UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2014
or
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to __________
Commission File Number 001-33717
General Steel Holdings, Inc.
(Exact name of registrant as specified in its charter)
Nevada | 41-2079252 | |
| (State or other Jurisdiction of | (I.R.S. Employer Identification No.) | |
| Incorporation or Organization) |
Level 21, Tower B, Jia Ming Center
No. 27 Dong San Huan North Road
Chaoyang District, Beijing, China 100020
(Address of Principal Executive Office, Including Zip Code)
+86(10)86 (10) 5775 7691
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨ No x
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files). Yes x No ¨ No 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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ | Accelerated filer¨ | Non-accelerated filer ¨ (Do not check if a smaller reporting company) | Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of November 5, 2013, 55,298,732May 9, 2014, 58,314,688 shares of common stock, par value $0.001 per share, were outstanding.
Table of Contents
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
(UNAUDITED)
(In thousands)
| September 30, | December 31, | ||||||
| 2013 | 2012 | ||||||
| ASSETS | |||||||
| CURRENT ASSETS: | |||||||
| Cash | $ | 62,091 | $ | 46,467 | |||
| Restricted cash | 405,781 | 323,420 | |||||
| Notes receivable | 116,900 | 145,502 | |||||
| Restricted notes receivable | 357,250 | 357,900 | |||||
| Loans receivable - related parties | 4,540 | 69,319 | |||||
| Accounts receivable, net | 8,577 | 6,695 | |||||
| Accounts receivable - related parties | 3,252 | 14,966 | |||||
| Other receivables, net | 56,494 | 8,407 | |||||
| Other receivables - related parties | 51,501 | 68,382 | |||||
| Inventories | 177,383 | 212,671 | |||||
| Advances on inventory purchase | 79,855 | 79,715 | |||||
| Advances on inventory purchase - related parties | 29,667 | 46,416 | |||||
| Prepaid expense and other | 1,490 | 450 | |||||
| Prepaid taxes | 16,415 | 24,116 | |||||
| Short-term investment | 2,771 | 2,619 | |||||
| TOTAL CURRENT ASSETS | 1,373,967 | 1,407,045 | |||||
| PLANT AND EQUIPMENT, net | 1,250,542 | 1,167,836 | |||||
| OTHER ASSETS: | |||||||
| Advances on equipment purchase | 21,715 | 6,499 | |||||
| Long-term other receivable | - | 43,008 | |||||
| Investment in unconsolidated entities | 1,161 | 1,166 | |||||
| Long-term deferred expense | 713 | 1,062 | |||||
| Intangible assets, net of accumulated amortization | 23,928 | 24,066 | |||||
| TOTAL OTHER ASSETS | 47,517 | 75,801 | |||||
| TOTAL ASSETS | $ | 2,672,026 | $ | 2,650,682 | |||
| LIABILITIES AND DEFICIENCY | |||||||
| CURRENT LIABILITIES: | |||||||
| Short term notes payable | $ | 987,988 | $ | 983,813 | |||
| Accounts payable | 495,488 | 352,052 | |||||
| Accounts payable - related parties | 172,259 | 177,432 | |||||
| Short term loans - bank | 254,929 | 147,124 | |||||
| Short term loans - others | 130,170 | 147,323 | |||||
| Short term loans - related parties | 48,889 | 79,557 | |||||
| Current maturities of long-term loans - related party | 47,896 | 54,885 | |||||
| Other payables and accrued liabilities | 52,272 | 54,589 | |||||
| Other payable - related parties | 106,153 | 73,025 | |||||
| Customer deposits | 95,695 | 125,890 | |||||
| Customer deposits - related parties | 14,512 | 21,998 | |||||
| Deposit due to sales representatives | 28,184 | 33,870 | |||||
| Deposit due to sales representatives - related parties | 1,809 | 1,238 | |||||
| Taxes payable | 9,716 | 16,674 | |||||
| Deferred lease income, current | 2,178 | 2,120 | |||||
| TOTAL CURRENT LIABILITIES | 2,448,138 | 2,271,590 | |||||
| NON-CURRENT LIABILITIES: | |||||||
| Long-term loans - related party | 24,450 | 38,088 | |||||
| Long-term other payable - related party | - | 43,008 | |||||
| Deferred lease income, noncurrent | 75,480 | 75,079 | |||||
| Capital lease obligations | 354,576 | 330,099 | |||||
| Profit sharing liability | 241,090 | 328,827 | |||||
| Other noncurrent liabilities | 1,402 | - | |||||
| TOTAL NON-CURRENT LIABILITIES | 696,998 | 815,101 | |||||
| TOTAL LIABILITIES | 3,145,136 | 3,086,691 | |||||
| COMMITMENTS AND CONTINGENCIES | |||||||
| DEFICIENCY: | |||||||
| Preferred stock, $0.001 par value, 50,000,000 shares authorized, 3,092,899 shares issued and outstanding as of September 30, 2013 and December 31, 2012 | 3 | 3 | |||||
| Common stock, $0.001 par value, 200,000,000 shares authorized, 57,771,038 and 57,269,838 shares issued, 55,298,732 and 54,797,532 shares outstanding as of September 30, 2013 and December 31, 2012, respectively | 58 | 57 | |||||
| Treasury stock, at cost, 2,472,306 shares as of September 30, 2013 and December 31, 2012 | (4,199) | (4,199) | |||||
| Paid-in-capital | 106,405 | 105,714 | |||||
| Statutory reserves | 6,263 | 6,076 | |||||
| Accumulated deficits | (414,696) | (381,782) | |||||
| Accumulated other comprehensive income | 2,471 | 10,185 | |||||
| TOTAL GENERAL STEEL HOLDINGS, INC. DEFICIENCY | (303,695) | (263,946) | |||||
| NONCONTROLLING INTERESTS | (169,415) | (172,063) | |||||
| TOTAL DEFICIENCY | (473,110) | (436,009) | |||||
| TOTAL LIABILITIES AND DEFICIENCY | $ | 2,672,026 | $ | 2,650,682 | |||
| March 31, | December 31, | |||||||
| 2014 | 2013 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | 36,378 | $ | 31,967 | ||||
| Restricted cash | 428,615 | 399,333 | ||||||
| Notes receivable | 81,998 | 60,054 | ||||||
| Restricted notes receivable | 261,220 | 395,589 | ||||||
| Loans receivable - related parties | 4,540 | 4,540 | ||||||
| Accounts receivable, net | 4,388 | 4,078 | ||||||
| Accounts receivable - related parties | 4,474 | 2,942 | ||||||
| Other receivables, net | 54,078 | 54,716 | ||||||
| Other receivables - related parties | 57,854 | 54,106 | ||||||
| Inventories | 210,761 | 212,921 | ||||||
| Advances on inventory purchase | 44,338 | 44,897 | ||||||
| Advances on inventory purchase - related parties | 120,426 | 83,003 | ||||||
| Prepaid expense and other | 1,890 | 1,388 | ||||||
| Prepaid taxes | 23,238 | 28,407 | ||||||
| Short-term investment | 2,597 | 2,783 | ||||||
| TOTAL CURRENT ASSETS | 1,336,795 | 1,380,724 | ||||||
| PLANT AND EQUIPMENT, net | 1,269,199 | 1,271,907 | ||||||
| OTHER ASSETS: | ||||||||
| Advances on equipment purchase | 54,690 | 6,409 | ||||||
| Investment in unconsolidated entities | 16,635 | 16,943 | ||||||
| Long-term deferred expense | 606 | 668 | ||||||
| Intangible assets, net of accumulated amortization | 23,587 | 23,707 | ||||||
| TOTAL OTHER ASSETS | 95,518 | 47,727 | ||||||
| TOTAL ASSETS | $ | 2,701,512 | $ | 2,700,358 | ||||
| LIABILITIES AND DEFICIENCY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Short term notes payable | $ | 963,357 | $ | 1,017,830 | ||||
| Accounts payable | 513,397 | 434,979 | ||||||
| Accounts payable - related parties | 282,540 | 235,692 | ||||||
| Short term loans - bank | 230,118 | 301,917 | ||||||
| Short term loans - others | 48,695 | 62,067 | ||||||
| Short term loans - related parties | 105,080 | 126,693 | ||||||
| Current maturities of long-term loans - related party | 57,428 | 53,013 | ||||||
| Other payables and accrued liabilities | 60,795 | 45,653 | ||||||
| Other payable - related parties | 80,694 | 94,079 | ||||||
| Customer deposits | 107,002 | 87,860 | ||||||
| Customer deposits - related parties | 145,366 | 64,881 | ||||||
| Deposit due to sales representatives | 23,713 | 24,343 | ||||||
| Deposit due to sales representatives - related parties | 1,980 | 1,997 | ||||||
| Taxes payable | 7,276 | 4,628 | ||||||
| Deferred lease income, current | 2,168 | 2,187 | ||||||
| Capital lease obligations, current | 4,774 | 4,321 | ||||||
| TOTAL CURRENT LIABILITIES | 2,634,383 | 2,562,140 | ||||||
| NON-CURRENT LIABILITIES: | ||||||||
| Long-term loans - related party | 14,607 | 19,644 | ||||||
| Deferred lease income, noncurrent | 74,072 | 75,257 | ||||||
| Capital lease obligations, noncurrent | 376,025 | 375,019 | ||||||
| Profit sharing liability | 160,956 | 162,295 | ||||||
| TOTAL NON-CURRENT LIABILITIES | 625,660 | 632,215 | ||||||
| TOTAL LIABILITIES | 3,260,043 | 3,194,355 | ||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| DEFICIENCY: | ||||||||
| Preferred stock, $0.001 par value, 50,000,000 shares authorized, 3,092,899 shares issued and outstanding as of March 31, 2014 and December 31, 2013 | 3 | 3 | ||||||
| Common stock, $0.001 par value, 200,000,000 shares authorized, 58,314,688 and 58,234,688 shares issued, 55,842,382 and 55,762,382 shares outstanding as of March 31, 2014 and December 31, 2013, respectively | 58 | 58 | ||||||
| Treasury stock, at cost, 2,472,306 shares as of March 31, 2014 and December 31, 2013 | (4,199 | ) | (4,199 | ) | ||||
| Paid-in-capital | 107,028 | 106,878 | ||||||
| Statutory reserves | 6,387 | 6,243 | ||||||
| Accumulated deficits | (458,362 | ) | (414,798 | ) | ||||
| Accumulated other comprehensive income | 3,593 | 729 | ||||||
| TOTAL GENERAL STEEL HOLDINGS, INC. DEFICIENCY | (345,492 | ) | (305,086 | ) | ||||
| NONCONTROLLING INTERESTS | (213,039 | ) | (188,911 | ) | ||||
| TOTAL DEFICIENCY | (558,531 | ) | (493,997 | ) | ||||
| TOTAL LIABILITIES AND DEFICIENCY | $ | 2,701,512 | $ | 2,700,358 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30,MARCH 31, 2014 AND 2013 AND 2012
(UNAUDITED)
(In thousands, except per share data)
| For the three months ended September 30, | For the nine months ended September 30, | ||||||||||||
| 2013 | 2012 | 2013 | 2012 | ||||||||||
| SALES | $ | 514,549 | $ | 518,542 | $ | 1,534,330 | $ | 1,441,325 | |||||
| SALES - RELATED PARTIES | 95,546 | 192,883 | 380,707 | 698,824 | |||||||||
| TOTAL SALES | 610,095 | 711,425 | 1,915,037 | 2,140,149 | |||||||||
| COST OF GOODS SOLD | 511,932 | 528,586 | 1,550,829 | 1,426,589 | |||||||||
| COST OF GOODS SOLD - RELATED PARTIES | 89,932 | 196,435 | 387,446 | 693,482 | |||||||||
| TOTAL COST OF GOODS SOLD | 601,864 | 725,021 | 1,938,275 | 2,120,071 | |||||||||
| GROSS PROFIT (LOSS) | 8,231 | (13,596) | (23,238) | 20,078 | |||||||||
| SELLING, GENERAL AND ADMINISTRATIVE EXPENSES | (19,661) | (22,787) | (59,464) | (61,548) | |||||||||
| CHANGE IN FAIR VALUE OF PROFIT SHARING LIABILITY | 41,825 | - | 107,877 | - | |||||||||
| INCOME (LOSS) FROM OPERATIONS | 30,395 | (36,383) | 25,175 | (41,470) | |||||||||
| OTHER INCOME (EXPENSE) | |||||||||||||
| Interest income | 2,835 | 4,337 | 8,657 | 13,039 | |||||||||
| Finance/interest expense | (25,503) | (36,615) | (81,355) | (138,929) | |||||||||
| Change in fair value of derivative liabilities | - | (55) | 1 | (48) | |||||||||
| Gain on disposal of equipment | 17 | 293 | 113 | 177 | |||||||||
| Income from equity investments | 47 | 44 | 137 | 80 | |||||||||
| Foreign currency transaction gain (loss) | 322 | (581) | 448 | (1,169) | |||||||||
| Lease income | 542 | 528 | 1,613 | 1,588 | |||||||||
| Other non-operating income (expense), net | 770 | 2,314 | 1,559 | 3,316 | |||||||||
| Other expense, net | (20,970) | (29,735) | (68,827) | (121,946) | |||||||||
| INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES AND NONCONTROLLING INTEREST | 9,425 | (66,118) | (43,652) | (163,416) | |||||||||
| PROVISION FOR INCOME TAXES | |||||||||||||
| Current | 25 | 100 | 201 | 510 | |||||||||
| Deferred | - | - | - | 169 | |||||||||
| Provision for income taxes | 25 | 100 | 201 | 679 | |||||||||
| NET INCOME (LOSS) | 9,400 | (66,218) | (43,853) | (164,095) | |||||||||
| Less: Net income (loss) attributable to noncontrolling interest | 5,599 | (24,620) | (10,939) | (61,336) | |||||||||
| NET INCOME (LOSS) ATTRIBUTABLE TO GENERAL STEEL HOLDINGS, INC. | $ | 3,801 | $ | (41,598) | $ | (32,914) | $ | (102,759) | |||||
| NET INCOME (LOSS) | $ | 9,400 | $ | (66,218) | $ | (43,853) | $ | (164,095) | |||||
| OTHER COMPREHENSIVE INCOME (LOSS) | |||||||||||||
| Foreign currency translation adjustments | (2,547) | (698) | (12,283) | (577) | |||||||||
| COMPREHENSIVE INCOME (LOSS) | 6,853 | (66,916) | (56,136) | (164,672) | |||||||||
| Less: Comprehensive income (loss) attributable to noncontrolling interest | 4,782 | (24,888) | (15,508) | (61,721) | |||||||||
| COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO GENERAL STEEL HOLDINGS, INC. | $ | 2,071 | $ | (42,028) | $ | (40,628) | $ | (102,951) | |||||
| WEIGHTED AVERAGE NUMBER OF SHARES | |||||||||||||
| Basic and Diluted | 55,141 | 54,466 | 54,976 | 54,946 | |||||||||
| EARNINGS (LOSS) PER SHARE | |||||||||||||
| Basic and Diluted | $ | 0.07 | $ | (0.76) | $ | (0.60) | $ | (1.87) | |||||
| 2014 | 2013 | |||||||
| SALES | $ | 512,005 | $ | 502,431 | ||||
| SALES - RELATED PARTIES | 82,206 | 148,860 | ||||||
| TOTAL SALES | 594,211 | 651,291 | ||||||
| COST OF GOODS SOLD | 530,744 | 498,626 | ||||||
| COST OF GOODS SOLD - RELATED PARTIES | 86,028 | 148,598 | ||||||
| TOTAL COST OF GOODS SOLD | 616,772 | 647,224 | ||||||
| GROSS (LOSS) PROFIT | (22,561 | ) | 4,067 | |||||
| SELLING, GENERAL AND ADMINISTRATIVE EXPENSES | (21,053 | ) | (18,955 | ) | ||||
| CHANGE IN FAIR VALUE OF PROFIT SHARING LIABILITY | (49 | ) | 46,779 | |||||
| (LOSS) INCOME FROM OPERATIONS | (43,663 | ) | 31,891 | |||||
| OTHER INCOME (EXPENSE) | ||||||||
| Interest income | 3,192 | 2,439 | ||||||
| Finance/interest expense | (28,695 | ) | (24,857 | ) | ||||
| Gain on disposal of equipment and intangible assets | 46 | 331 | ||||||
| Income from equity investments | 13 | (42 | ) | |||||
| Foreign currency transaction (loss) gain | (854 | ) | 28 | |||||
| Lease income | 546 | 532 | ||||||
| Other non-operating (expense) income, net | (176 | ) | 269 | |||||
| Other expense, net | (25,928 | ) | (21,300 | ) | ||||
| (LOSS) INCOME BEFORE PROVISION FOR INCOME TAXES AND NONCONTROLLING INTEREST | (69,591 | ) | 10,591 | |||||
| PROVISION FOR INCOME TAXES | ||||||||
| Current | 5 | 71 | ||||||
| Deferred | - | - | ||||||
| Provision for income taxes | 5 | 71 | ||||||
| NET (LOSS) INCOME | (69,596 | ) | 10,520 | |||||
| Less: Net (loss) income attributable to noncontrolling interest | (26,032 | ) | 7,417 | |||||
| NET (LOSS) INCOME ATTRIBUTABLE TO GENERAL STEEL HOLDINGS, INC. | $ | (43,564 | ) | $ | 3,103 | |||
| NET (LOSS) INCOME | $ | (69,596 | ) | $ | 10,520 | |||
| OTHER COMPREHENSIVE LOSS | ||||||||
| Foreign currency translation adjustments | 4,670 | (2,526 | ) | |||||
| COMPREHENSIVE (LOSS) INCOME | (64,926 | ) | 7,994 | |||||
| Less: Comprehensive (loss) income attributable to noncontrolling interest | (24,226 | ) | 6,455 | |||||
| COMPREHENSIVE (LOSS) INCOME ATTRIBUTABLE TO GENERAL STEEL HOLDINGS, INC. | $ | (40,700 | ) | $ | 1,539 | |||
| WEIGHTED AVERAGE NUMBER OF SHARES | ||||||||
| Basic and Diluted | 55,813 | 54,805 | ||||||
| (LOSS) INCOME PER SHARE | ||||||||
| Basic and Diluted | $ | (0.78 | ) | $ | 0.06 | |||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
FOR THE NINETHREE MONTHS ENDED SEPTEMBER 30,MARCH 31, 2014 AND 2013 AND 2012
(UNAUDITED)
(In thousands)
| Nine months ended September 30, | |||||||
| 2013 | 2012 | ||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||
| Net loss | $ | (43,853) | $ | (164,095) | |||
| Adjustments to reconcile net loss to cash provided by (used in) operating activities: | |||||||
| Depreciation, amortization and depletion | 64,955 | 62,538 | |||||
| Change in fair value of derivative liabilities | (1) | 48 | |||||
| Gain on disposal of equipment | (113) | (177) | |||||
| Provision for doubtful accounts | (251) | 2,316 | |||||
| Reservation of mine maintenance fee | 315 | 3 | |||||
| Stock issued for services and compensation | 692 | 679 | |||||
| Amortization of deferred financing cost on capital lease | 27,778 | 32,363 | |||||
| Income from equity investments | (137) | (80) | |||||
| Foreign currency transaction gain | (448) | 1,169 | |||||
| Deferred tax assets | - | 169 | |||||
| Deferred lease income | (1,613) | (1,588) | |||||
| Change in fair value of profit sharing liability | (107,877) | - | |||||
| Changes in operating assets and liabilities | |||||||
| Notes receivable | 32,138 | (99,337) | |||||
| Accounts receivable | (483) | 5,429 | |||||
| Accounts receivable - related parties | 11,968 | (7,607) | |||||
| Other receivables | (3,466) | (5,460) | |||||
| Other receivables - related parties | (55,744) | 4,784 | |||||
| Inventories | 4,191 | 73,024 | |||||
| Advances on inventory purchases | 1,996 | (23,365) | |||||
| Advances on inventory purchases - related parties | (27,882) | (88,412) | |||||
| Prepaid expense and other | (1,016) | (183) | |||||
| Long-term deferred expense | 373 | 119 | |||||
| Prepaid taxes | 8,250 | 4,168 | |||||
| Accounts payable | 113,592 | (48,059) | |||||
| Accounts payable - related parties | 54,364 | 31,353 | |||||
| Other payables and accrued liabilities | (3,742) | 34,286 | |||||
| Other payables - related parties | (12,844) | 95,746 | |||||
| Customer deposits | (33,185) | (9,490) | |||||
| Customer deposits - related parties | (7,981) | 14,740 | |||||
| Taxes payable | (7,317) | (5,195) | |||||
| Other noncurrent liabilities | 1,384 | - | |||||
| Net cash provided by (used in) operating activities | 14,043 | (90,114) | |||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||
| Restricted cash | (72,676) | (35,094) | |||||
| Loans to related parties | 1,460 | (69,247) | |||||
| Cash proceeds from (made to) short term investment | (80) | 40 | |||||
| Cash proceeds from sales of equipment | 16 | 19 | |||||
| Equipment purchase and intangible assets | (75,326) | (15,909) | |||||
| Effect on cash due to deconsolidating of a subsidiary | - | (2,972) | |||||
| Net cash used in investing activities | (146,606) | (123,163) | |||||
| CASH FLOWS FINANCING ACTIVITIES: | |||||||
| Capital contributed by noncontrolling interest | 18,028 | - | |||||
| Payments made for treasury stock acquired | - | (1,404) | |||||
| Notes receivable - restricted | 10,218 | 521,866 | |||||
| Borrowings on short term notes payable | 1,348,631 | 1,382,976 | |||||
| Payments on short term notes payable | (1,370,832) | (1,637,570) | |||||
| Borrowings on short term loans - bank | 258,357 | 237,535 | |||||
| Payments on short term loans - bank | (155,390) | (355,008) | |||||
| Borrowings on short term loan - others | 148,678 | 160,554 | |||||
| Payments on short term loans - others | (169,558) | (193,964) | |||||
| Borrowings on short term loan - related parties | 362,202 | 269,362 | |||||
| Payments on short term loans - related parties | (274,718) | (221,134) | |||||
| Deposits due to sales representatives | (6,521) | 11,939 | |||||
| Deposit due to sales representatives - related parties | 531 | 285 | |||||
| Payments on current maturities of long-term loans - related party | (22,856) | - | |||||
| Net cash provided by financing activities | 146,770 | 175,437 | |||||
| EFFECTS OF EXCHANGE RATE CHANGE IN CASH | 1,417 | 1,426 | |||||
| INCREASE (DECREASE) IN CASH | 15,624 | (36,414) | |||||
| CASH, beginning of period | 46,467 | 120,016 | |||||
| CASH, end of period | $ | 62,091 | $ | 83,602 | |||
| 2014 | 2013 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net (loss) income | $ | (69,596 | ) | $ | 10,520 | |||
| Adjustments to reconcile net loss to cash provided by (used in) operating activities: | ||||||||
| Depreciation, amortization and depletion | 24,346 | 21,358 | ||||||
| Change in fair value of derivative liabilities | - | (1 | ) | |||||
| Gain on disposal of equipment and intangible assets | (46 | ) | (331 | ) | ||||
| Provision for doubtful accounts | (251 | ) | (42 | ) | ||||
| Reservation of mine maintenance fee | 242 | 45 | ||||||
| Stock issued for services and compensation | 150 | 245 | ||||||
| Amortization of deferred financing cost on capital lease | 5,086 | 5,095 | ||||||
| (Income) loss from equity investments | (13 | ) | 42 | |||||
| Foreign currency transaction (gain) loss | 854 | (28 | ) | |||||
| Deferred lease income | (546 | ) | (532 | ) | ||||
| Change in fair value of profit sharing liability | 49 | (46,779 | ) | |||||
| Changes in operating assets and liabilities | ||||||||
| Notes receivable | (70,354 | ) | 27,752 | |||||
| Accounts receivable | (102 | ) | (9,426 | ) | ||||
| Accounts receivable - related parties | (1,569 | ) | 6,808 | |||||
| Other receivables | 355 | (2,826 | ) | |||||
| Other receivables - related parties | (4,219 | ) | (20,212 | ) | ||||
| Inventories | (730 | ) | (37,526 | ) | ||||
| Advances on inventory purchases | 176 | 22,786 | ||||||
| Advances on inventory purchases - related parties | (38,419 | ) | (46,883 | ) | ||||
| Prepaid expense and other | (516 | ) | (1,039 | ) | ||||
| Long-term deferred expense | 56 | 260 | ||||||
| Prepaid taxes | 4,963 | 1,049 | ||||||
| Accounts payable | 59,351 | 57,648 | ||||||
| Accounts payable - related parties | 16,986 | 39,661 | ||||||
| Other payables and accrued liabilities | 15,300 | 1,887 | ||||||
| Other payables - related parties | (12,676 | ) | 8,789 | |||||
| Customer deposits | 20,043 | (21,956 | ) | |||||
| Customer deposits - related parties | 113,895 | (9,457 | ) | |||||
| Taxes payable | 2,708 | (4,427 | ) | |||||
| Other noncurrent liabilities | - | 1,370 | ||||||
| Net cash provided by operating activities | 65,523 | 3,850 | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Restricted cash | (32,943 | ) | 54,991 | |||||
| Cash proceeds from short term investment | 164 | - | ||||||
| Cash proceeds from sales of equipments and intangible assets | 24 | 4 | ||||||
| Equipment purchase and intangible assets | (56,861 | ) | (24,093 | ) | ||||
| Net cash (used in) provided by investing activities | (89,616 | ) | 30,902 | |||||
| CASH FLOWS FINANCING ACTIVITIES: | ||||||||
| Restricted notes receivable | 131,971 | 99,224 | ||||||
| Borrowings on short term notes payable | 439,342 | 289,548 | ||||||
| Payments on short term notes payable | (485,455 | ) | (493,064 | ) | ||||
| Borrowings on short term loans - bank | 95,120 | 32,563 | ||||||
| Payments on short term loans - bank | (165,711 | ) | (63,315 | ) | ||||
| Borrowings on short term loan - others | 9,853 | 21,296 | ||||||
| Payments on short term loans - others | (14,426 | ) | (21,432 | ) | ||||
| Borrowings on short term loan - related parties | 24,528 | 142,999 | ||||||
| Payments on short term loans - related parties | (5,849 | ) | (30,430 | ) | ||||
| Deposits due to sales representatives | (425 | ) | 6,411 | |||||
| Deposit due to sales representatives - related parties | - | 526 | ||||||
| Net cash provided by (used in) financing activities | 28,948 | (15,674 | ) | |||||
| EFFECTS OF EXCHANGE RATE CHANGE IN CASH | (444 | ) | 254 | |||||
| INCREASE IN CASH | 4,411 | 19,332 | ||||||
| CASH, beginning of period | 31,967 | 46,467 | ||||||
| CASH, end of period | $ | 36,378 | $ | 65,799 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
(Unaudited)
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%100% owned subsidiary, General Steel Investment, operates steel companies serving various industries in the People’s Republic of China (“PRC”). The Company’s main operation is manufacturing and sales of steel products such as steel rebar, hot-rolled carbon and silicon sheets and spiral-weld pipes. The Company, together with its subsidiaries, majority owned subsidiaries and variable interest entity, is referred to as the “Group”.
On April 29, 2011, a 20-year Unified Management Agreement (“the Agreement”) was entered into between the Company, the Company’s 60%60%-owned subsidiary Shaanxi Longmen Iron and Steel Co., Ltd. (“Longmen Joint Venture”), Shaanxi Coal and Chemical Industry Group Co., Ltd. (“Shaanxi Coal”) and Shaanxi Iron and Steel Group (“Shaanxi Steel”). Shaanxi Steel is the controlling shareholder of Shaanxi Longmen Iron and Steel Group Co., Ltd (“Long Steel Group”) which is the non-controlling interest holder in Longmen Joint Venture, and Shaanxi Coal, a state owned entity, is the parent company of Shaanxi Steel. Under the terms of the Agreement, all manufacturing machinery and equipment of Longmen Joint Venture and the $603.2$605.8 million (or approximately RMB 3.7 billion) of newly constructed iron and steel making facilities owned by Shaanxi Steel, which includes one 400m 400 m2 sintering machine, two 1,280m 1,280 m3 blast furnaces, two 120 ton converters and some auxiliary systems, are managed collectively as a single virtual asset pool (“Asset Pool”). Longmen Joint Venture manages the Asset Pool as the principal operating entity and is responsible for the daily operations of the new and existing facilities.
The Agreement leverages each of the parties’ operating strengths, allowing 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 constructed iron and steel making facilities an amount equaling the depreciation expense on the equipment constructed by Shaanxi Steel as well as 40%40% of the pre-tax profit generated by the Asset Pool. The remaining 60%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 Longmen Joint Venture decreased from 60%60% to 36%36%. However, the overall capacity under the management of Longmen Joint Venture has increased by three million tons, or 75%75%. The Agreement is 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 Agreement have agreed 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. See Note 2(c) “Consolidation of VIE.”
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 a capital lease. See Notes 2 “Summary of significant accounting policies”, 15 “Capital lease obligations” and 16 “Profit sharing liability”.
Note 2 – Summary of significant accounting policies
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information pursuant to the rules and regulations of the Securities Exchange Commission (“SEC”). The financial statements include the accounts of all directly, indirectly owned subsidiaries and the variable interest entity listed below. All material intercompany transactions and balances have been eliminated in consolidation. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary to give a fair statement have been included. Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with information included in the 20122013 annual report filed on Form 10-K filed on June 17, 2013.
| (a) | Basis of presentation |
The unaudited condensed consolidated financial statements of the Company reflect the activities of the following major directly owned subsidiaries:
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| Subsidiary | Percentage of Ownership | |||||
| General Steel Investment Co., Ltd. | British Virgin Islands | 100.0 | % | |||
| General Steel (China) Co., Ltd. (“General Steel (China)”) | PRC | 100.0 | % | |||
| Baotou Steel – General Steel Special Steel Pipe Joint Venture Co., Ltd. | PRC | 80.0 | % | |||
| Yangpu Shengtong Investment Co., Ltd. (“Yangpu Shengtong”) | PRC | 99.1 | % | |||
| Tianjin Qiu Steel Investment Co., Ltd. (“Qiu Steel”) | PRC | 98.7 | % | |||
| Longmen Joint Venture | PRC | VIE/60.0 | % | |||
| Maoming Hengda Steel Company, Ltd. (“Maoming Hengda”) | PRC | 99.0 | % | |||
Tianwu
Prior to November 19, 2013, the Company held a 60.0% equity interest in Tianwu General Steel Material Trading Co., Ltd. (“Tianwu”). 32% interest was held by General Steel (China) and 28% interest was held by Yangpu Shengtong. On November 19, 2013, the Company sold its 28% equity interest of Tianwu held by Yangpu Shengtong to Tianjin Dazhan Industry Co., Ltd., a related party through indirect common ownership, for $13.6 million (RMB 84.3 million) while retaining 32% interest held by General Steel (China). Tianwu is in the process of registering the ownership change with the local State Administration for Industry and Commerce (“SAIC”) office. As a result of this transaction, the Company met the criteria under ASC 810-10-40-4 to deconsolidate Tianwu at disposal date and recognized a gain in accordance with ASC 810-10-40-5. At the same time, General Steel (China)’s remaining 32% interest is accounted for as an investment in unconsolidated subsidiaries using the equity method. See Note 2(t) - Investments in unconsolidated entities for details.
| (b) | Principles of consolidation – subsidiaries |
The accompanying unaudited condensed consolidated financial statements include the financial statements of the Company, its subsidiaries, its variable interest entity (“VIE”) for which the Company is the ultimate primary beneficiary, and the VIE’s subsidiaries.
Subsidiaries are those entities in which the Company, directly or indirectly, controls more than one half of the voting power; or has the power to govern the financial and operating policies, to appoint or remove the majority of the members of the board of directors, or to cast a majority of votes at the meeting of directors.
A VIE is an entity in which the Company, or its subsidiary, through contractual arrangements, bears the risks of, and enjoys the rewards normally associated with ownership of the entity, and therefore the Company or its subsidiary is the primary beneficiary of the entity.
All significant inter-company transactions and balances have been eliminated upon consolidation.
| (c) | Consolidation of VIE |
Prior to entering into the Unified Management Agreement on April 29, 2011, Longmen Joint Venture had been consolidated as the Company’s 60%60% direct owned subsidiary. Upon entering into the Unified Management Agreement on April 29, 2011, Longmen Joint Venture was re-evaluated by the Company to determine if Longmen Joint Venture is a VIE and if the Company is the primary beneficiary.
