal and ethical compliance programs, audit and non-audit services provided to us by our independent auditors, and considers conflicts of interest involving executive officers or Board members. Our Board of Directors has determined that each of Mr. Hu, Ms. He and Mr. Wang are “audit committee financial experts” as defined by the Securities and Exchange Commission no later than 120 days after(the “SEC”). Our Board of Directors has adopted a written charter for the Audit Committee which may be accessed and reviewed through our website: http://www.gshi-steel.com. This website address is not intended to function as a hyperlink, and the information contained in our website is not intended to be a part of this filing.
To the best of our knowledge, none of the following ever occurred to any of our directors and officers.
(1) Any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
(2) Any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
(3) Being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or
(4) Being found by a court of competent jurisdiction (in a civil action), the SEC or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.
Compensation Committee
Our Compensation Committee consists of James Hu, Angela He and Wenbing Chris Wang. Ms. He is the Chairwoman of the Compensation Committee. Each member of our Compensation Committee is a non-management director and each is (i) independent as defined under the NYSE listing standards and as determined by the Board of Directors, (ii) a “non-employee director” for purposes of Rule 16b-3 of the Securities Exchange Act of 1934, as amended, and (iii) an “outside director” for purposes of Section 162(m) of the Internal Revenue Code. The Compensation Committee met once during the fiscal year ended December 31, 2009 (the “20102011.
The Compensation Committee’s functions are to review and recommend compensation policies and programs, as well as salary and other compensation levels for individual executives, including our Chief Executive Officer. The Compensation Committee makes these recommendations to our Board of Directors which, in turn, provides final approval on individual compensation matters for our executives. The Compensation Committee has the authority to retain any advisors, counsel and consultants as the members deem necessary in order to carry out these functions. The Compensation Committee also administers the compensation programs for our employees, including executive officers, reviews and approves all awards granted under these programs, reviews the Compensation Discussion and Analysis section of this Proxy Statement”)Statement and approves the accompanying Compensation Committee Report. For more information on the Compensation Committee, see “Compensation Discussion and Analysis.” Our Board of Directors has adopted a written charter for the Compensation Committee which may be accessed and reviewed through our website: http://www.gshi-steel.com. This website address is incorporated hereinnot intended to function as a hyperlink, and the information contained in our website is not intended to be a part of this filing.
Governance and Nominating Committee
Our Governance and Nominating Committee consists of James Hu, Angela He and Wenbing Chris Wang. Mr. Wang serves as the Chairman of the Governance and Nominating Committee. All of the members of the Governance and Nominating Committee are considered “independent” within the meaning of the NYSE listing standards. The Governance and Nominating Committee held one meeting during the fiscal year ended December 31, 2011.
The Governance and Nominating Committee recommends criteria for service as a director, reviews candidates and recommends appropriate governance practices for the Company in light of corporate governance guidelines set forth by reference.
The Governance and Nominating Committee considers nominees for the Board recommended by stockholders if such recommendations are submitted in writing to our Secretary, John Chen, at Level 21, Tower B, Jia Ming Center, No. 27 Dong San Huan North Road, Chaoyang District, Beijing, China 100020. At this time, no additional specific procedures to propose a candidate for consideration by the Governance and Nominating Committee or minimum criteria for consideration of a proposed candidate for nomination to the Board of Directors have been adopted as the Company believes that the procedures currently in place will continue to serve the needs of the Board and stockholders. Our Board of Directors has adopted a written charter for the Nominating Committee which may be accessed and reviewed through our website: http://www.gshi-steel.com. This website address is not intended to function as a hyperlink, and the information contained in our website is not intended to be a part of this filing.
Risk-Management Oversight
Risk is inherent in any business and our management is responsible for the day-to-day management of risks that we face. Our Board of Directors, on the other hand, has responsibility for the oversight of risk management. In its risk oversight role, our Board of Directors has the responsibility to evaluate the risk management process to ensure its adequacy and to seek assurances that it is implemented properly by management.
Our Board of Directors believes that full and open communication between management and our Board of Directors is essential for effective risk management and oversight. Relevant members of senior management, as necessary, attend the Board of Directors’ meetings and, as necessary, Board committee meetings, in order to address any questions or concerns raised by our Board of Directors on risk management-related and other matters. At meetings, our Board of Directors may receive presentations from senior management on business operations, financial results and strategic matters, including an assessment of the sensitivity of the various financial, operational and strategic risks faced by our Company, and discuss strategies, key challenges, risks and opportunities.
Our committees assist our Board of Directors in fulfilling its oversight responsibilities in certain areas of risk. The Audit Committee assists the Board in fulfilling its oversight responsibilities with respect to risk management in the areas of financial reporting, internal controls and compliance with legal and regulatory requirements. The Compensation Committee assists the Board in fulfilling its oversight responsibilities with respect to the management of risks arising from our compensation policies and programs and succession planning for executives. The Governance and Nominating Committee assists our Board of Directors in fulfilling its oversight responsibilities with respect to the management of risks associated with Board organization and structure, code of conduct, conflict of interest policies and corporate governance, and in overseeing the membership and independence of our Board of Directors. While each committee is responsible for evaluating certain risks and overseeing the management of those risks, the entire Board of Directors is regularly informed about those risks and committee activities through committee reports.
Board Leadership Structure
Our Chief Executive Officer, Zuosheng Yu, also serves as the Chairman of our Board of Directors. Our Board of Directors believes that this leadership structure is appropriate because Mr. Yu founded General Steel Holdings, Inc. and has the most comprehensive institutional knowledge of any member of our Board of Directors and is thus best positioned to develop agendas that ensure that the Board’s time and attention are focused on the most critical matters. Mr. Yu’s combined role also provides decisive leadership, ensures clear accountability and enhances our ability to communicate our message and strategy clearly and consistently to our stockholders, employees, and investors. James Hu, our lead independent director, serves as a liaison between the Chairman and our non-management directors, consults with the Chairman and Chief Executive Officer regarding information sent to directors, reviews meeting agendas and schedules and may call meetings of our non-management directors.
