UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended December 31, 2013
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 001-33717
General Steel Holdings, Inc.
(Exact Name of Registrant as Specified in its Charter)
Nevada | 41-2079252 |
(State of Incorporation) | (I.R.S. Employer |
Identification Number) |
Level 21, Tower B, Jiaming Center
No. 27 Dong San Huan North Road
Chaoyang District,
Beijing, China, 100020
(Address of Principal Executive Offices, Including Zip Code)
Registrant’s telephone number: +86 (10) 5775 7691
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.001 par value per share | New York Stock Exchange |
(Title of each class) | (Name of each exchange on which registered) |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes¨ Nox
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes¨ Nox
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx No¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesx No¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “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 Act). Yes¨ Nox
The aggregate market value of the voting common equity held by non-affiliates as of June 28, 2013, the last business day of the registrant’s most recently completed second fiscal quarter, based upon the price of $1.00 that was the closing price of the common stock as reported on the New York Stock Exchange under the symbol “GSI” on such date, was approximately $32.6 million. The registrant has no non-voting common equity.
As of August 1, 2014, 58,314,688 shares of common stock, par value $0.001 per share, were outstanding.
EXPLANATORY NOTE
This Annual Report on Form 10-K/A is being filed as Amendment No. 1 to our Annual Report on Form 10-K (“Amendment No. 1”), to amend and restate our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 (the “Original 10-K”), which was originally filed with the Securities and Exchange Commission (the “Commission”) on March 27, 2014. This Amendment No. 1 also amends our previously filed annual reports on Form 10-K for the years ended December 31, 2012 and 2011 and previously filed quarterly reports on Form 10-Q for the interim periods ended September 30, 2013, June 30, 2013, March 31, 2013, September 30, 2012, June 30, 2012, March 31, 2012, September 30, 2011 and June 30, 2011, as a comprehensive filing.
This Amendment No. 1 restates the following items:
· | Part II, Item 7 – Management’s Discussion and Analysis of Financial Condition and Result of Operations; |
· | Part II, Item 8 – Financial Statements and Supplementary Data - Notes 2, 3(c), 3(i), 17 and 26; |
· | Part II, Item 9A – Controls and Procedures; and |
· | Part IV, Item 15 – Exhibits, Financial Statements Schedules |
This Amendment No. 1 includes the previously filed quarterly reports on Form 10-Q for the interim periods ended September 30, 2013, June 30, 2013, March 31, 2013, September 30, 2012, June 30, 2012, March 31, 2012, September 30, 2011 and June 30, 2011 under PART V – FINANCIAL INFORMATION - QUARTERLY and PART VI – OTHER INFORMATION- QUARTERLY and restates the following items:
· | Part V, Item 1 – Financial Statements - Notes 2, 3(c), 3(h), 16, 17 and 26; |
· | Part V, Item 2 – Management’s Discussion and Analysis of Financial Condition and Result of Operations; | |
· | Part V, Item 4 – Controls and Procedures; and |
· | Part VI, Item 6 – Exhibits |
Except for the Items noted above, no other information included in the Original 10-K is being amended or updated by this Amendment No. 1. This Amendment No. 1 continues to describe the conditions as of the date of the Original 10-K and, except as expressly contained herein, we have not updated or modified the disclosures contained in the Original 10-K. Accordingly, this Amendment No. 1 should be read in conjunction with our periodic reports filed with the Commission subsequent to the filing of the Original 10-K, including any amendment to those filings.
This Amendment No. 1 contains restatements related to the classification, display and disclosure of our profit sharing liability (which, since its inception during the interim period ended June 30, 2011, has been accounted for at fair value as a derivative instrument liability), which we concluded to be incomplete and inconsistent after communications with the Staff of the Commission following the Staff’s review of certain of our prior quarterly and annual reports, and based on subsequent communications between the Staff and us. We are amending the previously filed annual and quarterly reports as discussed above that were materially affected by these incomplete and inconsistent disclosures, although the restatements do not impact our previously reported consolidated balance sheets, or consolidated statements of changes in deficiency, nor do the restatements result in adjustment of reported net income/loss in our consolidated statements of operations and comprehensive income (loss) or adjustment of reported cash flows in our consolidated statements of cash flows for any period presented.
A summary of the effects of this restatement on our financial statements included in this Amendment No. 1 is presented under Part II, Item 8 – Financial Statements and Supplementary Data at Note 2, “ Restatement” and Part V, Item 1 – Financial Statements at Note 2, “ Restatement”.
This Amendment No. 1 includes re-issued dual dated audit reports of Friedman, LLP and new officer certifications, which are filed as exhibits to this Amendment No. 1.
TABLE OF CONTENTS
2 |
3 |
Cautionary Statement
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements relate to future events or the Company’s future financial performance. The Company has attempted to identify forward-looking statements by terminology including “anticipates,” “believes,” “expects,” “can,” “continues,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should” or “will” or the negative of these terms or other comparable terminology. Such statements are subject to certain risks and uncertainties, including the matters set forth in this Annual Report on Form 10-K or other reports or documents the Company files with the Securities and Exchange Commission from time to time, which could cause actual results or outcomes to differ materially from those projected. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance or achievements. Undue reliance should not be placed on these forward-looking statements which speak only as of the date hereof. The Company’s expectations are as of the date this Annual Report on Form 10-K is filed, and the Company does not intend to update nor is obligated to update any of the forward-looking statements after the date this Annual Report on Form 10-K is filed to confirm these statements to actual results, unless required by applicable law.
4 |
PART I
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. Our rebar 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 controlled steel companies in the People’s Republic of China (“PRC”). Our mission is to grow our business organically, and through the acquisition of Chinese steel companies, increase profitability and efficiency by utilizing western management practices and advanced production technologies, and the infusion of capital resources.
Our two-pronged growth strategy focuses on a combination of capacity expansion, as well as optimizing operating efficiencies and leverage.
· | We aim to grow revenue by increasing capacity and through continual cooperation and partnerships with leading state-owned enterprises (SOEs). |
· | We aim to drive profitability through improved operational efficiencies and optimization of our cost structure. |
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:
· | 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”); and |
· | Maoming Hengda Steel Co., Ltd. (“Maoming Hengda”). |
Our Company, together with our subsidiaries, majority owned subsidiaries and variable interest entity, is 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.
5 |
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) leased its facility located at No. 1, Tonga Street, Daqiuzhuang Town, Jinghai County, Tianjin City to the Lessee (the “Lease Agreement”). The Lease Agreement provides approximately 776,078 square feet of workshops, land, equipment and other facilities to the Lessee and allows our Company to reduce overhead costs while providing a recurring monthly income stream resulting from payments due under the lease. The initial term of the Lease Agreement was from January 1, 2010 to December 31, 2011 and the monthly base rental rate due to General Steel (China) was approximately $0.2 million (RMB 1.7 million). On July 28, 2011, General Steel (China) signed a supplemental agreement with the Lessee to extend the lease for an additional five years to December 31, 2016. However, due to current steel market conditions, the Lessee has informed us that it did not intend to continue with the lease at June 30, 2012. There was no penalty for early termination. Subsequently, General Steel (China) leased parts of its facilities to Tianjin Shuangjie Liansheng Rolled Steel Co., Ltd. for a monthly payment of $0.1 million (RMB 0.5 million). The lease expires in May 2021. A write-down in the carrying value of property, plant and equipment in relation to this event has been assessed and an impairment of $5.4 million (RMB 35.1 million) was recorded in the selling, general and administrative expenses in the second quarter of 2011 and an additional $3.9 million (RMB 24.3 million) was recorded in the selling, general and administrative expenses for the year ended December 31, 2012. Management re-evaluates the fair value of its long-term assets on annual basis, or upon a triggering event which would require an assessment sooner.
Baotou Steel - General Steel Special Steel Pipe Joint Venture Company Limited
On April 27, 2007, General Steel (China) and Baotou Iron and Steel Group Co., Ltd. (“Baotou Steel”) entered into an Amended and Restated Joint Venture Agreement, amending the Joint Venture Agreement entered into on September 28, 2005, to increase General Steel (China)’s ownership interest in the related joint venture to 80%. The joint venture’s name is Baotou Steel - General Steel Special Steel Pipe Joint Venture Company Limited, a Chinese limited liability company (“Baotou Steel Pipe Joint Venture”). Baotou Steel Pipe Joint Venture obtained its business license from governmental authorities in the PRC on May 25, 2007, and commenced operations in July 2007. Baotou Steel Pipe Joint Venture has four production lines capable of producing 100,000 metric tons of double spiral-weld pipes primarily used in the energy sector to transport oil and steam. These pipes have a diameter ranging from 219mm to 1240mm, a wall thickness ranging from 6mm to 13mm, and a length ranging from 6m to 12m. Presently, Baotou Steel Pipe Joint Venture sells its products using an internal sales force to customers in the Inner Mongolia Autonomous Region and the northwest region of the PRC.
Shaanxi Longmen Iron and Steel Co., Ltd
Effective June 1, 2007, through General Steel (China) and Tianjin Qiu Steel Investment Co., Ltd. (“Qiu Steel”), a 99% owned subsidiary of General Steel (China), we entered into a Joint Venture Agreement with Shaanxi Longmen Iron & Steel Group Co., Ltd. (“Long Steel Group”) to form Shaanxi Longmen Iron and Steel Co., Ltd. (“Longmen Joint Venture”). Through General Steel (China) and Qiu Steel, we invested approximately $39.3 million in cash and collectively held a 60% ownership interest in Longmen Joint Venture until April 29, 2011, when a 20-year Unified Management Agreement (the “Unified Management Agreement”) was entered into between our Company, Longmen Joint Venture, Shaanxi Coal and Shaanxi Steel. Longmen Joint Venture was determined as a Variable Interest Entity (“VIE”) and we are the primary beneficiary.
Long Steel Group, located in Hancheng city, Shaanxi Province, in China’s Western region, was founded in 1958 and incorporated in 2002, and is owned by a state owned entity through Shaanxi Steel. Long Steel Group holds the remaining 40% ownership interest in Longmen Joint Venture and operates as a fully-integrated steel production facility. Fewer than 10% of steel companies in China have fully-integrated steel production capabilities.
Currently, Longmen Joint Venture has five branch offices, four consolidated subsidiaries/VIE and five entities in which it has a noncontrolling interest. It employs approximately 8,700 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 177 vehicles and provides transportation services exclusively to Longmen Joint Venture.
Longmen Joint Venture’s rebar products are categorized within the steel industry as “longs” (in reference to their shape). Rebar is generally considered a regional product because its weight and dimension make it ill-suited for cost-effective long-haul ground transportation. By our estimates, the market demand for rebar in Shaanxi Province is six to eight million metric tons per year. Slightly more than half of this demand comes from Xi’an, the capital of Shaanxi Province, located 180km from Longmen Joint Venture’s main steel production site. Currently, we estimate that we have approximately a 72% share of the Xi’an market for rebar.
An established regional network of approximately one hundred twenty-eight distributors, together with smaller distributors and three sales offices sell Longmen Joint Venture’s products. All products are sold under the registered brand name of “Yulong”, which has strong regional recognition and awareness. Rebar and billet products carry ISO 9001 and 9002 certification and other of Longmen Joint Venture’s products have won national quality awards. Products produced at the facility have been used in the construction of the Yangtze River Three Gorges Dam, the Xi’an International Airport, the Xi’an city subway system and the Xi Luo Du and Xiang Jia Ba hydropower projects.
6 |
On September 24, 2007, Longmen Joint Venture acquired a 74.9% ownership interest in Longmen Iron and Steel Group Environmental Protection Industry Development Co., Ltd. (“Longmen EPID”). At the same time, Longmen Joint Venture entered into an equity transfer agreement with Long Steel Group to acquire a 36% ownership interest in its subsidiary, Longmen Iron and Steel Group Co., Ltd. Hualong Fire Retardant Materials Co., Ltd. (“Hualong”). Longmen Joint Venture paid $0.4 million (RMB 3.3 million) in exchange for the ownership interest and is the largest shareholder in Hualong. Hualong’s facility produces fire-retardant materials used in various steel making processes.
In January 2010, Longmen Joint Venture completed its acquisition of the remaining 25.1% interest in Longmen EPID pursuant to an equity transfer agreement with Shaanxi Fangxin Industrial Co., Ltd. (“Shaanxi Fangxin”), the other shareholder of Longmen EPID, for $1.3 million (RMB 8.7 million). Longmen EPID then became a branch of Longmen Joint Venture.
From June 2009 to March 2011, we worked with Shaanxi Steel to build new iron and steel making facilities, including two 1,280 cubic meter blast furnaces, two 120 metric ton converters, one 400 square meter sintering machine and some auxiliary systems. As a result, Longmen Joint Venture incurred certain costs of construction as well as economic losses on suspended production of certain small furnaces and other equipment to accommodate the construction of the new equipment, on behalf of Shaanxi Steel.
Dismantling of certain assets and a sub-lease of Longmen Joint Venture’s land associated with the construction by Shaanxi Steel began in June 2009. At the beginning 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 agreements between the two parties on December 20, 2010. To compensate us, in the fourth quarter of 2010, Shaanxi Steel reimbursed Longmen Joint Venture $11.1 million (RMB 70.1 million) relating to the value of assets dismantled and rent under a 40-year property sub-lease that was entered into by the parties in June 2009, and $29.0 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 $14.2 million (RMB 89.5 million) and $14.2 million (RMB 89.3 million), respectively, for trial production costs related to the new equipment.
During the period from June 2010 to March 2011, as construction progressed and certain of the assets came online, Longmen Joint Venture used the assets free of charge to produce saleable units of steel products. As such, the cost of using these assets, and therefore the fair value of the free rent received, was imputed with reference to what the depreciation charge would have been on these assets had they been owned or under capital lease to Longmen Joint Venture during the period. Costs of $7.0 million (RMB 43.9 million) each year were deferred and will be recognized over the term of the land sub-lease similar to the other charges and credits related to the construction of these assets
The amount of reimbursement was deferred as lease income and is being recognized, and amortized to income over the remaining terms of the 40-year sub-lease. For the years ended December 31, 2013 and 2012, we recognized lease income of $2.1 million and $2.1 million, respectively. As of December 31, 2013 and 2012, the deferred lease income on the land sub-lease was $77.4 million and $77.2 million, respectively. The remaining life of amortization is 35.3 years as of December 31, 2013.
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 is the parent company of Shaanxi Steel, a state-owned entity. Under the terms of the Unified Management Agreement, all manufacturing machinery of Longmen Joint Venture and $587.3 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 (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 February 2014, Shaanxi Steel agreed that it will not demand capital lease payments from Longmen Joint Venture until February 2017. In March 2013, Shaanxi Coal agreed to provide bank loan guarantees to Longmen Joint Venture in the amount of $320.9 million (RMB 2.0 billion).
7 |
Longmen Joint Venture pays Shaanxi Steel for the use of the newly constructed iron and steel making facilities an amount that 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 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, is accounted for as such by Longmen Joint Venture. See Note 3 - “Summary of significant accounting policies”, Note 16 - “Capital lease obligations” and Note 17 - “Profit sharing liability” of the Notes to Consolidated Financial Statements included herein.
In November 2010, we brought online a 1,200,000 metric ton capacity rebar production line, which was renovated based on an existing 800,000 metric ton capacity rebar production line. In July 2011, we brought online a 1,000,000 metric ton capacity high speed wire production line. These two newly installed production lines were both relocated from the Maoming Hengda (as defined below) facility and consume less energy when running at maximum efficiency 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 is 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 which targeted customers in Guangxi Province and the western region of Guangdong.
To take advantage of a stronger market demand in Shaanxi Province, in the second quarter 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 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 three installments to support the construction of the rebar production line for Maoming Hengda, and charged Maoming Hengda interest at a rate of 10% annually. The interest expense incurred was recorded in finance expenses.
On December 15, 2013, Maoming Hengda entered into a lease agreement with Zhongshan Baohua Rebar Factory, with which Maoming Hengda leased the 400,000 ton capacity rebar production line and various other buildings and equipment to Zhongshan Baohua Rebar Factory, for an annual payment of $1.2 million (RMB 7.2 million) for eight years between March 2014 and February 2022.
8 |
Production Capacity Information Summary by Subsidiaries
Annual Production Capacity (metric tons) | General Steel (China)(1) | 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.
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 year ended December 31, 2013, approximately 22.1% of our sales were to five customers. We believe that revenue derived from our current and future large customers will continue to represent a significant portion of our total revenue.
Moreover, our success will depend in part upon our ability to obtain orders from new customers, as well as the financial condition and success of our customers and the general economic conditions in China.
Demand for our Products
For the years ended December 31, 2013 and 2012, rebar, our major product, comprised of more than 99% and 99% of our sales, respectively. Overall, domestic economic growth is an important driver of demand for our major product, especially from construction and infrastructure projects.
At Longmen Joint Venture, growth in regional construction and infrastructure projects drives demand for our products. According to the 12th Five Year National Economic and Social Development Plan (“NESDP”) (2011-2015), development of China’s western region is one of China’s top five economic priorities. Shaanxi Province, where Longmen Joint Venture is located, has been designated as a focal point for development in the Western region, and Xi’an, the provincial capital, has been designated as a focal point for this development in China. Longmen Joint Venture is 180 kilometers from Xi’an and it does not have a major competitor within a 250 km radius.
The Western region of China, where our major sales market is located, has experienced a higher rate of growth than other Chinese regions in recent years. Compared to an increase of 7.7% for the national GDP, a GDP increase of 11% was reported by Shaanxi Province in 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%. We have a sales office in Chengdu City, Sichuan Province to meet the increasing demand for the production of steel.
According to the Shaanxi provincial government, the total fixed asset investment for the Shaanxi Province was approximately $257.4 billion (RMB 1.59 trillion) for the year ended December 31, 2013, an increase of 24.1% over the same period in 2012.
At the end of June 2009, the State Council Office announced that it approved the Guanzhong-Tianshui Economic Zone development program. This program covers the development of two western provinces and seven cities from 2009 to 2020.
In addition, the Guanzhong-Tianshui Economic Zone will concentrate on the development of the Xi’an area. The metropolitan area construction program focuses on the cities of Xi’an, Xianyang, and their surrounding areas, covering up to 12,000 square kilometers, including the construction of railways, highways, subways, airport expansion and newly developed areas. Under this program, the Shaanxi provincial government has announced that it will build approximately 4,500 kilometers of railway with an investment of approximately $40.2 billion (RMB 260 billion) by 2015 and 8,080 kilometers of highway by 2020. The infrastructure and construction projects provide strong and stable demand for our steel products in this area, in which we have over 70% of the market share.
9 |
In January 2011, the Shaanxi provincial government announced that it will invest approximately $12.2 billion (RMB 80 billion) in the construction of hydro projects, which is three times the amount invested during the 11th Five Year National Economic and Social Development Plan. In addition to hydro projects, according to the central government, 16,000 total kilometers of high speed railway will be built by 2020.
In May 2011, the central government passed the Cheng-Yu Economic Zone Plan focusing on Chongqing City and Sichuan Province, covering 206,000 square kilometers, to further accelerate the development of the western region of China. We anticipate that in the near future, the demand for our products will increase in those areas, and we expect that our expanded production capacity will be able to successfully meet the increase in demand. Furthermore, we have a sales office located in Chengdu to help facilitate such increased demand.
In February 2012, the government approved the Western Development 12th Five Year Plan, which continues the efforts to develop the Western areas. The Plan is centered on the infrastructure and construction, highlighted by the development of economic zones, construction of roads/railway and hydro projects, which drive the local demand for steel products.
In February 2014, National Development and Reform Commission (“NDRC”) announced nine focal points of the western development, which will speed up the major infrastructure construction in the western areas, including the construction of railway, highway and hydro-projects.
We anticipate strong demand for our products driven by these and many other construction and infrastructure projects. We believe there will be sustained regional demand for several years as both the central and provincial governments continue to drive western region development efforts.
At Baotou Steel Pipe Joint Venture, energy sector growth, which spurs the need to transport oil, natural gas and steam, drives demand for spiral-weld steel pipe. Presently, demand is fueled by smaller pipeline projects and municipal energy infrastructure projects within the Inner Mongolia Autonomous Region.
Supply of Raw Materials
The primary raw materials we use for steel production are iron ore, coke, hot-rolled steel coil and steel billets. Baotou Steel Pipe Joint Venture uses hot-rolled steel coil as its main raw material. Longmen Joint Venture uses iron ore and coke as its main raw materials. Maoming Hengda uses steel billets as its main raw material. Iron ore is the main raw material used to produce hot-rolled steel coil and steel billets. Therefore, the prices of iron ore and coke are the primary raw material cost drivers for our products.
Iron Ore
Longmen Joint Venture has 7 million tons of annual crude steel production capacity. At Longmen Joint Venture, approximately 77% of production costs are associated with raw materials, with iron ore being the largest component.
According to the China Iron and Steel Association, approximately 60% of the Chinese domestic steel industry’s demand for iron ore must be filled by imports. At Longmen Joint Venture, we purchase iron ore from four primary sources: Mulonggou mine (owned by Longmen Joint Venture), Daxigou mine (owned by Long Steel Group, our partner in Longmen Joint Venture), surrounding local mines and mines located abroad. According to the terms of Longmen Joint Venture‘s Agreement with the Long Steel Group, we have a first right of refusal for sales from the Daxigou mine. We presently purchase all of the iron ore produced by this mine.
Coke
Coke, produced from metallurgical coal (also known as coking coal), is our second most consumed raw material, after iron ore. It requires approximately 550kg to 600kg of coke to make one metric ton of crude steel.
Under the terms of the Unified Management Agreement, our partner, Shaanxi Coal, has committed to providing coke and coal to us at a cost not higher than the market price.
10 |
Our Longmen Joint Venture facility is located in the center of China’s coal belt. We source all coke used at Longmen Joint Venture from the town in which Longmen Joint Venture is located. This ensures a dependable, local supply and minimum transportation costs.
The sources and/or our top five major suppliers of our raw materials for the year ended December 31, 2013 are as follows:
Name of the Major Suppliers | Raw Material Purchased | % of Total Raw Material Purchased | Relationship with Company | |||||
Longgang Group Import & Export Co., Ltd. | Coke | 12.0 | % | Related Party | ||||
Shaanxi Longmen Coal Chemical Industry Co., Ltd. | Coke | 9.0 | % | Third Party | ||||
Long Steel Group | Iron Ore | 8.3 | % | Related Party | ||||
Shaanxi Haiyan Coal Chemical Industry Co., Ltd. | Coke | 7.7 | % | Related Party | ||||
Tianwu General Steel Material Trading Co., Ltd. | Iron Ore | 3.2 | % | Related Party | ||||
Total | 40.2 | % |
Industry Environment
Despite demand growth experienced during 2010 and 2011, the overall nationwide steelmaking capacity still exceeds steel demand. There is significant over-capacity in the Chinese steel sector which is putting pressure on operators’ profitability which has become the most significant challenge in the steel manufacturing business. Chinese crude steel production was 712.86 million tons from January to November in 2013, an increase of 7.82% compared to the same period last year, while the total consumption of crude steel reached 666.50 million tons from January to November in 2013, increased by 7.36% from the same period last year, according to the China Iron and Steel Association.
For steelmakers, operating performance depends on the volatility of the cost of raw materials. The shortage of these raw materials in the market has allowed suppliers of iron ore and metallurgical coal to rebuild the pricing mechanisms through the shift from annual to shorter-term price contracts. This has created numerous challenges for steelmakers as they must now deal with volatility in raw material prices, as well as maintain margins with fluctuating demand. Over the past few years, we have witnessed perseverance in steel prices that has given iron ore producers an opportunity to increase the prices in the next contract; however the reverse may not be true as steel companies cannot always pass on the rise in iron ore prices to end consumers due to the market overcapacity and fragmentation.
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 December 2011, the central government published an industry target to eliminate 96 million tons of inefficient iron and steel capacity during the 12th five-year plan. The central government had successfully reduced obsolete iron production capacities of 31.9 million tons 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 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.
11 |
Since 2013, the government has exerted more stringent environment protection policy on the steel industry. In January 2014, the Ministry of Industry and Information Technology of the People's Republic of China (the "MIIT") announced a List of Enterprises Fulfilling the Iron and Steel Industry Specification (the "List"). The List includes a highly-selected group of large and medium steel manufacturers that have met or exceeded more stringent national requirements and standards on product quality, environmental protection, energy consumption, workmanship and equipment, production scale, as well as work safety and social responsibility. The MIIT will collaborate with China's other governmental agencies to provide support to the List's members and to speed up the steel industry's restructuring and consolidation. Steel makers omitted from the List will most likely face higher electricity costs, more restrictive administrative measures, and adverse effects of forceful regulations intent on reducing the nation's overcapacity. Longmen Joint Venture, the major facility of General Steel, has been included on the List as the only enterprise in China’s Shaanxi Province.
Intellectual Property Rights
“Qiu Steel” is the registered trademark under which we sell hot-rolled carbon and silicon steel sheets products produced at General Steel (China). The “Qiu Steel” logo has been registered with the China National Trademark Bureau under No. 586433. “Qiu Steel” is registered under the GB 912-89 national quality standard and certified under the National Quality Assurance program.
“Baogang Tongyong” is the trademark under which we sell spiral-weld steel pipes products produced at Baotou Steel Pipe Joint Venture. This trademark is registered with China National Trademark Bureau.
“Yu Long” is the registered trademark under which we sell rebar and high-speed wire products produced in Longmen Joint Venture. The trademark is registered under the ISO9001:2000 international quality standard.
“Heng Da” is the registered trademark under which we sell high-speed wire and rebar products produced at our Maoming facility. The trademark is registered under the ISO9001:2000 international quality standard.
Employees
As of December 31, 2013, we had approximately 9,050 full-time employees.
Executive Officers of the Registrant
The following sets forth certain information as of March 25, 2014 concerning our executive officers.
Name | Age | Title | ||
Zuosheng Yu | 49 | Chairman and Chief Executive Officer | ||
John Chen | 43 | Chief Financial Officer |
Mr. Zuosheng Yu,age 49, Chairman of the Board of Directors. Mr. Yu joined our Company in October 2004 and became Chairman of the Board at that time. He also serves as our Chief Executive Officer. Since February 2001, he has been President and Chairman of the Board of Directors of Beijing Wendlar Investment Management Group, Beijing, China. Mr. Yu graduated in 1985 from Sciences and Engineering Institute, Tianjin, China. In July 1994, he received a Bachelor’s degree from Institute of Business Management for Officers. Mr. Yu received the title of “Senior Economist” from the Committee of Science and Technology of Tianjin City in 1994. In July 1997, he received an MBA degree from the Graduate School of Tianjin Party University. Since April 2003, Mr. Yu has held a position as a member of China’s APEC (Asia Pacific Economic Co-operation) Development Council.
Mr. John Chen, age 43, Director. Mr. Chen joined our Company in May 2004 and was elected as a director in March 2005. He also serves as our Chief Financial Officer. From August 1997 to July 2003, he served as a senior accountant at Moore Stephens, Wurth, Frazer and Torbet, LLP in Los Angeles, California. Mr. Chen graduated from Norman Bethune University of Medical Science, Changchun City, Jilin Province, China in September 1992. He received a B.S. degree in accounting from California State Polytechnic University, Pomona, California, U.S. in July 1997. He currently also serves on the board of directors of China Carbon Graphite Group, Inc. (OTCBB: CHGI), SGOCO Group, Ltd. (NASDAQ: SGOC), and China HGS Real Estate Inc. (NASDAQ: HGSH).
12 |
Our business, financial condition and results of operations are subject to various risks, including those discussed below, which may affect the value of our securities. The risks discussed below are those that we believe are currently the most significant, although additional risks not presently known to us or that we currently deem less significant may also impact our business, financial condition and results of operations, perhaps materially.
Risks Related to Our Business
We face substantial competition which, among other things, may lead to price pressure and adversely affect our sales.
We compete with other market players on the basis of product quality, responsiveness to customer needs and price. There are two types of steel and iron companies in China: state-owned enterprises (“SOEs”) and privately owned companies.
Criteria important to our customers when selecting a steel supplier include:
• | Quality; |
• | Price/cost competitiveness; |
• | System and product performance; |
• | Reliability and timeliness of delivery; |
• | New product and technology development capability; |
• | Excellence and flexibility in operations; |
• | Degree of global and local presence; |
• | Effectiveness of customer service; and |
• | Overall management capability. |
We compete with both SOEs and privately owned steel manufacturers. While we believe that our price and quality are superior to other manufacturers, many of our competitors are better capitalized, more experienced, and have deeper ties in the Chinese marketplace. We consider there to be the following ten major competitors of similar size, production capability and product line in the marketplace competing against our four operating subsidiaries as indicated:
• Competitors of General Steel (China) include: Tianjin No. 1 Rolling Steel Plant, Tianjin Yinze Metal Sheet Plant and Tangshan Fengrun Metal Sheet Plant;
• Competitors of Longmen Joint Venture include: Shanxi Haixin Iron and Steel Co., Ltd. and Gansu Jiuquan Iron and Steel Co., Ltd.;
• Competitors of Baotou Steel Pipe Joint Venture include: Tianjin Bo Ai Steel Pipe Co., Hebei Cangzhou Zhong Yuan Steel Pipe Co., and Shanxi Taiyuan Guo Lian Steel Pipe Co.; and
• Competitors of Maoming Hengda include: Guangdong Shao Guan Iron and Steel Group and Zhuhai Yue Yu Feng Iron and Steel Co., Ltd.
In addition, with China’s entry into the World Trade Organization and China’s agreements to lift many of the barriers to foreign competition, we believe that competition will increase as a whole with the entry of foreign companies into this market. This may limit our opportunities for growth, lead to price pressure and reduce our profitability. We may not be able to compete favorably and this increased competition may harm our business, our business prospects and results of operations.
Our inability to fund our capital expenditure requirements may adversely affect our growth and profitability.
Our continued growth is dependent upon our ability to raise additional capital from outside sources. Our strategy is to grow through mergers, joint ventures and acquisitions targeting SOE steel companies and selected entities we believe have outstanding potential. Our growth strategy will require us to obtain additional financing through capital markets. In the future, we may be unable to obtain the necessary financing on a timely basis and on favorable terms, if at all, and our failure to do so may weaken our financial position, reduce our competitiveness, limit our growth and reduce our profitability. Our ability to obtain acceptable financing at any given time may depend on a number of factors, including:
• Our financial condition and results of operations;
• The condition of the PRC economy and the industry sectors in which we operate; and
• Conditions in relevant financial markets in the United States, the PRC and elsewhere in the world.
13 |
Disruptions in world financial markets and the resulting governmental action of the United States and other countries could have a material adverse impact on our ability to obtain financing, our results of operations, financial condition and cash flow and could cause the market price of our common stock to decline.
The credit markets worldwide and in the United States have experienced significant contraction, de-leveraging and reduced liquidity, and the United States government and foreign governments have either implemented or are considering a broad variety of governmental action and/or new regulation of the financial markets. Securities and futures markets and the credit markets are subject to comprehensive statutes, regulations and other requirements.
The uncertainty surrounding the future of the global credit markets has resulted in reduced access to credit worldwide. Major market disruptions, the current adverse changes in global market conditions, and the regulatory climate in the United States and worldwide may adversely affect our business or impair our ability to borrow funds as needed. The current market conditions may last longer than we anticipate. These recent and developing economic and governmental factors may have a material adverse effect on our results of operations, financial condition or cash flows and could cause the price of our common stock to decline significantly.
We have made and may continue to make acquisitions which could divert management's attention, cause ownership dilution to our stockholders, or be difficult to integrate, which may adversely affect our financial results.
We have made a number of acquisitions, and it is our current plan to continue to acquire companies and technologies that we believe are strategic to our future business. Integrating newly acquired businesses or technologies could put a strain on our resources, could be costly and time consuming, and might not be successful. Such acquisitions could divert our management's attention from other business concerns. In addition, we might lose key employees while integrating new organizations. Acquisitions could also result in customer dissatisfaction, performance problems with an acquired company or technology, potentially dilutive issuances of equity securities or the incurrence of debt, assumption or incurrence of contingent liabilities, possible impairment charges related to goodwill or other intangible assets or other unanticipated events or circumstances, any of which could harm our business. We might not be successful in integrating any acquired businesses, products or technologies, and might not achieve anticipated revenues and cost benefits.
We may not be able to effectively control and manage our growth.
If our business and markets grow and develop, it will be necessary for us to finance and manage such an expansion in an orderly fashion. This growth will lead to an increase in the responsibilities of existing personnel, the hiring of additional personnel and expansion of our scope of operations. It is possible that we may not be able to obtain the required financing under terms that are acceptable to us or hire additional personnel to meet the needs of our expansion.
Our business, revenues and profitability are dependent on a limited number of large customers.
Our revenue is dependent, in large part, on significant contracts with a limited number of large customers. For the year ended December 31, 2013, approximately 22.1% of our sales were to five customers. We believe that revenue derived from our current and future large customers will continue to represent a significant portion of our total revenue. Our inability to continue to secure and maintain a sufficient number of large contracts or the loss of, or significant reduction in purchases by, one or more of our major customers would have the effect of reducing our revenues and profitability.
Moreover, our success will depend in part upon our ability to obtain orders from new customers, as well as the financial condition and success of our customers and general economic conditions in China.
Steel consumption is cyclical and worldwide overcapacity in the steel industry and the availability of alternative products have resulted in intense competition, which may have an adverse effect on profitability and cash flow.
Steel consumption is highly cyclical and follows general economic and industrial conditions both worldwide and in regional markets. The steel industry has historically been characterized by an excess in the world supply, which has led to substantial price decreases during periods of economic weakness. We currently have an annual steel production capacity of 7 million metric tons of crude steel and if the market for steel cannot support such production levels, the price for our products may go down. In addition, future economic downturns could decrease the demand for our products. Substitute materials are increasingly available for many steel products, which further reduces demand for steel.
14 |
We may not be able to pass on to customers the increases in the costs of our raw materials, particularly iron-ore, coke, steel billets and steel coil.
The major raw materials that we purchase for production are iron-ore, coke, steel billets and steel coil. The price and availability of these raw materials are subject to market conditions affecting supply and demand. Our financial condition or results of operations may be impaired by further increases in raw material costs to the extent we are unable to pass those increases to our customers. In addition, if these materials are not available on a timely basis or at all, we may not be able to produce our products and our sales may decline.
The price of steel may continue declining due to overproduction by the Chinese steel companies.
According to the China Iron and Steel Association, there are approximately 800 to 1,000 steel companies in China. Each steel company has its own production plan. The Chinese government released new guidance on the steel industry to encourage consolidation within the fragmented steel sector to mitigate problems of low-end repetitive production and inefficient use of resources. The current overproduction may not be solved by these measures enacted by the Chinese government. If the current overproduction continues, our product shipments could decline, our inventory could build up and eventually we may be required to decrease our sales price, which may decrease our profitability.
Disruptions to our manufacturing processes could adversely affect our operations, customer service and financial results.
Steel manufacturing processes are dependent on critical steel-making equipment, such as furnaces, continuous casters, rolling mills and electrical equipment (such as transformers), and such equipment may become temporarily inoperable as a result of unanticipated malfunctions or other events, such as fires or furnace breakdowns. Although our manufacturing plants have not experienced plant shutdowns or periods of reduced production as a result of such equipment failures or other events, we may experience such problems in the future. To the extent that lost production as a result of such a disruption could not be recovered by unaffected facilities, such disruptions could have an adverse effect on our operations, customer service and financial results.
Because we are a holding company with substantially all of our operations conducted through our subsidiaries, our performance will be affected by the performance of such subsidiaries.
We have no operations other than General Steel (China), Baotou Steel Pipe Joint Venture, Longmen Joint Venture, Maoming Hengda, and Tianwu Joint Venture, and our principal assets are our investments in these subsidiaries and VIE. As a result, we are dependent upon the performance of our subsidiaries and VIE and we will be subject to the financial, business and other factors affecting them as well as general economic and financial conditions. As substantially all of our operations are and will be conducted through our subsidiaries and VIE, we will be dependent on the cash flow of our subsidiaries to meet our obligations.
Because virtually all of our assets are and will be held by operating subsidiaries and VIE, the claims of our stockholders will be structurally subordinate to all existing and future liabilities and obligations, and trade payables of such subsidiaries and VIE. In the event of our bankruptcy, liquidation or reorganization, our assets and those of our subsidiaries will be available to satisfy the claims of our stockholders only after all of our subsidiaries’ and VIE’s liabilities and obligations have been paid in full.
Because we have entered into a significant number of related party transactions through the course of our routine business operations, there is a risk that we may not be able to control the valuation of such transactions, which could then adversely impact our profitability.
In the course of our normal business, we have purchased raw materials and supplies from our related parties and also engaged in sales of our products to our related parties. Because such related party transactions may not always be completed at arm’s length due to their nature, we may not be able to control the valuation of such transactions and as a result, there is a risk that the value of such related party transactions exceeds market value, which could ultimately impact our profitability.
We depend on bank financing for our working capital needs.
We have various financing facilities which are due on demand or within one year. So far, we have not experienced any difficulties in repaying such financing facilities. However, we may in the future encounter difficulties in repaying or refinancing such financings on time and may face severe difficulties in our operations and financial position.
15 |
Our bank loans may not be renewed if certain covenants of the loan agreements are not met.
We have various financing facilities with banks which are due on demand or within one year. So far, we have not experienced any difficulties in repaying such financing facilities. As of December 31, 2013, we have not satisfied our financial covenants stipulated by certain loan agreements because of debt to asset ratios. Furthermore, we are party to loan agreements with cross default clause where any breach of other loan covenants will automatically result in default of such loans. According to the loan agreements, the bank could request more collateral or guarantees if the covenant is not satisfied or request early repayment of the loan if we cannot remedy the default within a period of time. As of today, we have not received any notice from the banks requesting more collateral, guarantees or early repayment of our short term loans due to a breach. However, we may in the future encounter difficulties in repaying or refinancing such loans on time, or providing more collateral or guarantees to the banks or making early repayment of our loans.
We depend on our affiliates financing for our working capital needs. We have various types of financing with our affiliates.
We rely on Mr. Zuosheng Yu for important business leadership.
We depend, to a large extent, on the abilities and operations of our current management team. However, we have a particular reliance upon Mr. Zuosheng Yu, our Chairman, Chief Executive Officer and significant shareholder, for the direction of our business and leadership in our growth efforts. The loss of the services of Mr. Yu, for any reason, may have a material adverse effect on our business and prospects. We cannot guarantee that Mr. Yu will continue to be available to us, or that we will be able to find a suitable replacement for Mr. Yu on a timely basis.
Failure to achieve and maintain effective internal control over financial reporting could have a material adverse effect on our business, results of operations and the trading rice of our common stock. Also, we are exposed to potential risks from regulations requiring companies to evaluate controls under Section 404 of the Sarbanes-Oxley Act of 2002.
We are exposed to potential risks from regulations requiring companies to evaluate controls under Section 404 of the Sarbanes-Oxley Act of 2002. Ensuring that we have adequate internal financial and accounting controls and procedures in place to produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. Failure on our part to have effective internal financial and accounting controls, including the material weakness, had and could in the future cause our financial reporting to be unreliable, had and could in the future have a material adverse effect on our business, operating results, and financial condition, and had and could in the future cause the trading price of our common stock to fall dramatically.
Under the supervision and with the participation of our management, we have and will continue to evaluate our internal controls systems in order to allow management to report on our internal controls, as required by Section 404 of the Sarbanes-Oxley Act. We have and will continue to perform the system and process evaluation and testing required in an effort to comply with the management certification and auditor attestation requirements of Section 404. As a result, we have and will continue to incur additional expenses and a diversion of management’s time. If we are not able to meet the requirements of Section 404 in a timely manner or with adequate compliance, we might be subject to sanctions or investigation by regulatory authorities, such as the SEC or the New York Stock Exchange. Any such action could adversely affect our financial results and the market price of our stock.
We do not presently maintain product liability insurance in China, and our property and equipment insurance does not cover the full value of our property and equipment, which leaves us with exposure in the event of loss or damage to our properties or claims filed against us.
We currently do not carry any product liability or other similar insurance in China. We cannot assure you that we would not face liability in the event of the failure of any of our products.
We have purchased automobile insurance with third party liability coverage for our vehicles. In addition, we have purchased property insurance to cover production equipment. Except for property and automobile insurance, we do not have other insurance such as business liability or disruption insurance coverage for our operations in China. In the event of a significant product liability claim or other uninsured event, our financial results and the price of our common stock may be adversely affected.
16 |
Risks Related to Operating Our Business in China
We face the risk that changes in the policies of the Chinese government could have significant impact upon the business we may be able to conduct in China and the profitability of such business.
The economy in China is transitioning from a planned economy to a market oriented economy, subject to five-year and annual plans adopted by the government that set forth national economic development goals. Policies of the Chinese government can have significant effects on the economic conditions of China. The Chinese government has confirmed that economic development will follow a model of a market economy under socialism. Under this direction, we believe that China will continue to strengthen its economic and trading relationships with foreign countries and business development in China will follow market forces. While we believe that this trend will continue, there can be no assurance that such will be the case. A change in policies by the Chinese government could adversely affect our interests through, among other factors: changes in laws; regulations or the interpretation thereof; confiscatory taxation; restrictions on currency conversion; imports or sources of supplies; or the expropriation or nationalization of private enterprises. Although the Chinese government has been pursuing economic reform policies for approximately two decades, the Chinese government may significantly alter such policies, especially in the event of a change in leadership, social or political disruption, or other circumstances affecting China’s political, economic and social climate.
The PRC laws and regulations governing our current business operations and contractual arrangements are uncertain, and if we are found to be in violation of such laws and regulations, we could be subject to sanctions, which along with, any changes in such laws and regulations may have a material and adverse effect on our business.
There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including but not limited to the laws and regulations governing our business, or the enforcement and performance of our arrangements with customers in the event of the imposition of statutory liens, bankruptcy, or criminal proceedings against us or our customers. Along with our subsidiaries, we are considered foreign persons or foreign funded enterprises under PRC law, and, as a result, we are required to comply with certain PRC laws and regulations. These laws and regulations are relatively new and may be subject to future changes, and their official interpretation and enforcement may involve substantial uncertainty. The effectiveness of newly enacted laws, regulations or amendments may be delayed, resulting in detrimental reliance by foreign investors. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively. In addition, the Chinese authorities retain broad discretion in dealing with violations of laws and regulations, including levying fines, revoking business licenses and requiring actions necessary for compliance. In particular, licenses, permits and beneficial treatment issued or granted to us by relevant governmental bodies may be revoked at a later time under contrary findings of higher regulatory bodies. We cannot predict what effect the interpretation of existing or new PRC laws or regulations may have on our businesses. We may be subject to sanctions, including fines, and could be required to restructure our operations. Such restructuring may not be deemed effective or may encounter similar or other difficulties. As a result of these substantial uncertainties, there is a risk that we may be found in violation of current or future PRC laws or regulations.
A slowdown or other adverse developments in the Chinese economy may materially and adversely affect our customers, demand for our services and our business.
Substantially all of our assets, and the assets of our operating subsidiaries and VIE, are located in China and our revenue is derived from our operations in China. We anticipate that our revenues generated in China will continue to represent all of our revenues in the near future. Accordingly, our results of operations and prospects are subject, to a significant extent, to the economic, political and legal developments in China. Although the PRC economy has grown significantly in recent years, we cannot assure you that such growth will continue. In addition, the Chinese government also exercises significant control over Chinese economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Efforts by the Chinese government to slow the pace of growth of the Chinese economy could result in reduced demand for our products. A slowdown in overall economic growth, an economic downturn or recession or other adverse economic developments in the PRC may materially reduce the demand for our products and materially and adversely affect our business.
The PRC government’s recent measures to curb inflation rates could adversely affect future results of operations.
In recent years, the Chinese economy has experienced periods of rapid expansion and high rates of inflation. Rapid economic growth can lead to growth in the money supply and rising inflation. China’s Consumer Price Index increased by 2.6% for full year of 2013 according to the National Bureau of Statistics of China, or the NBS. If prices for our products rise at a rate that is insufficient to compensate for the rise in the costs of supplies, it may have an adverse effect on profitability. These factors have led to the adoption by the Chinese government, from time to time, of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation. High inflation may in the future cause the Chinese government to impose controls on credit and/or prices, or to take other action, which could inhibit economic activity in China, and thereby harm the market for our products.
17 |
In recent years, the government of China has undertaken various measures to alleviate the effects of inflation, especially with respect to key commodities. From time to time, the PRC National Development and Reform Commission announces national price controls on various products. The government of China has also encouraged local governments to institute price controls products. Such price controls could adversely affect our future results of operations and, accordingly, the price of our common stock.
If relations between the United States and China deteriorate, our stock price may decrease and we may experience difficulties accessing the United States capital markets.
At various times during recent years, the United States and China have had disagreements over political and economic issues. Controversies may arise in the future between these two countries. Any political or trade controversies between the United States and China could impact the market price of our common stock and our ability to access United States capital markets.
The Chinese Government could change its policies toward private enterprises, which could result in the total loss of our investments in China.
Our business is subject to political and economic uncertainties in China and may be adversely affected by its political, economic and social developments. Over the past several years, the Chinese government has pursued economic reform policies including the encouragement of private economic activity and greater economic decentralization. The Chinese government may not continue to pursue these policies or may alter them to our detriment. Conducting our business might become more difficult or costly due to changes in policies, laws and regulations, or in their interpretation or the imposition of confiscatory taxation, restrictions on currency conversion, restrictions or prohibitions on dividend payments to stockholders, devaluations of currency or the nationalization or other expropriation of private enterprises. In addition, nationalization or expropriation could result in the total loss of our investments in China.
The Chinese State Administration of Foreign Exchange, or SAFE, requires Chinese residents to register with, or obtain approval from SAFE regarding their direct or indirect offshore investment activities.
China’s State Administration of Foreign Exchange Regulations regarding offshore financing activities by Chinese residents has undertaken continuous changes which may increase the administrative burden we face and create regulatory uncertainties that could adversely affect the implementation of our acquisition strategy. A failure by our shareholders who are Chinese residents to make any required applications and filings pursuant to such regulations may prevent us from being able to distribute profits and could expose us and our Chinese resident shareholders to liability under PRC law.
Our business, results of operations and overall profitability are linked to the economic, political and social conditions in China.
All of our business, assets and operations are located in China. The economy of China differs from the economies of most developed countries in many respects, including government involvement, level of development, growth rate, control of foreign exchange, and allocation of resources. The economy of China has been transitioning from a planned economy to a more market-oriented economy. Although the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the Chinese government. In addition, the Chinese government continues to play a significant role in regulating industry by imposing industrial policies. It also exercises significant control over China’s economic growth through the allocation of resources, controlling payment of foreign currency denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Therefore, the Chinese government’s involvement in the economy may negatively affect our business operations, results of operations and our financial condition.
If there will be any changes in PRC Law, the PRC legal system could limit our Company’s ability to enforce the Unified Management Agreement, which in turn may lead to reconsideration of the VIE assessment with respect to Longmen Joint Venture.
Prior to entering into the Unified Management Agreement, Longmen Joint Venture had been consolidated as our 60% directly owned subsidiary. Upon entering into the Unified Management Agreement on April 29, 2011, Longmen Joint Venture was considered to be a VIE of which we are the primary beneficiary and therefore we continue to consolidate Longmen Joint Venture.
18 |
We believe that the Unified Management Agreement between Longmen Joint Venture and Shaanxi Coal is in compliance with PRC law and is legally enforceable. The Board of Directors of Longmen Joint Venture continues to be the controlling decision-making body with respect to Longmen Joint Venture. We control 60% of the voting rights of the Board of Directors, and have control over the operations of Longmen Joint Venture. As such, we believe we have the power to control the activities of the VIE. However, uncertainties in the PRC legal system could limit our ability to enforce the Unified Management Agreement, which in turn, may lead to reconsideration of, and a different conclusion under the VIE assessment.
Governmental control of currency conversion may cause the value of your investment in our common stock to decrease.
The Chinese government imposes controls on the conversion of Renminbi or RMB into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all of our revenues in Renminbi, which is currently not a freely convertible currency. Shortages in the availability of foreign currency may restrict our ability to remit sufficient foreign currency to pay dividends, or otherwise satisfy foreign currency denominated obligations. Under existing Chinese foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from a transaction, can be made in foreign currencies without prior approval from China’s State Administration of Foreign Exchange by complying with certain procedural requirements. However, approval from appropriate governmental authorities is required where Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of bank loans denominated in foreign currencies.