Based on projected profits in this entity and future operating plans, Longmen Joint Venture ’s equity at risk is considered insufficient to finance its activities and therefore Longmen Joint Venture is considered to be a VIE.
The Company would be considered the primary beneficiary of the VIE if it has both of the following characteristics:
| a. | The power to direct the activities of the VIE that most significantly impact the VIE’s economic performance; and | |
| b. | The obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A Supervisory Committee was formed during the negotiation of the Unified Management Agreement. Given there is both a Supervisory Committee and a Board with respect to Longmen Joint Venture , the powers (rights and roles) of both bodies were considered to determine which party has the power to direct the activities of Longmen Joint Venture , and by extension, whether the Company continues to have the power to direct Longmen Joint Venture ’s activities after this Supervisory Committee was formed and the significant investment in plant and equipment by owners of the Longmen Joint Venture partner, as discussed in Note
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.
The Company has the obligation to absorb losses and the rights to receive benefits based on the profit allocation as stipulated by the Unified Management Agreement that are significant to the VIE. As both conditions are met, the Company is the primary beneficiary of Longmen Joint Venture and therefore, continues to consolidate Longmen Joint Venture as a VIE.
The Company believes that the Unified Management Agreement between Longmen Joint Venture and Shaanxi Coal is in compliance with PRC law and is legally enforceable. The Board of Directors of Longmen Joint Venture continues to be the controlling decision-making body with respect to Longmen Joint Venture. The Company, which controls 60%60% of the voting rights of the Board of Directors, has control over the operations of Longmen Joint Venture and as such, has the power to direct the activities of the VIE. However, PRC law and/or uncertainties in the PRC legal system could limit the Company’s ability to enforce the Unified Management Agreement, which in turn, may lead to reconsideration of the VIE assessment and the potential for a different conclusion. If the Unified Management Agreement cannot be enforced, the Company would not consolidate Longmen Joint Venture as a VIE. However, the current PRC legal system has not limited the Company’s ability to enforce the Unified Management Agreement nor does the Company believe it is likely to do so in the future. The Company makes ongoing assessment to determine whether Longmen Joint Venture is a VIE.
The carrying amount of the VIE and its subsidiaries’ consolidated assets and liabilities are as follows:
| September 30, 2013 | December 31, 2012 | ||||||
| (in thousands) | (in thousands) | ||||||
| Current assets | $ | 1,253,672 | $ | 1,285,967 | |||
| Plant and equipment, net | 1,239,805 | 1,154,811 | |||||
| Other noncurrent assets | 44,475 | 72,428 | |||||
| Total assets | 2,537,952 | 2,513,206 | |||||
| Total liabilities | (3,006,938) | (2,943,761) | |||||
| Net liabilities | $ | (468,986) | $ | (430,555) | |||
| March 31, 2014 | December 31, 2013 | |||||||
| (in thousands) | (in thousands) | |||||||
| Current assets | $ | 1,174,775 | $ | 1,282,054 | ||||
| Plant and equipment, net | 1,260,199 | 1,262,144 | ||||||
| Other noncurrent assets | 77,116 | 29,014 | ||||||
| Total assets | 2,512,090 | 2,573,212 | ||||||
| Total liabilities | (3,039,135 | ) | (3,040,879 | ) | ||||
| Net liabilities | $ | (527,045 | ) | $ | (467,667 | ) | ||
VIE and its subsidiaries’ liabilities consist of the following:
| September 30, 2013 | December 31, 2012 | ||||||
| (in thousands) | (in thousands) | ||||||
| Current liabilities: | |||||||
| Short term notes payable | $ | 950,498 | $ | 971,117 | |||
| Accounts payable | 466,631 | 324,563 | |||||
| Accounts payable - related parties | 171,759 | 177,160 | |||||
| Short term loans - bank | 215,955 | 114,935 | |||||
| Short term loans - others | 123,974 | 141,290 | |||||
| Short term loans - related parties | 42,613 | 35,839 | |||||
| Current maturities of long-term loans – related party | 56,372 | 54,885 | |||||
| Other payables and accrued liabilities | 43,978 | 29,769 | |||||
| Other payables - related parties | 96,901 | 64,941 | |||||
| Customer deposits | 94,767 | 109,120 | |||||
| Customer deposits - related parties | 14,512 | 21,998 | |||||
| Deposit due to sales representatives | 28,184 | 33,870 | |||||
| Deposit due to sales representatives – related parties | 1,809 | 1,238 | |||||
| Taxes payable | 8,258 | 15,339 | |||||
| Deferred lease income | 2,178 | 2,120 | |||||
| Intercompany payable to be eliminated | - | 30,476 | |||||
| Total current liabilities | 2,318,416 | 2,128,660 | |||||
| Non-current liabilities: | |||||||
| Long term loans - related parties | 15,974 | 38,088 | |||||
| Long-term other payable – related party | - | 43,008 | |||||
| Deferred lease income - noncurrent | 75,480 | 75,079 | |||||
| Capital lease obligations | 354,576 | 330,099 | |||||
| Profit sharing liability | 241,090 | 328,827 | |||||
| Other noncurrent liabilities | 1,402 | - | |||||
| Total non-current liabilities | 688,522 | 815,101 | |||||
| Total liabilities of consolidated VIE | $ | 3,006,938 | $ | 2,943,761 | |||
| March 31, 2014 | December 31, 2013 | |||||||
| (in thousands) | (in thousands) | |||||||
| Current liabilities: | ||||||||
| Short term notes payable | $ | 937,389 | $ | 988,364 | ||||
| Accounts payable | 479,154 | 393,816 | ||||||
| Accounts payable - related parties | 281,899 | 235,116 | ||||||
| Short term loans - bank | 189,219 | 267,688 | ||||||
| Short term loans - others | 42,525 | 55,844 | ||||||
| Short term loans - related parties | 103,635 | 125,236 | ||||||
| Current maturities of long-term loans – related party | 56,130 | 56,614 | ||||||
| Other payables and accrued liabilities | 51,991 | 37, 028 | ||||||
| Other payables - related parties | 76,370 | 88,914 | ||||||
| Customer deposits | 106,959 | 87,661 | ||||||
| Customer deposits - related parties | 27,020 | 18,359 | ||||||
| Deposit due to sales representatives | 23,713 | 24,343 | ||||||
| Deposit due to sales representatives – related parties | 1,980 | 1,997 | ||||||
| Taxes payable | 6,013 | 3,357 | ||||||
| Deferred lease income | 2,168 | 2,187 | ||||||
| Capital lease obligations, current | 4,774 | 4,321 | ||||||
| Intercompany payable to be eliminated | 21,237 | 21,420 | ||||||
| Total current liabilities | 2,412,176 | 2,412,265 | ||||||
| Non-current liabilities: | ||||||||
| Long term loans - related parties | 15,906 | 16,043 | ||||||
| Deferred lease income - noncurrent | 74,072 | 75,257 | ||||||
| Capital lease obligations, noncurrent | 376,025 | 375,019 | ||||||
| Profit sharing liability | 160,956 | 162,295 | ||||||
| Total non-current liabilities | 626,959 | 628,614 | ||||||
| Total liabilities of consolidated VIE | $ | 3,039,135 | $ | 3,040,879 | ||||
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| Three months ended | Three months ended | ||||||
| September 30, 2013 | September 30, 2012 | ||||||
| (in thousands) | (in thousands) | ||||||
| Sales | $ | 606,444 | $ | 708,974 | |||
| Gross profit (loss) | $ | 8,122 | $ | (18,417) | |||
| Income (loss) from operations | $ | 32,967 | $ | (37,000) | |||
| Net income (loss) attributable to controlling interest | $ | 8,284 | $ | (39,494) | |||
| Nine months ended | Nine months ended | ||||||
| September 30, 2013 | September 30, 2012 | ||||||
| (in thousands) | (in thousands) | ||||||
| Sales | $ | 1,903,933 | $ | 2,126,556 | |||
| Gross profit (loss) | $ | (23,704) | $ | 12,628 | |||
| Income (loss) from operations | $ | 32,998 | $ | (40,071) | |||
| Net loss attributable to controlling interest | $ | (18,335) | $ | (92,974) | |||
| Three months ended March 31, 2014 | Three months ended March 31, 2013 | |||||||
| (in thousands) | (in thousands) | |||||||
| Sales | $ | 594,014 | $ | 646,748 | ||||
| Gross (loss) profit | $ | (22,219 | ) | $ | 4,367 | |||
| Income (loss) from operations | $ | (39,294 | ) | $ | 34,937 | |||
| Net income (loss) attributable to controlling interest | $ | (38,034 | ) | $ | 8,325 | |||
Longmen Joint Venture has two 100%100% owned subsidiaries, Yuxin Trading Co., Ltd. (“Yuxin”) and Yuteng Trading Co., Ltd. (“Yuteng”). Prior to March 1, 2012, Longmen Joint Venture had 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 did not hold a controlling interest. On March 1, 2012, Longmen Joint Venture sold its equity interest in Tongxing, and, as of March 31, 2012, Longmen Joint Venture has two consolidated subsidiaries, Hualong and Huatianyulong, in which it does not hold a controlling interest. Hualong and Huatianyulong are separate legal entities which were established in the PRC as limited liability companies and subsequently acquiredinvested in by Longmen Joint Venture in June 2007 and July 2008, respectively. Prior to and subsequent to their acquisition by Longmen Joint Venture, these two 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 two entities do not meet the definition of variable interest entities. Further consideration was given to whether consolidation was appropriate under the voting interest model, specifically where the power of control may exist with a lesser percentage of ownership (i.e. less than 50%), for example, by contract, lease, agreement with other stockholders or by court decree.
Hualong
Longmen Joint Venture, the single largest shareholder, holds a 36.0%36.0% equity interest in Hualong. The other two shareholders, who own 34.67%34.67% and 29.33%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.
Huatianyulong
Longmen Joint Venture holds a 50.0%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 Hualong and Huatianyulong with appropriate recognition in the Company’s financial statements of the non-controlling interests in each entity, beginning on the acquisition dates as these were also the effective dates of the agreements with other stockholders granting a majority voting rights in each entity, and thereby, the power of control, to Longmen Joint Venture. The Company also has determined that it is appropriate for Longmen Joint Venture to consolidate Tongxing’s net income from the beginning of the acquisition date to March 1, 2012, the date on which Longmen Joint Venture relinquished its equity interest and majority voting rights in Tongxing, and thereby its power of control of Tongxing.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| (d) | Liquidity |
The Company’s accounts have been prepared in 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 as of September 30, 2013March 31, 2014 and December 31, 20122013 were (6.6)(5.8) and (7.1)(6.5), respectively. As of September 30, 2013,March 31, 2014, the Company’s current liabilities exceed current assets (excluding non-cash item) by $1.1$1.3 billion.
Longmen Joint Venture, as the most important entity of the Company, accounted for majority of total sales of the Company. As such, the majority of the Company’s working capital needs come from Longmen Joint Venture. The Company’s ability to continue as a going concern depends heavily on Longmen Joint Venture’s operations. Longmen Joint Venture has obtained different types of financial supports, which are listed below by category:
Line of credit
The Company received lines of credit from the listed major banks totaling $110.8$229.0 million with expiration dates ranging from September 27, 2014March 23, 2015 to October 26, 2014.
| Amount of | |||||
| Line of Credit | |||||
| Banks | (in millions) | Repayment Date | |||
| Bank of China | 6.5 | August 25, 2014 to October 26, 2014 | |||
| China Everbright Bank | 48.9 | October 8, 2014 | |||
| Bank of Xi’an | 32.6 | October 9, 2014 | |||
| Bank of Jinzhou | 22.8 | September 27, 2014* | |||
| Total | $ | 110.8 | |||
| Banks | Amount of Line of Credit (in millions) | Repayment Date | ||||
| Bank of Chongqing | 48.7 | March 23, 2015* | ||||
| Industrial Bank Co., Ltd. | 48.7 | May 5, 2015 | ||||
| China Merchant Bank | 48.7 | May 19, 2015 | ||||
| China CITIC Bank | 32.5 | June 16, 2015 | ||||
| Bank of Communication | 17.9 | July 17, 2015 | ||||
| Bank of Jinzhou | 32.5 | March 23, 2015* | ||||
| Total | $ | 229.0 | ||||
*Management expects the linelines of credit will be extended after September 27, 2014.
As of the date of this report, the Company utilized $61.9$181.0 million of these lines of credit.
Vendor financing
Longmen Joint Venture signed additional vendor financing agreements, which will provide liquidity to the Company in a total amount of $815.0$811.5 million with the following companies:
| Financing Amount | ||||||
| Company | Financing period covered | (in millions) | ||||
| Company A – related party | January 6, 2013 – January 5, 2015 | $ | 163.0 | |||
| Company B – third party | January 6, 2013 – November 7, 2015 | 163.0 | ||||
| Company C – third party | October 1, 2013 – March 31, 2015 | 489.0 | ||||
| Total | $ | 815.0 | ||||
| Company | Financing period covered | Financing Amount (in millions) | ||||
| Company A – related party | July 1, 2013 – June 30, 2015 | $ | 162.3 | |||
| Company B – third party | January 22, 2014 – January 22, 2017 | 162.3 | ||||
| Company C – third party | October 1, 2013 – March 31, 2015 | 486.9 | ||||
| Total | $ | 811.5 | ||||
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 hasOn January 6, 2013, Company A 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 a two-year period. up to $81.9 million. On July 1, 2013, Company A agreed to increase the financing amount to $162.3 million and extend the financing period to June 30, 2015. Company B signed an additionala two-year agreement with Longmen Joint Venture effective on November 7, 2013.2013 to finance its coke purchase up to $162.3 million and agreed to extend the financing period for another three years effective on January 22, 2014. According to the above signed agreement,agreements, both Company A and B will not demand any cash payments for next two years.during their respective financing periods. As of the date of this report, our payables to Company A and Company B were approximately$64.3 $67.2 million and $51.9$94.9 million,, respectively.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Company C is a Fortune 500 Company. In October 2012,On June 28, 2013, Company C signed a one yearan agreement with Longmen Joint Venture to finance Longmen Joint Venture’s purchase of iron ore for an amount up to $158.3$486.9 million to commence on October 1, 2012. In June 2013 Company C signed another one year agreement with Longmen Joint Venture to finance Longmen Joint Venture’s purchase of iron ore for an amount up to $318.4 million to commenceand end on October 1, 2013. According to the agreement, Company C agrees to provide an amount not less than $318.4 million in iron ore to Longmen Joint Venture.March 31, 2015. Subject to the terms of the agreement, Longmen Joint Venture is subject to a penalty of 0.05%0.05% of the daily outstanding balance owed to Company C in an event of late payment. The agreement also helps secure Company C’s iron ore sales to Longmen Joint Venture. On June 28, 2013, Company C agreed to increase the finance amount limit to $489.0 million and extended the financing period to March 31, 2015. As of the date of this report, our payable to Company C is approximately$1.2 $5.8 million.
Financing sales
On January 7, 2013, November 6, 2013February 20, 2014, March 5, 2014, April 22, 2014 and November 7, 2013,April 23, 2014 Longmen Joint Venture signed a payment extension agreementagreements with each company listed below. In total, Longmen Joint Venture can get $77.4obtain $362.0 million in financial support from a two-year and three-year balancing payment extensionextensions granted by the following five companies:
| Financing Amount | ||||||
| Company | Financing period covered | (in millions) | ||||
| Company E – related party | January 7, 2013 – January 6, 2015 | $ | 16.3 | |||
| Company F – related party | January 7, 2013 – January 6, 2015 | 21.2 | ||||
| Company G – related party | January 7, 2013 – January 6, 2015 | 7.3 | ||||
| Company H – related party | November 7, 2013 – November 7, 2015 | 16.3 | ||||
| Company I – related party | November 6, 2013 – November 6, 2015 | 16.3 | ||||
| Total | $ | 77.4 |
Company |
Financing period covered | Financing Amount (in millions) | ||||
| Company D – related party | April 22, 2014 – April 22, 2017 | $ | 81.2 | |||
| Company E – related party | April 23, 2014 – April 23, 2017 | 86.0 | ||||
| Company F – related party | April 22, 2014 – April 22, 2017 | 81.2 | ||||
| Company G – related party | March 5, 2014 – March 5, 2016 | 56.8 | ||||
| Company H – related party | March 5, 2014 – March 5, 2016 | 56.8 | ||||
| Total | $ | 362.0 | ||||
According to the contract terms, Company D, Company E, Company F, Company G Company H and Company IH have agreed to grant a two year payment extensionextensions in the amounts of $16.3$81.2 million, $21.2$86.0 million, $7.3$81.2 million, $16.3$56.8 million and $16.3$56.8 million respectively. As of the date of this report, our payables to Company D, Company E, Company F, Company G and Company H and Company I are approximately $17.9$20.3 million, $14.0$14.2 million, $18.9$16.1 million, $7.5$7.5 million and $0,$9.6 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 September 30, 2013,March 31, 2014, Longmen Joint Venture has collected a total amount of $30.0$25.7 million. Historically, this amount is quite stable and we do not expect a big fluctuation in this amount for the next twelve months from September 30, 2013March 31, 2014 onwards.
With the financial support from the banks and the companies above, management is of the opinion that the Company has sufficient funds to meet its future operations, working capital requirements and debt obligations until the end of September 30, 2014.TheMarch 31, 2015. 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 | ||||
| September 30, 2014 | ||||
| Current liabilities over current assets (excluding non-cash items) as of September 30, 2013 (unaudited) | $ | (1,072.0) | ||
| Projected cash financing and outflows: | ||||
| Cash provided by line of credit from banks | 110.8 | |||
| Cash provided by vendor financing | 815.0 | |||
| Cash provided by financing sales | 81.5 | |||
| Cash provided by other financing | 77.4 | |||
| Cash provided by sales representatives | 30.0 | |||
| Cash projected to be used in operations in the twelve months ended September 30, 2014 | (28.6) | |||
| Net projected change in cash for the twelve months ended September 30, 2014 | $ | 14.1 | ||
| Cash inflow (outflow) (in millions) | ||||
| For the twelve months ended March 31, 2015 | ||||
| Current liabilities over current assets (excluding non-cash items) as of March 31, 2014 (unaudited) | $ | (1,295.4) | ||
| Projected cash financing and outflows: | ||||
| Cash provided by line of credit from banks | 229.0 | |||
| Cash provided by vendor financing | 811.5 | |||
| Cash provided by other financing | 362.0 | |||
| Cash provided by sales representatives | 25.7 | |||
| Cash projected to be used in operations in the twelve months ended March 31, 2015 | (29.5) | |||
| Cash projected to be used for financing cost in the twelve months ended March 31, 2015 | (74.0) | |||
| Net projected change in cash for the twelve months ended March 31, 2015 | $ | 29.3 | ||
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As a result, the unaudited condensed consolidated financial statements for the periodthree months ended September 30, 2013March 31, 2014 have been prepared on a going concern basis.
(e) | Use of estimates |
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the accompanying unaudited condensed consolidated financial statements and footnotes. Significant accounting estimates reflected in the Company’s unaudited condensed consolidated financial statements include the fair value of the profit sharing liability, the useful lives of and impairment for property, plant and equipment, and potential losses on uncollectible receivables, allowance for inventory valuation, the interest rate used in the financing sales, the fair value of the assets recorded under capital lease and the present value of the net minimum lease payments of the capital lease. Actual results could differ from these estimates.
| (f) | Concentration of risks and uncertainties |
The Company’s operations are carried out in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC’s economy. The Company’s operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in North America and Western Europe. The Company’s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.
The Company has significant exposure to the price fluctuation of raw materials and energy prices as part of its normal operations. As of September 30, 2013March 31, 2014 and December 31, 2012,2013, the Company doesdid not have any open commodity contracts to mitigate such risks.
Cash includes demand deposits in accounts maintained with banks within the PRC, Hong Kong and the United States. Total cash (including restricted cash balances) in these banks on September 30, 2013March 31, 2014 and December 31, 20122013 amounted to $467.9$465.0 million and $369.9$431.3 million, including $3.1$0.4 million and $2.3$2.0 million that were deposited in Shaanxi Coal and Chemical Industry Group Financial Co., Ltd., a related party, respectively. As of September 30, 2013, $0.2March 31, 2014, $0.2 million cash in the bank was covered by insurance. The Company has not experienced any losses in other bank accounts and believes it is not exposed to any risks on its cash in bank accounts.
The Company’s five major customers are all distributors and collectively represented approximately 25.5%20.4% and 23.4% of the Company’s total sales for the three and nine months ended September 30, 2013, respectively. The Company had five major customers, which represented approximately 27.2% and 34.1%20.4% of the Company’s total sales for the three months ended March 31, 2014 and nine months ended September 30, 2012,2013, respectively. None of the five major customers accounted for more than 10% of total sales for the three and nine months ended September 30,March 31, 2014 and 2013, and 2012, respectively. These five major customers accounted for 15.9% and 47.8%0% of total accounts receivable, including related parties, as of September 30, 2013March 31, 2014 and December 31, 2012, respectively. One2013. None of the five major customers accounted for more than 10%10% of total accounts receivable which amounted to $1.4 million and $10.4 million as of September 30, 2013March 31, 2014 and December 31, 2012, respectively.
For the three and nine months ended September 30,March 31, 2014 and 2013, the Company purchased approximately 15.3%43.9% and 29.3%32.6% of its raw materials from five major suppliers, respectively. NoneOne of the five major suppliers individually accounted for more than 10%10% of the total purchases for the three and nine months ended September 30, 2013. The purchases fromMarch 31, 2014, and none of the five major suppliers represent approximately 25.4% and 39.6%individually accounted for more than 10% of the Company’s total purchases for the three months ended March 31, 2013. These five vendors accounted for 39.6% and nine months ended September 30, 2012,29.1% of total accounts payable, including related parties, as of March 31, 2014 and December 31, 2013, respectively. Two of the five major suppliers individually accounted for more than 10% of the total purchases for the nine months ended September 30, 2012. These five vendors accounted for 28.9% and 33.8%10% of total accounts payable including related parties, as of September 30, 2013March 31, 2014, and December 31, 2012, respectively. Nonenone of the five major suppliers individually accounted for more than 10% of total accounts payable as September 30, 2013 and one of the five major suppliers individually accounted for more than 10%10% of total accounts payable as December 31, 2012.
| (g) | Foreign currency translation and other comprehensive income |
The reporting currency of the Company is the U.S. dollar. The Company’s subsidiaries and VIE in China use the local currency, Renminbi (RMB)(“RMB”), as their functional currency. Assets and liabilities are translated at the unified exchange rate as quoted by the People’s Bank of China at the end of the period. The statement of operations accounts are translated at the average translation rates and the equity accounts are translated at historical rates. Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statement of equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Translation adjustments included in accumulated other comprehensive income amounted to $2.5$3.6 million and $10.2$0.7 million as of September 30, 2013March 31, 2014 and December 31, 2012,2013, respectively. The balance sheet amounts, with the exception of equity at September 30, 2013March 31, 2014 and December 31, 20122013 were translated at 6.136.16 RMB and 6.306.11 RMB to $1.00, respectively. The equity accounts were stated at their historical rate. The average translation rates applied to statement of operations accounts for the three months ended September 30,March 31, 2014 and 2013 and 2012 were 6.166.12 RMB and 6.33 RMB, respectively. The average translation rates applied to statement of operations accounts for the nine months ended September 30, 2013 and 2012 were 6.21 RMB and 6.316.28 RMB, respectively. Cash flows are also translated at average translation rates for the periods, therefore, amounts reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheet.
The PRC government imposes significant exchange restrictions on fund transfers out of the PRC that are not related to business operations. These restrictions have not had a material impact on the Company because it has not engaged in any significant transactions that are subject to the restrictions.
(h) | Financial instruments |
The accounting 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 values because of the short period of time between the origination and repayment and as their stated interest rates 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 13, 2007, the Company entered into a Securities Purchase Agreement (the “Agreement”) with certain institutional investors issuing $40.0for the sale of $40 million (“Notes”)of Notes and 1,154,958 warrants. The warrants can be exercised for common stock through May 13, 2013warrants, initially exercisable at $13.51$13.51 per share, subject to customary anti-dilution adjustments.share. On December 24, 2009, the warrant 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$5 per share and increased the number of warrants from 1,154,958 to 3,900,871,which expired on May 13, 2013.
Payments related to the capital lease of the Asset Pool consist of two components: (1) a fixed monthly payment of $2.3 million (RMB 14.6 million), based on Shaanxi Steel’s cost to construct the assets, to be paid for the 20 year term of the Unified Management Agreement; and (2) 40% of any remaining pre-tax profits from the Asset Pool, which includes Longmen Joint Venture and the constructed iron and steel making facilities. The aforementioned profit sharing component meets the definition of a derivative liabilitiesinstrument under ASC 815-10-15-83 and, accordingly, the profit sharing liability is accounted for separately as a derivative liability. It was recognized initially at its estimated fair value at inception. The estimated fair value is adjusted each reporting period, with changes in the estimated fair value of the profit sharing liability charged against or credited to income. The fair value was determined using the Cox Rubenstein Binomial Model, defined in the accounting standard as Level 2 inputs, and recorded the change in earnings. See Note 12– “Convertible notes and derivative liabilities” for the variables used in the Cox Rubenstein Binomial model.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company determineddetermines the carryingfair value of the profit 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%7.3%, based on the Company’s average borrowing rate. The projected profits/losses in Longmen Joint Venture wereare based upon, but not limited to, the following assumptions until April 30, 2031:
| · | projected selling units and growth in the steel market |
| · | projected unit selling price in the steel market |
| · | projected unit purchase cost in the coal and iron ore markets |
| · | selling and general and administrative expenses to be in line with the growth in the steel market |
| · | projected bank borrowings |
| · | interest rate index |
| · | gross nation product index |
| · | industry index |
| · | government policy |
From inception to December 31, 2012, the assumptions underlying the estimated fair value did not change significantly. Beginning in the first quarter of 2013, the assumptions related to unit selling prices and costs were revised, resulting in a reduction of the estimated profit sharing liability. These assumptions were further revised during 2013. The above assumptions were again reviewed by the Company at September 30, 2013 and the Company changed those assumptions as comparedMarch 31, 2014 but no major change was deemed necessary to the assumptionassumptions used at December 31, 2012 because of2013. For the changes in market conditions in PRC. Sincethree months ended March 31, 2014, the Company hadrecognized a loss on the most updated information from the banks, GDP report and the operating results from the three and nine months ended September 30, 2013, all of the above information indicated the downward trendchange in the steel manufacturing industry in the coming years. As a result, the Company re-measured the fair value of the 40% profit sharing liability as of the period ended September 30, 2013 and recorded a gain on change in fair value of profit sharing liability of $41.8$0.05 million, and $107.9due to a $2.81 million reduction in the present value discount offset by a $2.76 million gain resulting from the Asset Pool’s operating results for the three and nine months ended September 30, 2013, respectively.
The estimated fair value of the profit sharing liability at March 31, 2014 is $161.0 million. Changes in any of the assumptions that we used to estimate the fair value of the profit sharing liability will be changedchange the liability accordingly. If we wouldwere to reduce the projected bank borrowings rate used to discount the liability to a present value by 1.0% and other factors remained unchanged, our profit sharing liability as of the beginning of the period ended September 30, 2013March 31, 2014 would have been $254.9$184.2 million and we would reduceincrease the gainloss from the change in the fair value of the profit sharing liabilitiesliability by $32.9$23.2 million.If we wouldwere to reduce the projected selling units and growth in the steel market rate by 1.0% and other factors remained unchanged, our profit sharing liability as of the beginning of the period ended September 30, 2013March 31, 2014 would have been $214.3$158.4 million and we would increase the gain from the change in the fair value of the profit sharing liabilitiesliability by $8.3$1.8 million.
The following table sets forth by level within the fair value hierarchy, the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2013:
| Carrying Value as | Fair Value Measurements at September 30, | ||||||||||||
| of September 30, | 2013 | ||||||||||||
| (in thousands) | 2013 | Using Fair Value Hierarchy | |||||||||||
| Level 1 | Level 2 | Level 3 | |||||||||||
| Profit sharing liability | $ | 241,090 | $ | - | $ | - | $ | 241,090 | |||||
| Total | $ | 241,090 | $ | - | $ | - | $ | 241,090 | |||||
| (in thousands) | Carrying Value as of March 31, 2014 | Fair Value Measurements at March 31, 2014 Using Fair Value Hierarchy | ||||||||||||||
| Level 1 | Level 2 | Level 3 | ||||||||||||||
| Profit sharing liability | $ | 160,956 | $ | - | $ | - | $ | 160,956 | ||||||||
| Total | $ | 160,956 | $ | - | $ | - | $ | 160,956 | ||||||||
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, 2012:
| Carrying Value as | Fair Value Measurements at December 31, | ||||||||||||
| of December 31, | 2012 | ||||||||||||
| (in thousands) | 2012 | Using Fair Value Hierarchy | |||||||||||
| Level 1 | Level 2 | Level 3 | |||||||||||
| Derivative liabilities | $ | 1 | $ | - | $ | 1 | $ | - | |||||
| Profit sharing liability | 328,827 | - | - | 328,827 | |||||||||
| Total | $ | 328,828 | $ | - | $ | 1 | $ | 328,827 | |||||
| (in thousands) | Carrying Value as of December 31, 2013 | Fair Value Measurements at December 31, 2013 Using Fair Value Hierarchy | ||||||||||||||
| Level 1 | Level 2 | Level 3 | ||||||||||||||
| Profit sharing liability | $ | 162,295 | $ | - | $ | - | $ | 162,295 | ||||||||
| Total | $ | 162,295 | $ | - | $ | - | $ | 162,295 | ||||||||
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 nine monththree months ended September 30, 2013March 31, 2014 and for the year ended December 31, 2012:
| September 30, 2013 | December 31, 2012 | ||||||
| (in thousands) | (in thousands) | ||||||
| Beginning balance | $ | 328,828 | $ | 303,243 | |||
| Change in fair value of profit sharing liability | (107,877) | - | |||||
| Current period interest expense accreted | 12,440 | 22,499 | |||||
| Change of derivative liabilities charged to earnings | 1 | 9 | |||||
| Exchange rate effect | 7,698 | 3,077 | |||||
| Ending balance | $ | 241,090 | $ | 328,828 | |||
| March 31, 2014 | December 31, 2013 | |||||||
| (in thousands) | (in thousands) | |||||||
| Beginning balance | $ | 162,295 | $ | 328,828 | ||||
| Change in fair value of profit sharing liability: | ||||||||
| Present value discount amortization | 2,810 | 16,872 | ||||||
| Change in estimate | (2,761 | ) | (191,441 | ) | ||||
| Change in derivative liabilities-warrants | - | 1 | ||||||
| Exchange rate effect | (1,388 | ) | 8,035 | |||||
| Ending balance | $ | 160,956 | $ | 162,295 | ||||
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Except for the derivative liabilities andrelated to the profit sharing liability and to the warrants issued by the Company, which expired on May 13, 2013, the Company did not identify any other assets or liabilities that are required to be presented on the balance sheet at fair value in accordance with the accounting standard.value. The carrying value of the long term loans-related party approximates to its fair value as of the reporting date.
| (i) | Notes receivable |
Notes receivable represents trade accounts receivable due from various customers where the customers’ banks have guaranteed the payment. The notes are non-interest bearing and normally paid within three to six months. The Company has the ability to submit request for payment to the customer’s bank earlier than the scheduled payment date, but will incur an interest charge and a processing fee.
Restricted notes receivable represents notes receivable pledged as collateral for short-term loans and short-term notes payable issued by banks.
Interest expenses for early submission request of payment amounted to $14.1 million and $10.8 million for the three months ended September 30,March 31, 2014 and 2013, and 2012 amounted to $9.6 million and $16.3 million, respectively, and amounted to $26.9 million and $65.6 million, respectively, for the nine months ended September 30, 2013 and 2012.
Plant and equipment, net |
Plant and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets with a 3%-5%3%-5% residual value. The depreciation expense on assets acquired under capital leases is included with depreciation expense on owned assets. The estimated useful lives are as follows:
| Buildings and Improvements | 10-40 Years | |||
| Machinery | 10-30 Years | |||
| Machinery and equipment under capital lease | 10-20 Years | |||
| Other equipment | 5 Years | |||
| Transportation Equipment | 5 Years |
The Company assesses all significant leases for purposes of classification as either operating or capital. At lease inception, if the lease meets any of the four following criteria, the Company will classify it as a capital lease; otherwise it will be treated as an operating lease: a) transfer of ownership to lessee at the end of the lease term, b) bargain purchase option, c) lease term is equal to 75% or more of the estimated economic life of the leased property, d) the present value of the minimum lease payments is 90% or more of the fair value of the leased asset.