Each of the directors other than Mr. Yu, Mr. Chen and Mr. Xu are independent and our Board of Directors believes that the independent directors provide effective oversight of management. Moreover, in addition to feedback provided during the course of Board meetings, the independent directors provide the Chairman with regular input regarding agenda items for Board of Directors and committee meetings and coordinate with the Chairman regarding information to be includedprovided to the independent directors in performing their duties. Our Board of Directors believes that this approach appropriately and effectively complements the combined Chairman/Chief Executive Officer structure.
Our Board periodically evaluates whether the leadership structure of our Board of Directors continues to be optimal for the Company and our stockholders. Although we believe that the combination of the Chairman and Chief Executive Officer roles is appropriate in our current circumstances, the Board has the flexibility to modify the Board leadership structure in the section entitled “Sectionfuture if it determines that to be appropriate.
Communications with the Board of Directors
Stockholders and all interested parties who wish to communicate with the Board of Directors, or specific individual directors, may do so by directing correspondence to our Secretary, John Chen, at Level 21, Tower B, Jia Ming Center, No. 27 Dong San Huan North Road, Chaoyang District, Beijing, China 100020. Such correspondence should prominently display the fact that it is a stockholder-director communication and indicate whether the correspondence should be forwarded to the entire Board of Directors or to particular directors.
Section 16(a) Beneficial Ownership Reporting Compliance”Compliance
Section 16(a) of the Exchange Act requires our directors and executive officers, and persons who own more than 10% of a registered class of our securities, to file with the SEC initial reports of ownership and reports of changes in ownership of our common stock and other equity securities. Based solely on a review of copies of such forms received with respect to fiscal year 2011 and the 2010 Proxy Statement is incorporated hereinwritten representations received from certain reporting persons that no other reports were required, we believe that all Section 16(a) filings were timely made by reference.
Code of Ethics and Business Conduct and Ethics” inCorporate Governance Guidelines
Our Code of Ethics and Business Conduct and Corporate Governance Guidelines provides information to guide employees, including our Chief Executive Officer, Chief Financial Officer, and our Directors, so that their business conduct is consistent with our ethical standards and improves the 2010 Proxy Statement is incorporated herein by reference.
Our Code of Ethics and Business Conduct and Corporate Governance Guidelines may also be obtained free of charge by contacting Investor Relations at jenny.wang@gshi-steel.com or by phone: +86-10-5775-7691.
ITEM 11. EXECUTIVE COMPENSATION.
Employment Agreements
We have not entered into employment agreements with any of our named executive officers.
Severance Arrangements
We do not have any severance agreements or other arrangements with any of our named executive officers.
Change of Control Arrangements
We do not have any change of control agreements or other arrangements with any of our named executive officers.
No Policies Regarding Equity Ownership and Hedging
We do not have any equity or other security ownership requirements or guidelines that specify applicable amounts or forms of ownership. We do not have any policies regarding hedging the economic risk of equity ownership.
COMPENSATION COMMITTEE REPORT
The informationCompensation Committee has reviewed and discussed the Compensation Discussion and Analysis with management and, based on such review and discussions, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in this Annual Report on Form-10K for the sections entitled “Executive Compensation”fiscal year ended December 31, 2011.
Respectfully submitted,
General Steel Holdings, Inc. Compensation Committee
Angela He, Chairwoman
James Hu, Member
Wenbing Chris Wang, Member
Executive Compensation
The table below sets forth all compensation awarded to, earned by or paid to our named executive officers for the fiscal years indicated. No other executive officers received more than $100,000 in total compensation.
Summary Compensation Table
Name and Principal Position | Year | Salary ($) (1) | Bonus ($) (1) | Stock Awards ($)(2) | Total ($) (1) | |||||||||||||||
Zuosheng Yu, | 2011 | 161,632 | — | 272,700 | 434,332 | |||||||||||||||
Chief Executive Officer | 2010 | 154,769 | — | 464,800 | 619,569 | |||||||||||||||
John Chen, | 2011 | 64,351 | — | 60,600 | 124,951 | |||||||||||||||
Chief Financial Officer | 2010 | 50,629 | — | 116,200 | 166,829 | |||||||||||||||
Xiao Zeng Xu | 2011 | 65,006 | — | 85,340 | 150,346 | |||||||||||||||
General Manager of Longmen Joint Venture | 2010 | 54,442 | — | 101,200 | 155,642 |
(1) | The amounts shown were paid in RMB and were translated into U.S. dollars at the rate of $0.1545 per RMB for 2011, and $0.14794 per RMB for 2010. |
(2) | The stock price assumption used to calculate the grant date fair value of all stock awards granted in the year indicated, as computed in accordance with FASB ASC Topic 718, and as disclosed in Note 19 to the financial statements in this Annual Report, and Note 17 to the financial statements of the Company’s 2010 Annual Report on Form 10-K/A, respectively. |
Director Compensation
The table below sets forth information regarding compensation earned by directors, other than our Chief Executive Officer and “Directors’ Compensation” inChief Financial Officer, as compensation for their service to the 2010 Proxy Statement is incorporated herein by reference.