The Chinese government may also at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay certain of our expenses as they come due.
Currency fluctuations and restrictions on currency exchanges may adversely affect our business, including limiting our ability to convert RMB into foreign currencies and, if RMB were to decline in value, reducing our revenue in U.S. dollar terms.
Our reporting currency is the U.S. dollar and our operations in China use their local currency as their functional currencies. Substantially all of our revenue and expenses are in Renminbi, or RMB. We are subject to the effects of exchange rate fluctuations with respect to local currencies. For example, the value of the RMB depends to a large extent on Chinese government policies and China’s domestic and international economic and political developments, as well as supply and demand in the local market. Prior to July 21, 2005, the official exchange rate for the conversion of RMB to the U.S. dollar had generally been stable and the RMB had appreciated slightly against the U.S. dollar. However, on July 21, 2005, the Chinese government changed its policy of pegging the value of RMB to the U.S. dollar. Under the new policy, RMB may fluctuate within a narrow and managed band against a basket of certain foreign currencies. The four main currencies in the basket are the U.S. dollar, the Euro, the Japanese yen and the Korean won. In the three years that followed, a slight appreciation against the U.S. currency occurred and by the end of October 2008, the RMB exchange rate with the U.S. dollar had risen to nearly 6.8 to the U.S. dollar. Since mid-2008, the RMB has been held stable as the Chinese government considers how best to respond to the global economic crisis. In June 2010, the temporary dollar peg was again abandoned, after the Chinese RMB rose approximately 16% against the Euro as a result of the Greek fiscal crisis. However, the Chinese government has signaled that going forward its currency will only be allowed to appreciate gradually against the dollar. It is possible that the Chinese government could adopt a more flexible currency policy, which could result in more significant fluctuation of RMB against the U.S. dollar. We can offer no assurance that RMB will be stable against the U.S. dollar or any other foreign currency. Our financial statements are translated into U.S. dollars at the average exchange rates in each applicable period. To the extent the U.S. dollar strengthens against foreign currencies, the translation of these foreign currency-denominated transactions results in reduced revenue, operating expenses and net income for our international operations. Similarly, to the extent the U.S. dollar weakens against foreign currencies, the translation of these foreign currency-denominated transactions results in increased revenue, operating expenses and net income for our international operations. We are also exposed to foreign exchange rate fluctuations as we convert the financial statements of our foreign consolidated subsidiaries into U.S. dollars in consolidation. If there is a change in foreign currency exchange rates, the conversion of the foreign consolidated subsidiaries’ financial statements into U.S. dollars will lead to a translation gain or loss which is recorded as a component of other comprehensive income. In addition, we have certain assets and liabilities that are denominated in currencies other than the relevant entity’s functional currency. Changes in the functional currency value of these assets and liabilities create fluctuations that will lead to a transaction gain or loss. We have not entered into agreements or purchased instruments to hedge our exchange rate risks, although we may do so in the future. The availability and effectiveness of any hedging transaction may be limited and we may not be able to hedge our exchange rate risks.
19 |
We are subject to environmental and safety regulations, which may increase our compliance costs and reduce our overall profitability.
We are subject to the requirements of environmental and occupational safety and health laws and regulations in China. We may incur substantial costs or liabilities in connection with these requirements. Additionally, these regulations may become stricter, which will increase our costs of compliance in a manner that could reduce our overall profitability. The capital requirements and other expenditures that may be necessary to comply with environmental requirements could increase and become a significant expense linked to the conduct of our business.
Our operating subsidiaries must comply with environmental protection laws that could adversely affect our profitability.
We are required to comply with the environmental protection laws and regulations promulgated by the national and local governments of China. Yearly inspections of waste treatment systems require the payment of a license fee which could become a penalty fee if standards are not maintained. If we fail to comply with any of these environmental laws and regulations in China, depending on the types and seriousness of the violation, we may be subject to, among other things, warning from relevant authorities, imposition of fines, specific performance and/or criminal liability, forfeiture of profits made, being ordered to close down our business operations and suspension of relevant permits.
Because the Chinese legal system is not fully developed, our legal protections may be limited.
The Chinese legal system is based upon written statutes. Prior court decisions may be cited for reference but are not binding on subsequent cases and have limited value as precedent. Since 1979, China’s legislative bodies have promulgated laws and regulations dealing with economic matters such as foreign investment, corporate organization and governance, commerce, taxation and trade. However, China has not developed a fully integrated legal system and the array of new laws and regulations may not be sufficient to cover all aspects of economic activities in China. In particular, because these laws and regulations are relatively new, and because of the limited volume of published decisions and their non-binding nature, the interpretation and enforcement of these laws and regulations involves uncertainties. In addition, published government policies and internal rules may have retroactive effects and, in some cases, the policies and rules are not published at all. As a result, we may be unaware of our violation of these policies and rules until sometime later. The laws of China govern our contractual arrangements with our affiliated entities and the enforcement of these contracts and the interpretation of the laws governing these relationships are subject to uncertainty.
In addition, our VIE and all of our subsidiaries that are incorporated in China are subject to all applicable PRC laws and regulations. Because of the relatively short period for enacting such a comprehensive legal system, the laws, regulations and legal requirements are relatively recent, and their interpretation and enforcement involve uncertainties. These uncertainties could limit the legal protections available to us and other foreign investors, including you, and may lead to penalties imposed on us because of the different understanding between the relevant authority and us. For example, according to current tax laws and regulations, we are responsible to pay business tax on a “Self-examination and Self-application” basis. However, since there is no clear guidance as to the applicability of certain preferential tax treatments, we may be found in violation of the interpretation of local tax authorities with regard to the scope of taxable services and the percentage of tax rate and therefore might be subject to penalties, including but not limited to, monetary penalties. In addition, we cannot predict the effect of future developments in the PRC legal system, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement thereof, or the preemption of local regulations by national laws.
The resolution of these matters may be subject to the exercise of considerable discretion by agencies of the Chinese government, and forces unrelated to the legal merits of a particular matter or dispute may influence their determination. Any rights we may have to specific performance or to seek an injunction under PRC law, in either of these cases, are severely limited, and without a means of recourse by virtue of the Chinese legal system, we may be unable to prevent these situations from occurring. Although legislation in China over the past 30 years has significantly improved the protection afforded to various forms of foreign investment and contractual arrangements in China, these laws, regulations and legal requirements are relatively new and their interpretation and enforcement involve uncertainties, which could limit the legal protection available to us and foreign investors, including you.
The PRC State Administration of Foreign Exchange, or SAFE, restrictions on currency exchange may limit our ability to receive and use our sales revenue effectively and to pay dividends.
All of our sales revenues and expenses are denominated in RMB. Under PRC law, RMB is currently convertible under the “current account,” which includes dividends and trade and service-related foreign exchange transactions, but not under the “capital account,” which includes foreign direct investment and loans. Currently, our PRC operating subsidiaries may purchase foreign currencies for settlement of current account transactions, including payments of dividends to us, without the approval of SAFE, by complying with certain procedural requirements. However, the relevant PRC government authorities may limit or eliminate our ability to purchase foreign currencies in the future. Since substantially all of our future revenue will be denominated in RMB, any existing and future restrictions on currency exchange may limit our ability to utilize revenue generated in RMB to fund our business activities outside China that are denominated in foreign currencies.
20 |
Foreign exchange transactions by PRC operating subsidiaries under the capital account continue to be subject to significant foreign exchange controls and require the approval of or need to register with PRC government authorities, including SAFE. In particular, if our PRC operating subsidiaries borrow foreign currency through loans from us or other foreign lenders, these loans must be registered with SAFE, and if we finance our PRC operating subsidiaries by means of additional capital contributions, these capital contributions must be approved by certain government authorities, including the Ministry of Commerce People’s Republic of China, or their respective local counterparts. These limitations could affect our PRC operating subsidiaries’ ability to obtain foreign exchange through debt or equity financing.
The PRC government also may at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining foreign currency, we may be unable to meet obligations that may be incurred in the future that require payment in foreign currency.
Under the New EIT Law, as defined below, we may be classified as a “resident enterprise” of China, which would likely result in unfavorable tax consequences to us and our non-PRC shareholders.
Under China’s Enterprise Income Tax Law, or the “EIT Law”, and its implementing rules, which became effective in 2008, an enterprise established with “de facto management bodies” within China is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. Under the implementing rules of the New EIT Law, de facto management means substantial and overall management and control over the production and operations, personnel, accounting, and properties of the enterprise. Because the New EIT Law and its implementing rules are new, it is unclear how tax authorities will determine tax residency based on the facts of each case.
In April 2009, the State Administration of Taxation (“SAT”) issued a new circular to clarify the criteria for recognizing the resident enterprise status for Chinese controlled foreign companies. According to the Circular Regarding the Determination Criteria on Chinese Controlled Offshore Companies as Resident Enterprises (Circular Guoshuifa 2009 No. 82), if a foreign company simultaneously satisfies the following four criteria it will have resident enterprise status:
· | It constitutes a Chinese controlled foreign company and shall be deemed to be a PRC resident enterprise. |
· | The premises where the senior management and the senior management bodies responsible for the routine production and business management of the enterprise perform their functions are mainly located within China. |
· | The financial decisions (including, borrowing, lending, financing, financial risk management, etc.) and the personnel decisions (for example, appointment, dismissal, remuneration, etc.) of the enterprise are made by the bodies or persons within China or are subject to the approval of the bodies or persons within China. |
· | The enterprise’s primary properties, accounting books, company seals, minutes and archives of the meetings of the board of directors and shareholders are located or preserved within China. The enterprise’s directors or senior management with fifty percent or more of the voting rights usually live in China. |
Despite the issuance of the new clarifying circular referenced above, the application of these standards remains uncertain. If the PRC tax authorities determine that we are a “resident enterprise” for PRC enterprise income tax purposes, unfavorable PRC tax consequences could follow. First, we will be subject to enterprise income tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations. Second, although under the EIT Law and its implementing rules dividends paid to us from our PRC subsidiaries would qualify as “tax-exempt income,” such dividends may be subject to a 10% withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax, have not yet issued guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise income tax purposes. Finally, it is possible that future guidance issued with respect to the new “resident enterprise” classification would result in a situation in which a 10% withholding tax is imposed on dividends we pay to our non-PRC shareholders and with respect to gains derived by our non-PRC shareholders from transferring our shares.
If we were treated as a “resident enterprise” by PRC tax authorities, we would be subject to tax in both the U.S. and China, and our PRC tax may not be creditable against our U.S. tax. In addition, we have not accrued any tax liability associated with the possible payment of dividends to our U.S. parent company. Such a tax would be an added expense appearing on our income statement, which would reduce our net income.
21 |
Failure to comply with the U.S. Foreign Corrupt Practices Act could subject us to penalties and other adverse consequences.
We are subject to the U.S. Foreign Corrupt Practices Act, or FCPA, which generally prohibits United States companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. In addition, we are required to maintain records that accurately and fairly represent our transactions and have an adequate system of internal accounting controls. Foreign companies, including some that may compete with us, are not subject to these prohibitions, and therefore may have a competitive advantage over us. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time-to-time in the PRC. We can make no assurance that our employees or other agents will not engage in such conduct for which we might be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations.
If we become subject to the recent scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we may have to expend significant resources to investigate and resolve such allegations, which could harm our business operations, stock price and reputation, especially if such matter cannot be addressed and resolved favorably.
Recently, U.S. public companies that have substantially all of their operations in China, particularly companies like us which have completed so-called reverse merger transactions, have been the subject of intense scrutiny, criticism and negative publicity by investors, financial commentators and regulatory agencies, such as the SEC. Much of the scrutiny, criticism and negative publicity has centered around financial and accounting irregularities and mistakes, a lack of effective internal controls over financial accounting, inadequate corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result of the scrutiny, criticism and negative publicity, the publicly traded stock of many U.S. listed Chinese companies has sharply decreased in value and, in some cases, has become virtually worthless. Many of these companies are now subject to shareholder lawsuits, SEC enforcement actions and are conducting internal and external investigations into the allegations. It is not clear what effect this sector-wide scrutiny, criticism and negative publicity will have on our Company, our business and our stock price. If we become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, we will have to expend significant resources to investigate such allegations and/or defend our Company. This situation will be costly and time consuming and distract our management from growing our Company. If such allegations are not proven to be groundless, our Company and our business operations will be severely impacted and your investment in our stock could be rendered worthless.
The disclosures in our reports and other filings with the SEC and our other public pronouncements are not subject to the scrutiny of any regulatory bodies in the PRC. Accordingly, our public disclosure should be reviewed in light of the fact that no governmental agency that is located in China where substantially all of our operations and business are located had conducted any due diligence on our operations or reviewed or cleared any of our disclosure.
We are regulated by the SEC and our reports and other filings with the SEC are subject to SEC review in accordance with the rules and regulations promulgated by the SEC under the Securities Act of 1933 and the Securities Exchange Act of 1934. Since substantially all of our operations and business takes place in China, it may be more difficult for the SEC to overcome the geographic and cultural obstacles when reviewing our disclosure. These same obstacles are not present for similar companies whose operations or business take place entirely or primarily in the United States. Furthermore, our SEC reports and other disclosure and public pronouncements are not subject to the review or scrutiny of any PRC regulatory authority. For example, the disclosure in our SEC reports and other filings are not subject to the review of the Chinese Securities Regulatory Commission, a PRC regulator that is tasked with oversight of the capital markets in China. Accordingly, you should review our SEC reports, filings and our other public pronouncements with the understanding that no local regulator has done any due diligence on our Company and with the understanding that none of our SEC reports, other filings or any of our other public pronouncements has been reviewed or otherwise been scrutinized by any local regulator.
We make equity compensation grants to persons who are PRC citizens and they may be required to register with SAFE. We may also face regulatory uncertainties that could restrict our ability to adopt equity compensation plans for our directors and employees and other parties under PRC laws.
On March 28, 2007, SAFE issued the “Operating Procedures for Administration of Domestic Individuals Participating in the Employee Stock Ownership Plan or Stock Option Plan of An Overseas Listed Company,” also known as “Circular 78.” It is not clear whether Circular 78 covers all forms of equity compensation plans or only those which provide for the granting of stock options. For any plans which are so covered and are adopted by a non-PRC listed company, such as our Company, after March 28, 2007, Circular 78 requires all participants who are PRC citizens to register with and obtain approvals from SAFE prior to their participation in the plan. In addition, Circular 78 also requires PRC citizens to register with SAFE and make the necessary applications and filings if they participated in an overseas listed company’s covered equity compensation plan prior to March 28, 2007. We believe that the registration and approval requirements contemplated in Circular 78 are burdensome and time consuming.
22 |
We currently have an effective equity incentive plan and make numerous stock grants under the plan to our officers, directors and employees, some of whom are PRC citizens and may be required to register with SAFE. If it is determined that any of our equity compensation plans are subject to Circular 78, failure to comply with relevant provisions may subject us and participants of any such equity incentive plan who are PRC citizens to fines and legal sanctions and prevent us from being able to grant equity compensation to our PRC employees. In that case, our ability to compensate our employees and directors through equity compensation and to attract and retain employees and directors may be hindered and our business operations may be adversely affected.
Due to various restrictions under PRC law on the distribution of dividends by our PRC operating companies, we may not be able to pay dividends to our shareholders.
The Wholly-Foreign Owned Enterprise Law (1986) (“WFOE”), as amended and the Wholly-Foreign Owned Enterprise Law Implementing Rules (1990), as amended and the Company Law of the PRC (2006) contain the principal regulations governing dividend distributions by wholly foreign owned enterprises. Under these regulations WFOE’s may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. Additionally, a WFOE is required to set aside a certain amount of its accumulated profits each year, if any, to fund certain reserve funds. These reserves are not distributable as cash dividends, except in the event of liquidation, and cannot be used for working capital purposes.
Furthermore, if any of our consolidated subsidiaries in China incurs debt in the future, the instruments governing the debt may restrict our ability to pay dividends or make other payments. If we or our consolidated subsidiaries are unable to receive all of the revenues from our operations due to these contractual or dividend arrangements, we may be unable to pay dividends on our common stock. In addition, under WFOE regulations mentioned above, we must retain a reserve equal to 10 percent of net income after taxes, not to exceed 50 percent of registered capital. Accordingly, this reserve will not be available to be distributed as dividends to our shareholders. We presently do not intend to pay dividends in the foreseeable future. Our management intends to follow a policy of retaining all of our earnings to finance the development and execution of our strategy and the expansion of our business.
We may have difficulty establishing adequate management, legal and financial controls in the PRC.
The PRC historically has been deficient in western style management and financial reporting concepts and practices, as well as in modern banking and other control systems. We may have difficulty in hiring and retaining a sufficient number of qualified employees to work in the PRC. As a result of these factors, and especially given that we are an exchange listed company in the U.S. and subject to regulation as such, we may experience difficulty in establishing management, legal and financial controls, collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet western standards. As there is a shortage of well-educated and experienced professionals who have bilingual and bicultural backgrounds in China, especially in remote areas where our factories are located, we may experience high turnover in our staff. Therefore, we may, in turn, experience difficulties in implementing and maintaining adequate internal controls as required under Section 404 of the Sarbanes-Oxley Act and other applicable laws, rules and regulations. This may result in significant deficiencies or material weaknesses in our internal controls which could impact the reliability of our financial statements and prevent us from complying with SEC rules and regulations and the requirements of the Sarbanes-Oxley Act. Any such deficiencies, weaknesses or lack of compliance could have a material adverse effect on our results of operations and the public announcement of such deficiencies could adversely impact our stock price.
Risks Related to Our Common Stock
Our officers, directors and affiliates control us through their positions and stock ownership and their interests may differ from other stockholders.
Our officers, directors and affiliates beneficially own approximately 40.6% of our common stock. Mr. Zuosheng Yu, our major stockholder, beneficially owns approximately 39.9% of our common stock. Mr. Yu can effectively control us and his interests may differ from other stockholders.
23 |
All of our subsidiaries and substantially all of our assets are located outside the United States.
All our subsidiaries are located in China and substantially all of our assets are located outside the United States. It may therefore be difficult for investors in the United States to enforce their legal rights based on the civil liability provisions of the U.S. federal securities laws against us in the courts of either the United States or China and, even if civil judgments are obtained in United States courts, such judgments may not be enforceable in Chinese courts. Most of our directors and officers reside outside of the United States. It is unclear if extradition treaties now in effect between the United States and China would permit effective enforcement against us or our officers and directors of criminal penalties under the U.S. federal securities laws or otherwise.
We have never paid cash dividends and are not likely to do so in the foreseeable future.
We currently intend to retain any future earnings for use in the operation and expansion of our business. We do not expect to pay any cash dividends in the foreseeable future but will review this policy as circumstances dictate.
Our common stock is subject to price volatility unrelated to our operations.
The market price of our common stock could fluctuate substantially due to a variety of factors, including market perception of our ability to achieve our planned growth, quarterly operating results of other steel makers, trading volume in our common stock, changes in general conditions in the economy and the financial markets or other developments affecting our competitors or us. In addition, the stock market is subject to extreme price and volume fluctuations. This volatility has had a significant effect on the market price of securities issued by many companies for reasons unrelated to their operating performance and could have the same effect on our common stock.
Investors may experience dilution from exercise of warrants we issued in December 2007.
Shares of our common stock are issuable upon conversion of senior convertible notes and warrants to purchase common stock issued in a private placement that closed on December 13, 2007. The senior convertible notes were initially convertible into 4,170,009 shares of our common stock based on a conversion price of $12.47 per share and applicable interest rates. As of the date of this report, all of the convertible notes had been converted. Prior to the adjustments described below, upon the exercise of the warrants, an additional aggregate amount of 1,154,958 shares of our common stock were issuable based upon the then exercise price of $13.51 per share. The warrants are exercisable from May 13, 2008, to May 13, 2013. The exercise price of the warrants (and the number of shares issuable under the warrants) are each subject to adjustment under certain customary circumstances, including, among others, if the sale price of securities issued by us in subsequent offerings is less than the exercise price then in effect. As discussed below, the warrants have been adjusted such that upon their exercise, an aggregate of 3,900,871 shares of our common stock are now issuable based upon the current adjusted exercise price of $5.00 per share.
The issuance of shares of our common stock upon exercise of any of our outstanding warrants (including any increased amount of shares that may be issued in the future because of reductions in exercise price thereof) will dilute our current shareholders.
Our failure to comply with conditions required for our common stock to be listed on the New York Stock Exchange (“NYSE”) could result in delisting of our common stock from the NYSE and have a significant negative effect on the value and liquidity of our securities as well as other matters.
On September 26, 2013, we received a notice from NYSE Regulations, Inc. (“NYSE Regulations”) that we were not in compliance with the continued listing standard set forth in Sections 802.01B and 802.01C of the Listed Company Manual of the NYSE (the “Manual”). Noncompliance with Section 802.01B of the Manual (the “Market Cap Standard”) was due to the Company not maintaining an average market capitalization of at least fifty million dollars ($50,000,00.00) over a consecutive 30 trading-day period. Noncompliance with Section 802.01C of the Manual (the “Pricing Standard”) was due to the average closing price of the Company’s common stock being less than $1.00 over a consecutive 30 trading-day period. As a result of the Company’s noncompliance with both the Market Cap Standard and the Pricing Standard (collectively, the “Listing Standards”), we were required to submit a business plan to the NYSE and remain subject to quarterly monitoring for compliance with the Listing Standards and the submitted business plan through March of 2015. On March 10, 2014, we received a notice from NYSE Regulations that we had gained compliance with the Pricing Standard; however, we remain in noncompliance with the Market Cap Standard.
We are required to comply with the Manual as a condition for our common stock to continue to be listed on the NYSE. If we are unable to comply with such conditions, then our shares of common stock are subject to immediate delisting from the NYSE. We intend to appeal any decision to delist our shares from the NYSE, but cannot provide any assurance that our appeal will be successful. Any such appeal will not stay the decision to delist our shares. If our common stock is delisted from the NYSE, such securities may be traded over-the-counter on the “pink sheets.” The alternative market, however, is generally considered to be less efficient than, and not as broad as, the NYSE. Accordingly, delisting of our common stock from the NYSE could have a significant negative effect on the value and liquidity of our securities. In addition, the delisting of such stock could adversely affect our ability to raise capital on terms acceptable to us or at all. In addition, delisting of our common stock may preclude us from using exemptions from certain state and federal securities regulations, including the SEC’s “penny stock” rules.
24 |
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not Applicable.
25 |
General Steel (China)
The properties of General Steel (China) consist of manufacturing sites and office buildings located in Jinghai county, about 20 miles (45 kilometers) southwest of the Tianjin city center on a total of 17.81 acres (7.21 hectares) of land, which includes 320,390 square feet (29,667 square meters) of building space.
Under PRC law, all land in China is owned by the government, which grants a “land use right” to an individual or entity after a purchase price for such “land use right” is paid to the government. The land use right allows the holder the right to use the land for a specified long-term period of time and enjoy all the ownership incidents to the land. We are the registered owner of the land use rights for the parcels of land identified in the chart below.
Registered Owner of Land Use Right | Location & Certificate of Land Use Right | Usage | Space (acres) | Life of Land Use Right | Remaining Life | |||||||
Tianjin Daqiuzhuang Metal Sheet Co., Ltd | No. 6 West Gangtuan Road, Daqiuzhuang, Jinghai Country, Tianjin | Industrial Use | 6.78 | 50 years | 38 years | |||||||
Tianjin Daqiuzhuang Metal Sheet Co., Ltd | No. 35 Baiyi Road, Daqiuzhuang, Jinghai County, Tianjin | Industrial Use | 9.89 | 50 years | 38 years | |||||||
Tianjin Daqiuzhuang Metal Sheet Co., Ltd | Ying Feng Road North, Daqiuzhuang, Jinghai country Tianjin | Commercial Use | 1.14 | 50 years | 38 years |
Baotou Steel Pipe Joint Venture
The properties of Baotou Steel Pipe Joint Venture consist of our production and administrative sites located on the main production campus of the Baotou Steel Pipe Joint Venture located in Baotou, Inner Mongolia Autonomous Region. The land is leased from Baotou Iron and Steel Group Co., Ltd., our strategic partner in the Baotou Steel Pipe Joint Venture.
Longmen Joint Venture
The properties of Longmen Joint Venture consist of production and administrative sites located in various locations throughout the southern half of Shaanxi province on land totaling approximately 307 acres (124.4 hectares).
Longmen Joint Venture is the registered owner of the land use rights for the parcel of land identified in the chart below.
Registered Owner of Land Use Right | Location & Certificate Of Land Use Right | Usage | Space (acres) | Life of Land Use Right | Remaining Life | |||||||
Longmen Joint Venture | North Huanyuan Road, Weiyang District, Xi'an, Shaanxi | Industrial Use | 19.1 | 50 Years | 33 Years | |||||||
Longmen Joint Venture | Longmen Town, Hancheng, Shaanxi | Industrial Use | 179.6 | 40-48 Years | 33-37 Years* | |||||||
Longmen Joint Venture | Sanping Village, Shipo Town, Zhashui County, Shaanxi | Industrial Use | 103.2 | 50 Years | 39 Years | |||||||
Longmen Joint Venture | Zhaikouhe Village, Xunjian Town, Zhashui County, Shaanxi | Industrial Use | 1.9 | 50 Years | 38 Years | |||||||
Longmen Joint Venture | East Taishi Avenue, Xincheng District, Hancheng, Shaanxi | Commercial Use | 3.6 | 40 Years | 29 Years |
*This location consists of six land use rights with various remaining useful lives.
26 |
Maoming Hengda
The properties of Maoming Hengda consist of our production and administrative sites located in two separated sites inside Maoming city, Guangdong province, on land totaling approximately 240 acres (96.9 hectares).
Maoming Hengda is the registered owner of the land use rights for the parcels of land identified in the chart below.
Registered Owner Of Land Use Right | Location & Certificate Of Land Use Right | Usage | Space (acres) | Life of Land Use Right | Remaining Life | |||||||
Maoming Hengda | Diancheng Town, Dianbai County, Maoming City, Industrial Zone of Bohe Port, Guangdong | Industrial Use | 240 | 50 Years | 41 Years |
From time to time, we are subject to certain legal proceedings, claims and disputes that arise in the ordinary course of our business. Although we cannot predict the outcomes of these legal proceedings, we do not believe these actions, in the aggregate, will have a material adverse impact on our financial position, results of operations or liquidity. We are currently not a party to any material legal proceedings.
ITEM 4. MINE SAFETY DISCLOSURES.
The information required by Item 4 is not applicable to us, as we have no mining operations in the United States.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Our common stock is listed on the New York Exchange under the symbol “GSI”. The high and low closing common stock price for each quarter of the last two years is as follows:
HIGH AND LOW SALES PRICES | 1ST QTR | 2ND QTR | 3RD QTR | 4TH QTR | ||||||||||||
2010 | ||||||||||||||||
High | $ | 5.04 | $ | 4.22 | $ | 3.54 | $ | 3.15 | ||||||||
Low | $ | 3.78 | $ | 2.35 | $ | 2.28 | $ | 2.38 | ||||||||
2011 | ||||||||||||||||
High | $ | 2.93 | $ | 2.41 | $ | 1.73 | $ | 1.50 | ||||||||
Low | $ | 2.28 | $ | 1.42 | $ | 1.13 | $ | 0.99 | ||||||||
2012 | ||||||||||||||||
High | $ | 1.17 | $ | 1.11 | $ | 1.33 | $ | 1.28 | ||||||||
Low | $ | 0.75 | $ | 0.80 | $ | 0.57 | $ | 0.91 | ||||||||
2013 | ||||||||||||||||
High | $ | 1.35 | $ | 1.12 | $ | 1.04 | $ | 1.09 | ||||||||
Low | $ | 0.94 | $ | 0.94 | $ | 0.83 | $ | 0.85 |
As of March 17, 2014, there were approximately 322 holders of record of our common stock. On the same date, the trading price of our common stock closed at $1.40 per share.
Dividend Policy
Our Board of Directors currently does not intend to declare dividends or make any other distributions to our shareholders. Any determination to pay dividends in the future will be at our board’s discretion and will depend upon our results of operations, financial condition and prospects as well as other factors deemed relevant by our Board of Directors.
27 |
Recent Sales of Unregistered Sale Securities
None.
ITEM 6. SELECTED FINANCIAL DATA.
Not Applicable.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Forward-Looking Statements:
The following discussion of the financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes thereto included elsewhere in this Annual Report. 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 People’s Republic of China, including regulatory factors that may affect such economic conditions; (b) whether we are able to manage our planned growth efficiently and operate profitable operations, including whether our management will be able to identify, hire, train, retain, motivate and manage required personnel or that management will be able to successfully manage and exploit existing and potential market opportunities; (c) whether we are able to generate sufficient revenues or obtain financing to sustain and grow our operations; and (d) whether we are able to successfully fulfill our primary requirements for cash which are explained below under “Liquidity and Capital Resources” as well as other factors described in “Item 1A: Risk Factors” in this Annual Report. You should carefully review all of these factors, as well as the comprehensive discussion of forward-looking statements on page 4 of this Annual Report. Unless otherwise required by applicable law, we do not undertake, and we specifically disclaim any obligation, to update any forward-looking statements to reflect occurrences, developments, unanticipated events or circumstances after the date of such statement.
OVERVIEW
We were founded on the strategy to merge, partner with, and acquire State-owned enterprises and selected steel companies with great growth potential within China’s highly fragmented steel industry. As of December 31, 2013, we were comprised of four steel producing and processing subsidiaries/VIE of which Longmen Joint Venture is the largest. Located in Shaanxi province, Longmen Joint Venture contributed approximately 99.5%, 99.1%, 97.9% and 98.1% of our total revenue for the 2013, 2012, 2011 and 2010 fiscal years, respectively.
Fiscal year 2013 was highlighted with the following:
· | Sales revenue decreased by $399.8 million, or 14.0% year-over-year to $2.5 billion, down from $2.9 billion in 2012, mainly due to the decrease in both the sales volume and average selling price of our rebar products. For the year of 2013, sales volume in Longmen Joint Venture totaled 5.0 million metric tons, a decrease of 0.1 million metric tons, or 1.3%, compared to 5.1 million metric tons in the year of 2012, with an average selling price of rebar of $490.7 per ton in the year of 2013, compared to $560.6 per ton in the year of 2012. |
· | Gross loss in the year of 2013 totaled $(55.9) million, or (2.3)% of total revenue, as compared to a gross profit of $32.1 million, or 1.1% of total revenue in the year of 2012. |
· | Total finance expenses in the year of 2013 were $91.9 million, as compared to $153.7 million in the year of 2012. Finance expenses mainly consisted of interest expense on capital lease, which was $20.8 million and $20.6 million in the year of 2013 and 2012, respectively, and interest expense on bank loans and discounted notes receivable, which was $71.1 million and $133.1 million in years of 2013 and 2012, respectively. |
Fiscal year 2012 was highlighted with the following:
· | Sales revenue decreased by $700.3 million, or 19.6% year-over-year to $2.9 billion, down from $3.6 billion in 2011 mainly due to decreased sales volumes as well as a decrease in average selling price of our rebar products. For 2012, sales volume in Longmen Joint Venture totaled 5.3 million metric tons, a decrease of 0.9 million metric tons, or 14.0%, compared to 6.2 million metric tons in 2011, with an average selling price of rebar of $560.6 per ton in 2012, compared to $634.6 per ton in 2011. |
28 |
· | Gross profit in the year of 2012 totaled $32.1 million, or 1.1% of total revenue, as compared to a gross loss of $88.2 million, or (2.5)% of total revenue in the year of 2011. Gross profit in 2012 represented a turnaround as compared to 2011. |
· | On March 27, 2012, we launched another share repurchase program to repurchase up to an aggregate of 2,000,000 shares of our common stock (the “Share Repurchase Program”). Together with our previous share repurchase program launched in December 2010 and this newly announced Share Repurchase Program, it brought the total authorized shares of our common stock available for purchase to 4,000,000. As of December 31, 2012, we had repurchased 2,472,306 shares of common stock in open market transactions at an average price of $1.70 per share pursuant to the above mentioned expansion of the Share Repurchase Program. |
Fiscal year 2011 was highlighted by increased sales revenue, driven from both increased sales volume and average selling prices, and capacity expansion from a Unified Management Agreement with Shaanxi Iron and Steel Group Co., Ltd. (“Shaanxi Steel”) and Shaanxi Coal and Chemical Industry Group Co., Ltd. (“Shaanxi Coal”), which was entered in April 2011. Highlights include:
· | Sales revenue increased by $1.7 billion, or 89.4% year-over-year to $3.6 billion, up from $1.9 billion in 2010 mainly due to increased sales volumes as well as average selling price of our rebar products. For the year of 2011, sales volume totaled 6.2 million metric tons, an increase of 2.3 million metric tons, or 58.1%, compared to 3.9 million metric tons in the year of 2010, with an average selling price of rebar of $635 per ton, compared to $526 per ton in the year of 2010. |
· | The construction of the newly constructed iron and steel making facilities, which include two 1,280 cubic meter blast furnaces, two 120 metric ton converters and one 400 square meter sintering machine paid by Shaanxi Steel at the business property of Longmen Joint Venture were finalized in the beginning of 2011. Through our collaboration with Shaanxi Steel and Shaanxi Coal under the terms of the Unified Management Agreement, we added a production capacity of 3 million metric tons of crude steel annually under our management. Out total crude steel production capacity under management is 7 million metric tons per annum and can produce approximately the same volume of rebar. |
· | On June 1, 2011, we announced an increase of additional 1,000,000 shares of our common stock which will be purchased under our share repurchase program launched in December 2010 (the “Share Repurchase Program”), bringing the total authorized shares of our common stock available for purchase to 2,000,000. As of December 31, 2011, we had repurchased 1,090,978 shares of common stock in open market transactions at an average price of $2.56 per share pursuant to the above mentioned expansion of the Share Repurchase Program. |
· | In July 2011, we completed the installation and started testing the 1,000,000 metric ton capacity high speed wire production line, which was relocated from Maoming facility to Longmen Joint Venture in December 2010, in order to consume less energy when running at maximum efficiencies than our previous production line. |
29 |
Our two-pronged growth strategy focused on a combination of capacity expansion, as well as optimizing operating efficiencies and leverage:
· | We aim to grow revenue by increasing capacity and through continual cooperation and partnerships with leading state-owned enterprises (SOEs); and |
· | We aim to drive profitability through improved operational efficiencies and optimization of our cost structure. |
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.
At the same time, the overall nationwide steelmaking capacity still exceeds steel demand in China. There is a significant over-capacity in the Chinese steel industry which is putting pressure on operators’ profitability. This has become the most significant challenge in the steel manufacturing business. From January to November 2013, China’s crude steel production increased by 7.82% to 712.86 million tons from the same period last year, while the consumption of crude steel increased by 7.36% to 666.50 million tons from the same period last year, according to the China Iron & Steel Association. However, due to the rapid economic development and urbanization in the Western region of China, which is the core market we serve, steel demand in the region has seen a stable growth compared to the rest of the country.
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 two 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 December 2011, the central government published an industry target to eliminate 96 million tons of inefficient iron and steel capacity during the 12th five-year plan. The central government had successfully reduced obsolete iron production capacities of 31.9 million tons 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 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 confirmed its determination of the 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 significant growth opportunities in the industry and market we serve and such consolidation is not expected to directly impact our Company. In January 2014, our principal facility, Longmen Joint Venture, has been included in the List of Enterprises Fulfilling the Iron and Steel Industry Specification (the "List") released by the Ministry of Industry and Information Technology of the People's Republic of China (the "MIIT"). Longmen Joint Venture is the only enterprise in China's Shaanxi province included in the List.
As the Chinese government aims to speed up the steel industry's restructuring and consolidation, the List members will receive the supports from the MIIT and China's other governmental agencies, while those who are omitted from the List will most likely face higher electricity costs, more restrictive administrative measures, and adverse effects of forceful regulations intent on reducing the nation's overcapacity.
On July 12, 2010, the Ministry of Industry & Information Technology Commission enacted the Steel Industry Admittance and Operation Qualifications standards. These new standards set forth requirements for all aspects of steel production in China, which include: size of blast furnaces, size of converters, emission of waste water, dust per ton from steel production, quantity of coal used for each process in steel production and output capacity. According to the new standards, blast furnaces under 450 cubic meters are targeted to be eliminated. These standards once again confirmed the central government’s determination to push forward the consolidation of this fragmented industry. While the operational conditions become more stringent, more small and medium sized companies will likely aggressively look for valued partners which could lead to opportunities for high quality acquisitions. We believe these standards do not impact our Company and we also believe that the above-mentioned policy will strengthen our position as an industry consolidator by creating numerous qualified potential acquisition targets.
30 |
Since 2013, the Chinese government has exerted a more stringent environmental protection policy on the steel industry. In January 2014, the Ministry of Industry and Information Technology of the People's Republic of China (the "MIIT") announced a List of Enterprises Fulfilling the Iron and Steel Industry Specification (the "List"). The List includes a highly-selected group of large and medium steel manufacturers that have met or exceeded more stringent national requirements and standards on product quality, environmental protection, energy consumption, workmanship and equipment, production scale, as well as work safety and social responsibility. The MIIT will collaborate with China's other governmental agencies to provide support to the List's members and to speed up the steel industry's restructuring and consolidation. Steel makers omitted from the List will most likely face higher electricity costs, more restrictive administrative measures, and adverse effects of forceful regulations intent on reducing the nation's overcapacity. Longmen Joint Venture, the major facility of General Steel was included on the List as the only enterprise in China’s Shaanxi Province.
RESULTS OF OPERATIONS
Statements of Operations for the years ended December 31, 2013 and 2012:
(In thousands except share data) | 2013 | 2012 | Change | Percentage Change | ||||||||||||
(Restated) | ||||||||||||||||
Sales | $ | 2,463,747 | $ | 2,863,593 | $ | (399,846 | ) | (14.0 | )% | |||||||
Cost of Goods Sold | 2,519,685 | 2,831,474 | (311,789 | ) | (11.0 | )% | ||||||||||
Gross Profit (Loss) | (55,938 | ) | 32,119 | (88,057 | ) | (274.2 | )% | |||||||||
Gross Profit (Loss) Margin % | (2.3 | )% | 1.1 | % | (3.4 | )% | ||||||||||
Selling, General and Administrative Expenses | (84,226 | ) | (105,077 | ) | 20,851 | (19.8 | )% | |||||||||
Change in Fair Value of Profit Sharing Liability | 174,569 | (22,499 | ) | 197,068 | (875.9 | )% | ||||||||||
Income (Loss) from Operations | 34,405 | (95,457 | ) | 129,862 | (136.0 | )% | ||||||||||
Other Expense, net | (76,676 | ) | (135,685 | ) | 59,009 | (43.5 | )% | |||||||||
Loss Before Provision for Income Taxes and Noncontrolling Interest | (42,271 | ) | (231,142 | ) | 188,871 | (81.7 | )% | |||||||||
Provision for Income Taxes | 354 | 796 | (442 | ) | (55.5 | )% | ||||||||||
Net Loss | (42,625 | ) | (231,938 | ) | 189,313 | (81.6 | )% | |||||||||
Less: Net Loss Attributable to Noncontrolling Interest | (9,609 | ) | (79,241 | ) | 69,632 | (87.9 | )% | |||||||||
Net Loss Attributable to General Steel Holdings, Inc. | $ | (33,016 | ) | $ | (152,697 | ) | $ | 119,681 | (78.4 | )% | ||||||
Loss Per Share | ||||||||||||||||
Basic and Diluted | $ | (0.60 | ) | $ | (2.78 | ) | $ | 2.18 | (78.4 | )% |
Sales
Fiscal year ended December 31, 2013 compared to fiscal year ended December 31, 2012
Sales by Subsidiary and Product
(in thousands) | 2013 | 2012 | Change | Percentage Change | ||||||||||||||||
Subsidiary | Product | |||||||||||||||||||
Longmen Joint Venture | Rebar | $ | 2,450,256 | $ | 2,837,609 | $ | (387,353 | ) | (13.7 | )% | ||||||||||
Others | 13,491 | 25,984 | (12,493 | ) | (48.1 | )% | ||||||||||||||
Total Sales | $ | 2,463,747 | $ | 2,863,593 | $ | (399,846 | ) | (14.0 | )% |
(In thousand metric tons) | 2013 | 2012 | Change | Percentage Change | ||||||||||||||||
Subsidiary | Product | |||||||||||||||||||
Longmen Joint Venture | Rebar | 4,994 | 5,062 | (68 | ) | (1.3 | )% | |||||||||||||
Others | 106 | 274 | (168 | ) | (61.3 | )% | ||||||||||||||
Total Sales Volume | 5,100 | 5,336 | (236 | ) | (4.4 | )% |
31 |
Total sales for the fiscal year 2013 decreased by $399.8 million or 14.0% to $2.5 billion from $2.9 billion in 2012. The decrease in sales compared to 2012 was due to decreases in both sales volume and average selling price of our rebar products. Longmen Joint Venture comprised 99.5% and 99.1% of total sales for the year ended 2013 and 2012, respectively. Sales volume of rebar decreased by 0.1 million metric tons, or 1.3% to 5.0 million metric tons, compared to 5.1 million metric tons in 2012. The average selling price of rebar decreased by 12.5% to approximately $490.7 per ton in 2013 from approximately $560.6 per ton in 2012.
Our product demands and prices had been rising in the first two quarters of 2012. As a result of the China and global steel industry over-capacity, Chinese economic control polices and the financial crisis, commodity prices declined significantly in the third quarter of 2012. With weakened demand, market forces kicked-in and the price of steel dropped substantially. As such, our sales prices have dropped since the third quarter of 2012, evidencing a continued decline. The over-capacity issue continued to impact our results during the year of 2013. 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 22.1% of our total sales for the year ended December 31, 2013 in comparison to 26.7% of our total sales for year ended December 31, 2012. These five customers included related parties and major distributors owned by central government. As we are the largest supplier in Shaanxi Province, we maintain a good relationship with these five customers to stabilize our sales channel.
Cost of Goods Sold
Fiscal year ended December 31, 2013 compared with fiscal year ended December 31, 2012
(in thousands) | 2013 | 2012 | Change | Percentage Change | ||||||||||||
Subsidiary | ||||||||||||||||
Longmen Joint Venture | $ | 2,506,322 | $ | 2,803,318 | $ | (296,996 | ) | (10.6 | )% | |||||||
Others | 13,363 | 28,156 | (14,793 | ) | (52.5 | )% | ||||||||||
Total Cost of Goods Sold | $ | 2,519,685 | $ | 2,831,474 | $ | (311,789 | ) | (11.0 | )% |
Our primary cost of goods sold is the cost of raw materials, such as iron ore, coke, alloy and scrap steel. The costs of iron ore and coke account for approximately 63.3% of our total cost of sales. The cost of goods sold decreased by $311.8 million or 11.0% to $2.5 billion in 2013 from $2.8 billion in 2012. This 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 2.5% and approximately 20.6%, respectively, for the year ended December 31, 2013 as compared to the same period in 2012. In addition, the decrease was also offset by the increase in inventory valuation allowance. We provided allowance for inventory valuation of approximately $15.2 million as of December 31, 2013 for both our raw materials and finished goods due to the drop in market price of iron ore, coke and our rebar products as of December 31, 2013, whereas only $9.6 million allowance for inventory valuation was provided as of December 31, 2012.
As such, the average costs of rebar manufactured decreased 9.4% to approximately $501.9 per ton during the year ended December 31, 2013 from approximately $553.8 per ton in the same period 2012. Longmen Joint Venture’s production line stoppages during 2013 due to mechanical repairs also led to the decrease of production volume and the increase of unit cost.
Gross Profit (Loss)
Fiscal year ended December 31, 2013 compared to fiscal year ended December 31, 2012
(in thousands) | 2013 | 2012 | Change | Percentage Change | ||||||||||||
Gross Profit (Loss) | $ | (55,938 | ) | $ | 32,119 | $ | (88,057 | ) | (274.2 | )% | ||||||
Gross Profit (Loss) Margin | (2.3 | )% | 1.1 | % |
Gross loss for the year of 2013 was $55.9 million, or 2.3% of total sales, as compared to a gross profit of $32.1 million, or 1.1% of total sales in the same period in 2012. The decrease in gross margin percentage was mainly attributable to the percentage decrease of average rebar selling price of 12.5% was higher than the percentage decrease of costs of rebar manufactured of 9.4% for the year of 2013 as compared to the same period of 2012.
32 |
Gross Profit (Loss) and Gross Profit (Loss) Margin by Quarters
Our product demands and prices had been rising in the first two quarters of 2012. As such, we have been able to achieve positive gross profit margin. As a result of the China and global steel industry over-capacity, Chinese economic control polices and the financial crisis, commodity prices abruptly plummeted in the third quarter of 2012. With weakened demand, market forces kicked-in and the price of steel dropped substantially. As a result, we were forced to manufacture with high priced raw material inventories that we had previously purchased during the first two quarters of 2012, while the market selling prices for finished goods had dropped below the cost of goods again during the third quarter of 2012. However, we were able to achieve positive gross profit margin again during the fourth quarter of 2012, as we manufactured our products with the decreased unit costs of raw materials as a result of the price decline in both iron ore and coke that we purchased during the third quarter of 2012.
The over-capacity issue continued to affect our results during 2013 and the Chinese economy remained weak, which indirectly affected our industry, and our selling prices suffered further decline during the first two quarters of 2013. At the same time, the prices of iron ore and coke, which accounted for the majority of our cost goods sold, had slightly rebounded at the beginning of 2013 before declining again in the second and third quarter of 2013. Consequently our selling prices in the second quarter of 2013 dropped below the cost of raw materials purchased earlier in the year, resulting in a gross loss in the second quarter of 2013. In the third quarter of 2013, demand and prices of our products rose slightly while unit cost declined further as a result of decreasing cost of raw materials purchased earlier in the year, leading to an increase in gross margins. However, the combination of a slight climb in raw material costs and Longmen Joint Venture’s production line stoppage due to mechanical repairs, which increased our unit cost, caused our unit cost of goods sold to increase above the unit selling price again, leading to a drop in gross margin in the fourth quarter of 2013.
Selling, General and Administrative Expenses
Fiscal year ended December 31, 2013 compared with fiscal year ended December 31, 2012
Percentage | ||||||||||||||||
(in thousands) | 2013 | 2012 | Change | Change | ||||||||||||
Selling, General and Administrative expenses | $ | (84,226 | ) | $ | (105,077 | ) | $ | 20,851 | (19.8 | )% | ||||||
SG&A expenses as percentage of total revenue | (3.4 | )% | (3.7 | )% |
Selling, general and administrative (“SG&A”) expenses decreased by $20.9 million, or 19.8% to $84.2 million for the year ended December 31, 2013, compared to $105.1 million for of the same period in 2012.
Selling expenses decreased by 13.2% to $34.1 million for the year ended December 31, 2013 as compared to $39.3 million in the same period of 2012. The decrease was mainly due to the decrease in sales and rail transport expenses along with the decrease in cross-province sales for the year ended December 31, 2013 as compared to the same period in 2012.
In addition, general and administrative (“G&A”) expenses decreased by 23.8% to $50.1 million for the year ended December 31, 2013 as compared to $65.8 million in the same period of 2012. The decrease was mainly due to the equipment impairment charge in the amount of $20.2 million in General Steel (China) for the year ended December 31, 2012 while no additional impairment was charged in 2013. The decrease in impairment expense was offset by $2.1 million increase in bad debt expenses in 2013 as compared to 2012 and $1.9 million prepaid special fund tax written off in 2013 as the PRC tax authorities granted us an exemption for the special fund tax in 2013 and the future realization of the prepaid amount was remote.
Change in Fair Value of Profit Sharing Liability
Fiscal year ended December 31, 2013 compared with fiscal year ended December 31, 2012
(in thousands) | 2013 | 2012 | Change | Change % | ||||||||||||
(Restated) | ||||||||||||||||
Change in fair value of profit sharing liability (gain (loss)) | $ | 174,569 | $ | (22,499 | ) | 197,068 | (875.9 | )% |
33 |
Our profit sharing liability relates to equipment operated by Longmen Joint Venture under a capital lease arrangement. Part of the payments under the capital lease are a portion of our future operating profits. Our estimate of those future profit sharing payments are accounted for as a derivative liability at fair value. In 2013, we considered the recent changes in China’s economic situation, which included a new estimation and downgrade of 2014 GDP by major investment bankers in June 2013, and a steel industry outlook reports issued for 2014. 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 fourth quarter and year to date operating results. Due to the continued decrease in our rebar selling price, the market slow-down in the fourth quarter of 2013, and the lack of gross profit recovery as quickly as expected in the year ended December 31, 2013, we have foreseen a greater downward trend in 2014 through 2016 than previously anticipated. As our projected profit (loss) decreased, the fair value of our profit sharing liability has been reduced as compared to our previous estimates in 2012 and we have recognized a gain of $174.6 million in our income from operations for the year ended December 31, 2013 as compared to a loss of $22.5 million recognized for the year ended December 31, 2012 related to the passage of time and change in the number of future periods over which the present value of future cash flows was estimated.