Construction in progress represents the costs incurred in connection with the construction of buildings or new additions to the Company’s plant facilities. No depreciation is provided for construction in progress until such time as the assets are completed and are placed into service, maintenance, repairs and minor renewals are charged directly to expense as incurred. Major additions and betterment to buildings and equipment are capitalized. Interest incurred during construction is capitalized into construction in progress. All other interest is expensed as incurred.
Long lived assets, including buildings and improvements, equipment and intangible assets are reviewed if events and changes in circumstances indicate that its carrying amount may not be recoverable, to determine whether their carrying value has become impaired. The Company considers assets to be impaired if the carrying value exceeds the future projected cash flows from related operations. The Company also re-evaluates the periods of depreciation and amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives.
Intangible assets |
Finite lived intangible assets of the Company are reviewed for impairment if events and circumstances require. The Company considers assets to be impaired if the carrying value exceeds the future projected cash flows from related operations. The Company also re-evaluates the periods of amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives. As of September 30, 2013,March 31, 2014, the Company expects these assets to be fully recoverable.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Land use rights
All land in the PRC is owned by the government. However, the government grants “land use rights.” General Steel (China) acquired land use rights in 2001 for a total of $3.9$3.9 million (RMB 23.7 million). These land use rights are for 50 years and expire in 2050 and 2053. The Company amortizes the land use rights over the twenty-year business term because its business license had a twenty-year term.
Long Steel Group contributed land use rights for a total amount of $24.2$24.1 million (RMB 148.6148.3 million) to the Longmen Joint Venture. The contributed land use rights are for 50 years and expire in 2048 to 2052.
Maoming Hengda has land use rights amounting to $2.7$2.7 million (RMB 16.6 million) for 50 years that expire in 2054.
Other than the land use rights that General Steel (China) acquired in 2001, the Company amortizes the land use rights over their 50 year term.
| Entity | Original Cost | Expires on | |||||
| (in thousands) | |||||||
| General Steel (China) | $ | 3,867 | 2050 & 2053 | ||||
| Longmen Joint Venture | $ | 24,226 | 2048 & 2052 | ||||
| Maoming Hengda | $ | 2,705 | 2054 | ||||
| Entity | Original Cost | Expires on | ||||||
| (in thousands) | ||||||||
| General Steel (China) | $ | 3,851 | 2050 & 2053 | |||||
| Longmen Joint Venture | $ | 24,075 | 2048 & 2052 | |||||
| Maoming Hengda | $ | 2,694 | 2054 | |||||
Mining right
Mining rights are capitalized at cost when acquired, including amounts associated with any value beyond proven and probable reserves, and amortized to operations as depletion expense using the units-of-production method over the estimated proven and probable recoverable tons. Longmen Joint Venture has iron ore mining right amounting to $2.4$2.4 million (RMB 15.0 million), which is amortized over the estimated recoverable reserve of 4.2 million tons.
Investments in unconsolidated entities |
Entities in which the Company has the ability to exercise significant influence, but does not have a controlling interest, are accounted for using the equity method. Significant influence is generally considered to exist when the Company has an ownership interest in the voting stock between 20%20% and 50%50%, and other factors, such as representation on the Board of Directors, voting rights and the impact of commercial arrangements, are considered in determining whether the equity method of accounting is appropriate. The Company accounts for investments with ownership less than 20% using the cost method.
The table below summarizes Longmen Joint Venture’s investment holdings as of September 30, 2013March 31, 2014 and December 31, 2012.
| September 30, | December 31, | |||||||||||||||
| 2013 | 2012 | |||||||||||||||
| Year | Net investment | Owned | Net investment | Owned | ||||||||||||
| Unconsolidated entities | acquired | (In thousands) | % | (In thousands) | % | |||||||||||
| Xian Delong Powder Engineering Materials Co., Ltd. | 2007 | $ | 1,161 | 24.1 | $ | 1,166 | 24.1 | |||||||||
| Unconsolidated entities | Year acquired | March 31, 2014 Net investment (In thousands) | Owned % | December 31, 2013 Net investment (In thousands) | Owned % | |||||||||||||||
| Xi’an Delong Powder Engineering Materials Co., Ltd. | 2007 | $ | 1,042 | 24.1 | $ | 1,215 | 24.1 | |||||||||||||
The table below summarizes General Steel (China)’s investment holding (see Note 2(a) - Basis of presentation) as of March 31, 2014 and December 31, 2013.
| Unconsolidated entities | Year acquired | March 31, 2014 Net investment (In thousands) | Owned % | December 31, 2013 Net investment (In thousands) | Owned % | |||||||||||||||
| Tianwu General Steel Material Trading Co., Ltd. | 2010 | $ | 15,593 | 32.0 | $ | 15,728 | 32.0 | |||||||||||||
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Total investment income (loss) in unconsolidated subsidiaries amounted to $0.05$0.01 million and $0.04$(0.04) million for the three months ended September 30,March 31, 2014 and 2013, and 2012, respectively, and $0.1 million and $0.1 million for the nine months ended September 30, 2013 and 2012, respectively, which was included in “Loss“Income from equity investments” in the unaudited condensed consolidated statements of operations and comprehensive income (loss).
Sales is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, the Company has no other significant obligations and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are recorded as customer deposits. Sales represent the invoiced value of goods, net of value-added tax (VAT). All of the Company’s products sold in the PRC are subject to a Chinese value-added tax at a rate of 13% or 17% of the gross sales price. This VAT may be offset by VAT paid by the Company on raw materials and other materials included in the cost of producing the finished product.
The Company infrequently engages in trading transactions in which the Company acts as an agent between the suppliers and the customers. The trading arrangements are such that the suppliers are the primary obligators, the Company does not have any general inventory risk, physical inventory loss risk or credit risk, and the Company does not have latitude in establishing price. Sales and cost of goods sold from these trading arrangements are recorded at the net amount retained in accordance with ASC 605-45.
| (n) | Reclassifications |
Certain prior year amounts have been reclassified to conform to the current year presentation. These reclassifications have no effect on the accompanying condensed consolidated statements of operations and cash flows.
Note 3 – Loans receivable – related parties
Loans receivable – related parties represents amounts the Company expects to collect from related parties upon maturity.
The Company had the following loans receivable – related parties due within one year as of:
| September 30, 2013 | December 31, 2012 | ||||||
| (in thousands) | (in thousands) | ||||||
| Loans to Long Steel Group; due on demand and non-interest bearing. | - | 63,319 | |||||
Loan to Teamlink Investment Co., Ltd; due in December 2013, June 2014, and July 2014; interest rate was 4.75% | 4,540 | 6,000 | |||||
| Total loans receivable – related parties | $ | 4,540 | $ | 69,319 | |||
| March 31, 2014 | December 31, 2013 | |||||||
| (in thousands) | (in thousands) | |||||||
| Loan to Teamlink Investment Co., Ltd; due in June, July and December 2014; interest rate was 4.75% | $ | 4,540 | $ | 4,540 | ||||
| Total loans receivable – related parties | $ | 4,540 | $ | 4,540 | ||||
See Note 20 “Related20“Related party transactions and balances” for the nature of the relationship of related parties.
Total interest income for the loans amounted to $0.1$0.1 million and $0$0.1 million for the three months ended September 30,March 31, 2014 and 2013, and 2012, respectively.
Note 4 – Accounts receivable (including related parties), net
Accounts receivable, including related party receivables, net of allowance for doubtful accounts consists of the following:
| September 30, 2013 | December 31, 2012 | ||||||
| (in thousands) | (in thousands) | ||||||
| Accounts receivable | $ | 9,729 | $ | 8,062 | |||
| Less: allowance for doubtful accounts | (1,152) | (1,367) | |||||
| Accounts receivable – related parties | 3,252 | 14,966 | |||||
| Net accounts receivable | $ | 11,829 | $ | 21,661 | |||
| March 31, 2014 | December 31, 2013 | |||||||
| (in thousands) | (in thousands) | |||||||
| Accounts receivable | $ | 5,188 | $ | 5,131 | ||||
| Less: allowance for doubtful accounts | (800 | ) | (1,053 | ) | ||||
| Accounts receivable – related parties | 4,474 | 2,942 | ||||||
| Net accounts receivable | $ | 8,862 | $ | 7,020 | ||||
Movement of allowance for doubtful accounts is as follows:
| September 30, 2013 | December 31, 2012 | ||||||
| (in thousands) | (in thousands) | ||||||
| Beginning balance | $ | 1,367 | $ | 2,023 | |||
| Charge to expense | - | 433 | |||||
| Less: recovery | (249) | (1,109) | |||||
| Exchange rate effect | 34 | 20 | |||||
| Ending balance | $ | 1,152 | $ | 1,367 | |||
| March 31, 2014 | December 31, 2013 | |||||||
| (in thousands) | (in thousands) | |||||||
| Beginning balance | $ | 1,053 | $ | 1,367 | ||||
| Charge to expense | - | 96 | ||||||
| Less: recovery | (245 | ) | (449 | ) | ||||
| Exchange rate effect | (8 | ) | 39 | |||||
| Ending balance | $ | 800 | $ | 1,053 | ||||
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 5 – Inventories
Inventories consist of the following:
| September 30, 2013 | December 31, 2012 | ||||||
| (in thousands) | (in thousands) | ||||||
| Supplies | $ | 23,302 | $ | 23,123 | |||
| Raw materials | 138,951 | 141,503 | |||||
| Finished goods | 22,527 | 57,630 | |||||
| Less: allowance for inventory valuation | (7,397) | (9,585) | |||||
| Total inventories | $ | 177,383 | $ | 212,671 | |||
| March 31, 2014 | December 31, 2013 | |||||||
| (in thousands) | (in thousands) | |||||||
| Supplies | $ | 23,172 | $ | 21,040 | ||||
| Raw materials | 130,356 | 164,301 | ||||||
| Finished goods | 72,611 | 42,977 | ||||||
| Less: allowance for inventory valuation | (15,378 | ) | (15,397 | ) | ||||
| Total inventories | $ | 210,761 | $ | 212,921 | ||||
Raw materials consist primarily of iron ore and coke at Longmen Joint Venture. The cost of finished goods includes direct costs of raw materials as well as direct labor used in production. Indirect production costs at normal capacity such as utilities and indirect labor related to production such as assembling, shipping and handling costs for purchasing are also included in the cost of inventory.
The Company values its inventory at the lower of cost or market, determined on a weighted average method, or net realizable value. As of September 30, 2013March 31, 2014 and December 31, 2012,2013, the Company had provided allowance for inventory valuation in the amounts of $7.3$15.4 million and $9.6$15.4 million, respectively.
Movement of allowance for inventory valuation is as follows:
| September 30, 2013 | December 31, 2012 | ||||||
| (in thousands) | (in thousands) | ||||||
| Beginning balance | $ | 9,585 | $ | 38,143 | |||
| Addition | 7,305 | 9,582 | |||||
| Less: write-off | (9,722) | (38,519) | |||||
| Exchange rate effect | 229 | 379 | |||||
| Ending balance | $ | 7,397 | $ | 9,585 | |||
| March 31, 2014 | December 31, 2013 | |||||||
| (in thousands) | (in thousands) | |||||||
| Beginning balance | $ | 15,397 | $ | 9,585 | ||||
| Addition | 15,493 | 15,194 | ||||||
| Less: write-off | (15,380 | ) | (9,757 | ) | ||||
| Exchange rate effect | (132 | ) | 375 | |||||
| Ending balance | $ | 15,378 | $ | 15,397 | ||||
Note 6 – Advances on inventory purchases
Advances on inventory purchases are monies deposited or advanced to outside vendors or related parties on future inventory purchases. 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 require the deposit to be returned to the Company or netted against accounts payable due to its vendors to the extent there are unpaid balances when the contract ends. The inventory is normally delivered within one month after the monies have been advanced. The total outstanding amount, including advances to related parties, was $109.5$164.8 million and $126.1$127.9 million as of September 30, 2013March 31, 2014 and December 31, 2012,2013, respectively.
Note 7 – Plant and equipment, net
Plant and equipment consist of the following:
| September 30, 2013 | December 31, 2012 | ||||||
| (in thousands) | (in thousands) | ||||||
| Buildings and improvements | $ | 253,621 | $ | 214,661 | |||
| Machinery | 616,813 | 573,572 | |||||
| Machinery under capital lease | 603,248 | 587,334 | |||||
| Transportation and other equipment | 22,085 | 20,274 | |||||
| Construction in progress | 58,111 | 4,645 | |||||
| Subtotal | 1,553,878 | 1,400,486 | |||||
| Less: accumulated depreciation | (303,336) | (232,650) | |||||
| Total | $ | 1,250,542 | $ | 1,167,836 | |||
| March 31, 2014 | December 31, 2013 | |||||||
| (in thousands) | (in thousands) | |||||||
| Buildings and improvements | $ | 287,617 | $ | 274,402 | ||||
| Machinery | 663,902 | 667,093 | ||||||
| Machinery under capital lease | 618,559 | 623,895 | ||||||
| Transportation and other equipment | 23,220 | 22,991 | ||||||
| Construction in progress | 24,920 | 11,412 | ||||||
| Subtotal | 1,618,218 | 1,599,793 | ||||||
| Less: accumulated depreciation | (349,019 | ) | (327,886 | ) | ||||
| Total | $ | 1,269,199 | $ | 1,271,907 | ||||
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Construction in progress consisted of the following as of September 30, 2013:
| Construction in progress | Value | Completion | |||||
| description | (In thousands) | date | |||||
| 1.2 million tons high-strength steel production line | 32,268 | December 2013 | |||||
| Iron-making system dust removing equipment | 3,307 | November 2013 | |||||
| Drainage system | 499 | November 2013 | |||||
| Factory wall repair | 241 | November 2013 | |||||
| Gas pipe repair | 121 | November 2013 | |||||
| Office buildings | 1,336 | November 2013 | |||||
| Equipment updates | 7,381 | November 2013 | |||||
| #5 blast furnace construction | 208 | September 2014 | |||||
| Reconstruction of miscellaneous factory buildings | 690 | January 2014 | |||||
| Project materials | 2,154 | ||||||
| Others | 9,906 | ||||||
| Total | $ | 58,111 | |||||
| Construction in progress | Value | Completion | Estimated additional cost to complete | |||||||||
| description | (In thousands) | date | (In thousands) | |||||||||
| Factory wall remodel | 1,021 | June 2014 | 77 | |||||||||
| Equipment updates | 696 | May 2014 | 1,332 | |||||||||
| Sintering machine construction | 3,923 | November 2014 | 141,580 | |||||||||
| #5 blast furnace construction | 10,654 | December 2014 | 166,253 | |||||||||
| Electrical substation construction | 5 | August 2014 | 24,523 | |||||||||
| Reconstruction of miscellaneous factory buildings | 5,272 | June 2014 | 4,405 | |||||||||
| Project materials | 2,136 | - | ||||||||||
| Others | 1,213 | - | ||||||||||
| Total | $ | 24,920 | $ | 338,170 | ||||||||
The GroupCompany is obligated under a capital lease for the iron and steel making facilities, including one sintering machine, two converters, two blast furnaces and some auxiliary systems that expire on April 30, 2031. 2031. During 2013, Longmen Joint Venture entered into a number of capital lease agreements for energy-saving equipment installed throughout the steel production line. The Company is obligated under the capital lease for the equipment upon the confirmation of the energy-saving rate between the Company and its vendors.
The carrying value of assets acquired under the capital lease consists of the following:
| September 30, 2013 | December 31, 2012 | ||||||
| (in thousands) | (in thousands) | ||||||
| Machinery | $ | 603,248 | $ | 587,334 | |||
Less: accumulated depreciation | (69,248) | (46,497) | |||||
| Carrying value of leased assets | $ | 534,000 | $ | 540,837 | |||
| March 31, 2014 | December 31, 2013 | |||||||
| (in thousands) | (in thousands) | |||||||
| Machinery | $ | 618,559 | $ | 623,895 | ||||
| Less:accumulated depreciation | (84,250 | ) | (77,086 | ) | ||||
| Carrying value of leased assets | $ | 534,309 | $ | 546,809 | ||||
The Company assessed the recoverability of all of its remaining long lived assets at September 30,March 31, 2014 and December 31, 2013, respectively, and such assessment did not result in any other impairment charges for the three and nine months ended September 30, 2013.
Depreciation expense for the three months ended September 30,March 31, 2014 and 2013 and 2012 amounted to $21.6$24.1 million and $20.8 million, respectively, and for the nine months ended September 30, 2013 and 2012, amounted to $64.1 and $61.4$21.1 million, respectively. These amounts include depreciation of assets held under capital leases for the three months ended September 30,March 31, 2014 and 2013, and 2012, which amounted to $7.1$7.9 million and $7.0$7.0 million, respectively, and for the nine months ended September 30, 2013 and 2012, amounted to $21.2 and $20.9 million, respectively.
Note 8 – Intangible assets, net
Intangible assets consist of the following:
| September 30, 2013 | December 31, 2012 | ||||||
| (in thousands) | (in thousands) | ||||||
| Land use rights | $ | 30,798 | $ | 29,986 | |||
| Mining right | 2,448 | 2,384 | |||||
| Software | 742 | 692 | |||||
| Subtotal | 33,988 | 33,062 | |||||
| Less: | |||||||
| Accumulated amortization – land use rights | (8,387) | (7,577) | |||||
| Accumulated amortization – mining right | (1,144) | (993) | |||||
| Accumulated amortization – software | (529) | (426) | |||||
| Subtotal | (10,060) | (8,996) | |||||
| Intangible assets, net | $ | 23,928 | $ | 24,066 | |||
| March 31, 2014 | December 31, 2013 | |||||||
| (in thousands) | (in thousands) | |||||||
| Land use rights | $ | 30,620 | $ | 30,884 | ||||
| Mining right | 2,438 | 2,459 | ||||||
| Software | 1,047 | 743 | ||||||
| Subtotal | 34,105 | 34,086 | ||||||
| Less: | ||||||||
| Accumulated amortization – land use rights | (8,595 | ) | (8,498 | ) | ||||
| Accumulated amortization – mining right | (1,322 | ) | (1,320 | ) | ||||
| Accumulated amortization – software | (601 | ) | (561 | ) | ||||
| Subtotal | (10,518 | ) | (10,379 | ) | ||||
| Intangible assets, net | $ | 23,587 | $ | 23,707 | ||||
The gross amount of the intangible assets amounted to $34.0$34.1 million and $33.1$34.1 million as of September 30, 2013March 31, 2014 and December 31, 2012,2013, respectively. The remaining weighted average amortization period is 33.733.3 years as of September 30, 2013.
Total amortization expense for the three months ended September 30,March 31, 2014 and 2013 and 2012 amounted to $0.2$0.2 million and $0.3$0.2 million, respectively, and for the nine months ended September 30, 2013 and 2012, amounted to $0.7 million and $0.9 million, respectively.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Total depletion expense for the three months ended September 30,March 31, 2014 and 2013 and 2012 amounted to $0.02$0.01 million and $0.1$0.1 million, respectively, and for the nine months ended September 30, 2013 and 2012, amounted to $0.1 million and $0.2 million, respectively.
The estimated aggregate amortization and depletion expenses for each of the five succeeding years is as follows:
| Estimated | |||||||
| amortization and | Gross carrying | ||||||
| Year ending | depletion expenses | amount | |||||
| (in thousands) | (in thousands) | ||||||
| June 30, 2014 | $ | 1,082 | 22,846 | ||||
| June 30, 2015 | 1,082 | 21,764 | |||||
| June 30, 2016 | 1,082 | 20,682 | |||||
| June 30, 2017 | 1,082 | 19,600 | |||||
| June 30, 2018 | 1,082 | 18,518 | |||||
| Thereafter | 18,518 | - | |||||
| Total | $ | 23,928 | |||||
| Year ending | Estimated amortization and depletion expenses | Gross carrying amount | ||||||
| (in thousands) | (in thousands) | |||||||
| March 31, 2015 | $ | 917 | 22,669 | |||||
| March 31, 2016 | 917 | 21,752 | ||||||
| March 31, 2017 | 917 | 20,835 | ||||||
| March 31, 2018 | 917 | 19,918 | ||||||
| March 31, 2019 | 917 | 19,001 | ||||||
| Thereafter | 19,002 | - | ||||||
| Total | $ | 23,587 | ||||||
Note 9 – Debt
Short-term notes payable
Short-term notes payable are lines of credit extended by banks. Banks in turn issue the Company a bank acceptance note, which can be endorsed and assigned to vendors as payments for purchases. The notes payable are generally payable within three to six months. This short-term note payable is guaranteed by the bank for its complete face value. The banks do not charge interest on these notes, but usually charge a transaction fee of 0.05%0.05% of the notes value. In addition, the banks usually require the Company to deposit either a certain amount of cash at the bank as a guarantee deposit, which is classified on the balance sheet as restricted cash, or provide notes receivable as security, which are classified on the balance sheet as restricted notes receivable. Restricted cash as a guarantee for the notes payable amounted to $405.8$419.8 million and $322.7$399.4 million as of September 30, 2013March 31, 2014 and December 31, 2012,2013, respectively. Restricted notes receivable as a guarantee for the notes payable amounted to $237.2$133.0 million and $345.8$231.7 million as of September 30, 2013March 31, 2014 and December 31, 2012,2013, respectively.
The Company had the following short-term notes payable as of:
| September 30, 2013 | December 31, 2012 | ||||||
| (in thousands) | (in thousands) | ||||||
| General Steel (China): Notes payable to various banks in China, due various dates from October 2013 to March 2014. Restricted cash required of $24.5 million and $6.3 million as of September 30, 2013 and December 31, 2012, respectively; guaranteed by third parties. These notes payable were either repaid or renewed subsequently on the due dates. | $ | 37,490 | $ | 12,696 | |||
| Longmen Joint Venture: Notes payable to various banks in China, due various dates from October 2013 to August 2014. $381.3 million restricted cash and $237.2 million notes receivable are secured for notes payable as of September 30, 2013, and comparatively $316.4 million restricted cash and $345.8 million notes receivable secured as of December 31, 2012, respectively; some notes are further guaranteed by third parties. These notes payable were either repaid or renewed subsequently on the due dates. | 950,498 | 971,117 | |||||
| Total short-term notes payable | $ | 987,988 | $ | 983,813 | |||
| March 31, 2014 | December 31, 2013 | |||||||
| (in thousands) | (in thousands) | |||||||
| General Steel (China): Notes payable to various banks in China, due various dates from April to July 2014. Restricted cash required of $13.0 million and $16.4 million as of March 31, 2014 and December 31, 2013, respectively; guaranteed by third parties. These notes payable were either repaid or renewed subsequently on the due dates. | $ | 25,968 | $ | 29,466 | ||||
| Longmen Joint Venture: Notes payable to various banks in China, due various dates from April to September 2014. $406.8 million restricted cash and $133.0 million notes receivable are secured for notes payable as of March 31, 2014, and comparatively $383.0 million restricted cash and $231.7 million notes receivable secured as of December 31, 2013, respectively; some notes are further guaranteed by third parties. These notes payable were either repaid or renewed subsequently on the due dates. | 937,389 | 988,364 | ||||||
| Total short-term notes payable | $ | 963,357 | $ | 1,017,830 | ||||
Short-term loans
Short-term loans represent amounts due to various banks, other companies and individuals, including related parties, normally due within one year. The principal of the loans are due at maturity but can be renewed at the bank’s option. Accrued interest is due either monthly or quarterly.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Short term loans due to banks, related parties and other parties consisted of the following as of:
Due to banks
| September 30, 2013 | December 31, 2012 | ||||||
| (in thousands) | (in thousands) | ||||||
| General Steel (China): Loans from various banks in China, due various dates from December 2013 to September 2014. Weighted average interest rate was 7.2% per annum and 7.6% per annum as of September 30, 2013 and December 31, 2012, respectively; 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. | $ | 38,973 | $ | 32,189 | |||
| Longmen Joint Venture: Loans from various banks in China, due various dates from November 2013 to August 2014. Weighted average interest rate was 6.5% per annum and 6.8% per annum as of September 30, 2013 and December 31, 2012, respectively; some are guaranteed by third parties, restricted cash or notes receivables. $120.0 million and $76.0 million restricted notes receivable were secured for the loans as of September 30, 2013 and December 31, 2012, respectively; These loans were either repaid or renewed subsequently on the due dates. | 215,956 | 114,935 | |||||
| Total short-term loans - bank | $ | 254,929 | $ | 147,124 | |||
| March 31, 2014 | December 31, 2013 | |||||||
| (in thousands) | (in thousands) | |||||||
| General Steel (China): Loans from various banks in China, due various dates from May 2014 to January 2015. Weighted average interest rate was 7.1% per annum and 7.2% per annum as of March 31, 2014 and December 31, 2013, respectively; some are guaranteed by third parties. These loans were either repaid or renewed subsequently on the due dates. | $ | 40,899 | $ | 34,229 | ||||
| Longmen Joint Venture: Loans from various banks in China, due various dates from April 2014 to January 2015. Weighted average interest rate was 6.1% per annum and 6.3% per annum as of March 31, 2014 and December 31, 2013, respectively; some are guaranteed by third parties, restricted cash or notes receivables. $128.2 million and $163.9 million restricted notes receivable were secured for the loans as of March 31, 2014 and December 31, 2013, respectively; These loans were either repaid or renewed subsequently on the due dates. | 189,219 | 267,688 | ||||||
| Total short-term loans - bank | $ | 230,118 | $ | 301,917 | ||||
As of September 30, 2013March 31, 2014 and December 31, 2012,2013, the Company had not met its financial covenants stipulated by certain loan agreements related to the Company’s debt to asset ratio. Based on theAs of March 31, 2014, two of General Steel (China)’s bank loans contained financial covenants the Company should have kept itsstipulating debt to asset ratioratios below 20% and 85% as of September 30, 2013 and December 31, 2012, respectively.20%. However, as of September 30, 2013 and DecemberMarch 31, 2012, the Company's2014, General Steel (China)’s debt to asset ratio was 117.7%93.5%. As of December 31, 2013, three of General Steel (China)’s bank loans contained financial covenants stipulating debt to asset ratios below 20% and 116.4%, respectively.
Furthermore, the Company is a party to a loan agreement with a cross default clause whereby any breach of loan covenants will automatically result in default of the loan. The outstanding balance of the short term loans affected by the above breach of covenants and cross default as of September 30, 2013March 31, 2014 and December 31, 20122013 was $6.4$5.2 million and $12.7$6.4 million, respectively. According to the Company’s short term loan agreements, the banks have the rights to request for more collateral or additional guarantees if the breach of covenant is not remedied or request early repayment of the loan if the Company does not cure such breach within a certain period of time. As of the date of this report, the Company has not received any notice from the banks to request more collateral, additional guarantees or early repayment of the short term loans due to the breach of covenant.
Due to unrelated parties
| September 30, 2013 | December 31, 2012 | ||||||
| (in thousands) | (in thousands) | ||||||
| Longmen Joint Venture: Loans from various unrelated companies and individuals, due various dates from October 2013 to February 2014, and weighted average interest rate was 5.2% per annum and 6.0% per annum as of September 30, 2013 and December 31, 2012, respectively. These loans were either repaid or renewed subsequently on the due dates. | $ | 33,294 | $ | 25,324 | |||
| Longmen Joint Venture: Loans from financing sales. | 90,680 | 115,966 | |||||
| Maoming Hengda: Loans from one unrelated parties and one related party, due on demand, none interest bearing. | 6,196 | 6,033 | |||||
| Total short-term loans – others | $ | 130,170 | $ | 147,323 | |||
| March 31, 2014 | December 31, 2013 | |||||||
| (in thousands) | (in thousands) | |||||||
| Longmen Joint Venture: Loans from various unrelated companies and individuals, due various dates from April to September 2014, and weighted average interest rate was 5.6% per annum and 5.2% per annum as of March 31, 2014 and December 31, 2013, respectively. These loans were either repaid or renewed subsequently on the due dates. | $ | 17,987 | $ | 22,720 | ||||
| Longmen Joint Venture: Loans from financing sales. | 24,538 | 33,124 | ||||||
| Maoming Hengda: Loans from one unrelated parties and one related party, due on demand, none interest bearing. | 6,170 | 6,223 | ||||||
| Total short-term loans – others | $ | 48,695 | $ | 62,067 | ||||
The Company had various loans from unrelated companies amounting to $130.2$48.7 million and $147.3$62.1 million as of September 30, 2013March 31, 2014 and December 31, 2012,2013, respectively. Of the $130.2$48.7 million, $6.2 million loans carry no interest, $90.7$24.5 million of financing sales are subject to interest rates ranging between 4.2%4.2% and 5.9%5.9%, and the remaining $33.3$18.0 million are subject to interest rates ranging from 4.7%5.0% to 12.0%12.0%. All short term loans from unrelated companies are payable on demand and unsecured.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As part of its working capital management, Longmen Joint Venture has entered into a number of sale and purchase back contracts ("contracts") with third party companies and Yuxin and Yuteng. According to the contracts, Longmen Joint Venture sells rebar to the third party companies at a certain price, and within the same month, Yuxin and Yuteng will purchase back the rebar from the third party companies at a price of 4.2%4.2% to 5.9%5.9% higher than the original selling price from Longmen Joint Venture. Based on the contract terms, Longmen Joint Venture is paid in advance for the rebar sold to the third party companies and Yuxin and Yuteng are given a credit period of several months to one year from the third party companies. There is no physical movement of the inventory during the sale and purchase back arrangement. The margin of 4.2% to 5.9%5.9% is determined by reference to the bank loan interest rates at the time when the contracts are entered into, plus an estimated premium based on the financing sale amount, which represents the interest charged by the third party companies for financing Longmen Joint Venture through the above sale and purchase back arrangement. The revenue and cost of goods sold arising from the above transactions are eliminated and the incremental amounts paid by Yuxin and Yuteng to purchase back the goods are treated as financing costs in the unaudited condensed consolidated financial statements.
Total financing sales for the three months ended September 30,March 31, 2014 and 2013 and 2012 amounted to $166.2$230.5 million and $307.1 million, respectively, and for the nine months ended September 30, 2013 and 2012, amounted to $519.5 million and $600.8$165.2 million, respectively, which are eliminated in the Company’s unaudited condensed consolidated financial statements. The financial cost related to financing sales for the three months ended September 30,March 31, 2014 and 2013 and 2012, accountedamounted to $1.1$0.9 million and $2.1$1.6 million, respectively, and for the nine months ended September 30, 2013 and 2012, amounted to $4.2 million and $6.8 million, respectively.
Short term loans due to related parties
| September 30, 2013 | December 31, 2012 | ||||||
| (in thousands) | (in thousands) | ||||||
| Baotou Steel: Loans from Tianjin Hengying Trading Co., Ltd, due on demand, and interest rates is 10% per annum. | $ | 3,430 | $ | 4,133 | |||
| General Steel China: Loans from Tianjin Hengying Trading Co., Ltd., due on demand, and interest rates is 10% per annum. | - | 15,416 | |||||
| General Steel China: Loans from Tianjin Dazhan Industry Co, Ltd., due on demand, and interest rates is 10% per annum. | - | 21,397 | |||||
| General Steel China: Loans from Beijing Shenhua Xinyuan Metal Materials Co., Ltd., due on demand, and interest rates is 10% per annum. | 1,395 | 1,359 | |||||
| General Steel China: Loans from Yangpu Capital Automobile, due on demand, and interest rates is 10% per annum. | 1,451 | 1,413 | |||||
| Longmen Joint Venture: Loan from Shaanxi Coal and Chemical Industry Group Co., Ltd., due in December 2013, and interest rate is 7.0% per annum. | 33,580 | - | |||||
| Longmen Joint Venture: Loans from financing sales. | 9,033 | 35,839 | |||||
| Total short-term loans - related parties | $ | 48,889 | $ | 79,557 | |||
| March 31, 2014 | December 31, 2013 | |||||||
| (in thousands) | (in thousands) | |||||||
| General Steel China: Loans from Yangpu Capital Automobile, due on demand, and interest rates is 10% per annum. | $ | 1,445 | $ | 1,458 | ||||
| Longmen Joint Venture: Loan from Shaanxi Coal and Chemical Industry Group Co., Ltd., due on demand, and interest rate is 7.0% per annum. | 22,169 | 28,216 | ||||||
| Longmen Joint Venture: Loan from Shaanxi Steel Group due on various dates from November 2014 to March 2015, and interest rate is 6.6% and 7.0% per annum. | 73,035 | 49,110 | ||||||
| Longmen Joint Venture: Loans from financing sales. | 8,431 | 47,909 | ||||||
| Total short-term loans - related parties | $ | 105,080 | $ | 126,693 | ||||
Long-term loans due to related party
| September 30, 2013 | December 31, 2012 | ||||||
| (in thousands) | (in thousands) | ||||||
| Longmen Joint Venture: Loans from Shaanxi Steel Group, due on various dates through November 2015 and interest rate are 5.6% - 5.9% per annum. | $ | 72,346 | $ | 92,973 | |||
| Less: Current maturities of long-term loans – related party | (47,896) | (54,885) | |||||
| Long-term loans - related party | $ | 24,450 | $ | 38,088 | |||
| March 31, 2014 | December 31, 2013 | |||||||
| (in thousands) | (in thousands) | |||||||
| Longmen Joint Venture: Loans from Shaanxi Steel Group, due on various dates through November 2015 and interest rate are 5.6% - 5.9% per annum. | $ | 72,035 | $ | 72,657 | ||||
| Less: Current maturities of long-term loans – related party | (57,428 | ) | (53,013 | ) | ||||
| Long-term loans - related party | $ | 14,607 | $ | 19,644 | ||||
Total interest expense, net of capitalized interest, amounted to $15.5$9.5 million and $36.6$8.0 million for the three months ended September 30,March 31, 2014 and 2013, and 2012, respectively.