Name | Stock Awards ($) (1) | Total ($) (1) | ||||||
Xiao Zeng Xu | $ | 85,340 | $ | 150,346 | ||||
James Hu | 15,150 | 15,150 | ||||||
Angela He | 25,725 | 25,725 | ||||||
Qinghai Du | 3,030 | 3,030 | ||||||
Zhongkui Cao | 3,030 | 3,030 | ||||||
Wenbing Chris Wang | 15,150 | 15,150 | ||||||
Yong Tao Si | 15,150 | 15,150 |
(1) | The stock price assumption used to calculate the grant date fair value of all stock awards granted on the date indicated, as computed in accordance with FASB ASC Topic 718, and as disclosed in Note 19 to the financial statements in the Company’s 2011 Annual Report on Form 10-K. |
Currently, we do not pay annual fees to our directors. During fiscal year 2011, we granted fully-vested unregistered shares of common stock to our directors on a quarterly basis. We determined the amount of each grant based on level of involvement, responsibility and length of service.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended December 31, 2011, the members of the Compensation Committee were Angela He, James Hu and Wenbing Chris Wang. In fiscal 2011, no member of the Compensation Committee was an officer or employee of our Company or any of our subsidiaries.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table sets forth certain information as of February 7, 2013, as to be includedshares of common stock and preferred stock beneficially owned by: (i) each person who is known by our Company to own beneficially more than 5% of common stock and preferred stock, (ii) each of our current named executive officers, (iii) each of our current directors, and (iv) all of our current directors and named executive officers as a group. Unless otherwise stated below, the address of each beneficial owner listed on the table is c/o General Steel Holdings, Inc., Level 21, Tower B, Jia Ming Center, No. 27 Dong San Huan North Road, Chaoyang District, Beijing, China 100020.
Name of Beneficial Owner | Shares Beneficially Owned | Percentage Beneficial Ownership of Class (1) | Percentage of Voting Power | |||||||||||||
Common Stock | ||||||||||||||||
Directors and Named Executive Officers | Common Stock | Series A Preferred Stock | ||||||||||||||
Zuosheng Yu (2) Chief Executive Officer and Chairman of the Board of Directors | 8,023,900 | 14.6 | % | 10.2 | % | |||||||||||
John Chen Chief Financial Officer and Director | 140,000 | * | * | |||||||||||||
Xiao Zeng Xu Director and General Manager of Longmen Joint Venture | 99,000 | * | * | |||||||||||||
James Hu Independent Director | 40,000 | * | * | |||||||||||||
Angela He Independent Director | 33,750 | * | * | |||||||||||||
Qinghai Du Independent Director | 10,500 | * | * | |||||||||||||
Zhongkui Cao Independent Director | 10,500 | * | * | |||||||||||||
Wenbing Chris Wang Independent Director | 52,500 | * | * | |||||||||||||
Yong Tao Si Independent Director | 22,500 | * | * | |||||||||||||
Executive Officers and Directors as a group | 8,432,650 | 15.4 | % | 10.8 | % | |||||||||||
5% Owners | ||||||||||||||||
Golden Eight Investments Limited (2) | 14,000,000 | 25.5 | % | 17.9 | % | |||||||||||
Series A Preferred Stock | ||||||||||||||||
Victory New Holdings Limited (3) | 3,092,899 | 100 | % | 30.0 | % |
* Less than 1%
(1) Percentages based on 54,797,532 shares of Common Stock and 3,092,899 shares of Preferred Stock outstanding as of February 7, 2013.
(2) Mr. Yu is the beneficial owner of 8,023,900 shares of common stock held in his name and 14,000,000 shares of common stock held in the section entitled “Security Ownershipname of Certain Beneficial OwnersGolden Eight Investments Limited (“Golden Eight”). Mr. Yu is the sole director of Golden Eight. Golden Eight is wholly owned by The GSI Family Trust U/A/D 01/21/10 (the “Trust”). Mr. Yu has sole power of revocation over the Trust and Management”is the sole member of the Investment Committee of the Trust. As such, Mr. Yu has voting and investment control directly over the securities held by the Trust and indirectly over the securities held by Golden Eight. Mr. Yu also has voting and investment control over 3,092,899 shares of Series A Preferred Stock held in the 2010 Proxy Statementname of Victory New Holdings Limited, a British Virgin Islands registered company, which, while outstanding, have a voting power equal to 30% of the combined voting power of our common stock and Preferred Stock.
(3) Victory New Holdings Limited, a British Virgin Islands registered company (“Victory New”), is incorporated hereincontrolled by reference.
EQUITY INCENTIVE PLAN INFORMATION
The following table provides information as of December 31, 2011, about compensation plans under which shares of our Common Stock may be issued to employees, consultants or non-employee directors upon exercise of options, warrants or rights.
(a) | (b) | (c) | ||||||||||
Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights(1) | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights(1) | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a))(1) | |||||||||
Plans approved by stockholders | - | $ | - | 640,466 | ||||||||
Plans not approved by stockholders | - | - | - | |||||||||
Total | $ | 640,466 |
(1) | We grant fully vested, unregistered shares of our common stock to employees under our 2008 Equity Incentive Plan. Our stock grants are not restricted and therefore there are no securities to be issued upon exercise of outstanding options, warrants and rights. |
(2) | Represents the number of securities remaining available for issuance under our 2008 Equity Incentive Plan. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Set for below are our related party transactions.
Related party transactions
Capital lease
As disclosed in Notes 1- “Background” and 13 – “ Capital lease obligations” to the financial statements in this Annual Report on Form 10-K, 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 Company. The informationfollowing is an analysis of the leased assets under the capital lease:
Balance at December 31, 2011 | ||||
(in thousands) | ||||
Machinery | $ | 581,413 | ||
Less: accumulated depreciation | (18,411 | ) | ||
Carrying value of leased assets | $ | 563,002 |
The following is a schedule by year of future minimum lease payments under the capital lease and profit sharing liability to bethe lessor, Shaanxi Steel, and the present value of the net minimum lease payments as of December 31, 2011.