Income (Loss) from Operations
Fiscal year ended December 31, 2013 compared to fiscal year ended December 31, 2012
( in thousands) | 2013 | 2012 | Change | Percentage Change | ||||||||||||
(Restated) | ||||||||||||||||
Income (Loss) from Operations | $ | 34,405 | $ | (95,457 | ) | $ | 129,862 | (136.0 | )% |
Income from operations for the year ended December 31, 2013 was $34.4 million as compared to $95.5 million loss from operations for the same period in 2012. The increase in income from operations was predominantly due to the gain from change in fair value of profit sharing liability offset by the increase in gross loss.
Total Other Income (Expense), Net
Fiscal year ended December 31, 2013 compared with fiscal year ended December 31, 2012
Other Income (Expense)
(in thousands) | 2013 | 2012 | Change | Percentage Change | ||||||||||||
(Restated) | ||||||||||||||||
Interest Income | $ | 11,214 | $ | 15,059 | $ | (3,845 | ) | (25.5 | )% | |||||||
Finance/Interest Expense | (71,079 | ) | (133,120 | ) | 62,041 | (46.6 | )% | |||||||||
Financing Cost on Capital Lease | (20,799 | ) | (20,623 | ) | (176 | ) | 0.9 | % | ||||||||
Change in Fair Value of Derivative Liabilities - Warrants | 1 | 9 | (8 | ) | (88.9 | )% | ||||||||||
Gain (Loss) on Disposal of Equipment and Intangible Assets | 424 | (2,134 | ) | 2,558 | (119.9 | )% | ||||||||||
Government Grant | 4,216 | 2,253 | 1,963 | 87.1 | % | |||||||||||
Income from Equity Investments | 203 | 217 | (14 | ) | (6.5 | )% | ||||||||||
Foreign Currency Transaction (Loss) Gain | 1,394 | (1,248 | ) | 2,642 | (211.7 | )% | ||||||||||
Lease income | 2,158 | 2,119 | 39 | 1.8 | % | |||||||||||
Gain on deconsolidation of a subsidiary | 1,011 | - | 1,011 | 100 | % | |||||||||||
Payment for public highway construction | (6,462 | ) | - | (6,462 | ) | (100 | )% | |||||||||
Other non-operating income (expense), net | 1,043 | 1,783 | (740 | ) | (41.5 | )% | ||||||||||
Total Other Expense, Net | $ | (76,676 | ) | $ | (135,685 | ) | $ | 59,009 | (43.5 | )% |
Total other expenses, net for the year ended December 31, 2013 were $76.7 million compared to $135.7 million in 2012. The decrease of $59.0 million or 43.5% was mainly a result of the decrease of $62.0 million in financial expenses primarily due to decreased discounted interest on notes receivable and loan interest offset by $6.5 million (RMB 40 million) additional expense due to our payment for building a new exit ramp from a highway that leads to our manufacturing facility. This project was initiated by us, Shaanxi Coal Co., Ltd. and its affiliates (all companies are located adjacent to each other) during 2013. Total project cost is approximately $13.4 million (RMB 82 million). The local government will be responsible for approximately $3.3 million (RMB 20 million). Our share of the total costs will be approximately $8.0 million (RMB 49 million). The remaining $2.1 million (RMB 13 million) with be shared by others. All the payments for this project are made to the department of transportation of the local government for controlling and monitoring the project. The companies do not retain any control in connection with this project construction. The completion of the exit ramp from the highway that leads to our facilities will greatly enhance our efficiency, especially the savings in our transportation costs and our labor time. Interest expenses for early submission request of payment decreased by $52.1 million or 57.9% to $37.9 million for the year ended December 31, 2013 from $90.0 million for the year ended December 31, 2012. The decrease in discounted interest on notes receivables in 2013 as compared to 2012 was mainly due to fewer conversions of notes receivables before the maturity date into cash for financing our operations in 2013 as compared to 2012. Short-term loan interest expense also decreased by $9.9 million to $33.2 million in 2013 from $43.1 million in 2012 mainly as a result of decreased short-term borrowings from third parties in 2013 compared to 2012.
34 |
Income Taxes
For the years ended December 31, 2013 and 2012, we had a total tax provision from our profitable subsidiaries of $0.4 million and $0.8 million, respectively. For the years ended December 31, 2013 and 2012, we had current income tax provisions for our profitable subsidiaries, amounting to $0.4 million and $0.6 million, respectively. For the years ended December 31, 2013 and 2012, we evaluated the deferred tax assets and concluded the net operating loss may not be fully realizable and provided 100% valuation allowance for the deferred tax assets. No deferred income tax benefit was recorded for the year ended December 31, 2013 as the resulting deferral of tax assets had been fully reserved because the benefit was not considered to be realizable due to recent historical experience.
For the years ended December 31, 2013 and 2012, we had effective tax rates of (0.8%) and of (0.3% ), respectively. The negative effective tax rates for the years ended December 31, 2013 and 2012 were mainly due to a consolidated loss before income tax while we provided 100% valuation allowance for the deferred tax assets at subsidiaries with losses and incurred income tax expenses in our profitable subsidiaries.
Net Loss
Fiscal year ended December 31, 2013 compared with fiscal year ended December 31, 2012
( in thousands) | 2013 | 2012 | Change | Percentage Change | ||||||||||||
Net loss | $ | (42,625 | ) | $ | (231,938 | ) | $ | 189,313 | (81.6 | )% |
Net Loss attributable to General Steel Holdings, Inc.
Fiscal year ended December 31, 2013 compared to fiscal year ended December 31, 2012
( in thousands) | 2013 | 2012 | Change | Percentage Change | ||||||||||||
Net loss | $ | (42,625 | ) | $ | (231,938 | ) | $ | 189,313 | (81.6 | )% | ||||||
Less: Net loss attributable to noncontrolling interest | (9,609 | ) | (79,241 | ) | 69,632 | (87.9 | )% | |||||||||
Net loss attributable to General Steel Holdings, Inc. | $ | (33,016 | ) | $ | (152,697 | ) | $ | 119,681 | (78.4 | )% |
Net loss attributable to us for the year ended December 31, 2013 decreased to $33.0 million compared to $152.7 million for the year ended December 31, 2012. The decrease in net loss for the year ended December 31, 2013 was mainly a result of an increase in gross loss of $88.1 million offset by an increase in gain from change in fair value of profit sharing liability of $197.1 million, a decrease in SG&A expenses of $20.9 million and a decrease in other expense of $59.0 million for the year ended December 31, 2013 as compared to the same period in 2012.
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.
35 |
Statements of Operations for the years ended December 31, 2012 and 2011:
(In thousands except share data) | 2012 | 2011 | Change | Percentage Change | ||||||||||||
(Restated) | (Restated) | |||||||||||||||
Sales | $ | 2,863,593 | $ | 3,563,896 | $ | (700,303 | ) | (19.6 | )% | |||||||
Cost of Goods Sold | 2,831,474 | 3,652,110 | (820,636 | ) | (22.5 | )% | ||||||||||
Gross Profit (loss) | 32,119 | (88,214 | ) | 120,333 | (136.4 | )% | ||||||||||
Gross Profit Margin % | 1.1 | % | (2.5 | )% | (3.6 | )% | ||||||||||
Selling, General and Administrative Expenses | (105,077 | ) | (91,827 | ) | (13,250 | ) | 14.4 | % | ||||||||
Change in Fair Value of Profit Sharing Liability | (22,499 | ) | (14,047 | ) | (8,452 | ) | 60.2 | % | ||||||||
Loss from Operations | (95,457 | ) | (194,088 | ) | 98,631 | (50.8 | )% | |||||||||
Other Expense, net | (135,685 | ) | (73,617 | ) | (62,068 | ) | 84.3 | % | ||||||||
Loss Before Provision for Income Taxes and Noncontrolling Interest | (231,142 | ) | (267,705 | ) | 36,563 | (13.7 | )% | |||||||||
Provision (Benefit) for Income Taxes | 796 | 15,594 | (14,798 | ) | (94.9 | )% | ||||||||||
Net Loss | (231,938 | ) | (283,299 | ) | 51,361 | (18.1 | )% | |||||||||
Less: Net Loss Attributable to Noncontrolling Interest | (79,241 | ) | (106,112 | ) | 26,871 | (25.3 | )% | |||||||||
Net Loss Attributable to General Steel Holdings, Inc. | $ | (152,697 | ) | $ | (177,187 | ) | $ | 24,490 | (13.8 | )% | ||||||
Loss Per Share | ||||||||||||||||
Basic | $ | (2.78 | ) | $ | (3.24 | ) | $ | 0.46 | (14.2 | )% | ||||||
Diluted | $ | (2.78 | ) | $ | (3.24 | ) | $ | 0.46 | (14.2 | )% |
Fiscal year ended December 31, 2012 compared to fiscal year ended December 31, 2011
Sales by Subsidiary and Product
(in thousands) | 2012 | 2011 | Change | Percentage Change | ||||||||||||||||
Subsidiary | Product | |||||||||||||||||||
Longmen Joint Venture | Rebar | $ | 2,837,609 | $ | 3,487,636 | $ | (650,027 | ) | (18.6 | )% | ||||||||||
Others | 25,984 | 76,260 | (50,276 | ) | (65.9 | )% | ||||||||||||||
Total Sales | $ | 2,863,593 | $ | 3,563,896 | $ | (700,303 | ) | (19.6 | )% |
(In thousands metric tons) | 2012 | 2011 | Change | Percentage Change | ||||||||||||||||
Subsidiary | Product | |||||||||||||||||||
Longmen Joint Venture | Rebar | 5,062 | 5,496 | (434 | ) | (7.9 | )% | |||||||||||||
Others | 274 | 711 | (437 | ) | (61.5 | )% | ||||||||||||||
Total Production | 5,336 | 6,207 | (871 | ) | (14.0 | )% |
Total sales for the fiscal year 2012 decreased by $700.3 million or 19.6% to $2.9 billion from $3.6 billion in 2011. The decrease in sales compared to 2011 was predominantly due to the combined effect of decreased volume and average selling price of our rebar products. Longmen Joint Venture comprised 99.1% and 97.9% of total sales for the year ended 2012 and 2011, respectively. Sales volume of rebar decreased by 0.4 million metric tons, or 7.9% to 5.1 million metric tons, compared to 5.5 million metric tons in 2011. The average selling price of rebar decreased by 11.7% to approximately $560.6 per ton in 2012 from approximately $634.6 per ton in 2011.
Our product demands and prices had been rising in the first three quarters of 2011 until the end of the third quarter of 2011. In the fourth quarter of 2011, as a result of the China and global steel industry over-capacity, Chinese economic control polices and the financial crisis, commodity prices abruptly plummeted in the fourth quarter of 2011. With weakened demand, market forces kicked-in and the price of steel dropped substantially. As such, both our sales volume and prices have continued to drop during the year of 2012 in comparison to the same period of 2011
Our five major customers are all distributors and collectively represented approximately 26.7% of our total sales for the year ended December 31, 2012 in comparison to 27.1% of our total sales for year ended December 31, 2011. These five customers included related parties and major distributors owned by 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.
36 |
Cost of Goods Sold
Fiscal year ended December 31, 2012 compared with fiscal year ended December 31, 2011
(in thousands) | 2012 | 2011 | Change | Percentage Change | ||||||||||||
Subsidiary | ||||||||||||||||
Longmen Joint Venture | $ | 2,803,318 | $ | 3,502,109 | $ | (698,791 | ) | (20.0 | )% | |||||||
Others | 28,156 | 150,001 | (121,845 | ) | (81.2 | )% | ||||||||||
Total Cost of Goods Sold | $ | 2,831,474 | $ | 3,652,110 | $ | (820,636 | ) | (22.5 | )% |
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 84.9% of our total cost of sales. The cost of goods sold decreased by $820.6 million or 22.5% to $2.8 billion, in 2012 from $3.7 billion in 2011. The decrease was mainly driven by the decreased sales volume of 7.9% in rebar and decreased unit costs of raw materials as a result of the decline in both iron ore and coke purchases of approximately 18.1%, for the year ended December 31, 2012 as compared to the same period in 2011. In addition, we provided allowance for inventory valuation of approximately $37.5 million at the end of 2011 for both our raw materials and finished goods due to the drop in market price of iron ore, coke and our rebar products as of December 31, 2011 and we only provided allowance for inventory valuation of approximately $9.6 million as of December 31, 2012. As such, the average costs of rebar manufactured decreased by 13.1% to approximately $553.8 per ton for the year of 2012 from approximately $637.2 per ton in the same period of 2011.
Gross Profit (Loss)
Fiscal year ended December 31, 2012 compared to fiscal year ended December 31, 2011
(in thousands) | 2012 | 2011 | Change | Percentage Change | ||||||||||||
Gross Profit (Loss) | $ | 32,119 | $ | (88,214 | ) | $ | 120,333 | (136.4 | )% | |||||||
Gross Profit (Loss) Margin | 1.1 | % | (2.5 | )% |
Gross profit for the year of 2012 was $32.1 million, or 1.1% of total sales, as compared to a gross loss of $88.2 million, or (2.5%) of total sales in the same period in 2011. The increase in gross margin percentage was mainly attributable to the percentage decrease of average rebar selling price of 11.7% was lower than the percentage decrease of costs of rebar manufactured of 13.1% for the year of 2012 as compared to the same period of 2011.
Gross Profit (Loss) and Gross Profit (Loss) Margin by quarters
Our product demands and prices had been rising in the first three quarters of 2011 until the end of the third quarter of 2011. As such, we have been able to achieve positive gross profit margin. In the fourth quarter of 2011, as a result of the China and global steel industry over-capacity, Chinese economic control polices and the financial crisis, commodity prices abruptly plummeted in the fourth quarter of 2011. With weakened demand, market forces kicked-in and the price of steel dropped substantially. As such, both our selling volume and prices dropped since the fourth quarter of 2011, continuing a decline. We had significant negative margins during the fourth quarter of 2011 as we were forced to manufacture with high priced raw material inventories that we had previously purchased while the market selling prices for finished goods had dropped below the cost of goods.
37 |
The over-capacity issue continued to effect our results during 2012 and the Chinese economy remained weak which had indirect impact affecting our industry and the selling price suffered further decline during the third quarter of 2012. As a result, we were forced to manufacture with high priced raw material inventories that we had previously purchased during the first two quarters of 2012 while the market selling prices for finished goods had dropped below the cost of goods again during the third quarter of 2012. However, we were able to achieve positive gross profit margin again during the fourth quarter of 2012 as we have manufactured our products with the decreased unit costs of raw materials as a result of the decline in both iron ore and coke that we purchased during the third quarter of 2012.
Selling, General and Administrative Expenses
Fiscal year ended December 31, 2012 compared with fiscal year ended December 31, 2011
Selling, General and Administrative Expenses | Percentage | |||||||||||||||
(in thousands) | 2012 | 2011 | Change | Change | ||||||||||||
Selling, General and Administrative expenses | $ | (105,077 | ) | $ | (91,827 | ) | $ | (13,250 | ) | 14.4 | % | |||||
SG&A expenses as percentage of total revenue | (3.7 | )% | (2.6 | )% |
Selling, general and administrative (“SG&A”) expenses increased by $13.3 million, or 14.4% to $105.1 million for the year ended December 31, 2012, compared to $91.8 million for of the same period in 2011.
Selling expenses decreased by 1.0% to $39.3 million for the year ended December 31, 2012 as compared to $39.7 million in the same period of 2011. The decrease was mainly due to the decline of sales agent charges at Longmen Joint Venture related to the decrease of shipment volume, offset by the increase of transportation expenses due to long distance sales deliveries to markets in rural areas in Xian city, Sichuan Province and Gansu Province during the year ended December 31, 2012 as compared to the same period of 2011.
In addition, general and administrative (“G&A”) expenses increased by 26.1% to $65.8 million for the year ended December 31, 2012 as compared to $52.1 million in the same period of 2011. The increase was mainly due to the equipment impairment charge in the amount of $20.2 million in General Steel (China) for the year ended December 31, 2012, as compared to $5.4 million for the same period of 2011. The increase was also attributable to the rise of executive compensation, salaries and wages, legal and accounting and maintenance facility expenses offset by the decrease in bad debt expenses.
Change in Fair Value of Profit Sharing Liability
Fiscal year ended December 31, 2012 compared with fiscal year ended December 31, 2011
(in thousands) | 2012 | 2011 | Change | Change % | ||||||||||||
(Restated) | (Restated) | |||||||||||||||
Change in fair value of profit sharing liability (loss) | $ | (22,499 | ) | $ | (14,047 | ) | (8,452 | ) | 60.2 | % |
Our profit sharing liability relates to equipment operated by Longmen Joint Venture under a capital lease arrangement. Part of the payments under the capital lease are a portion of our future operating profits. Our estimate of those future profit sharing payments are accounted for as a derivative liability at fair value. We recognized a loss on change in fair value of profit sharing liability of $22.5 million in our loss from operations for the year ended December 31, 2012 as compared to $14.0 million in the same period of 2011 primarily due to the change in fair value related to the passage of time and change in the number of future periods over which the present value of future cash flows was estimated. The increase of loss from change in fair value of profit sharing liability of $8.5 million was mainly due to a full year in 2012 was accounted for the change in fair value related to the passage of time and change in the number of future periods over which the present value of future cash flows was estimated, while in 2011 we did not start incurring such loss until May 2011. The fair value of the profit sharing liability at December 31, 2012 was not materially different from the previous reporting period at December 31, 2011.
Loss from Operations
Fiscal year ended December 31, 2012 compared to fiscal year ended December 31, 2011
( in thousands) | 2012 | 2011 | Change | Percentage Change | ||||||||||||
(Restated) | (Restated) | |||||||||||||||
Loss from Operations | $ | (95,457 | ) | $ | (194,088 | ) | $ | 98,631 | (50.8 | )% |
Loss from operations was $95.5 million for the year ended December 31, 2012, as compared to loss of $194.1 million for the same period in 2011. The decrease in loss of $98.6 million is predominantly due to positive gross profit margin for the year ended December 31, 2012 as compared to negative profit margin for the same period of 2011, offset by the increase in SG&A and the increase in loss on fair value of profit sharing liability as discussed above.
38 |
Total Other Income (Expense), Net
Fiscal year ended December 31, 2012 compared with fiscal year ended December 31, 2011
Other Income (Expense)
(in thousands) | 2012 | 2011 | Change | Percentage Change | ||||||||||||
(Restated) | (Restated) | |||||||||||||||
Interest Income | $ | 15,059 | $ | 7,892 | $ | 7,167 | 90.8 | % | ||||||||
Finance/Interest Expense | (133,120 | ) | (87,245 | ) | (45,875 | ) | 52.6 | % | ||||||||
Financing Cost on Capital Lease | (20,623 | ) | (13,657 | ) | (6,966 | ) | 51.0 | % | ||||||||
Change in Fair Value of Derivative Liabilities - Warrants | 9 | 5,563 | (5,554 | ) | (99.8 | )% | ||||||||||
Gain on Debt Settlement | - | 3,430 | (3,430 | ) | (100.0 | )% | ||||||||||
(Loss) Gain on Disposal of Fixed Assets | (2,134 | ) | 693 | (2,827 | ) | (407.9 | )% | |||||||||
Government Grant | 2,253 | - | 2,253 | 100.0 | % | |||||||||||
Realized Income from Future Contract | - | 415 | (415 | ) | (100.0 | )% | ||||||||||
Income from Equity Investments | 217 | 5,302 | (5,085 | ) | (95.9 | )% | ||||||||||
Foreign Currency Transaction (Loss) Gain | (1,248 | ) | 3,424 | (4,672 | ) | (136.4 | )% | |||||||||
Lease income | 2,119 | 2,008 | 111 | 5.5 | % | |||||||||||
Other non-operating income (expense), net | 1,783 | (1,442 | ) | 3,225 | (223.6 | )% | ||||||||||
Total Other Expense, Net | $ | (135,685 | ) | $ | (73,617 | ) | $ | (62,068 | ) | 84.3 | % |
Total other expenses, net for the year ended December 31, 2012 were $135.7 million compared to $73.6 million in 2011. The increase of $62.1 million or 84.3% was mainly a result of the combined effect of an increase of $52.8 million in financial expenses, of which, $7.0 million was increased interest expense on capital lease, which we did not start incurring until May 2011, and $45.9 million of increased interest expense due to an increased discounted interest on notes receivable in 2012 after the central government tightened its funding policy with a higher discount rate. Interest expenses for early submission request of payment for the years ended December 31, 2012 and 2011 amounted to $90.0 million and $34.2 million, respectively. The increased discounted interest on notes receivables in 2012 as compared to 2011 was mainly due to the conversion of our notes receivables into cash before the maturity date for the purposes of financing our operations. Total other expenses increased in 2012 as compared to 2011, which was also offset by the increase of interest income. The increased interest income in 2012 as compared to 2011 was mainly due to the interest income in the amount of $2.3 million incurred from the loans receivable of $69.3 million to our related parties during 2012 and an increased interest income from the bank in the amount of $4.9 million as we maintained a higher average restricted bank balance in 2012 as compared to 2011.
The change in fair value of derivative liabilities for the year ended December 31, 2012 was a gain of $0.01 million compared to a gain of $5.6 million for the same period in 2011.
According to U.S. GAAP, our December 2007 convertible notes, December 2007 warrants and the December 2009 warrants were considered derivatives and therefore are carried at their fair market value at each financial reporting date with any changes in the fair value reported as gains or losses in our income statements. One of the major drivers used to calculate the value of the derivatives is our stock price.
Income Taxes
For the years ended December 31, 2012 and 2011, we had a total tax provision of $0.8 million and $15.6 million, respectively. For the years ended December 31, 2012 and 2011, we had current income tax provisions for our profitable subsidiaries, amounting to $0.6 million and $0.2 million, respectively. After the filing of the Form 10-K/A for the year ended December 31, 2010, management evaluated our future operating forecast based on the current steel market condition, and concluded the net operating loss may not be fully realizable and decided to provide 100% valuation allowance for the deferred tax assets, which resulted in a provision in 2011 of $46.9 million. For the year ended December 31, 2012, we evaluated the deferred tax assets remained in Baotou Steel Pipe Joint Venture and concluded the net operating loss may not be fully realizable and to provide 100% valuation allowance for the deferred tax assets. As such, we provided an allowance against the remaining deferred tax assets as of December 31, 2011 and had $0.2 million of deferred provision for income taxes. For the year ended December 31, 2011, we provided 100% valuation allowance of the deferred tax assets as of December 31, 2010 and had $15.4 million of deferred provision for income taxes.
For the years ended December 31, 2012 and 2011, we had effective tax rates of (0.3%) and of (5.8%), respectively. The negative effective tax rate for the years ended December 31, 2012 and 2011 were mainly due to a consolidated loss before income tax while we provided 100% valuation allowance for the deferred tax assets at subsidiaries with losses and incurred income tax expenses in our profitable subsidiaries.
39 |
Net Loss
Fiscal year ended December 31, 2012 compared with fiscal year ended December 31, 2011
Net Loss
( in thousands) | 2012 | 2011 | Change | Percentage Change | ||||||||||||
Net loss | $ | (231,938 | ) | $ | (283,299 | ) | $ | 51,361 | (18.1 | )% |
Net Loss attributable to General Steel Holdings, Inc.
Fiscal year ended December 31, 2012 compared to fiscal year ended December 31, 2011
Net Loss
(in thousands) | 2012 | 2011 | Change | Percentage Change | ||||||||||||
Net loss | $ | (231,938 | ) | $ | (283,299 | ) | $ | 51,361 | (18.1 | )% | ||||||
Less: Net loss attributable to noncontrolling interest | (79,241 | ) | (106,112 | ) | 26,871 | (25.3 | )% | |||||||||
Net loss attributable to General Steel Holdings, Inc. | $ | (152,697 | ) | $ | (177,187 | ) | $ | 24,490 | (13.8 | )% |
Net loss attributable to us for the year ended December 31, 2012 decreased to $152.7 million compared to $177.2 million for the year ended December 31, 2011. The decrease in net loss attributable to us for the year ended December 31, 2012 was mainly a result of the combined effect of a decrease in loss from operations of $107.1 million, offset by an increase other expenses of $70.5 million as compared to the same period of 2011.
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.
Statements of Operations for the years ended December 31, 2011 and 2010:
(In thousands except share data) | 2011 | 2010 | Change | Percentage Change | ||||||||||||
(Restated) | ||||||||||||||||
Sales | $ | 3,563,896 | $ | 1,882,140 | $ | 1,681,756 | 89.4 | % | ||||||||
Cost of Goods Sold | 3,652,110 | 1,850,725 | 1,801,385 | 97.3 | % | |||||||||||
Gross Profit (loss) | (88,214 | ) | 31,415 | (119,629 | ) | (380.8 | )% | |||||||||
Gross Profit Margin % | (2.5 | )% | 1.7 | % | (4.2 | )% | ||||||||||
Selling, General and Administrative Expenses | (91,827 | ) | (52,577 | ) | (39,250 | ) | 74.7 | % | ||||||||
Change in Fair Value of Profit Sharing Liability | (14,047 | ) | - | (14,047 | ) | - | ||||||||||
Loss from Operations | (194,088 | ) | (21,162 | ) | (172,926 | ) | 817.2 | % | ||||||||
Other Expense, net | (73,617 | ) | (33,891 | ) | (39,726 | ) | 117.2 | % | ||||||||
Loss Before Provision for Income Taxes and Noncontrolling Interest | (267,705 | ) | (55,053 | ) | (212,652 | ) | 386.3 | % | ||||||||
Provision (Benefit) for Income Taxes | 15,594 | (8,782 | ) | 24,376 | (277.6 | )% | ||||||||||
Net Loss | (283,299 | ) | (46,271 | ) | (237,028 | ) | 512.3 | % | ||||||||
Less: Net Loss Attributable to Noncontrolling Interest | (106,112 | ) | (16,265 | ) | (89,847 | ) | 552.4 | % | ||||||||
Net Loss Attributable to General Steel Holdings, Inc. | $ | (177,187 | ) | $ | (30,006 | ) | $ | 147,181 | 490.5 | % | ||||||
Loss Per Share | ||||||||||||||||
Basic | $ | (3.24 | ) | $ | (0.56 | ) | $ | (2.68 | ) | 478.6 | % | |||||
Diluted | $ | (3.24 | ) | $ | (0.56 | ) | $ | (2.68 | ) | 478.6 | % |
40 |
Revenue
Fiscal year ended December 31, 2011 compared to fiscal year ended December 31, 2010
Revenue by Subsidiary and Product
(in thousands) | 2011 | 2010 | Change | Percentage Change | ||||||||||||||||
Subsidiary | Product | |||||||||||||||||||
Longmen Joint Venture | Rebar | $ | 3,487,636 | $ | 1,845,577 | $ | 1,642,059 | 89.0 | % | |||||||||||
Others | 76,260 | 36,563 | 39,697 | 108.6 | % | |||||||||||||||
Total Revenue | $ | 3,563,896 | $ | 1,882,140 | $ | 1,681,756 | 89.4 | % |
(In thousands metric tons) | 2011 | 2010 | Change | Percentage Change | ||||||||||||||||
Subsidiary | Product | |||||||||||||||||||
Longmen Joint Venture | Rebar | 5,496 | 3,511 | 1,985 | 56.5 | % | ||||||||||||||
Others | 711 | 415 | 296 | 71.3 | % | |||||||||||||||
Total Production | 6,207 | 3,926 | 2,281 | 58.1 | % |
Total Sales Revenue for the fiscal year 2011 increased $1.7 billion or 89.4% to $3.6 billion from $1.9 billion in 2010. The increase in sales revenue compared to 2010 was predominantly due to the combined effect of increased production volume and average selling price of our rebar products. Sales volume increased 2.3 million metric tons, or 58.1% to 6.2 million metric tons, compared to 3.9 million metric tons in 2010. The average selling price of rebar increased 20.7% to approximately $635 per ton in 2011 from approximately $526 per ton in 2010.
Longmen Joint Venture comprised 97.9% of total sales for 2011. Production volume of rebar at Longmen Joint Venture reached 5.5 million metric tons in 2011, which increased 56.5% compared with 3.5 million metric tons for of the same period in 2010. The increase of Longmen Joint Venture’s production was mainly due to the additional capacity contributed from the new blast furnaces brought online in January 2011 through our cooperation with Shaanxi Steel and Shaanxi Coal under the Unified Management Agreement. Our current total monthly production volume is approximately 555,000 tons of crude steel.
Our product demands and prices have been on a rise in the first three quarters of 2011 until the end of the third quarter. In the fourth quarter of 2011, as a result of the China and global steel industry over-capacity, Chinese economic control polices and the financial crisis, global demand stalled and commodity prices abruptly plummeted. With weakened demand, market forces kicked-in and the price of steel dropped substantially. As such, both our selling volume and prices have dropped in the fourth quarter of 2011 in comparison to the previous quarters after the launch of our new blast furnaces.
Longmen Joint Venture comprised 98.1% of total sales for 2010. We operated at about 89% of our total capacity in 2010 due to a stable market demand for our construction steel products.
Our five major customers are all distributors and collectively represented approximately 27.1% of our total sales for the year ended December 31, 2011 in comparison to 28.6% of our total sales for year ended December 31, 2010. These five customers include related parties and major distributors owned by central government. As we are the largest supplier in Shaanxi province, we normally maintain a good relationship with them to stabilize our sales channel.
Cost of Goods Sold
Fiscal year ended December 31, 2011 compared with fiscal year ended December 31, 2010
Cost of Goods Sold
(in thousands) | 2011 | 2010 | Change | Percentage Change | ||||||||||||
Subsidiary | ||||||||||||||||
Longmen Joint Venture | $ | 3,502,109 | $ | 1,813,170 | $ | 1,688,939 | 93.1 | % | ||||||||
Others | 150,001 | 37,555 | 112,446 | 299.4 | % | |||||||||||
Total Cost of Goods Sold | $ | 3,652,110 | $ | 1,850,725 | $ | 1,801,385 | 97.3 | % |
41 |
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 90.1% of our total cost of sales. As a result, the cost of goods sold increased by $1.8 billion or 97.3% to $3.7 billion, in 2011 from $1.9 billion in 2010. The increase was mainly driven by the increasing sales volume of 56.5% in rebar and unit costs of raw materials as a result of the rise in iron ore and coke purchase prices until the end of third quarter of 2011 before the market started getting weaker in the fourth quarter of 2011. The rise in iron ore and coke purchases of approximately 10.7% and 15.6%, respectively, for the year ended December 31, 2011 as compared to the same period in 2010 increased our period over period costs. As our operating strategy is to maintain competitiveness and to produce quality products, we have previously entered into some import raw material purchase contracts prior to September 2011, which generally have a higher quality and price compared to domestic raw materials. As such, this also contributed to our unit costs of raw materials being higher in the fourth quarter of 2011. In addition, we incurred depreciation of $18.1 million during the year ended December 31, 2011 related to the new blast furnaces brought online in April 2011 through our cooperation with Shaanxi Steel and Shaanxi Coal under the Unified Management Agreement, while we did not have such cost during the same period of 2010. Furthermore, we also wrote off approximately $37.5 million of inventory for impairment at the end of 2011 for both of our raw materials and finished goods due to the drop in market price of iron ore, coke and our rebar products during the fourth quarter of 2011.
Gross Profit (Loss)
Fiscal year ended December 31, 2011 compared to fiscal year ended December 31, 2010
(in thousands) | 2011 | 2010 | Change | Percentage Change | ||||||||||||
Gross Profit (Loss) | $ | (88,214 | ) | $ | 31,415 | $ | (119,629 | ) | (380.8 | )% | ||||||
Gross Profit (Loss) Margin | (2.5 | )% | 1.7 | % | (4.2 | )% |
Gross profit for 2011 decreased by $119.6 million or 380.8% which resulted in a gross loss of $(88.2) million from $31.4 million in 2010. The gross margin for 2011 decreased by 4.2% to a gross loss margin of (2.5)% compared to 1.7% of gross profit margin for 2010. The decrease was primarily attributable to a drop in gross profit at Longmen Joint Venture. As discussed above, in the fourth quarter of 2011, as a result of the China and global steel industry over-capacity and Chinese economic control polices and the financial crisis, global demand stalled and commodity prices abruptly plummeted. With weakened demand, market forces kicked-in and the price of steel dropped substantially. We, like many other steel producers in China, experienced significant losses in the fourth quarter as we were forced to manufacture with high priced raw material inventories that we had previously purchased while the market selling prices for finished goods had dropped below the cost of goods. This resulted in negative margins.
Selling, General and Administrative Expenses
Fiscal year ended December 31, 2011 compared with fiscal year ended December 31, 2010
Selling, General and Administrative (“SG&A”) Expenses | Percentage | |||||||||||||||
(in thousands) | 2011 | 2010 | Change | Change | ||||||||||||
Selling, General and Administrative expenses | $ | (91,827 | ) | $ | (52,577 | ) | $ | (39,250 | ) | 74.7 | % | |||||
SG&A expenses as percentage of total revenue | (2.6 | )% | (2.8 | )% | 0.2 | % |
Selling, general and administrative (“SG&A”) expenses increased $39.3 million, or 74.7% to $91.8 million for the year ended December 31, 2011, compared to $52.6 million for of the same period in 2010.
The increase was mainly due to the rise of transportation and sales agent charges at Longmen Joint Venture related to the increase in shipment volume and long distance sales deliveries to markets in the rural area in Xian city, Henan, Hubei, Sichuan and Gansu as sales expansion to other region other than Shaanxi province as a result of the increase in production volume. In addition, we had an impairment charge in the amount of $5.4 million in General Steel (China) in the second quarter of 2011. Refer to “Note 8 - plant and equipment, net” in the Notes to Consolidated Financial Statements for details.
SG&A expenses as a percentage of revenue decreased to 2.6% in 2011 from 2.8% in 2010. The decrease in percentage of revenue was due to the increase of sales revenue as a result of expanded production capacity when comparing to some of the fixed SG&A expenses.
Change in Fair Value of Profit Sharing Liability
Fiscal year ended December 31, 2011 compared with fiscal year ended December 31, 2010
(in thousands) | 2011 | 2010 | Change | Change % | ||||||||||||
(Restated) | ||||||||||||||||
Change in fair value of profit sharing liability (loss) | $ | (14,047 | ) | $ | - | (14,047 | ) | - |
Our profit sharing liability relates to equipment operated by Longmen Joint Venture under a capital lease arrangement. Part of the payments under the capital lease are a portion of our future operating profits. Our estimate of those future profit sharing payments are accounted for as a derivative liability at fair value. We recognized a loss from change in fair value of profit sharing liability of $14.0 million in our loss from operations for the year ended December 31, 2011 as compared to $0 in the same period of 2010 primarily due to the change in fair value related to the passage of time and change in the number of future periods over which the present value of future cash flows was estimated, which we started to incur in May 2011. The fair value of the profit sharing liability at December 31, 2011 was not materially different from inception period at May 1, 2011.
42 |
Loss from Operations
Fiscal year ended December 31, 2012 compared to fiscal year ended December 31, 2011
( in thousands) | 2011 | 2010 | Change | Percentage Change | ||||||||||||
(Restated) | ||||||||||||||||
Loss from Operations | $ | (194,088 | ) | $ | (21,162 | ) | $ | (172,926 | ) | 817.2 | % |
Loss from operations was $194.1 million for the year ended December 31, 2011, as compared to loss of $21.2 million for the same period in 2010. The increase in loss of $172.9 million is predominantly due to negative profit margins and increased in SG&A expenses and loss on change in fair value of profit sharing liability as discussed above.
Total Other Income (Expense), Net
Fiscal year ended December 31, 2011 compared with fiscal year ended December 31, 2010
Other Income (Expense)
(in thousands) | 2011 | 2010 | Change | Percentage Change | ||||||||||||
(Restated) | ||||||||||||||||
Interest Income | $ | 7,892 | $ | 6,154 | $ | 1,738 | 28.2 | % | ||||||||
Finance/Interest Expense | (87,245 | ) | (51,283 | ) | (35,962 | ) | 70.1 | % | ||||||||
Financing Cost on Capital Lease | (13,657 | ) | - | (13,657 | ) | - | ||||||||||
Change in Fair Value of Derivative Liabilities - Warrants | 5,563 | 15,055 | (9,492 | ) | (63.0 | )% | ||||||||||
Gain on Debt Settlement | 3,430 | - | 3,430 | - | ||||||||||||
Gain (Loss) on Disposal of Fixed Assets | 693 | (9,447 | ) | 10,140 | (107.3 | )% | ||||||||||
Realized Income from Future Contract | 415 | 1,424 | (1,009 | ) | (70.9 | )% | ||||||||||
Income from Equity Investments | 5,302 | 6,383 | (1,081 | ) | (16.9 | )% | ||||||||||
Foreign Currency Transaction Gain | 3,424 | - | 3,424 | - | ||||||||||||
Lease Income | 2,008 | 943 | 1,065 | 112.9 | % | |||||||||||
Other Non-operating Expense, net | (1,442 | ) | (3,120 | ) | 1,678 | (53.8 | )% | |||||||||
Total Other Expense, Net | $ | (73,617 | ) | $ | (33,891 | ) | $ | (39,726 | ) | 117.2 | % |
Total other expenses, net for the year ended December 31, 2011 were $73.6 million compared to $33.9 million in 2010. The increase of $39.7 million or 117.2% in total other expenses, was mainly a result of the combined effect of an increase of $49.6 million in financial expenses, of which, $13.6 million was interest expense on capital lease, and $36.0 million was interest expense increase was primarily due to increased in banks borrowings, a $9.5 million reductions in income from the change in fair value of derivative liabilities, and offset by an increase of $3.4 million gain from debt extinguishment and $3.4 million foreign currency transaction gain.
The foreign currency transaction gain was due to the loans proceeds we received in the second quarter of 2011 which was denominated in U.S. Dollars. Prior to the second quarter of 2011, there were no other transactions denominated in U.S. Dollars and therefore we did not incur any foreign currency gains or losses.
According to U.S. GAAP, our December 2007 convertible notes, December 2007 warrants and the December 2009 warrants were considered derivatives and therefore are carried at their fair market value at each financial reporting date with any changes in the fair value reported as gains or losses in our income statements. One of the major drivers used to calculate the value of the derivatives is our stock price.
The change in fair value of derivative liabilities for the year ended December 31, 2011 was a gain of $5.6 million compared to a gain of $15.1 million for the same period last year. This gain was mainly due to a change of stock price of our common stock as of December 31, 2011 compared to the one as of December 31, 2010.
Income Taxes
For the years ended December 31, 2011 and 2010, we had a total tax provision of $15.6 million and a tax benefit of $8.8 million, respectively.
For the years ended December 31, 2011 and 2010, we had effective tax rates of (5.8%) and 16.0%, respectively. The negative effective tax rate for the year ended December 31, 2011 was mainly due to a consolidated loss before income tax while we provided 100% valuation allowance for the deferred tax assets at Longmen Joint Venture and we incurred income tax expenses in our profitable subsidiaries. The positive effective tax rate for the year ended December 31, 2010 was mainly due to a consolidated loss before income tax while we recognized the deferred tax assets that were incurred from the net operating losses to be carrying forwards.
43 |
Net Loss
Fiscal year ended December 31, 2011 compared with fiscal year ended December 31, 2010
Net Loss
( in thousands) | 2011 | 2010 | 2011 vs 2010 | Percentage Change | ||||||||||||
Net loss | $ | (283,299 | ) | $ | (46,271 | ) | $ | (237,028 | ) | 512.3 | % |
Net Loss attributable to General Steel Holdings, Inc.
Fiscal year ended December 31, 2011 compared to fiscal year ended December 31, 2010
Net Loss
( in thousands) | 2011 | 2010 | 2011 vs 2010 | Percentage Change | ||||||||||||
Net loss | $ | (283,299 | ) | $ | (46,271 | ) | $ | (237,028 | ) | 512.3 | % | |||||
Less: Net loss attributable to noncontrolling interest | (106,112 | ) | (16,265 | ) | (89,847 | ) | 552.4 | % | ||||||||
Net loss attributable to General Steel Holdings, Inc. | $ | (177,187 | ) | $ | (30,006 | ) | $ | (147,181 | ) | 490.5 | % |
Net loss attributable to us for the year ended December 31, 2011 increased to $177.2 million compared to $30.0 million for the year ended December 31, 2010. The increase in net loss attributable to us for the year ended December 31, 2011 was mainly a result of the combined effect of an increase of $3.7 million impairment charge on equipment, an increase of $27.7 million in interest expense on the capital lease, an increase of $36.0 million in interest expense on banks borrowings, and a decrease of $9.5 million in the change in fair value of in derivative liabilities, offset by an increase of $3.4 million gain from debt extinguishment. In addition, we determined the net operating losses carry forward may not be fully realizable in 2011 and provided 100% allowance charges of $15.4 million of our deferred tax assets carried over from 2010.
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 December 31, 2013, our current liabilities exceeded the current assets by approximately $1.2 billion. Given our expected capital expenditure in the foreseeable future, we have comprehensively considered our available sources of funds as follows:
· | Financial support and credit guarantee from related parties; and |
· | Other available sources of financing from domestic banks and other financial institutions given our credit history. |
Based on the above considerations, our 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 consolidated financial statements for the year ended December 31, 2013 have been prepared on a going concern basis.
As of December 31, 2013, we had cash and restricted cash aggregating $431.3 million, of which $399.3 million was restricted. As of December 31, 2012, we had cash and restricted cash aggregating $369.9 million, of which $323.4 million was restricted. There was an increase of $61.4 million.
As of December 31, 2012, we had cash and restricted cash aggregating $369.9 million, of which $323.4 million was restricted. As of December 31, 2011, we had cash and restricted cash aggregating $518.2 million, of which $398.2 million was restricted. There was a decrease of $148.3 million.
As of December 31, 2011, we had cash and restricted cash aggregating $518.2 million, of which $398.2 million was restricted. As compared to $263.1 million, of which $197.8 million was restricted as of December 31, 2010, there was an increase of $255.1 million.
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, customer deposits and from other sources. This blended form of financing reduces our reliance on any single source.
44 |
Substantially all our operations are conducted in China and all of our revenues are denominated in Renminbi (RMB). RMB is subject to the exchange control regulation in China, and, as a result, we may have difficulty distributing any dividends outside of China due to PRC exchange control regulations that restrict its ability to convert RMB into U.S. Dollars.
Under applicable PRC regulations, foreign-invested enterprises in China may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, a foreign-invested enterprise in China is required to set aside at least 10.0% of its after-tax profit based on PRC accounting standards each year to its general reserves until the accumulative amount of such reserves reaches 50.0% of its registered capital. These reserves are not distributable as cash dividends. The board of directors of a foreign-invested enterprise has the discretion to allocate a portion of its after-tax profits to staff welfare and bonus funds, which may not be distributed to equity owners except in the event of liquidation. Under PRC law, RMB is currently convertible into U.S. Dollars under a company’s “current account,” which includes dividends, trade and service-related foreign exchange transactions, without prior approval of the State Administration of Foreign Exchange (SAFE), but is not from a company’s “capital account,” which includes foreign direct investments and loans, without the prior approval of the SAFE.
We have previously raised money in the U.S. capital markets which provided the capital needed for our operations and for General Steel Investment Co, Ltd. (“General Steel Investment”). Thus the foreign currency restrictions and regulations in the PRC on the dividends distribution will not have a material impact on the liquidity, financial condition and results of operations of General Steel Holdings, Inc. and General Steel Investment.
Although the steel industry is slowing down due to over-capacity issues in the PRC, in order for us to stay competitive, we continue to look for opportunities to improve the efficiency on our production lines. In addition to the 1,200,000 metric ton capacity rebar production renovation of an existing 800,000 metric ton capacity rebar production line that we brought online in November 2010, in July 2011, we also brought online a 1,000,000 metric ton capacity high speed wire production line. These two newly installed production lines were both relocated from the Maoming Hengda (as defined below) facility and are expected to consume less energy when running at maximum efficiencies compared to our previous production line. In September 2012 we began the construction of a 900,000 metric ton capacity rebar production line, which was completed and put into production in September 2013. In March 2013, we began the construction of a 1,200,000 metric ton capacity rebar production line for the purpose of reducing our reprocessing cost and to increase our profit margin. The 1,200,000 metric ton capacity rebar production lines was completed and put into test production in November 2013. Any future facility expansion will require additional financing and/or equity capital and will be dependent upon the availability of financing arrangements and capital at the time.
Short-term Notes Payable
As of December 31, 2013, we had $1.0 billion in short-term notes payables, which are secured by restricted cash of $399.3 million and restricted notes receivable of $231.7 million. These are lines of credit extended by banks for a maximum of six months and are used to finance working capital. The short-term notes payable must be paid in full at maturity and credit availability is continued upon payment at maturity. There are no additional significant financial covenants. We pay zero interest on this type of credit as this is a monetary tool used by China’s central bank to control liquidity over the Chinese monetary system. However, we are subject to pay a transaction fee of 0.05% of the notes’ value. In addition, the banks usually require us to deposit either a certain amount of cash at the bank as a guarantee deposit or provide notes receivable as security.
Short-term Loans – banks
As of December 31, 2013, we had $301.9 million in short-term bank loans. We believe our current creditors will renew their loans to us after our loans mature as they did in the past. Longmen Joint Venture has been included in the List of Enterprises Fulfilling the Iron and Steel Industry Specification (the "List") released by the MIIT in January 2014. The MIIT will collaborate with China's other governmental agencies to provide various supports to the List's members, which includes financing supports from the banks.
As of December 31, 2013, 2012, 2011 and 2010, we breached certain a financial covenant, debt to equity ratio, on outstanding short term loans, and due to the breach, a loan with cross default clause was automatically considered as breached, and the affected loan amounted to $6.4 million, $12.7 million, $12.6 million and $12.1 million, respectively. According to the loan agreements, the bank has the right to request collateral or guarantees if the covenant is breached or request early repayment of the loan if we do not remedy the breach within a certain period of time. As of the date of the filing of this report, we have not received any notice from the banks to request more collateral or guarantee or early repayment of the short term loans due to the breach.
We are able to repay our short-term notes payables and short term bank loans upon maturity using available capital resources.
For more details about our debts, please see Note 10 in our Notes to the consolidated financial statements included in this Annual Report.
45 |
For more details about our related party debt financing, see Note 21 in our Notes to the consolidated financial statements included in this Annual 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 of 4.2% to 5.9% higher than the original selling price from Longmen Joint Venture (this transaction is referred to as “financing sales”). 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. A margin of between 4.2% and 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 year ended December 31, 2013, 2012, 2011 and 2010 amounted to $724.3 million, $1.0 billion, $998.9 million and $761.8 million, respectively, which were eliminated in our consolidated financial statements. The financial cost related to financing sales for the year ended December 31, 2013, 2012, 2011 and 2010, accounted to $5.4 million, $9.2 million, $10.7 million and $7.0 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 become due.
The steel business is capital intensive and as a normal industry practice in PRC, our Company is highly leveraged. Debt financing in the form of short term bank loans, loans from related parties, financing sales, bank acceptance notes, and capital leases have been utilized to finance the working capital requirements and the capital expenditures of our Company. As a result, our debt to equity ratio as of December 31, 2013, 2012, 2011 and 2010 were (6.5), (7.1), (19.8) and 13.8, respectively. As of December 31, 2013, our current liabilities exceed current assets (excluding non-cash item) by $1.2 billion. And as of December 31, 2014, our estimated current liabilities may exceed current assets (excluding non-cash item) by $1.2 billion.
Longmen Joint Venture, as our most important subsidiary, accounted for a majority of our total sales. As such, the majority of our working capital needs to come from Longmen Joint Venture. Our ability to continue as a going concern depends heavily on Longmen Joint Venture’s operations. Longmen Joint Venture has obtained different types of financial supports, which include line of credit from banks, vendor financing, financing sales, other financing and sales representative financing.