Capitalized interest amounted to $1.3$0.6 million and $0.2$0.2 million for the three months ended September 30,March 31, 2014 and 2013, and 2012, respectively.
Note 10 – 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 September 30, 2013March 31, 2014 and December 31 2012,2013, customer deposits amounted to $110.2$252.4 million and $147.9$152.7 million, respectively, including deposits received from related parties, which amounted to $14.5$145.4 million and $22.0$64.9 million, respectively.
Note 11 – Deposits due to sales representatives
Longmen Joint Venture entered into agreements with various entities to act as the Company’s exclusive sales agent in a specified geographic area. These exclusive sales agents must meet certain criteria and are required to deposit a certain amount of money with the Company. In return the sales agents receive exclusive sales rights in a specified area and at discounted prices on products they order. These deposits bear no interest and are required to be returned to the sales agent once the agreement is terminated. The agreement is normally entered/or renewed on an annual basis. Termination of the agreement can be mutually agreed to by both parties at any time. The Company had $30.0$25.7 million and $35.1$26.3 million in deposits due to sales representatives, including deposits due to related parties, as of September 30, 2013March 31, 2014 and December 31, 2012,2013, respectively.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 12 – Convertible notes and derivative liabilities
The Company had 3,900,871 outstanding warrants in connection with the $40$40 million convertible notes issued in 2007, which expired on May 13, 2013, and 2,777,778 warrants in connection with a registered direct offering in 2009, which expired on June 24, 2012.2013. The aforementioned warrants met the definition of a derivative instrument in the accounting standards and were recorded at their fair value on each reporting date. The change in the value of the derivative liabilities is charged against or credited to income each period.
| December 31, 2012 | ||||
| Expected volatility | 86 | % | ||
| Expected dividend yield | 0 | % | ||
| Risk-free interest rate | 0.08 | % | ||
| Expected lives | 0.36 years | |||
| Market price | $ | 0.99 | ||
| Strike price | $ | 5.00 | ||
The Company hashad the following warrants outstanding:
| Outstanding as of December 31, | 3,900,871 | |||
| Granted | - | |||
| Forfeited / expired | (3,900,871 | ) | ||
| Exercised | - | |||
| Outstanding as of December 31, | - | |||
| Granted | - | |||
| Forfeited / expired | - | |||
| Exercised | - | |||
| Outstanding as of | - |
Note 13 - Supplemental disclosure of cash flow information
Interest paid, net of capitalized, amounted to $11.5$5.7 million and $20.2$3.6 million for the ninethree months ended September 30,March 31, 2014 and 2013, and 2012, respectively.
The Company paid income tax amounted to $0.3$0.01 million and $0.1$0.1 million for the ninethree months ended September 30,March 31, 2014 and 2013, and 2012, respectively.
During the ninethree months ended September 30,March 31, 2014 and 2013, the Company had receivables of $1.0$0.01 million and $1.0 million, respectively, as a result of the disposal of equipment that has not been collected.
During the ninethree months ended September 30, 2013, the Company converted $1.0 million of equipment into inventory productions.
The Company had $47.7 million notes receivable from financing sales loans to be converted to cash as of March 31, 2014.
During the ninethree months ended September 30, 2013 and 2012, the Company offset $64.2 million and $0, respectively, accounts payable to related party as loan receivable – related party repayment.
During the ninethree months ended September 30,March 31, 2014 and 2013, and 2012, one of the Company’s unconsolidated entities declared dividend and the Company was entitled for the dividend amounted to $0.2$0.2 million and $0.1$0.2 million, respectively, which was not yet collected.
During the ninethree months ended September 30, 2012, the Company sold its 22.76% equity interest of Tongxing at the carrying value of $8.0 million to two individuals who are representatives from Long Steel Group, a related party. In connection with this transaction, the Company received a land use rights from Tongxing at carrying value for $3.6 million and settled with a payable in cash of $0.3 million that the Company has not been paid. In addition, the Company determined that dividend receivables of $0.9 million will be transferring to the two individuals and will not be collected from Tongxing after these transactions.
Note 14 - Deferred lease income
To compensate the GroupCompany for costs and economic losses incurred during construction of the iron and steel making facilities owned by Shaanxi Steel, Shaanxi Steel reimbursed Longmen Joint Venture $11.4$11.4 million (RMB 70.1 million) in the fourth quarter of 2010 for the value of assets dismantled and rent under a 40-year property sub-lease that was entered into by the parties in June 2009 (the "Longmen Sub-lease"), and $29.8$29.7 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 $14.6$14.5 million (RMB 89.5 million) and $14.6$14.5 million (RMB 89.3 million), respectively, for trial production costs related to the new equipment.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
During the period from June 2010 to March 2011, as construction progressed and certain of the assets came online, Longmen Joint Venture used the assets free of charge to produce saleable units of steel products during this period. As such, the cost of using these assets and therefore the fair value of the free rent received was imputed with reference to what the depreciation charge would have been on these assets had they been owned or under capital lease to Longmen Joint Venture during the free use period. This cost of $7.2$7.1 million (RMB 43.9 million) each year were deferred and will be recognized over the term of the land sub-lease similar to the other charges and credits related to the construction of these assets.
The deferred lease income is amortized to income over the remaining term of the 40-year land sub-lease. For the three months ended September 30,March 31, 2014 and 2013, and 2012, the Company recognized $0.5$0.5 million in each period. For the nine months ended September 30, 2013 and 2012, the Company recognized $1.6$0.5 million, in each period.respectively. As of September 30, 2013March 31, 2014 and December 31, 2012,2013, the balance of deferred lease income amounted to $77.7$76.2 million and $77.2$77.4 million, respectively, of which $2.2$2.2 million and $2.1$2.2 million represents balance to be amortized within one year.
Note 15 - Capital lease obligation
Iron and steel production facilities
On April 29, 2011, the Company’s subsidiary, Longmen Joint Venture entered into a Unified Management Agreement with Shaanxi Steel and Shaanxi Coal under which Longmen Joint Venture uses new iron and steel making facilities including one sintering machine, two converters, two blast furnaces and other auxiliary systems constructed by Shaanxi Steel. As the 20-year20-year term of the agreement exceeds 75%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$2.3 million (RMB14.6 million) to be paid over the term of the Unified Management Agreement of 20 years and (2) 40%40% of any remaining pre-tax profits from the Asset Pool which includes Longmen Joint Venture and the newly constructed iron and steel making facilities. In October 2012,February 2014, Shaanxi Steel agreed that it will not demand capital lease payment from Longmen Joint Venture until October 2014.February 2017. The profit sharing component does not meet the definition of contingent rent because it is based on future revenue and is therefore considered part of the financing for the capital leased assets which is related to the Unified Management Agreement. For purposes of determining the value of the leased asset and obligation at the inception of the lease, the lease liability is then reduced by the value of the profit sharing component, which is recognized as a separate financialderivative liability, which is carried at fair value. See Note 16 – “Profit sharing liability”.
Energy-saving equipment
During 2013, the Company’s subsidiary, Longmen Joint Venture, entered into capital lease agreements for energy-saving equipment to be installed throughout the production chain. Under these agreements, Longmen Joint Venture uses the energy-saving equipment for which the vendors are responsible for the design, purchase, installation, and on-site testing, as well as the ownership rights to the equipment during the lease periods. The lease periods, which vary between four to six years, begin upon the completion of the equipment installation, testing, and the issuance of the energy-saving rate reports to be agreed upon by both the vendors and Longmen Joint Venture. As the ownership rights of the equipment transfer to Longmen Joint Venture at the end of the lease periods, these agreements are accounted for as capital leases.
The minimum lease payments are based on the energy cost saved during the lease periods, which is determined by the estimated annual equipment operating hours per the lease agreements. If the actual annual equipment operating hours are less than the estimated amount, the lease periods may be extended, subject to further negotiation and agreement between the Company and the vendors. If the actual annual equipment operating hours exceed the estimated amount, the Company is obligated to pay the additional lease payment based on the additional energy cost saved during the lease period and recognize the additional lease payments as contingent rent expense. For the three months ended March 31, 2014 and 2013, no contingent rent expense has incurred under these lease agreements.
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 September 30, 2013:
| Capital Lease Obligation | Capital Lease Obligation | |||||||||
| Year ending September 30, | Minimum Lease Payments | Profit (Loss) Sharing | Total | |||||||
| (in thousands) | (in thousands) | (in thousands) | ||||||||
| 2014 | $ | - | $ | - | $ | - | ||||
| 2015 | 126,557 | - | 126,557 | |||||||
| 2016 | 28,654 | - | 28,654 | |||||||
| 2017 | 28,654 | - | 28,654 | |||||||
| 2018 | 28,654 | - | 28,654 | |||||||
| Thereafter | 360,567 | 650,586 | 1,011,153 | |||||||
| Total minimum lease payments | 573,086 | 650,586 | 1,223,672 | |||||||
Less: amounts representing interest | (218,510) | (409,496) | (628,006) | |||||||
| Ending balance | $ | 354,576 | $ | 241,090 | $ | 595,666 | ||||
| Year ending March 31, | Capital Lease Obligations Minimum Lease Payments | |||
| (in thousands) | ||||
| 2015 | $ | 5,755 | ||
| 2016 | 4,211 | |||
| 2017 | 172,982 | |||
| 2018 | 31,906 | |||
| 2019 | 30,345 | |||
| Thereafter | 345,697 | |||
| Total minimum lease payments | 590,896 | |||
| Less:amounts representing interest | (210,097 | ) | ||
| Ending balance | $ | 380,799 | ||
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Interest expense for the three months ended September 30,March 31, 2014 and 2013 and 2012 on the minimumcapital lease payments were $5.1obligations was $5.4 million and $5.1$5.1 million, respectively.
Note 16 –Profit sharing liability
The profit sharing liability iscomponent of the capital lease obligation was recognized initially at its estimated fair value at the lease commencement date and included in the initial measurement and recognition of the capital lease, in addition to the fixed payment component of the minimum lease payments. Subsequently, this financial instrumentThe profit sharing liability is accounted for separately from the fixed portion of the capital lease accounting (Noteobligation (see Note 15 - “Capital lease obligation”). and is accounted for as a derivative instrument in accordance with ASC 815-10-15-83. The initialestimated fair value of the expected payments under the profit sharing component of the Unified Management Agreement is amortized over the term of the agreement using the effective interest method. The value of the profit sharing liability will beis reassessed at the end of each reporting period, with any change in fair value accounted for on a prospective basis. Refercharged or credited to income as “Change in Fair Value of Profit Sharing Liability”. See Note 2(h) – “Financial instruments” for details.
Payments to Shaanxi Steel for the profit sharing liability are not required until net cumulative profits are achieved. Based on the performance of the Asset Pool, no profit sharing payment which is not required until net cumulative profits are achieved, was made forduring the ninethree months ended September 30, 2013March 31, 2014 and 2012. Payments to Shaanxi Steel for the profit sharing are made based on net cumulative profits.
Note 17 – Other income (expense)
Lease income
The deferred lease income from the reimbursement from Shaanxi Steel for the net book value of the fixed assets that were demolished and for the inefficiency costs caused by the construction and loss incurred in the beginning stages of the system production is amortized to income over the remaining sub-lease term. For the three months ended September 30,March 31, 2014 and 2013, and 2012, the Company recognized lease income of $0.5$0.5 million and $0.5$0.5 million, and for the nine months ended September 30, 2013 and 2012, amounted to $1.6 million and $1.6 million, respectively.
Note 18 – Taxes
Income tax
Significant components of the provision for income taxes on earnings and deferred taxes on net operating losses from operations for the three months ended September 30,March 31, 2014 and 2013 and 2012 are as follows:
| For the three months ended | For the three months ended | ||||||
| (In thousands) | September 30, 2013 | September 30, 2012 | |||||
| Current | $ | 25 | $ | 100 | |||
| Deferred | - | - | |||||
| Total provision for income taxes | $ | 25 | $ | 100 | |||
| For the nine months ended | For the nine months ended | ||||||
| (In thousands) | September 30, 2013 | September 30, 2012 | |||||
| Current | $ | 201 | $ | 510 | |||
| Deferred | - | 169 | |||||
| Total provision (benefit) for income taxes | $ | 201 | $ | 679 | |||
| (In thousands) | The three months ended March 31, 2014 | The three months ended March 31, 2013 | ||||||
| Current | $ | 5 | $ | 71 | ||||
| Deferred | - | - | ||||||
| Total provision for income taxes | $ | 5 | $ | 71 | ||||
Under the Income Tax Laws of the PRC, General 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 income tax at a rate of 25%25%.
Longmen Joint Venture is located in the Mid-West region of China and as such, qualifies for the “Go-West” tax rate of 15%15% promulgated by the government. In 2010, the Chinese government announced that the “Go-West” tax initiative would be extended for 10 years, and thus, the preferential tax rate of 15%15% will be in effect until 2020. This special tax treatment for Longmen Joint Venture will be evaluated on a year-to-year basis by the local tax bureau.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Deferred taxes assets – China
According to Chinese tax regulations, net operating losses can be carried forward to offset operating income for the next five years. The Group’s losses carried forward of $436.9$533.0 million will begin to expire in 2014.2015. The Chinese government recently announced several policies to curb the real estate price increases across the country which led to a slowdown in demand for construction steel products. Additionally due to the continued global economic slowdown and the overcapacity issues in China's steel market, management expected there would be a sustained increase in margin pressure in the next five years until all the existing but outdated steel capacity across the whole industry are eliminated. Management took into consideration this potential negative impact on average selling price and gross margin of its products, re-performed an operating forecast for the next five years and concluded that the beginning-of-the-year balance of deferred tax assets mainly relating to the net operating loss carry forward may not be fully realizable due to the reduction in the projection of income to be available in the next 5 years. Management therefore decided to provide 100%100% valuation allowance for the deferred tax assets. The valuation allowance as of September 30, 2013March 31, 2014 and December 31, 20122013 was $86.9$100.7 million and $72.9$97.6 million, respectively. Management will review this valuation allowance periodically and make adjustments as warranted. Temporary differences representingrepresent tax and book differences in various items, such as receivable allowances, inventory allowances, impairments on fixed assets and deferred lease income.
Movement of valuation allowance:
| September 30, 2013 | December 31, 2012 | ||||||
| (in thousands) | (in thousands) | ||||||
| Beginning balance | $ | 72,891 | $ | 47,703 | |||
| Current period addition | 12,776 | 25,180 | |||||
| Current period reversal | (857) | - | |||||
| Deconsolidation of Tongxing | - | (216) | |||||
| Exchange difference | 2,125 | 224 | |||||
| Ending balance | $ | 86,935 | $ | 72,891 | |||
| March 31, 2014 | December 31, 2013 | |||||||
| (in thousands) | (in thousands) | |||||||
| Beginning balance | $ | 97,569 | $ | 72,891 | ||||
| Current period addition | 4,129 | 23,293 | ||||||
| Current period reversal | (155 | ) | (1,206 | ) | ||||
| Deconsolidation of Tongxing | - | - | ||||||
| Exchange difference | (865 | ) | 2,591 | |||||
| Ending balance | $ | 100,678 | $ | 97,569 | ||||
Deferred taxes assets – U.S.
General Steel Holdings, Inc. was incorporated in the United States and has incurred net operating losses for income tax purposes for the ninethree months ended September 30, 2013. March 31, 2014. The net operating loss carry forwards for United States income taxes amounted to $1.6$2.3 million, which may be available to reduce future years’ taxable income. These carry forwards will expire, if not utilized, starting from 2026 through 2032.2033. Management believes that the realization of the benefits from these losses appears uncertain due to the Company’s limited operating history and continuing losses for United States income tax purposes. Accordingly, the Company has provided a 100%100% valuation allowance on the deferred tax asset benefit to reduce the asset to zero. The valuation allowance as of September 30, 2013March 31, 2014 was $0.5$0.8 million. The net change in the valuation allowance for the ninethree months ended September 30, 2013March 31, 2014 was $0.$0.1 million. Management will review this valuation allowance periodically and make adjustments as warranted.
The Company has no cumulative proportionate retained earnings from profitable subsidiaries of approximately $0.1 million as of September 30, 2013.March 31, 2014. Accordingly, no provision has been made for U.S. deferred taxes related to future repatriation of these earnings, nor is it practicable to estimate the amount of income taxes that would have to be provided if we concluded that such earnings will be remitted in the future.
Value added tax
Enterprises or individuals who sell commodities, engage in repair and maintenance or import and export goods in the PRC are subject to a value added tax in accordance with PRC laws. The value added tax (“VAT”) standard rates are 13%13% to 17%17% of the gross sales price. A credit is available whereby VAT paid on the purchases of semi-finished products or raw materials used in the production of the Company’s finished products can be used to offset the VAT due on sales of the finished product. As of September 30, 2013March 31, 2014 and December 31, 2012,2013, the Company had $3.1$12.1 million and $4.2$3.5 million in value added tax credit which are available to offset future VAT payables, respectively.
Sales and purchases are recorded net of VAT collected and paid as the Company acts as an agent for the government for VAT collection. VAT on sales and VAT on purchases amounted to $160.5$152.9 million and $156.2$151.9 million, respectively, for the three months ended September 30, 2013March 31, 2014 and $209.7$183.2 million and $206.7$183.8 million, respectively, for the three months ended September 30, 2012. VAT on sales and VAT on purchases amounted to $513.7 million and $494.4 million, respectively, for the nine months ended September 30, 2013, $620.6 million and $594.1 million, respectively, for the nine months ended September 30, 2012.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Taxes payable consisted of the following:
| September 30, 2013 | December 31, 2012 | ||||||
| (in thousands) | (in thousands) | ||||||
| VAT taxes payable | $ | 7,309 | $ | 13,579 | |||
| Income taxes payable | 20 | 68 | |||||
| Misc. taxes | 2,387 | 3,027 | |||||
| Totals | $ | 9,716 | $ | 16,674 | |||
| March 31, 2014 | December 31, 2013 | |||||||
| (in thousands) | (in thousands) | |||||||
| VAT taxes payable | $ | 4,472 | $ | 2,211 | ||||
| Income taxes payable | 164 | 173 | ||||||
| Misc. taxes | 2,640 | 2,244 | ||||||
| Totals | $ | 7,276 | $ | 4,628 | ||||
Note 19 – Earnings (Loss)Income (loss) per share
The computation of earningsincome (loss) per share is as follows:
| For the three | For the three | ||||||
| months ended | months ended | ||||||
| September 30, 2013 | September 30, 2012 | ||||||
| Income (loss) attributable to holders of common stock | $ | 3,801 | $ | (41,598) | |||
| Basic and diluted weighted average number of common shares outstanding | 55,141 | 54,466 | |||||
| Earnings (loss) per share | |||||||
| Basic and diluted | $ | 0.07 | $ | (0.76) | |||
| For the nine | For the nine | ||||||
| months ended | months ended | ||||||
| September 30, 2013 | September 30, 2012 | ||||||
| Loss attributable to holders of common stock | $ | (32,914) | $ | (102,759) | |||
| Basic and diluted weighted average number of common shares outstanding | 54,976 | 54,946 | |||||
| Loss per share | |||||||
| Basic and diluted | $ | (0.60) | $ | (1.87) | |||
| (in thousands, except per share data) | The three months ended March 31, 2014 | The three months ended March 31, 2013 | ||||||
| Income (loss) attributable to holders of common stock | $ | (43,564 | ) | $ | 3,103 | |||
| Basic and diluted weighted average number of common shares outstanding | 55,813 | 54,805 | ||||||
| Earnings (loss) per share | ||||||||
| Basic and diluted | $ | (0.78 | ) | $ | 0.06 | |||
The Company had warrants exercisable for 0 and 3,900,871 shares of the Company’s common stock at September 30, 2012.March 31, 2014 and 2013, respectively. For the three and nine months ended September 30, 2012,March 31, 2014 and 2013, all outstanding warrants were excluded from the diluted earnings per share calculation since they are anti-dilutive.
Other than the aforementioned potentially dilutive securities, there were no other potentially dilutive securities outstanding for the three and nine months ended September 30, 2013March 31, 2014 and 2012.
Note 20 – Related party transactions and balances
Related party transactions
| a. | Capital lease |
As disclosed in Notes 15 – “Capital lease obligations”, Longmen Joint Venture entered into a capital lease arrangement on April 29, 2011, with Shaanxi Coal and Shaanxi Steel, which are related parties of the Group. The following is an analysis of the leased assets under the capital lease:
| September 30, 2013 | December 31, 2012 | ||||||
| (in thousands) | (in thousands) | ||||||
| Machinery | $ | 603,248 | $ | 587,334 | |||
| Less: accumulated depreciation | (69,248) | (46,497) | |||||
| Carrying value of leased assets | $ | 534,000 | $ | 540,837 | |||
| March 31, 2014 | December 31, 2013 | |||||||
| (in thousands) | (in thousands) | |||||||
| Machinery | $ | 600,658 | $ | 605,839 | ||||
| Less:accumulated depreciation | (83,216 | ) | (76,740 | ) | ||||
| Carrying value of leased assets | $ | 517,442 | $ | 529,099 | ||||
b. On January 1, 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, equipment and other facilities amounting to RMB 215.8 million ($34.4 million) 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 was from January 1, 2010 to December 31, 2011 and the monthly base rental rate due to General Steel (China) was approximately $0.2 million (RMB 1.7 million). On July 28, 2011, General Steel (China) (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 informed the Company that they did not intend to extend the lease at June 30, 2012 and has terminated the supplemental agreement early. There was no penalty for early termination. The Company assessed the recoverability of all of its remaining long lived assets at September 30, 2013 and such assessment did not result in any other impairment charges for the three and nine months ended September 30, 2013.
| Three months ended | Three months ended | ||||||||
| Name of related parties | Relationship | September 30, 2013 | September 30, 2012 | ||||||
| (in thousands) | (in thousands) | ||||||||
| Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | $ | 63,793 | $ | 123,631 | ||||
| Sichuan Yutai Trading Co., Ltd | Significant influence by Long Steel Group** | - | 16,998 | ||||||
| Shaanxi Yuchang Trading Co., Ltd | Significant influence by Long Steel Group | 1,081 | - | ||||||
| Shaanxi Haiyan Trade Co., Ltd | Significant influence by Long Steel Group | 85 | 12,480 | ||||||
| Shaanxi Shenganda Trading Co., Ltd | Significant influence by Long Steel Group | 19,866 | 7,599 | ||||||
| Shaanxi Steel | Majority shareholder of Long Steel Group | 979 | 25 | ||||||
| Shaanxi Long Steel Group Baoji Steel Rolling Co., Ltd | Subsidiary of Long Steel Group | 9 | 11,392 | ||||||
| Shaanxi Junlong Rolling Co., Ltd | Investee of Long Steel Group | 1,782 | 20,758 | ||||||
| Shaanxi Coal and Chemical Industry Group Co., Ltd | Shareholder of Shaanxi Steel | 7,951 | - | ||||||
| Others | Entities either owned or have significant influence by our affiliates or management | - | - | ||||||
| Total | $ | 95,546 | $ | 192,883 | |||||
| Name of related parties | Relationship | Three months ended March 31, 2014 | Three months ended March 31, 2013 | |||||||
| (in thousands) | (in thousands) | |||||||||
| Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | $ | 44,800 | $ | 80,675 | |||||
| Sichuan Yutai Trading Co., Ltd | Significant influence by Long Steel Group* | - | 72 | |||||||
| Shaanxi Yuchang Trading Co., Ltd | Significant influence by Long Steel Group | - | 14,435 | |||||||
| Shaanxi Haiyan Trade Co., Ltd | Significant influence by Long Steel Group | 15 | 10,592 | |||||||
| Shaanxi Shenganda Trading Co., Ltd | Significant influence by Long Steel Group | 20,736 | 18,286 | |||||||
| Shaanxi Steel | Majority shareholder of Long Steel Group | 471 | 963 | |||||||
| Shaanxi Coal and Chemical Industry Group Co., Ltd. | Shareholder of Shaanxi Steel | 4,969 | 1,834 | |||||||
| Shaanxi Long Steel Group Baoji Steel Rolling Co., Ltd | Subsidiary of Long Steel Group | 6,618 | 1,999 | |||||||
| Shaanxi Junlong Rolling Co., Ltd | Investee of Long Steel Group | 4,597 | 20,004 | |||||||
| Total | $ | 82,206 | $ | 148,860 | ||||||
Sales to related parties in trading transactions, which were netted against the corresponding cost of goods sold, amounted to $33.3 million for the three months ended March 31, 2014. See Note 2(m) Revenue Recognition for details.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
*Long Steel Group has the ability to significantly influence the operating and financial decisions of the entity through equity ownership either directly or through key employees, commercial contractual terms, or the ability to assign management personnel.
| Nine months ended | Nine months ended | ||||||||
| Name of related parties | Relationship | September 30, 2013 | September 30, 2012 | ||||||
| (in thousands) | (in thousands) | ||||||||
| Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | $ | 226,754 | $ | 360,820 | ||||
| Sichuan Yutai Trading Co., Ltd | Significant influence by Long Steel Group | 72 | 147,847 | ||||||
| Shaanxi Yuchang Trading Co., Ltd | Significant influence by Long Steel Group | 21,491 | 41,433 | ||||||
| Shaanxi Haiyan Trade Co., Ltd | Significant influence by Long Steel Group | 15,681 | 43,015 | ||||||
| Shaanxi Shenganda Trading Co., Ltd | Significant influence by Long Steel Group | 56,545 | 34,132 | ||||||
| Shaanxi Steel | Majority shareholder of Long Steel Group | 2,390 | 634 | ||||||
| Shaanxi Long Steel Group Baoji Steel Rolling Co., Ltd | Subsidiary of Long Steel Group | 2,122 | 31,485 | ||||||
| Shaanxi Junlong Rolling Co., Ltd | Investee of Long Steel Group | 33,075 | 37,965 | ||||||
| Shaanxi Coal and Chemical Industry Group Co., Ltd | Shareholder of Shaanxi Steel | 22,577 | - | ||||||
| Others | Entities either owned or have significant influence by our affiliates or management | - | 1,493 | ||||||
| Total | $ | 380,707 | $ | 698,824 | |||||
c. The following charts summarize purchases from related parties for the three and nine months ended September 30, 2013March 31, 2014 and 2012.
| Three months ended | Three months ended | ||||||||
| Name of related parties | Relationship | September 30, 2013 | September 30, 2012 | ||||||
| (in thousands) | (in thousands) | ||||||||
| Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | $ | 101,606 | $ | 123,637 | ||||
| Hancheng Haiyan Coking Co., Ltd | Noncontrolling shareholder of Long Steel Group | 31,331 | 47,487 | ||||||
| Xi’an Pinghe Metallurgical Raw Material Co., Ltd | Noncontrolling shareholder of Long Steel Group | 1,181 | 16,674 | ||||||
| Shaanxi Long Steel Group Baoji Steel Rolling Co., Ltd | Subsidiary of Long Steel Group | - | 1,568 | ||||||
| Shaanxi Junlong Rolling Co., Ltd | Investee of Long Steel Group | 1 | 2,257 | ||||||
| Shaanxi Huafu New Energy Co., Ltd | Significant influence by the Long Steel Group | 10,529 | 10,322 | ||||||
| Beijing Daishang Trading Co., Ltd. | Noncontrolling shareholder of Longmen Joint Venture’s subsidiary | 1,726 | 1,049 | ||||||
| Others | Entities either owned or have significant influence by our affiliates or management | 64 | 91 | ||||||
| Total | $ | 146,438 | $ | 203,085 | |||||
| Name of related parties | Relationship | Three months ended March 31, 2014 | Three months ended March 31, 2013 | |||||||
| (in thousands) | (in thousands) | |||||||||
| Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | $ | 151,772 | $ | 104,493 | |||||
| Hancheng Haiyan Coking Co., Ltd | Noncontrolling shareholder of Long Steel Group | 44,088 | 63,798 | |||||||
| Xi’an Pinghe Metallurgical Raw Material Co., Ltd | Noncontrolling shareholder of Long Steel Group | 904 | 11,755 | |||||||
| Shaanxi Long Steel Group Baoji Steel Rolling Co., Ltd | Subsidiary of Long Steel Group | - | 53 | |||||||
| Shaanxi Junlong Rolling Co., Ltd | Investee of Long Steel Group | - | 210 | |||||||
| Shaanxi Huafu New Energy Co., Ltd | Significant influence by the Long Steel Group | 6,660 | 9,529 | |||||||
| Beijing Daishang Trading Co., Ltd. | Noncontrolling shareholder of Longmen Joint Venture’s subsidiary | - | 3,477 | |||||||
| Tianwu General Steel Material Trading Co., Ltd. | Investee of General Steel (China) | 23,339 | - | |||||||
Tianjin General Quigang Pipe Co., Ltd | Partially owned by CEO through indirect shareholding | 4,275 | - | |||||||
Tianjin Hengying Trading Co., Ltd | Partially owned by CEO through indirect shareholding | 27,919 | - | |||||||
| Others | Entities either owned or have significant influence by our affiliates or management | 47 | 70 | |||||||
| Total | $ | 259,004 | $ | 193,385 | ||||||
Related party balances
| Nine months ended | Nine months ended | ||||||||
| Name of related parties | Relationship | September 30, 2013 | September 30, 2012 | ||||||
| (in thousands) | (in thousands) | ||||||||
| Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | $ | 376,104 | $ | 453,947 | ||||
| Hancheng Haiyan Coking Co., Ltd | Noncontrolling shareholder of Long Steel Group | 148,322 | 195,861 | ||||||
| Xi’an Pinghe Metallurgical Raw Material Co., Ltd | Noncontrolling shareholder of Long Steel Group | 13,678 | 83,251 | ||||||
| Shaanxi Long Steel Group Baoji Steel Rolling Co., Ltd | Subsidiary of Long Steel Group | 53 | 5,332 | ||||||
| Shaanxi Junlong Rolling Co., Ltd | Investee of Long Steel Group | 212 | 4,417 | ||||||
| Shaanxi Huafu New Energy Co., Ltd | Significant influence by the Long Steel Group | 28,618 | 24,347 | ||||||
| Beijing Daishang Trading Co., Ltd. | Noncontrolling shareholder of Longmen Joint Venture’s subsidiary | 6,635 | 3,653 | ||||||
| Others | Entities either owned or have significant influence by our affiliates or management | 300 | 305 | ||||||
| Total | $ | 573,922 | $ | 771,113 | |||||
a. | Loans receivable – related parties: |
| Name of related parties | Relationship | September 30, 2013 | December 31, 2012 | ||||||
| (in thousands) | (in thousands) | ||||||||
| Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | $ | - | $ | 63,319 | ||||
| Teamlink Investment Co., Ltd | Partially owned by CEO* through indirect shareholding | 4,540 | 6,000 | ||||||
| Total | $ | 4,540 | $ | 69,319 | |||||
| Name of related parties | Relationship | March 31, 2014 | December 31, 2013 | |||||||
| (in thousands) | (in thousands) | |||||||||
| Teamlink Investment Co., Ltd | Partially owned by CEO through indirect shareholding** | 4,540 | 4,540 | |||||||
| Total | $ | 4,540 | $ | 4,540 | ||||||
**The CEO is referred to herein as the chief executive officer of General Steel Holdings, Inc.
See Note 3 – loans receivable – related parties for loan details.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| b. | Accounts receivables – related parties: |
| Name of related parties | Relationship | September 30, 2013 | December 31, 2012 | ||||||
| (in thousands) | (in thousands) | ||||||||
| Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | $ | 1,834 | $ | 10,409 | ||||
| Shaanxi Long Steel Group Baoji Steel Rolling Co., Ltd | Subsidiary of Long Steel Group | - | 2,017 | ||||||
| Tianjin Daqiuzhuang Steel Plates | Partially owned by CEO through indirect shareholding | 19 | 18 | ||||||
| Shaanxi Steel | Majority shareholder of Long Steel Group | 1,227 | 2,435 | ||||||
| Others | 172 | 87 | |||||||
| Total | $ | 3,252 | $ | 14,966 | |||||
| Name of related parties | Relationship | March 31, 2014 | December 31, 2013 | |||||||
| (in thousands) | (in thousands) | |||||||||
| Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | $ | 2,633 | $ | 548 | |||||
| Tianjin Daqiuzhuang Steel Plates | Partially owned by CEO through indirect shareholding | 19 | 19 | |||||||
| Shaanxi Steel | Majority shareholder of Long Steel Group | 1,816 | 1,741 | |||||||
| Others | 6 | 634 | ||||||||
| Total | $ | 4,474 | $ | 2,942 | ||||||
c. | Other receivables – related parties: |
Other receivables - related parties are those nontrade receivables arising from transactions between the Company and its related parties, such as advances or payments made on behalf of these related parties.