(in thousands) | Capital Lease Obligation Minimum Lease Payments | Capital Lease Obligation Profit (Loss) Sharing | Total | |||||||||
Year ended December 31, 2012 | $ | 46,029 | $ | - | $ | 46,029 | ||||||
Year ended December 31, 2013 | 27,617 | - | 27,617 | |||||||||
Year ended December 31, 2014 | 27, 617 | - | 27,617 | |||||||||
Year ended December 31, 2015 | 27, 617 | - | 27,617 | |||||||||
Year ended December 31, 2016 | 27, 617 | - | 27,617 | |||||||||
Thereafter | 395,845 | 854,157 | 1,250,002 | |||||||||
Total minimum lease payments | 552,342 | 854,157 | 1,402,499 | |||||||||
Less: amounts representing interest | (245,992 | ) | (550,924 | ) | (796,916 | ) | ||||||
Ending balance | $ | 306,350 | $ | 303,233 | $ | 609,583 |
As of December 31, 2011 and, 2010, the amount payable to Shaanxi Steel was approximately $18.4 million and $0, respectively, and was included in the sections entitled “Certain Relationshipscurrent portion of capital lease obligation.
On April 30, 2011, Tongxing completed its transfer of 20.7% share of Shaanxi Xinglong Thermoelectric Co., Ltd to the Labor Union Trust of Shaanxi Long Steel Group. The transfer price of $11.3 million (RMB 72.9 million) was considered to be at fair value based on management assessment. As of April 30, 2011, our investment in Xinglong is approximately $9.9 million and Related Transactions,” “Board Independence,” and “Compensation Committee Interlocks and Insider Participation”this transaction resulted in a gain of $1.4 million, which is included in “Income from equity investments” in the consolidated statements of operation and other comprehensive income (loss).
On March 31, 2010, Proxy StatementGeneral Steel (China), entered into a lease agreement with Tianjin Daqiuzhuang Steel Plates Co., Ltd. (the “Lessee”), whereby General Steel (China) leases 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 the Company to reduce overhead costs while providing a recurring monthly income stream resulting from payments due under the lease. The term of the Lease Agreement is incorporatedfrom January 1, 2010 to December 31, 2011 and the monthly base rental rate due to General Steel (China) is approximately $0.3 million (RMB1.7 million).On July 28, 2011, General Steel (China) (lessor) 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 the Company that they do not intend to extend the lease at the end of 2012 and plans to terminate the supplemental agreement early. There is no penalty for early termination.
For the years ended December 31, 2011 and 2010, General Steel (China) realized rental income in each period of $3.1 million which has been included in “other non-operating income (expense), net” in the consolidated statements of operation and other comprehensive income (loss).
December 31, 2011 | December 31, 2010 | |||||||
(in thousands) | (in thousands) | |||||||
Original cost of fixed assets leased | $ | 33,903 | $ | 33,385 | ||||
Less: Accumulated depreciation | (17,813 | ) | (15,286 | ) | ||||
Less : Impairment of long-lived assets | (5,515 | ) | - | |||||
Fixed assets leased, net | $ | 10,575 | $ | 18,099 |
The future rental payments to be received associated with the Lease Agreement entered into on March 31, 2010 and the supplemental agreement entered into on July 28, 2011 and ending on December 31, 2012, are as follows:
Year ending December 31, | Amount | |||
(in thousands) | ||||
2012 | $ | 3,115 | ||
Thereafter | - | |||
Total | $ | 3,115 |
The following chart summarized sales to related parties for the years ended December 31, 2011 and 2010.
Name of related parties | Relationship | December 31, 2011 | December 31, 2010 | |||||||
(in thousands) | (in thousands) | |||||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | $ | 337,359 | $ | 344,556 | |||||
Tianjin Hengying Trading Co., Ltd. | Partially owned by CEO* through indirect shareholding | 94,984 | 47,268 | |||||||
Tianjin Dazhan Industry Co, Ltd. | Partially owned by CEO through indirect shareholding | 76,130 | 43,778 | |||||||
Sichuan Yutai Trading Co., Ltd. | Significant influence by Long Steel Group** | 187,689 | - | |||||||
Shaanxi Yuchang Trading Co., Ltd. | Significant influence by Long Steel Group | 160,422 | - | |||||||
Shaanxi Haiyan Trade Co.,Ltd. | Significant influence by Long Steel Group | 58,299 | 38,545 | |||||||
Shaanxi Shenganda Trading Co., Ltd. | Significant influence by Long Steel Group | 37,432 | - | |||||||
Tianjin General Qiugang Pipe Co., Ltd. | Partially owned by CEO through indirect shareholding | 20,014 | - | |||||||
Shaanxi Steel | Majority shareholder of Long Steel Group | 19,735 | 1,152 | |||||||
Beijing Daishang Trading Co., Ltd. | Noncontrolling shareholder of Longmen Joint Venture’s subsidiary | - | 5,503 | |||||||
Tianjin Daqiuzhuang Steel Plates Co., Ltd. | Partially owned by CEO through indirect shareholding | - | 8,385 | |||||||
Shaanxi Long Steel Group Baoji Steel Rolling Co., Ltd | Subsidiary of Long Steel Group | 69,872 | - | |||||||
Shaanxi Junlong Rolling Co., Ltd. | Investee of Long Steel Group | 48,991 | - | |||||||
Others | Entities either owned or have significant influence by our affiliates or management | 842 | 183 | |||||||
Total | $ | 1,111,769 | $ | 489,370 |
*The CEO referred to herein by reference.
**Long Steel Group has the ability to significantly influence the operating and financial decisions of the entity through equity ownership either directly or through key employees, commercial contractual terms, or the ability to assign management personnel.
The following charts summarize purchases from related parties for the years ended December 31, 2011 and 2010.