For more details and terms about our financial supports, see Note 3(d) in our Notes to the consolidated financial statements included in this Annual Report.
With the financial support from the banks and the companies discussed in Note 3(d) in our Notes to the consolidated financial statements included in this Annual Report, 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 December 31, 2014. The detailed breakdown of Longmen Joint Venture’s estimated cash flows items are listed below.
Cash inflow (outflow) (in millions) | ||||
For the twelve months ended December 31, 2014 | ||||
Estimated current liabilities over current assets (excluding non-cash items) as of December 31, 2013 | $ | (1,179.2 | ) | |
Projected cash financing and outflows: | ||||
Cash provided by line of credit from banks | 230.7 | |||
Cash provided by vendor financing | 818.5 | |||
Cash provided by other financing | 217.7 | |||
Cash provided by sales representatives | 26.3 | |||
Cash projected to be used in operations in the twelve months ended December 31, 2014 | (35.4 | ) | ||
Cash projected to be used for financing cost in the twelve months ended December 31, 2014 | (55.2 | ) | ||
Net projected change in cash for the twelve months ended December 31, 2014 | $ | 23.4 |
46 |
As a result, the consolidated financial statements for the year ended December 31, 2013 have been prepared on a going concern basis.
Cash-flow
Fiscal year ended December 31, 2013 compared with fiscal year ended December 31, 2012
Operating activities
Net cash used in operating activities for the year ended December 31, 2013 was $163.9 million compared to $5.2 million for the year ended December 31, 2012. This change was mainly due to the combination of the following factors:
The impact of non-cash items included in net loss was $69.1 million in the year ended December 31, 2013, compared to $149.2 million for the same period in 2012. The non-cash items are the following:
- | Depreciation, amortization and depletion; |
- | Impairment of plant and equipment; |
- | Change in fair value of derivative liabilities -warrants; |
- | Change in fair value of profit sharing liability; |
- | Gain/loss on disposal of equipment and intangible assets; |
- | Provision for doubtful accounts; |
- | Reservation of mine maintenance fee; |
- | Stock issued for services and compensation; |
- | Amortization of deferred financing cost on capital lease; |
- | Income from equity investments; |
- | Foreign currency transaction gain/loss; |
- | Gain on deconsolidation of a subsidiary; |
- | Deferred tax assets; and |
- | Deferred lease income. |
The other primary reasons for the material fluctuations in cash inflow from operations are as follows:
- | Notes receivable: The decrease of notes receivable was mainly due to our acceptance of fewer notes receivables as a substitute for cash receipts during year ended December 31, 2013; |
- | Accounts receivable, including related parties: The decrease in accounts receivables was mainly due to the better collection effort of our accounts receivable from our customers for the year ended December 31, 2013; |
- | Advance on inventory purchases: The decrease in advance on inventory purchases to third parties was mainly due to more advances being paid to related party vendors instead of third parties for the year ended December 31, 2013. |
- | Accounts payable, including related parties: The increase in accounts payable, including related parties, was mainly due to Longmen Joint Venture paying less to its suppliers as compared to the same period in 2012. Pursuant to the supplier financing agreements signed between Longmen Joint Venture and its suppliers, those suppliers agreed not to demand certain cash payment for a period of time under the agreements; |
- | Other payables - related parties: The increase in other payables – related parties was mainly due to Longmen Joint Venture paying less to its related parties during the year ended December 31, 2013. Pursuant to the related party financing agreements signed between Longmen Joint Venture and those related parties, such related parties agreed not to demand certain cash payment; and |
- | Customer deposits – related parties: The increase in customer deposit – related parties was mainly due to our related party customers making prepayment to us prior to the end of 2013. These deposits were subsequently recognized as sales after December 31, 2013 in accordance with our sales recognition policy. |
The primary reasons for the material fluctuations in cash outflows are as follows:
- | Other receivables, including related parties: The increase was mainly due to an increase in receivables incurred with related parties for cash flow purpose for doing business on our behalf; |
- | Inventories: The increase in inventories in the year of 2013 was mainly due to the increase in the price of raw materials towards the end of the year and the production line stoppage in the fourth quarter, which decreased the consumption of raw materials; |
- | Advances on inventory purchases - related parties: The increase was mainly due to the fact that more advance payments were made for raw material purchases to related parties to meet future production capacity. Advance payment is a prevailing requirement on iron ore purchases in the steel production industry; |
- | Other payables and accrued liabilities: The decrease in other payables and accrued liabilities was mainly due to an increase in payments to various third parties for the year ended December 31, 2013 compared to the prior year; |
47 |
- | Customer deposits: The decrease was mainly due to the China and global steel industry over-capacity which led to lower demands from our third party customers on our products, as such, we received fewer advanced payments made by our these customers; and |
- | Taxes payable: The decrease was mainly due to the decrease in VAT taxes payable as our sales VAT tax payables relative to purchase VAT tax receivables decreased in 2013 compared to the prior year. |
Investing activities
Net cash used in investing activities was $105.8 million and $63.8 million for the year ended December 31, 2013 and 2012, respectively. Cash inflow from investing activities mainly came from the sale of our 28% ownership interest in Tianwu Joint Venture in 2013. The increase in cash provided was partially offset by the increase in restricted cash. Restricted cash was used as a pledge for our notes payable as required by the bank. In 2013, such balance increased because less notes payable were due and settled by December 31, 2013 as compared to 2012. We also incurred additional spending on equipment purchase of $43.3 million. Furthermore, $12.7 million cash held in Tianwu Joint Venture was deconsolidated when we sold our interests in Tianwu Joint Venture to a related party.
Financing activities
Net cash provided by financing activities was $254.0 million for the year ended December 31, 2013 compared to net cash used in financing activities of $6.9 million for the year ended December 31, 2012. The increase of cash inflow from financing activities was mainly driven by the following:
- | Capital contributed by noncontrolling interest: On August 16, 2013, additional capital of $45.1 million (or RMB 280 million) was contributed to Tianwu Joint Venture with $27.1 million (or RMB 168 million) contributed by us and $18.0 million (or RMB 112 million) contributed by TME Group, the noncontrolling shareholder; |
- | Short term notes payable: We borrowed more short term notes payable during the year ended December 31, 2013; and |
- | Short term loans: We borrowed more from banks and related parties during the year ended December 31, 2013. |
The cash inflow was offset by the following cash outflow:
- | Notes receivable - restricted: The decrease in notes receivable – restricted was mainly due to less notes receivable was used as guarantee for notes payable and bank loans during the year ended December 31, 2013; |
- | Short term loans: We repaid more money to other parties during the year ended December 31, 2013 as short term loans became due; |
- | Deposits due to sales representatives: We repaid more deposits to third party sales representatives during the year ended December 31, 2013; and |
- | Payments on current maturities of long-term loans - related party: We repaid $22.9 million current maturities of long-term loans to our related party during the year ended December 31, 2013 as they became due. |
Fiscal year ended December 31, 2012 compared with fiscal year ended December 31, 2011
Operating activities
Net cash used in operating activities for the year ended December 31, 2012 was $5.2 million compared to net cash provided by operating activities of $33.4 million for the year ended December 31, 2011. This change was mainly due to the combination of the following factors:
The impact of non-cash items included in net loss was $149.2 million in the year ended December 31, 2012, compared to $98.3 million for the same period in 2011. The non-cash items are the following:
- | Depreciation, amortization and depletion; |
- | Impairment of plant and equipment; |
- | Change in fair value of derivative liabilities -warrants; |
- | Change in fair value of profit sharing liability; |
- | Gain on debt settlement; |
- | Gain/loss on disposal of equipment; |
- | Bad debt allowance/recovery; |
- | Reservation of mine maintenance fee; |
- | Stock issued for services and compensation; |
- | Amortization of deferred financing cost on capital lease; |
- | Income from equity investments; |
- | Foreign currency transaction gain/loss; |
- | Deferred tax assets; and |
- | Deferred lease income. |
48 |
The other primary reasons for the material fluctuations in cash inflow from operations are as follows:
1. | Accounts receivable, including related parties: The decrease in accounts receivables was mainly due to the better collection effort of our accounts receivable from our customers as of December 31, 2012. |
2. | Other receivables: The decrease in other receivables was mainly due to the collection of purchase deposit from a vendor during the year of 2012 that was determined to be refundable in 2011. |
3. | Inventories: The decrease of inventories was mainly due to the significant decline in iron ore and coke purchase prices during the year of 2012. As such, we did not stock our raw materials and instead kept them at the minimal level required to meet our production needs to minimize our risk of a further drop in iron ore and coke. |
4. | Accounts payable – related parties: The increase in accounts payable – related parties was mainly due to Longmen Joint Venture paid less to its suppliers as compared to the same period in 2011. Pursuant to the supplier financing agreements signed between Longmen Joint Venture and its suppliers, those suppliers agreed not to demand certain cash payment. |
5. | Other payables and accrued liabilities, including related parties: The increase in other payables and accrued liabilities was mainly due to the increase of payable to our vendors for our equipment maintenance fee incurred during the year ended December 31, 2012. The increase in other payables – related parties was mainly due to Longmen Joint Venture paying less to its related parties during the year ended December 31, 2012. Pursuant to the related party financing agreements signed between Longmen Joint Venture and those related parties, such related parties agreed not to demand certain cash payment; and |
6. | Customer deposits: The increase in customer deposits was mainly due to our customers making prepayment to us prior to the end of 2012. These deposits were immediately recognized as sales after December 31, 2012 in accordance with our sales recognition policy. |
The primary reasons for the material fluctuations in cash outflows are as follows:
1. | Notes receivable: In order to increase and promote sales, we encouraged our customers to settle their payments by notes receivable, which resulted in an increase in notes receivable during the year of 2012. |
2. | Advances on inventory purchases, including related parties: The increase was mainly due to the fact that more advance payments were made for raw material purchases to meet future production capacity. Advance payment is a prevailing requirement on iron ore purchases in the steel production industry. |
3. | Accounts payable: The decrease was mainly due to the payments that we made to our vendors when the credit terms were due while we delayed our payments to our related parties vendors as discussed in the operating cash inflow section. In addition, we made an adjustment to reduce some of our accounts payable that we accrued in prior periods upon completion of our construction project; and |
4. | Customer deposits – related parties: The decrease was mainly due to the China and global steel industry over-capacity which led to lower demands from our related party customers on our products, as such, we received fewer advanced payments made by our related party customers. |
Investing activities
Net cash used in investing activities was $63.8 million for the year ended December 31, 2012 compared to net cash used in investing activities of $302.7 million for the year ended December 31, 2011. Fluctuation in cash inflow between the two periods was mainly due to the decrease of restricted cash. Restricted cash was used as a pledge for our notes payable as required by the bank. In 2012, such balance decreased because more notes payable were due and settled by December 31, 2012. The increase in cash provided was partially offset by net loan provided to related parties. We also incurred additional spending by purchasing new equipment in the amount of $32.0 million. In addition, we have provided $43.0 million to a municipality for the purpose of funding the construction of two new villages for the relocation the villagers from an older village to another. The municipality will return the funds to us after the construction of the two villages. The purpose for us to enter into this transaction with the municipality is for the opportunity to obtain the land use rights of the old villages from the municipality once the new villages are built. Furthermore, $3.0 million cash held on Hancheng Tongxing Metallurgy Co., Ltd. (“Tongxing”) was deconsolidated on March 1, 2012 when we sold our interests in Tongxing to a related party.
Financing activities
Net cash used in financing activities was $6.9 million for the year ended December 31, 2012 compared to net cash provided by financing activities of $323.2 million for the year ended December 31, 2011. The increase of cash inflow from financing activities was mainly driven by the following:
1. | Notes receivable – restricted: The decrease of notes receivable was mainly due to more notes receivable being due and collected by banks during the year ended December 31, 2012. |
2. | Long-term other payable – related party: One of our related parties has provided $43.0 million financing supports to us to fund the construction of two new villages by a municipality, which is repayable only after the municipality has reimbursed the Company for the advance classified in long-term other receivable. |
49 |
The cash inflow was offset by the following cash outflow:
1. | Short Term Notes Payable: We repaid more notes payables to banks for the year ended December 31, 2012 as short term notes payable became due compared to the same period in 2011 as more of our notes payable were due. |
2. | Short Term Loans: We repaid more money to banks and other parties for the year ended December 31, 2012 as short term loans became due compared to the same period in 2011. |
Fiscal year ended December 31, 2011 compared with fiscal year ended December 31, 2010
Operating activities
Net cash provided by operating activities for the year ended December 31, 2011 was an inflow of $33.4 million compared to an outflow of $162.8 million for the year ended December 31, 2010. This change was mainly due to the combination of the following factors:
The impact of certain non-cash items included in net loss of $135.8 in year ended December 31, 2011, compared to $28.8 million in the same period in 2010. The non-cash items are the following:
- | Depreciation, amortization and depletion; |
- | Impairment of plant and equipment; |
- | Change in fair value of derivative liabilities -warrants; |
- | Change in fair value of profit sharing liability; |
- | Gain on debt settlement; |
- | Gain/loss on disposal of equipment; |
- | Bad debt allowance; |
- | Inventory written-off; |
- | Stock issued for services and compensation; |
- | Income from compensation; |
- | Make whole shares interest expense on notes conversion; |
- | Amortization of deferred note issuance cost and discount on convertible notes; |
- | Amortization of deferred financing cost on capital lease; |
- | Income from equity investments; |
- | Deferred tax assets; |
- | Deferred lease income; and |
- | Foreign currency transaction gain. |
The primary reasons for the material fluctuations in cash inflow are as follows:
1. | Accounts receivable: The decrease in accounts receivable is mainly due to the better collection effort of our accounts receivable from the third parties as a result of decreasing accounts receivable as of December 31, 2011. |
2. | Inventories: The decrease of inventories is due to the fact that we were no longer required maintaining a high level of raw material inventories at the end of 2011. The raw material inventory reached its peak at December 31, 2010 because we were stocking for the expanded capacity from our new blast furnaces. We are no longer stocking the raw materials as of December 31, 2011, because of the increase in finished goods as a result of the increased daily production volume after the two new furnaces were put into use in May 2011. In addition, as the cost of raw materials continued to rise during the first three quarters of 2011 before the cost began to decrease in late 2011, we did not stock our raw materials and instead kept them at the minimal level required to meet our production needs. |
3. | Prepaid expense: The decrease in prepaid expense is mainly due to the amortization of the other miscellaneous local tax during 2011 and we did not prepay such taxes in 2011. |
4. | Prepaid value added tax: The decrease in prepaid value added tax is mainly due to the decrease in purchase of inventory. As a result, we have fewer value added tax credits pending to be offset with value added tax payables resulting from sales in the future. |
5. | Accounts payable, including related parties: The increase in accounts payable is mainly due to the increased raw materials purchased during the year as a result of the launch of full-scale production at Longmen Joint Venture in May 2011 while we are utilizing credit terms to make our payments. |
6. | Other payables, including related parties: The increase in other payables is mainly due to the increase of salary payable as we have increased the numbers of employees to meet the expanded production capacity from our new blast furnaces. In addition, we also increased the base salary for our employees. The increase of other payables – related party is mainly due to the additional borrowings in 2011 from our related parties and the increase of interest payables due to these parties. |
7. | Customer deposits – related parties: The increase in customer deposits – related parties is mainly to our related parties customers making prepayment to us prior to the end of 2011. These deposits were immediately recognized as sales after December 31, 2011 in accordance with our sales recognition policy. |
8. | Tax payable: The increase is mainly due to the increase in value added tax and other miscellaneous taxes that were caused by value added tax as a result of our increased sales in 2011. |
50 |
The primary reasons for the material fluctuations in cash outflows are as follows:
1. | Notes receivable: In order to increase and promote sales, we encourage our customers to settle their payments by notes receivable, which resulted in an increase in notes receivable during the year of 2011, compared to the same period in 2010. |
2. | Account receivable – related parties: The increase is due to the sales transactions occurred right before the year ended December 31, 2011. The receivable balances were subsequently collected in the beginning of 2012. |
3. | Other receivables, including related parties: The increase of other receivables is mainly due to the payment of $7.8 million that we made to the Bureau of Land and Resource in Zhashui County for the land use rights deposit made on behalf of another party. The increase of other receivables – related parties in 2011 is mainly due to the increase of reimbursement for the costs and economic losses incurred during the construction of the new iron and steel making facilities to be reimbursed by Shaanxi Steel. |
4. | Advances on inventory purchases, including related parties: The increase is mainly due to the fact that more advance payments were made to the suppliers for raw material purchases to meet the higher production capacity. Advance payment is a prevailing requirement on iron ore purchases in the steel production industry. |
5. | Customer deposits: The decrease of customer deposits is due to the change in deposit requirements for our medium and small size customers. As the market demand of products has dropped in the fourth quarter of 2011, in order to retain our medium and small customers, we managed to require our customers to deposit on their orders approximately 10 - 14 days prior to shipments in comparison to one month advance deposits in 2010. |
Investing activities
Net cash used in investing activities was $302.7 million for the year ended December 31, 2011 compared to net cash used in investing activities of $88.3 million for the year ended December 31, 2010. Fluctuation in cash outflow between the two periods was mainly due to the increase in restricted cash and the capital expenditures. Restricted cash is used as a pledge for our notes payable as required by the banks. In 2011, such balance increased because we pledged more cash to the banks in order for them to issue notes payables to settle with our suppliers. In addition, the cash used in capital expenditures in 2011 was mainly for the relocation of production line which was completed in the fourth quarter of 2011 from Maoming Hengda to Longmen Joint Venture. We also incurred additional spending for technology improvements and technical updates in the fourth quarter of 2011 on some of our existing production lines, which improved the useful life of the production line, as well as the quality of the inventories and efficiency of the production as a result of technical updates.
Financing activities
Net cash provided by financing activities was $323.2 million for the year ended December 31, 2011 compared to net cash provided by financing activities of $232.4 million for the year ended December 31, 2010. The increase of cash inflow from financing activities was mainly driven by the following:
1. | Treasury stock: During 2011, we repurchased 774,218 shares of our treasury stock with $1.9 million pursuant to our Shares Repurchase Program. |
2. | Notes Receivable-Restricted: In 2011, we collected more notes receivable resulting from our sales transactions and more of our notes receivable were pledged when settling with our supplies with notes payable, which resulted in the increase in our total restricted notes receivable in 2011. |
3. | Short term and long term loans from various banks and others, including related parties: We have repaid our loans of $844.6 million and obtained additional borrowings of $923.1 million throughout 2011. We have net borrowings of $78.5 million to finance our working capital. |
4. | Notes payables: We increased notes borrowing from the bank to settle the payables with suppliers. |
5. | Deposits due to sales representative: The decrease in deposits collected from sales representatives is a result of changing our deposit policy. Longmen Joint Venture entered into agreements with various entities to act as our exclusive sales agents in specified geographic areas. These exclusive sales agents must meet certain criteria and are required to deposit a certain amount of money with our Company. In return, the sales agents receive exclusive sales rights in a specified area and discounted prices on products they order . The sales agents proposed to start charging us interest on their deposits if we continue to keep a significant amount of deposits. In order to avoid such interest expenses, we changed the deposit policy at the beginning of 2011 by reducing the deposit amount from $9-12 million to $2 million for four to five large strategic distributors, which resulted in a decrease in the deposits due to sales representatives. After the change in the deposit policy, our sales representatives are no longer required to start charging us interest on their deposits. |
51 |
Restrictions on our ability to distribute dividends
Substantially all of our assets are located within the PRC. Under the laws of the PRC governing foreign invested enterprises, dividend distribution and other funds transfers are allowed but subject to special procedures under relevant rules and regulations. Foreign-invested enterprises in China may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, a foreign-invested enterprise in China is required to set aside at least 10.0% of its after-tax profit based on PRC accounting standards each year to its general reserves until the accumulative amount of such reserves reaches 50.0% of its registered capital. These reserves are not distributable as cash dividends. The board of directors of a foreign-invested enterprise has the discretion to allocate a portion of its after-tax profits to staff welfare and bonus funds, which may not be distributed to equity owners except in the event of liquidation. Under PRC regulations, RMB is currently convertible into U.S. Dollars under a company’s “current account” which includes dividends, trade and service-related foreign exchange transactions, without prior approval of the State Administration of Foreign Exchange (SAFE). Transfers from a company’s “capital account,” which includes foreign direct investments and loans, can’t be executed without the prior approval of the SAFE.
There are no restrictions to distribute or transfer other funds from General Steel Investment to us.
We have never declared or paid any cash dividends to our shareholders. We do not plan to pay any dividends out of our retained earnings for the year ended December 31, 2013. With respect to retained earnings accrued after such date, our Board of Directors may declare dividends after taking into account our operations, earnings, financial condition, cash requirements and availability and other factors as it may deem relevant at such time. Any declaration and payment, as well as the amount, of dividends will be subject to our By-Laws, charter and applicable Chinese and U.S. state and federal laws and regulations, including the approval from the shareholders of each subsidiary which intends to declare such dividends, if applicable.
We have previously raised money in the U.S. capital markets which has provided the capital needed for our operations and investments activities. Thus, the foreign currency restrictions and regulations in the PRC on the dividends distribution will not have a material impact on our liquidity, financial condition, and results of operation.
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 regulation
Longmen Joint Venture:
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 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 2011, 0.91 metric tons of new water was consumed per metric ton of steel produced.
We have one 10,000 cubic meter coke-oven gas tank, 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 $35.6 million (RMB 230 million) on a thermal power plant with two 25 Kilowatt generators that use the residual coal gas from the blast furnaces and converters as fuel to generate power.
We have several plants to further process solid waste generated from the steel making process into useful products such as construction materials, building blocks, porcelain tiles, curb tops, ornamental tiles, as well as other products.
In 2009, we treated and recycled about 6.8 million tons of waste water, 335,320 tons of slag, 130 million m³ of gas from the converters and 6.1 billion m³ of gas from the blast furnaces. We also reused 855,714 tons of hot steam and generated 433 million KWH of electricity.
During 2010 and 2011, more than $9.6 million (RMB 60 million) was used on the technical upgrade and renovation of our converters and $0.88 billion (RMB 5.5 billion) was 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 2013 fiscal year 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.
52 |
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 December 31, 2013 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 | $ | 1,017,830 | $ | 1,017,830 | $ | - | $ | - | $ | - | ||||||||||
Bank loans | 301,917 | 301,917 | - | - | - | |||||||||||||||
Other loans, including related parties | 188,760 | 188,760 | - | - | - | |||||||||||||||
Deposits due to sales representatives, including related parties | 26,340 | 26,340 | - | - | - | |||||||||||||||
Operating lease obligations | 23,774 | 1,450 | 1,245 | 1,124 | 19,955 | |||||||||||||||
Construction obligations - Longmen Joint Venture | 353,024 | 353,024 | - | - | - | |||||||||||||||
Long term loan – Shaanxi Steel | 72,657 | 53,013 | 19,644 | - | - | |||||||||||||||
Capital lease obligations | 379,340 | 4,321 | 7,124 | 129,286 | 238,609 | |||||||||||||||
Profit sharing liability | 162,295 | - | - | - | 162,295 | |||||||||||||||
Total | $ | 2,525,937 | $ | 1,946,655 | $ | 28,013 | $ | 130,410 | $ | 420,859 |
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 December 31, 2013, Longmen Joint Venture guaranteed bank loans for related parties and third parties, including lines of credit, amounting to $326.8 million, as follows:
Nature of guarantee | Guarantee amount | Guaranty Due Date | ||||
(In thousands) | ||||||
Line of credit | $ | 226,618 | Various from January 2014 to August 2015 | |||
Three-party financing agreements | 13,096 | Various from January to July 2014 | ||||
Confirming storage | 41,252 | Various from March to December 2014 | ||||
Financing by the rights of goods delivery in future | 45,836 | Various from April to October 2014 | ||||
Total | $ | 326,802 |
As of December 31, 2013, we did not accrue any liability for the amount guaranteed for third and related parties because those parties are current in their payment obligations and we have not experienced any loss from providing guarantees. We evaluated the debt guarantees and concluded that the likelihood of having to make payments under the guarantees is remote and that the fair value of the stand-ready obligation under these commitments is not material.
Critical Accounting Policies
Management’s discussion and analysis of its financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. Our financial statements reflect the selection and application of accounting policies which require management to make significant estimates and judgments. See Note 3 to our consolidated financial statements, “Summary of Significant Accounting Policies.” Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
We believe that the following reflect the more critical accounting policies that currently affect our financial condition and results of operations.
53 |
Principles of consolidation – subsidiaries
The accompanying consolidated financial statements include the financial statements of our Company, our subsidiaries, our variable interest entity (“VIE”) for which we are the ultimate primary beneficiary, and the VIE’s subsidiaries.
The consolidated financial statements have been prepared on a historical cost basis to reflect the financial position and results of operations of our Company in accordance with the generally accepted accounting principles in the United States of America (“U.S. GAAP”).
Subsidiaries are those entities in which our Company, directly or indirectly, controls more than one half of the voting power; or has the power to govern the financial and operating policies, to appoint or remove the majority of the members of the board of directors, or to cast a majority of votes at the meeting of directors.
A VIE is an entity in which our Company, or our subsidiary, through contractual arrangements, bears the risks of, and enjoys the rewards normally associated with, ownership of the entity, and therefore our Company or our subsidiary is the primary beneficiary of the entity.
All significant inter-company transactions and balances have been eliminated upon consolidation.
Consolidation of VIE
Prior to entering into the Unified Management Agreement on April 29, 2011, Longmen Joint Venture had been consolidated as our 60% directly owned subsidiary. Upon entering into the Unified Management Agreement, Longmen Joint Venture was evaluated by our Company to determine if Longmen Joint Venture is a VIE and if we are the primary beneficiary.
Based on the projected profit in this entity and future operating plans, 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.
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 power to direct the activities of Longmen Joint Venture, and by extension, whether we continue to have the power to direct Longmen Joint Venture’s activities after this Supervisory Committee was formed. The Supervisory Committee, 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 over the operations of Longmen Joint Venture and as such, have the power to direct the activities of the VIE that most significantly impact Longmen Joint Venture’s economic performance.
In connection with the Unified Management Agreement, Shaanxi Coal, we and Shaanxi Steel may provide such support on a discretionary basis in the future, which could expose us to a loss.
As discussed in Note 3(c) to the consolidated financial statements – Consolidation of VIE, we have the obligation to absorb losses and the rights to receive benefits based on the profit allocation as stipulated by the Unified Management Agreement. As both conditions are met, we are the primary beneficiary of Longmen Joint Venture and therefore, continue to consolidate Longmen Joint Venture.
We believe that the Unified Management Agreement between Longmen Joint Venture and Shaanxi Coal is in compliance with PRC law and is legally enforceable. The board of directors of Longmen Joint Venture continues to be the controlling decision-making body with respect to Longmen Joint Venture. We control 60% of the voting rights of the board of directors and have control over the operations of Longmen Joint Venture. As such, we have the power to direct the activities of the VIE. However, uncertainties in the PRC legal system could limit our ability to enforce the Unified Management Agreement, which in turn, may lead to reconsideration of the VIE assessment.
Longmen Joint Venture has two 100% owned subsidiaries, Yuxin Trading Co., Ltd. (“Yuxin”) and Yuteng Trading Co., Ltd (“Yuteng”). 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 December 31, 2013, 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 acquired 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 with 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.
54 |
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.
Tongxing
Prior to March 1, 2012, Longmen Joint Venture held a 22.76% equity interest in Tongxing while hundreds of employees of Longmen Joint Venture owned the remaining 77.24%. Each individual employee shareholder comprising the remaining 77.24% assigned its voting rights to Longmen Joint Venture in writing at the time of the acquisition of Tongxing. The voting rights assigned were effective until Tongxing ceased its business operations or Longmen Joint Venture liquidated its equity interest of Tongxing, whichever came first.
On March 1, 2012, Longmen Joint Venture sold its 22.76% equity interest of Tongxing to two individuals, who are the representatives from Long Steel Group. As of March 1, 2012, Tongxing had a carrying value of net assets of $40.5 million which were included in our consolidated net assets and a noncontrolling interest in Tongxing of $32.5 million. We retained the land use right associated with the Tongxing property adjacent to the Longmen Joint Venture facility, which had a carrying value of $3.6 million immediately prior to the transaction and relinquished its controlling interest in the remaining net assets (primarily operating assets). In connection with the transaction, we also settled with a payable in cash of $0.3 million and transferred the dividend receivable of $0.9 million from Tongxing to the two individuals. Therefore, these transactions are economically justified when considered together. These arrangements meet the criteria of ASC 810-10-40-6b and 6d, deconsolidation of a Subsidiary with multiple arrangements treated as a single transaction. As the land use rights held in Tongxing have been included as part of our consolidated assets, this transaction was considered as a change in our ownership interest in the land use right similar to a change in a parent company’s ownership interest in a subsidiary in accordance with ASC 810-10-45-23 and therefore the carrying value of the land use right was not stepped up to fair value. The net impact of these transactions resulted in a reduction of $3.1 million paid-in capital.
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 Hualong and Huatianyulong with appropriate recognition in our financial statements of the non-controlling interests in each entity, beginning on the acquisition dates as these were also the effective dates of the agreements with other stockholders granting a majority voting rights in each entity, and thereby, the power of control, to Longmen Joint Venture. We also have 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.
Revenue recognition
We follow U.S. GAAP regarding revenue recognition. Sales revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, we have no other significant obligations and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are recorded as customer deposits. Sales revenue represents the invoiced value of goods, net of value-added tax (VAT). All our products sold in the PRC are subject to a Chinese VAT at a rate of 13% to 17% of the gross sales price. This VAT may be offset by VAT paid by us on raw materials and other materials included in the cost of producing the finished product.
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.
55 |
Useful lives of plant and equipment
Plant and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets with a 3%-5% residual value. The depreciation expense on assets acquired under capital leases is included with depreciation expense on owned assets.
The estimated useful lives are as follows:
Buildings and Improvements | 10-40 Years | |||
Machinery | 10-30 Years | |||
Machinery under capital lease | 10-20 Years | |||
Other equipment | 5 Years | |||
Transportation Equipment | 5 Years |
We have re-evaluated the useful lives of depreciation and amortization to determine whether subsequent events and circumstances warrant any revisions.
Impairment of long-lived assets
The carrying values of long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Based on the existence of one or more indicators of impairment, we measure any impairment of long-lived assets using the projected undiscounted cash flow method. The estimation of future cash flows requires significant management judgment based on our historical results and anticipated results and is subject to many factors.
The discount rate that is commensurate with the risk inherent in our business model is determined by our management. An impairment charge would be recorded if we determined that the carrying value of long-lived assets may not be recoverable. The impairment to be recognized is measured by the amount by which the carrying values of the assets exceed the fair value of the assets.
As of December 31, 2013, the fair value of our plant and equipment exceeded our carrying value of these assets by approximately 73.8%. 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 financial statements and accompanying notes. Significant accounting estimates reflected in our financial statements include the useful lives of and impairment for property, plant and equipment, potential losses on uncollectible receivables, the recognition of contingent liabilities, the interest rate used in financing sales, the fair value of the assets recorded under capital lease, the present value of the net minimum lease payments of the capital lease and 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.
56 |
We also analyze all financial instruments with features of both liabilities and equity under the accounting standard establishing, “accounting for certain financial instruments with characteristics of both liabilities and equity,” the accounting standard regarding “accounting for derivative instruments and hedging activities” and “accounting for derivative financial instruments indexed to, and potentially settled in, a company’s own stock.” Additionally, we analyze registration rights agreements associated with any equity instruments issued to determine if penalties triggered for late filing should be accrued under accounting standard establishing “accounting for registration payment arrangements.”
Fair value measurements (restated)
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 December 2007 warrants issued in conjunction with the December 2007 notes and December 2009 warrants issued in connection with a registered direct offering, were carried at fair value. The aforementioned warrants and the conversion option embedded in the notes meet the definition of a derivative instrument in the accounting standards. Therefore these instruments are accounted for as derivative liabilities and recorded at their fair value as of each reporting period. As all of the notes were converted to common stock by the end of 2010, the derivative instruments include only the outstanding warrants of 0 and 3,900,871 as of December 31, 2013 and 2012, respectively. The fair value was determined using the Cox Rubenstein Binomial Model. Because all inputs to the valuation methodology are not observable, fair value is determined using level 3 inputs, and the change in earnings was recorded. As a result, the derivative liability is carried on the balance sheet at its fair value.
We determined that the carrying value of the profit sharing liability using Level 3 inputs by taking consideration of the present value of our projected profits/losses with the discount interest rate of 7.3%.
The fair value of the profit sharing liability will change each period as a result of (a) any changes in our estimate of Longmen Joint Venture’s projected profits/losses over the remaining term of the agreement, (b) any change in the discount rate used, based on changes in our current or expected borrowing rate, (c) the change in fair value related to the passage of time and change in the number of future periods over which the present value of future cash flows is estimated and (d) any difference between the previously estimated operating results for the current period and actual results.
Each period, we consider whether the discount rate based on our average borrowing rate should be adjusted based upon the current and expected future financial condition of the Company. To date, we have not considered any adjustment to be necessary based upon, but not limited to, the following assumptions:
· | because the joint venture partner of Longmen Joint Venture is a state-owned enterprise with an excellent credit history, PRC banks grant similar credit treatment to Longmen Joint Venture in terms of credit availability |
· | the current average borrowing rate of enterprises in the steel industry in the PRC is similar to this borrowing rate |
· | the current new/renewal borrowing rates of the Company’s bank loans are similar to prior periods |
· | the People’s Bank of China has not recently adjusted any borrowing rate |
· | PRC bank interest rates are not industry specific. The downtrend in the steel industry did not materially impact the bank borrowing rates for steel companies |
· | the bank interest rates are assessed by each individual bank and governed by the Chinese banking regulatory bodies. Reports from credit rating research firms are not commonly used by PRC banks |
The projected profits/losses in Longmen Joint Venture were 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 borrowing; |
· | interest rate index; |
· | gross national product index; |
· | industry index; and |
· | government policy. |
57 |
Income tax
We did not conduct any business and did not maintain any branch office in the United States during the years ended December 31, 2013, 2012, 2011 and 2010. 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 intension 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%.
For the years ended December 31, 2013, 2012, 2011 and 2010, we had total tax provisions of $0.4 million, $0.8 million, $15.6 million and a tax benefit of $8.8 million, respectively.
Deferred lease income
From June 2009 to March 2011, we worked with Shaanxi Steel to build new state-of-the-art equipment at the site of Longmen Joint Venture. To compensate Longmen Joint Venture for costs and economic losses incurred during construction of the new iron and steel making facilities owned by Shaanxi Steel, Shaanxi Steel reimbursed Longmen Joint Venture $11.5 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, and $30.0 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 $14.7 million (RMB 89.5 million) and $14.6 million (RMB 89.3 million), respectively, for trial production costs related to the new iron and steel making facilities.
During the period June 2010 to March 2011, as construction progressed and certain of the assets came online, Longmen Joint Venture used the assets free of charge to produce saleable units of steel products during this period. As such, the cost of using these assets was imputed with reference to what the depreciation charge would have been on these assets had they been owned or under capital lease to Longmen Joint Venture during the free use period. This cost of $7.2 million (RMB 43.9 million) each year were deferred and will be recognized over the term of the land sub-lease similar to the other charges and credits related to the construction of these assets.
The deferred lease income is amortized to income over the remaining term of the 40-year land sub-lease.
Capital lease obligations
Iron and steel production facilities
On April 29, 2011, our subsidiary, Longmen Joint Venture entered into a Unified Management Agreement with Shaanxi Steel and Shaanxi Coal under which Longmen Joint Venture uses new iron and steel making facilities including one sintering machine, two converters, two blast furnaces and other auxiliary systems constructed by Shaanxi Steel. As the 20-year term of the agreement exceeds 75% of the assets’ useful lives, this arrangement is accounted for as a capital lease. The ongoing lease payments are comprised of two elements: (1) a monthly payment of $2.3 million (RMB 14.6 million) based on Shaanxi Steel’s cost to construct the assets to be paid over the term of the Unified Management Agreement of 20 years; and (2) 40% of any remaining pre-tax profits from the Asset Pool which includes Longmen Joint Venture and the newly constructed iron and steel making facilities. In February 2014, Shaanxi Steel agreed that it would not demand capital lease payment from Longmen Joint Venture until February 2017. The profit sharing component does not meet the definition of contingent rent because it is based on future revenue and is therefore considered part of the financing for the capital leased assets which is related to the Unified Management Agreement. After determining the value of the leased asset and obligation at the inception of the lease, the lease liability was then reduced by the value of the profit sharing component, which is recognized as a separate financial liability carried at fair value. See Note 17 – “Profit sharing liability”.
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.
58 |
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 year ended December 31, 2013, $18.1 million (RMB $110.3 million) energy-saving equipment under these lease agreements have been capitalized and no contingent rent expense has been incurred.
Profit sharing liability (restated)
The profit sharing liability component of the capital lease obligation was recognized initially at its estimated fair value at the lease commencement date and included in the initial measurement and recognition of the capital lease, in addition to the fixed payment component of the minimum lease payments. The profit sharing liability is accounted for separately from the fixed portion of the capital lease obligation (See Note 16 - “Capital lease obligation” in the Notes to Consolidated Financial Statements) and is accounted for as a derivative instrument in accordance with ASC 815-10-15-83. The estimated fair value of the profit sharing liability is reassessed at the end of each reporting period, with any change in fair value charged or credited to income as “Change in Fair Value of Profit Sharing Liability”. See Note 3(i) - “Financial instruments” in the Notes to Consolidated Financial Statements 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 has been made since inception.
Recently Issued Accounting Pronouncements
In July 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-11,Presentation of Unrecognized Tax Benefit When a Net Operating Loss Carry forward, a Similar Tax Loss, or a Tax Credit Carry forward Exists, an amendment to FASB Accounting Standards Codification ("ASC") Topic 740,Income Taxes ("FASB ASC Topic 740"). This update clarifies that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carry forward, a similar tax loss, or a tax credit carry forward if such settlement is required or expected in the event the uncertain tax position is disallowed. In situations where a net operating loss carry forward, a similar tax loss, or a tax credit carry forward is not available at the reporting date under the tax law of the applicable jurisdiction or the tax law of the jurisdiction does not require, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. This ASU is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. Retrospective application is permitted. The adoption of this guidance did not have any significant impact on our consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
59 |
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
GENERAL STEEL HOLDINGS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
Index to consolidated financial statements
60 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
General Steel Holdings, Inc.
We have audited the accompanying consolidated balance sheets of General Steel Holdings, Inc. and Subsidiaries (the “Company”) as of December 31, 2013 and 2012, and the related consolidated statements of operations and comprehensive loss, changes in deficiency and cash flows for the years then ended. General Steel Holdings, Inc.’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of General Steel Holdings, Inc. and Subsidiaries as of December 31, 2013 and 2012, and the consolidated results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ Friedman LLP
New York, New York
March 27, 2014, except for the effects described in Notes 2, 3(c), 3(i), 17 and 26 as to which the date is August 19, 2014
61 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
General Steel Holdings, Inc.
We have audited the accompanying consolidated balance sheets of General Steel Holdings, Inc. and Subsidiaries (the “Company”) as of December 31, 2012 and 2011, and the related consolidated statements of operations and comprehensive loss, changes in deficiency and cash flows for the years then ended. General Steel Holdings, Inc.’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of General Steel Holdings, Inc. and Subsidiaries as of December 31, 2012 and 2011, and the consolidated results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ Friedman LLP
New York, New York
June 17, 2013, except for the effects described in Notes 2, 3(c), 3(i), 17 and 26 as to which the date is August 19, 2014
62 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
General Steel Holdings, Inc.
We have audited the accompanying consolidated balance sheet of General Steel Holdings, Inc. and Subsidiaries (the “Company”) as of December 31, 2011, and the related consolidated statements of operations and other comprehensive loss, cash flows and changes in equity for the year then ended. General Steel Holdings, Inc.’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of General Steel Holdings, Inc. and Subsidiaries as of December 31, 2011, and the consolidated results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ Friedman LLP
New York, New York
February 15, 2013,except for the effects described in Notes 2, 3(c), 3(i), 17 and 26 as to which the date is August 19, 2014
63 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of General Steel Holdings, Inc.
We have audited the accompanying consolidated balance sheets of General Steel Holdings, Inc. and subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of operations and other comprehensive income, changes in equity, and cash flows for each of the years in the three-year period ended December 31, 2010. General Steel Holdings, Inc.’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of General Steel Holdings, Inc. as of December 31, 2010 and 2009, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), General Steel Holdings, Inc.’s internal control over financial reporting as of December 31, 2010, based on criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 16, 2011, except for the effects of the material weakness described in the ninth paragraph of that report, as to which the date is August 29, 2012, expressed an adverse opinion on the effectiveness of internal control over financial reporting.
/s/ Frazer Frost, LLP | |
Brea, California |
March 16, 2011, except for the effects on the consolidated financial statements of the restatement described in Note 2, as to which the date is August 29, 2012
64 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2013, 2012, 2011 AND 2010
(In thousands)
2013 | 2012 | 2011 | 2010 | |||||||||||||
ASSETS | ||||||||||||||||
CURRENT ASSETS: | ||||||||||||||||
Cash | $ | 31,967 | $ | 46,467 | $ | 120,016 | $ | 65,271 | ||||||||
Restricted cash | 399,333 | 323,420 | 398,216 | 197,797 | ||||||||||||
Notes receivable | 60,054 | 145,502 | 92,910 | 49,147 | ||||||||||||
Restricted notes receivable | 395,589 | 357,900 | 584,241 | 240,298 | ||||||||||||
Loans receivable - related parties | 4,540 | 69,319 | - | - | ||||||||||||
Accounts receivable, net | 4,078 | 6,695 | 12,601 | 18,500 | ||||||||||||
Accounts receivable - related parties | 2,942 | 14,966 | 20,593 | 4,160 | ||||||||||||
Other receivables, net | 54,716 | 8,407 | 22,411 | 11,150 | ||||||||||||
Other receivables - related parties | 54,106 | 68,382 | 87,679 | 10,938 | ||||||||||||
Inventories | 212,921 | 212,671 | 297,729 | 453,636 | ||||||||||||
Advances on inventory purchase | 44,897 | 79,715 | 63,585 | 24,577 | ||||||||||||
Advances on inventory purchase - related parties | 83,003 | 46,416 | 20,244 | 6,187 | ||||||||||||
Prepaid expense and other | 1,388 | 450 | 364 | 5,018 | ||||||||||||
Prepaid taxes | 28,407 | 24,116 | 24,189 | 37,323 | ||||||||||||
Short-term investment | 2,783 | 2,619 | 2,906 | - | ||||||||||||
Deferred tax assets | - | - | 167 | 15,301 | ||||||||||||
TOTAL CURRENT ASSETS | 1,380,724 | 1,407,045 | 1,747,851 | 1,139,303 | ||||||||||||
PLANT AND EQUIPMENT, net | 1,271,907 | 1,167,836 | 1,257,236 | 602,612 | ||||||||||||
OTHER ASSETS: | ||||||||||||||||
Advances on equipment purchase | 6,409 | 6,499 | 10,420 | 14,898 | ||||||||||||
Long-term other receivable | - | 43,008 | - | - | ||||||||||||
Investment in unconsolidated entities | 16,943 | 1,166 | 12,840 | 17,456 | ||||||||||||
Long-term deferred expense | 668 | 1,062 | 631 | 1,439 | ||||||||||||
Intangible assets, net of accumulated amortization | 23,707 | 24,066 | 25,143 | 23,672 | ||||||||||||
TOTAL OTHER ASSETS | 47,727 | 75,801 | 49,034 | 57,465 | ||||||||||||
TOTAL ASSETS | $ | 2,700,358 | $ | 2,650,682 | $ | 3,054,121 | $ | 1,799,380 | ||||||||
LIABILITIES AND DEFICIENCY | ||||||||||||||||
CURRENT LIABILITIES: | ||||||||||||||||
Short term notes payable | $ | 1,017,830 | $ | 983,813 | $ | 1,113,504 | $ | 480,152 | ||||||||
Accounts payable | 434,979 | 352,052 | 413,345 | 241,367 | ||||||||||||
Accounts payable - related parties | 235,692 | 177,432 | 121,828 | 79,694 | ||||||||||||
Short term loans - bank | 301,917 | 147,124 | 253,954 | 285,198 | ||||||||||||
Short term loans - others | 62,067 | 147,323 | 246,657 | 127,712 | ||||||||||||
Short term loans - related parties | 126,693 | 79,557 | 15,710 | 14,548 | ||||||||||||
Current maturities of long-term loans - related party | 53,013 | 54,885 | - | - | ||||||||||||
Other payables and accrued liabilities | 45,653 | 54,589 | 49,538 | 30,087 | ||||||||||||
Other payable - related parties | 94,079 | 73,025 | 28,873 | 18,214 | ||||||||||||
Customer deposits | 87,860 | 125,890 | 90,556 | 133,464 | ||||||||||||
Customer deposits - related parties | 64,881 | 21,998 | 68,277 | 54,922 | ||||||||||||
Deposit due to sales representatives | 24,343 | 33,870 | 22,890 | 51,624 | ||||||||||||
Deposit due to sales representatives - related parties | 1,997 | 1,238 | 943 | 455 | ||||||||||||
Taxes payable | 4,628 | 16,674 | 11,374 | 6,237 | ||||||||||||
Deferred lease income, current | 2,187 | 2,120 | 2,099 | 1,971 | ||||||||||||
Capital lease obligations, current | 4,321 | - | 25,607 | - | ||||||||||||
TOTAL CURRENT LIABILITIES | 2,562,140 | 2,271,590 | 2,465,155 | 1,525,645 | ||||||||||||
NON-CURRENT LIABILITIES: | ||||||||||||||||
Long-term loans - related party | 19,644 | 38,088 | 92,035 | 91,020 | ||||||||||||
Long-term other payable - related party | - | 43,008 | - | - | ||||||||||||
Deferred lease income, noncurrent | 75,257 | 75,079 | 76,425 | 55,620 | ||||||||||||
Capital lease obligations, noncurrent | 375,019 | 330,099 | 280,743 | - | ||||||||||||
Profit sharing liability at fair value | 162,295 | 328,827 | �� | 303,233 | - | |||||||||||
Derivative liabilities - warrants | - | - | 10 | 5,573 | ||||||||||||
TOTAL NON-CURRENT LIABILITIES | 632,215 | 815,101 | 752,446 | 152,213 | ||||||||||||
TOTAL LIABILITIES | 3,194,355 | 3,086,691 | 3,217,601 | 1,677,858 | ||||||||||||
COMMITMENTS AND CONTINGENCIES | ||||||||||||||||
DEFICIENCY: | ||||||||||||||||
Preferred stock, $0.001 par value, 50,000,000 shares authorized, 3,092,899 shares issued and outstanding as of December 31, 2013, 2012, 2011 and 2010, respectively | 3 | 3 | 3 | 3 | ||||||||||||
Common stock, $0.001 par value, 200,000,000 shares authorized, 58,234,688, 57,269,838, 56,601,988 and 54,678,083 shares issued, 55,762,382, 54,797,532, 55,511,010 and 54,522,973 shares outstanding as of December 31, 2013, 2012, 2011, and 2010, respectively | 58 | 57 | 56 | 55 | ||||||||||||
Treasury stock, at cost, 2,472,306, 2,472,306, 1,090978 and 316,760 shares as of December 31, 2013, 2012, 2011 and 2010, respectively | (4,199 | ) | (4,199 | ) | (2,795 | ) | (871 | ) | ||||||||
Paid-in-capital | 106,878 | 105,714 | 107,940 | 104,970 | ||||||||||||
Statutory reserves | 6,243 | 6,076 | 6,388 | 6,202 | ||||||||||||
Accumulated deficits | (414,798 | ) | (381,782 | ) | (229,083 | ) | (51,793 | ) | ||||||||
Accumulated other comprehensive income | 729 | 10,185 | 10,200 | 10,987 | ||||||||||||
TOTAL GENERAL STEEL HOLDINGS, INC. DEFICIENCY | (305,086 | ) | (263,946 | ) | (107,291 | ) | 69,553 | |||||||||
NONCONTROLLING INTERESTS | (188,911 | ) | (172,063 | ) | (56,189 | ) | 51,969 | |||||||||
TOTAL DEFICIENCY | (493,997 | ) | (436,009 | ) | (163,480 | ) | 121,522 | |||||||||
TOTAL LIABILITIES AND DEFICIENCY | $ | 2,700,358 | $ | 2,650,682 | $ | 3,054,121 | $ | 1,799,380 |
The accompanying notes are an integral part of these consolidated financial statements.