| Name of related parties | Relationship | September 30, 2013 | December 31, 2012 | ||||||
| (in thousands) | (in thousands) | ||||||||
| Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | $ | 561 | $ | 301 | ||||
| Shaanxi Steel | Majority shareholder of Long Steel Group | 44,811 | 65,981 | ||||||
| Tianjin General Quigang Pipe Co., Ltd | Partially owned by CEO through indirect shareholding | 1,228 | 1,195 | ||||||
| Tianjin Dazhan Industry Co, Ltd | Partially owned by CEO through indirect shareholding | 489 | 476 | ||||||
| Maoming Shengze Trading Co., Ltd. | Partially owned by CEO through indirect shareholding | 3,834 | - | ||||||
| Others | Entities either owned or have significant influence by our affiliates or management | 578 | 429 | ||||||
| Total | $ | 51,501 | $ | 68,382 | |||||
| Name of related parties | Relationship | March 31, 2014 | December 31, 2013 | |||||||
| (in thousands) | (in thousands) | |||||||||
| Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | $ | 702 | $ | 406 | |||||
| Shaanxi Steel | Majority shareholder of Long Steel Group | 47,238 | 46,439 | |||||||
| Tianjin General Quigang Pipe Co., Ltd | Partially owned by CEO through indirect shareholding | 1,237 | 1,247 | |||||||
| Tianjin Dazhan Industry Co, Ltd | Partially owned by CEO through indirect shareholding | 484 | 491 | |||||||
| Beijing Shenhua Xinyuan Metal Materials Co., Ltd. | Partially owned by CEO through indirect shareholding | 4,859 | 4,901 | |||||||
| Victory Energy Resource Co., Ltd | Partially owned by CEO through indirect shareholding | 2,531 | - | |||||||
| Others | Entities either owned or have significant influence by our affiliates or management | 803 | 622 | |||||||
| Total | $ | 57,854 | $ | 54,106 | ||||||
| d. | Advances on inventory purchase – related parties: |
| Name of related parties | Relationship | September 30, 2013 | December 31, 2012 | ||||||
| (in thousands) | (in thousands) | ||||||||
| Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | $ | 1,377 | $ | 1,367 | ||||
| Tianjin Dazhan Industry Co., Ltd | Partially owned by CEO through indirect shareholding | 6,254 | - | ||||||
| Tianjin Hengying Trading Co., Ltd | Partially owned by CEO through indirect shareholding | 12,805 | - | ||||||
| Tianjin General Qiugang Pipe Co., Ltd | Partially owned by CEO through indirect shareholding | 9,210 | 41,316 | ||||||
| Maoming Shengze Trading Co., Ltd | Partially owned by CEO through indirect shareholding | - | 3,733 | ||||||
| Others | Entities either owned or have significant influence by our affiliates or management | 21 | - | ||||||
| Total | $ | 29,667 | $ | 46,416 | |||||
| Name of related parties | Relationship | March 31, 2014 | December 31, 2013 | |||||||
| (in thousands) | (in thousands) | |||||||||
| Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | $ | - | $ | 9,123 | |||||
| Shaanxi Shenganda Trading Co., Ltd. | Significant influence by Long Steel Group | - | 25,607 | |||||||
| Tianjin Dazhan Industry Co., Ltd | Partially owned by CEO through indirect shareholding | 26,049 | 10,343 | |||||||
| Tianjin Hengying Trading Co., Ltd | Partially owned by CEO through indirect shareholding | 60,849 | 16,158 | |||||||
| Tianjin General Qiugang Pipe Co., Ltd | Partially owned by CEO through indirect shareholding | 30,018 | 555 | |||||||
| Maoming Shengze Trading Co., Ltd | Partially owned by CEO through indirect shareholding | - | 21,197 | |||||||
| Tianwu General Steel Material Trading Co., Ltd. | Investee of General Steel (China) | 3,490 | - | |||||||
| Others | Entities either owned or have significant influence by our affiliates or management | 20 | 20 | |||||||
| Total | $ | 120,426 | $ | 83,003 | ||||||
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| e. | Accounts payable - related parties: |
| Name of related parties | Relationship | September 30, 2013 | December 31, 2012 | ||||||
| (in thousands) | (in thousands) | ||||||||
| Hancheng Haiyan Coking Co., Ltd | Noncontrolling shareholder of Longmen Joint Venture | $ | 60,463 | $ | 58,661 | ||||
| Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | 100,579 | 91,511 | ||||||
| Shaanxi Coal and Chemical Industry Group Co., Ltd. | Shareholder of Shaanxi Steel | - | 5,652 | ||||||
| Tianjin Dazhan Industry Co., Ltd | Partially owned by CEO through indirect shareholding | 954 | 3 | ||||||
| Xi’an Pinghe Metallurgical Raw Material Co., Ltd | Noncontrolling shareholder of Long Steel Group | 7,838 | 5,278 | ||||||
| Tianjin Hengying Trading Co., Ltd | Partially owned by CEO through indirect shareholding | 1 | 13,919 | ||||||
| Henan Xinmi Kanghua Fire Refractory Co., Ltd | Noncontrolling shareholder of Longmen Joint Venture’s subsidiary | 722 | 1,146 | ||||||
| Beijing Daishang Trading Co., Ltd | Noncontrolling shareholder of Longmen Joint Venture’s subsidiary | 1,149 | 875 | ||||||
| Tianjin General Qiugang Pipe Co., Ltd | Partially owned by CEO through indirect shareholding | - | 52 | ||||||
| Others | Entities either owned or have significant influence by our affiliates or management | 553 | 335 | ||||||
| Total | $ | 172,259 | $ | 177,432 | |||||
| Name of related parties | Relationship | March 31, 2014 | December 31, 2013 | |||||||
| (in thousands) | (in thousands) | |||||||||
| Hancheng Haiyan Coking Co., Ltd | Noncontrolling shareholder of Longmen Joint Venture | $ | 71,047 | $ | 58,163 | |||||
| Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | 176,347 | 134,758 | |||||||
| Shaanxi Coal and Chemical Industry Group Co., Ltd. | Shareholder of Shaanxi Steel | 21,814 | 29,990 | |||||||
| Tianjin Dazhan Industry Co., Ltd | Partially owned by CEO through indirect shareholding | 7,528 | 958 | |||||||
| Xi’an Pinghe Metallurgical Raw Material Co., Ltd | Noncontrolling shareholder of Long Steel Group | 4,429 | 8,714 | |||||||
| Henan Xinmi Kanghua Fire Refractory Co., Ltd | Noncontrolling shareholder of Longmen Joint Venture’s subsidiary | 641 | 716 | |||||||
| Beijing Daishang Trading Co., Ltd | Noncontrolling shareholder of Longmen Joint Venture’s subsidiary | 36 | 1,004 | |||||||
| Tianwu General Steel Material Trading Co., Ltd. | Investee of General Steel (China) | - | 759 | |||||||
| Others | Entities either owned or have significant influence by our affiliates or management | 696 | 630 | |||||||
| Total | $ | 282,540 | $ | 235,692 | ||||||
| f. | Short-term loans - related parties: |
| Name of related parties | Relationship | September 30, 2013 | December 31, 2012 | ||||||
| (in thousands) | (in thousands) | ||||||||
| Shaanxi Steel | Majority shareholder of Long Steel Group | $ | - | $ | 35,839 | ||||
| Shaanxi Coal and Chemical Industry Group Co., Ltd | Shareholder of Shaanxi Steel | 33,580 | - | ||||||
| Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | 1,547 | - | ||||||
| Tianjin Hengying Trading Co., Ltd | Partially owned by CEO through indirect shareholding | 10,916 | 19,549 | ||||||
| Tianjin Dazhan Industry Co., Ltd | Partially owned by CEO through indirect shareholding | - | 21,397 | ||||||
| Beijing Shenhua Xinyuan Metal Materials Co., Ltd | Partially owned by CEO through indirect shareholding | 1,395 | 1,359 | ||||||
| Yangpu Capital Automobile | Partially owned by CEO through indirect shareholding | 1,451 | 1,413 | ||||||
| Total | $ | 48,889 | $ | 79,557 | |||||
| Name of related parties | Relationship | March 31, 2014 | December 31, 2013 | |||||||
| (in thousands) | (in thousands) | |||||||||
| Shaanxi Steel | Majority shareholder of Long Steel Group | $ | 73,035 | $ | 49,110 | |||||
| Shaanxi Coal and Chemical Industry Group Co., Ltd | Shareholder of Shaanxi Steel | 22,169 | 28,216 | |||||||
| Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | - | 33,183 | |||||||
| Tianjin Hengying Trading Co., Ltd | Partially owned by CEO through indirect shareholding | 8,431 | 8,178 | |||||||
| Tianjin Dazhan Industry Co., Ltd | Partially owned by CEO through indirect shareholding | - | 6,548 | |||||||
| Yangpu Capital Automobile | Partially owned by CEO through indirect shareholding | 1,445 | 1,458 | |||||||
| Total | $ | 105,080 | $ | 126,693 | ||||||
See Note 9 – Debt for the loan details.
| g. | Current maturities of long-term loans – related parties |
| Name of related party | Relationship | September 30, 2013 | December 31, 2012 | ||||||
| (in thousands) | (in thousands) | ||||||||
| Shaanxi Steel | Majority shareholder of Long Steel Group | $ | 47,896 | $ | 54,885 | ||||
| Total | $ | 47,896 | $ | 54,885 | |||||
| Name of related party | Relationship | March 31, 2014 | December 31, 2013 | |||||||
| (in thousands) | (in thousands) | |||||||||
| Shaanxi Steel | Majority shareholder of Long Steel Group | $ | 57,428 | $ | 53,013 | |||||
| Total | $ | 57,428 | $ | 53,013 | ||||||
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| h. | Other payables – related parties: |
Other payables – related parties are those nontrade payables arising from transactions between the Company and its related parties, such as advances or payments from these related parties on behalf of the Group.
| September 30, | December 31, | ||||||||
| Name of related parties | Relationship | 2013 | 2012 | ||||||
| (in thousands) | (in thousands) | ||||||||
| Tianjin Hengying Trading Co, Ltd | Partially owned by CEO through indirect shareholding | $ | 876 | $ | 2,770 | ||||
| Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | 51,919 | 60,180 | ||||||
| Shaanxi Steel | Majority shareholder of Long Steel Group | 44,173 | - | ||||||
| Wendlar Investment & Management Group Co., Ltd | Common control under CEO | 911 | 836 | ||||||
| Yangpu Capital Automobile | Partially owned by CEO through indirect shareholding | 254 | 141 | ||||||
| Xi’an Pinghe Metallurgical Raw Material Co., Ltd | Noncontrolling shareholder of Long Steel Group | - | 4,761 | ||||||
| Tianjin Dazhan Industry Co., Ltd | Partially owned by CEO through indirect shareholding | 4,020 | 3,695 | ||||||
| Maoming Shengze Trading Co., Ltd | Partially owned by CEO through indirect shareholding | 1,566 | - | ||||||
| Victory Energy Resource Co., Ltd | Partially owned by CEO through indirect shareholding | 1,375 | - | ||||||
| Others | Entities either owned or have significant influence by our affiliates or management | 1,059 | 642 | ||||||
| Total | $ | 106,153 | $ | 73,025 | |||||
| Name of related parties | Relationship | March 31, 2014 | December 31, 2013 | |||||||
| (in thousands) | (in thousands) | |||||||||
| Tianjin Hengying Trading Co, Ltd | Partially owned by CEO through indirect shareholding | $ | 377 | $ | 380 | |||||
| Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | 31,861 | 43,636 | |||||||
| Shaanxi Steel | Majority shareholder of Long Steel Group | 43,983 | 44,363 | |||||||
| Wendlar Investment & Management Group Co., Ltd | Common control under CEO | 900 | 895 | |||||||
| Yangpu Capital Automobile | Partially owned by CEO through indirect shareholding | 325 | 291 | |||||||
| Tianjin Dazhan Industry Co., Ltd | Partially owned by CEO through indirect shareholding | 469 | 473 | |||||||
| Maoming Shengze Trading Co., Ltd | Partially owned by CEO through indirect shareholding | 2,248 | 1,745 | |||||||
| Victory Energy Resource Co., Ltd | Partially owned by CEO through indirect shareholding | - | 1,375 | |||||||
| Others | Entities either owned or have significant influence by our affiliates or management | 531 | 921 | |||||||
| Total | $ | 80,694 | $ | 94,079 | ||||||
| i. | Customer deposits – related parties: |
| Name of related parties | Relationship | September 30, 2013 | December 31, 2012 | ||||||
| (in thousands) | (in thousands) | ||||||||
| Shaanxi Yuchang Trading Co., Ltd | Significant influence by Long Steel Group | $ | 10 | $ | 4,869 | ||||
| Sichuan Yutai Trading Co., Ltd | Significant influence by Long Steel Group | - | 2,163 | ||||||
| Tianjin Hengying Trading Co, Ltd | Partially owned by CEO through indirect shareholding | - | 90 | ||||||
| Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | 13,600 | 8,864 | ||||||
| Shaanxi Junlong Rolling Co., Ltd | Investee of Long Steel Group | 679 | 5,615 | ||||||
| Shaanxi Shenganda Trading Co., Ltd | Significant influence by Long Steel Group | - | 353 | ||||||
| Others | Entities either owned or have significant influence by our affiliates or management | 223 | 44 | ||||||
| Total | $ | 14,512 | $ | 21,998 | |||||
| Name of related parties | Relationship | March 31, 2014 | December 31, 2013 | |||||||
| (in thousands) | (in thousands) | |||||||||
| Shaanxi Yuchang Trading Co., Ltd | Significant influence by Long Steel Group | $ | 10 | $ | 10 | |||||
| Shaanxi Coal and Chemical Industry Group Co., Ltd | Shareholder of Shaanxi Steel | 1,967 | - | |||||||
| Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | 20,978 | 15,038 | |||||||
| Shaanxi Junlong Rolling Co., Ltd | Investee of Long Steel Group | 4,065 | 2,748 | |||||||
| Shaanxi Shenganda Trading Co., Ltd | Significant influence by Long Steel Group | - | 275 | |||||||
| Tianwu General Steel Material Trading Co., Ltd. | Investee of General Steel (China) | 118,346 | 46,521 | |||||||
| Others | Entities either owned or have significant influence by our affiliates or management | - | 289 | |||||||
| Total | $ | 145,366 | $ | 64,881 | ||||||
| j. | Deposits due to sales representatives – related parties |
| Name of related parties | Relationship | September 30, 2013 | December 31, 2012 | ||||||
| (in thousands) | (in thousands) | ||||||||
| Hancheng Haiyan Coking Co., Ltd | Noncontrolling shareholder of Long Steel Group | $ | 587 | $ | 619 | ||||
| Shaanxi Junlong Rolling Co., Ltd | Investee of Long Steel Group | 635 | 619 | ||||||
| Shaanxi Yuchang Trading Co., Ltd | Significant influence by Long Steel Group | 587 | - | ||||||
| Total | $ | 1,809 | $ | 1,238 | |||||
| Name of related parties | Relationship | March 31, 2014 | December 31, 2013 | |||||||
| (in thousands) | (in thousands) | |||||||||
| Gansu Yulong Trading Co., Ltd. | Significant influence by Long Steel Group | $ | 1,396 | $ | 1,408 | |||||
| Shaanxi Yuchang Trading Co., Ltd | Significant influence by Long Steel Group | 584 | 589 | |||||||
| Total | $ | 1,980 | $ | 1,997 | ||||||
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| k. | Long-term loans – related party: |
| Name of related party | Relationship | September 30, 2013 | December 31, 2012 | ||||||
| (in thousands) | (in thousands) | ||||||||
| Shaanxi Steel | Majority shareholder of Long Steel Group | $ | 24,450 | $ | 38,088 | ||||
| Total | $ | 24,450 | $ | 38,088 | |||||
| Name of related party | Relationship | March 31, 2014 | December 31, 2013 | |||||||
| (in thousands) | (in thousands) | |||||||||
| Shaanxi Steel | Majority shareholder of Long Steel Group | $ | 14,607 | $ | 19,644 | |||||
| Total | $ | 14,607 | $ | 19,644 | ||||||
The Company also provided guarantee on related parties’ bank loans amounting to $139.9$190.1 million and $118.0$205.8 million as of September 30, 2013March 31, 2014 and as of December 31, 2012,2013, respectively.
| Name of related party | Relationship | September 30, 2013 | December 31, 2012 | ||||||
| (in thousands) | (in thousands) | ||||||||
| Shaanxi Steel | Majority shareholder of Long Steel Group | $ | - | $ | 43,008 | ||||
| Total | $ | - | $ | 43,008 | |||||
| Deferred lease income |
| September 30, 2013 | December 31, 2012 | ||||||
| (in thousands) | (in thousands) | ||||||
| Beginning balance | $ | 77,199 | $ | 78,524 | |||
| Less: Lease income realized | (1,613) | (2,119) | |||||
| Exchange rate effect | 2,072 | 794 | |||||
| Ending balance | 77,658 | 77,199 | |||||
| Current portion | (2,178) | (2,120) | |||||
| Noncurrent portion | $ | 75,480 | $ | 75,079 | |||
| March 31, 2014 | December 31, 2013 | |||||||
| (in thousands) | (in thousands) | |||||||
| Beginning balance | $ | 77, 444 | $ | 77,199 | ||||
| Less: Lease income realized | (546 | ) | (2,158 | ) | ||||
| Exchange rate effect | (658 | ) | 2,403 | |||||
| Ending balance | 76,240 | 77,444 | ||||||
| Current portion | (2,168 | ) | (2,187 | ) | ||||
| Noncurrent portion | $ | 74,072 | $ | 75,257 | ||||
For the three months ended September 30,March 31, 2014 and 2013, and 2012, the Company realized lease income from Shaanxi Steel, a related party, amounted to $0.5$0.5 million and $0.5$0.5 million, respectively.
| m. | Equity |
On November 19, 2013, and 2012, the Company realized lease income from Shaanxi Steel,sold its 28% equity interest of Tianwu held by Yangpu Shengtong to Tianjin Dazhan Industry Co., Ltd., a related party through indirect common ownership by the CEO, for $13.6 million (RMB 84.3 million) while retaining the 32% interest held by General Steel (China). As a result of this transaction, the Company met the criteria under ASC 810-10-40-4 to deconsolidate Tianwu as of the ownership disposal date and recognize a gain, which amounted to $1.6$1.0 million. After the deconsolidation of Tianwu, General Steel (China)’s 32% interest in Tianwu was accounted for as an equity method investment, which amounted to $15.6 million and $1.6$15.8 million as of March 31, 2014 and December 31, 2013, respectively.
Note 21 -– Equity
20132014 Equity Transactions
On March 28, 2013,February 3, 2014, the Company granted senior management and directors 174,90080,000 shares of common stock at $1.01$1.01 per share as compensationservice fees for investor relations consulting services under the Company’s 2008 Equity Incentive Plan.two service agreements dated January 14, 2014. The shares were valued at the quoted market price on the grant date.
Note 22 – Retirement plan
Regulations in the PRC require the Company to contribute to a defined contribution retirement plan for all employees. All the employees of the Company’s entities in China are entitled to a retirement pension amount calculated based upon their salary at their date of retirement and their length of service in accordance with a government managed pension plan. The PRC government is responsible for the pension liability to the retired staff. The Company’s entities in China are required to contribute based on the higher of 20%20% of the employees’ monthly base salary or 12%12% of the minimum social average salary of the city where the facilities are located. Employees are required to contribute 8%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 was $2.3 million and $1.7 million for the three months ended September 30,March 31, 2014 and 2013 and 2012, respectively, and for the nine months ended September 30, 2013 and 2012 amounted to $6.4$2.8 million and $5.5$2.2 million, respectively.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 23 – Statutory reserves
The laws and regulations of the People’s Republic of China require that before a foreign -invested enterprise distributes profits to its shareholders, it must first satisfy all tax liabilities, provision for losses in previous years, and make allocations, in proportions determined at the discretion of the board of directors, to the statutory reserves. The statutory reserves include the surplus reserve funds and the enterprise fund and these statutory reserves represent restricted retained earnings.
Surplus reserve fund
The Company is required to transfer 10%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%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%25% of the registered capital. For the periodsthree months ended September 30,March 31, 2014 and 2013, and 2012, the Company did not make any contributions to these reserves.
Special reserve
The Company is required by the PRC government to reserve safety and maintenance expense to the cost of production based on the actual quantity of mineral exploited. The amount of reserves is determined within the unit price range provided by Ministry of Finance of PRC. For the ninethree months ended September 30,March 31, 2014 and 2013, and 2012, the Company made contributions of $0.7$0.3 million and $0.9$0.2 million to these reserves, respectively and used $0.4$0.1 million and $0.9$0.1 million of safety and maintenance expense, respectively.
Note 24 – Commitment and contingencies
Operating Lease Commitments
Total operating lease commitments for rental of offices, buildings, equipment and land use rights of the Company’s PRC subsidiaries as of September 30, 2013March 31, 2014 is as follows:
| Year ending September 30, | Minimum lease payment | |||
| (in thousands) | ||||
| (Unaudited) | ||||
| 2014 | $ | 1,445 | ||
| 2015 | 680 | |||
| 2016 | 559 | |||
| 2017 | 559 | |||
| 2018 | 559 | |||
| Years after | 20,185 | |||
| Total minimum payments required | $ | 23,987 | ||
| Year ending March 31, | Minimum lease payment | |||
| (in thousands) | ||||
| 2015 | $ | 1,243 | ||
| 2016 | 568 | |||
| 2017 | 568 | |||
| 2018 | 568 | |||
| 2019 | 568 | |||
| Years after | 19,744 | |||
| Total minimum payments required | $ | 23,259 | ||
Total rental expense was $0.8$0.9 million and $0.8$0.8 million for the three months ended September 30,March 31, 2014 and 2013, and 2012, respectively, and $2.4 million and $2.4 million for the nine months ended September 30, 2013 and 2012, respectively.
Contractual Commitments
Longmen Joint Venture has $211.6$338.2 million contractual obligations related to construction projects as of September 30, 2013March 31, 2014 estimated to be fulfilled between November 2013May and SeptemberDecember 2014.
Contingencies
As of September 30, 2013,March 31, 2014, Longmen Joint Venture provided guarantees to related parties’ and third parties’ bank loans, including lines of credit and others, amounting to $304.6$274.5 million.
| Guarantee | ||||||
| Nature of guarantee | amount | Guaranty Due Date | ||||
| (In thousands) | ||||||
| Line of credit | $ | 178,931 | Various from October 2013 to August 2015 | |||
| Three-party financing agreements | 42,315 | Various from October 2013 to January 2014 | ||||
| Confirming storage | 19,951 | Various from December 2013 to September 2014 | ||||
| Financing by the rights of goods delivery in future | 63,374 | Various from December 2013 to March 2015 | ||||
| Total | $ | 304,571 | ||||
| Guarantee | ||||||
| Name of parties being guaranteed | amount | Guaranty Due Date | ||||
| (In thousands) | ||||||
| Long Steel Group | $ | 74,819 | Various from October 2013 to August 2015 | |||
| Hancheng Haiyan Coking Co., Ltd | 42,315 | Various from October 2013 to January 2014 | ||||
| Long Steel Group Fuping Rolling Steel Co., Ltd | 11,271 | Various from January to June 2014 | ||||
| Yichang Zhongyi Industrial Co., Ltd | 25,428 | June 2014 | ||||
| Xi’an Laisheng Logistics Co., Ltd | 4,303 | May 2014 | ||||
| Xi'an Kaiyuan Steel Sales Co., Ltd | 3,733 | Various from November 2013 to January 2014 | ||||
| Shaanxi Hongan Material Co., Ltd. | 5,379 | Various from October to December 2013 | ||||
| Shaanxi Anlin Logistics Co., Ltd | 7,726 | Various from December 2013 to April 2014 | ||||
| Chengdu Zhongyi Steel Co., Ltd | 3,977 | December 2013 | ||||
| Shaanxi Huatai Huineng Group Co., Ltd | 24,450 | March 2014 | ||||
| Hancheng Sanli Furnace Burden Co., Ltd. | 16,300 | March 2015 | ||||
| Tianjin Dazhan Industry Co., Ltd | 44,238 | Various from January 2014 to March 2015 | ||||
| Tianjin Hengying Trading Co., Ltd | 19,637 | Various from January to July 2014 | ||||
| Tianjin Qiu Steel Pipe Industry Co., Ltd | 11,410 | April 2014 | ||||
| Jinmen Desheng Metallurty Co., Ltd | 3,260 | August 2014 | ||||
| Shaanxi Baolong Industry Co., Ltd | 2,347 | November 2013 | ||||
| Shaanxi Longan Industrial Development Co., Ltd | 3,978 | November 2013 | ||||
| Total | $ | 304,571 | ||||
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| Nature of guarantee | Guarantee amount | Guaranty Due Date | ||||
| (In thousands) | ||||||
| Line of credit | $ | 177,353 | Various from April 2014 to August 2015 | |||
| Three-party financing agreements | 4,869 | July 2014 | ||||
| Confirming storage | 41,549 | Various from April to September 2014 | ||||
| Financing by the rights of goods delivery in future | 50,719 | Various from April to October 2014 | ||||
| Total | $ | 274,490 | ||||
Name of parties being guaranteed | Guarantee amount | Guaranty Due Date | ||||
| (In thousands) | ||||||
| Long Steel Group | $ | 55,182 | Various from September 2014 to August 2015 | |||
| Hancheng Haiyan Coking Co., Ltd | 44,795 | Various from April to December 2014 | ||||
| Shaanxi Xingyuan Materials Co., Ltd. | 2,435 | July 2014 | ||||
| Long Steel Group Fuping Rolling Steel Co., Ltd | 6,938 | Various from April to June 2014 | ||||
| Shaanxi Tianyi Metal Materials Co., Ltd | 6,492 | December 2014 | ||||
| Xi’an Laisheng Logistics Co., Ltd | 11,767 | Various from May to August 2014 | ||||
| Xi'an Kaiyuan Steel Sales Co., Ltd | 6,492 | January 2015 | ||||
| Shaanxi Anlin Logistics Co., Ltd | 6,492 | April 2014 | ||||
| Shaanxi Longan Industry Co., Ltd. | 8,115 | December 2014 | ||||
| Hancheng Sanli Furnace Burden Co., Ltd. | 16,230 | March 2015 | ||||
| Tianjin Dazhan Industry Co., Ltd | 44,633 | Various from June 2014 to March 2015 | ||||
| Tianjin Hengying Trading Co., Ltd | 40,575 | Various from July 2014 to January 2015 | ||||
| Tianjin Qiu Steel Pipe Industry Co., Ltd | 4,869 | April 2014 | ||||
| Jinmen Desheng Metallurgy Co., Ltd | 19,475 | Various from August to September 2014 | ||||
| Total | $ | 274,490 | ||||
As of September 30, 2013,March 31, 2014, the Company did not accrue any liability for the amounts the Group has guaranteed for third and related parties because those parties are current in their payment obligations and the Company has not experienced any losses from providing guarantees. The Company has evaluated the debt guarantees and concluded that the likelihood of having to make payments under the guarantees is remote and that the fair value of the stand-ready obligation under these commitments is not material.