Name of related parties | Relationship | December 31, 2011 | December 31, 2010 | |||||||
(in thousands) | (in thousands) | |||||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | $ | 913,850 | $ | 553,752 | |||||
Hancheng Jinma Coking Co., Ltd. | Investee of Longmen Joint Venture’s subsidiary (unconsolidated) | 4,772 | 8,489 | |||||||
Hancheng Haiyan Coking Co., Ltd. | Noncontrolling shareholder of Long Steel Group | 391,065 | 234,479 | |||||||
Xi’an Pinghe Metallurgical Raw Material Co., Ltd. | Noncontrolling shareholder of Long Steel Group | 37,890 | - | |||||||
Shaanxi Long Steel Group Baoji Steel Rolling Co., Ltd. | Subsidiary of Long Steel Group | 19,076 | - | |||||||
Shaanxi Junlong Rolling Co., Ltd. | Investee of Long Steel Group | 19,110 | - | |||||||
Shaanxi Huafu New Energy Co., Ltd. | Significant influence by the Long Steel Group | 34,810 | - | |||||||
Beijing Daishang Trading Co., Ltd. | Noncontrolling shareholder of Longmen Joint Venture’s subsidiary | 6,509 | 1,984 | |||||||
Others | Entities either owned or have significant influence by our affiliates or management | 1,471 | 1,019 | |||||||
Total Related Party Purchases | $ | 1,428,553 | $ | 799,723 |
Related party balances
a. | Accounts receivables – related parties: |
Name of related parties | Relationship | December 31, 2011 | December 31, 2010 | |||||||
(in thousands) | (in thousands) | |||||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | $ | 9,187 | $ | 3,023 | |||||
Shaanxi Long Steel Group Baoji Steel Rolling Co., Ltd | Subsidiary of Long Steel Group | 3,141 | - | |||||||
Hancheng Haiyan Coking Co., Ltd. | Noncontrolling shareholder of Long Steel Group | 303 | - | |||||||
Tianjin Daqiuzhuang Steel Plates | Partially owned by CEO through indirect shareholding | 755 | - | |||||||
Tianjin Hengying Trading Co., Ltd. | Partially owned by CEO through indirect shareholding | - | 1,054 | |||||||
Shaanxi Steel | Majority shareholder of Long Steel Group | 7,207 | 83 | |||||||
Total | $ | 20,593 | $ | 4,160 |
b. | 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 on behalf of these related parties.
Name of related parties | Relationship | December 31, 2011 | December 31, 2010 | |||||||
(in thousands) | (in thousands) | |||||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | $ | 15,244 | $ | 993 | |||||
Shaanxi Steel | Majority shareholder of Long Steel Group | 66,869 | - | |||||||
Maoming Shengze Trading Co., Ltd. | Partially owned by CEO through indirect shareholding | 937 | 8,095 | |||||||
Tianjin Daqiuzhuang Steel Plates Co., Ltd. | Partially owned by CEO through indirect shareholding | - | 1,078 | |||||||
Shaanxi Huafu New Energy Co., Ltd. | Significant influence by Long Steel Group | 2,441 | - | |||||||
Teamlink Investment Co., Ltd. | Owned by CEO through indirect shareholding | 2,000 | - | |||||||
Tianjin Dazhan Industry Co, Ltd. | Partially owned by CEO through indirect shareholding | - | 455 | |||||||
Others | Entities either owned or have significant influence by our affiliates or management | 188 | 317 | |||||||
Total | $ | 87,679 | $ | 10,938 |
c. | Advances on inventory purchase – related parties: |
Name of related parties | Relationship | December 31, 2011 | December 31, 2010 | |||||||
(in thousands) | (in thousands) | |||||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | $ | 1,028 | $ | - | |||||
Tianjin General Qiugang Pipe Co., Ltd. | Partially owned by CEO through indirect shareholding | 15,678 | 6,187 | |||||||
Maoming Shengze Trading Co., Ltd. | Partially owned by CEO through indirect shareholding | 3,538 | - | |||||||
Total | $ | 20,244 | $ | 6,187 |
d. | Accounts payable - related parties: |
Name of related parties | Relationship | December 31, 2011 | December 31, 2010 | |||||||
(in thousands) | (in thousands) | |||||||||
Hancheng Haiyan Coking Co., Ltd. | Noncontrolling shareholder of Longmen Joint Venture | $ | 46,487 | $ | 25,708 | |||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | 11,231 | 28,329 | |||||||
Tianjin Dazhan Industry Co., Ltd. | Partially owned by CEO through indirect shareholding | 25,511 | 2,764 | |||||||
Xi’an Pinghe Metallurgical Raw Material Co., Ltd. | Noncontrolling shareholder of Long Steel Group | 12,800 | - | |||||||
Tianjin Hengying Trading Co., Ltd. | Partially owned by CEO through indirect shareholding | 14,856 | 17,264 | |||||||
Henan Xinmi Kanghua Fire Refractory Co., Ltd. | Noncontrolling shareholder of Longmen Joint Venture’s subsidiary | 1,185 | 880 | |||||||
Hancheng Jinma Coking Co., Ltd | Investee of Longmen Joint Venture’s subsidiary (unconsolidated) | - | 1,579 | |||||||
Beijing Daishang Trading Co., Ltd. | Noncontrolling shareholder of Longmen Joint Venture’s subsidiary | 1,600 | 1,101 | |||||||
Maoming Shengze Trading Co., Ltd. | Partially owned by CEO through indirect shareholding | - | 1,954 | |||||||
Tianjin General Qiugang Pipe Co., Ltd. | Partially owned by CEO through indirect shareholding | 8,034 | - | |||||||
Others | Entities either owned or have significant influence by our affiliates or management | 124 | 115 | |||||||
Total Accounts Payable – Related Parties | $ | 121,828 | $ | 79,694 |
e. | Short-term loans - related parties: |
Name of related parties | Relationship | December 31, 2011 | December 31, 2010 | |||||||
(in thousands) | (in thousands) | |||||||||
Shaanxi Steel | Majority shareholder of Long Steel Group | $ | - | $ | 14,548 | |||||
Tianjin Hengying Trading Co., Ltd. | Partially owned by CEO through indirect shareholding | 15,710 | - | |||||||
Total | $ | 15,710 | $ | 14,548 |
f. | Other payables - related parties: |
Other payables – related parties are those nontrade payables arising from transactions between the Company and its related parties, such as advances or payments from these related parties on behalf of the Group.