65 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012, 2011 AND 2010
(In thousands, except per share data)
2013 | 2012 | 2011 | 2010 | |||||||||||||
(Restated) | (Restated) | |||||||||||||||
SALES | $ | 2,016,548 | $ | 1,966,391 | $ | 2,452,127 | $ | 1,392,770 | ||||||||
SALES - RELATED PARTIES | 447,199 | 897,202 | 1,111,769 | 489,370 | ||||||||||||
TOTAL SALES | 2,463,747 | 2,863,593 | 3,563,896 | 1,882,140 | ||||||||||||
COST OF GOODS SOLD | 2,062,570 | 1,930,793 | 2,519,183 | 1,369,523 | ||||||||||||
COST OF GOODS SOLD - RELATED PARTIES | 457,115 | 900,681 | 1,132,927 | 481,202 | ||||||||||||
TOTAL COST OF GOODS SOLD | 2,519,685 | 2,831,474 | 3,652,110 | 1,850,725 | ||||||||||||
GROSS (LOSS) PROFIT | (55,938 | ) | 32,119 | (88,214 | ) | 31,415 | ||||||||||
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES | (84,226 | ) | (105,077 | ) | (91,827 | ) | (52,577 | ) | ||||||||
CHANGE IN FAIR VALUE OF PROFIT SHARING LIABILITY | 174,569 | (22,499 | ) | (14,047 | ) | - | ||||||||||
INCOME (LOSS) FROM OPERATIONS | 34,405 | (95,457 | ) | (194,088 | ) | (21,162 | ) | |||||||||
OTHER INCOME (EXPENSE) | ||||||||||||||||
Interest income | 11,214 | 15,059 | 7,892 | 6,154 | ||||||||||||
Finance/interest expense | (91,878 | ) | (153,743 | ) | (100,902 | ) | (51,283 | ) | ||||||||
Change in fair value of derivative liabilities - warrants | 1 | 9 | 5,563 | 15,055 | ||||||||||||
Gain on debt settlement | - | - | 3,430 | - | ||||||||||||
Gain (loss) on disposal of equipment and intangible assets | 424 | (2,134 | ) | 693 | (9,447 | ) | ||||||||||
Government grant | 4,216 | 2,253 | - | - | ||||||||||||
Realized income from future contracts | - | - | 415 | 1,424 | ||||||||||||
Income from equity investments | 203 | 217 | 5,302 | 6,383 | ||||||||||||
Foreign currency transaction gain (loss) | 1,394 | (1,248 | ) | 3,424 | - | |||||||||||
Lease income | 2,158 | 2,119 | 2,008 | 943 | ||||||||||||
Gain on deconsolidation of a subsidiary | 1,011 | - | - | - | ||||||||||||
Payment for public highway construction | (6,462 | ) | - | - | - | |||||||||||
Other non-operating income (expense), net | 1,043 | 1,783 | (1,442 | ) | (3,120 | ) | ||||||||||
Other expense, net | (76,676 | ) | (135,685 | ) | (73,617 | ) | (33,891 | ) | ||||||||
LOSS BEFORE PROVISION FOR INCOME TAXES AND NONCONTROLLING INTEREST | (42,271 | ) | (231,142 | ) | (267,705 | ) | (55,053 | ) | ||||||||
PROVISION FOR INCOME TAXES | ||||||||||||||||
Current | 354 | 627 | 175 | 1,267 | ||||||||||||
Deferred | - | 169 | 15,419 | (10,049 | ) | |||||||||||
Provision for income taxes | 354 | 796 | 15,594 | (8,782 | ) | |||||||||||
NET LOSS | (42,625 | ) | (231,938 | ) | (283,299 | ) | (46,271 | ) | ||||||||
Less: Net loss attributable to noncontrolling interest | (9,609 | ) | (79,241 | ) | (106,112 | ) | (16,265 | ) | ||||||||
NET LOSS ATTRIBUTABLE TO GENERAL STEEL HOLDINGS, INC. | $ | (33,016 | ) | $ | (152,697 | ) | $ | (177,187 | ) | $ | (30,006 | ) | ||||
NET LOSS | $ | (42,625 | ) | $ | (231,938 | ) | $ | (283,299 | ) | $ | (46,271 | ) | ||||
OTHER COMPREHENSIVE LOSS | ||||||||||||||||
Foreign currency translation adjustments | (14,425 | ) | (744 | ) | (587 | ) | 4,623 | |||||||||
COMPREHENSIVE LOSS | (57,050 | ) | (232,682 | ) | (283,886 | ) | (41,648 | ) | ||||||||
Less: Comprehensive loss attributable to noncontrolling interest | (15,107 | ) | (79,970 | ) | (105,912 | ) | (14,511 | ) | ||||||||
COMPREHENSIVE LOSS ATTRIBUTABLE TO GENERAL STEEL HOLDINGS, INC. | $ | (41,943 | ) | $ | (152,712 | ) | $ | (177,974 | ) | $ | (27,137 | ) | ||||
WEIGHTED AVERAGE NUMBER OF SHARES | ||||||||||||||||
Basic and Diluted | 55,126 | 54,867 | 54,750 | 53,113 | ||||||||||||
LOSS PER SHARE | ||||||||||||||||
Basic and Diluted | $ | (0.60 | ) | $ | (2.78 | ) | $ | (3.24 | ) | $ | (0.56 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
66 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN DEFICIENCY
(In thousands)
Preferred stock | Common stock | Treasury stock | Retained earnings / Accumulated deficits | Accumulated other | ||||||||||||||||||||||||||||||||||||||||||||
Paid-in | Statutory | comprehensive | Noncontrolling | |||||||||||||||||||||||||||||||||||||||||||||
Shares | Par value | Shares | Par value | Shares | At cost | capital | reserves | Unrestricted | income | interest | Total | |||||||||||||||||||||||||||||||||||||
BALANCE, December 31, 2010 | 3,093 | $ | 3 | 54,840 | $ | 55 | (317 | ) | $ | (871 | ) | $ | 104,970 | $ | 6,202 | $ | (51,793 | ) | $ | 10,987 | $ | 51,969 | 121,522 | |||||||||||||||||||||||||
Net loss attributable to General Steel Holdings, Inc. | (177,187 | ) | (177,187 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Net loss attributable to noncontrolling interest | (106,112 | ) | (106,112 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Adjustment to statutory reserve | 104 | (103 | ) | 608 | 609 | |||||||||||||||||||||||||||||||||||||||||||
Adjustment to special reserve | 82 | 128 | 210 | |||||||||||||||||||||||||||||||||||||||||||||
Common stock issued for compensation | 788 | 0.79 | 1,253 | 1,254 | ||||||||||||||||||||||||||||||||||||||||||||
Common stock issued for debt settlement | 974 | 0.97 | 1,441 | 1,442 | ||||||||||||||||||||||||||||||||||||||||||||
Common stock transferred by CEO for compensation | 276 | 276 | ||||||||||||||||||||||||||||||||||||||||||||||
Treasury stock purchased | (0.77 | ) | (774 | ) | (1,924 | ) | (1,925 | ) | ||||||||||||||||||||||||||||||||||||||||
Dividend declared to noncontrolling shareholders | (2,982 | ) | (2,982 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustments | (787 | ) | 200 | (587 | ) | |||||||||||||||||||||||||||||||||||||||||||
BALANCE, December 31, 2011 | 3,093 | $ | 3 | 56,602 | $ | 56 | (1,091 | ) | $ | (2,795 | ) | $ | 107,940 | $ | 6,388 | $ | (229,083 | ) | $ | 10,200 | $ | (56,189 | ) | $ | (163,480 | ) | ||||||||||||||||||||||
Net loss attributable to General Steel Holdings, Inc. | (152,697 | ) | (152,697 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Net loss attributable to noncontrolling interest | (79,241 | ) | (79,241 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Adjustment to statutory reserve | �� | 2 | (2 | ) | - | |||||||||||||||||||||||||||||||||||||||||||
Addition to special reserve | 691 | 605 | 1,296 | |||||||||||||||||||||||||||||||||||||||||||||
Usage of special reserve | (693 | ) | (566 | ) | (1,259 | ) | ||||||||||||||||||||||||||||||||||||||||||
Common stock transferred by CEO for compensation | 276 | 276 | ||||||||||||||||||||||||||||||||||||||||||||||
Common stock issued for compensation | 668 | 1 | 641 | 642 | ||||||||||||||||||||||||||||||||||||||||||||
Treasury stock purchased | (1,381 | ) | (1,404 | ) | (1,404 | ) | ||||||||||||||||||||||||||||||||||||||||||
Deconsolidation of a subsidiary | (3,143 | ) | (312 | ) | (35,943 | ) | (39,398 | ) | ||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustments | (15 | ) | (729 | ) | (744 | ) | ||||||||||||||||||||||||||||||||||||||||||
BALANCE, December 31, 2012 | 3,093 | $ | 3 | 57,270 | $ | 57 | (2,472 | ) | $ | (4,199 | ) | $ | 105,714 | $ | 6,076 | $ | (381,782 | ) | $ | 10,185 | $ | (172,063 | ) | $ | (436,009 | ) | ||||||||||||||||||||||
Net loss attributable to General Steel Holdings, Inc. | (33,016 | ) | (33,016 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Net loss attributable to noncontrolling interest | (9,609 | ) | (9,609 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Addition to special reserve | 619 | 553 | 1,172 | |||||||||||||||||||||||||||||||||||||||||||||
Usage of special reserve | (452 | ) | (393 | ) | (845 | ) | ||||||||||||||||||||||||||||||||||||||||||
Common stock transferred by CEO for compensation | 276 | 276 | ||||||||||||||||||||||||||||||||||||||||||||||
Common stock issued for compensation | 665 | 1 | 633 | 634 | ||||||||||||||||||||||||||||||||||||||||||||
Common stock issued for services | 300 | 255 | 255 | |||||||||||||||||||||||||||||||||||||||||||||
Addition to Tianwu paid-in capital | 18,028 | 18,028 | ||||||||||||||||||||||||||||||||||||||||||||||
Deconsolidation of a subsidiary | (529 | ) | (19,929 | ) | (20,458 | ) | ||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustments | (8,927 | ) | (5,498 | ) | (14,425 | ) | ||||||||||||||||||||||||||||||||||||||||||
BALANCE, December 31, 2013 | 3,093 | $ | 3 | 58,235 | $ | 58 | (2,472 | ) | $ | (4,199 | ) | $ | 106,878 | $ | 6,243 | $ | (414,798 | ) | $ | 729 | $ | (188,911 | ) | $ | (493,997 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
67 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012, 2011 AND 2010
(In thousands)
2013 | 2012 | 2011 | 2010 | |||||||||||||
(Restated) | (Restated) | |||||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||||||
Net loss | $ | (42,625 | ) | $ | (231,938 | ) | $ | (283,299 | ) | $ | (46,271 | ) | ||||
Adjustments to reconcile net loss to cash provided by (used in) operating activities: | ||||||||||||||||
Depreciation, amortization and depletion | 89,048 | 83,931 | 58,331 | 41,153 | ||||||||||||
Impairment of plant and equipment | - | 20,173 | 5,424 | 1,747 | ||||||||||||
Change in fair value of derivative liabilities - warrants | (1 | ) | (9 | ) | (5,563 | ) | (15,055 | ) | ||||||||
Change in fair value of profit sharing liability | (174,569 | ) | 22,499 | 14,047 | - | |||||||||||
Gain on debt settlement | - | - | (3,430 | ) | - | |||||||||||
(Gain) loss on disposal of equipment and intangible assets | (424 | ) | 2,134 | (693 | ) | 8,257 | ||||||||||
Provision for doubtful accounts | (677 | ) | (157 | ) | 3,529 | 326 | ||||||||||
Inventory written-off | - | 37,512 | 1,061 | |||||||||||||
Reservation of mine maintenance fee | 327 | 37 | - | - | ||||||||||||
Stock issued for services and compensation | 1,165 | 918 | 1,530 | 2,479 | ||||||||||||
Income from compensation | - | - | - | (1,377 | ) | |||||||||||
Make whole shares interest expense on notes conversion | - | - | - | 1,130 | ||||||||||||
Amortization of deferred note issuance cost and discount on convertible notes | - | - | - | 17 | ||||||||||||
Amortization of deferred financing cost on capital lease | 20,799 | 20,623 | 13,657 | - | ||||||||||||
Income from equity investments | (203 | ) | (217 | ) | (5,302 | ) | (6,383 | ) | ||||||||
Foreign currency transaction (gain) loss | (1,394 | ) | 1,248 | (3,424 | ) | - | ||||||||||
Gain on deconsolidation of a subsidiary | (1,011 | ) | - | - | - | |||||||||||
Deferred tax assets | - | 169 | 15,419 | (10,058 | ) | |||||||||||
Deferred lease income | (2,158 | ) | (2,119 | ) | 4,782 | 5,549 | ||||||||||
Changes in operating assets and liabilities | ||||||||||||||||
Notes receivable | 25,555 | (53,946 | ) | (41,318 | ) | (18,498 | ) | |||||||||
Accounts receivable | 1,281 | 6,694 | 4,761 | (8,647 | ) | |||||||||||
Accounts receivable - related parties | 12,161 | 5,835 | (16,015 | ) | 14,065 | |||||||||||
Other receivables | (1,116 | ) | 7,221 | (12,638 | ) | (3,210 | ) | |||||||||
Other receivables - related parties | (48,017 | ) | 1,820 | (50,562 | ) | (2,968 | ) | |||||||||
Inventories | (40,632 | ) | 86,635 | 131,695 | (270,046 | ) | ||||||||||
Advances on inventory purchases | 25,414 | (18,677 | ) | (37,674 | ) | 4,681 | ||||||||||
Advances on inventory purchases - related parties | (145,686 | ) | (69,573 | ) | (13,608 | ) | 13,782 | |||||||||
Prepaid expense and other | (916 | ) | (83 | ) | 4,753 | - | ||||||||||
Long-term deferred expense | 422 | (424 | ) | 845 | - | |||||||||||
Prepaid taxes | (3,485 | ) | 320 | 14,223 | - | |||||||||||
Accounts payable | 23,760 | (35,719 | ) | 160,657 | 76,003 | |||||||||||
Accounts payable - related parties | 113,034 | 90,833 | 38,647 | 45,480 | ||||||||||||
Other payables and accrued liabilities | (10,508 | ) | 14,138 | 18,076 | (1,527 | ) | ||||||||||
Other payables - related parties | 8,332 | 49,991 | 9,845 | 30,618 | ||||||||||||
Customer deposits | (41,069 | ) | 34,410 | (46,870 | ) | (24,433 | ) | |||||||||
Customer deposits - related parties | 41,636 | (46,960 | ) | 11,211 | 18,855 | |||||||||||
Taxes payable | (12,367 | ) | 4,957 | 4,834 | (19,543 | ) | ||||||||||
Net cash (used in) provided by operating activities | (163,924 | ) | (5,236 | ) | 33,382 | (162,813 | ) | |||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||||
Restricted cash | (64,860 | ) | 78,826 | (190,178 | ) | 741 | ||||||||||
Acquired long term investment | - | - | (2,021 | ) | ||||||||||||
Loans to related parties | (200 | ) | (69,299 | ) | - | - | ||||||||||
Repayments from related parties | 1,660 | - | - | - | ||||||||||||
Cash proceeds from disposal of long-term investment | - | - | - | 8,137 | ||||||||||||
Cash proceeds from (made to) short term investment | (81 | ) | 317 | (2,858 | ) | - | ||||||||||
Cash proceeds from sales of equipments and intangible assets | 160 | 337 | 1,306 | 1,828 | ||||||||||||
Long-term other receivable | - | (42,994 | ) | - | - | |||||||||||
Equipment purchase and intangible assets | (43,355 | ) | (27,976 | ) | (110,939 | ) | (97,022 | ) | ||||||||
13,619 | - | - | - | |||||||||||||
Effect on cash due to deconsolidating of a subsidiary | (12,735 | ) | (2,975 | ) | - | - | ||||||||||
Net cash used in investing activities | (105,792 | ) | (63,764 | ) | (302,669 | ) | (88,337 | ) | ||||||||
CASH FLOWS FINANCING ACTIVITIES: | ||||||||||||||||
Capital contributed by noncontrolling interest | 18,028 | - | - | 1,184 | ||||||||||||
Payments made to dividend distribution | - | - | - | (2,855 | ) | |||||||||||
Payments made for treasury stock acquired | - | (1,404 | ) | (1,923 | ) | (870 | ) | |||||||||
Notes receivable - restricted | (26,066 | ) | 232,218 | (329,839 | ) | (234,342 | ) | |||||||||
Borrowings on short term notes payable | 1,913,987 | 1,923,584 | 563,007 | 327,807 | ||||||||||||
Payments on short term notes payable | (1,911,006 | ) | (2,064,571 | ) | (600,294 | ) | (199,905 | ) | ||||||||
Borrowings on short term loans - bank | 371,685 | 260,611 | 330,037 | 152,517 | ||||||||||||
Payments on short term loans - bank | (222,104 | ) | (371,241 | ) | (212,661 | ) | (174,913 | ) | ||||||||
Borrowings on short term loan - others | 69,632 | 184,890 | 15,450 | 71,714 | ||||||||||||
Payments on short term loans - others | (72,989 | ) | (284,242 | ) | (14,817 | ) | (11,850 | ) | ||||||||
Borrowings on short term loan - related parties | 393,833 | 356,989 | 1,655,741 | 905,124 | ||||||||||||
Payments on short term loans - related parties | (248,119 | ) | (297,718 | ) | (1,049,680 | ) | (693,633 | ) | ||||||||
Deposits due to sales representatives | (10,455 | ) | 10,743 | (30,066 | ) | 987 | ||||||||||
Deposit due to sales representatives - related parties | 711 | 286 | 464 | 444 | ||||||||||||
Borrowings on long term loan - related parties | - | - | 14,677 | 91,020 | ||||||||||||
Payments on current maturities of long-term loans - related party | (22,940 | ) | - | (16,865 | ) | - | ||||||||||
Principal payment under capital lease obligation | (218 | ) | - | - | - | |||||||||||
Long-term other payable - related party | - | 42,994 | - | - | ||||||||||||
Net cash provided by (used in) financing activities | 253,979 | (6,861 | ) | 323,231 | 232,429 | |||||||||||
EFFECTS OF EXCHANGE RATE CHANGE IN CASH | 1,237 | 2,312 | 801 | 1,874 | ||||||||||||
(DECREASE) INCREASE IN CASH | (14,500 | ) | (73,549 | ) | 54,745 | (16,847 | ) | |||||||||
CASH, beginning of year | 46,467 | 120,016 | 65,271 | 82,118 | ||||||||||||
CASH, end of year | $ | 31,967 | $ | 46,467 | $ | 120,016 | $ | 65,271 |
The accompanying notes are an integral part of these consolidated financial statements.
68 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Organization and Operations
General Steel Holdings, Inc. (the “Company”) was incorporated on August 5, 2002 in the state of Nevada. The Company through its 100% owned subsidiary, General Steel Investment, operates steel companies serving various industries in the People’s Republic of China (“PRC”). The Company’s main operation is manufacturing and sales of steel products such as steel rebar, hot-rolled carbon and silicon sheets and spiral-weld pipes. The Company, together with its subsidiaries, majority owned subsidiaries and variable interest entity, is referred to as the “Group”.
On April 29, 2011, a 20-year Unified Management Agreement (“the Agreement”) was entered into between the Company, the Company’s 60%-owned subsidiary Shaanxi Longmen Iron and Steel Co., Ltd. (“Longmen Joint Venture”), Shaanxi Coal and Chemical Industry Group Co., Ltd. (“Shaanxi Coal”) and Shaanxi Iron and Steel Group (“Shaanxi Steel”). Shaanxi Steel is the controlling shareholder of Shaanxi Longmen Iron and Steel Group Co., Ltd (“Long Steel Group”) which is the non-controlling interest holder in Longmen Joint Venture, and Shaanxi Coal, a state owned entity, is the parent company of Shaanxi Steel. Under the terms of the Agreement, all manufacturing machinery and equipment of Longmen Joint Venture and the $605.8 million (or approximately RMB 3.7 billion) of newly constructed iron and steel making facilities owned by Shaanxi Steel, which includes one 400m2 sintering machine, two 1,280m3 blast furnaces, two 120 ton converters and some auxiliary systems, are managed collectively as a single virtual asset pool (“Asset Pool”). Longmen Joint Venture manages the Asset Pool as the principal operating entity and is responsible for the daily operations of the new and existing facilities.
The Agreement leverages each of the parties’ operating strengths, allowing 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% of the pre-tax profit generated by the Asset Pool. The remaining 60% of the pre-tax profit is allocated to Longmen Joint Venture. As a result, the Company’s economic interest in the profit generated by Longmen Joint Venture decreased from 60% to 36%. However, the overall capacity under the management of Longmen Joint Venture has increased by three million tons, or 75%. The Agreement is also expected to 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. There has been no adjustment to the Agreement from its inception to the present time nor intention to make future adjustment by the Company and Shaanxi Steel.
The parties to the Agreement have agreed to 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 3(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 3 “Summary of significant accounting policies”, 16 “Capital lease obligations” and 17 “Profit sharing liability”.
Note 2 - Restatement
These financial statements contain restatements related to the classification, display and disclosure of the profit sharing liability (which is accounted for at fair value as a derivative instrument liability), which the Company concluded to be incomplete and inconsistent after communications with the Staff of the United States Securities and Exchange Commission following the Staff’s review certain of the Company’s prior annual reports and based on subsequent communications between the Staff and the Company. The restatements do not impact the Company’s previously reported consolidated balance sheets, or consolidated statements of changes in deficiency, nor do the restatements result in adjustment of reported net income/loss in the Company’s consolidated statements of operations and comprehensive income (loss) or adjustment of reported cash flows in the Company’s consolidated statements of cash flows for any period presented.
69 |
The impact of these restatements on the previously issued financial statements is reflected in the following table:
For the year ended December 31, 2012 | ||||||||||||
Consolidated Statements of Operations | Original | Restatement | Restated | |||||||||
Change in fair value of profit sharing liability | $ | - | $ | (22,499 | ) | $ | (22,499 | ) | ||||
Loss from operations | (72,958 | ) | (22,499 | ) | (95,457 | ) | ||||||
Finance/interest expense | (176,242 | ) | 22,499 | (153,743 | ) | |||||||
Other expense, net | (158,184 | ) | 22,499 | (135,685 | ) |
For the year ended December 31, 2012 | ||||||||||||
Consolidated Statements of Cash Flows | Original | Restatement | Restated | |||||||||
Amortization of deferred financing cost on capital lease | $ | 43,122 | $ | (22,499 | ) | $ | 20,623 | |||||
Change in fair value of profit sharing liability | - | 22,499 | 22,499 | |||||||||
For the year ended December 31, 2011 | ||||||||||||
Consolidated Statements of Operations | Original | Restatement | Restated | |||||||||
Change in fair value of profit sharing liability | $ | - | $ | (14,047 | ) | $ | (14,047 | ) | ||||
Loss from operations | (180,041 | ) | (14,047 | ) | (194,088 | ) | ||||||
Finance/interest expense | (114,949 | ) | 14,047 | (100,902 | ) | |||||||
Other expense, net | (87,664 | ) | 14,047 | (73,617 | ) |
For the year ended December 31, 2011 | ||||||||||||
Consolidated Statements of Cash Flows | Original | Restatement | Restated | |||||||||
Amortization of deferred financing cost on capital lease | $ | 27,704 | $ | (14,047 | ) | $ | 13,657 | |||||
Change in fair value of profit sharing liability | - | 14,047 | 14,047 |
In addition, the Company revised and enhanced the disclosure in Note 3(c)– Consolidation of VIE, Note 3(i) – Financial instruments, Note 17 – Profit Sharing Liability, and Note 26 – Segments to reflect the classification of the profit sharing liability and to provide a more complete display and disclosure of the profit sharing liability which is accounted for at fair value as a derivative instrument liability.
Note 3 – Summary of significant accounting policies (restated– sections 3(c) and 3(i) only)
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for 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.
(a) | Basis of presentation |
The consolidated financial statements of the Company reflect the activities of the following major directly owned subsidiaries:
Percentage | ||||||
Subsidiary | 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 | % |
70 |
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. See Note 18 – Other income (expense) under the section “Gain on deconsolidation of a subsidiary” for details. 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 3(t) - Investments in unconsolidated entities for details.
(b) | Principles of consolidation – subsidiaries |
The accompanying consolidated financial statements include the financial statements of the Company, its subsidiaries, its variable interest entity (“VIE”) for which the Company is the ultimate primary beneficiary, and the VIE’s subsidiaries.
Subsidiaries are those entities in which the Company, directly or indirectly, controls more than one half of the voting power; or has the power to govern the financial and operating policies, to appoint or remove the majority of the members of the board of directors, or to cast a majority of votes at the meeting of directors.
A VIE is an entity in which the Company, or its subsidiary, through contractual arrangements, bears the risks of, and enjoys the rewards normally associated with ownership of the entity, and therefore the Company or its subsidiary is the primary beneficiary of the entity.
All significant inter-company transactions and balances have been eliminated upon consolidation.
(c) | Consolidation of VIE (restated) |
Prior to entering into the Unified Management Agreement on April 29, 2011, Longmen Joint Venture had been consolidated as the Company’s 60% direct owned subsidiary. Upon entering into the Unified Management Agreement on April 29, 2011, Longmen Joint Venture was re-evaluated by the Company to determine if Longmen Joint Venture is a VIE and if the Company is the primary beneficiary.
Based on projected profits in this entity and future operating plans, Longmen Joint Venture ’s equity at risk is considered insufficient to finance its activities and therefore Longmen Joint Venture is considered to be a VIE.
The Company would be considered the primary beneficiary of the VIE if it has both of the following characteristics:
a. | The power to direct the activities of the VIE that most significantly impact the VIE’s economic performance; and |
b. | The obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. |
A Supervisory Committee was formed during the negotiation of the Unified Management Agreement. Given there is both a Supervisory Committee and a Board with respect to Longmen Joint Venture , the powers (rights and roles) of both bodies were considered to determine which party has the power to direct the activities of Longmen Joint Venture , and by extension, whether the Company continues to have the power to direct Longmen Joint Venture ’s activities after this Supervisory Committee was formed and the significant investment in plant and equipment by owners of the Longmen Joint Venture partner. The Supervisory Committee, in which the Company holds 2 out of 4 seats, requires a ¾ majority vote, while the Board, which the Company holds 4 out of 7 seats, requires a simple majority vote. As the Supervisory Committee’s role is limited to supervising and monitoring management of Longmen Joint Venture and in the event there is any disagreement between the Board and the Supervisory Committee, the Board prevails, the Supervisory Committee is considered subordinate to the Board. Thus, the Board of Directors of Longmen Joint Venture continues to be the controlling decision-making body with respect to Longmen Joint Venture. The Company, which controls 60% of the voting rights of the Board of Directors, has control over the operations of Longmen Joint Venture and as such, has the power to direct the activities of the VIE that most significantly impact Longmen Joint Venture ’s economic performance.
71 |
In connection with the Unified Management Agreement, the Company, Shaanxi Coal and Shaanxi Steel may provide such support on a discretionary basis or as needed in the future. See Note 3 item (d) Liquidity.
The Company has the obligation to absorb losses and the rights to receive benefits based on the profit allocation as stipulated by the Unified Management Agreement that are significant to the VIE. As both conditions are met, the Company is the primary beneficiary of Longmen Joint Venture and therefore, continues to consolidate Longmen Joint Venture as a VIE.
The Company believes that the Unified Management Agreement between Longmen Joint Venture and Shaanxi Coal is in compliance with PRC law and is legally enforceable. The Board of Directors of Longmen Joint Venture continues to be the controlling decision-making body with respect to Longmen Joint Venture. The Company, which controls 60% of the voting rights of the Board of Directors, has control over the operations of Longmen Joint Venture and as such, has the power to direct the activities of the VIE. However, PRC law and/or uncertainties in the PRC legal system could limit the Company’s ability to enforce the Unified Management Agreement, which in turn, may lead to reconsideration of the VIE assessment and the potential for a different conclusion. If the Unified Management Agreement cannot be enforced, the Company would not consolidate Longmen Joint Venture as a VIE. However, the current PRC legal system has not limited the Company’s ability to enforce the Unified Management Agreement nor does the Company believe it is likely to do so in the future. The Company makes ongoing assessment to determine whether Longmen Joint Venture is a VIE.
The carrying amount of the VIE and its subsidiaries’ consolidated assets and liabilities are as follows:
December 31, 2013 | December 31, 2012 | December 31, 2011 | December 31, 2010 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
Current assets | $ | 1,282,054 | $ | 1,285,967 | $ | 1,674,171 | $ | 1,087,108 | ||||||||
Plant and equipment, net | 1,262,144 | 1,154,811 | 1,217,264 | 553,688 | ||||||||||||
Other noncurrent assets | 29,014 | 72,428 | 45,836 | 54,099 | ||||||||||||
Total assets | 2,573,212 | 2,513,206 | 2,937,271 | 1,694,895 | ||||||||||||
Total liabilities | (3,040,879 | ) | (2,943,761 | ) | (3,131,823 | ) | (1,612,925 | ) | ||||||||
Net liabilities | $ | (467,667 | ) | $ | (430,555 | ) | $ | (194,552 | ) | $ | 81,970 |
72 |
VIE and its subsidiaries’ liabilities consist of the following:
December 31, 2013 | December 31, 2012 | December 31, 2011 | December 31, 2010 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
Current liabilities: | ||||||||||||||||
Short term notes payable | $ | 988,364 | $ | 971,117 | $ | 1,105,570 | $ | 447,992 | ||||||||
Accounts payable | 393,816 | 324,563 | 401,158 | 230,753 | ||||||||||||
Accounts payable - related parties | 235,116 | 177,160 | 81,403 | 56,742 | ||||||||||||
Short term loans - bank | 267,688 | 114,935 | 209,234 | 260,977 | ||||||||||||
Short term loans - others | 55,844 | 141,290 | 240,684 | 113,328 | ||||||||||||
Short term loans - related parties | 125,236 | 35,839 | 15,710 | 14,548 | ||||||||||||
Current maturities of long-term loans – related party | 56,614 | 54,885 | - | - | ||||||||||||
Other payables and accrued liabilities | 37, 028 | 29,769 | 31,249 | 27,932 | ||||||||||||
Other payables - related parties | 88,914 | 64,941 | 20,677 | 2,132 | ||||||||||||
Customer deposits | 87,661 | 109,120 | 84,767 | 129,832 | ||||||||||||
Customer deposits - related parties | 18,359 | 21,998 | 66,932 | 53,624 | ||||||||||||
Deposit due to sales representatives | 24,343 | 33,870 | 22,890 | 52,079 | ||||||||||||
Deposit due to sales representatives – related parties | 1,997 | 1,238 | - | - | ||||||||||||
Taxes payable | 3,357 | 15,339 | 5,386 | 5,159 | ||||||||||||
Deferred lease income | 2,187 | 2,120 | 2,099 | 1,971 | ||||||||||||
Capital lease obligations, current | 4,321 | - | 25,607 | - | ||||||||||||
Intercompany payable to be eliminated | 21,420 | 30,476 | 66,021 | 69,216 | ||||||||||||
Total current liabilities | 2,412,265 | 2,128,660 | 2,379,387 | 1,466,285 | ||||||||||||
Non-current liabilities: | ||||||||||||||||
Long term loans - related parties | 16,043 | 38,088 | 92,035 | 91,020 | ||||||||||||
Long-term other payable – related party | - | 43,008 | - | - | ||||||||||||
Deferred lease income - noncurrent | 75,257 | 75,079 | 76,425 | 55,620 | ||||||||||||
Capital lease obligations, noncurrent | 375,019 | 330,099 | 280,743 | - | ||||||||||||
Profit sharing liability at fair value | 162,295 | 328,827 | 303,233 | - | ||||||||||||
Total non-current liabilities | 628,614 | 815,101 | 752,436 | 146,640 | ||||||||||||
Total liabilities of consolidated VIE | $ | 3,040,879 | $ | 2,943,761 | $ | 3,131,823 | $ | 1,612,925 |
For the year ended | For the year ended | For the year ended | For the year ended | |||||||||||||
December 31, 2013 | December 31, 2012 | December 31, 2011 | December 31, 2010 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
Sales | $ | 2,450,256 | $ | 2,837,608 | $ | 3,496,551 | $ | 1,846,080 | ||||||||
Gross (loss) profit | $ | (56,065 | ) | $ | 29,512 | $ | (86,308 | ) | $ | 32,751 | ||||||
Income (loss) from operations | $ | 45,161 | $ | (68,081 | ) | $ | (175,104 | ) | $ | (8,073 | ) | |||||
Net loss attributable to controlling interest | $ | (16,457 | ) | $ | (114,936 | ) | $ | (161,897 | ) | $ | (32,668 | ) |
Longmen Joint Venture has two 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 equity 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 invested in by Longmen Joint Venture in June 2007 and July 2008, respectively. However, these two entities do not meet the definition of variable interest entities. Further consideration was given to whether consolidation was appropriate under the voting interest model, specifically where the power of control may exist with a lesser percentage of ownership (i.e. less than 50%), for example, by contract, lease, agreement with other stockholders or by court decree.
73 |
Hualong
Longmen Joint Venture, the single largest shareholder, holds a 36.0% equity interest in Hualong. The other two shareholders, who own 34.67% and 29.33% respectively, assigned their voting rights to Longmen Joint Venture in writing at the time of the acquisition of Hualong. The voting rights have been assigned through the date Hualong ceases its business operations or the other two shareholders sell their interest in Hualong. Hualong’s main business is to supply refractory. The assets, liabilities and the operating results of Hualong are immaterial to the Company’s consolidated financial statements as for and during the years ended December 31, 2013, 2012, 2011 and 2010.
Tongxing
Prior to March 1, 2012, Longmen Joint Venture held a 22.76% equity interest in Tongxing while hundreds of employees of Longmen Joint Venture owned the remaining 77.24%. Each individual employee shareholder comprising the remaining 77.24% assigned its voting rights to Longmen Joint Venture in writing at the time of the acquisition of Tongxing. The voting rights assigned were effective until Tongxing ceased its business operations or Longmen Joint Venture liquidated its equity interest of Tongxing, whichever came first.
On March 1, 2012, Longmen Joint Venture sold its 22.76% equity interest of Tongxing to two individuals, who are the representatives from Long Steel Group. As of March 1, 2012, Tongxing had a carrying value of net assets of $40.5 million which were included in the consolidated net assets of the Company and a noncontrolling interest in Tongxing of $32.5 million. The Company retained the land use right associated with the Tongxing property adjacent to the Longmen Joint Venture facility, which had a carrying value of $3.6 million immediately prior to the transaction and relinquished its controlling interest in the remaining net assets (primarily operating assets). In connection with the transaction, the Company also settled with a payable in cash of $0.3 million and transferred the dividend receivable of $0.9 million from Tongxing to the two individuals. These arrangements meet the criteria of ASC 810-10-40-6b and 6d, deconsolidation of a Subsidiary with multiple arrangements treated as a single transaction. As the land use rights held in Tongxing have been included as part of the Company’s consolidated assets, this transaction was considered as a change in the Company’s ownership interest in the land use right similar to a change in a parent company’s ownership interest in a subsidiary in accordance with ASC 810-10-45-23 and therefore the carrying value of the land use right was not stepped up to fair value. The net impact of these transactions resulted in a reduction of $3.1 million paid-in capital on March 1, 2012.
Huatianyulong
Longmen Joint Venture holds a 50.0% equity interest in Huatianyulong and the other unrelated shareholder holds the remaining 50.0%. The other shareholder assigned its voting rights to Longmen Joint Venture in writing at the time of acquisition of Huatianyulong. The voting rights have been assigned through the date Huatianyulong ceases its business operation or the other unrelated shareholder sells its interest in Huatianyulong. Huatianyulong mainly sells imported iron ore. The assets, liabilities and the operating results of Huatianyulong are immaterial to the Company’s consolidated financial statements as for and during the years ended December 31, 2013, 2012, 2011 and 2010.
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.
(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.
74 |
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 December 31, 2013, 2012, 2011 and 2010 were (6.5), (7.1), (19.7) and 13.8, respectively. As of December 31, 2013, the Company’s current liabilities exceed current assets (excluding non-cash item) by $1.2 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 $230.7 million with expiration dates ranging from March 23, 2015 to July 17, 2015.
Banks | Amount of Line of Credit (in millions) | Repayment Date | ||||
Bank of Chongqing | 49.1 | March 23, 2015 | ||||
Industrial Bank Co., Ltd. | 49.1 | May 5, 2015 | ||||
China Merchant Bank | 49.1 | May 19, 2015 | ||||
China CITIC Bank | 32.7 | June 16, 2015 | ||||
Bank of Communication | 18.0 | July 17, 2015 | ||||
Bank of Jinzhou | 32.7 | March 23, 2015 | ||||
Total | $ | 230.7 |
As of the date of this report, the Company utilized $182.5 million of these lines of credit.
Vendor financing
Longmen Joint Venture signed additional vendor financing agreements, which will provide liquidity to the Company in a total amount of $818.5 million with the following companies:
Company | Financing period covered | Financing Amount (in millions) | ||||
Company A – related party | July 1, 2013 – June 30, 2015 | $ | 163.7 | |||
Company B – third party | January 22, 2014 – January 22, 2017 | 163.7 | ||||
Company C – third party | October 1, 2013 – March 31, 2015 | 491.1 | ||||
Total | $ | 818.5 |
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. On January 6, 2013, Company A signed a two-year agreement with Longmen Joint Venture to finance its coke purchase up to $81.9 million. On July 1, 2013, Company A agreed to increase the financing amount to $163.7 million and extend the financing period to June 30, 2015. Company B Signed a two-year agreement with Longmen Joint Venture on November 7, 2013 to finance its coke purchase up to $163.7 million and agreed to extend the financing period for another three years effective on January 22, 2014. According to the above signed agreements, both Company A and B will not demand any cash payments during their respective financing periods. As of the date of this report, our payables to Company A and Company B were approximately $54.4 million and $51.8 million, respectively.
Company C is a Fortune 500 Company. On June 28, 2013, Company C signed an agreement with Longmen Joint Venture to finance Longmen Joint Venture’s purchase of iron ore for an amount up to $491.1 million to commence on October 1, 2013 and end on March 31, 2015. Subject to the terms of the agreement, Longmen Joint Venture is subject to a penalty of 0.05% of the daily outstanding balance owed to Company C in an event of late payment. As of the date of this report, our payable to Company C is approximately $2.0 million.
75 |
Other financing
On February 20, 2014 and March 5, 2014, Longmen Joint Venture signed a payment extension agreement with each company listed below. In total, Longmen Joint Venture can get $217.7 million in financial support from two-year and three-year balancing payment extensions granted by the following five companies:
Company | Financing period covered | Financing Amount (in millions) | ||||
Company D – related party | February 20, 2014 – February 20, 2017 | $ | 32.7 | |||
Company E – related party | February 20, 2014 – February 20, 2017 | 37.7 | ||||
Company F – related party | February 20, 2014 – February 20, 2017 | 32.7 | ||||
Company G – related party | March 5, 2014 – March 5, 2016 | 57.3 | ||||
Company H – related party | March 5, 2014 – March 5, 2016 | 57.3 | ||||
Total | $ | 217.7 |
According to the contract terms, Company D, Company E, Company F, Company G and Company H have agreed to grant payment extensions in the amounts of $32.7 million, $37.7 million, $32.7 million, $57.3 million and $57.3 million respectively. As of the date of this report, our payables to Company D, Company E, Company F, Company G and Company H are approximately $16.4 million, $26.6 million, $17.1 million, $49.1 million and $49.9, respectively.
Amount due to sales representatives
Longmen Joint Venture entered into agreements with various entities to act as the Company’s exclusive sales agents in specified geographic areas. These exclusive sales agents must meet certain criteria and are required to deposit a certain amount of money with the Company. In return, the sales agents receive exclusive sales rights in a specified area and discounted prices on products they order. These deposits bear no interest and are required to be returned to the sales agent once the agreement is terminated. As of December 31, 2013, Longmen Joint Venture has collected a total amount of $26.3 million. Historically, this amount is quite stable and we do not expect a big fluctuation in this amount for the next twelve months from December 31, 2013 onwards.
With the financial support from the banks and the companies above, management is of the opinion that the Company has sufficient funds to meet its future operations, working capital requirements and debt obligations until the end of December 31, 2014. The detailed breakdown of Longmen Joint Venture’s estimated cash flows items are listed below.
Cash inflow (outflow) (in millions) | ||||
For the twelve months ended December 31, 2014 | ||||
Current liabilities over current assets (excluding non-cash items) as of December 31, 2013 | $ | (1,179.2 | ) | |
Projected cash financing and outflows: | ||||
Cash provided by line of credit from banks | 230.7 | |||
Cash provided by vendor financing | 818.5 | |||
Cash provided by other financing | 217.7 | |||
Cash provided by sales representatives | 26.3 | |||
Cash projected to be used in operations in the twelve months ended December 31, 2014 | (35.4 | ) | ||
Cash projected to be used for financing cost in the twelve months ended December 31, 2014 | (55.2 | ) | ||
Net projected change in cash for the twelve months ended December 31, 2014 | $ | 23.4 |
As a result, the consolidated financial statements for the year ended December 31, 2013 have been prepared on a going concern basis.
76 |
(e) | Use of estimates |
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the accompanying consolidated financial statements and footnotes. Significant accounting estimates reflected in the Company’s consolidated financial statements include the fair value of the profit sharing liability, the useful lives of and impairment for property, plant and equipment, and potential losses on uncollectible receivables, allowance for inventory valuation, the interest rate used in the financing sales, the fair value of the assets recorded under capital lease and the present value of the net minimum lease payments of the capital lease. Actual results could differ from these estimates.
(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 fluctuation of raw materials and energy prices as part of its normal operations. As of December 31, 2013, 2012, 2011 and 2010, the Company does 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 December 31, 2013, 2012, 2011 and 2010 amounted to $431.3 million, $369.9 million, $518.2 million and $263.1 million, including $2.0 million, $2.3 million, $0 and $0 that were deposited in Shaanxi Coal and Chemical Industry Group Financial Co., Ltd., a related party, respectively. As of December 31, 2013, $0.1 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 22.1%, 26.7%, 27.1% and 28.6% of the Company’s total sales for the years ended December 31, 2013, 2012, 2011 and 2010, respectively. None of the five major customers accounted for more than 10% of total sales for the year ended December 31, 2013, 2012, 2011 and 2010, respectively. These five major customers accounted for 0%, 47.8%, 27.2% and 0% of total accounts receivable, including related parties, as of December 31, 2013, 2012, 2011 and 2010, respectively. None of the five major customers accounted for more than 10% of total accounts receivable as of December 31, 2013. One of the five major customers accounted for more than 10% of total accounts receivable as of December 31, 2012, 2011 and 2010.
For the years ended December 31, 2013, 2012, 2011 and 2010, the Company purchased approximately 40.2%, 38.9%, 48.6% and 48.0% of its raw materials from five major suppliers, respectively. One of the five major suppliers individually accounted for more than 10% of the total purchases for the year ended December 31, 2013 and none of the five major suppliers individually accounted for more than 10% of the total purchases for the year ended December 31, 2012, 2011 and 2010. These five vendors accounted for 29.1%, 33.8%, 16.9%, and 28.3% of total accounts payable, including related parties, as of December 31, 2013, 2012, 2011 and 2010, respectively. None of the five major suppliers individually accounted for more than 10% of total accounts payable as December 31, 2013, 2011 and 2010 while one of the five major suppliers individually accounted for more than 10% of total accounts payable as December 31, 2012.
(g) | Revenue recognition |
Sales is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, the Company has no other significant obligations and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are recorded as customer deposits. Sales represent the invoiced value of goods, net of value-added tax (VAT). All of the Company’s products sold in the PRC are subject to a Chinese value-added tax at a rate of 13% or 17% of the gross sales price. This VAT may be offset by VAT paid by the Company on raw materials and other materials included in the cost of producing the finished product.
77 |
(h) | Foreign currency translation and other comprehensive income |
The reporting currency of the Company is the U.S. dollar. The Company’s subsidiaries and VIE in China use the local currency, Renminbi (RMB), as their functional currency. Assets and liabilities are translated at the unified exchange rate as quoted by the People’s Bank of China at the end of the period. The statement of operations accounts are translated at the average translation rates and the equity accounts are translated at historical rates. Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statement of equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.
Translation adjustments included in accumulated other comprehensive income amounted to $0.7 million, $10.2 million, $10.2 million and $11.0 million as of December 31, 2013, 2012, 2011 and 2010, respectively. The balance sheet amounts, with the exception of equity at December 31, 2013, 2012, 2011 and 2010 were translated at 6.11 RMB, 6.30 RMB, 6.37 RMB and 6.59 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 years ended December 31, 2013, 2012, 2011 and 2010 were 6.19 RMB, 6.30 RMB, 6.47 RMB and 6.76 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.
(i) | Financial instruments (restated) |
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 carrying value of the long term loans-related party approximates its fair value as of the reporting date as their stated interest rates approximate current rates available.
The accounting standards define fair value, establish a three-level valuation hierarchy for disclosures of fair value measurement and enhance disclosure requirements for fair value measures. The three levels are defined as follow:
· | Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
· | Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments. |
· | Level 3 inputs to the valuation methodology are unobservable and significant to the fair value. |
The Company analyzes all financial instruments with features of both liabilities and equity, pursuant to which previously issued by the Company warrants were required to be recorded as a liability at fair value and marked to market each reporting period.The warrants were accounted for as derivative liabilities and recorded at their fair value, with the change in fair value charged or credited to income each period. The warrants expired unexercised on May 13, 2013. Prior to their expiration, the fair value of the warrants was estimated using a binomial lattice model, using level 3 inputs. See Note 13– “Convertible notes and derivative liabilities” for the variables used in the Cox Rubenstein Binomial model.
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 income each period.
78 |
The Company determines the fair value of the profit sharing liability using Level 3 inputs by considering the present value of Longmen Joint Venture’s projected profits/losses, discounted based on our average borrowing rate, which is currently 7.3%.
The fair value of the profit sharing liability will change each period as a result of (a) any changes in our estimate of Longmen Joint Venture’s projected profits/losses over the remaining term of the Agreement, (b) any change in the discount rate used, based on changes in our current or expected borrowing rate, (c) the change in fair value related to the passage of time and change in the number of future periods over which the present value of future cash flows is estimated and (d) any difference between the previously estimated operating results for the current period and actual results.
Each period, the Company considers whether the discount rate based on the Company’s average borrowing rate should be adjusted based upon the current and expected future financial condition of the Company. To date, the Company has not considered any adjustment to be necessary based upon, but not limited to, the following assumptions:
· | because the joint venture partner of Longmen Joint Venture is a state-owned enterprise with an excellent credit history, PRC banks grant similar credit treatment to Longmen Joint Venture in terms of credit availability |
· | the current average borrowing rate of enterprises in the steel industry in the PRC is similar to this borrowing rate |
· | the current new/renewal borrowing rates of the Company’s bank loans are similar to prior periods |
· | the People’s Bank of China has not recently adjusted any borrowing rate |
· | PRC bank interest rates are not industry specific. The downtrend in the steel industry did not materially impact the bank borrowing rates for steel companies |
· | the bank interest rates are assessed by each individual bank and governed by the Chinese banking regulatory bodies. Reports from credit rating research firms are not commonly used by PRC banks |
The projected profits/losses in Longmen Joint Venture were based upon, but not limited to, the following assumptions:
· | projected selling units and growth in the steel market |
· | projected unit selling price in the steel market |
· | projected unit purchase cost in the coal and iron ore markets |
· | selling and general and administrative expenses to be in line with the growth in the steel market |
· | projected bank borrowings |
· | interest rate index |
· | gross national product index |
· | industry index |
· | government policy |
The above assumptions were reviewed by the Company at December 31, 2013 and the Company changed those assumptions compared with the assumptions used at December 31, 2012 and 2011 because of the changes in market conditions in the PRC. Since the Company had the most updated information from the banks, GDP report, government policies, and the operating results from the year ended December 31, 2013, all of the above information indicated the downward trend 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 December 31, 2013 and recorded a gain on change in fair value of profit sharing liability of $ $174.6 million for the year ended December 31, 2013.
