GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

As a result, the consolidated financial statements for the three months ended March 31,as of June 30, 2014 have been prepared on a going concern basis.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the accompanying consolidated financial statements and footnotes. Significant accounting estimates reflected in the Company’s consolidated financial statements include the fair value of the profit sharing liability, the useful lives of and impairment forof property, plant and equipment, and potential losses on uncollectible receivables, the allowance for inventory valuation, the interest rate used in the financing sales, the fair value of the assets recorded under capital leaseleases and the present value of the net minimum lease payments of the capital lease.leases. Actual results could differ from these estimates.

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 March 31, 2014 and December 31, 2013, theThe Company diddoes not haveutilize any open commodity contracts to mitigate such risks.

Cash includes demand deposits in accounts maintained with banks within the PRC, Hong Kong and the United States. Total cash (including restricted cash balances) in these banks on March 31,June 30, 2014 and December 31, 2013 amounted to $465.0$ 492.9 million and $431.3$ 431.3 million, including $0.4$ 0.6 million and $2.0$ 2.0 million that were deposited in Shaanxi Coal and Chemical Industry Group Financial Co., Ltd., a related party, respectively. As of March 31,June 30, 2014, $0.2$ 0.1 million cash in the bank was covered by insurance. The Company has not experienced any losses in otherits bank accounts and believes it is not exposed to any risks ondeposits its cash in bank accounts.a number of different banks to minimize its exposure to credit risk.

The Company’s five major customers are all distributors and collectively represented approximately 20.4%31.8% and 20.4%24.4% of the Company’s total sales for the three and six months ended June 30, 2014, respectively. None of the five major customers individually accounted for more than 10% of the total sales for the three months or the six months ended June 30, 2014. The Company’s five major customers represented 27.8% and 23.3% of the Company’s total sales for the three months and six months ended March 31, 2014 andJune 30, 2013, respectively. None of the five major customers individually accounted for more than 10% of the total sales for the three months or the six months ended March 31, 2014 and 2013, respectively. These five major customers accounted for 0% of total accounts receivable, including related parties, as of March 31, 2014 and December 31,June 30, 2013. None of the five major customers accounted for more than 10% of totalhas accounts receivable, including related parties, with the Company as of March 31,June 30, 2014 and December 31, 2013.2013, respectively.

For the three and six months ended March 31,June 30, 2014, and 2013, the Company purchased approximately 43.9%47.4% and 32.6%43.8% of its raw materials from five major suppliers, respectively. OneNone of the five major suppliers individually accounted for more than 10% of the total purchases for the three months ended March 31,June 30, 2014 and noneone of the five major suppliers individually accounted for more than 10%12.7% of the total purchases for the six months ended June 30, 2014. The purchases from the five major suppliers represented 45.0% and 38.4% of the Company’s total purchases for the three months and six months ended June 30, 2013, respectively. Two of the five major suppliers individually accounted for 15.6% and 10.7% of the total purchases for the three months ended March 31,June 30, 2013, respectively, and one of the five major suppliers individually accounted for 11.6% of the total purchases for the six months ended June 30, 2013. These five vendors accounted for 39.6%38.3% and 29.1% of total accounts payable, including related parties, as of March 31,June 30, 2014 and December 31, 2013, respectively. TwoNone of the five major suppliers individually accounted for more than 10% of total accounts payable as March 31,June 30, 2014 and none of the five major suppliers individually accounted for more than 10% of total accounts payable asand December 31, 2013.

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

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Translation adjustments included in accumulated other comprehensive income amounted to $3.6$3.0 million and $0.7 million as of March 31,June 30, 2014 and December 31, 2013, respectively. The balance sheet amounts, with the exception of equity, at March 31,June 30, 2014 and December 31, 2013 were translated at 6.166.15 RMB and 6.11 RMB to $1.00, respectively. The equity accounts were stated at their historical rate. The average translation rates applied to statementthe statements of operations accounts for the three months ended March 31,June 30, 2014 and 2013 were 6.126.16 RMB and 6.286.20 RMB, respectively. The average translation rates applied to the statements of operations for the six months ended June 30, 2014 and 2013 were 6.14 RMB and 6.24 RMB, respectively. Cash flows are also translated at average translation rates for the periods, therefore,periods; as a result,, amounts reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances onin 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.

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

The Company analyzes all financial instruments with featurescarrying value of both liabilities and equity, pursuant to which the Company’s warrants were required to be recorded as a liability atlong term loans-related party approximates its fair value and marked to market eachas of the reporting period.date as their stated interest rates approximate current rates available.

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

On December 13, 2007,The Company analyzes all financial instruments with features of both liabilities and equity, pursuant to which warrants previously issued by the Company entered intowere required to be recorded as a Securities Purchase Agreement with certain institutional investors for the sale of $40 million of Notesliability at fair value and 1,154,958 common stock warrants, initially exercisable at $13.51 per share. On December 24, 2009, the warrant holders entered into an agreement with the Company that reset the exercise price from $13.51marked to $5 per share and increased the number of warrants from 1,154,958 to 3,900,871.market each reporting period. The warrants were accounted for as derivative liabilities and recorded at their fair value, with the change in fair value charged or credited to income each period.  The warrants expired unexercised on May 13, 2013. Prior to their expiration, the fair value of the warrants was estimated using a binomial lattice model, using level 3 inputs.