Name of related parties | Relationship | December 31, 2011 | December 31, 2010 | |||||||
(in thousands) | (in thousands) | |||||||||
Tianjin Hengying Trading Co, Ltd. | Partially owned by CEO through indirect shareholding | $ | - | $ | 10,168 | |||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | 20,001 | - | |||||||
Wendlar Investment & Management Group Co., Ltd. | Common control under CEO | 241 | - | |||||||
Yangpu Capital Automobile | Partially owned by CEO through indirect shareholding | 1,398 | 1,350 | |||||||
Tianjin Daqiuzhuang Steel Plates Co., Ltd. | Partially owned by CEO through indirect shareholding | 5,771 | - | |||||||
Tianjin General Qiugang Pipe Co., Ltd. | Partially owned by CEO through indirect shareholding | - | 4,547 | |||||||
Tianjin Hengying Trading Co., Ltd. | Partially owned by CEO through indirect shareholding | 1,040 | - | |||||||
Wenchun Han | Director of General Steel (China) | - | 2,124 | |||||||
Others | Entities either owned or have significant influence by our affiliates or management | 422 | 25 | |||||||
Total | $ | 28,873 | $ | 18,214 |
g. | Customer deposits – related parties: |
Name of related parties | Relationship | December 31, 2011 | December 31, 2010 | |||||||
(in thousands) | (in thousands) | |||||||||
Hancheng Haiyan Coking Co., Ltd. | Noncontrolling shareholder of Long Steel Group | $ | - | $ | 5,081 | |||||
Shaanxi Yuchang Trading Co., Ltd. | Significant influence by Long Steel Group | 24,256 | - | |||||||
Sichuan Yutai Trading Co., Ltd. | Significant influence by Long Steel Group | 5,972 | - | |||||||
Tianjin Hengying Trading Co, Ltd. | Partially owned by CEO through indirect shareholding | 1,506 | - | |||||||
Tianjin General Qiugang Pipe Co., Ltd. | Partially owned by CEO through indirect shareholding | 9,102 | - | |||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | 4,755 | 48,161 | |||||||
Beijing Shenhua Xinyuan Metal Materials Co., Ltd. | Partially owned by CEO through indirect shareholding | 1,345 | 1,299 | |||||||
Shaanxi Haiyan Trade Co.,Ltd. | Significant influence by Long Steel Group | 6,822 | - | |||||||
Shaanxi Junlong Rolling Co., Ltd. | Investee of Long Steel Group | 1,540 | - | |||||||
Tianjin Dazhan Industry Co., Ltd. | Partially owned by CEO through indirect shareholding | 11,178 | - | |||||||
Shaanxi Shenganda Trading Co., Ltd. | Significant influence by Long Steel Group | 1,750 | - | |||||||
Others | Entities either owned or have significant influence by our affiliates or management | 51 | 381 | |||||||
Total | $ | 68,277 | $ | 54,922 |
h. | Deposits due to sales representatives – related parties |
Name of related parties | Relationship | December 31, 2011 | December 31, 2010 | |||||||
(in thousands) | (in thousands) | |||||||||
Hancheng Haiyan Coking Co., Ltd. | Noncontrolling shareholder of Long Steel Group | $ | 471 | $ | 455 | |||||
Shaanxi Junlong Rolling Co., Ltd. | Investee of Long Steel Group | 472 | - | |||||||
Total | $ | 943 | $ | 455 |
i. | Long-term loans – related parties: |
Name of related parties | Relationship | December 31, 2011 | December 31, 2010 | |||||||
(in thousands) | (in thousands) | |||||||||
Shaanxi Steel | Majority shareholder of Long Steel Group | $ | 92,035 | $ | 91,020 | |||||
Total | $ | 92,035 | $ | 91,020 |
The Company also provided guarantee on related parties’ bank loans amounting to $56.6 million and $3.0 million as of December 31, 2011 and as of December 31, 2010, respectively.
j. | Deferred lease income |
December 31, 2011 | December 31, 2010 | |||||||
(in thousands) | (in thousands) | |||||||
Beginning balance | $ | 57,591 | $ | 16,487 | ||||
Add: Reimbursement for dismantled assets | - | 568 | ||||||
Add: Reimbursement for loss of efficiency | - | 20,676 | ||||||
Add: Reimbursement for trial production costs | 14,042 | 13,584 | ||||||
Add: Deferred depreciation cost during free use period | 6,904 | 6,656 | ||||||
Less: Lease income realized | (2,008 | ) | (943 | ) | ||||
Exchange rate effect | 1,995 | 563 | ||||||
Ending balance | 78,524 | 57,591 | ||||||
Ending balance – current portion | (2,099 | ) | (1,971 | ) | ||||
Ending balance – non current portion | $ | 76,425 | $ | 55,620 |
For the years ended December 31, 2011 and 2010, the Company realized deferred lease income from Shaanxi Steel, a related party, amounting $2.0 million and $0.9 million, respectively.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
Fees for professional services provided by our independent registered public accounting firms in each of the last two fiscal years, in each of the following categories are as follows:
2011 | 2010 | |||||||
Audit fees | $ | 3,037,675 | $ | 740,000 | ||||
Audit-related fees | $ | - | $ | - | ||||
Tax fees | $ | 29,000 | $ | 27,500 | ||||
All other fees | $ | - | $ | - |
Audit fees were notifiedfor the audit of our annual financial statements and the review of our financial statements included in our quarterly reports on Form 10-Q and services that effective January 1, 2010, certain partners of its previousare normally provided by our independent registered public accounting firm Moore Stephens Wurth Frazerin connection with the statutory and Torbet,regulatory filings. Tax fees involved the preparation of our consolidated tax returns. Please note that the audit fees include services provided by both of our current and former independent registered public accounting firms. Our current auditor, Friedman LLP, (“MSWFT”),fees are $770,000 in fiscal year 2011. We had terminated our former auditor, PricewaterhouseCoopers Zhong Tian CPAs Limited Company, on December 19, 2012, and certain partners of Frost, PLLC (“Frost”) formedtheir fees were $2,187,675 in fiscal year 2011. Our former auditor, Frazer Frost LLP (“Frazer Frost”), a new partnership. Pursuantfees were $109,000, as Frazer Frost still provided services to us in through the transition of our auditors in fiscal year 2011 and fees were $767,500 in fiscal year 2010.