The estimated fair value of the profit sharing liability at December 31, 2013 is $162.3 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 borrowing rate used to discount the liability to a present value by 1.0% and other factors remained unchanged, our profit sharing liability as of December 31, 2013 would have been $186.0 million and we would reduce the gain from the change in the fair value of the profit sharing liabilities by $23.7 million. If we were to reduce the projected selling units and growth in the steel market rate by 1.0% and other factors remained unchanged, our profit sharing liability as of December 31, 2013 would have been $159.8 million and we would reduce the loss from the change in the fair value of profit sharing liabilities by $2.5 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 December 31, 2013:
79 |
Carrying Value as | Fair Value Measurements at December 31, | |||||||||||||||
(in thousands) | of December 31, 2013 | 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 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:
(in thousands) | Carrying Value as of December 31, 2012 | Fair Value Measurements at December 31, 2012 Using Fair Value Hierarchy | ||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||
Derivative liabilities - warrants | $ | 1 | $ | - | $ | - | $ | 1 | ||||||||
Profit sharing liability | 328,827 | - | - | 328,827 | ||||||||||||
Total | $ | 328,828 | $ | - | $ | - | $ | 328,828 |
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, 2011:
(in thousands) | Carrying Value as of December 31, 2011 | Fair Value Measurements at December 31, 2011 Using Fair Value Hierarchy | ||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||
Derivative liabilities - warrants | $ | 10 | $ | - | $ | - | $ | 10 | ||||||||
Profit sharing liability | 303,233 | - | - | 303,233 | ||||||||||||
Total | $ | 303,243 | $ | - | $ | - | $ | 303,243 |
The following table sets forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2010:
(in thousands) | Carrying Value as of December 31, 2010 | Fair Value Measurements at December 31, 2010 Using Fair Value Hierarchy | ||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||
Derivative liabilities - warrants | $ | 5,573 | $ | - | $ | - | $ | 5,573 |
The following is a reconciliation of the beginning and ending balance of the assets and liabilities measured at fair value on a recurring basis for the years ended December 31, 2013, 2012, 2011 and 2010:
December 31, 2013 | December 31, 2012 | December 31, 2011 | December 31, 2010 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
Beginning balance | $ | 328,828 | $ | 303,243 | $ | 5,573 | $ | 24,390 | ||||||||
Initial measurement and recognition of the 40% profit sharing liability on April 29, 2011 | - | - | 280,857 | - | ||||||||||||
Change in fair value of profit sharing liability: | ||||||||||||||||
Change in estimate of future operating profits | (174,821 | ) | - | - | - | |||||||||||
Change in discount rate | - | - | - | |||||||||||||
Change in the number of future periods over which the present value of future cash flows is estimated | 16,872 | 22,499 | 14,047 | - | ||||||||||||
Difference between the previously estimated operating results for the current period and actual results | (16,620 | ) | - | - | - | |||||||||||
Current period interest expense accreted | - | - | - | 389 | ||||||||||||
Current period payments made for principal and stated interest | - | - | - | (217 | ) | |||||||||||
Current period note converted carrying value | - | - | - | (3,934 | ) | |||||||||||
Change in derivative liabilities - warrants | 1 | 9 | (5,563 | ) | (15,055 | ) | ||||||||||
Exchange rate effect | 8,035 | 3,077 | 8,329 | - | ||||||||||||
Ending balance | $ | 162,295 | $ | 328,828 | $ | 303,243 | $ | 5,573 |
80 |
Except for the derivative liabilities and profit sharing liability, the Company did not identify any other assets or liabilities that are required to be presented on the balance sheet at fair value in accordance with the accounting standard.
(j) | Cash |
Cash includes cash on hand and demand deposits in banks with original maturities of less than three months.
(k) | Restricted cash |
The Company has notes payable outstanding with various banks and is required to keep certain amounts on deposit that are subject to withdrawal restrictions. The notes payable are generally short term in nature due to its maturity period of six months or less, thus restricted cash is classified as a current asset.
(l) | Short term investment |
Short-term investments are certificated deposits maintained with banks within the PRC with maturity date of less than one year.
(m) | Accounts receivable and allowance for doubtful accounts |
Accounts receivable include trade accounts due from customers and other receivables from cash advances to employees, related parties or third parties. An allowance for doubtful 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 receivables 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.
(n) | 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 $37.9 million, $90.0 million $34.2 million and $24.4 million, respectively, for the years ended December 31, 2013, 2012, 2011 and 2010.
81 |
(o) | Advances on inventory purchase |
Advances on inventory purchases are monies deposited or advanced to outside vendors or related parties on future inventory purchases. Due to the shortage of raw material in China, most of the Company’s vendors require a certain amount of money to be deposited with them as a guarantee that the Company will complete its purchases on a timely basis.
This amount is refundable and bears no interest. The Company has legally binding contracts with its vendors, which required the deposit to be returned to the Company when the contract ends. The inventory is normally delivered within one month after the monies have been advanced.
(p) | Inventories |
Inventories are comprised of raw materials, work in progress and finished goods and are stated at the lower of cost or market using the weighted average cost method. Management reviews inventories for obsolescence and cost in excess of net realizable value at least annually and records a reserve against the inventory and additional cost of goods sold when the carrying value exceeds net realizable value. The Company had written-off $9.8 million, $38.5 million, $37.5 million and $1.1 million inventory cost as of December 31, 2013, 2012, 2011 and 2010, respectively.
(q) | Shipping and handling |
Shipping and handling for raw materials purchased are included in cost of goods sold. Shipping and handling cost incurred to ship finished products to customers are included in selling expenses. Shipping and handling expenses for finished goods for the years ended December 31, 2013, 2012, 2011 and 2010 amounted to $23.1 million, $23.7 million, $30.1 million and $9.5 million, respectively.
(r) | Plant and equipment, net |
Plant and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets with a 3%-5% residual value. The depreciation expense on assets acquired under capital leases is included with depreciation expense on owned assets. The estimated useful lives are as follows:
Buildings and Improvements | 10-40 Years | |||
Machinery | 10-30 Years | |||
Machinery and equipment under capital lease | 10-20 Years | |||
Other equipment | 5 Years | |||
Transportation Equipment | 5 Years |
The Company assesses all significant leases for purposes of classification as either operating or capital. At lease inception, if the lease meets any of the four following criteria, the Company will classify it as a capital lease; otherwise it will be treated as an operating lease: a) transfer of ownership to lessee at the end of the lease term, b) bargain purchase option, c) lease term is equal to 75% or more of the estimated economic life of the leased property, d) the present value of the minimum lease payments is 90% or more of the fair value of the leased asset.
Construction in progress represents the costs incurred in connection with the construction of buildings or new additions to the Company’s plant facilities. No depreciation is provided for construction in progress until such time as the assets are completed and are placed into service, maintenance, repairs and minor renewals are charged directly to expense as incurred. Major additions and betterment to buildings and equipment are capitalized. Interest incurred during construction is capitalized into construction in progress. All other interest is expensed as incurred.
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.
82 |
(s) | 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 December 31, 2013, the Company expects these assets to be fully recoverable.
Land use rights
All land in the PRC is owned by the government. However, the government grants “land use rights.” General Steel (China) acquired land use rights in 2001 for a total of $3.9 million (RMB 23.7 million). These land use rights are for 50 years and expire in 2050 and 2053. The Company amortizes the land use rights over the twenty-year business term because its business license had a twenty-year term.
Long Steel Group contributed land use rights for a total amount of $24.3 million (RMB 148.3 million) to the Longmen Joint Venture. The contributed land use rights are for 50 years and expire in 2048 to 2052.
Maoming Hengda has land use rights amounting to $2.7 million (RMB 16.6 million) for 50 years that expire in 2054.
Other than the land use rights that General Steel (China) acquired in 2001, the Company amortizes the land use rights over their 50 year term.
Entity | Original Cost | Expires on | ||||||
(in thousands) | ||||||||
General Steel (China) | $ | 3,884 | 2050 & 2053 | |||||
Longmen Joint Venture | $ | 24,283 | 2048 & 2052 | |||||
Maoming Hengda | $ | 2,717 | 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. In October 2011, Longmen Joint Venture acquired an iron ore mining right amounting to $2.5 million (RMB 15.0 million), which is amortized over the estimated recoverable reserve of 4.2 million tons.
(t) | Investments in unconsolidated entities |
Entities in which the Company has the ability to exercise significant influence, but does not have a controlling interest, are accounted for using the equity method. Significant influence is generally considered to exist when the Company has an ownership interest in the voting stock between 20% and 50%, and other factors, such as representation on the Board of Directors, voting rights and the impact of commercial arrangements, are considered in determining whether the equity method of accounting is appropriate. The Company accounts for investments with ownership less than 20% using the cost method.
The tables below summarize Longmen Joint Venture’s investment holdings as of December 31, 2013, 2012, 2011 and 2010.
Unconsolidated entities | Year acquired | December 31, 2013 Net investment (In thousands) | Owned % | December 31, 2012 Net investment (In thousands) | Owned % | |||||||||||||||
Xi’an Delong Powder Engineering Materials Co., Ltd. | 2007 | $ | 1,215 | 24.1 | $ | 1,166 | 24.1 |
83 |
December 31, | December 31, | |||||||||||||||||||
2011 | 2010 | |||||||||||||||||||
Year | Net investment | Owned | Net investment | Owned | ||||||||||||||||
Unconsolidated entities | acquired | (In thousands) | % | (In thousands) | % | |||||||||||||||
Xi’an Delong Powder Engineering Materials Co., Ltd. | 2007 | $ | 1,041 | 24.1 | $ | 1,236 | 27.0 | |||||||||||||
Shaanxi Daxigou Mining Co., Ltd | 2004 | 8,304 | 22.1 | 4,779 | 22.1 | |||||||||||||||
Shaanxi Xinglong Thermoelectric Co., Ltd. | 2004-2007 | - | - | 8,534 | 20.7 | |||||||||||||||
Huashan Metallurgical Equipment Co., Ltd. | 2003 | 3,067 | 25.0 | 2,907 | 25.0 | |||||||||||||||
Shaanxi Long Steel Group Baoji Steel Rolling Co., Ltd | 2003 | 428 | 23.8 | - | 25.0 | |||||||||||||||
Total | $ | 12,840 | $ | 17,456 |
The table below summarizes General Steel (China)’s investment holding (see Note 3(a) - Basis of presentation) as of December 31, 2013 and 2012.
Unconsolidated entities | Year acquired | December 31, 2013 Net investment (In thousands) | Owned % | December 31, 2012 Net investment (In thousands) | Owned % | |||||||||||||||
Tianwu General Steel Material Trading Co., Ltd. | 2010 | $ | 15,728 | 32.0 | $ | 1,064 | 32.0 |
Total investment income in unconsolidated subsidiaries amounted to $0.2 million, $0.2 million, $3.9 million and $6.4 million for the years ended December 31, 2013, 2012, 2011 and 2010, respectively, which was included in “Income from equity investments” in the consolidated statements of operations and comprehensive loss.
(u) | Short-term notes payable |
Short-term notes payable are lines of credit extended by banks. The banks in-turn issue the Company a bankers acceptance note, which can be endorsed and assigned to vendors as payments for purchases. The notes payable are generally payable at a determinable period, generally three to six months. This short-term notes payable bears no interest and is guaranteed by the bank for its complete face value and usually matures within three to six-month period. The banks usually require the Company to deposit a certain amount of cash at the bank as a guarantee deposit, which is classified on the balance sheet as restricted cash.
(v) | 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.
(w) | Deferred lease income |
To reimburse Longmen Joint Venture for certain construction costs incurred as well as economic losses on suspended production to accommodate the construction of the new iron and steel making facilities on behalf of Shaanxi Steel, in the fourth quarter of 2010, Shaanxi Steel reimbursed Longmen Joint Venture for the value of assets dismantled, various site preparation costs incurred and rent under a 40-year land sub-lease that was entered into by the parties in June 2009 (the "Longmen Sub-lease"), and for the reduced production efficiency caused by the construction. Applying the lease accounting guidance, the Company has concluded that, except for the reimbursement for site preparation costs incurred, the amount of reimbursement should be deferred and recognized as a component of the land that was sub-leased during the construction, to be amortized to income over the remaining term of the 40-year sub-lease. Deferred lease income represents the remaining balance of compensation being deferred. See Note 15 - “Deferred lease income”.
84 |
(x) | Non-controlling Interest |
Non-controlling interest mainly consists of Long Steel Group’s 40% interest in Longmen Joint Venture, Baotou Iron and Steel Group’s 20% interest in Baotou Steel Pipe Joint Venture, an individuals’ 0.9% interest in Yangpu Shengtong, two individuals’ 1.3% interest in Qiu Steel, an individual’s 1% interest in Maoming Hengda, and TME Group’s 40% interest in Tianwu Joint Venture prior to its deconsolidation on November 19, 2013. The non-controlling interests are presented in the consolidated balance sheets, separately from equity attributable to the shareholders of the Company. Non-controlling interests in the results of the Company are presented on the face of the consolidated statement of operations as an allocation of the total income or loss for the year between non-controlling interest holders and the shareholders of the Company.
(y) | Earnings (loss) per share |
The Company has adopted the accounting principles generally accepted in the United States regarding earnings per share (“EPS”), which requires presentation of basic and diluted earnings (loss) per share in conjunction with the disclosure of the methodology used in computing such earnings (loss) per share.
Basic earnings (loss) per share are computed by dividing income available to common stockholders by the weighted average common shares outstanding during the period. Diluted earnings (loss) per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock.
(z) | Treasury Stock |
Treasury stock consists of shares repurchased by the Company that are no longer outstanding and are held by the Company. Treasury stock is accounted for under the cost method.
As of December 31, 2013, the Company had repurchased 2,472,306 total shares of its common stock under the share repurchase plan approved by the Board of Directors in December 2010.
(aa) | Income taxes |
The Company accounts for income taxes in accordance with the accounting principles generally accepted in the United States for income taxes. Under the asset and liability method as required by this accounting standard, the recognition of deferred income tax liabilities and assets for the expected future tax consequences of temporary differences between the income tax basis and financial reporting basis of assets and liabilities. Provision for income taxes consists of taxes currently due plus deferred taxes. The accounting principles generally accepted in the United States for accounting for uncertainty in income taxes clarify the accounting and disclosure for uncertain tax positions. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.
The charge for taxation is based on the results for the year as adjusted for items, which are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.
Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the consolidated financial statements and the corresponding tax basis used in the computation of assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences. Deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which deductible temporary differences can be utilized. Deferred tax is calculated using tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it is related to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity.
Deferred income taxes are recognized for temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements, net operating loss carry forwards and credits, by applying enacted statutory tax rates applicable to future years. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Current income taxes are provided for in accordance with the laws of the relevant taxing authorities.
85 |
An uncertain tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the period incurred. No significant penalties or interest relating to income taxes have been incurred during the years ended December 31, 2013, and 2012. As of December 31, 2013, the Company’s income tax returns filed for December 31, 2013, 2012 and 2011 remain subject to examination by the taxing authorities.
(bb) | Share-based compensation |
The Company accounts for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance with the accounting standards regarding accounting for stock-based compensation and accounting for equity instruments that are issued to other than employees for acquiring or in conjunction with selling goods or services. Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably determinable. The value of equity instruments issued for consideration other than employee services is determined on the earlier of a performance commitment or completion of performance by the provider of goods or services as defined by these accounting standards. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement.
(cc) | Recently issued accounting pronouncements |
In July 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-11,Presentation of Unrecognized Tax Benefit When a Net Operating Loss Carry forward, a Similar Tax Loss, or a Tax Credit Carry forward Exists, an amendment to FASB Accounting Standards Codification ("ASC") Topic 740,Income Taxes ("FASB ASC Topic 740"). This update clarifies that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carry forward, a similar tax loss, or a tax credit carry forward if such settlement is required or expected in the event the uncertain tax position is disallowed. In situations where a net operating loss carry forward, a similar tax loss, or a tax credit carry forward is not available at the reporting date under the tax law of the applicable jurisdiction or the tax law of the jurisdiction does not require, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. This ASU is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. Retrospective application is permitted. The adoption of this guidance did not have any significant impact on the Company’s consolidated financial statements.
(dd) | Reclassifications |
Certain prior year amounts have been reclassified to conform to the current year presentation. These reclassifications have no effect on the accompanying consolidated statements of operations and cash flows.
Note 4 – 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:
December 31, 2013 | December 31, 2012 | December 31, 2011 | December 31, 2010 | |||||||||||||
(in thousands) | (in thousands) | (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 June, July and December 2014; interest rate was 4.75% | 4,540 | 6,000 | - | - | ||||||||||||
Total loans receivable – related parties | $ | 4,540 | $ | 69,319 | $ | - | $ | - |
86 |
See Note 21 “Related party transactions and balances” for the nature of the relationship of related parties.
Total interest income for the loans amounted to $0.3 million, $2.3 million, $0 and $0 for the year ended December 31, 2013, 2012, 2011 and 2010, respectively.
Note 5 – Accounts receivable (including related parties), net
Accounts receivable, including related party receivables, net of allowance for doubtful accounts consists of the following:
December 31, 2013 | December 31, 2012 | December 31, 2011 | December 31, 2010 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
Accounts receivable | $ | 5,131 | $ | 8,062 | $ | 14,624 | $ | 18,796 | ||||||||
Less: allowance for doubtful accounts | (1,053 | ) | (1,367 | ) | (2,023 | ) | (296 | ) | ||||||||
Accounts receivable – related parties | 2,942 | 14,966 | 20,593 | 4,160 | ||||||||||||
Net accounts receivable | $ | 7,020 | $ | 21,661 | $ | 33,194 | $ | 22,660 |
Movement of allowance for doubtful accounts is as follows:
December 31, 2013 | December 31, 2012 | December 31, 2011 | December 31, 2010 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
Beginning balance | $ | 1,367 | $ | 2,023 | $ | 292 | $ | 490 | ||||||||
Charge to expense | 96 | 433 | 1,972 | 174 | ||||||||||||
Less: recovery | (449 | ) | (1,109 | ) | (284 | ) | (386 | ) | ||||||||
Exchange rate effect | 39 | 20 | 39 | 18 | ||||||||||||
Ending balance | $ | 1,053 | $ | 1,367 | $ | 2,023 | $ | 296 |
Note 6 – Inventories
Inventories consist of the following:
December 31, 2013 | December 31, 2012 | December 31, 2011 | December 31, 2010 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
Supplies | $ | 21,040 | $ | 23,123 | $ | 20,869 | $ | 13,733 | ||||||||
Raw materials | 164,301 | 141,503 | 279,041 | 381,178 | ||||||||||||
Finished goods | 42,977 | 57,630 | 35,962 | 59,813 | ||||||||||||
Less: allowance for inventory valuation | (15,397 | ) | (9,585 | ) | (38,143 | ) | (1,088 | ) | ||||||||
Total inventories | $ | 212,921 | $ | 212,671 | $ | 297,729 | $ | 453,636 |
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 December 31, 2013, 2012, 2011 and 2010, the Company had provided allowance for inventory valuation in the amounts of $15.4 million, $9.6 million, $37.5 million and $1.1 million, respectively.
87 |
Movement of allowance for inventory valuation is as follows:
December 31, 2013 | December 31, 2012 | December 31, 2011 | December 31, 2010 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
Beginning balance | $ | 9,585 | $ | 38,143 | $ | 1,088 | $ | - | ||||||||
Addition | 15,194 | 9,582 | 37,512 | 1,061 | ||||||||||||
Less: write-off | (9,757 | ) | (38,519 | ) | (1,108 | ) | - | |||||||||
Exchange rate effect | 375 | 379 | 651 | 27 | ||||||||||||
Ending balance | $ | 15,397 | $ | 9,585 | $ | 38,143 | $ | 1,088 |
Note 7 – 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 $127.9 million, $126.1 million, $83.8 million and $30.8 million as of December 31, 2013, 2012, 2011 and 2010, respectively.
Note 8 – Plant and equipment, net
Plant and equipment consist of the following:
December 31, 2013 | December 31, 2012 | December 31, 2011 | December 31, 2010 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
Buildings and improvements | $ | 274,402 | $ | 214,661 | $ | 183,343 | $ | 116,294 | ||||||||
Machinery | 667,093 | 573,572 | 621,463 | 502,958 | ||||||||||||
Machinery under capital lease | 623,895 | 587,334 | 581,413 | - | ||||||||||||
Transportation and other equipment | 22,991 | 20,274 | 18,132 | 13,253 | ||||||||||||
Construction in progress | 11,412 | 4,645 | 8,203 | 65,749 | ||||||||||||
Subtotal | 1,599,793 | 1,400,486 | 1,412,554 | 698,254 | ||||||||||||
Less: accumulated depreciation | (327,886 | ) | (232,650 | ) | (155,318 | ) | (95,642 | ) | ||||||||
Total | $ | 1,271,907 | $ | 1,167,836 | $ | 1,257,236 | $ | 602,612 |
Construction in progress consisted of the following as of December 31, 2013:
Construction in progress | Value | Completion | Estimated additional cost to complete | |||||||
description | (In thousands) | date | (In thousands) | |||||||
Iron-making system dust removing equipment | $ | 141 | January 2014 | $ | 1,381 | |||||
Factory wall repair | 945 | March 2014 | 105 | |||||||
Equipment updates | 843 | January 2014 | 2,725 | |||||||
Sintering machine construction | 257 | November 2014 | 143,525 | |||||||
#5 blast furnace construction | 1,907 | December 2014 | 176,526 | |||||||
Electrical substation construction | 4 | August 2014 | 24,229 | |||||||
Reconstruction of miscellaneous factory buildings | 4,428 | June 2014 | 4,533 | |||||||
Project materials | 2,156 | - | ||||||||
Others | 731 | - | ||||||||
Total | $ | 11,412 | $ | 353,024 |
88 |
The Company is obligated under a capital lease for the iron and steel making facilities, including one sintering machine, two converters, two blast furnaces and some auxiliary systems that expire on April 30, 2031. During 2013, Longmen Joint Venture entered into a number of capital lease agreements for energy-saving equipment installed throughout the steel production line. The Company is obligated under the capital lease for the equipment upon the confirmation of the energy-saving rate between the Company and its vendors.
The carrying value of assets acquired under the capital lease consists of the following:
December 31, 2013 | December 31, 2012 | December 31, 2011 | December 31, 2010 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
Machinery | $ | 623,895 | $ | 587,334 | $ | 581,413 | $ | - | ||||||||
Less:accumulated depreciation | (77,086 | ) | (46,497 | ) | (18,411 | ) | - | |||||||||
Carrying value of leased assets | $ | 546,809 | $ | 540,837 | $ | 563,002 | $ | - |
The Company assessed the recoverability of all of its remaining long-lived assets at December 31, 2012, and the sum of the discounted future cash flows expected to result from the long-lived assets and their disposition was less than the carrying value by $20.2 million (RMB 127.2 million), which was impaired and included in the selling, general and administrative expenses for the for the year ended December 31, 2012. The discounted cash flows were determined using certain expected changes to the current operational assumptions. If those expectations are not met, the Company may be required to record additional impairment charges in future periods.
The Company assessed the recoverability of all of its remaining long lived assets at December 31, 2013 and such assessment did not result in any other impairment charges for the year ended December 31, 2013.
The Company determined that the construction in progress in Maoming Hengda was impaired as of June 30, 2010. For the year ended December 31, 2010, $1.7 million construction-in-progress has been written off and included in selling, general and administrative expenses.
Depreciation expense for the year ended December 31, 2013, 2012, 2011 and 2010 amounted to $87.9 million, $82.5 million, $56.4 million and $40.1 million, respectively. These amounts include depreciation of assets held under capital leases for the years ended December 31, 2013, 2012, 2011 and 2010, which amounted to $28.7 million, $27.9 million, $18.1 million and $0, respectively.
Note 9 – Intangible assets, net
Intangible assets consist of the following:
December 31, 2013 | December 31, 2012 | December 31, 2011 | December 31, 2010 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
Land use rights | $ | 30,884 | $ | 29,986 | $ | 29,685 | $ | 28,462 | ||||||||
Mining right | 2,459 | 2,384 | 2,338 | - | ||||||||||||
Software | 743 | 692 | 685 | 660 | ||||||||||||
Subtotal | 34,086 | 33,062 | 32,708 | 29,122 | ||||||||||||
Less: | ||||||||||||||||
Accumulated amortization – land use rights | (8,498 | ) | (7,577 | ) | (6,442 | ) | (5,316 | ) | ||||||||
Accumulated amortization – mining right | (1,320 | ) | (993 | ) | (822 | ) | - | |||||||||
Accumulated amortization – software | (561 | ) | (426 | ) | (301 | ) | (134 | ) | ||||||||
Subtotal | (10,379 | ) | (8,996 | ) | (7,565 | ) | (5,450 | ) | ||||||||
Intangible assets, net | $ | 23,707 | $ | 24,066 | $ | 25,143 | $ | 23,672 |
89 |
The gross amount of the intangible assets amounted to $34.1 million, $33.1 million, $32.7 million and $29.1 million as of December 31, 2013, 2012, 2011 and 2010, respectively. The remaining weighted average amortization period is 33.5 years as of December 31, 2013.
Total amortization expense for the year ended December 31, 2013, 2012, 2011 and 2010 amounted to $0.8 million, $1.2 million, $1.1 million and $1.1 million, respectively.
Total depletion expense for the year ended December 31, 2013, 2012, 2011 and 2010 amounted to $0.3 million, $0.2 million, $0.8 million and $0, respectively.
The estimated aggregate amortization and depletion expenses for each of the five succeeding years is as follows:
Year ending | Estimated amortization and depletion expenses | Gross carrying amount | ||||||
(in thousands) | (in thousands) | |||||||
December 31, 2014 | $ | 1,086 | 22,621 | |||||
December 31, 2015 | 1,086 | 21,535 | ||||||
December 31, 2016 | 1,086 | 20,449 | ||||||
December 31, 2017 | 1,086 | 19,363 | ||||||
December 31, 2018 | 1,086 | 18,277 | ||||||
Thereafter | 18,277 | - | ||||||
Total | $ | 23,707 |
Note 10 – Debt
Short-term notes payable
Short-term notes payable are lines of credit extended by banks. Banks in turn issue the Company a bank acceptance note, which can be endorsed and assigned to vendors as payments for purchases. The notes payable are generally payable within three to six months. This short-term note payable is guaranteed by the bank for its complete face value. The banks do not charge interest on these notes, but usually charge a transaction fee of 0.05% of the notes value. In addition, the banks usually require the Company to deposit either a certain amount of cash at the bank as a guarantee deposit, which is classified on the balance sheet as restricted cash, or provide notes receivable as security, which are classified on the balance sheet as restricted notes receivable. Restricted cash as a guarantee for the notes payable amounted to $399.4 million, $322.7 million, $363.3 million and $167.7 million as of December 31, 2013, 2012, 2011 and 2010, respectively. Restricted notes receivable as a guarantee for the notes payable amounted to $231.7 million, $345.8 million, $451.1 million and $159.3 million as of December 31, 2013, 2012, 2011 and 2010, respectively.
90 |
The Company had the following short-term notes payable as of:
December 31, 2013 | December 31, 2012 | December 31, 2011 | December 31, 2010 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
General Steel (China): Notes payable to various banks in China, due various dates from January to April 2014. Restricted cash required of $16.4 million, $6.3 million, $7.9 million and $11.7 million as of December 31, 2013, 2012, 2011 and 2010, respectively; guaranteed by third parties. These notes payable were either repaid or renewed subsequently on the due dates. | $ | 29,466 | $ | 12,696 | $ | 7,934 | $ | 21,541 | ||||||||
Longmen Joint Venture: Notes payable to various banks in China, due various dates from January to August 2014. Restricted cash required of $383.0 million, $316.4 million, $355.4 million and $150.7 million as of December 31, 2013, 2012, 2011 and 2010, respectively; Notes receivable secured for the notes payable amounted to $231.7 million, $345.8 million, $451.1 million and $159.3 million as of December 31, 2013, 2012, 2011 and 2010, respectively; some notes are further guaranteed by third parties. These notes payable were either repaid or renewed subsequently on the due dates. | 988,364 | 971,117 | 1,105,570 | 447,992 | ||||||||||||
Baotou: Notes payable to various banks in China, due in April 2011. Restricted cash required of $5.3 million as of December 31, 2010, guaranteed by third parties. | - | - | - | 10,619 | ||||||||||||
Total short-term notes payable | $ | 1,017,830 | $ | 983,813 | $ | 1,113,504 | $ | 480,152 |
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.
91 |
Short term loans due to banks, related parties and other parties consisted of the following as of:
Due to banks
December 31, 2013 | December 31, 2012 | December 31, 2011 | December 31, 2010 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
General Steel (China): Loans from various banks in China, due various dates from March to September 2014. Weighted average interest rate was 7.2%, 7.6%, 7.5% and 6.0% per annum as of December 31, 2013, 2012, 2011 and 2010, respectively; some are guaranteed by third parties while others were secured by equipment and inventory. These loans were either repaid or renewed subsequently on the due dates. | $ | 34,229 | $ | 32,189 | $ | 43,149 | $ | 24,220 | ||||||||
Longmen Joint Venture: Loans from various banks in China, due various dates from January to December 2014. Weighted average interest rate was 6.3%, 6.8%, 8.3% and 6.0% per annum as of December 31, 2013, 2012, 2011 and 2010, respectively; some are guaranteed by third parties, restricted cash or notes receivables while others are secured by equipment, buildings, land use right and inventory. $163.9 million, $12.4 million, $76.0 million and $81.0 million restricted notes receivable were secured for the loans as of December 31, 2013, 2012, 2011 and 2010, respectively; These loans were either repaid or renewed subsequently on the due dates. | 267,688 | 114,935 | 209,234 | 260,978 | ||||||||||||
Tianwu: Loans from Industrial and Commercial Bank of China Ltd., due dates vary from March to August 2012. Interest rate was 5% additional to standard bank interest rate, and secured by accounts receivables. These loans were either repaid or renewed subsequently on the due dates. | - | - | 1,571 | - | ||||||||||||
Total short-term loans - bank | $ | 301,917 | $ | 147,124 | $ | 253,954 | $ | 285,198 |
As of December 31, 2013, 2012, 2011 and 2010, the Company had not met its financial covenants stipulated by certain loan agreements related to the Company’s debt to asset ratio. As of December 31, 2013, three of General Steel (China)’s bank loans contained financial covenants stipulating debt to asset ratios below 20% and 70%. However, as of December 31, 2013, General Steel (China)’s debt to asset ratio was 89.7%. As of December 31, 2012, 2011 and 2010, one of Longmen Joint Venture’s bank loans contained a financial covenant that stipulated a debt to asset ratio below 85%. However, as of December 31, 2012, 2011 and 2010, Longmen Joint Venture’s debt to asset ratio was 117.1%, 105.4% and 93.2%, 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 December 31, 2013, 2012, 2011 and 2010 was $6.4 million, $12.7 million, $12.6 million and $12.1 million, respectively. According to the Company’s short term loan agreements, the banks have the rights to request for more collateral or additional guarantees if the breach of covenant is not remedied or request early repayment of the loan if the Company does not cure such breach within a certain period of time. As of the date of this report, the Company has not received any notice from the banks to request more collateral, additional guarantees or early repayment of the short term loans due to the breach of covenant.
Due to unrelated parties
December 31, 2013 | December 31, 2012 | December 31, 2011 | December 31, 2010 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
Longmen Joint Venture: Loans from various unrelated companies and individuals, due various dates from January to June 2014, and weighted average interest rate was 5.2%, 6.0%, 6.2% and 6.0% per annum as of December 31, 2013, 2012, 2011 and 2010, respectively. These loans were either repaid or renewed subsequently on the due dates. | $ | 22,720 | $ | 25,324 | $ | 143,102 | $ | 75,380 | ||||||||
Longmen Joint Venture: Loans from financing sales. | 33,124 | 115,966 | 97,583 | 37,947 | ||||||||||||
Maoming Hengda: Loans from one unrelated parties and one related party, due on demand, none interest bearing. | 6,223 | 6,033 | 5,972 | 14,385 | ||||||||||||
Total short-term loans – others | $ | 62,067 | $ | 147,323 | $ | 246,657 | $ | 127,712 |
92 |
The Company had various loans from unrelated companies amounting to $62.1 million, $147.3 million, $246.7 million and $127.7 million as of December 31, 2013, 2012, 2011 and 2010, respectively. Of the $62.1 million, $6.2 million loans carry no interest, $33.1 million of financing sales are subject to interest rates ranging between 4.2% and 5.9%, and the remaining $22.7 million are subject to interest rates ranging from 4.7% to 12.0%. All short term loans from unrelated companies are payable on demand and unsecured.
As part of its working capital management, Longmen Joint Venture has entered into a number of sale and purchase back contracts ("contracts") with third party companies and 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% 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 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% is determined by reference to the bank loan interest rates at the time when the contracts are entered into, plus an estimated premium based on the financing sale amount, which represents the interest charged by the third party companies for financing Longmen Joint Venture through the above sale and purchase back arrangement. The revenue and cost of goods sold arising from the above transactions are eliminated and the incremental amounts paid by Yuxin and Yuteng to purchase back the goods are treated as financing costs in the consolidated financial statements.
Total financing sales for the years ended December 31, 2013, 2012, 2011 and 2010 amounted to $724.3 million, $1.0 billion, $998.9 million and $761.8 million, respectively, which are eliminated in the Company’s consolidated financial statements. The financial cost related to financing sales for the years ended December 31, 2013, 2012, 2011 and 2010 amounted to $5.4 million, $9.2 million, $10.7 million and $7.0 million, respectively.
Short term loans due to related parties
December 31, 2013 | December 31, 2012 | December 31, 2011 | December 31, 2010 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
Baotou Steel: Loans from Tianjin Hengying Trading Co., Ltd, due on demand, and interest rates is 10% per annum. | $ | - | $ | 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. | - | 1,359 | - | - | ||||||||||||
General Steel China: Loans from Yangpu Capital Automobile, due on demand, and interest rates is 10% per annum. | 1,458 | 1,413 | - | - | ||||||||||||
Longmen Joint Venture: Loan from Shaanxi Coal and Chemical Industry Group Co., Ltd., due on demand, and interest rate is 7.0% per annum. | 28,216 | - | - | - | ||||||||||||
Longmen Joint Venture: Loan from Shaanxi Steel Group due in November 2014, and interest rate is 6.6% and 5.6% per annum as of December 31, 2013 and 2010, respectively. | 49,110 | - | 14,548 | |||||||||||||
Longmen Joint Venture: Loans from Tianjin Hengying Trading Co., Ltd., due in April 2012, and interest rate was 5.2% per annum. This loan was repaid subsequently on the due date. | - | - | 15,710 | - | ||||||||||||
Longmen Joint Venture: Loans from financing sales. | 47,909 | 35,839 | - | - | ||||||||||||
Total short-term loans - related parties | $ | 126,693 | $ | 79,557 | $ | 15,710 | $ | 14,548 |
93 |
Long-term loans due to related party
December 31, 2013 | December 31, 2012 | December 31, 2011 | December 31, 2010 | |||||||||||||
(in thousands) | (in thousands) | (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. | $ | 72,657 | $ | 92,973 | $ | 92,035 | $ | 91,020 | ||||||||
Less: Current maturities of long-term loans – related party | (53,013 | ) | (54,885 | ) | - | - | ||||||||||
Long-term loans - related party | $ | 19,644 | $ | 38,088 | $ | 92,035 | $ | 91,020 |
Total interest expense, net of capitalized interest, amounted to $33.2 million, $43.1 million, $100.9 million and $51.3 million for the years ended December 31, 2013, 2012, 2011 and 2010, respectively.
Capitalized interest amounted to $2.8 million, $0.7 million, $3.0 million and $2.1 million for the years ended December 31, 2013, 2012, 2011 and 2010, respectively.
Note 11 – Customer deposits
Customer deposits represent amounts advanced by customers on product orders. The product normally is shipped within one month after receipt of the advance payment, and the related sale is recognized in accordance with the Company’s revenue recognition policy. As of December 31, 2013, 2012, 2011 and 2010, customer deposits amounted to $152.7 million, $147.9 million, $158.8 million and $188.4 million, respectively, including deposits received from related parties, which amounted to $64.9 million, $22.0 million, $68.3 million and $54.9 million, respectively.
Note 12 – Deposits due to sales representatives
Longmen Joint Venture entered into agreements with various entities to act as the Company’s exclusive sales agent in a specified geographic area. These exclusive sales agents must meet certain criteria and are required to deposit a certain amount of money with the Company. In return the sales agents receive exclusive sales rights in a specified area and at discounted prices on products they order. These deposits bear no interest and are required to be returned to the sales agent once the agreement is terminated. The agreement is normally entered/or renewed on an annual basis. Termination of the agreement can be mutually agreed to by both parties at any time. The Company had $26.3 million, $35.1 million, $23.8 million and $52.1 million in deposits due to sales representatives, including deposits due to related parties, as of December 31, 2013, 2012, 2011 and 2010, respectively.
Note 13 – Convertible notes and warrants
The Company had 3,900,871 outstanding warrants in connection with the $40 million convertible notes issued in 2007, which expired on May 13, 2013, and 2,777,778 warrants in connection with a registered direct offering in 2009, which expired on June 24, 2012. 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.
94 |
The fair value of the warrants as of December 31, 2012 was calculated using the Cox Rubenstein Binomial model based on the following variables:
2007 Warrants | ||||
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 fair value of the warrants as of December 31, 2011 was calculated using the Cox Rubenstein Binomial model based on the following variables:
2007 Warrants | 2009 Warrants | |||||||
Expected volatility | 55 | % | 50 | % | ||||
Expected dividend yield | 0 | % | 0 | % | ||||
Risk-free interest rate | 0.17 | % | 0.24 | % | ||||
Expected lives | 1.37 years | 0.48 years | ||||||
Market price | $ | 0.99 | $ | 0.99 | ||||
Strike price | $ | 5.00 | $ | 5.00 |
The fair value of the warrants as of December 31, 2010 was calculated using the Cox Rubenstein Binomial model based on the following variables:
2007 Warrants | 2009 Warrants | |||||||
Expected volatility | 100 | % | 60 | % | ||||
Expected dividend yield | 0 | % | 0 | % | ||||
Risk-free interest rate | 0.76 | % | 0.44 | % | ||||
Expected lives | 2.37 years | 1.48 years | ||||||
Market price | $ | 2.87 | $ | 2.87 | ||||
Strike price | $ | 5.00 | $ | 5.00 |
As of December 31, 2013, 2012, 2011 and 2010, derivative liabilities - warrants amounted to $0, $1.0 thousand, $10.2 thousand and $5.6 million, respectively.
The Company has the following warrants outstanding:
Outstanding as of December 31, 2010 | 6,678,649 | |||
Granted | - | |||
Forfeited / expired | - | |||
Exercised | - | |||
Outstanding as of December 31, 2011 | 6,678,649 | |||
Granted | - | |||
Forfeited / expired | (2,777,778 | ) | ||
Exercised | - | |||
Outstanding as of December 31, 2012 | 3,900,871 | |||
Granted | - | |||
Forfeited / expired | (3,900,871 | ) | ||
Exercised | - | |||
Outstanding as of December 31, 2013 | - |
95 |
Note 14 - Supplemental disclosure of cash flow information
Interest paid, net of capitalized, amounted to $14.5 million, $22.7 million, $22.5 million and $20.9 million for the years ended December 31, 2013, 2012, 2011 and 2010, respectively.
The Company paid income tax amounted to $0.9 million, $0.6 million, $0.8 million and $1.8 million for the years ended December 31, 2013, 2012, 2011 and 2010, respectively.
During the year ended December 31, 2013, the Company had receivables of $1.2 million as a result of the disposal of equipment that has not been collected.
During the year ended December 31, 2013, the Company converted $1.0 million of equipment into inventory productions.
During the year ended December 31, 2013, the Company used $46.3 million inventory in plant and equipment constructions.
During the year ended December 31, 2013, the Company capitalized $17.8 million (RMB 110.3 million) on energy-saving equipment under capital lease agreements.
The Company had $63.3 million notes receivable from financing sales loans to be converted to cash as of December 31, 2013.
During the year ended December 31, 2013, the Company offset $64.5 million accounts payable to a related party as loan receivable – related party repayment as contractually agreed to with the related party.
During the years ended December 31, 2013 and 2012, the Company offset $120.3 million and $43.6 million, respectively, advance on inventory purchases and other receivables to related parties as short-term loan repayments.
During the year ended December 31, 2013, the Company reclassified $3.8 million refundable advances on inventory purchase – related parties to other receivables – related parties.
During the year ended December 31, 2013, the Company incurred $48.7 million accounts payable to be paid for the purchase of equipment and construction in progress.
During the years ended December 31, 2013 and 2012, two and one of the Company’s unconsolidated entities declared dividend and the Company was entitled for the dividend amounted to $0.2 million and $0.1 million, respectively, which was not yet collected.
During the year ended December 31, 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.
During the year ended December 31, 2012, the Company converted $48.0 million of our accounts payable and other payables from our related parties to short term loans upon the execution of the loan agreements.
For the year ended December 31, 2011, the Company recognized $0.3 million of non-operating income that has not been collected. The unpaid amount was included in the other receivables in the consolidated balance sheets.
96 |
For the years ended December 31, 2011 and 2010, the Company recognized $13.8 million and $35.6 million, respectively, of deferred lease income in related to other receivables – related parties that have not been collected.
The Company capitalized all the fixed assets constructed by Shaanxi Steel for a price of $572.5 million through a 20 year capital lease starting from April29, 2011 upon the inception of the Unified Management Agreement. See Note 16 – “Capital lease obligations”.
During the year ended December 31, 2011, the Company issued 974,571 shares of common stock for repayment of debt of $4.8 million.
On April 30, 2011, a share transfer agreement was signed with the Labor Union Trust of Shaanxi Long Steel Group, transferring Tongxing’s 20.7% share of Shaanxi Xinglong (“Xinglong”) Thermoelectric Co., Ltd to the Labor Union Trust of Shaanxi Long Steel Group for $11.3 million on April 30, 2011. This transaction resulted in a gain of $1.4 million, which is included in “Income from equity investments” in the consolidated statements of operations and other comprehensive income (loss). As of December 31, 2011, the unpaid amount of $11.4 million was included in the other receivable – related parties.
Note 15 - Deferred lease income
To compensate the Company for costs and economic losses incurred during construction of the iron and steel making facilities owned by Shaanxi Steel, Shaanxi Steel reimbursed Longmen Joint Venture $11.5 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 $30.0 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 $14.7 million (RMB 89.5 million) and $14.6 million (RMB 89.3 million), respectively, for trial production costs related to the new equipment.
During the period from June 2010 to March 2011, as construction progressed and certain of the assets came online, Longmen Joint Venture used the assets free of charge to produce saleable units of steel products during this period. As such, the cost of using these assets and therefore the fair value of the free rent received was imputed with reference to what the depreciation charge would have been on these assets had they been owned or under capital lease to Longmen Joint Venture during the free use period. This cost of $7.2 million (RMB 43.9 million) each year were deferred and will be recognized over the term of the land sub-lease similar to the other charges and credits related to the construction of these assets.
The deferred lease income is amortized to income over the remaining term of the 40-year land sub-lease. For the year ended December 31, 2013, 2012, 2011 and 2010, the Company recognized $2.2 million, $2.1 million, $2.0 million and $0.9 million, respectively. As of December 31, 2013, 2012, 2011 and 2010, the balance of deferred lease income amounted to $77.4 million, $77.2 million, $78.5 million and $57.6 million, respectively, of which $2.2 million, $2.1 million, $2.1 million and $2.0 million represents balance to be amortized within one year. See Note 21 – Related party transactions and balances (m) – Deferred lease income for details.
Note 16 - Capital lease obligations
Iron and steel production facilities
On April 29, 2011, the Company’s subsidiary, Longmen Joint Venture entered into a Unified Management Agreement with Shaanxi Steel and Shaanxi Coal under which Longmen Joint Venture uses new iron and steel making facilities including one sintering machine, two converters, two blast furnaces and other auxiliary systems constructed by Shaanxi Steel. As the 20-year term of the agreement exceeds 75% of the assets’ useful lives, this arrangement is accounted for as a capital lease. The ongoing lease payments are comprised of two elements: (1) a monthly payment of $2.3 million (RMB14.6 million) based on Shaanxi Steel’s cost to construct the assets to be paid over the term of the Unified Management Agreement of 20 years and (2) 40% of any remaining pre-tax profits from the Asset Pool which includes Longmen Joint Venture and the newly constructed iron and steel making facilities. In February 2014, Shaanxi Steel agreed that it will not demand capital lease payment from Longmen Joint Venture until February 2017. The profit sharing component does not meet the definition of contingent rent because it is based on future revenue and is therefore considered part of the financing for the capital leased assets which is related to the Unified Management Agreement. After determining the value of the leased asset and obligation at the inception of the lease, the lease liability was then reduced by the value of the profit sharing component, which is recognized as a derivative liability, which is carried at fair value. See Note 17 – “Profit sharing liability”.
97 |
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 year ended December 31, 2013, $18.1 million (RMB $110.3 million) energy-saving equipment under these lease agreements have been capitalized and no contingent rent expense has been incurred.
Presented below is a schedule of estimated minimum lease payments on the capital lease obligation for the next five years as of December 31, 2013:
Year ending December 31, | Capital Lease Obligations Minimum Lease Payments | |||
(in thousands) | ||||
2014 | $ | 5,292 | ||
2015 | 4,248 | |||
2016 | 4,248 | |||
2017 | 195,506 | |||
2018 | 31,057 | |||
Thereafter | 356,191 | |||
Total minimum lease payments | 596,542 | |||
Less:amounts representing interest | (217,202 | ) | ||
Ending balance | $ | 379,340 |
Interest expense for the years ended December 31, 2013, 2012, 2011 and 2010 on the capital lease obligations was $20.8 million, $20.6 million, $18.4 million and $0, respectively.
Note 17 –Profit sharing liability (restated)
The profit sharing liability component of the capital lease obligation was recognized initially at its estimated fair value at the lease commencement date and included in the initial measurement and recognition of the capital lease, in addition to the fixed payment component of the minimum lease payments. The profit sharing liability is accounted for separately from the fixed portion of the capital lease obligation (see Note 16 - “Capital lease obligation”) and is accounted for as a derivative instrument in accordance with ASC 815-10-15-83. The estimated fair value of the profit sharing liability is reassessed at the end of each reporting period, with any change in fair value charged or credited to income as “Change in Fair Value of Profit Sharing Liability”. See Note 3(i) – “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 has been made since inception.
98 |
Note 18 – Other income (expense)
Gain on debt settlement
On June 16, 2011, the Company and Maoming Hengda entered into a Debt Repayment Agreement with Guangzhou Hengda Industrial Group Ltd. (“Guangzhou Hengda”), an unrelated party, and its sole shareholder Ms. Ding Yumei whereby the Company issued 974,571 shares of its common stock (the“Shares”) to Ms. Ding Yumei, the designee and sole shareholder of Guangzhou Hengda, to partially repay the outstanding balance due to Guangzhou Hengda by $4.8 million. The Company recorded paid-in-capital based on the market price of its common stock on the date of debt settlement at $1.48 per share, totaling $1.4 million and a gain from debt settlement totaling $3.4 million for the year ended December 31, 2011, respectively, which was the difference between the amount of debt extinguished and the fair value of the Shares issued in the settlement.
Government grant
On November 8, 2013 and December 31, 2013, the Company received government grants totaling $4.2 million (RMB 26.1 million) from the local government as production equipment upgrade incentive and rural urbanization development incentive for building material suppliers.
On June 14, 2012 and December 31, 2012, the Company received government grants totaling $2.3 million (RMB 14.2 million) from the local government as economic development incentive for building material manufacturers, such as steel rebar and cement.
Realized income from future contracts
On May 2011, the Company entered a forward contract with one unrelated party to minimize the economic impact of price fluctuations of steel rebar. The contract was not material and only represented less than 1% of the company’s anticipated rebar sales in 2011. The Company has not designated the derivative as a hedging instrument, and, as such, includes the realized gain or loss in other income (expense). For the year ended December 31, 2011, the Company realized$0.4 million gain on these contracts. There was no cash deposit held in the brokerage account and no trading financial assets and no open contracts held as of December 31, 2011. There are no required minimum investment amount and no specific contract period requirement on this future brokerage contract. The contract amount may be withdrawn at any time.