Note 25 – Segments
The Company’s chief operating decision maker evaluates performance and determines resource allocations based on a number of factors, the primary measure being income from operations of the Group’s four regional divisions in the PRC: Longmen Joint Venture in Shaanxi province, Maoming Hengda in Guangdong province, Baotou Steel Pipe Joint Venture in Inner Mongolia province and General Steel (China) & 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 information. The accounting principles applied at the operating division level in determining income from operations is generally the same as those applied at the consolidated financial statement level.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following represents results of division operations for three months ended September 30, 2013March 31, 2014 and 2012:
| (In thousands) | |||||||
| Sales: | 2013 | 2012 | |||||
| Longmen Joint Venture | $ | 606,444 | $ | 708,974 | |||
| Maoming Hengda | 252 | 1,134 | |||||
| Baotou Steel Pipe Joint Venture | 2,921 | 1,322 | |||||
| General Steel (China) & Tianwu Joint Venture | 4,236 | 129,341 | |||||
| Total sales | 613,853 | 840,771 | |||||
| Interdivision sales | (3,758) | (129,346) | |||||
| Consolidated sales | $ | 610,095 | $ | 711,425 | |||
| Gross profit (loss): | 2013 | 2012 | |||||
| Longmen Joint Venture | $ | 8,122 | $ | (18,417) | |||
| Maoming Hengda | (57) | (761) | |||||
| Baotou Steel | 160 | 120 | |||||
| General Steel (China) & Tianwu Joint Venture | 6 | 5,462 | |||||
| Total gross profit (loss) | 8,231 | (13,596) | |||||
| Interdivision gross profit | - | - | |||||
| Consolidated gross profit (loss) | $ | 8,231 | $ | (13,596) | |||
| Income (loss) from operations: | 2013 | 2012 | |||||
| Longmen Joint Venture | $ | 32,967 | $ | (37,000) | |||
| Maoming Hengda | (719) | (1,062) | |||||
| Baotou Steel | 20 | 630 | |||||
| General Steel (China) & Tianwu Joint Venture | (695) | 2,399 | |||||
| Total income (loss) from operations | 31,572 | (35,033) | |||||
| Interdivision income (loss) from operations | - | - | |||||
| Reconciling item (1) | (1,177) | (1,350) | |||||
| Consolidated income (loss) from operations | $ | 30,395 | $ | (36,383) | |||
| Net income (loss) attributable to General Steel Holdings, Inc.: | 2013 | 2012 | |||||
| Longmen Joint Venture | $ | 8,284 | $ | (39,494) | |||
| Maoming Hengda | (694) | (1,073) | |||||
| Baotou Steel | 16 | 403 | |||||
| General Steel (China) & Tianwu Joint Venture | (2,689) | (26) | |||||
| Total net income (loss) attributable to General Steel Holdings, Inc. | 4,917 | (40,190) | |||||
| Interdivision net income | - | - | |||||
| Reconciling item (1) | (1,116) | (1,408) | |||||
| Consolidated net income (loss) attributable to General Steel Holdings, Inc. | $ | 3,801 | $ | (41,598) | |||
| (In thousands) | ||||||||
| Sales: | 2014 | 2013 | ||||||
| Longmen Joint Venture | $ | 594,014 | $ | 646,748 | ||||
| Maoming Hengda | 36 | 1,523 | ||||||
| Baotou Steel Pipe Joint Venture | 162 | 9 | ||||||
| General Steel (China) & Tianwu Joint Venture | 53 | 48,726 | ||||||
| Total sales | 594,265 | 697,006 | ||||||
| Interdivision sales | (54 | ) | (45,715 | ) | ||||
| Consolidated sales | $ | 594,211 | $ | 651,291 | ||||
| Gross profit (loss): | 2014 | 2013 | ||||||
| Longmen Joint Venture | $ | (22,219 | ) | $ | 4,367 | |||
| Maoming Hengda | 24 | (228 | ) | |||||
| Baotou Steel | (23 | ) | (78 | ) | ||||
| General Steel (China) & Tianwu Joint Venture | (343 | ) | 6 | |||||
| Total gross profit (loss) | (22,561 | ) | 4,067 | |||||
| Interdivision gross profit | - | - | ||||||
| Consolidated gross profit (loss) | $ | (22,561 | ) | $ | 4,067 | |||
| Income (loss) from operations: | 2014 | 2013 | ||||||
| Longmen Joint Venture | $ | (39,294 | ) | $ | 34,937 | |||
| Maoming Hengda | (522 | ) | (797 | ) | ||||
| Baotou Steel | (44 | ) | (361 | ) | ||||
| General Steel (China) & Tianwu Joint Venture | (2,566 | ) | (808 | ) | ||||
| Total income (loss) from operations | (42,426 | ) | 32,971 | |||||
| Interdivision income (loss) from operations | - | - | ||||||
| Reconciling item (1) | (1,237 | ) | (1,080 | ) | ||||
| Consolidated income (loss) from operations | $ | (43,663 | ) | $ | 31,891 | |||
| Net income (loss) attributable to General Steel Holdings, Inc.: | 2014 | 2013 | ||||||
| Longmen Joint Venture | $ | (38,034 | ) | $ | 8,325 | |||
| Maoming Hengda | (537 | ) | (771 | ) | ||||
| Baotou Steel | (35 | ) | (289 | ) | ||||
| General Steel (China) & Tianwu Joint Venture | (3,843 | ) | (3,156 | ) | ||||
| Total net income (loss) attributable to General Steel Holdings, Inc. | (42,449 | ) | 4,109 | |||||
| Interdivision net income | - | - | ||||||
| Reconciling item (1) | (1,115 | ) | (1,006 | ) | ||||
| Consolidated net loss attributable to General Steel Holdings, Inc. | $ | (43,564 | ) | $ | 3,103 | |||
| Depreciation, amortization and depletion: | 2014 | 2013 | ||||||
| Longmen Joint Venture | $ | 23,530 | $ | 20,431 | ||||
| Maoming Hengda | 304 | 311 | ||||||
| Baotou Steel | 62 | 97 | ||||||
| General Steel (China) & Tianwu Joint Venture | 450 | 519 | ||||||
| Consolidated depreciation, amortization and depletion | $ | 24,346 | $ | 21,358 | ||||
| Finance/interest expenses: | 2014 | 2013 | ||||||
| Longmen Joint Venture | $ | 26,990 | $ | 22,150 | ||||
| Maoming Hengda | - | |||||||
| Baotou Steel | 1 | - | ||||||
| General Steel (China) & Tianwu Joint Venture | 1,609 | 2,706 | ||||||
| Interdivision interest expenses | - | - | ||||||
| Reconciling item (1) | 95 | 1 | ||||||
| Consolidated interest expenses | $ | 28,695 | $ | 24,857 | ||||
| Capital expenditures: | 2014 | 2013 | ||||||
| Longmen Joint Venture | $ | 56,747 | $ | 24,083 | ||||
| Maoming Hengda | 32 | 2 | ||||||
| Baotou Steel | - | 7 | ||||||
| General Steel (China) & Tianwu Joint Venture | 82 | 1 | ||||||
| Reconciling item (1) | - | - | ||||||
| Consolidated capital expenditures | $ | 56,861 | $ | 24,093 | ||||
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| Depreciation, amortization and depletion: | 2013 | 2012 | |||||
| Longmen Joint Venture | $ | 21,014 | $ | 19,915 | |||
| Maoming Hengda | 307 | 451 | |||||
| Baotou Steel | 62 | 52 | |||||
| General Steel (China) & Tianwu Joint Venture | 505 | 790 | |||||
| Consolidated depreciation, amortization and depletion | $ | 21,888 | $ | 21,208 | |||
| Finance/interest expenses: | 2013 | 2012 | |||||
| Longmen Joint Venture | $ | 23,252 | $ | 33,989 | |||
| Maoming Hengda | 1 | 35 | |||||
| Baotou Steel | - | 127 | |||||
| General Steel (China) & Tianwu Joint Venture | 2,249 | 2,467 | |||||
| Interdivision interest expenses | - | - | |||||
| Reconciling item (1) | 1 | (3) | |||||
| Consolidated interest expenses | $ | 25,503 | $ | 36,615 | |||
| Capital expenditures: | 2013 | 2012 | |||||
| Longmen Joint Venture | $ | 16,455 | $ | 3,259 | |||
| Maoming Hengda | - | 23 | |||||
| Baotou Steel | - | 1 | |||||
| General Steel (China) & Tianwu Joint Venture | - | 15 | |||||
| Reconciling item (1) | - | - | |||||
| Consolidated capital expenditures | $ | 16,455 | $ | 3,298 | |||
| (In thousands) | |||||||
| Sales: | 2013 | 2012 | |||||
| Longmen Joint Venture | $ | 1,903,933 | $ | 2,126,556 | |||
| Maoming Hengda | 3,124 | 4,003 | |||||
| Baotou Steel Pipe Joint Venture | 3,902 | 3,923 | |||||
| General Steel (China) & Tianwu Joint Venture | 58,416 | 141,668 | |||||
| Total sales | 1,969,375 | 2,276,150 | |||||
| Interdivision sales | (54,338) | (136,001) | |||||
| Consolidated sales | $ | 1,915,037 | $ | 2,140,149 | |||
| Gross profit (loss): | 2013 | 2012 | |||||
| Longmen Joint Venture | $ | (23,704) | $ | 12,628 | |||
| Maoming Hengda | 188 | (1,174) | |||||
| Baotou Steel | 249 | 193 | |||||
| General Steel (China) & Tianwu Joint Venture | 29 | 8,431 | |||||
| Total gross profit (loss) | (23,238) | 20,078 | |||||
| Interdivision gross profit | - | - | |||||
| Consolidated gross profit (loss) | $ | (23,238) | $ | 20,078 | |||
| Income (loss) from operations: | 2013 | 2012 | |||||
| Longmen Joint Venture | $ | 32,998 | $ | (40,071) | |||
| Maoming Hengda | (1,741) | (2,498) | |||||
| Baotou Steel | (285) | 224 | |||||
| General Steel (China) & Tianwu Joint Venture | (2,293) | 4,878 | |||||
| Total income (loss) from operations | 28,679 | (37,467) | |||||
| Interdivision income (loss) from operations | - | - | |||||
| Reconciling item (1) | (3,504) | (4,003) | |||||
| Consolidated income (loss) from operations | $ | 25,175 | $ | (41,470) | |||
| Net loss attributable to General Steel Holdings, Inc.: | 2013 | 2012 | |||||
| Longmen Joint Venture | $ | (18,335) | $ | (92,974) | |||
| Maoming Hengda | (1,681) | (2,393) | |||||
| Baotou Steel | (227) | (263) | |||||
| General Steel (China) & Tianwu Joint Venture | (9,373) | (3,079) | |||||
| Total net loss attributable to General Steel Holdings, Inc. | (29,616) | (98,709) | |||||
| Interdivision net income | - | - | |||||
| Reconciling item (1) | (3,298) | (4,050) | |||||
| Consolidated net loss attributable to General Steel Holdings, Inc. | $ | (32,914) | $ | (102,759) | |||
| Depreciation, amortization and depletion: | 2013 | 2012 | |||||
| Longmen Joint Venture | $ | 62,295 | $ | 58,573 | |||
| Maoming Hengda | 933 | 1,447 | |||||
| Baotou Steel | 185 | 134 | |||||
| General Steel (China) & Tianwu Joint Venture | 1,542 | 2,384 | |||||
| Consolidated depreciation, amortization and depletion | $ | 64,955 | $ | 62,538 | |||
| Finance/interest expenses: | 2013 | 2012 | |||||
| Longmen Joint Venture | $ | 73,424 | $ | 129,683 | |||
| Maoming Hengda | 1 | 47 | |||||
| Baotou Steel | - | 381 | |||||
| General Steel (China) & Tianwu Joint Venture | 7,927 | 8,819 | |||||
| Interdivision interest expenses | - | - | |||||
| Reconciling item (1) | 3 | (1) | |||||
| Consolidated interest expenses | $ | 81,355 | $ | 138,929 | |||
| Capital expenditures: | 2013 | 2012 | |||||
| Longmen Joint Venture | $ | 60,461 | $ | 19,604 | |||
| Maoming Hengda | 2 | 38 | |||||
| Baotou Steel | 8 | 6 | |||||
| General Steel (China) & Tianwu Joint Venture | 3 | 18 | |||||
| Reconciling item (1) | - | - | |||||
| Consolidated capital expenditures | $ | 60,474 | $ | 19,666 | |||
| Total Assets as of: | September 30, 2013 | December 31, 2012 | |||||
| Longmen Joint Venture | $ | 2,537,952 | $ | 2,513,206 | |||
| Maoming Hengda | 29,340 | 29,687 | |||||
| Baotou Steel Pipe Joint Venture | 5,116 | 5,186 | |||||
| General Steel (China) & Tianwu Joint Venture | 178,844 | 152,965 | |||||
| Interdivision assets | (84,880) | (57,436) | |||||
| Reconciling item (2) | 5,654 | 7,074 | |||||
| Total Assets | $ | 2,672,026 | $ | 2,650,682 | |||
| Total Assets as of: | March 31, 2014 | December 31, 2013 | ||||||
| Longmen Joint Venture | $ | 2,512,090 | $ | 2,573,212 | ||||
| Maoming Hengda | 28,278 | 29,211 | ||||||
| Baotou Steel Pipe Joint Venture | 4,122 | 4,448 | ||||||
| General Steel (China) & Tianwu Joint Venture | 182,641 | 121,883 | ||||||
| Interdivision assets | (33,930 | ) | (34,213 | ) | ||||
| Reconciling item (2) | 8,311 | 5,817 | ||||||
| Total Assets | $ | 2,701,512 | $ | 2,700,358 | ||||
| (1) | Reconciling item represents the unallocated income or expenses of the Company, arising from General Steel Investment Co., Ltd, Yangpu Shengtong Investment Co., Ltd and Qiu Steel for the three |
| (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 2013. |
Note Regarding Forward-Looking Statements
The following discussion of the financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and related notes thereto. The following discussion contains forward-looking statements. General Steel Holdings, Inc. is referred to herein as “we,” “our,” “us” and “the Company.” The words or phrases “would be,” “will allow,” “expect to,” “intends to,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” or similar expressions are intended to identify forward-looking statements. Such statements include those concerning our expected financial performance, our corporate strategy and operational plans. Actual results could differ materially from those projected in the forward-looking statements as a result of a number of risks and uncertainties, including: (a) those risks and uncertainties related to general economic conditions in the People’sPeople���s Republic of China, including regulatory factors that may affect such economic conditions; (b) whether we are able to manage our planned growth efficiently and operate profitable operations, including whether our management will be able to identify, hire, train, retain, motivate and manage required personnel or that management will be able to successfully manage and exploit existing and potential market opportunities; (c) whether we are able to generate sufficient revenues or obtain financing to sustain and grow our operations; and (d) whether we are able to successfully fulfill our primary requirements for cash which are explained below under “Liquidity and Capital Resources.” Unless otherwise required by applicable law, we do not undertake, and we specifically disclaim any obligation, to update any forward-looking statements to reflect occurrences, developments, unanticipated events or circumstances after the date of such statement. Additional information regarding certain factors which could cause actual results to differ from such forward-looking statements include, but are not limited to, those described in Item 1A, “Risk Factors”, to our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 filed with the SEC on June 17, 2013, and in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2013 filed with the SEC on August 6, 2013.March 27, 2014.
Recent Developments and ThirdFirst Quarter Highlights
The thirdfirst quarter of 20132014 was highlighted with the following:
| · | Sales in the |
| · | Gross | |
| · | Total finance |
| · |
OVERVIEW
We were incorporated on August 5, 2002, in the State of Nevada. We are headquartered in Beijing, China and operate a portfolio of Chinese steel companies. We serve various industries and produce a variety of steel products including, but not limited to: reinforced bars (“rebar”), hot-rolled carbon, spiral-weld pipes and high-speed wire. Our current aggregate annual production capacity of crude steel products, consisting mainly of steel rebar, is 7 million metric tons of crude steel.tons. Our individual product categoriesrebar products have a 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 ownedcontrolled steel companies in the People’s Republic of China (the “PRC”(“PRC”). Our mission is to grow our business organically, and through the acquisition of Chinese steel companies, to increase their profitability and efficienciesefficiency by utilizing western management practices and advanced production technologies, and the infusion of capital resources.
Our two-pronged growth strategy focuses on a combination of capacity expansion, as well as optimizing operating efficiencies and leverage:
| · | We aim to grow |
| · | We aim to drive profitability through improved operational efficiencies and optimization of our cost structure. |
Unless the context indicates otherwise, as used herein the terms “General Steel”, the “Company”, “we”, “our” and “us” all refer to General Steel Holdings, Inc.
Steel-Related Subsidiaries and Raw Material Trading Company
We presently have controlling interests in four steel-related subsidiaries and one raw material trading subsidiary:
| · | General Steel (China) Co., Ltd. (“General Steel (China)”); | |
| · | Baotou Steel - General Steel Special Steel Pipe Joint Venture Company Limited (“Baotou Steel Pipe Joint Venture”); | |
| · | Shaanxi Longmen Iron and Steel Co., Ltd. (“Longmen Joint Venture”); | |
| · | Maoming Hengda Steel Co., Ltd. (“Maoming Hengda”); and | |
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.”, started operations in 1988.
On May 14, 2009, General Steel (China) changed its official name from “Tianjin Daqiuzhuang Metal Sheet Co., Ltd.” to better reflect its role as a merger and acquisition platform for steel company investments in China. In some instances, General Steel (China) retains the use of the name “Daqiuzhuang Metal” for brand recognition purposes within the industry.
On January 1, 2010, General Steel (China) entered into a lease agreement with Tianjin Daqiuzhuang Steel Plates Co., Ltd. (the “Lessee”), whereby General Steel (China) leasesleased 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 theour 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, 20122011 and the monthly base rental rate due to General Steel (China) was approximately $0.3$0.2 million (RMB 1.7 million). On July 28, 2011, General Steel (China) signed a supplemental agreement with the Lessee to extend the lease for an additional five years to December 31, 2016. However, due to current steel market conditions, the Lessee hadhas informed us that they doit did not intend to continue with the lease at June 30, 2012. There was no penalty for early termination. Subsequently, General Steel (China) currently does not have plansleased parts of its facilities to Tianjin Shuangjie Liansheng Rolled Steel Co., Ltd. for a monthly payment of $0.1 million (RMB 0.5 million). The lease the facility to another company and as such, aexpires in May 2021. A write-down in the carrying value of property, plant and equipment in relation to this event hadhas been assessed and the estimatedan impairment amount of $5.5$5.4 million (RMB 35.1 million) was recorded in the selling, general and administrative expenses in the second quarter of 2011 and an additional $20.2$3.9 million (RMB 127.224.3 million) was impaired and recorded in the selling, general and administrative expenses for the year ended December 31, 2012. Management also re-evaluates the fair value of its long-term assets on annual basis, or if there isupon a triggering event which would require an assessment sooner.
Baotou SteelSteel - General Steel Special Steel Pipe Joint Venture Company Limited
On April 27, 2007, General Steel (China) and Baotou Iron and Steel Group Co., Ltd. (“Baotou Steel”) entered into an Amended and Restated Joint Venture Agreement, amending the Joint Venture Agreement entered into on September 28, 2005, to increase General Steel (China)'s’s ownership interest in the related joint venture to 80%. The joint venture’s name is Baotou Steel - General Steel Special Steel Pipe Joint Venture Company Limited, a Chinese limited liability company (“Baotou Steel Pipe Joint Venture”). Baotou Steel Pipe Joint Venture obtained its business license from governmentgovernmental authorities in the PRC on May 25, 2007, and started itscommenced operations in July 2007. Baotou Steel Pipe Joint Venture has four production lines capable of producing 100,000 metric tons of double spiral-weld pipes primarily used in the energy sector to transport oil and steam. These pipes have a diameter ranging from 219mm to 1240mm, a wall thickness ranging from 6mm to 13mm, and a length ranging from 6m to 12m. Presently, Baotou Steel Pipe Joint Venture sells its products using an internal sales force to customers in the Inner Mongolia Autonomous Region and the northwest region of the PRC.
Shaanxi Longmen Iron and Steel Co., Ltd
Effective June 1, 2007, through General Steel (China) and Tianjin Qiu Steel Investment Co., Ltd.(“ (“Qiu Steel”), a 99% owned companysubsidiary of General Steel (China), we entered into a Joint Venture Agreement with Shaanxi Longmen Iron & Steel Group Co., Ltd. (“Long Steel Group”) to form Shaanxi Longmen Iron and Steel Co., Ltd. (“Longmen Joint Venture”). Through General Steel (China) and Qiu Steel, we invested approximately $39.3 million in cash and collectively held a 60% ownership interest in Longmen Joint Venture until April 29, 2011, when we entered into a 20-year Unified Management Agreement (the “Unified Management Agreement”) withwas entered into between our Company, Longmen Joint Venture, Shaanxi Coal and Chemical Industry Group Co., Ltd. (“Shaanxi Coal”) and Shaanxi Iron and Steel Group Co., Ltd. (“Shaanxi Steel”).Steel. Longmen Joint Venture was determined to beas a Variable Interest Entity (“VIE”) and we are the primary beneficiary.
Long Steel Group, located in Hancheng city, Shaanxi Province, in China’s Western region, was founded in 1958 and incorporated in 2002. Long Steel Group2002, and is owned by a state owned entity through Shaanxi Steel. Long Steel Group holds the remaining 40% ownership interest in Longmen Joint Venture and operates as a fully-integrated steel production facility. Fewer than 10% of steel companies in China have fully-integrated steel production capabilities.
Currently, Longmen Joint Venture has five branch offices, four consolidated subsidiaries/VIE and five entities in which it has a noncontrolling interest. It employs approximately 9,6008,700 full-time workers. In addition to steel production, Longmen Joint Venture operates transportation services through its Changlong Branch, located in Hancheng city, Shaanxi Province. Changlong Branch owns 185177 vehicles and provides transportation services exclusively to Longmen Joint Venture.
Longmen Joint Venture’s rebar products are categorized within the steel industry as “longs” (referencing(in reference to their shape). Rebar is generally considered a regional product because its weight and dimensionsdimension make it ill-suited for cost-effective long-haul ground transportation. By our estimates, the market demand for rebar in Shaanxi Province is six to eight million metric tons per year. Slightly more than half of this demand comes from Xi’an, the capital of Shaanxi Province, located 180km from Longmen Joint Venture’s main steel production site. Currently, we estimate that we have an approximateapproximately a 72% share of the Xi’an market for rebar.
An established regional network of approximately 128one hundred twenty-eight distributors, together with those smallsmaller distributors and three sales offices sell Longmen Joint Venture’s products. All products sellare sold under the registered brand name of “Yulong”, which has strong regional recognition and awareness. Rebar and billet products carry ISO 9001 and 9002 certification and other of Longmen Joint Venture’s products have won national quality awards. Products produced at the facility have been used in the construction of the Yangtze River Three Gorges Dam, the Xi’an International Airport, the Xi’an city subway system and the Xi Luo Du and the Xiang Jia Ba hydropower projects.
On September 24, 2007, Longmen Joint Venture acquired a 74.92%74.9% ownership interest in Longmen Iron and Steel Group.Group Environmental Protection Industry Development Co., Ltd. (“Longmen EPID”). At the same time, Longmen Joint Venture entered into an equity transfer agreement with Long Steel Group to acquire a 36% ownership interest in its subsidiary, Longmen Iron and Steel Group Co., Ltd. Hualong Fire Retardant Materials Co., Ltd. (“Hualong”). Longmen Joint Venture paid $0.4 million (RMB 3.3 million) in exchange for the ownership interest and is the largest shareholder in Hualong. Hualong’s facility produces fire-retardant materials used in various steel making processes.
In January 2010, Longmen Joint Venture completed its acquisition of the remaining 25.08%25.1% interest in Longmen EPID pursuant to an equity transfer agreement with Shaanxi Fangxin Industrial Co., Ltd. (“Shaanxi Fangxin”), the other shareholder of Longmen EPID, for RMB$1.3 million (RMB 8.7 million.million). Longmen EPID then became a branch of Longmen Joint Venture.
From June 2009 to March 2011, we worked with Shaanxi Steel to build new iron and steel making facilities, including two 1,280 cubic meter blast furnaces, two 120 metric ton converters, one 400 square meter sintering machine and some auxiliary systems. As a result, Longmen Joint Venture incurred certain costs of construction as well as economic losses on suspended production of certain small furnaces and other equipment to accommodate the construction of the new equipment, on behalf of Shaanxi Steel.
Dismantling of certain assets and a sub-lease of Longmen Joint Venture’s land associated with the construction by Shaanxi Steel began in June 2009. At the beginning 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, toTo compensate us, in the fourth quarter of 2010, Shaanxi Steel reimbursed Longmen Joint Venture $11.4 million (RMB 70.1 million) relatedrelating to the value of assets dismantled and rent under a 40-year property sub-lease that was entered into by the parties in June 2009, and $29.8$29.7 million (RMB 183.1 million) for the reduced production efficiency caused by the construction. In addition, in 2010 and 2012,2011, Shaanxi Steel reimbursed Longmen Joint Venture $14.6$14.5 million (RMB 89.5 million) and $14.6$14.5 million (RMB 89.3 million), respectively, for trial production costs related to the new equipment.
During the period from June 2010 to March 2011, as construction progressed and certain of the assets came online, Longmen Joint Venture used the assets free of charge to produce saleable units of steel products during this period.products. As such, the cost of using these assets, and therefore the fair value of the free rent received, was imputed with reference to what the depreciation charge would have been on these assets had they been owned or under capital lease to Longmen Joint Venture during thisthe period. This costCosts of $7.2$7.1 million (RMB 43.9 million) each year were deferred and will be recognized over the term of the land sub-lease similar to the other charges and credits related to the construction of these assets.
The amount of reimbursement iswas deferred as lease income and is being recognized as a component of the property that was sub-leased during the construction, and is to be amortized to income over the remaining terms of the 40-year sub-lease.
On April 29, 2011, we entered into a 20-year Unified Management Agreement (the “Unified Management Agreement”) with 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 a state-owned entity, is the parent company of Shaanxi Steel.Steel, a state-owned entity. Under the terms of the Unified Management Agreement, all manufacturing machinery and other equipment of Longmen Joint Venture plus $603.2and $600.7 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(the “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 October 2012,February 2014, Shaanxi Steel agreed that it will not demand capital lease paymentpayments from Longmen Joint Venture until October 2014.
Longmen Joint Venture pays Shaanxi Steel for the use of the newly constructed iron and steel making facilities an amount equalingthat equals 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 Agreement is 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 have agreed 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 a derivative liability and therefore, the lease is accounted for as such by Longmen Joint Venture. See Note 2 - “Summary of significant accounting policies”, Note 15 - “Capital lease obligations” and Note 16 -“Profit- “Profit sharing liability” of the Notes to Condensed Consolidated Financial Statements included herein.
In November 2010, we brought online a 1,200,000 metric ton capacity rebar production line, which was renovated based on an existing 800,000 metric ton capacity rebar production line. In July 2011, we brought online a 1,000,000 metric ton capacity high speed wire production line. These two newly installed production lines were both relocated from the Maoming Hengda (as defined below) facility whichand consume less energy when running at maximum efficienciesefficiency compared to our previous production line.
Maoming Hengda Steel Co., Ltd
On June 25, 2008, through our subsidiary Qiu Steel, we paid approximately $7.1 million (RMB 50 million) in cash to purchase 99% of Maoming Hengda Steel Group, Ltd. (“Maoming Hengda”). The total registered capital of Maoming Hengda is approximately $77.8 million (RMB 544.6 million).
Maoming Hengda’s core business iswas the production of rebar products used in the construction industry. Located on 140 hectares (approximately 346 acres) in Maoming city, Guangdong Province, the Maoming Hengda facility previously had two production lines capable of annual production capacities of 1.8 million metric tons of 5.5mm to 16mm diameter high-speed wire and 12mm to 38mm diameter rebar. The products were sold through nine distributors targetingwhich targeted customers in Guangxi Province and the Westernwestern region of Guangdong.
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 Maoming Hengda’s facility to Longmen Joint Venture. Thereafter, in December 2010, we relocated the 1,000,000 metric ton capacity high-speed wire production line from Maoming Hengda’s facility to Longmen Joint Venture to meet the increased demand in Shaanxi Province.
In December 2010, we brought online a new 400,000 ton capacity rebar production line. The new rebar line was constructed as a result of a strategic alliance agreement between Maoming Hengda and Zhuhai Yueyufeng Iron and Steel Co., Ltd. (“Yueyufeng”), executed on February 3, 2010. According to this agreement, Yueyufeng paid in advance $4.4 million in advance in three installments to support the construction of the rebar production line for Maoming Hengda, and charged Maoming Hengda interest at a rate of 10% annually. The interest expense incurred was recorded in finance expense.
On December 15, 2013, Maoming Hengda entered into a lease agreement with Tianjin MaterialZhongshan Baohua Rebar Factory, with which Maoming Hengda leased the 400,000 ton capacity rebar production line and Equipment Group Corporation (“TME Group”). The contributed capital of Tianwu Joint Venture is approximately $2.9 million (or RMB20 million),various other buildings and we hold a 60% controlling interest. TME Group is one of the largest and most diversified commodity trading groups in China. On August 16, 2013, an additional $45 million (or RMB 280 million) was contributedequipment to Tianwu Joint Venture with $27.0 million (or RMB 168 million) contributed by us and $18.0 million (or RMB 112 million) contributed by TME Group. Our controlling interest of Tianwu Joint Venture remains 60%.
Production Capacity Information Summary by Subsidiary
| Annual Production Capacity (metric tons) | General Steel (China) | Baotou Steel Pipe Joint Venture | Longmen Joint Venture | Maoming Hengda (1) | ||||||
| Crude Steel | - | - | 7 million | - | ||||||
| Processing | 400,000 | 100,000 | 4.3 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 |
| (1) | The production facilities of General Steel (China) and Maoming Hengda currently are leased to unrelated parties. |
| 40 |
| Annual Production | General Steel | Baotou Steel Pipe | Longmen Joint | Maoming | |||||
| Capacity (metric tons) | (China) | Joint Venture | Venture | 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 collect payment from these distributors in advance. Our marketing efforts are mainly directed toward those customers who have demanding requirements for on-time delivery, general inquiries and product quality. We believe that these requirements, as well as product planning, are critical factors in our ability to serve this segment of the market.
Our revenue is dependent, in large part, on significant contracts with a limited number of large customers. For the three and nine months ended September 30, 2013,March 31, 2014, approximately 25.5% and 23.4%20.4% of our sales were to five customers, respectively.customers. We believe that revenue derived from our current and future large customers will continue to represent a significant portion of our total revenue.
Moreover, our success will depend in part upon our ability to obtain orders from new customers, as well as the financial condition and success of our customers and general economic conditions in China.
Demand for our Products
For the three months ended March 31, 2014 and 2013, rebar, our major product, comprised of more than 99% and 99% of our sales, respectively. Overall, domestic economic growth is an important driver of demand for our products,major product, 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 12th Five Year National Economic and Social Development Plan (“NESDP”) (2011-2015), development of China’s Westernwestern region is one of theChina’s top five economic priorities of the nation.priorities. Shaanxi Province, where Longmen Joint Venture is located, has been designated as a focal point for development in the Western region.region, and Xi’an, the provincial capital, has been designated as a focal point for this development in China. Longmen Joint Venture is 180 kmkilometers from Xi’an the capital city of Shaanxi Province and it does not have a major competitor within a 250 km radius.
The Western region of China, where our major sales market is located, has experienced a higher rate of growth than other Chinese regions in recent years. Compared to an increase of 7.7% for the national GDP, thea GDP increase of 11.1%11% was reported by Shaanxi Province in the first nine months of 2013 over the previous year. Additionally, according to Accounting and Corporate Finance Production Statistics in China, Sichuan Province also reported a GDP increase of 10.0%10%. We have a sales office in Chengdu City, Sichuan Province to meet the increasing demand for the constructionproduction of steel.
According to the Shaanxi provincial government, the total fixed asset investment for the Shaanxi Province was approximately $198.4$257.4 billion (RMB 1.251.59 trillion) for the year ended December 31, 2012,2013, an increase of 28.9%24.1% over 2011.
At the end of June 2009, the State Council Office announced that it approved the Guanzhong-Tianshui Economic Zone development program. This program covers the development of two western provinces and seven cities from 2009 to 2020.
In addition, the Guanzhong-Tianshui Economic Zone will concentrate on the development of the Xi’an area. The metropolitan area construction program focuses on the cities of Xi’an, and Xianyang, and their surrounding areas, covering up to 12,000 square kilometers, including the construction of railways, highways, subways, airport expansion and newly developed areas. Under this program, the Shaanxi provincial government has announced that it will build approximately 4,500 kilometers of railway with thean investment of approximately $41.5$40.2 billion (RMB 260 billion) by 2015 and 8,080 kilometers of highway by 2020. The infrastructure and constructionsconstruction projects provide strong and stable demand for our steel productproducts in this area, in which we have over 70% of the market share.
In January 2011, the Shaanxi provincial government announced that it will invest approximately $12.2$13.0 billion (RMB 80 billion) in the construction of hydro projects, which is three times the amount invested during the 11th Five Year National Economic and Social Development Plan. In addition to hydro projects, according to the central government, 5,00016,000 total kilometers of high-speedhigh 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 Westernwestern region of China. We anticipate that in the near future, the demand for our products will increase in those areas, and we expect that our expanded production capacity will be able to successfully meet the increase in demand. Furthermore, we have a sales office located in Chengdu to help facilitate such increased demand.
In February 2012, the government approved the Western Development 12th12th Five Year Plan, which continues the efforts to develop the Western regions.areas. The Plan is centered on the infrastructure and construction, highlighted by the development of economic zones, construction of roads/railway and hydro project,projects, which drive the local demand for steel products.
In February 2014, National Development and Reform Commission (“NDRC”) announced nine focal points of the datewestern development, which will speed up the major infrastructure construction in the western areas, including the construction of this report, we are not aware of any updates to these announcements.
We anticipate strong demand for our products driven by these and many other construction and infrastructure projects. We believe there will be sustained regional demand for several years as both the central and provincial governments continue to drive Westernwestern region development efforts.
At Baotou Steel Pipe Joint Venture, energy sector growth, which spurs the need to transport oil, natural gas and steam, drives demand for spiral-weld steel pipe. Presently, demand is fueled by smaller pipeline projects and municipal energy infrastructure projects within the Inner Mongolia Autonomous Region.
Supply of Raw Materials
The primary raw materials we use for steel production are iron ore, coke, hot-rolled steel coil and steel billets. Baotou Steel Pipe Joint Venture uses hot-rolled steel coil as its main raw material. Longmen Joint Venture uses iron ore and coke as its main raw materials. Maoming Hengda uses steel billets as its main raw material. Iron ore and coke areis 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 has 7 million tons of annual crude steel production capacity. At Longmen Joint Venture, approximately 85%80% of production costs are associated with raw materials, with iron ore being the largest component.
According to the China Iron and Steel Association, approximately 60% of the Chinese domestic steel industryindustry’s demand for iron ore must be filled by imports. At Longmen Joint Venture, we purchase iron ore from four primary sources: Mulonggou mine (owned by Longmen Joint Venture), Daxigou mine (owned by Long Steel Group, our partner in Longmen Joint Venture), surrounding local mines and mines located abroad. According to the terms of Longmen Joint Venture’sVenture‘s Agreement with the Long Steel Group, we have a first right of refusal for sales from the Daxigou mine and for its development.mine. We presently purchase all of the products fromiron ore produced by this mine.
Coke
Coke, produced from metallurgical coal (also known as coking coal), is our second most consumed raw material, after iron ore. It requires approximately 550kg to 600kg of coke to make one metric ton of crude steel.
Under the terms of the Unified Management Agreement, our partner, Shaanxi Coal, has committed to providing coke and coal to us at a cost not higher than the market price.
Our Longmen Joint Venture facility is located in the center of China’s coal belt. We source all coke used at Longmen Joint Venture from the town in which Longmen Joint Venture is located. This ensures a dependable, local supply and minimum transportation costs.