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

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

The fair value of the profit sharing liability will change each period as a result of (a) any changes in our estimate of Longmen Joint Venture’s projected profits/losses over the remaining term of the Agreement, (b) any change in the discount rate used, based on changes in our current or expected borrowing rate, (c) the change in fair value related to the passage of 7.3%,time and change in the number of future periods over which the present value of future cash flows is estimated and (d) any difference between the previously estimated operating results for the current period and actual results.

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Each period, the Company considers whether the discount rate based on the Company’s average borrowing rate. rate should be adjusted based upon the current and expected future financial condition of the Company. To date, the Company has not considered any adjustment to be necessary based upon, but not limited to, the following assumptions:

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

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 March 31,June 30, 2014 but no major change was deemed necessary to the assumptions used at December 31, 2013. For the threesix months ended March 31,June 30, 2014, the Company recognized a loss on the change in the fair value of the profit sharing liability of $0.05$2.9 million due to a $2.81$5.7 million reduction in the present value discount offset by a $2.76$2.8 million gain resulting from the Asset Pool’s operating results for the threesix months ended March 31,June 30, 2014 being slightly lowerless favorable than previously estimated as of December 31, 2013.

The estimated fair value of the profit sharing liability at March 31,June 30, 2014 is $161.0$164.1 million. Changes in any of the assumptions used to estimate the fair value of the profit sharing liability will change the liability accordingly. If we were to reduce the projected bank borrowingsborrowing rate used to discount the liability to a present value by 1.0% and other factors remained unchanged, our profit sharing liability as of March 31,June 30, 2014 would have been $184.2$187.3 million and we would increase the loss from the change in the fair value of the profit sharing liability by $23.2 million. If we were to reduce the projected selling units and growth in the steel market rate by 1.0% and other factors remained unchanged, our profit sharing liability as of March 31,June 30, 2014 would have been $158.4$162.2 million and we would increasedecrease the gainloss from the change in the fair value of the profit sharing liability by $1.8$1.9 million.

The following table sets forth by level within the fair value hierarchy, the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of March 31,June 30, 2014:

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

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Except for the derivative liabilities related to the profit sharing liability and to the warrants issued by the Company, which expired on May 13, 2013, the Company did not identify any other assets or liabilities that are required to be presented on the balance sheet at fair value. The carrying value of the long term loans-related party approximates its fair value as of the reporting date.

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 requestrequests 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 expensesexpense for early submission request ofrequests for payment amounted to $14.1 million and $10.8 million for the three months ended March 31,June 30, 2014 and 2013 respectively.amounted to $12.8 million and $6.5 million, respectively, and amounted to $26.9 million and $17.3 million, respectively, for the six months ended June 30, 2014 and 2013.

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:

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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,service. Maintenance, repairs and minor renewals are charged directly to expense as incurred. Major additions and bettermentbetterments 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 itstheir 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.

Finite lived intangible assets of the Company are reviewed for impairment if events and circumstances require. The Company considers assets to be impaired if the carrying value exceeds the future projected cash flows from related operations. The Company also re-evaluates the periods of amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives.  As of March 31,June 30, 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 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 hadhas a twenty-year term.

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

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

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

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 rightrights amounting to $2.4 million (RMB 15.0 million), which is amortized over the estimated recoverable reserve of 4.2 million tons.

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

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The table below summarizes Longmen Joint Venture’s investment holdings as of March 31,June 30, 2014 and December 31, 2013.

The table below summarizes General Steel (China)’s investment holding (see Note 2(a) - Basis of presentation) as of March 31,June 30, 2014 and December 31, 2013.

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Total investment income (loss) in unconsolidated subsidiaries amounted to $0.01$0.05 million and $(0.04)$0.13 million for the three months ended March 31,June 30, 2014 and 2013, respectively, and $0.06 million and $0.09 million for the six months ended June 30, 2014 and 2013, respectively, which was included in “Income from equity investments” in the condensed consolidated statements of operations and comprehensive (loss) income.

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

The Company infrequently engages in trading transactions in which the Company acts as an agent between the suppliers and the customers. The trading arrangements are such that the suppliers are the primary obligators,obligors, 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.

In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-08,Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. The new guidance also requires disclosure of the pre-tax income attributable to a disposal of a significant part of an organization that does not qualify for discontinued operations reporting. The amendments in the ASU are effective in the first quarter of 2015 for public organizations with calendar year ends. Early adoption is permitted. The Company does not expect the adoption of this guidance will have a significant impact on the Company’s financial position and results of operations.

GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

In May 2014, the FASB issued ASU No. 2014-09,Revenue from Contracts with Customers: Topic 606. This Update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets, unless those contracts are within the scope of other standards. The guidance in this Update supersedes the revenue recognition requirements in Topic 605,Revenue Recognition and most industry-specific guidance. The core principle of the guidance is that an entity should recognize revenue to illustrate the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.The new guidance also includes a cohesive set of disclosure requirements that will provide users of financial statements with comprehensive information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from a reporting organization’s contracts with customers.This ASU is effective retrospectively for fiscal years, and interim periods within those years beginning after December 15, 2016 for public companies and 2017 for non-public entities. Management is evaluating the effect, if any, on the Company’s financial position and results of operations.

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:

See Note 20“18“Related party transactions and balances” for the nature of the relationship of related parties.

Total interest income for the loans amounted to $0.05 million and $0.07 million for the three months ended June 30, 2014 and 2013, respectively.

Total interest income for the loans amounted to $0.1 million and $0.1 million for the threesix months ended March 31,June 30, 2014 and 2013, respectively.

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

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