Audit Committee’s Pre-Approval Policies and Procedures
The Audit Committee’s policy is to pre-approve all audit and non-audit services provided by our independent registered public accounting firm. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the termsparticular service or category of services and is generally subject to a combination agreement by and among MSWFT, Frazer Frost and Frost (the “Combination Agreement”), each of MSWFT and Frost contributed all of their assets and certain of their liabilitiesspecific budget. The Audit Committee has delegated pre-approval authority to Frazer Frost, resulting in Frazer Frost assuming MSWFT’s engagement letter with us. On January 7, 2010, the Audit Committee Chairman, or any Audit Committee member in his absence, when services are required on an expedited basis, with such pre-approval disclosed to the full Audit Committee at its next scheduled meeting. None of the fees paid to the independent auditors under the categories “Audit-Related fees” and “All other fees” described above were approved by the Audit Committee prior to services being rendered pursuant to the de minimis exception established by the SEC.
All of the Audit fees and Tax fees provided by our independent registered public accounting firm in fiscal 2011 and related fees were approved in advance by our Audit Committee.
Audit Committee Report
The Audit Committee oversees our financial reporting process on behalf of the Board of Directors. Management has the primary responsibility for the financial statements and the reporting process, including the system of internal controls. In fulfilling its oversight responsibilities, the Audit Committee reviewed and discussed the audited financial statements for this Annual Report on Form 10-K with management, including a discussion of the quality, not just the acceptability, of the accounting principles; the reasonableness of significant judgments; and the clarity of disclosures in the financial statements.
The Audit Committee discussed with Friedman LLP, our independent registered public accounting firm (independent auditors) for the fiscal year ended December 31, 2011, who are responsible for expressing an opinion on the conformity of those audited financial statements with U.S. generally accepted accounting principles, their judgments as to the quality, not just the acceptability, of our accounting principles and such other matters as are required to be discussed with the independent registered public accounting firm under generally accepted auditing standards including Statement on Auditing Standards No. 61, as amended by Statement on Auditing Standards No. 90 (Communication with Audit Committees), other standards of the Public Company Accounting Oversight Board (United States), rules of the Securities and Exchange Commission and other applicable regulations. In addition, the Audit Committee has discussed with the independent registered public accounting firm the auditors’ independence from management and our Company, including the matters in the written disclosures required by the applicable requirements of the Public Company Accounting Oversight Board regarding the independent registered public accounting firm’s communications with the Audit Committee concerning independence, which the Audit Committee received from the independent registered public accounting firm, and considered the compatibility of non-audit services with the independent registered public accounting firm’s independence.
The Audit Committee also reviewed management’s report on its assessment of the effectiveness of our internal control over financial reporting.
The Audit Committee discussed with our independent registered public accounting firm and the persons responsible for the internal audit function the overall scope and plans for their respective audits. The Audit Committee meets with the independent registered public accounting firm and the persons responsible for the internal audit function, with and without management present, to discuss the results of their examinations, their evaluations of the Company’s internal control, including internal control over financial reporting, and the overall quality of our financial reporting. During 2011, the Audit Committee held four meetings, including quarterly closing conferences with the independent registered public accounting firm and management during which financial results and related issues were reviewed and discussed prior to the release of quarterly results to the public.
The Audit Committee is governed by a charter which may be found on our website. The members of the Audit Committee are considered to be “independent” because they satisfy the independence requirements of the New York Stock Exchange listing standards and Rule 10A-3 of the Securities Exchange Act of 1934.
Based on the reviews and discussions referred to above, the Audit Committee recommended to the Board of Directors and the Board of Directors has approved the engagementinclusion of Frazer Frost as MSWFT’s successor to continue asthe audited financial statements and management’s assessment of the effectiveness of our independent accounting firm.
Audit Committee: | James Hu, Chairman |
Angela He, Member | |
Wenbing Chris Wang, Member |
The informationAudit Committee Report does not constitute soliciting material, and shall not be deemed to be included infiled or incorporated by reference into any other Company filing under the section entitled “Independent Registered Public Accountants” inSecurities Act of 1933, as amended, or the 2010 Proxy Statement is incorporated hereinSecurities Exchange Act of 1934, as amended, except to the extent that our Company specifically incorporates the Audit Committee Report by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) | (1) and (2) –LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES set forth below |
(3) See Item 8, Financial Statements and Supplementary Data:
(b) | The following financial statements are included herein under Part II, Item 8, Financial Statements and Supplementary Data: |
• | Reports of Independent Registered Public Accounting Firms | |
• | Consolidated Balance Sheets —December 31, 2011 and 2010 | |
• | Consolidated Statements of Operations and Other Comprehensive Loss for the years ended December 31, 2011, and 2010 | |
• | Consolidated Statements of Changes in Equity for the years ended December 31, 2011 and 2010 | |
• | Consolidated Statements of Cash Flows for the years ended December 31, 2011 and 2010 | |
• | Notes to Consolidated Financial Statements |
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions, are not applicable, or information required is included in the financial statements or notes thereto and, therefore, have been omitted.