The sources and/or our top five major suppliers of our raw materials for the three months ended September 30, 2013March 31, 2014 are as follows:
| Name of Major Supplier | Raw Material Purchased | |||||||||
| % of Total Raw | ||||||||
Material | Purchased | Relationship with | ||||||
Company | ||||||||
| Longgang Group Import & Export Co., Ltd. | Iron Ore | % | Related Party | |||||
| Shaanxi Longmen Coal Chemical Industry Co., Ltd | Coke | % | Third Party | |||||
| Long Steel Group | Iron Ore | 7.6 | % | Related Party | ||||
| Shaanxi Haiyan Coal Chemical Industry Co., Ltd. | Coke | % | Related Party | |||||
| Iron Ore | ||||||||
| % | Third Party | |||||||
| Total | % | |||||||
Industry Environment
Despite demand growth experienced during 2010 through 2012, recent developments in the Chinese economy, including a projected downgrade in the national GDP in the coming years, the tightening of the monetary policy in the PRC by PRC policy makers on June 20, 2013 by increasing short-term borrowing rates, and the removal of the floor rate charged to customers by the Chinese central bank, may put more financial pressure on the real estate development and construction industries and, by extension, affect product demand in the Chinese steel industry.
For steelmakers, operating performance depends on the volatility of the cost of raw materials. The shortage of these raw materials in the market has allowed suppliers of iron ore and metallurgical coal to rebuild the pricing mechanisms through the shift from annual to shorter-term price contracts. This has created numerous challenges for steelmakers as they must now deal with volatility in raw material prices, as well as maintain margins with fluctuating demand. Over the past twofew years, we have witnessed perseverance in steel prices that has given iron ore producers an opportunity to increase the prices in the next contract; however the reverse may not be true as steel companies cannot always pass on the rise in iron ore prices to end consumers due to the market overcapacity and fragmentation.
The Chinese central government has had a long-stated goal to consolidate 70% of domestic steel production among the top ten producers 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 April 2012, the central government announced its goal of reducing obsolete iron and steel capacities of 17.8 million tons in 2012 and successfully reached the goal and eliminated 20.2 million tons of obsolete iron and steel capacity. In April 2013, the central government published the industry target of eliminating 10.4 million tons of obsolete iron and steel capacities in 2013 and successfully eliminated 16.9 million tons of obsolete iron and steel capacity. In March 2014, the government reaffirmed its determination of industry consolidation, and announced that it plans to eliminate 27 million tons of obsolete iron and steel capacity in order to reach the industry goal of 12th five-year plan ahead of schedule in 2014. However, we continue to see a strong demand for our products and believe there are significant growth opportunities in the industry and market we service and such consolidation is not expected to directly impact our Company.
On July 12, 2010, the Ministry of Industry & Information Technology Commission enacted the Steel Industry Admittance and Operation Qualifications standards. The new standards specify requirements for all aspects of steel production in China, which include: size of blast furnaces, size of converters, emission of waste water, dust per ton from steel production, quantity of coal used for each process in steel production and output capacity. According to the new standards, blast furnaces under 450 cubic meters are targeted to be eliminated. These standards once again confirmed the central government’s determination to push forward the consolidation of this fragmented industry. While the operational conditions become more stringent, more small and medium sized companies will likely to aggressively look for valued partners which could lead to opportunities for high quality acquisitions for us. We believe the above government policy will strengthen our position as an industry consolidator by creating quantitative qualified potential acquisition targets.
Since 2013, the government has hadexerted more stringent environment protection policy on the steel industry. In January 2014, the Ministry of Industry and Information Technology of the People's Republic of China (the "MIIT") announced a long-stated goalList of Enterprises Fulfilling the Iron and Steel Industry Specification (the "List"). The List includes a highly-selected group of large and medium steel manufacturers that have met or exceeded more stringent national requirements and standards on product quality, environmental protection, energy consumption, workmanship and equipment, production scale, as well as work safety and social responsibility. The MIIT will collaborate with China's other governmental agencies to consolidate 70%provide support to the List's members and to speed up the steel industry's restructuring and consolidation. Steel makers omitted from the List will most likely face higher electricity costs, more restrictive administrative measures, and adverse effects of domestic steel production amongforceful regulations intent on reducing the top ten producers by 2020. Currently, there are approximately over 500 crude steel producers throughout China, andnation's overcapacity. Longmen Joint Venture, the top ten producers account for approximately 48%major facility of total national output. In December 2011,General Steel, has been included on the central government published an industry target to eliminate 96 million tons of inefficient iron and steel capacity duringList as the 12th five-year plan. The central government had successfully reduced obsolete iron production capacities by 31.9 million tonsonly enterprise in 2011. In April 2012, the central government announced its goal of reducing obsolete iron and steel capacities of 17.8 million tons in 2012, and in April 2013, the central government published the industry target of eliminating 10.4 million tons of obsolete iron and steel capacities in 2013.
Results of Operations for the Three and Nine months ended September 30, 2013
Sales
Three months ended September 30, 2013March 31, 2014 compared with three months ended September 30, 2012March 31, 2013
The following table sets forth sales and volume in metric tons.
| Three months ended | ||||||||||||||||||||||||||||
| September 30, 2013 | September 30, 2012 | Change | Change | |||||||||||||||||||||||||
| in thousands, except metric | Volume | Sales | ||||||||||||||||||||||||||
| tons | Volume | Sales | % | Volume | Sales | % | % | % | ||||||||||||||||||||
| Longmen Joint Venture | 1,238,689 | $ | 606,446 | 99.4 | % | 1,360,226 | $ | 708,974 | 99.7 | % | (8.9) | % | (14.5) | % | ||||||||||||||
| Others | 18,132 | 3,649 | 0.6 | % | 36,553 | 2,451 | 0.3 | % | (50.4) | % | 48.9 | % | ||||||||||||||||
| Total Sales | 1,256,821 | $ | 610,095 | 100.0 | % | 1,396,779 | $ | 711,425 | 100.0 | % | (10.0) | % | (14.2) | % | ||||||||||||||
| Three months ended | ||||||||||||||||||||||||||||||||
| March 31, 2014 | March 31, 2013 | Change | Change | |||||||||||||||||||||||||||||
| in thousands, except metric tons | Volume | Sales | % | Volume | Sales | % | Volume % | Sales % | ||||||||||||||||||||||||
| Longmen Joint Venture | 1,317,540 | $ | 594,014 | 100.0 | % | 1,255,123 | $ | 646,748 | 99.3 | % | 5.0 | % | (8.2 | )% | ||||||||||||||||||
| Others | 723 | 197 | 0.0 | % | 49,300 | 4,543 | 0.7 | % | (98.5 | )% | (95.7 | )% | ||||||||||||||||||||
| Total Sales | 1,318,263 | $ | 594,211 | 100.0 | % | 1,304,423 | $ | 651,291 | 100.0 | % | 1.1 | % | (8.8 | )% | ||||||||||||||||||
Total sales for the three months ended September 30, 2013March 31, 2014 decreased by 14.2%8.8% to $610.1$594.2 million from $711.4$651.3 million for the same period in 2012.2013. The decrease in sales compared to the same period in 2012 was predominantly due to a decrease in sales volume and the decreased average selling price. Longmen Joint Venture comprised approximately 99.4%100.0% and 99.7%99.3% of total sales for the thirdfirst quarter of 20132014 and 2012,2013, respectively. Sales volume of rebar decreasedincreased by 8.9%5.0% to 1.241.32 million metric tons, as compared to 1.361.26 million metric tons in the same period in 2012.2013. The average selling price of rebar decreased by 6.1%12.5% to approximately $489.6$450.9 per ton in the thirdfirst quarter of 20132014 compared to approximately $521.2$515.3 per ton in the same period in 2012.
Our product demands and prices had been rising in the first threetwo quarters of 2011.2012. As a result of the China and global steel industry over-capacity, Chinese economic control polices and the financial crisis, commodity prices abruptly plummeteddeclined significantly in the fourththird quarter of 2011.2012. With weakened demand, market forces kicked-in and the price of steel dropped substantially. As such, our sales prices have dropped since the fourththird quarter of 2011,2012, evidencing a continued decline. The over-capacity issue continued to impact our results during the third quarteryear of 2013.2013 and into 2014. Further, the Chinese economy remained weak, which had an indirect impact of affecting our industry, and the selling price of our products continued to decrease during this period in comparison to the same period in 2012.
Our five major customers were distributors and collectively represented approximately 25.5%20.4% of our total sales for the three months ended September 30, 2013March 31, 2014 as compared to 27.2%20.4% of our total sales for the three months ended September 30, 2012. The decrease in the concentration of our five major customers in the third quarter of 2013 as compared to the same period in 2012 was mainly due to the decrease in sales to Long Steel Group and its surrounding Southwest region and shifts in market demands being concentrated in the Northwest region.March 31, 2013. These five customers included related parties and major distributors owned by the central government. As we are the largest supplier in Shaanxi Province, we maintain a good relationship with these five customers to stabilize our sales channel.
Nine months ended September 30, 2013 compared with nine months ended September 30, 2012
| Nine months ended | ||||||||||||||||||||||||||||
| September 30, 2013 | September 30, 2012 | Change | Change | |||||||||||||||||||||||||
| in thousands, except metric | Volume | Sales | ||||||||||||||||||||||||||
| tons | Volume | Sales | % | Volume | Sales | % | % | % | ||||||||||||||||||||
| Longmen Joint Venture | 3,841,985 | $ | 1,903,933 | 99.4 | % | 3,751,571 | $ | 2,126,556 | 99.4 | % | 2.4 | % | (10.5) | % | ||||||||||||||
| Others | 104,163 | 11,104 | 0.6 | % | 159,259 | 13,593 | 0.6 | % | (34.6) | % | (18.3) | % | ||||||||||||||||
| Total Sales | 3,946,148 | $ | 1,915,037 | 100.0 | % | 3,910,830 | $ | 2,140,149 | 100.0 | % | 0.9 | % | (10.5) | % | ||||||||||||||
Three months ended September 30, 2013March 31, 2014 compared with three months ended September 30, 2012March 31, 2013
| Three months ended | ||||||||||||||||||||||||||||
| September 30, 2013 | September 30, 2012 | Change | Change | |||||||||||||||||||||||||
| Cost of | ||||||||||||||||||||||||||||
| Cost of | Cost of | Volume | Goods Sold | |||||||||||||||||||||||||
| in thousands, except metric tons | Volume | Goods Sold | % | Volume | Goods Sold | % | % | % | ||||||||||||||||||||
| Longmen Joint Venture | 1,238,689 | $ | 598,324 | 99.4 | % | 1,360,226 | $ | 721,853 | 99.6 | % | (8.9) | % | (17.1) | % | ||||||||||||||
| Others | 18,132 | 3,540 | 0.6 | % | 36,553 | 3,168 | 0.4 | % | (50.4) | % | 11.7 | % | ||||||||||||||||
| Total Cost of Goods Sold | 1,256,821 | $ | 601,864 | 100.0 | % | 1,396,779 | $ | 725,021 | 100.0 | % | (10.0) | % | (17.0) | % | ||||||||||||||
| Nine months ended | |||||||||||||||||||||||||||
| September 30, 2013 | September 30, 2012 | Change | Change | ||||||||||||||||||||||||
| Cost of | |||||||||||||||||||||||||||
| Cost of | Cost of | Volume | Goods Sold | ||||||||||||||||||||||||
| in thousands, except metric tons | Volume | Goods Sold | % | Volume | Goods Sold | % | % | % | |||||||||||||||||||
| Longmen Joint Venture | 3,841,985 | $ | 1,927,639 | 99.5 | % | 3,751,571 | $ | 2,105,808 | 99.3 | % | 2.4 | % | (8.5) | % | |||||||||||||
| Others | 104,163 | 10,636 | 0.5 | % | 159,259 | 14,263 | 0.7 | % | (34.6) | % | (25.4) | % | |||||||||||||||
| Total Cost of Goods Sold | 3,946,148 | $ | 1,938,275 | 100.0 | % | 3,910,830 | $ | 2,120,071 | 100.0 | % | 0.9 | % | (8.6) | % | |||||||||||||
| Three months ended | ||||||||||||||||||||||||||||||||
| March 31, 2014 | March 31, 2013 | Change | Change | |||||||||||||||||||||||||||||
| in thousands, except metric tons | Volume | Cost of Goods Sold | % | Volume | Cost of Goods Sold | % | Volume % | Cost of Goods Sold % | ||||||||||||||||||||||||
| Longmen Joint Venture | 1,317,540 | $ | 616,234 | 99.9 | % | 1,255,123 | $ | 642,381 | 99.3 | % | 5.0 | % | (4.1 | )% | ||||||||||||||||||
| Others | 723 | 538 | 0.1 | % | 49,300 | 4,843 | 0.7 | % | (98.5 | )% | (88.9 | )% | ||||||||||||||||||||
| Total Cost of Goods Sold | 1,318,263 | $ | 616,772 | 100.0 | % | 1,304,423 | $ | 647,224 | 100.0 | % | 1.1 | % | (4.7 | )% | ||||||||||||||||||
Our primary cost of goods sold is the cost of raw materials such as iron ore, coke, alloy and scrap steel. The costs of iron ore and coke account for approximately 62.0%67.4% of our total cost of sales for the nine months ended September 30, 2013.sales. The cost of goods sold decreased by 8.6%4.7% to $1.9 billion$616.8 million in the nine months ended September 30, 2013first quarter of 2014 from $2.1 billion$647.2 million in the same period of 2012.2013. The decrease was mainly driven by the decreased unit costs of raw materials as a result of the decline in iron ore and coke purchase prices of approximately 7.2%3.0% and approximately 24.5%17.0%, respectively, for the ninethree months ended September 30, 2013March 31, 2014 as compared to the same period in 2012.2013. As such, the average costs of rebar manufactured decreased 10.6%8.6% to approximately $501.7$467.7 per ton in nine months ended September 30, 2013the first quarter of 2014 from approximately $561.3$511.8 per ton in the same period 2012.
Gross Profit (Loss)
Three months ended September 30, 2013March 31, 2014 compared with three months ended September 30, 2012March 31, 2013
| Three months ended | |||||||||||||||||||||||
| September 30, 2013 | September 30, 2012 | Change | |||||||||||||||||||||
| Gross Profit | Margin | Gross Profit | Margin | Gross | |||||||||||||||||||
| in thousands, except metric tons | Volume | (Loss) | % | Volume | (Loss) | % | Profit | ||||||||||||||||
| Longmen Joint Venture | 1,238,689 | $ | 8,122 | 1.3 | % | 1,360,226 | $ | (12,879) | (1.8) | % | (163.1) | % | |||||||||||
| Others | 18,132 | 109 | 3.0 | % | 36,553 | (717) | (29.3) | % | (115.2) | % | |||||||||||||
| Total Gross Profit (Loss) | 1,256,821 | $ | 8,231 | 1.3 | % | 1,396,779 | $ | (13,596) | (1.9) | % | (160.5) | % | |||||||||||
| Three months ended | ||||||||||||||||||||||||||||
| March 31, 2014 | March 31, 2013 | Change | ||||||||||||||||||||||||||
| in thousands, except metric tons | Volume | Gross Profit (Loss) | Margin % | Volume | Gross Profit (Loss) | Margin % | Gross Profit | |||||||||||||||||||||
| Longmen Joint Venture | 1,317,540 | $ | (22,220 | ) | (3.7 | )% | 1,255,123 | $ | 4,367 | 0.7 | % | (608.8 | )% | |||||||||||||||
| Others | 723 | (341 | ) | (173.1 | )% | 49,300 | (300 | ) | (6.6 | )% | 13.7 | % | ||||||||||||||||
| Total Gross Profit (Loss) | 1,318,263 | $ | (22,561 | ) | (3.8 | )% | 1,304,423 | $ | 4,067 | 0.6 | % | (654.7 | )% | |||||||||||||||
Gross profitloss for the thirdfirst quarter in 2013of 2014 was $8.2$(22.6) million, or 1.3%(3.8)% of total sales, as compared to a gross lossprofit of $13.6$4.1 million, or (1.9)%0.6% of total sales in the same period in 2012. The increase in gross margin percentage was mainly attributable to the percentage decrease of average rebar selling price of 6.1% being lower than the percentage decrease of costs of rebar manufactured of 9.0% for the third quarter in 2013 as compared to the same period in 2012.
| Nine months ended | |||||||||||||||||||
| September 30, 2013 | September 30, 2012 | Change | |||||||||||||||||
| in thousands, except metric tons | Volume | Gross Profit (Loss) | Margin % | Volume | Gross Profit (Loss) | Margin % | Gross Profit | ||||||||||||
| Longmen Joint Venture | 3,841,985 | $ | (23,706) | (1.2) | % | 3,751,571 | $ | 20,748 | 1.0 | % | (214.3) | % | |||||||
| Others | 104,163 | 468 | 4.2 | % | 159,259 | (670) | (4.9) | % | (169.9) | % | |||||||||
| Total Gross Profit (Loss) | 3,946,148 | $ | (23,238) | (1.2) | % | 3,910,830 | $ | 20,078 | 0.9 | % | (215.7) | % | |||||||
Selling, General and Administrative Expenses (“SG&A”)
Three months ended September 30, 2013March 31, 2014 compared with three months ended September 30, 2012March 31, 2013
| (in thousands) | Three months ended | ||||||||||||
| September 30, 2013 | September 30, 2012 | Change % | |||||||||||
| Selling, general and administrative expenses | $ | (19,661) | $ | (22,787) | (13.7) | % | |||||||
| SG&A expenses as a percentage of total revenue | (3.2) | % | (3.2) | % | |||||||||
| (in thousands) | Three months ended | |||||||||||
| March 31, 2014 | March 31, 2013 | Change % | ||||||||||
| Selling, general and administrative expenses | $ | (21,053 | ) | $ | (18,955 | ) | 11.1 | % | ||||
| SG&A expenses as a percentage of total revenue | (3.5 | )% | (2.9 | )% | ||||||||
SG&A expenses, such as travel expenses and transportation fees, entertainment, employee benefit, training, and travel expenses decreasedincreased by 13.7%11.1% to $19.7$21.1 million for the three months ended September 30, 2013,March 31, 2014, compared to $22.8$19.0 million for the same period in 2012.
Selling expenses decreasedincreased by 16.5%3.4% to $7.3$8.3 million for three months ended September 30, 2013March 31, 2014 as compared to $8.7$8.1 million in the same period of 2012.2013. The decreaseincrease was mainly due to a special fund related tothe increase in freight expenses along with the 5.0% increase in the sales volume of our products which Longmen Joint Venture received tax exemption for from the PRC tax authorities in 2013 while $1.6 million of the special fund was imposed in the third quarter of 2012. Since this was the first time we are exempted from this type of tax, we do not know whether the local government will grant us this tax exemption in the future.
In addition, general and administrative (“G&A”) expenses were approximately $12.4$12.7 million and $14.1$10.9 million for three months ended September 30,March 31, 2014 and 2013, and 2012, respectively. The 12.0% decrease was mainly due to the $1.7 million decrease in bad debt expenses in the third quarter of 2013 from the same period of 2012. This decrease was offset by a $0.6 million additional write-off of bad debt expenses resulting from the imposition of a prepaid special fund in the third quarter of 2013.
| (in thousands) | Nine months ended | ||||||||||||
| September 30, 2013 | September 30, 2012 | Change % | |||||||||||
| Selling, general and administrative expenses | $ | (59,464) | $ | (61,548) | (3.4) | % | |||||||
| SG&A expenses as a percentage of total revenue | (3.1) | % | (2.9) | % | |||||||||
Change in Fair Value of Profit Sharing Liability
Three months ended September 30, 2013March 31, 2014 compared with three months ended September 30, 2012March 31, 2013
| (in thousands) | Three months ended | ||||||||||
| September 30, | September 30, | ||||||||||
| 2013 | 2012 | Change % | |||||||||
| Change in fair value of profit sharing liability | $ | 41,825 | $ | - | 100.0 | % | |||||
| (in thousands) | Three months ended | |||||||||||
| March 31, 2014 | March 31, 2013 | Change % | ||||||||||
| Change in fair value of profit sharing liability | $ | (49 | ) | $ | 46,779 | (100.1 | )% | |||||
We have considered the recent changes in China’s economic situation, which includesincluded a new estimation and downgrade of 2014 GDP by major investment bankers in June 2013, and a steel industry outlook reports issued for 2014. Also, there hashad been a tightening of the monetary policy by the Chinese policy makers since June 20, 2013 by increasing the short-term borrowing rates of approximately 1% in China, and removal of the floor rate charged to customers by the Chinese central bank. As a result, we have re-evaluated our projected operating profit (loss) taking into consideration the recent macroeconomic events in China, as well as our third quarter and year to datemost recent operating results. Due to the continued decrease in our rebar selling price, the market slow-down in the thirdfirst quarter of 2013, and the lack of gross profit recovery as quickly as expected in the third quarter of 2013,2012, we have foreseenforesaw a furthergreater downward trend in 2014 through 2016 than previously anticipated in the second quarter of 2013.2012. As such,our projected profit (loss) decreased in 2013, the fair value of our profit sharing liability has beenwas reduced as compared to our previous estimates in 2012 and we have recognized a gain of $41.8$46.8 million in our income (loss) from operations for the three months ended September 30,March 31, 2013.
| (in thousands) | Nine months ended | ||||||||||
| September 30, | September 30, | ||||||||||
| 2013 | 2012 | Change % | |||||||||
| Change in fair value of profit sharing liability | $ | 107,877 | $ | - | 100.0 | % | |||||
| (in thousands) | Three months ended | ||||||||||
| September 30, | September 30, | ||||||||||
| 2013 | 2012 | Change % | |||||||||
| Income (loss) from operations | $ | 30,395 | $ | (36,383) | (183.5) | % | |||||
Income (Loss) from Operations
Three months ended March 31, 2014 compared with three months ended March 31, 2013
| (in thousands) | Three months ended | |||||||||||
| March 31, 2014 | March 31, 2013 | Change % | ||||||||||
| Income (loss) from operations | $ | (43,663) | $ | 31,891 | (236.9) | % | ||||||
Loss from operations for the three months ended March 31, 2014 was $30.4$(43.7) million as compared to $36.4$31.9 million lossincome from operations for the same period in 2012.2013. The increase in incomeloss from operations was predominantly due to the increase in gross profitloss and the gain fromdecrease in the change in fair value of profit sharing liability.
| (in thousands) | Nine months ended | ||||||||||
| September 30, | September 30, | ||||||||||
| 2013 | 2012 | Change % | |||||||||
| Income (loss) from operations | $ | 25,175 | $ | (41,470) | (160.7) | % | |||||
Three months ended September 30, 2013March 31, 2014 compared with three months ended September 30, 2012March 31, 2013
| (in thousands) | Three months ended | ||||||||
| September 30, | September 30, | ||||||||
| 2013 | 2012 | Change % | |||||||
| Interest income | $ | 2,835 | $ | 4,337 | (34.6) | % | |||
| Finance/interest expense | (17,721) | (25,879) | (31.5) | % | |||||
| Financing cost on capital lease | (7,782) | (10,736) | (27.5) | % | |||||
| Change in fair value of derivative liabilities | - | (55) | (100.0) | % | |||||
| Gain on disposal of equipment | 17 | 293 | (94.2) | % | |||||
| Income from equity investment | 47 | 44 | 6.8 | % | |||||
| Foreign currency transaction gain (loss) | 322 | (581) | (155.4) | % | |||||
| Lease income | 542 | 528 | 2.7 | % | |||||
| Other non-operating income (expense), net | 770 | 2,314 | (66.7) | % | |||||
| Total other expense, net | $ | (20,970) | $ | (29,735) | (29.5) | % | |||
| (in thousands) | Three months ended | |||||||||||
| March 31, 2014 | March 31, 2013 | Change % | ||||||||||
| Interest income | $ | 3,192 | $ | 2,439 | 30.9 | % | ||||||
| Finance/interest expense | (23,609 | ) | (19,762 | ) | 19.5 | % | ||||||
| Financing cost on capital lease | (5,086 | ) | (5,095 | ) | (0.2 | )% | ||||||
| Gain on disposal of equipment | 46 | 331 | (86.1 | )% | ||||||||
| Income from equity investment | 13 | (42 | ) | (131.0 | )% | |||||||
| Foreign currency transaction gain (loss) | (854 | ) | 28 | (3,150.0 | )% | |||||||
| Lease income | 546 | 532 | 2.6 | % | ||||||||
| Other non-operating income (expense), net | (176 | ) | 268 | (165.4 | )% | |||||||
| Total other expense, net | $ | (25,928 | ) | $ | (21,300 | ) | 21.7 | % | ||||
Total other expense, net, for the three months ended September 30, 2013March 31, 2014 was $21.0$25.9 million, a 29.5% decrease21.7% increase compared to $29.7$21.3 million for the same period in 2012.2013. The decreaseincrease was mainly a result of the $8.2$3.8 million decreaseincrease in finance/interest expenses and $0.9 million increase in foreign currency transaction loss from the $3.0 million decrease in financing cost on capital lease.appreciation of our USD bank loans. The decrease was offset by the $1.5 million decrease in interest income as a result of decrease in loans receivable-related parties. The decreaseincrease in finance/interest expenses was mainly a result of the reductionincrease in the amount of bank notes receivable that were redeemed early and the amount borrowed from banks and third parties in the thirdfirst quarter of 20132014 as compared to the same period in 2012. We utilized more vendor financings during the third quarter in 2013. As a result, notes receivable early redemption expenses for the three months ended September 30, 2013March 31, 2014 amounted to $9.6$14.1 million, a $6.7$3.3 million or 41.5% decrease30.6% increase from $16.3$10.8 million for the same period in 2012,2013, and interest expense on loan borrowings for the three months ended September 30, 2013March 31, 2014 amounted to $8.1$9.5 million, a $1.5 million or 15.1% decrease18.8% increase from $9.6$8.0 million for the same period in 2012.
| (in thousands) | Nine months ended | ||||||||||
| September 30, | September 30, | ||||||||||
| 2013 | 2012 | Change % | |||||||||
| Interest income | $ | 8,657 | $ | 13,039 | (33.6) | % | |||||
| Finance/interest expense | (53,577) | (106,566) | (49.7) | % | |||||||
| Financing cost on capital lease | (27,778) | (32,363) | (14.2) | % | |||||||
| Change in fair value of derivative liabilities | 1 | (48) | (102.1) | % | |||||||
| Gain on disposal of equipment | 113 | 177 | (36.2) | % | |||||||
| Income from equity investment | 137 | 80 | 71.3 | % | |||||||
| Foreign currency transaction gain (loss) | 448 | (1,169) | (138.3) | % | |||||||
| Lease income | 1,613 | 1,588 | 1.6 | % | |||||||
| Other non-operating income (expense), net | 1,559 | 3,316 | (53.0) | % | |||||||
| Total other expense, net | $ | (68,827) | $ | (121,946) | (43.6) | % | |||||
Income Taxes
For the three months ended September 30,March 31, 2014 and 2013, and 2012, we had total and current income tax provisions for our profitable subsidiaries, amounting to $0.03 million and $0.1 million, respectively. No deferred income tax provision was recorded for the three months ended September 30, 2013 and 2012 as the deferred tax assets had been fully reserved.
For the ninethree months ended September 30,March 31, 2014 and 2013, and 2012, we had effective tax rates of (0.5%)0.0% and (0.4%)0.7%, respectively. The negative effective tax rates for the three months ended September 30, 2013 and 2012 were mainly due to a consolidated loss before income tax while we needed to accrue tax provision for our profitable subsidiaries.
Net Income (Loss)
Three months ended September 30, 2013March 31, 2014 compared with three months ended September 30, 2012March 31, 2013
| (in thousands) | Three months ended | ||||||||||
| September 30, | September 30, | ||||||||||
| 2013 | 2012 | Change % | |||||||||
| Net income (loss) | $ | 9,400 | $ | (66,218) | (114.2) | % | |||||
| (in thousands) | Nine months ended | ||||||||||
| September 30, | September 30, | ||||||||||
| 2013 | 2012 | Change % | |||||||||
| Net loss | $ | (43,853) | $ | (164,095) | (73.3) | % | |||||
| (in thousands) | Three months ended | |||||||||||
| March 31, 2014 | March 31, 2013 | Change % | ||||||||||
| Net income (loss) | $ | (69,596 | ) | $ | 10,520 | (761.6 | )% | |||||
Net Income (Loss) Attributableattributable to General Steel Holdings, Inc.
Three months ended September 30, 2013March 31, 2014 compared with three months ended September 30, 2012March 31, 2013
| (in thousands) | Three months ended | ||||||||||
| September 30, | September 30, | ||||||||||
| 2013 | 2012 | Change % | |||||||||
| Net income (loss) | $ | 9,400 | $ | (66,218) | (114.2) | % | |||||
Less: Net income (loss) attributable to the noncontrolling interest | 5,599 | (24,620) | (122.7) | % | |||||||
| Net income (loss) attributable to General Steel Holdings, Inc. | $ | 3,801 | $ | (41,598) | (109.1) | % | |||||
| (in thousands) | Three months ended | |||||||||||
| March 31, 2014 | March 31, 2013 | Change % | ||||||||||
| Net income (loss) | $ | (69,596 | ) | $ | 10,520 | (761.6 | )% | |||||
| Less: Net income (loss) attributable to the noncontrolling interest | (26,032 | ) | 7,417 | (451.0 | )% | |||||||
| Net income (loss) attributable to General Steel Holdings, Inc. | $ | (43,564 | ) | $ | 3,103 | (1,503.9 | )% | |||||
Net incomeloss attributable to us for the three months ended September 30, 2013 increased to $3.8March 31, 2014 was $(43.6) million as compared to $41.6$3.1 million net loss attributable to usincome for the same period in 2012.2013. The increase in net incomeloss attributable to us for the three months ended September 30, 2013March 31, 2014 was mainly a result of a $8.2 million gross profit, a $41.8the $26.3 million increase in change in fair value of profit sharing liability and a $8.2gross loss, $46.8 million decrease in finance/interest expense for the three months ended September 30, 2013.
| (in thousands) | Nine months ended | ||||||||||
| September 30, | September 30, | ||||||||||
| 2013 | 2012 | Change % | |||||||||
| Net loss | $ | (43,853) | $ | (164,095) | (73.3) | % | |||||
Less: Net loss attributable to the noncontrolling interest | (10,939) | (61,336) | (82.2) | % | |||||||
| Net loss attributable to General Steel Holdings, Inc. | $ | (32,914) | $ | (102,759) | (68.0) | % | |||||
We have subsidiaries in which we do not have a 100% ownership interest. Allocation of income or loss to these non-controlling interests is based on the percentage of their equity investment times the subsidiaries’ net income or loss.
Liquidity and capital resources
As of September 30, 2013,March 31, 2014, our current liabilities exceeded the current assets by approximately $1.1 billion.$1,297.6 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, managementManagement and our Board of Directors is of the opinion that we have sufficient funds to meet our working capital requirements and debt obligations as they become due. As a result, our unaudited condensed consolidated financial statements for the period ended September 30, 2013March 31, 2014 have been prepared on a going concern basis.
As of September 30, 2013,March 31, 2014, we had cash and restricted cash aggregating $467.9$465.0 million, of which $405.8$428.6 million was restricted.
We believe our cash flows generated from operations and financing, which include customer prepayments and vendor financing, existing cash balances, and credit facilities will be adequate to finance our working capital requirements, fund capital expenditures, make required debt and interest payments, pay taxes, and support our operating strategies.
The steel business is capital intensive and we utilize leverage greater than our industry peers, which we believe enables us to generate revenue compared to our shareholder equity at a rate higher than our industry peers. We utilize leverage in the form of credit from banks, vendor financing and customer deposits and from other sources. This blended form of financing reduces our reliance on any single source.
Substantially all our operations are conducted in China and all of our revenues are denominated in Renminbi (RMB)(“RMB”). RMB is subject to the exchange control regulation in China, and, as a result, we may have difficulty distributing any dividends outside of China due to the PRC'sPRC exchange control regulations that restrict its ability to convert RMB into U.S. Dollars.
Under applicable PRC regulations, foreign-invested enterprises in the PRCChina 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 the PRCChina is required to set aside at least 10.0% of its after-tax profit based on PRC accounting standards each year to its general reserves until the accumulative amount of such reserves reaches 50.0% of its registered capital. These reserves are not distributable as cash dividends. The board of directors of a foreign-invested enterprise has the discretion to allocate a portion of its after-tax profits to staff welfare and bonus funds, which may not be distributed to equity owners except in the event of liquidation. Under PRC law, RMB is currently convertible into U.S. Dollars under a company’s “current account,” which includes dividends, trade and service-related foreign exchange transactions, without prior approval of the State Administration of Foreign Exchange (SAFE), but is not from a company’s “capital account,” which includes foreign direct investments and loans, without the prior approval of the SAFE.
We have previously raised money in the U.S. capital markets which providesprovided the capital needed for our operationoperations 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 operationoperations of our CompanyGeneral Steel Holdings, Inc. and General Steel Investment.