On May 2010, the Company entered a forward contract with one unrelated party to minimize the economic impact of price fluctuations of steel rebar. The contract was not material and only represented less than 1% of the Company’s anticipated rebar sales in 2010. The Company has not designated the derivative as a hedging instrument, and, as such, includes the realized gain or loss in other income (expense). For the year ended December 31, 2010, the Company realized $1.4 million gain on these contracts. There was no cash deposit held in the brokerage account and no trading financial assets and no open contacts held as of December 31, 2010. There are no required minimum investment amount and no specific contract period requirement on this future brokerage contract. The contract amount may be withdrawn at any time.
Lease income
The deferred lease income from the reimbursement from Shaanxi Steel for the net book value of the fixed assets that were demolished and for the inefficiency costs caused by the construction and loss incurred in the beginning stages of the system production is amortized to income over the remaining sub-lease term. For the year ended December 31, 2013, 2012, 2011 and 2010, the Company recognized lease income of $2.2 million, $2.1 million, $2.0 million and $0.9 million, respectively.
Gain on deconsolidation of a subsidiary
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). 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, Tianwu’s cumulative translation adjustment as of the disposal date was released to net income in accordance with ASC 830-30-40-1A. At the time of deconsolidation, the fair value of the 32% equity interest retained by General Steel (China) was $15.3 million (RMB 96.3 million), which was based on an independent third-party valuation, while Tianwu’s carrying value was $48.2 million (RMB 301.0 million). $19.4 million (RMB 121.2 million) noncontrolling interest in Tianwu was deconsolidated (see Note 22 – Equity) while 0.9 million cumulative translation adjustment was released to net income. The total gain from the deconsolidation of Tianwu was approximately $1.0 million.
99 |
Payment for public highway construction
During 2013, Longmen Joint Venture paid $6.5 million (RMB 40 million) for the construction of an exit ramp from a highway that leads to its facility. Total costs for this project is approximately $8.0 million (RMB 49 million) for Longmen Joint venture. Longmen Joint Venture will not be able to obtain any easement rights, land use rights or exclusive rights after the completion of the exit ramp. Therefore, this payment was recorded as an expense for the year ended December 31, 2013.
Note 19 – Taxes
Income tax
Significant components of the provision for income taxes on earnings and deferred taxes on net operating losses from operations for the years ended December 31, 2013, 2012, 2011 and 2010 are as follows:
For the year ended | For the year ended | For the year ended | For the year ended | |||||||||||||
(In thousands) | December 31, 2013 | December 31, 2012 | December 31, 2011 | December 31, 2010 | ||||||||||||
Current | $ | 354 | $ | 627 | $ | 175 | $ | 1267 | ||||||||
Deferred | - | 169 | 15,419 | (10,049 | ) | |||||||||||
Total provision for income taxes | $ | 354 | $ | 796 | $ | 15,594 | $ | (8,782 | ) |
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%.
Longmen Joint Venture is located in the Mid-West region of China and as such, qualifies for the “Go-West” tax rate of 15% promulgated by the government. In 2010, the Chinese government announced that the “Go-West” tax initiative would be extended for 10 years, and thus, the preferential tax rate of 15% will be in effect until 2020. This special tax treatment for Longmen Joint Venture will be evaluated on a year-to-year basis by the local tax bureau.
The following table reconciles the U.S. statutory rates to the Company’s effective tax rate for the years ended December 31, 2013, 2012, 2011 and 2010 are as follows:
December 31, 2013 | December 31, 2012 | December 31, 2011 | December 31, 2010 | |||||||||||||
U.S. Statutory rates | 34.0 | % | 34.0 | % | 34.0 | % | 34.0 | % | ||||||||
Foreign income not recognized in the U.S. | (34.0 | )% | (34.0 | )% | (34.0 | )% | (34.0 | )% | ||||||||
China income tax rate | 25.0 | % | 25.0 | % | 25.0 | % | 25.0 | % | ||||||||
Current year tax loss that were not recognized as deferred tax assets | - | - | (17.1 | )% | 2.3 | % | ||||||||||
Effect of tax rate differential of subsidiaries/VIE | (12.0 | )% | (8.3 | )% | 13.6 | % | (12.3 | )% | ||||||||
Effect of change in deferred tax assets valuation allowance | (58.4 | )% | (10.9 | )% | (27.3 | )% | 2.3 | % | ||||||||
Effect of permanent difference – change in fair value of profit sharing liability | 61.9 | % | - | - | - | |||||||||||
Effect of permanent difference – capital lease obligation for iron and steel production facilities | (17.3 | )% | (6.1 | )% | ||||||||||||
Total provision for income taxes* | (0.8 | )% | (0.3 | )% | (5.8 | )% | 15.0 | % |
100 |
*The negative effective tax rates for the years ended December 31, 2013, 2012 and 2011 were mainly due to a consolidated loss before income tax while the Company provided 100% valuation allowance for the deferred tax assets at subsidiaries with losses and incurred income tax expenses in our profitable subsidiaries.
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 $493.7 million will begin to expire in 2014. The Chinese government recently announced several policies to curb the real estate price increases across the country which led to a slowdown in demand for construction steel products. Additionally due to the continued global economic slowdown and the overcapacity issues in China's steel market, management expected there would be a sustained increase in margin pressure in the next five years until all the existing but outdated steel capacity across the whole industry are eliminated. Management took into consideration this potential negative impact on average selling price and gross margin of its products, re-performed an operating forecast for the next five years and concluded that the beginning-of-the-year balance of deferred tax assets mainly relating to the net operating loss carry forward may not be fully realizable due to the reduction in the projection of income to be available in the next 5 years. Management therefore decided to provide 100% valuation allowance for the deferred tax assets. The valuation allowance as of December 31, 2013, 2012, 2011 and 2010 was $97.6 million, $72.9 million, $47.7 million and $0, respectively. Management will review this valuation allowance periodically and make adjustments as warranted. Temporary differences represent tax and book differences in various items, such as receivable allowances, inventory allowances, impairments on fixed assets and deferred lease income.
The movement of the deferred income tax assets arising from carried forward losses is as follows:
December 31, 2013 | December 31, 2012 | December 31, 2011 | December 31, 2010 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
Beginning balance | $ | - | (A) | $ | 167 | (A) | $ | 15,301 | (A) | $ | 5,044 | (A) | ||||
(Tax assets realized) net operating losses carried forward for subsidiaries subject to a 25% tax rate | (272 | ) | 2,484 | 912 | 1,062 | |||||||||||
Effective tax rate | 25 | % | 25 | % | 25 | % | 25 | % | ||||||||
Addition (deduction) in deferred tax asset | (68 | )(B) | 621 | (B) | 228 | (B) | 266 | (B) | ||||||||
Net operating losses carried forward for Longmen Joint Venture and subsidiaries subject to a 15% tax rate | 143,873 | 95,453 | 143,180 | 8,488 | ||||||||||||
Effective tax rate | 15 | % | 15 | % | 15 | % | 15 | % | ||||||||
Addition in deferred tax asset | 21,581 | (C) | 14,318 | (C) | 1,528 | (C) | 1,273 | (C) | ||||||||
Temporary difference carried forward for subsidiaries subject to a 25% tax rate | (2,697 | ) | 22,427 | 6,112 | 1,281 | |||||||||||
Effective tax rate | 25 | % | 25 | % | 25 | % | 25 | % | ||||||||
Addition (deduction) in deferred tax asset | (674 | )(D) | 5,607 | )(D) | 1,528 | (D) | 320 | (D) | ||||||||
Temporary difference carried forward for subsidiaries subject to a 15% tax rate | 10,282 | 29,836 | 58,611 | 56,531 | ||||||||||||
Effective tax rate | 15 | % | 15 | % | 15 | % | 15 | % | ||||||||
Addition (deduction) in deferred tax asset | 1,542 | (E) | 4,475 | (E) | 8,792 | (E) | 8,480 | (E) | ||||||||
Addition in valuation allowance | (22,087 | )(F) | (25,180 | )(F) | (46,914 | )(F) | - | (F) | ||||||||
Deconsolidation of Tongxing | - | (G) | (216 | )(G) | - | (G) | - | (G) | ||||||||
Exchange difference | (294 | )(H) | 208 | (H) | (245 | )(H) | (82 | )(H) | ||||||||
Total (A+B+C+D+E+F+G+H) | $ | - | $ | - | $ | 167 | $ | 15,301 |
101 |
Movement of valuation allowance:
December 31, 2013 | December 31, 2012 | December 31, 2011 | December 31, 2010 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
Beginning balance | $ | 72,891 | $ | 47,703 | $ | - | $ | - | ||||||||
Current period addition | 23,293 | 25,180 | 46,914 | - | ||||||||||||
Current period reversal | (1,206 | ) | - | - | - | |||||||||||
Deconsolidation of Tongxing | - | (216 | ) | - | - | |||||||||||
Exchange difference | 2,591 | 224 | 789 | - | ||||||||||||
Ending balance | $ | 97,569 | $ | 72,891 | $ | 47,703 | $ | - |
Deferred taxes assets – U.S.
General Steel Holdings, Inc. was incorporated in the United States and has incurred net operating losses for income tax purposes for the year ended December 31, 2013. The net operating loss carry forwards for United States income taxes amounted to $1.9 million, which may be available to reduce future years’ taxable income. These carry forwards will expire, if not utilized, starting from 2026 through 2032. Management believes that the realization of the benefits from these losses appears uncertain due to the Company’s limited operating history and continuing losses for United States income tax purposes. Accordingly, the Company has provided a 100% valuation allowance on the deferred tax asset benefit to reduce the asset to zero. The valuation allowance as of December 31, 2013 was $0.7 million. The net change in the valuation allowance for the year ended December 31, 2013 was $0.2 million. Management will review this valuation allowance periodically and make adjustments as warranted.
The Company has no cumulative proportionate retained earnings from profitable subsidiaries as of December 31, 2013. Accordingly, no provision has been made for U.S. deferred taxes related to future repatriation of these earnings, nor is it practicable to estimate the amount of income taxes that would have to be provided if we concluded that such earnings will be remitted in the future.
Value added tax
Enterprises or individuals who sell commodities, engage in repair and maintenance or import and export goods in the PRC are subject to a value added tax in accordance with PRC laws. The value added tax (“VAT”) standard rates are 13% to 17% of the gross sales price. A credit is available whereby VAT paid on the purchases of semi-finished products or raw materials used in the production of the Company’s finished products can be used to offset the VAT due on sales of the finished product. As of December 31, 2013, 2012, 2011 and 2010, the Company had $3.5 million, $4.2 million, $20.4 million and $37.3 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 $751.6 million and $713.5 million, respectively, for the year ended December 31, 2013 and $812.4 million and $985.9 million, respectively, for the year ended December 31, 2012. 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 $985.9 million and $934.2 million, respectively, for the year ended December 31, 2011, $519.0 million and $482.4 million, respectively, for the year ended December 31, 2010.
102 |
Taxes payable consisted of the following:
December 31, 2013 | December 31, 2012 | December 31, 2011 | December 31, 2010 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
VAT taxes payable | $ | 2,211 | $ | 13,579 | $ | 4,856 | $ | 3,921 | ||||||||
Income taxes payable | 173 | 68 | 96 | 840 | ||||||||||||
Misc. taxes | 2,244 | 3,027 | 6,422 | 1,476 | ||||||||||||
Total | $ | 4,628 | $ | 16,674 | $ | 11,374 | $ | 6,237 |
Note 20 –Loss per share
The computation of loss per share is as follows:
(in thousands, except per | For the year ended | For the year ended | For the year ended | For the year ended | ||||||||||||
share data) | December 31, 2013 | December 31, 2012 | December 31, 2011 | December 31, 2010 | ||||||||||||
Loss attributable to holders of common stock | $ | (33,016 | ) | $ | (152,697 | ) | $ | (177,187 | ) | $ | (30,006 | ) | ||||
Basic and diluted weighted average number of common shares outstanding | 55,126 | 54,867 | 54,750 | 53,113 | ||||||||||||
Loss per share | ||||||||||||||||
Basic and diluted | $ | (0.60 | ) | $ | (2.78 | ) | $ | (3.24 | ) | $ | (0.56 | ) |
The Company had warrants exercisable for 3,900,871 shares of the Company’s common stock at December 31, 2012. For the year ended December 31, 2012, 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 years ended December 31, 2013, 2012, 2011 and 2010.
Note 21 – Related party transactions and balances
Related party transactions
a. | Capital lease |
As disclosed in Notes 16 – “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:
December 31, 2013 | December 31, 2012 | December 31, 2011 | December 31, 2010 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
Machinery | $ | 605,839 | $ | 587,334 | $ | 581,413 | $ | - | ||||||||
Less:accumulated depreciation | (76,740 | ) | (46,497 | ) | (18,411 | ) | - | |||||||||
Carrying value of leased assets | $ | 529,099 | $ | 540,837 | $ | 563,002 | $ | - |
103 |
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 December 31, 2013 and such assessment did not result in any impairment charges.
For the year ended December 31, 2013, 2012, 2011 and 2010, General Steel (China) realized rental income $0 million, $1.6 million, $3.1 million and $3.1 million, respectively, which has been included in “other non-operating income (expense), net” in the consolidated statements of operations and comprehensive income (loss).
c. | The following chart summarized sales to related parties for the years ended December 31, 2013, 2012, 2011 and 2010. |
For the year ended | For the year ended | For the year ended | For the year ended | |||||||||||||||
Name of Related parties | Relationship | December 31, 2013 | December 31, 2012 | December 31, 2011 | December 31, 2010 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | $ | 255,859 | $ | 438,951 | $ | 337,359 | $ | 344,556 | |||||||||
Tianjin Hengying Trading Co., Ltd | Partially owned by CEO* through indirect shareholding | - | 5,953 | 94,984 | 47,268 | |||||||||||||
Tianjin Dazhan Industry Co, Ltd | Partially owned by CEO through indirect shareholding | - | - | 76,130 | 43,778 | |||||||||||||
Sichuan Yutai Trading Co., Ltd | Significant influence by Long Steel Group** | 73 | 147,968 | 187,689 | - | |||||||||||||
Shaanxi Yuchang Trading Co., Ltd | Significant influence by Long Steel Group | 21,570 | 92,724 | 160,422 | - | |||||||||||||
Shaanxi Haiyan Trade Co., Ltd | Significant influence by Long Steel Group | 16,273 | 46,998 | 58,299 | 38,545 | |||||||||||||
Shaanxi Shenganda Trading Co., Ltd | Significant influence by Long Steel Group | 77,899 | 53,866 | 37,432 | - | |||||||||||||
Tianjin General Qiugang Pipe Co., Ltd | Partially owned by CEO through indirect shareholding | - | - | 20,014 | - | |||||||||||||
Shaanxi Steel | Majority shareholder of Long Steel Group | 3,221 | 3,332 | 19,735 | 1,152 | |||||||||||||
Beijing Daishang Trading Co., Ltd. | Noncontrolling shareholder of Longmen Joint Venture’s subsidiary | - | - | - | 5,503 | |||||||||||||
Tianjin Daqiuzhuang Steel Plates Co., Ltd. | Partially owned by CEO through indirect shareholding | - | - | - | 8,385 | |||||||||||||
Shaanxi Coal and Chemical Industry Group Co., Ltd. | Shareholder of Shaanxi Steel | 27,911 | 24,515 | - | - | |||||||||||||
Shaanxi Long Steel Group Baoji Steel Rolling Co., Ltd | Subsidiary of Long Steel Group | 7,325 | 35,542 | 69,872 | - | |||||||||||||
Shaanxi Junlong Rolling Co., Ltd | Investee of Long Steel Group | 37,068 | 47,110 | 48,991 | - | |||||||||||||
Others | Entities either owned or have significant influence by our affiliates or management | - | 243 | 842 | 183 | |||||||||||||
Total | $ | 447,199 | $ | 897,202 | $ | 1,111,769 | $ | 489,370 |
104 |
*The CEO is referred to herein as the chief executive officer of General Steel Holdings, Inc.
**Long Steel Group has the ability to significantly influence the operating and financial decisions of the entity through equity ownership either directly or through key employees, commercial contractual terms, or the ability to assign management personnel.
d. | The following charts summarize purchases from related parties for the years ended December 31, 2013, 2012, 2011 and 2010. |
For the year ended | For the year ended | For the year ended | For the year ended | |||||||||||||||
Name of related parties | Relationship | December 31, 2013 | December 31, 2012 | December 31, 2011 | December 31, 2010 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | $ | 522,295 | $ | 483,058 | $ | 913,850 | $ | 553,752 | |||||||||
Hancheng Jinma Coking Co., Ltd | Investee of Longmen Joint Venture’s subsidiary (unconsolidated) | - | - | 4,772 | 8,489 | |||||||||||||
Tianjin Hengying Trading Co., Ltd. | Partially owned by CEO through indirect shareholding | - | 43,160 | - | - | |||||||||||||
Tianjin General Qiugang Pipe Co., Ltd. | Partially owned by CEO through indirect shareholding | - | 6,933 | - | - | |||||||||||||
Hancheng Haiyan Coking Co., Ltd | Noncontrolling shareholder of Long Steel Group | 180,401 | 255,800 | 391,065 | 234,479 | |||||||||||||
Xi’an Pinghe Metallurgical Raw Material Co., Ltd | Noncontrolling shareholder of Long Steel Group | 19,943 | 88,094 | 37,890 | - | |||||||||||||
Shaanxi Long Steel Group Baoji Steel Rolling Co., Ltd | Subsidiary of Long Steel Group | - | 6,379 | 19,076 | - | |||||||||||||
Shaanxi Junlong Rolling Co., Ltd | Investee of Long Steel Group | 213 | 7,334 | 19,110 | - | |||||||||||||
Shaanxi Huafu New Energy Co., Ltd | Significant influence by the Long Steel Group | 32,824 | 32,693 | 34,810 | - | |||||||||||||
Beijing Daishang Trading Co., Ltd. | Noncontrolling shareholder of Longmen Joint Venture’s subsidiary | 6,933 | 5,400 | - | - | |||||||||||||
Shaanxi Coal and Chemical Industry Group Co., Ltd. | Shareholder of Shaanxi Steel | 26,047 | - | - | - | |||||||||||||
Tianwu General Steel Material Trading Co., Ltd. | Investee of General Steel (China) | 76,735 | - | - | - | |||||||||||||
Shaanxi Shenganda Trading Co., Ltd. | Significant influence by the Long Steel Group | 20,213 | - | - | - | |||||||||||||
Beijing Daishang Trading Co., Ltd. | Noncontrolling shareholder of Longmen Joint Venture’s subsidiary | - | - | 6,509 | 1,984 | |||||||||||||
Others | Entities either owned or have significant influence by our affiliates or management | 797 | 154 | 1,471 | 1,019 | |||||||||||||
Total | $ | 886,401 | $ | 929,005 | $ | 1,428,553 | $ | 799,723 |
105 |
Related party balances
a. | Loans receivable – related parties: |
Name of related parties | Relationship | December 31, 2013 | December 31, 2012 | December 31, 2011 | December 31, 2010 | |||||||||||||
(in thousands) | (in thousands) | (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 | $ | - | $ | - |
See Note 4 – loans receivable – related parties for loan details.
b. | Accounts receivables – related parties: |
Name of related parties | Relationship | December 31, 2013 | December 31, 2012 | December 31, 2011 | December 31, 2010 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | $ | 548 | $ | 10,409 | $ | 9,187 | $ | 3,023 | |||||||||
Shaanxi Long Steel Group Baoji Steel Rolling Co., Ltd | Subsidiary of Long Steel Group | - | 2,017 | 3,141 | - | |||||||||||||
Tianjin Daqiuzhuang Steel Plates | Partially owned by CEO through indirect shareholding | 19 | 18 | 755 | - | |||||||||||||
Tianjin Hengying Trading Co., Ltd. | Partially owned by CEO through indirect shareholding | - | - | - | 1,054 | |||||||||||||
Shaanxi Steel | Majority shareholder of Long Steel Group | 1,741 | 2,435 | 7,207 | 83 | |||||||||||||
Others | 634 | 87 | 303 | - | ||||||||||||||
Total | $ | 2,942 | $ | 14,966 | $ | 20,593 | $ | 4,160 |
106 |
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 | December 31, 2013 | December 31, 2012 | December 31, 2011 | December 31, 2010 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | $ | 406 | $ | 301 | $ | 15,244 | $ | 993 | |||||||||
Shaanxi Steel | Majority shareholder of Long Steel Group | 46,439 | 65,981 | 66,869 | - | |||||||||||||
Maoming Shengze Trading Co., Ltd | Partially owned by CEO through indirect shareholding | - | - | 937 | 8,095 | |||||||||||||
Tianjin Daqiuzhuang Steel Plates Co., Ltd. | Partially owned by CEO through indirect shareholding | - | - | - | 1,078 | |||||||||||||
Shaanxi Huafu New Energy Co., Ltd | Significant influence by Long Steel Group | - | - | 2,441 | - | |||||||||||||
Teamlink Investment Co., Ltd | Owned by CEO through indirect shareholding | - | - | 2,000 | - | |||||||||||||
Tianjin General Quigang Pipe Co., Ltd | Partially owned by CEO through indirect shareholding | 1,247 | 1,195 | - | - | |||||||||||||
Tianjin Dazhan Industry Co, Ltd | Partially owned by CEO through indirect shareholding | 491 | 476 | - | 455 | |||||||||||||
Beijing Shenhua Xinyuan Metal Materials Co., Ltd. | Partially owned by CEO through indirect shareholding | 4,901 | - | - | - | |||||||||||||
Others | Entities either owned or have significant influence by our affiliates or management | 622 | 429 | 188 | 317 | |||||||||||||
Total | $ | 54,106 | $ | 68,382 | $ | 87,679 | $ | 10,938 |
107 |
d. | Advances on inventory purchase – related parties: |
Name of related parties | Relationship | December 31, 2013 | December 31, 2012 | December 31, 2011 | December 31, 2010 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | $ | 9,123 | $ | 1,367 | $ | 1,028 | $ | - | |||||||||
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 | 10,343 | - | - | - | |||||||||||||
Tianjin Hengying Trading Co., Ltd | Partially owned by CEO through indirect shareholding | 16,158 | - | - | - | |||||||||||||
Tianjin General Qiugang Pipe Co., Ltd | Partially owned by CEO through indirect shareholding | 555 | 41,316 | 15,678 | 6,187 | |||||||||||||
Maoming Shengze Trading Co., Ltd | Partially owned by CEO through indirect shareholding | 21,197 | 3,733 | 3,538 | - | |||||||||||||
Others | Entities either owned or have significant influence by our affiliates or management | 20 | - | - | - | |||||||||||||
Total | $ | 83,003 | $ | 46,416 | $ | 20,244 | $ | 6,187 |
e. | Accounts payable - related parties: |
Name of related parties | Relationship | December 31, 2013 | December 31, 2012 | December 31, 2011 | December 31, 2010 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||||
Hancheng Haiyan Coking Co., Ltd | Noncontrolling shareholder of Longmen Joint Venture | $ | 58,163 | $ | 58,661 | $ | 46,487 | $ | 25,708 | |||||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | 134,758 | 91,511 | 11,231 | 28,329 | |||||||||||||
Shaanxi Coal and Chemical Industry Group Co., Ltd. | Shareholder of Shaanxi Steel | 29,990 | 5,652 | - | - | |||||||||||||
Tianjin Dazhan Industry Co., Ltd | Partially owned by CEO through indirect shareholding | 958 | 3 | 25,511 | 2,764 | |||||||||||||
Xi’an Pinghe Metallurgical Raw Material Co., Ltd | Noncontrolling shareholder of Long Steel Group | 8,714 | 5,278 | 12,800 | - | |||||||||||||
Tianjin Hengying Trading Co., Ltd | Partially owned by CEO through indirect shareholding | 1 | 13,919 | 14,856 | 17,264 | |||||||||||||
Henan Xinmi Kanghua Fire Refractory Co., Ltd | Noncontrolling shareholder of Longmen Joint Venture’s subsidiary | 716 | 1,146 | 1,185 | 880 | |||||||||||||
Hancheng Jinma Coking Co., Ltd | Investee of Longmen Joint Venture’s subsidiary (unconsolidated) | - | - | - | 1,579 | |||||||||||||
Beijing Daishang Trading Co., Ltd | Noncontrolling shareholder of Longmen Joint Venture’s subsidiary | 1,004 | 875 | 1,600 | 1,101 | |||||||||||||
Maoming Shengze Trading Co., Ltd | Partially owned by CEO through indirect shareholding | - | - | - | 1,954 | |||||||||||||
Tianjin General Qiugang Pipe Co., Ltd | Partially owned by CEO through indirect shareholding | - | 52 | 8,034 | - | |||||||||||||
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 | 629 | 335 | 124 | 115 | |||||||||||||
Total | $ | 235,692 | $ | 177,432 | $ | 121,828 | $ | 79,694 |
108 |
f. | Short-term loans - related parties: |
Name of related parties | Relationship | December 31, 2013 | December 31, 2012 | December 31, 2011 | December 31, 2010 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||||
Shaanxi Steel | Majority shareholder of Long Steel Group | $ | 49,110 | $ | 35,839 | $ | - | $ | 14,548 | |||||||||
Shaanxi Coal and Chemical Industry Group Co., Ltd | Shareholder of Shaanxi Steel | 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 | 8,178 | 19,549 | 15,710 | - | |||||||||||||
Tianjin Dazhan Industry Co., Ltd | Partially owned by CEO through indirect shareholding | 6,548 | 21,397 | - | - | |||||||||||||
Beijing Shenhua Xinyuan Metal Materials Co., Ltd | Partially owned by CEO through indirect shareholding | - | 1,359 | - | - | |||||||||||||
Yangpu Capital Automobile | Partially owned by CEO through indirect shareholding | 1,458 | 1,413 | - | - | |||||||||||||
Total | $ | 126,693 | $ | 79,557 | $ | 15,710 | $ | 14,548 |
See Note 10 – Debt for the loan details.
109 |
g. | Current maturities of long-term loans – related parties |
Name of related party | Relationship | December 31, 2013 | December 31, 2012 | December 31, 2011 | December 31, 2010 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||||
Shaanxi Steel | Majority shareholder of Long Steel Group | $ | 53,013 | $ | 54,885 | $ | - | $ | - | |||||||||
Total | $ | 53,013 | $ | 54,885 | $ | - | $ | - |
h. | Other payables – related parties: |
Other payables – related parties are those nontrade payables arising from transactions between the Company and its related parties, such as advances or payments from these related parties on behalf of the Group.
Name of related parties | Relationship | December 31, 2013 | December 31, 2012 | December 31, 2011 | December 31, 2010 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||||
Tianjin Hengying Trading Co, Ltd | Partially owned by CEO through indirect shareholding | $ | 380 | $ | 2,770 | $ | - | $ | 10,168 | |||||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | 43,636 | 60,180 | 20,001 | - | |||||||||||||
Shaanxi Steel | Majority shareholder of Long Steel Group | 44,363 | - | - | - | |||||||||||||
Wendlar Investment & Management Group Co., Ltd | Common control under CEO | 895 | 836 | 241 | - | |||||||||||||
Yangpu Capital Automobile | Partially owned by CEO through indirect shareholding | 291 | 141 | 1,398 | 1,350 | |||||||||||||
Tianjin Daqiuzhuang Steel Plates Co., Ltd. | Partially owned by CEO through indirect shareholding | - | - | 5,771 | - | |||||||||||||
Tianjin General Qiugang Pipe Co., Ltd | Partially owned by CEO through indirect shareholding | - | - | - | 4,547 | |||||||||||||
Tianjin Hengying Trading Co., Ltd | Partially owned by CEO through indirect shareholding | - | - | 1,040 | - | |||||||||||||
Xi’an Pinghe Metallurgical Raw Material Co., Ltd | Noncontrolling shareholder of Long Steel Group | - | 4,761 | - | - | |||||||||||||
Wenchun Han | Director of General Steel (China) | - | - | - | 2,124 | |||||||||||||
Tianjin Dazhan Industry Co., Ltd | Partially owned by CEO through indirect shareholding | 473 | 3,695 | - | - | |||||||||||||
Maoming Shengze Trading Co., Ltd | Partially owned by CEO through indirect shareholding | 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 | 921 | 642 | 422 | 25 | |||||||||||||
Total | $ | 94,079 | $ | 73,025 | $ | 28,873 | $ | 18,214 |
110 |
i. | Customer deposits – related parties: |
Name of related parties | Relationship | December 31, 2013 | December 31, 2012 | December 31, 2011 | December 31, 2010 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||||
Hancheng Haiyan Coking Co., Ltd | Noncontrolling shareholder of Long Steel Group | $ | - | $ | - | $ | - | $ | 5,081 | |||||||||
Shaanxi Yuchang Trading Co., Ltd | Significant influence by Long Steel Group | 10 | 4,869 | 24,256 | - | |||||||||||||
Sichuan Yutai Trading Co., Ltd | Significant influence by Long Steel Group | - | 2,163 | 5,972 | - | |||||||||||||
Tianjin Hengying Trading Co, Ltd | Partially owned by CEO through indirect shareholding | - | 90 | 1,506 | - | |||||||||||||
Tianjin General Qiugang Pipe Co., Ltd | Partially owned by CEO through indirect shareholding | - | - | 9,102 | - | |||||||||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | 15,038 | 8,864 | 4,755 | 48,161 | |||||||||||||
Beijing Shenhua Xinyuan Metal Materials Co., Ltd | Partially owned by CEO through indirect shareholding | - | - | 1,345 | 1,299 | |||||||||||||
Shaanxi Haiyan Trade Co., Ltd | Significant influence by Long Steel Group | - | - | 6,822 | - | |||||||||||||
Shaanxi Junlong Rolling Co., Ltd | Investee of Long Steel Group | 2,748 | 5,615 | 1,540 | - | |||||||||||||
Tianjin Dazhan Industry Co., Ltd | Partially owned by CEO through indirect shareholding | - | - | 11,178 | - | |||||||||||||
Shaanxi Shenganda Trading Co., Ltd | Significant influence by Long Steel Group | 275 | 353 | 1,750 | - | |||||||||||||
Tianwu General Steel Material Trading Co., Ltd. | Investee of General Steel (China) | 46,521 | - | - | - | |||||||||||||
Others | Entities either owned or have significant influence by our affiliates or management | 289 | 44 | 51 | 381 | |||||||||||||
Total | $ | 64,881 | $ | 21,998 | $ | 68,277 | $ | 54,922 |
111 |
j. | Deposits due to sales representatives – related parties |
Name of related parties | Relationship | December 31, 2013 | December 31, 2012 | December 31, 2011 | December 31, 2010 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||||
Hancheng Haiyan Coking Co., Ltd | Noncontrolling shareholder of Long Steel Group | $ | - | $ | 619 | $ | 471 | $ | 455 | |||||||||
Shaanxi Junlong Rolling Co., Ltd | Investee of Long Steel Group | - | 619 | 472 | - | |||||||||||||
Gansu Yulong Trading Co., Ltd. | Significant influence by Long Steel Group | 1,408 | - | - | - | |||||||||||||
Shaanxi Yuchang Trading Co., Ltd | Significant influence by Long Steel Group | 589 | - | - | - | |||||||||||||
Total | $ | 1,997 | $ | 1,238 | $ | 943 | $ | 455 |
k. | Long-term loans – related party: |
Name of related party | Relationship | December 31, 2013 | December 31, 2012 | December 31, 2011 | December 31, 2010 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||||
Shaanxi Steel | Majority shareholder of Long Steel Group | $ | 19,644 | $ | 38,088 | $ | 92,035 | $ | 91,020 | |||||||||
Total | $ | 19,644 | $ | 38,088 | $ | 92,035 | $ | 91,020 |
The Company also provided guarantee on related parties’ bank loans amounting to $205.8 million, $118.0 million, $56.6 million and $3.0 million as of December 31, 2013, 2012, 2011 and 2010, respectively.
l. | Long-term other payable – related party: |
Long-term other payable – related party is a nontrade payable arising from a transaction between the Company and its related party, Shaanxi Steel, in which the Company received an advance from Shaanxi Steel to make payment to a third party for a construction project.
Name of related party | Relationship | December 31, 2013 | December 31, 2012 | December 31, 2011 | December 31, 2010 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||||
Shaanxi Steel | Majority shareholder of Long Steel Group | $ | - | $ | 43,008 | $ | - | $ | - | |||||||||
Total | $ | - | $ | 43,008 | $ | - | $ | - |
112 |
m. | Deferred lease income |
December 31, 2013 | December 31, 2012 | December 31, 2011 | December 31, 2010 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
Beginning balance | $ | 77,199 | $ | 78,524 | $ | 57,591 | $ | 16487 | ||||||||
Add: Reimbursement for dismantled assets | - | - | - | 568 | ||||||||||||
Add: Reimbursement for loss of efficiency | - | - | - | 20676 | ||||||||||||
Add: Reimbursement for trial production costs | - | - | 14,042 | 13584 | ||||||||||||
Add: Deferred depreciation cost during free use period | - | - | 6,904 | 6656 | ||||||||||||
Less: Lease income realized | (2,158 | ) | (2,119 | ) | (2,008 | ) | (943 | ) | ||||||||
Exchange rate effect | 2,403 | 794 | 1995 | 563 | ||||||||||||
Ending balance | 77,444 | 77,199 | 78,524 | 57,591 | ||||||||||||
Current portion | (2,187 | ) | (2,120 | ) | (2,099 | ) | (1,971 | ) | ||||||||
Noncurrent portion | $ | 75,257 | $ | 75,079 | $ | 76,425 | $ | 55,620 |
For the year ended December 31, 2013, 2012, 2011 and 2010, the Company realized lease income from Shaanxi Steel, a related party, amounted to $2.2 million, $2.1 million, $2.0 million and $0.9 million, respectively.
n. | Equity |
On November 19, 2013, the Company sold its 28% equity interest of Tianwu held by Yangpu Shengtong to Tianjin Dazhan Industry Co., Ltd., a related party through indirect common ownership by the CEO, for $13.6 million (RMB 84.3 million) while retaining the 32% interest held by General Steel (China). As a result of this transaction, the Company met the criteria under ASC 810-10-40-4 to deconsolidate Tianwu as of the ownership disposal date and recognize a gain, which amounted to $1.0 million. After the deconsolidation of Tianwu, General Steel (China)’s 32% interest in Tianwu was accounted for as an equity method investment, which amounted to $15.8 million as of December 31, 2013.
Note 22 – Equity
Preferred Stock
On May 18, 2007, the Company entered into a Purchase Agreement with Victory New Holdings Limited (“Victory New”), a British Virgin Islands registered company under the control of the Company’s Chairman, CEO and majority shareholder, Zuosheng Yu (aka Henry Yu), to acquire Victory New’s 30% interest in General Steel (China). The Company agreed to issue to Victory New an aggregate of 3,092,899 shares of its Series A Preferred Stock with a fair value of $8,374,000. These shares of Series A Preferred Stock carry a voting power of 30% of the combined voting power of the Company’s common and preferred stock while outstanding. The holders of preferred stock are entitled to receive noncumulative dividends, when and if declared by the board of directors. Dividends are not mandatory and shall not accrue. Preferred shares are non-redeemable.
2010 Equity Transactions
The Company granted senior management and directors 733,300 shares of common stock as compensation in 2010. The shares were valued at the quoted market price on the grant date. The Company recorded compensation expense of $2.2 million for the year ended December 31, 2010.
On June 7, 2010, the Company issued 928,163 shares of common stock to one of Maoming Hengda’s creditors to settle certain short-term loans.
113 |
On August 4, 2010, $3.5 million of the Notes were converted to 1,208,791 shares of common stock. According to the Notes agreement, the Company incurred make-whole amount of $0.7 million and accrued interest expense of $0.2 million settled in shares on conversion and 350,885 shares of common stock were issued.
On December 21, 2010, the Company’s Board of Directors authorized to repurchase up to an aggregate of 1,000,000 shares of the Company’s common stock as part of a share repurchase program (the “Share Repurchase Program”). The Share Repurchase Program does not have an expiration date and these repurchases may be made from time to time in the open market or in privately negotiated transactions in accordance with applicable laws. As of December 31, 2010, the Company has repurchased 316,760 shares for a total cost of $0.9 million.
2011 Equity Transactions
On March 31, 2011, the Company granted senior management and directors 240,734 shares of common stock at $2.40 per share, as compensation. The shares were valued at the quoted market price on the grant date. The Company recorded compensation expense of $0.6 million.
On June 1, 2011, the Company announced an increase of additional 1,000,000 shares of common stock may be purchased under the Share Repurchase Program launched in December 2010, bringing the total authorized shares of its common stock available for purchase to 2,000,000. During the year ended December 31, 2011, the Company has repurchased 774,218 shares with $1.9 million pursuant to the Share Repurchase Program. The Company had a total of 1,090,978 shares of treasury stock as of December 31, 2011.
On June 16, 2011, the Company and Maoming Hengda entered into a Debt Repayment Agreement with Guangzhou Hengda and its sole shareholder Ms. Ding Yumei whereby the Company issued 974,571 shares of its common stock to Ms. Ding Yumei, the designee and sole shareholder of Guangzhou Hengda, to repay loan balance of $4.8 million due to Guangzhou Hengda.
On June 28, 2011, the Company granted senior management and directors 191,150 shares of common stock at $1.44 per share, as compensation. The shares were valued at the quoted market price on the grant date. The Company recorded compensation expense of $0.3 million.
On September 26, 2011, the Company granted senior management and directors 189,650 shares of common stock at $1.18 per share, as compensation. The shares were valued at the quoted market price on the grant date. The Company recorded compensation expense of $0.2 million.
On December 28, 2011, the Company granted senior management and directors 166,150 shares of common stock at $1.04 per share, as compensation. The shares were valued at the quoted market price on the grant date. The Company recorded compensation expense of $0.2 million.
2012 Equity Transactions
On March 1, 2012, Longmen Joint Venture sold its 22.76% equity interest of Tongxing to two individuals, who are the representatives from Long Steel Group. As of March 1, 2012, Tongxing had a carrying value of net assets of $40.5 million which were included in the consolidated net assets of the Company and a noncontrolling interest in Tongxing of $32.5 million. The Company retained the land use right associated with the Tongxing property adjacent to the Longmen Joint Venture facility, which had a carrying value of $3.6 million immediately prior to the transaction and relinquished its controlling interest in the remaining net assets (primarily operating assets). In connection with the transaction, the Company also settled with a payable in cash of $0.3 million and transferred the dividend receivable of $0.9 million from Tongxing to the two individuals. These arrangements meet the criteria of ASC 810-10-40-6b and 6d, deconsolidation of a Subsidiary with multiple arrangements treated as a single transaction. As the land use rights held in Tongxing have been included as part of the Company’s consolidated assets, this transaction was considered as a change in the Company’s ownership interest in the land use right similar to a change in a parent company’s ownership interest in a subsidiary in accordance with ASC 810-10-45-23 and therefore the carrying value of the land use right was not stepped up to fair value. The net impact of these transactions resulted in a reduction of $3.1 million paid-in capital.
114 |
The following is a reconciliation of the Company’s noncontrolling interest for the year ended December 31, 2012:
(in thousands) | Noncontrolling interest | |||||||||||
Total | Tongxing | Others | ||||||||||
Balance at December 31, 2011 | $ | (56,189 | ) | $ | 32,934 | $ | (89,123 | ) | ||||
Net income (loss) attributable to noncontrolling interest | (79,241 | ) | 341 | (79,582 | ) | |||||||
Addition to special reserve | 605 | - | 605 | |||||||||
Usage of special reserve | (566 | ) | - | (566 | ) | |||||||
Deconsolidation of Tongxing | (35,943 | ) | (33,654 | ) | (2,289 | ) | ||||||
Foreign currency translation adjustments | (729 | ) | 379 | (1,108 | ) | |||||||
Balance at December 31, 2012 | $ | (172,063 | ) | $ | - | $ | (172,063 | ) |
On March 26, 2012, the Company granted senior management and directors 165,400 shares of common stock at $0.75 per share, as compensation under the Company’s 2008 Equity Incentive Plan. The shares were valued at the quoted market price on the grant date. The Company recorded compensation expense of $0.1 million.
On March 27, 2012, we launched another share repurchase program to repurchase up to an aggregate of 2,000,000 shares of our common stock. Together with the previous share repurchase program launched in December 2010 and this newly announced Share Repurchase Program, it brought the total authorized shares of our common stock available for purchase to 4,000,000. During the year ended December 31, 2012, the Company has repurchased 1,381,328 shares with $1.4 million pursuant to the Share Repurchase Program. The Company had a total of 2,472,306 shares of treasury stock as of December 31, 2012.
On June 28, 2012, the Company granted senior management and directors 165,400 shares of common stock at $0.80 per share, as compensation under the Company’s 2008 Equity Incentive Plan. The shares were valued at the quoted market price on the grant date. The Company recorded compensation expense of $0.1 million.
On September 27, 2012, the Company granted senior management and directors 167,900 shares of common stock at $1.29 per share, as compensation under the Company’s 2008 Equity Incentive Plan. The shares were valued at the quoted market price on the grant date. The Company recorded compensation expense of $0.2 million.
On December 28, 2012, the Company granted senior management and directors 169,150 shares of common stock at $1.00 per share, as compensation under the Company’s 2008 Equity Incentive Plan. The shares were valued at the quoted market price on the grant date. The Company recorded compensation expense of $0.2 million.
2013 Equity Transactions
On March 28, 2013, the Company granted senior management and directors 174,900 shares of common stock at $1.01 per share, as compensation under the Company’s 2008 Equity Incentive Plan. The shares were valued at the quoted market price on the grant date.
On June 27, 2013, the Company granted senior management and directors 163,150 shares of common stock at $1.02 per share, as compensation under the Company’s 2008 Equity Incentive Plan. The shares were valued at the quoted market price on the grant date.
On August 16, 2013, an additional $45.1 million (or RMB 280 million) was contributed to Tianwu Joint Venture with $27.0 million (or RMB 168 million) contributed by the Company and $18.0 million (or RMB 112 million) contributed by Tianjin Material and Equipment Group Corporation (“TME Group”). The Company’s controlling interest of Tianwu Joint Venture remains at 60% after the capital contribution.
On September 28, 2013, the Company granted senior management and directors 163,150 shares of common stock at $0.88 per share as compensation under the Company’s 2008 Equity Incentive Plan. The shares were valued at the quoted market price on the grant date.
On October 11, 2013, the Company granted 300,000 shares of common stock at $0.85 per share as service fee for corporate advisory services under a one year service agreement dated September 25, 2013. The shares were valued at the quoted market price on the grant date.
On December 30, 2013, the Company granted senior management and directors 163,650 shares of common stock at $0.91 per share as compensation under the Company’s 2008 Equity Incentive Plan. The shares were valued at the quoted market price on the grant date.
115 |
Prior to November 19, 2013, the Company held a combined 60.0% equity interest in 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 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 at disposal date and recognized a gain in accordance with ASC 810-10-40-5. At the same time, Tianwu’s cumulative translation adjustment as of the disposal date was released to net income in accordance with ASC 830-30-40-1A. The total gain from the deconsolidation of Tianwu amounted to $1.0 million.
The following is a reconciliation of the Company’s noncontrolling interest for the year ended December 31, 2013:
(in thousands) | Noncontrolling interest | |||||||||||
Total | Tianwu | Others | ||||||||||
Balance at December 31, 2012 | $ | (172,063 | ) | $ | 1,339 | $ | (173,402 | ) | ||||
Net income (loss) attributable to noncontrolling interest | (9,609 | ) | 2 | (9,611 | ) | |||||||
Addition to special reserve | 553 | - | 553 | |||||||||
Usage of special reserve | (393 | ) | - | (393 | ) | |||||||
Addition to Tianwu paid-in capital | 18,028 | 18,028 | - | |||||||||
Deconsolidation of a subsidiary | (19,929 | ) | (19,929 | ) | - | |||||||
Foreign currency translation adjustments | (5,498 | ) | 560 | (6,058 | ) | |||||||
Balance at December 31, 2013 | $ | (188,911 | ) | $ | - | $ | (188,911 | ) |
Note 23 – Retirement plan
Regulations in the PRC require the Company to contribute to a defined contribution retirement plan for all employees. All the employees of the Company’s entities in China are entitled to a retirement pension amount calculated based upon their salary at their date of retirement and their length of service in accordance with a government managed pension plan. The PRC government is responsible for the pension liability to the retired staff. The Company’s entities in China are required to contribute based on the higher of 20% of the employees’ monthly base salary or 12% of the minimum social average salary of the city where the facilities are located. Employees are required to contribute 8% of their base salary to the plan. The minimum social average salary is announced by the local Social Security bureau and updated annually. Total pension expense incurred by the Company for the years ended December 31, 2013, 2012, 2011 and 2010 amounted to $8.5 million, $7.4 million, $7.0 million and $5.1 million, respectively.
Note 24 – Statutory reserves
The laws and regulations of the People’s Republic of China require that before a foreign -invested enterprise distributes profits to its shareholders, it must first satisfy all tax liabilities, provision for losses in previous years, and make allocations, in proportions determined at the discretion of the board of directors, to the statutory reserves. The statutory reserves include the surplus reserve funds and the enterprise fund and these statutory reserves represent restricted retained earnings.
Surplus reserve fund
The Company is required to transfer 10% of its net income, as determined in accordance with the PRC accounting rules and regulations, to a statutory surplus reserve fund until such reserve balance reaches 50% of the Company’s registered capital.
The transfer to this reserve must be made before distribution of any dividend to shareholders. The surplus reserve fund is non-distributable other than during liquidation and can be used to fund previous years’ losses, if any, and may be utilized for business expansion or converted into share capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing the par value of the shares currently held by them, provided that the remaining reserve balance after such issue is not less than 25% of the registered capital. For the years ended December 31, 2013, 2012 and 2010, the Company did not make any contributions to these reserves. For the year ended December 31, 2011, the Company made contributions of $0.1 million to these reserves.
116 |
Special reserve
The Company is required by the PRC government to reserve safety and maintenance expense to the cost of production based on the actual quantity of mineral exploited. The amount of reserves is determined within the unit price range provided by Ministry of Finance of PRC. For the years ended December 31, 2013, 2012, 2011 and 2010, the Company made contributions of $1.2 million, $1.3 million, $82.0 thousand and $40.0 thousand to these reserves, respectively and used $0.8 million, $1.3 million, $0 and $0 of safety and maintenance expense, respectively.
Note 25 – 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 December 31, 2013 is as follows:
Year ending December 31, | Minimum lease payment | |||
(in thousands) | ||||
2014 | $ | 1,450 | ||
2015 | 683 | |||
2016 | 562 | |||
2017 | 562 | |||
2018 | 562 | |||
Years after | 19,955 | |||
Total minimum payments required | $ | 23,774 |
Total rental expense was $3.2 million, $3.3 million, $0.3 million and $0.4 million for the years ended December 31, 2013, 2012, 2011 and 2010, respectively.
Contractual Commitments
Longmen Joint Venture has $353.0 million contractual obligations related to construction projects as of December 31, 2013 estimated to be fulfilled between January and December 2014.
Contingencies
As of December 31, 2013, Longmen Joint Venture provided guarantees to related parties’ and third parties’ bank loans, including lines of credit and others, amounting to $326.8 million.
Nature of guarantee | Guarantee amount | Guaranty Due Date | ||||
(In thousands) | ||||||
Line of credit | $ | 226,618 | Various from January 2014 to August 2015 | |||
Three-party financing agreements | 13,096 | Various from January to July 2014 | ||||
Confirming storage | 41,252 | Various from March to December 2014 | ||||
Financing by the rights of goods delivery in future | 45,836 | Various from April to October 2014 | ||||
Total | $ | 326,802 |
117 |
Name of parties being guaranteed | Guarantee amount | Guaranty Due Date | ||||
(In thousands) | ||||||
Long Steel Group | $ | 68,099 | Various from February 2014 to August 2015 | |||
Hancheng Haiyan Coking Co., Ltd | 46,818 | Various from January to December 2014 | ||||
Long Steel Group Fuping Rolling Steel Co., Ltd | 16,820 | Various from January to June 2014 | ||||
Yichang Zhongyi Industrial Co., Ltd | 28,909 | June 2014 | ||||
Xi’an Laisheng Logistics Co., Ltd | 6,548 | May 2014 | ||||
Xi'an Kaiyuan Steel Sales Co., Ltd | 1,637 | January 2014 | ||||
Shaanxi Anlin Logistics Co., Ltd | 6,548 | April 2014 | ||||
Shaanxi Huatai Huineng Group Co., Ltd | 24,555 | March 2014 | ||||
Hancheng Sanli Furnace Burden Co., Ltd. | 16,370 | March 2015 | ||||
Tianjin Dazhan Industry Co., Ltd | 45,018 | Various from January 2014 to March 2015 | ||||
Tianjin Hengying Trading Co., Ltd | 40,925 | Various from January to October 2014 | ||||
Tianjin Qiu Steel Pipe Industry Co., Ltd | 4,911 | April 2014 | ||||
Jinmen Desheng Metallurty Co., Ltd | 19,644 | August 2014 | ||||
Total | $ | 326,802 |
As of December 31, 2013, 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 26 – Segments (restated)
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.