(c) –LIST OF EXHIBITS
Exhibit Number | Description |
3.1 | Articles of Incorporation of General Steel Holdings, Inc. (included as Exhibit 3.1 to the Form SB-2 filed with the Commission on June 6, 2003 and incorporated herein by reference). |
3.2 | Amendment to the Articles of Incorporation dated February 22, 2005 |
3.3 | Amendment to the Articles of Incorporation dated November 14, 2007 |
3.4 | Certificate of Designation of Series A Preferred Stock of the registrant (included as Exhibit 10.6 to the Form 10-K filed March 31, 2008 and incorporated herein by reference). |
3.5 | Bylaws of General Steel Holdings, Inc. |
Form of Common Stock Purchase Warrant (included as Exhibit 4.1 to the Form 8-K filed on December 24, 2009 and incorporated herein by reference). |
10.1 | Form of Warrant Reset Agreement by and between General Steel Holdings, Inc. and Hudson Bay Fund, LP (included as Exhibit 10.3 to the Form 8-K filed on December 24, 2009 and incorporated herein by reference). |
10.2 | Form of Warrant Reset Agreement by and between General Steel Holdings, Inc. and the holders of the December 2007 Warrants (not including Hudson Bay Fund, LP) (included as Exhibit 10.4 to the Form 8-K filed on December 24, 2009 and incorporated herein by reference). |
10.3 |
General Steel Holdings, Inc. 2008 Equity Incentive Plan (included as Appendix A to the Schedule 14A filed June 20, 2008 and incorporated herein by reference). |
10.4 | Service Agreement, dated February 25, 2009, by and between General Steel Holdings, Inc. and James Hu thereto (included as Exhibit 10.1 to the Form 8-K filed with the Commission on February 27, 2009 and incorporated herein by reference). |
10.5 | Form of Securities Purchase Agreement, dated as of December 24, 2009, by and between General Steel Holdings, Inc. and each purchaser signatory thereto (included as Exhibit 10.1 to Form 8-K filed with the Commission on December 24, 2009 and incorporated herein by reference). |
10.6 | Form of Voting Agreement (included as Exhibit 10.2 to the Form 8-K filed on December 24, 2009 and incorporated herein by reference). |
10.7 | Amendment to the Securities Purchase Agreement dated October 5, 2009 to the Securities Purchase Agreement, December 13, 2007 by and among General Steel Holdings, Inc. and the Buyers set forth therein | |
10.8 | Lease Agreement, dated March 31, 2010, by and between General Steel (China) Co., Ltd. and Tianjin Daqiuzhuang Steel Plates Co., Ltd. (included as Exhibit 10.1 to the Form 8-K filed with the Commission on April 6, 2010 and incorporated herein by reference). | |
10.9 | Joint Venture Framework Agreement, dated May 13, 2010, by and between General Steel Holdings, Inc. and Shanxi Meijin EnergeryEmerge Group Co., Ltd. (included as Exhibit 10.1 to the Form 8-K filed with the Commission on May 18, 2010 and incorporated herein by reference). |
10.10 | Debt Repayment Agreement, dated June 7, 2010, by and among General Steel Holdings, Inc., Maoming Hengda Group Ltd., Guangzhou Hengda Industrial Group Ltd., and Ms. Ding Yumei (included as Exhibit 10.1 to the Form 8-K filed with the Commission on June 9, 2010 and incorporated herein by reference). | |
10.11 | Cooperation Agreement (also referred to as the Unified Management Agreement), dated April 29, 2011, by and among General Steel Holdings, Inc., Shaanxi Coal and Chemical Industry Group Co., Ltd., Shaanxi Iron and Steel Group Co., Ltd., and Shaanxi Longmen Iron and Steel Co., Ltd. (included as Exhibit 10.1 to the Form 8-K filed with the Commission on May 5, 2011 and incorporated herein by reference). | |
10.12 | Debt Repayment Agreement, dated June 16, 2011, by and among Maoming Hengda Steel Co. Ltd., Tianjin Qiu Gang Investment Co., Ltd, Guangzhou Hengda Industrial Group Ltd., and Ms. Ding Yumei (included as Exhibit 10.1 to the Form 8-K filed with the Commission on June 20, 2011 and incorporated herein by reference). | |
21 | Subsidiaries of the |
23 | Consent of Frazer Frost, LLP (filed herewith). |
31.1 | Certification of Chief Executive |
31.2 | Certification of Chief Financial |
32.1 | Certification of Chief Executive Officer and Chief Financial Officer. (filed herewith). | |
101.INS*** | XBRL Instance Document | |
101.SCH*** | XBRL Taxonomy Extension Schema Document | |
101.CAL*** | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF*** | XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB*** | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE*** | XBRL Taxonomy Extension Presentation Linkbase Document |
*** | XBRL (Extensive Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
GENERAL STEEL HOLDINGS, INC | ||
By: | /s/ Zuosheng Yu | |
Name: Zuosheng Yu | ||
Title: Chairman and Chief Executive Officer (Principal Executive Officer) | ||
Date: |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE | TITLE | DATE | ||
/s/ Zuosheng Yu | Chairman and Chief Executive Officer and Director | |||
YU, Zuosheng | (Principal Executive Officer) | |||
/s/ John Chen | ||||
CHEN, John | (Principal Accounting and Financial Officer) | |||
/s/ | Director | |||
/s/ | ||||
Independent Director | ||||
/s/ | Independent Director | February 15, 2013 | ||
HE, Angela | ||||
/s/ Qinghai Du | Independent Director | |||
DU, | ||||
/s/ Zhong Kui Cao | Independent Director | |||
CAO, Zhong Kui | ||||
/s/ Chris Wang | Independent Director | |||
WANG, Chris | ||||
/s/ | Independent Director | |||
130 |