Although the steel industry is slowing down due to over-capacity issues in the PRC, in order for us to stay competitive, we continue to look for opportunities to improve the efficiency on our production lines. In addition to the 1,200,000 metric ton capacity rebar production renovation of an existing 800,000 metric ton capacity rebar production line that we brought online in November 2010, in July 2011, we also brought online a 1,000,000 metric ton capacity high speed wire production line. These two newly installed production lines were both relocated from the Maoming Hengda (as defined below) facility and are expected to consume less energy when running at maximum efficiencies compared to our previous production line. In September 2012 we began the construction of a 900,000 metric ton capacity rebar production line, which was completed and put into test production in JulySeptember 2013. In March 2013, we began the construction of a 1,200,000 metric ton capacity rebar production line for the purpose of reducing our reprocessing cost and to increase our profit margin. The 1,200,000 metric ton capacity rebar production lines require additional capital resources of approximately $14.2 million which was completed and put into test production byin November 2013. Any future facility expansion will require additional financing and/or equity capital and will be dependent upon the availability of financing arrangements and capital at the time.
Short-term Notes Payable
As of September 30, 2013,March 31, 2014, we had $988.0$963.4 million in short-term notes payable liabilities, which were secured by restricted cash of $405.8$419.8 million and restricted notes receivable of $237.2$133.0 million. These are lines of credit extended by banks for a maximum of six months and are used to finance working capital. The short-term notes payable must be paid in full at maturity and credit availability is continued upon payment at maturity. There are no additional significant financial covenants. We pay zero interest on this type of credit as this is a monetary tool used by China’s central bank to control liquidity over the Chinese monetary system.
Short-term Loans – Banks
As of September 30, 2013,March 31, 2014, we had $254.9$230.1 million in short-term bank loans. These were bank loans with a one year maturity and must be paid in full upon maturity. PRC banks have not been impacted as heavily by the financial crisis as U.S. banks and we believe our current creditors will renew their loans to us after our loans mature as they did in the past.
We are able to repay our short-term notes payables and short term bank loans upon maturity using available capital resources.
For more details about our debt, see Note 9 in our Notes to the unaudited condensed consolidated financial statements included in this report.
For more details about our related party debt financing, see Note 20 in our Notes to the unaudited condensed consolidated financial statements included in this report.
As part of our working capital management, Longmen Joint Venture has entered into a number of sale and purchase back contracts (“Contracts”) with third party companies and two 100% owned subsidiaries of Longmen Joint Venture, named Yuxin Trading Co., Ltd. (“Yuxin”) and Yuteng Trading Co., Ltd. (“Yuteng”). Pursuant to the Contracts, Longmen Joint Venture sells rebar to the third party companies at a certain price, and within the same month, Yuxin and Yuteng will purchase back the rebar from the third party companies at a price between 4.2% to 5.9% higher than the original selling price from Longmen Joint Venture. Based on the Contract terms, Longmen Joint Venture is paid in advance for the rebar sold to the third party companies and Yuxin and Yuteng are given a credit period of several months to one year for the purchase back of the inventory from the third party companies. There is no physical movement of the inventory during the sale and purchase back arrangement. The margin between 4.2% to 5.9% is determined by reference to the bank loan interest rates at the time when the Contracts are entered into, plus an estimated premium based on the financing sale amount, which represents the interest charged by the third party companies for financing Longmen Joint Venture through the above sale and purchase back arrangement. As such, the revenue and cost of goods sold arising from the above transactions are recorded on a net basis and the incremental amounts paid by Yuxin and Yuteng to purchase back the goods are treated as financing costs in the consolidated financial statements.
Total financing sales for the three months ended September 30,March 31, 2014 and 2013 and 2012 amounted to $166.3$230.5 million and $307.1$165.2 million, respectively, which were eliminated in our consolidated financial statements. The financial cost related to financing sales for the three months ended September 30,March 31, 2014 and 2013 and 2012 amounted to $1.1$0.9 million and $2.1$1.6 million, respectively.
Liquidity
Our accounts have been prepared in 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. Our ability to continue as a going concern depends upon aligning our sources of funding (debt and equity) with our expenditure requirements and repayment of the short-term debt facilities as and when they fall due.
The steel business is capital intensive and as a normal industry practice in the PRC, we are highly leveraged. Debt financing in the form of short term bank loans, loans from related parties, financing sales, bank acceptance notes, and capital leases have been utilized to finance the working capital requirements and the capital expenditures of our Company. As a result, our debt to equity ratio as of September 30, 2013March 31, 2014 and December 31, 20122013 were (6.6)(5.8) and (7.1)(6.5), respectively. As of September 30, 2013,March 31, 2014, our current liabilities exceed current assets (excluding non-cash item) by $1.1$1.3 billion.
Longmen Joint Venture, as our most important operating subsidiary, accounted for thea majority of our total sales. As such, the majority of our working capital needs to come from Longmen Joint Venture. Our ability to continue as a going concern depends heavily on Longmen Joint Venture’s operations. Longmen Joint Venture has obtained different types of financial supports, which include line of credit from banks, vendor financing, financing sales, other financing and sales representative financing.
For more details and terms about our financial supports, see Note 2(d) in our Notes to the condensed consolidated financial statements.
With the financial support from the banks and the companies above,discussed in Note 2(d) in our Notes to the condensed consolidated financial statements, management is of the opinion that we have sufficient funds to meet our future operations, working capital requirements and debt obligations until the end of September 30, 2014.March 31, 2015. 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 | ||||
| September 30, 2014 | ||||
| Current liabilities over current assets (excluding non-cash items) as of September 30, 2013 (unaudited) | $ | (1,072.0) | ||
| Projected cash financing and outflows: | ||||
| Cash provided by line of credit from banks | 110.8 | |||
| Cash provided by vendor financing | 815.0 | |||
| Cash provided by financing sales | 81.5 | |||
| Cash provided by other financing | 77.4 | |||
| Cash provided by sales representatives | 30.0 | |||
| Cash projected to be used in operations in the twelve months ended September 30, 2014 | (28.6) | |||
| Net projected change in cash for the twelve months ended September 30, 2014 | $ | 14.1 | ||
| Cash inflow (outflow) (in millions) | ||||
| For the twelve months ended March 31, 2015 | ||||
| Estimated current liabilities over current assets (excluding non-cash items) as of March 31, 2014 (unaudited) | $ | (1,295.4 | ) | |
| Projected cash financing and outflows: | ||||
| Cash provided by line of credit from banks | 229.0 | |||
| Cash provided by vendor financing | 811.5 | |||
| Cash provided by other financing | 362.0 | |||
| Cash provided by sales representatives | 25.7 | |||
| Cash projected to be used in operations in the twelve months ended March 31, 2015 | (29.5 | ) | ||
| Cash projected to be used for financing cost in the twelve months ended March 31, 2015 | (74.0 | ) | ||
| Net projected change in cash for the twelve months ended March 31, 2015 | $ | 29.3 | ||
As a result, the unaudited condensed consolidated financial statements for the ninethree month period ended September 30, 2013March 31, 2014 have been prepared on a going concern basis.
Cash-flow
Operating Activities
Net cash provided by operating activities for the ninethree months ended September 30,March 31, 2014 and 2013 was $14.0$65.5 million as compared to net cash used in operating activities of $90.1and $3.9 million, in the same period of 2012.respectively. This change was mainly due to the combination of the following factors:
| · | The impact of some non-cash items included in net |
| - | Depreciation, amortization and depletion; | |
| - | ||
| - | ||
| - | ||
| - |
| - | ||
| - | ||
| - | (Income) loss from equity investments; | |
| - | ||
| - | ||
| - |
| · | The primary reasons for the material fluctuations in cash inflow were as follows: |
| - | Accounts | |
| - | Other payables and accrued liabilities: The increase in other payables and accrued liabilities was mainly due to an decrease in payments to various third parties for the three months ended March 31, 2014 compared to same period in 2013; and | |
| - | Customer deposits, including related parties: The increase in customer deposit, including related parties was mainly due to our customers making more prepayment to us for the three months ended March 31, 2014. These deposits were subsequently recognized as sales after March 31, 2014 in accordance with our sales recognition policy. |
| · | The primary reasons for material fluctuations in cash outflow were as follows: |
| - | ||
| - | Advance on inventory purchases – related parties: The increase was mainly due to more advance payments were made to related parties for raw material purchases to meet future production capacity. Advance payment is a prevailing requirement on iron ore purchases in the steel production industry; and | |
| - | Other payables | |
Investing activities
Net cash used in investing activities was $146.6 million and $123.2$89.6 million for the ninethree months ended September 30, 2013 and 2012, respectively.March 31, 2014 compared to net cash provided by investing activities of $30.9 million for the three months ended March 31, 2013. Fluctuation in cash outflow between the two periods was mainly due to the increase of restricted cash and the increase in construction in process as the construction of a new rebar production line and other various factory building projects are near completion.cash. Restricted cash was used as a pledge for our notes payable as required by the bank. In the first ninethree months of 2013,2014, such balance increased along with the increase in the outstanding balance ofbecause we needed more notes payable to settle with our suppliers.
Financing activities
Net cash provided by financing activities was $146.8 million and 175.4$28.9 million for the ninethree months ended September 30, 2013 and 2012, respectively.March 31, 2014 compared to net cash used in financing activities of $15.7 million for the three months ended March 31, 2013. Compared to the same period in 2012,2013, the increase of cash inflow from financing activities was mainly driven by the following:
| · |
| · | Short term |
| · | Short term loans – bank: We borrowed more from banks for the three months ended March 31, 2014 compared to the same period in 2013; and |
| · | Short term loans – related parties: We repaid fewer loans from related parties for the |
The cash inflow was offset by the following cash outflow:
| · | Short term loans: We repaid | |
| · |
Impact of Inflation
We are subject to commodity price risks arising from price fluctuations in the market prices of the raw materials. We have generally been able to pass on cost increases through price adjustments. However, the ability to pass on these increases depends on market conditions influenced by the overall economic conditions in China. We manage our price risks through productivity improvements and cost-containment measures. We do not believe that inflation risk is material to our business or our financial position, results of operations or cash flows.
Compliance with Environmental Laws and Regulations
Longmen Joint Venture:
Together with our joint venture partners Long Steel Group and Shaanxi Steel, we have invested RMB 580 million in a series of comprehensive projects to reduce our waste emissions of coal gas, water, and solid waste. In 2005, we received ISO 14001 certification for our overall environmental management system. We have received several awards from the Shaanxi provincial government as a result of our increased effort in environmental protection.
We have spent in excess of $9.1 million (RMB 57 million) on a comprehensive waste water recycling and water treatment system. The 2,000 cubic meter/h treatment capacity systems were implemented at the end of 2005. In 2010, 1.08 metric tons of new water was consumed per metric ton of steel produced.
We have one 10,000 cubic meter coke-oven gas tank, one 50,000 cubic meter blast furnace coal gas tank and one 80,000 cubic meter converter furnace coal gas tank to collect the residual coal gas produced from our facility and that of surrounding enterprises. We also have spent $36.6 million (RMB 230 million) on a thermal power plant with two 25 Kilowatt generators that use the residual coal gas from the blast furnaces and converters as fuel to generate power.
We have several plants to further process solid waste generated from the steel making process into useful products such as construction materials, building blocks, porcelain tiles, curb tops, ornamental tiles, as well as other products.
In 2009, we treated and recycled about 6.8 million tons of waste water, 335,320 tons of slag, 130 million m³ of gas from the converters and 6.1 billion m³ of gas from the blast furnaces. We also reused 855,714 tons of hot steam and generated 433 million KWH of electricity.
During 2010 and 2012, more than $9.6 million (RMB 60 million) were used on the technical upgrade and renovation of our converters and $0.88 billion (RMB 5.5 billion) were used on the upgrade of the blast furnaces and sintering machines.
In 2012, we installed desulfidation equipment for two sintering machines, which started operating in June 2012.
Off-balance Sheet Arrangements
There were no off-balance sheet arrangements for the period ended September 30, 2013March 31, 2014 that have or that, in the opinion of management, are likely to have a current or future material effect on our financial condition or results of operations.
Contractual Obligations and Commercial Commitments
We have certain fixed contractual obligations and commitments that include future estimated payments. Changes in our business needs, cancellation provisions, changing interest rates, and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of payments. Throughout our operating history, we have funded our contractual obligations and commercial commitments through financing arrangements and operating cash flow, including but not limited to, the operating income, payments collected from the customers in advance and stock issuances. Below, we have presented a summary of the most significant contractual obligations and commercial commitments in the tables, in order to assist in the review of this information within the context of our consolidated financial position, results of operations, and cash flows.
The following tables summarize our contractual obligations as of September 30, 2013March 31, 2014 and the effect these obligations are expected to have on our liquidity and cash flows in future periods.
| Principal due by period | ||||||||||||||||
| Less than | ||||||||||||||||
| Contractual obligations | Total | 1 year | 1-3 years | 3- 5 years | 5 years after | |||||||||||
| (in thousands) | ||||||||||||||||
| Note payable | $ | 987,988 | $ | 987,988 | $ | - | $ | - | $ | - | ||||||
| Bank loans | 254,929 | 254,929 | - | - | - | |||||||||||
| Other loans, including related parties | 179,059 | 179,059 | - | - | - | |||||||||||
| Deposits due to sales representatives, including related parties | 29,993 | 29,993 | - | - | - | |||||||||||
| Lease obligations | 23,987 | 1,445 | 1,239 | 1,118 | 20,185 | |||||||||||
| Construction obligations - Longmen Joint Venture | 211,625 | 211,625 | - | - | - | |||||||||||
| Long term loan – Shaanxi Steel | 72,346 | 47,896 | 24,450 | - | - | |||||||||||
| Capital lease obligation | 354,576 | - | 96,517 | 21,685 | 236,374 | |||||||||||
| Profit sharing liability | 241,090 | - | - | - | 241,090 | |||||||||||
| Total | $ | 2,355,593 | $ | 1,712,935 | $ | 122,206 | $ | 22,803 | $ | 497,649 | ||||||
| Payment due by period | ||||||||||||||||||||
| Less than | ||||||||||||||||||||
| Contractual obligations | Total | 1 year | 1-3 years | 3- 5 years | 5 years after | |||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Note payable | $ | 963,357 | $ | 963,357 | $ | - | $ | - | $ | - | ||||||||||
| Bank loans | 230,118 | 230,118 | - | - | - | |||||||||||||||
| Other loans, including related parties | 153,774 | 153,774 | - | - | - | |||||||||||||||
| Deposits due to sales representatives, including related parties | 25,693 | 25,693 | - | - | - | |||||||||||||||
| Lease obligations | 23,259 | 1,243 | 1,136 | 1,136 | 19,744 | |||||||||||||||
| Construction obligations - Longmen Joint Venture | 338,170 | 338,170 | - | - | - | |||||||||||||||
| Long term loan – Shaanxi Steel | 72,035 | 57,428 | 14,607 | - | - | |||||||||||||||
| Capital lease obligation | 380,799 | 4,774 | 118,485 | 27,161 | 230,379 | |||||||||||||||
| Profit sharing liability | 160,956 | - | - | - | 160,956 | |||||||||||||||
| Total | $ | 2,348,161 | $ | 1,774,557 | $ | 134,228 | $ | 28,297 | $ | 411,079 | ||||||||||
Bank loans in the PRC are due either on demand or, more typically, within one year. These loans can be renewed with the banks subject to bank’s credit reevaluation. This amount includes estimated interest payments as well as principal repayment.
As of September 30, 2013,March 31, 2014, Longmen Joint Venture guaranteed bank loans for related parties and third parties, including lines of credit, amounting to $304.6$274.5 million, as follows:
| Guarantee | |||||
| Nature of guarantee | amount | Guaranty Due Date | |||
| (In thousands) | |||||
| Line of credit | $ | 178,931 | Various from October 2013 to August 2015 | ||
| Three-party financing agreements | 42,315 | Various from October 2013 to January 2014 | |||
| Confirming storage | 19,951 | Various from December 2013 to September 2014 | |||
| Financing by the rights of goods delivery in future | 63,374 | Various from December 2013 to March 2015 | |||
| Total | $ | 304,571 | |||
| Nature of guarantee | Guarantee amount | Guaranty Due Date | ||||
| (In thousands) | ||||||
| Line of credit | $ | 177,353 | Various from April 2014 to August 2015 | |||
| Three-party financing agreements | 4,869 | July 2014 | ||||
| Confirming storage | 41,549 | Various from April to September 2014 | ||||
| Financing by the rights of goods delivery in future | 50,719 | Various from April to October 2014 | ||||
| Total | $ | 274,490 | ||||
As of September 30, 2013,March 31, 2014, we did not accrue any liability for the amount the Group has guaranteed for third and related parties because those parties are current in their payment obligations and we have not experienced any losslosses from providing guarantees. We evaluated the debt guarantees and concluded that the likelihood of having to make payments under the guarantees is remote and that the fair value of the stand-ready obligation under these commitments is not material.
Critical Accounting Policies and Estimates
Management’s discussion and analysis of its financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. Our unaudited condensed consolidated financial statements reflect the selection and application of accounting policies which require management to make significant estimates and judgments. See Note 2 to our unaudited Condensed Consolidated Financial Statements “Summary of Significant Accounting Policies”. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
We believe that the following reflect the more critical accounting policies that currently affect our financial condition and results of operations.
Principles of consolidation – subsidiaries
The accompanying unaudited condensed consolidated financial statements include the financial statements of our Company, our subsidiaries, our variable interest entity (“VIE”) for which our Company is the ultimate primary beneficiary, and the VIE’s subsidiaries.
The unaudited condensed consolidated financial statements have been prepared on a historical cost basis to reflect the financial position and results of operations of ourthe 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 powerpower; or has the power to govern the financial and operating policies, to appoint or remove the majority of the members of the board of directors, or to cast a majority of votes at the meeting of directors.
A VIE is an entity in which our Company, or our subsidiary, through contractual arrangements, bears the risks of, and enjoys the rewards normally associated with, ownership of the entity, and therefore our Company or our subsidiary is the primary beneficiary of the entity.
All significant inter-company transactions and balances have been eliminated upon consolidation.
Consolidation of VIE
Prior to entering into the Unified Management Agreement on April 29, 2011, Longmen Joint Venture had been consolidated as our 60% directdirectly owned subsidiary. Upon entering into the Unified Management Agreement, on April 29, 2011, Longmen Joint Venture was evaluated by our Company to determine if Longmen Joint Venture is a VIE and if we are the primary beneficiary.
Based on the projected profit in this entity and future operating plans, Longmen Joint Venture’sVenture ’s equity at risk is considered insufficient to finance its activities and therefore Longmen Joint Venture is considered to be a VIE.
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 Longmen Joint Venture, the powers rights and roles of both bodies were considered to determine which has the authoritypower to direct the activities of Longmen Joint Venture, and by extension, whether we continue to have the authoritypower to direct Longmen Joint 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, which we hold 4 out of 7 seats, requires a simple majority vote. As the Supervisory Committee’s role is limited to supervising and monitoring management of Longmen Joint Venture and in the event there is any disagreement between the board 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 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, have control ofover the operations of Longmen Joint Venture and as such, have the authoritypower to direct the activities of the VIE that most significantly impact Longmen Joint Venture ’sVenture’s economic performance.
In connection with the Unified Management Agreement, Shaanxi Coal, we and Shaanxi Steel and we may provide such support on a discretionary basis in the future, which could expose us to a loss.
As discussed in Note 12(c) to Condensed Consolidated Financial Statements - Background,the consolidated financial statements – Consolidation of VIE, we have the obligation to absorb losses and the rights to receive benefits based on the profit allocation as stipulated by the Unified Management Agreement. As both conditions are met, we are the primary beneficiary of Longmen Joint Venture and therefore, continue to consolidate Longmen Joint Venture.
We believe that the Unified Management Agreement between Longmen Joint Venture and Shaanxi Coal is in compliance with PRC law and is legally enforceable. The Boardboard of Directorsdirectors of Longmen Joint Venture continues to be the controlling decision-making body with respect to Longmen Joint Venture. We control 60% of the voting rights of the board of directors and have control over the operations of Longmen Joint Venture. As such, we have the authoritypower 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., LtdLtd. (“Yuteng”). In addition, Longmen Joint Venture has two consolidated subsidiaries, Hualong Fire Retardant Material Co., Ltd. (“Hualong”) and Beijing Huatianyulong, International Steel Trading Co., Ltd. (“Huatianyulong”), in which Longmen Joint Ventureit does not hold a controlling interest. Hualong and Huatianyulong are separate legal entities which were established in the PRC as limited liability companies and subsequently acquiredinvested in by Longmen Joint Venture in June 2007 and July 2008, respectively. Prior to and subsequent to their acquisition by Longmen Joint Venture, these two 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 two entities do not meet the definition of variable interest entities. Further consideration was given to whether consolidation was appropriate under the voting interest model, specifically where the power of control may exist with a lesser percentage of ownership (i.e. less than 50%), for example, by contract, lease, agreement with other stockholders or by court decree.
Hualong
Longmen Joint Venture, the single largest shareholder, holds a 36.0% equity interest in Hualong. The other two shareholders, who own 34.67% and 29.33% respectively, assigned their voting rights to Longmen Joint Venture in writing at the time of the acquisition of Hualong. The voting rights have been assigned through the date Hualong ceases its business operation or the other two shareholders sell their interest in Hualong. Hualong’s main business is to supply refractory.
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 two entitiesHualong and Huatianyulong with appropriate recognition in our financial statements of the non-controlling interests in each entity, beginning on the acquisition dates as these were also the effective dates of the agreements with other stockholders granting a majority voting rights in each entity, and thereby, the power of control, to Longmen Joint Venture.
Revenue recognition
We follow the generally accepted accounting principles in the United StatesU.S. GAAP regarding revenue recognition. Sales wererevenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, we have no other significant obligations and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are recorded as customer deposits. Sales representrevenue represents the invoiced value of goods, net of value-added tax (VAT). All our products sold in the PRC are subject to a Chinese VAT at a rate of 13% to 17% of the gross sales price. This VAT may be offset by VAT paid by us on raw materials and other materials included in the cost of producing the finished product.
We infrequently engage in trading transactions in which we acts as an agent between the suppliers and the customers. The trading arrangements are such that the suppliers are the primary obligators, we do not have any general inventory risk, physical inventory loss risk or credit risk, and we do not have latitude in establishing price. Sales and cost of goods sold from these trading arrangements are recorded at the net amount retained in accordance with ASC 605-45.
Accounts receivable, other receivables and 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 and equipment 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 revision.
Impairment of long-lived assets
The carrying values of long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Based on the existence of one or more indicators of impairment, we measure any impairment of long-lived assets using the projected discountedundiscounted 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.
As of March 31, 2014, the fair value of our plant and equipment exceeded our carrying value of these assets by approximately 71.9%. We used the discounted cash flows model to determine the fair value of these assets. The key assumptions that were included in the model are projected selling units and growth in the steel market, projected unit selling price in the steel market, projected unit purchase cost in the coal and iron ore markets, selling and general and administrative expenses to be in line with the growth in the steel market, and projected bank borrowings. We believed these assumptions provided us the best estimates of projecting our future cash flows on these assets, net of any related cash outflow of our cost, expenses and taxes in related to these revenues. The estimated fair value of these assets may be lower than their current fair value, thus could result in future impairment charge if potential events occur to further reduce the current selling price or product demand in the steel market or increase our cost that are associated with our revenues. In addition, competitive pricing pressure and changes in interest rates could materially and adversely affect our estimates of future net cash flows to be generated by our long-lived assets, and thus could result in future impairment losses.
Use of estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the accompanying unaudited condensed consolidated financial statements and accompanying footnotes.notes. Significant accounting estimates reflected in our unaudited condensed consolidated financial statements include the useful lives of and impairment for property, plant and equipment, and potential losses on uncollectible receivables, the recognition of contingent liabilities, the interest rate used in financing sales, the fair value of the assets recorded under capital lease, the present value of the net minimum lease payments of the capital lease and the fair value of the profit share liability. Actual results could differ from these estimates.
Financial instruments
The accounting standard regarding “Disclosures about fair value of financial instruments” defines financial instruments and requires disclosure of the fair value of financial instruments held by us. We consider the carrying amount of cash, accounts receivable, other receivables, accounts payable and accrued liabilities to approximate their fair values because of the short period of time between the origination of such instruments and their expected realization. For short-term loans and notes payable, we concluded the carrying values are a reasonable estimate of fair value because of the short period of time between the origination and repayment and their stated interest rate approximates current rates available.
We also analyze all financial instruments with features of both liabilities and equity under the accounting standard establishing, “Accounting“accounting for certain financial instruments with characteristics of both liabilities and equity,” the accounting standard regarding “Accounting“accounting for derivative instruments and hedging activities” and “Accounting“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“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 warrants issued in conjunction with the December 2007 notes were carried at fair value. The warrants were accounted for as derivative liabilities and recorded at their fair value, with the change in fair value charged or credited to income each period. The warrants expired unexercised on May 13, 2013. Prior to their expiration, the fair value of the warrants was estimated using a binomial lattice model, using level 3 inputs.
We determined thatdetermine the carryingfair value of the profit sharing liability using Level 3 inputs by taking consideration ofconsidering the present value of ourLongmen Joint Venture’s projected profits/losses with thea discount interest rate of 7.3%, based on our average borrowing rate. The projected profits/losses in Longmen Joint Venture wereare based upon, but not limited to, the following assumptions until April 30, 2031:
| · | projected selling units and growth in the steel market; | |
| · | projected unit selling price in the steel market; | |
| · | projected unit purchase cost in the coal and iron ore markets; | |
| · | selling and general and administrative expenses to be in line with the growth in the steel market; | |
| · | projected bank | |
| · | interest rate index; | |
| · | gross nation product index; | |
| · | industry index; and | |
| · | government policy. |
We did not conduct any business and did not maintain any branch office in the United States during the three months ended September 30, 2013March 31, 2014 and 2012.2013. Therefore, no provision for withholding of U.S. federal or state income taxes has been made. The tax impact from undistributed earnings from overseas subsidiaries is not recognized as there is no intention for future repatriation of these earnings.
General Steel (China) is located in Tianjin Costal Economic Development Zone and is subject to an income tax rate of 25%.
Longmen Joint Venture is located in the Mid-West Region of China. It qualifies for the “Go-West” tax rate of 15% promulgated by the government. In 2010, the central government announced that the “Go-West” tax initiative was extended for 10 years, and thus, the preferential tax rate of 15% will be in effect until 2020. This special tax treatment will be evaluated on a year-to-year basis by the local tax bureau.
Baotou Steel Pipe Joint Venture is located in Inner Mongolia autonomous region and is subject to an income tax rate of 25%.
Maoming Hengda is located in Guangdong Province and is subject to an income tax rate of 25%.
Capital lease obligations
Iron and steel production facilities
On April 29, 2011, we, along with Longmen Joint Venture entered into a Unified Management Agreement with Shaanxi Steel and Shaanxi Coal under which Longmen Joint Venture uses the new iron and steel making facilities 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 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 minimum lease payment for purposes of determining the value of the leased asset and obligation at the inception of the lease, however, 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 16 – “Profit sharing liability” in the Notes to Condensed Consolidated Financial Statements.
Energy-saving equipment
During 2013, our subsidiary, Longmen Joint Venture, entered into capital lease agreements for energy-saving equipment to be installed throughout the production chain. Under these agreements, Longmen Joint Venture uses the energy-saving equipment for which the vendors are responsible for the design, purchase, installation, and on-site testing, as well as the ownership rights to the equipment during the lease periods. The lease periods, which vary between four to six years, begin upon the completion of the equipment installation, testing, and the issuance of the energy-saving rate reports to be agreed upon by both the vendors and Longmen Joint Venture. As the ownership rights of the equipment transfer to Longmen Joint Venture at the end of the lease periods, these agreements are accounted for as capital leases.
The minimum lease payments are based on the energy cost saved during the lease periods, which is determined by the estimated annual equipment operating hours per the lease agreements. If the actual annual equipment operating hours are less than the estimated amount, the lease periods may be extended, subject to further negotiation and agreement between us and the vendors. If the actual annual equipment operating hours exceed the estimated amount, we are obligated to pay the additional lease payment based on the additional energy cost saved during the lease period and recognize the additional lease payments as contingent rent expense. For the three months ended March 31, 2014 and 2013, no contingent rent expense has incurred under these lease agreements.
Profit sharing liability
The profit sharing liability iscomponent of the capital lease obligation was recognized initially at its estimated fair value at the lease commencement date and included in the initial measurement and recognition of the capital lease, in addition to the fixed payment component of the minimum lease payments. Subsequently, this financial instrumentThe profit sharing liability is accounted for separately from the fixed portion of the capital lease accounting (Noteobligation (see Note 15 –- “Capital lease obligations”obligation” in the Notes to Condensed Consolidated Financial Statements). and is accounted for as a derivative instrument in accordance with ASC 815-10-15-83. The initialestimated fair value of the expected payments under the profit sharing component of the Unified Management Agreement is accreted over the term of the agreement using the effective interest method. The value of the profit sharing liability will beis reassessed at the end of each reporting period, with any changes reflected prospectivelychange in fair value charged or credited to income as “Change in Fair Value of Profit Sharing Liability”. See Note 2(h) – “Financial instruments” in the estimate ofNotes to Condensed Consolidated Financial Statements for details.
Payments to Shaanxi Steel for the effective interest rate.
Our Company, with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the design and operation of our disclosure controls and procedures, as defined under Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of September 30, 2013.March 31, 2014. Our Company’s disclosure controls and procedures are designeddesigned: (i) to ensure that information required to be disclosed by us in the reports that we file or submitsubmits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and formsforms; and (ii) to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Based on their evaluations, our evaluation of the effectiveness of our disclosure controlsChief Executive Officer and procedures and our internal control over financial reporting, we identified a material weakness related to not having sufficient 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 disclosure controls and procedures 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.
Changes in Internal Controls over Financial Reporting
Except as otherwise noted above, there has not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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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.
To our knowledge and to the extent additional factual information disclosed in this Quarterly Report on Form 10-Q relates to such risk factors, there have been no other changes in the risk factors described in “ITEM 1A. RISK FACTORS” in our Annual Report on Form 10-K for the year ended December 31, 2012,2013, which was filed with the SEC on June 17, 2013,March 27, 2014.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On February 3, 2014, in connection with two services agreements relating to investor relations and consulting services, both dated as of January 14, 2014, we issued 80,000 shares of common stock. The total cost of the stock issuance was $80,800. We based the market price for our common shares on the date they were granted, which was $1.01 per share. The recipients are accredited investors and the issuances are exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”) in our Quarterly Reportreliance on Form 10-Q foran exemption from registration provided pursuant to Section 4(2) of the quarter ended March 31, 2013, filed with the SEC on August 6, 2013.
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| 3.1 | Articles of Incorporation of General Steel Holdings, Inc. (included as Exhibit 3.1 to the Form SB-2 filed with the Commission on June 6, 2003 and incorporated herein by reference). |
| 3.2 | Amendment to the Articles of Incorporation dated February 22, 2005 (included as Exhibit 3.2 to the Form 10-K filed March 16, 2010 and incorporated herein by reference). |
| 3.3 | Amendment to the Articles of Incorporation dated November 14, 2007 (included as Exhibit 3.3 to the Form 10-K filed March 16, 2010 and incorporated herein by reference). |
| 3.4 | Certificate of Designation of Series A Preferred Stock of the registrant (included as Exhibit 10.6 to the Form 10-K filed June 30, 2008 and incorporated herein by reference). |
| 3.5 | Bylaws of General Steel Holdings, Inc. (included as Exhibit 3.5 to the Form 10-K filed March 16, 2010 and incorporated herein by reference). |
| 31.1* | Certification of the CEO (Principal Executive Officer) pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as filed herewith. |
| 31.2* | Certification of the CFO (Principal Financial Officer) pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as filed herewith. |
| 32.1* | Certification of the CEO (Principal Executive Officer) pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as filed herewith. |
| 32.2* | Certification of the CFO (Principal Financial Officer) pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as filed herewith. |
| 101.INS*** | XBRL Instance Document | |
| 101.SCH*** | XBRL Taxonomy Extension Schema Document | |
| 101.CAL*** | XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF*** | XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB*** | XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE*** | XBRL Taxonomy Extension Presentation Linkbase Document |
*** | XBRL (Extensive Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections. |
Filed herewith. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| General Steel Holdings, Inc. | ||
| Date: | By: | |
| Zuosheng Yu | ||
| Chief Executive Officer and Chairman | ||
| Date: | By: | |
| John Chen | ||
| Director and Chief Financial Officer |
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