The following represents results of division operations for the years ended December 31, 2013, 2012, 2011 and 2010:
Sales: | 2013 | 2012 | 2011 | 2010 | ||||||||||||
Longmen Joint Venture | $ | 2,450,256 | $ | 2,837,608 | $ | 3,496,551 | $ | 1,846,080 | ||||||||
Maoming Hengda | 3,814 | 6,502 | 9,946 | 10,011 | ||||||||||||
Baotou Steel Pipe Joint Venture | 5,585 | 6,760 | 8,036 | 12,315 | ||||||||||||
General Steel (China) & Tianwu Joint Venture | 58,630 | 161,613 | 267,543 | 68,918 | ||||||||||||
Total sales | 2,518,285 | 3,012,483 | 3,782,076 | 1,937,324 | ||||||||||||
Interdivision sales | (54,538 | ) | (148,890 | ) | (218,180 | ) | (55,184 | ) | ||||||||
Consolidated sales | $ | 2,463,747 | $ | 2,863,593 | $ | 3,563,896 | $ | 1,882,140 |
118 |
Gross profit (loss): | 2013 | 2012 | 2011 | 2010 | ||||||||||||
Longmen Joint Venture | $ | (56,065 | ) | $ | 29,512 | $ | (86,308 | ) | $ | 32,751 | ||||||
Maoming Hengda | (130 | ) | (1,350 | ) | (392 | ) | (2,726 | ) | ||||||||
Baotou Steel | 229 | 69 | 491 | 562 | ||||||||||||
General Steel (China) & Tianwu Joint Venture | 28 | 3,888 | (3,845 | ) | 2,589 | |||||||||||
Total gross profit (loss) | (55,938 | ) | 32,119 | (90,054 | ) | 33,176 | ||||||||||
Interdivision gross profit | - | - | 1,840 | (1,761 | ) | |||||||||||
Consolidated gross profit (loss) | $ | (55,938 | ) | $ | 32,119 | $ | (88,214 | ) | $ | 31,415 |
Income (loss) from operations: | 2013 | 2012 | 2011 | 2010 | ||||||||||||
Longmen Joint Venture | $ | 45,161 | $ | (68,081 | ) | $ | (175,104 | ) | $ | (8,073 | ) | |||||
Maoming Hengda | (2,811 | ) | (19,789 | ) | (2,568 | ) | (5,782 | ) | ||||||||
Baotou Steel | (407 | ) | (7 | ) | (2,516 | ) | (862 | ) | ||||||||
General Steel (China) & Tianwu Joint Venture | (2,971 | ) | (2,539 | ) | (10,902 | ) | 1,133 | |||||||||
Total income (loss) from operations | 38,972 | (90,416 | ) | (191,090 | ) | (13,584 | ) | |||||||||
Interdivision income (loss) from operations | - | - | 1,840 | (1,762 | ) | |||||||||||
Reconciling item (1) | (4,567 | ) | (5,041 | ) | (4,838 | ) | (5,816 | ) | ||||||||
Consolidated income (loss) from operations | $ | 34,405 | $ | (95,457 | ) | $ | (194,088 | ) | $ | (21,162 | ) |
Net income (loss) attributable to General Steel Holdings, Inc.: | 2013 | 2012 | 2011 | 2010 | ||||||||||||
Longmen Joint Venture | $ | (16,457 | ) | $ | (114,936 | ) | $ | (161,897 | ) | $ | (32,668 | ) | ||||
Maoming Hengda | (2,721 | ) | (18,968 | ) | 3,763 | (5,450 | ) | |||||||||
Baotou Steel | 70 | (531 | ) | (1,861 | ) | (744 | ) | |||||||||
General Steel (China) & Tianwu Joint Venture | (10,485 | ) | (13,128 | ) | (17,120 | ) | (330 | ) | ||||||||
Total net income (loss) attributable to General Steel Holdings, Inc. | (29,593 | ) | (147,563 | ) | (177,115 | ) | (39,192 | ) | ||||||||
Interdivision net income | - | - | (1,501 | ) | (1,762 | ) | ||||||||||
Reconciling item (1) | (3,423 | ) | (5,134 | ) | 1,429 | 10,948 | ||||||||||
Consolidated net loss attributable to General Steel Holdings, Inc. | $ | (33,016 | ) | $ | (152,697 | ) | $ | (177,187 | ) | $ | (30,006 | ) |
Depreciation, amortization and depletion: | 2013 | 2012 | 2011 | 2010 | ||||||||||||
Longmen Joint Venture | $ | 85,603 | $ | 79,048 | $54, 755 | $ | 34,131 | |||||||||
Maoming Hengda | 1,237 | 1,984 | 205 | 3,411 | ||||||||||||
Baotou Steel | 246 | 185 | 246 | 281 | ||||||||||||
General Steel (China) & Tianwu Joint Venture | 1,962 | 2,714 | 3,125 | 3,330 | ||||||||||||
Consolidated depreciation, amortization and depletion | $ | 89,048 | $ | 83,931 | $ | 58,331 | $ | 41,153 |
119 |
Finance/interest expenses: | 2013 | 2012 | 2011 | 2010 | ||||||||||||
Longmen Joint Venture | $ | 83,062 | $ | 142,086 | $ | 90,325 | $ | 49,180 | ||||||||
Maoming Hengda | 1 | 13 | 262 | 109 | ||||||||||||
Baotou Steel | - | 485 | (10 | ) | 14 | |||||||||||
General Steel (China) & Tianwu Joint Venture | 8,812 | 10,861 | 6,655 | 1,955 | ||||||||||||
Interdivision interest expenses | - | - | (709 | ) | - | |||||||||||
Reconciling item (1) | 3 | 298 | 4,379 | 25 | ||||||||||||
Consolidated interest expenses | $ | 91,878 | $ | 153,743 | $ | 100,902 | $ | 51,283 |
Capital expenditures: | 2013 | 2012 | 2011 | 2010 | ||||||||||||
Longmen Joint Venture | $ | 43,341 | $ | 27,837 | $ | 108,885 | $ | 80,718 | ||||||||
Maoming Hengda | 2 | 73 | 1,978 | 8,735 | ||||||||||||
Baotou Steel | 8 | 11 | 32 | 44 | ||||||||||||
General Steel (China) & Tianwu Joint Venture | 4 | 55 | 44 | 419 | ||||||||||||
Consolidated capital expenditures | $ | 43,355 | $ | 27,976 | $ | 110,939 | $ | 89,916 |
Total Assets as of: | December 31, 2013 | December 31, 2012 | December 31, 2011 | December 31, 2010 | ||||||||||||
Longmen Joint Venture | $ | 2,573,212 | $ | 2,513,206 | $2, 937,271 | $ | 1,694,895 | |||||||||
Maoming Hengda | 29,211 | 29,687 | 48,350 | 47,839 | ||||||||||||
Baotou Steel Pipe Joint Venture | 4,448 | 5,186 | 8,093 | 31,852 | ||||||||||||
General Steel (China) & Tianwu Joint Venture | 121,883 | 152,965 | 146,150 | 194,966 | ||||||||||||
Interdivision assets | (34,213 | ) | (57,436 | ) | (88,326 | ) | (173,076 | ) | ||||||||
Reconciling item (2) | 5,817 | 7,074 | 2,583 | 2,904 | ||||||||||||
Total Assets | $ | 2,700,358 | $ | 2,650,682 | $ | 3,054,121 | $ | 1,799,380 |
(1) | Reconciling item represents the unallocated income or expenses of the Company, arising from General Steel Investment Co., Ltd, Yangpu Shengtong Investment Co., Ltd and Qiu Steel for the years ended December 31, 2013, 2012, 2011 and 2010. |
(2) | Reconciling item represents assets held at General Steel Holdings, Inc., General Steel Investment Co., Ltd, Yangpu Shengtong Investment Co., Ltd and Qiu Steel as of December 31, 2013, 2012, 2011 and 2010. |
120 |
Note 27 – Subsequent events
On February 3, 2014, the Company granted 80,000 shares of common stock at $1.01 per share as service fees for investor relations consulting services under two service agreements dated January 14, 2014. The shares were valued at the quoted market price on the grant date.
121 |
GENERAL STEEL HOLDINGS, INC.
SCHEDULE 1 - CONDENSED PARENT COMPANY BALANCE SHEETS
AS OF DECEMBER 31, 2013, 2012, 2011 AND 2010
(In thousands)
2013 | 2012 | 2011 | 2010 | |||||||||||||
ASSETS | ||||||||||||||||
CURRENT ASSETS: | ||||||||||||||||
Cash | $ | 11 | $ | 88 | $ | 48 | $ | 47 | ||||||||
Restricted cash | - | - | 4 | 1,130 | ||||||||||||
Other receivables | 39 | 19 | 1 | 3 | ||||||||||||
Prepaid expense | 301 | 45 | 60 | 205 | ||||||||||||
TOTAL CURRENT ASSETS | 351 | 152 | 113 | 1,385 | ||||||||||||
OTHER ASSETS: | ||||||||||||||||
Intercompany receivable | 82,987 | 83,320 | 85,106 | 84,941 | ||||||||||||
TOTAL OTHER ASSETS | 82,987 | 83,320 | 85,106 | 84,941 | ||||||||||||
TOTAL ASSETS | $ | 83,338 | $ | 83,472 | $ | 85,219 | $ | 86,326 | ||||||||
LIABILITIES AND DEFICIENCY | ||||||||||||||||
CURRENT LIABILITIES: | ||||||||||||||||
Other payables and accrued liabilities | $ | 6 | $ | 7 | $ | 7 | $ | 8 | ||||||||
TOTAL CURRENT LIABILITIES | 6 | 7 | 7 | 8 | ||||||||||||
OTHER LIABILITIES: | ||||||||||||||||
Loss in excess of investment in subsidiaries | 388,418 | 347,411 | 192,493 | 11,192 | ||||||||||||
Derivative liabilities - warrants | - | - | 10 | 5,573 | ||||||||||||
TOTAL OTHER LIABILITIES | 388,418 | 347,411 | 192,503 | 16,765 | ||||||||||||
TOTAL LIABILITIES | 388,424 | 347,418 | 192,510 | 16,773 | ||||||||||||
COMMITMENTS AND CONTINGENCIES | ||||||||||||||||
DEFICIENCY: | ||||||||||||||||
Preferred stock, $0.001 par value, 50,000,000 shares authorized, 3,092,899 shares issued and outstanding as of December 31, 2013, 2012, 2011 and 2010 | 3 | 3 | 3 | 3 | ||||||||||||
Common stock, $0.001 par value, 200,000,000 shares authorized, 58,234,688, 57,269,838, 56,601,988 and 54,678,083 shares issued, 55,762,382, 54,797,532, 55,511,010 and 54,522,973 shares outstanding as of December 31, 2013, 2012, 2011 and 2010, respectively | 58 | 57 | 56 | 55 | ||||||||||||
Treasury stock, at cost, 2,472,306, 2,472,306, 1,090,978 and 316,760 shares as of December 31, 2013, 2012, 2011 and 2010, respectively | (4,199 | ) | (4,199 | ) | (2,795 | ) | (871 | ) | ||||||||
Paid-in-capital | 106,878 | 105,714 | 107,940 | 104,970 | ||||||||||||
Statutory reserves | 6,243 | 6,076 | 6,388 | 6,202 | ||||||||||||
Accumulated deficits | (414,798 | ) | (381,782 | ) | (229,083 | ) | (51,793 | ) | ||||||||
Accumulated other comprehensive income | 729 | 10,185 | 10,200 | 10,987 | ||||||||||||
TOTAL GENERAL STEEL HOLDINGS, INC. DEFICIENCY | (305,086 | ) | (263,946 | ) | (107,291 | ) | 69,553 | |||||||||
TOTAL LIABILITIES AND DEFICIENCY | $ | 83,338 | $ | 83,472 | $ | 85,219 | $ | 86,326 |
The accompanying notes are an integral part of these condensed financial statements.
122 |
GENERAL STEEL HOLDINGS, INC.
SCHEDULE 1 - CONDENSED PARENT COMPANY STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012, 2011 AND 2010
(In thousands)
2013 | 2012 | 2011 | 2010 | |||||||||||||
OPERATING EXPENSES | ||||||||||||||||
General and administrative expenses | $ | (1,324 | ) | $ | (1,260 | ) | $ | (2,149 | ) | $ | (3,057 | ) | ||||
Total operating expenses | (1,324 | ) | (1,260 | ) | (2,149 | ) | (3,057 | ) | ||||||||
OTHER INCOME | ||||||||||||||||
Finance/interest (expense) income | - | - | (1 | ) | 1,714 | |||||||||||
Change in fair value of derivative liabilities - warrants | 1 | 9 | 5,563 | 15,055 | ||||||||||||
Total other income, net | 1 | 9 | 5,562 | 16,769 | ||||||||||||
EQUITY LOSS OF SUBSIDIARIES | (31,693 | ) | (151,446 | ) | (180,600 | ) | (43,718 | ) | ||||||||
NET LOSS | (33,016 | ) | (152,697 | ) | (177,187 | ) | (30,006 | ) | ||||||||
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS | (8,927 | ) | (802 | ) | (787 | ) | 2,869 | |||||||||
COMPREHENSIVE LOSS | $ | (41,943 | ) | $ | (153,499 | ) | $ | (177,974 | ) | $ | (27,137 | ) |
The accompanying notes are an integral part of these condensed financial statements.
123 |
GENERAL STEEL HOLDINGS, INC.
SCHEDULE 1 - CONDENSED PARENT COMPANY STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012, 2011 AND 2010
(In thousands)
2013 | 2012 | 2011 | 2010 | |||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||||||
Net loss | $ | (33,016 | ) | $ | (152,697 | ) | $ | (177,187 | ) | $ | (30,006 | ) | ||||
Adjustments to reconcile net loss to cash provided by (used in) operating activities: | ||||||||||||||||
Change in fair value of derivative instruments - warrants | (1 | ) | (9 | ) | (5,563 | ) | (15,055 | ) | ||||||||
Stock issued for services and compensation | 1,165 | 919 | 1,530 | 2,479 | ||||||||||||
Make whole shares interest expense on notes conversion | - | - | - | 1,130 | ||||||||||||
Amortization of deferred note issuance cost and discount on convertible notes | - | - | - | 17 | ||||||||||||
Loss from subsidiaries | 31,693 | 151,446 | 180,600 | 43,718 | ||||||||||||
Changes in operating assets and liabilities | ||||||||||||||||
Other receivables | (20 | ) | (18 | ) | 1 | (3 | ) | |||||||||
Prepaid expense | (257 | ) | 15 | 141 | 349 | |||||||||||
Other payables and accrued liabilities | - | (1 | ) | (1 | ) | (2,483 | ) | |||||||||
Net cash used in operating activities | (436 | ) | (345 | ) | (479 | ) | 146 | |||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||||
Restricted cash | - | 4 | 1,126 | (1,130 | ) | |||||||||||
Loan repayment from (payment to) subsidiaries | 334 | 1,785 | (165 | ) | (524 | ) | ||||||||||
Net cash provided by investing activities | 334 | 1,789 | 961 | (1,654 | ) | |||||||||||
CASH FLOWS FINANCING ACTIVITIES: | ||||||||||||||||
Payments made for treasury stock acquired | - | (1,404 | ) | (1,923 | ) | (870 | ) | |||||||||
Borrowings from subsidiaries | 25 | - | 1,442 | 2,404 | ||||||||||||
Net cash provided by (used in) financing activities | 25 | (1,404 | ) | (481 | ) | 1,534 | ||||||||||
(DECREASE) INCREASE IN CASH | (77 | ) | 40 | 1 | 26 | |||||||||||
CASH, beginning of year | 88 | 48 | 47 | 21 | ||||||||||||
CASH, end of year | $ | 11 | $ | 88 | $ | 48 | $ | 47 | ||||||||
Non-cash transactions of investing and financing activities: | ||||||||||||||||
Deconsolidation of a subsidiary as a reduction to paid-in-capital | $ | - | $ | 3,143 | $ | - | $ | - | ||||||||
Share issuance for intercompany's debt settlement | $ | - | $ | - | $ | 1,442 | $ | 2,404 |
The accompanying notes are an integral part of these condensed financial statements.
124 |
GENERAL STEEL HOLDINGS, INC.
CONDENSED NOTES TO SCHEDULE 1
1. | Basis of presentation |
Certain information and footnote disclosures normally included in financial statements prepared in conformity with generally accepted accounting principles have been condensed or omitted. The Company’s investment in subsidiaries is stated at cost plus equity in undistributed earnings of subsidiaries.
Certain prior year amounts have been reclassified to conform to the current year presentation. These reclassifications have no effect on the accompanying condensed parent company statements of operations and cash flows.
2. | Restricted net assets |
Schedule I of Article 5-04 of Regulation S-X requires the condensed financial information of registrant shall be filed when the restricted net assets of consolidated subsidiaries exceed 25 percent of consolidated net assets as of the end of the most recently completed fiscal year. For purposes of the above test, restricted net assets of consolidated subsidiaries shall mean that amount of the registrant’s proportionate share of net assets of consolidated subsidiaries (after intercompany eliminations) which as of the end of the most recent fiscal year may not be transferred to the parent company by subsidiaries in the form of loans, advances or cash dividends without the consent of a third party (i.e., lender, regulatory agency, foreign government, etc.).
The condensed parent company financial statements have been prepared in accordance with Rule 12-04, Schedule I of Regulation S-X as the restricted net assets of the subsidiaries of General Steel Holdings, Inc. exceed 25% of the consolidated net assets of General Steel Holdings, Inc. The ability of our Chinese operating affiliates to pay dividends may be restricted due to the foreign exchange control policies and availability of cash balances of the Chinese operating subsidiaries. Because a significant portion of our operations and revenues are conducted and generated in China, a significant portion of our revenues being earned and currency received are denominated in Renminbi (RMB). RMB is subject to the exchange control regulation in China, and, as a result, we may be unable to distribute any dividends outside of China due to PRC exchange control regulations that restrict our ability to convert RMB into US Dollars.
3. | Derivative instruments - warrants |
The Company had 3,900,871 outstanding warrants in connection with the $40 million convertible notes issued in 2007, which expired on May 13, 2013, and 2,777,778 warrants in connection with a registered direct offering in 2009, which expired on June 24, 2012. 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.
Refer to Note 13 of the Notes to the Consolidated Financial Statements for the convertible notes and derivative liabilities.
4. | Equity |
Preferred Stock
On May 18, 2007, the Company entered into a Purchase Agreement with Victory New Holdings Limited (“Victory New”), a British Virgin Islands registered company under the control of the Company’s Chairman, CEO and majority shareholder, Zuosheng Yu (aka Henry Yu), to acquire Victory New’s 30% interest in General Steel (China). The Company agreed to issue to Victory New an aggregate of 3,092,899 shares of its Series A Preferred Stock with a fair value of $8,374,000. These shares of Series A Preferred Stock carry a voting power of 30% of the combined voting power of the Company’s common and preferred stock while outstanding. The holders of preferred stock are entitled to receive noncumulative dividends, when and if declared by the board of directors. Dividends are not mandatory and shall not accrue. Preferred shares are non-redeemable.
2010 Equity Transactions
The Company granted senior management and directors 733,300 shares of common stock as compensation in 2010. The shares were valued at the quoted market price on the grant date. The Company recorded compensation expense of $2.2 million for the year ended December 31, 2010.
On June 7, 2010, the Company issued 928,163 shares of common stock to one of Maoming Hengda’s creditors to settle certain short-term loans.
125 |
GENERAL STEEL HOLDINGS, INC.
CONDENSED NOTES TO SCHEDULE 1
On August 4, 2010, $3.5 million of the Notes were converted to 1,208,791 shares of common stock. According to the Notes agreement, the Company incurred make-whole amount of $0.7 million and accrued interest expense of $0.2 million settled in shares on conversion and 350,885 shares of common stock were issued.
On December 21, 2010, the Company’s Board of Directors authorized to repurchase up to an aggregate of 1,000,000 shares of the Company’s common stock as part of a share repurchase program (the “Share Repurchase Program”). The Share Repurchase Program does not have an expiration date and these repurchases may be made from time to time in the open market or in privately negotiated transactions in accordance with applicable laws. As of December 31, 2010, the Company has repurchased 316,760 shares for a total cost of $0.9 million.
2011 Equity Transactions
On March 31, 2011, the Company granted senior management and directors 240,734 shares of common stock at $2.40 per share, as compensation. The shares were valued at the quoted market price on the grant date. The Company recorded compensation expense of $0.6 million.
On June 1, 2011, the Company announced an increase of additional 1,000,000 shares of common stock may be purchased under the Share Repurchase Program launched in December 2010, bringing the total authorized shares of its common stock available for purchase to 2,000,000. During the year ended December 31, 2011, the Company has repurchased 774,218 shares with $1.9 million pursuant to the Share Repurchase Program. The Company had a total of 1,090,978 shares of treasury stock as of December 31, 2011.
On June 16, 2011, the Company and Maoming Hengda entered into a Debt Repayment Agreement with Guangzhou Hengda and its sole shareholder Ms. Ding Yumei whereby the Company issued 974,571 shares of its common stock to Ms. Ding Yumei, the designee and sole shareholder of Guangzhou Hengda, to repay loan balance of $4.8 million due to Guangzhou Hengda.
On June 28, 2011, the Company granted senior management and directors 191,150 shares of common stock at $1.44 per share, as compensation. The shares were valued at the quoted market price on the grant date. The Company recorded compensation expense of $0.3 million.
On September 26, 2011, the Company granted senior management and directors 189,650 shares of common stock at $1.18 per share, as compensation. The shares were valued at the quoted market price on the grant date. The Company recorded compensation expense of $0.2 million.
On December 28, 2011, the Company granted senior management and directors 166,150 shares of common stock at $1.04 per share, as compensation. The shares were valued at the quoted market price on the grant date. The Company recorded compensation expense of $0.2 million.
2012 Equity Transactions
On March 1, 2012, Longmen Joint Venture sold its 22.76% equity interest of Tongxing to two individuals, who are the representatives from Long Steel Group. As of March 1, 2012, Tongxing had a carrying value of net assets of $40.5 million which were included in the consolidated net assets of the Company and a noncontrolling interest in Tongxing of $32.5 million. The Company retained the land use right associated with the Tongxing property adjacent to the Longmen Joint Venture facility, which had a carrying value of $3.6 million immediately prior to the transaction and relinquished its controlling interest in the remaining net assets (primarily operating assets). In connection with the transaction, the Company also settled with a payable in cash of $0.3 million and transferred the dividend receivable of $0.9 million from Tongxing to the two individuals. These arrangements meet the criteria of ASC 810-10-40-6b and 6d, deconsolidation of a Subsidiary with multiple arrangements treated as a single transaction. As the land use rights held in Tongxing have been included as part of the Company’s consolidated assets, this transaction was considered as a change in the Company’s ownership interest in the land use right similar to a change in a parent company’s ownership interest in a subsidiary in accordance with ASC 810-10-45-23 and therefore the carrying value of the land use right was not stepped up to fair value. The net impact of these transactions resulted in a reduction of $3.1 million paid-in capital.
126 |
GENERAL STEEL HOLDINGS, INC.
CONDENSED NOTES TO SCHEDULE 1
The following is a reconciliation of the Company’s noncontrolling interest for the year ended December 31, 2012:
(in thousands) | Noncontrolling interest | |||||||||||
Total | Tongxing | Others | ||||||||||
Balance at December 31, 2011 | $ | (56,189 | ) | $ | 32,934 | $ | (89,123 | ) | ||||
Net income (loss) attributable to noncontrolling interest | (79,241 | ) | 341 | (79,582 | ) | |||||||
Addition to special reserve | 605 | - | 605 | |||||||||
Usage of special reserve | (566 | ) | - | (566 | ) | |||||||
Deconsolidation of Tongxing | (35,943 | ) | (33,654 | ) | (2,289 | ) | ||||||
Foreign currency translation adjustments | (729 | ) | 379 | (1,108 | ) | |||||||
Balance at December 31, 2012 | $ | (172,063 | ) | $ | - | $ | (172,063 | ) |
On March 26, 2012, the Company granted senior management and directors 165,400 shares of common stock at $0.75 per share, as compensation under the Company’s 2008 Equity Incentive Plan. The shares were valued at the quoted market price on the grant date. The Company recorded compensation expense of $0.1 million.
On March 27, 2012, we launched another share repurchase program to repurchase up to an aggregate of 2,000,000 shares of our common stock. Together with the previous share repurchase program launched in December 2010 and this newly announced Share Repurchase Program, it brought the total authorized shares of our common stock available for purchase to 4,000,000. During the year ended December 31, 2012, the Company has repurchased 1,381,328 shares with $1.4 million pursuant to the Share Repurchase Program. The Company had a total of 2,472,306 shares of treasury stock as of December 31, 2012.
On June 28, 2012, the Company granted senior management and directors 165,400 shares of common stock at $0.80 per share, as compensation under the Company’s 2008 Equity Incentive Plan. The shares were valued at the quoted market price on the grant date. The Company recorded compensation expense of $0.1 million.
On September 27, 2012, the Company granted senior management and directors 167,900 shares of common stock at $1.29 per share, as compensation under the Company’s 2008 Equity Incentive Plan. The shares were valued at the quoted market price on the grant date. The Company recorded compensation expense of $0.2 million.
On December 28, 2012, the Company granted senior management and directors 169,150 shares of common stock at $1.00 per share, as compensation under the Company’s 2008 Equity Incentive Plan. The shares were valued at the quoted market price on the grant date. The Company recorded compensation expense of $0.2 million.
2013 Equity Transactions
On March 28, 2013, the Company granted senior management and directors 174,900 shares of common stock at $1.01 per share, as compensation under the Company’s 2008 Equity Incentive Plan. The shares were valued at the quoted market price on the grant date.
On June 27, 2013, the Company granted senior management and directors 163,150 shares of common stock at $1.02 per share, as compensation under the Company’s 2008 Equity Incentive Plan. The shares were valued at the quoted market price on the grant date.
On August 16, 2013, an additional $45.1 million (or RMB 280 million) was contributed to Tianwu Joint Venture with $27.0 million (or RMB 168 million) contributed by the Company and $18.0 million (or RMB 112 million) contributed by Tianjin Material and Equipment Group Corporation (“TME Group”). The Company’s controlling interest of Tianwu Joint Venture remains at 60% after the capital contribution.
On September 28, 2013, the Company granted senior management and directors 163,150 shares of common stock at $0.88 per share as compensation under the Company’s 2008 Equity Incentive Plan. The shares were valued at the quoted market price on the grant date.
On October 11, 2013, the Company granted 300,000 shares of common stock at $0.85 per share as service fee for corporate advisory services under a one year service agreement dated September 25, 2013. The shares were valued at the quoted market price on the grant date.
On December 30, 2013, the Company granted senior management and directors 163,650 shares of common stock at $0.91 per share as compensation under the Company’s 2008 Equity Incentive Plan. The shares were valued at the quoted market price on the grant date.
127 |
GENERAL STEEL HOLDINGS, INC.
CONDENSED NOTES TO SCHEDULE 1
Prior to November 19, 2013, the Company held a combined 60.0% equity interest in 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 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 at disposal date and recognized a gain in accordance with ASC 810-10-40-5. At the same time, Tianwu’s cumulative translation adjustment as of the disposal date was released to net income in accordance with ASC 830-30-40-1A. The total gain from the deconsolidation of Tianwu amounted to $1.0 million.
The following is a reconciliation of the Company’s noncontrolling interest for the year ended December 31, 2013:
(in thousands) | Noncontrolling interest | |||||||||||
Total | Tianwu | Others | ||||||||||
Balance at December 31, 2012 | $ | (172,063 | ) | $ | 1,339 | $ | (173,402 | ) | ||||
Net income (loss) attributable to noncontrolling interest | (9,609 | ) | 2 | (9,611 | ) | |||||||
Addition to special reserve | 553 | - | 553 | |||||||||
Usage of special reserve | (393 | ) | - | (393 | ) | |||||||
Addition to Tianwu paid-in capital | 18,028 | 18,028 | - | |||||||||
Deconsolidation of a subsidiary | (19,929 | ) | (19,929 | ) | - | |||||||
Foreign currency translation adjustments | (5,498 | ) | 560 | (6,058 | ) | |||||||
Balance at December 31, 2013 | $ | (188,911 | ) | $ | - | $ | (188,911 | ) |
128 |
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
a) | Evaluation Disclosure Controls and Procedures |
Our Company, with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the United States Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of December 31, 2013, 2012 and 2011. Our Company’s disclosure controls and procedures are designed: (i) to ensure that information required to be disclosed by us in the reports that we file or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and (ii) to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on their original evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our Company’s disclosure controls and procedures were effective as of December 31, 2013.
As a result of comments received from the Staff of the Commission following the Staff’s review of certain of our prior quarterly and annual reports, and based on subsequent communications between the Staff of the Commission and us, we concluded that the classification, display and disclosure of our profit sharing liability (which is accounted for at fair value as a derivative instrument liability) had been incomplete and inconsistent. As a result, we have restated our financial statements and related disclosures for each of the reporting periods from the period ended June 30, 2011 to the period ended December 31, 2013. The restatements are set out in this Amendment No. 1. Although the restatements did not result in any restatement of the reported balance sheets nor adjustment of reported net income for any period presented, because of the restatement, management concluded that the restatements resulted from control deficiencies that represent a material weakness in our disclosure controls and procedures.
As a result of such material weakness, our Chief Executive Officer and Chief Financial Officer have re-evaluated our disclosure controls and procedures, and on July 25, 2014 concluded that our Company’s disclosure controls and procedures were not effective as of December 31, 2013. Our disclosure controls and procedures were not effective as of December 31, 2012 and 2011 based on the same reevaluation.
Despite the existence of the material weakness in our disclosure controls and procedures, we believe that the consolidated financial statements included in this Amendment No. 1 present, in all material aspects, our financial position, results of operations and comprehensive income (loss) and cash flows for the periods presented in conformity with U.S. GAAP.
b) | Management’s Annual Report on Internal Control over Financial Reporting |
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. Our internal control over financial reporting includes those policies and procedures that:
· | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; |
· | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and members of our board of directors; and |
· | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements. |
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process, and it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
129 |
In connection with this Amendment No. 1, our management assessed the effectiveness of its internal control over financial reporting as of December 31, 2013. In making this assessment, management used the 1992 framework set forth in the report entitled Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO. The COSO framework summarizes each of the components of a company’s internal control system, including: (i) the control environment, (ii) risk assessment, (iii) control activities, (iv) information and communication, and (v) monitoring. Based on such evaluation, management revised its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2013, originally included in Management’s Report on Internal Control Over Financial Reporting in the Company’s Original 10-K. In the original 10-K, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2013. Subsequent to the original 10-K, we have restated our financial statements and related disclosures for each of the reporting periods from the period ended June 30, 2011 to the period ended December 31, 2013. The restatements are set out in this Amendment No. 1. Because of the restatement, management concluded that the restatements resulted from control deficiencies that represent a material weakness in internal control over financial reporting. As a result, management has revised its assessment of the effectiveness of our internal control over financial reporting due to a material weakness in our reporting of disclosure control and procedures on complex accounting transactions.
Based on this assessment and the determination that a material weakness exists with our reporting of disclosure control and procedures on complex accounting transactions, on July 25, 2014, our management concluded that, as of December 31, 2013, our internal control over financial reporting was not effective based on those criteria due to the material weakness described above. Our internal control over financial reporting was not effective as of December 31, 2012 and 2011 based on the same assessment.
This Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the SEC that permit our Company to provide only management’s report in this Annual Report.
Remediation
Our management has dedicated significant resources to correcting the control deficiencies and to ensuring that we take proper steps to improve our internal control over financial reporting in the area of financial statement disclosures.
We have taken a number of remediation actions that we believe will improve the effectiveness of our internal control over financial reporting including the following:
· | We have engaged an outside professional consulting firm to supplement our efforts to improve our internal control over financial reporting; |
· | We have engaged and will continue to engage accounting experts to review complex accounting transactions and our financial statement disclosures related to such transactions. |
Management believes the foregoing efforts will effectively remediate the material weakness described above.
c) | Changes in Internal Control over Financial Reporting |
During the most recent fiscal quarter, we have engaged accounting experts to assist management in identifying complicated accounting transactions and applying applicable accounting policies. In addition, we have implemented an internal review process over financial reporting to review all recent accounting pronouncements and to verify that any accounting treatment identified in such report has been fully implemented and confirmed by our outside professional consultants. An enhanced training program, including, but not limited to, accounting and auditing updates, and review of consolidated guidance of variable interest entities, was also established to update our employees on current accounting pronouncements. There has not been any other changes in our internal control over financial reporting (as such term is defined in Rules 13a-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.
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Directors and executive officers
The following table sets forth the names and ages of our current directors and executive officers, their principal offices and positions and the date each such person became our director or executive officer. Our executive officers are elected annually by the Board of Directors. Our directors serve one-year terms until they are re-elected or their successors are elected. The executive officers serve by election of the Board of Directors for one year terms or until their death, resignation, removal or renewal by the Board of Directors. The executive officers are all full-time employees of General Steel Holdings, Inc.
130 |
There are no known familial relationships between any of the directors and executive officers. In addition, there was no arrangement or understanding between any executive officer and any other person pursuant to which any person was selected as an executive officer. Our Common Stock is listed on the New York Stock Exchange, or “NYSE.” Under NYSE listing standards, the Board of Directors is required to affirmatively determine that each “independent” director has no material relationship with our Company, either directly or as a partner, stockholder or officer of an organization that has a relationship with the Company. Our Board has determined that the following directors are “independent” as required by NYSE listing standards: Angela He, Zhongkui Cao and James Hu. Additionally, all members of our Audit Committee are “independent” as defined in Rule 10A-3(b)(1) under the Securities Exchange Act and as required by NYSE listing standards. The non-management directors, all of whom currently are independent, met once during the fiscal year ended December 31, 2013 without management present and James Hu served as the lead independent director at such meeting.
Our directors and executive officers are as follows:
Name | Age | Position | Date of appointment | |||
Zuosheng Yu | 49 | Chairman of the Board of Directors and Chief Executive Officer | 10/14/04 | |||
John Chen | 43 | Director/Chief Financial Officer | 03/07/05 | |||
James Hu | 41 | Independent Director | 02/15/10 | |||
Angela He | 44 | Independent Director | 07/23/10 | |||
Zhongkui Cao | 64 | Independent Director | 04/13/07 |
On February 25, 2011, James Hu was chosen to preside at the regularly scheduled executive sessions of the independent directors to comply with Section 303A.03 of the corporate governance rules of the NYSE. Any stockholder or interested party who wishes to communicate with our Board of Directors or any specific director, including the Presiding Director, any non-management director or the non-management directors as a group, may do so by writing to such direct or directors at: General Steel Holdings, Inc., Level 21, Tower B, Jia Ming Center, No. 27 Dong San Huan North Road, Chaoyang District, Beijing 100020, China. This communication will be forwarded to the director or directors to whom addressed. This information regarding contacting the board of directors is also posted on our website atwww.gshi-steel.com .
Biographical information
Mr. Zuosheng Yu ,age 49, Chairman of the Board of Directors . Mr. Yu joined our Company in October 2004 and became Chairman of the Board at that time. He also serves as our Chief Executive Officer. Since February 2001, he has been President and Chairman of the Board of Directors of Beijing Wendlar Investment Management Group, Beijing, China. Mr. Yu graduated in 1985 from Sciences and Engineering Institute, Tianjin, China. In July 1994, he received a Bachelor’s degree from Institute of Business Management for Officers. Mr. Yu received the title of “Senior Economist” from the Committee of Science and Technology of Tianjin City in 1994. In July 1997, he received an MBA degree from the Graduate School of Tianjin Party University. Since April 2003, Mr. Yu has held a position as a member of China’s APEC (Asia Pacific Economic Co-operation) Development Council. Mr. Yu’s strong knowledge of, and experience in, the Chinese steel industry, as well as his extensive institutional knowledge of our Company make him well suited to contribute to our Board of Directors.
Mr. John Chen, age 43, Director . Mr. Chen joined us in May 2004 and was elected as a director in March 2005. He also serves as our Chief Financial Officer. From August 1997 to July 2003, he served as a senior accountant at Moore Stephens, Wurth, Frazer and Torbet, LLP in Los Angeles, California. Mr. Chen graduated from Norman Bethune University of Medical Science, Changchun City, Jilin Province, China in September 1992. He received a B.S. degree in accounting from California State Polytechnic University, Pomona, California, U.S. in July 1997. Mr. Chen’s accounting skills and experience make him well suited to contribute to our Board. He currently also serves on the board of directors of China Carbon Graphite Group, Inc. (OTCBB: CHGI), SGOCO Group, Ltd. (NASDAQ: SGOC), and China HGS Real Estate Inc. (NASDAQ: HGSH).
Mr. James Hu ,age 41, Independent Director. Mr. Hu was elected as an independent director in February 2009. Since 2006, Mr. Hu has worked at Standard Chartered Bank (China) Limited. Previously, Mr. Hu was a Senior Auditor with Deloitte Touche Tohmatsu in the United States before moving on to hold management positions at both U.S. and China-based firms. His education includes a Bachelor’s degree in Economics from the University of California at Berkeley and a Masters degree in Business Administration from the Darden Graduate School at the University of Virginia. He is a California licensed certified public accountant. Mr. Hu’s auditing and consulting experience make him well suited to contribute to our Board of Directors.
Ms. Angela He ,age 44, Independent Director. Ms. He was elected as an independent director in July 2010. She currently serves as the Chief Financial Officer of Procell Biotech Asia Corp. in Newport Beach, California and as an SEC reporting and accounting advisor to various publicly traded and private companies in the United States. From 2010 to 2012, she served as the Chief Officer of Aero Technology in Long Beach, California. From 2006 to 2007, she served as a Senior Auditor for PriceWaterhouse Coopers in Los Angeles. From 2003 to 2006, she served as an auditor for Moore Stephens Wurth Frazer and Torbet, LLP (now known as Frazer LLP). Ms. He graduated with a Bachelor of Arts from California State University at Fullerton and is a California Certified Public Accountant. Ms. He’s strong accounting skills and experiences of advising public companies make her well suited to contribute to our Board of Directors.
131 |
Mr. Zhongkui Cao ,age 64, Independent Director. Mr. Cao was elected as a director in April 2007. From January 1994 to December 1998, Mr. Cao was President and Chairman of the Board at Baotou Metallurgy Machinery State-owned Asset Management Co. Mr. Cao graduated from Baotou Institute of Iron and Steel in 1974. Mr. Cao’s understanding and experience relating to the Chinese steel industry make him well suited to contribute to our Board of Directors.
Board Committees and Meetings of the Board of Directors
Our business is managed under the direction of our Board of Directors, which meets during the year to review significant developments affecting us and acts upon matters requiring its approval. Our Board of Directors met one time during the fiscal year ended December 31, 2013. Our Board of Directors acted by written consent six times during the fiscal year ended December 31, 2013.
It is our policy to encourage all directors to attend the Annual Meeting.
Our Board of Directors has three standing committees: the Compensation Committee, the Audit Committee and the Governance and Nominating Committee. A brief description of the composition and functions of each committee follows.
Audit Committee
Our Audit Committee consists of James Hu, Angela He and Zhongkui Cao. Mr. Hu is the Chairman of the Audit Committee. Each member of our Audit Committee is “independent” within the meaning of the NYSE listing standards and the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) and related federal law. The Audit Committee held four meetings during the fiscal year ended December 31, 2013.
The primary responsibilities of the Audit Committee are to review the results of the annual audit and to discuss the financial statements, including the independent auditors’ judgment about the quality of accounting principles, the reasonableness of significant judgments, and the clarity of the disclosures in the financial statements. Additionally, the Audit Committee meets with our independent auditors to review the interim financial statements prior to the filing of our Quarterly Reports on Form 10-Q, recommends independent auditors to our Board of Directors to be retained by us, oversees the independence of the independent auditors, evaluates the independent auditors’ performance, receives and considers the independent auditors’ comments as to controls, adequacy of staff and management performance and procedures in connection with audit and financial controls, including our system to monitor and manage business risks and legal and ethical compliance programs, audit and non-audit services provided to us by our independent auditors, and considers conflicts of interest involving executive officers or Board members. Our Board of Directors has determined that each of Mr. Hu and Ms. He are “audit committee financial experts” as defined by the SEC. Our Board of Directors has adopted a written charter for the Audit Committee which may be accessed and reviewed through our website: http://www.gshi-steel.com. This website address is not intended to function as a hyperlink, and the information contained in our website is not intended to be a part of this filing.
To the best of our knowledge, none of the following has ever occurred to any of our directors and officers.
(1) Any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
(2) Any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
(3) Being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or
(4) Being found by a court of competent jurisdiction (in a civil action), the SEC or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.
Compensation Committee
Our Compensation Committee consists of James Hu, Angela He and Zhongkui Cao. Ms. He is the Chairwoman of the Compensation Committee. Each member of our Compensation Committee is a non-management director and each is (i) independent as defined under the NYSE listing standards and as determined by the Board of Directors, (ii) a “non-employee director” for purposes of Rule 16b-3 of the Securities Exchange Act of 1934, as amended, and (iii) an “outside director” for purposes of Section 162(m) of the Internal Revenue Code. The Compensation Committee met once during the fiscal year ended December 31, 2013.
The Compensation Committee reviews and recommends compensation policies and programs, as well as salary and other compensation levels for individual executives, including our Chief Executive Officer. The Compensation Committee makes these recommendations to our Board of Directors which, in turn, provides final approval on individual compensation matters for our executives. The Compensation Committee has the authority to retain any advisors, counsel and consultants as the members deem necessary in order to carry out these functions. The Compensation Committee also administers the compensation programs for our employees, including executive officers, reviews and approves all awards granted under these programs, and approves the compensation committee report. Our Board of Directors has adopted a written charter for the Compensation Committee which may be accessed and reviewed through our website: http://www.gshi-steel.com. This website address is not intended to function as a hyperlink, and the information contained in our website is not intended to be a part of this filing.
132 |
Governance and Nominating Committee
Our Governance and Nominating Committee consists of James Hu, Angela He and Zhongkui Cao. Mr. Cao serves as the Chairman of the Governance and Nominating Committee. All of the members of the Governance and Nominating Committee are considered “independent” within the meaning of the NYSE listing standards. The Governance and Nominating Committee held one meeting during the fiscal year ended December 31, 2013.
The Governance and Nominating Committee recommends criteria for service as a director, reviews candidates and recommends appropriate governance practices for the Company in light of corporate governance guidelines set forth by the NYSE and other regulatory entities, as applicable. The Governance and Nominating Committee considers director candidates who are suggested by directors, management, stockholders and search firms hired to identify and evaluate qualified candidates. From time to time, the Governance and Nominating Committee may recommend highly qualified candidates who it believes will enhance the strength, independence and effectiveness of the Company’s Board of Directors. Additionally, the Governance and Nominating Committee annually reviews the size of our Board of Directors. The Governance and Nominating Committee does not have a formal policy specifically focusing on the consideration of diversity; however, diversity is one of the many factors that the Governance and Nominating Committee considers when identifying candidates and making its recommendations to the Board.
The Governance and Nominating Committee considers nominees for the Board recommended by stockholders if such recommendations are submitted in writing to our Secretary, John Chen, at Level 21, Tower B, Jia Ming Center, No. 27 Dong San Huan North Road, Chaoyang District, Beijing, China 100020. At this time, no additional specific procedures to propose a candidate for consideration by the Governance and Nominating Committee or minimum criteria for consideration of a proposed candidate for nomination to the Board of Directors have been adopted as the Company believes that the procedures currently in place will continue to serve the needs of the Board and stockholders. Our Board of Directors has adopted a written charter for the Nominating Committee which may be accessed and reviewed through our website: http://www.gshi-steel.com. This website address is not intended to function as a hyperlink, and the information contained in our website is not intended to be a part of this filing.
Risk-Management Oversight
Risk is inherent in any business and our management is responsible for the day-to-day management of risks that we face. Our Board of Directors has responsibility for the oversight of risk management. In its risk oversight role, our Board of Directors has the responsibility to evaluate the risk management process to ensure its adequacy and to seek assurances that it is implemented properly by management.
Our Board of Directors believes that full and open communication between management and our Board of Directors is essential for effective risk management and oversight. Relevant members of senior management, as necessary, attend the Board of Directors’ meetings and, as necessary, Board committee meetings, in order to address any questions or concerns raised by our Board of Directors on risk management-related and other matters. At meetings, our Board of Directors may receive presentations from senior management on business operations, financial results and strategic matters, including an assessment of the sensitivity of the various financial, operational and strategic risks faced by our Company, and discuss strategies, key challenges, risks and opportunities.
Our committees assist our Board of Directors in fulfilling its oversight responsibilities in certain areas of risk. The Audit Committee assists the Board in fulfilling its oversight responsibilities with respect to risk management in the areas of financial reporting, internal controls and compliance with legal and regulatory requirements. The Compensation Committee assists the Board in fulfilling its oversight responsibilities with respect to the management of risks arising from our compensation policies and programs and succession planning for executives. The Governance and Nominating Committee assists our Board of Directors in fulfilling its oversight responsibilities with respect to the management of risks associated with Board organization and structure, code of conduct, conflict of interest policies and corporate governance, and in overseeing the membership and independence of our Board of Directors. While each committee is responsible for evaluating certain risks and overseeing the management of those risks, the entire Board of Directors is regularly informed about those risks and committee activities through committee reports.
Board Leadership Structure
Our Chief Executive Officer, Zuosheng Yu, also serves as the Chairman of our Board of Directors. Our Board of Directors believes that this leadership structure is appropriate because Mr. Yu founded General Steel Holdings, Inc. and has the most comprehensive institutional knowledge of any member of our Board of Directors and is thus best positioned to develop agendas that ensure that the Board’s time and attention are focused on the most critical matters. Mr. Yu’s combined role also provides decisive leadership, ensures clear accountability and enhances our ability to communicate our message and strategy clearly and consistently to our stockholders, employees, and investors. James Hu, our lead independent director, serves as a liaison between the Chairman and our non-management directors, consults with the Chairman and Chief Executive Officer regarding information sent to directors, reviews meeting agendas and schedules and may call meetings of our non-management directors.
133 |
Each of the directors other than Mr. Yu and Mr. Chen are independent and our Board of Directors believes that the independent directors provide effective oversight of management. Moreover, in addition to feedback provided during the course of Board meetings, the independent directors provide the Chairman with regular input regarding agenda items for Board of Directors and committee meetings and coordinate with the Chairman regarding information to be provided to the independent directors in performing their duties. Our Board of Directors believes that this approach appropriately and effectively complements the combined Chairman/Chief Executive Officer structure.
Our Board of Directors periodically evaluates whether the leadership structure of our Board of Directors continues to be optimal for our Company and our stockholders. Although we believe that the combination of the Chairman and Chief Executive Officer roles is appropriate in our current circumstances, our Board of Directors has the flexibility to modify the leadership structure in the future if it determines that to be appropriate.
Communications with the Board of Directors
Stockholders and all interested parties who wish to communicate with our Board of Directors, or specific individual directors, may do so by directing correspondence to our Secretary, John Chen, at Level 21, Tower B, Jia Ming Center, No. 27 Dong San Huan North Road, Chaoyang District, Beijing, China 100020. Such correspondence should prominently display the fact that it is a stockholder-director communication and indicate whether the correspondence should be forwarded to the entire Board of Directors or to particular directors.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors and executive officers, and persons who own more than 10% of a registered class of our securities, to file with the SEC initial reports of ownership and reports of changes in ownership of our common stock and other equity securities. Based solely on a review of copies of such forms received with respect to fiscal year 2012 and the written representations received from certain reporting persons that no other reports were required, we believe that all Section 16(a) filings were timely made by our directors, executive officers and persons who own more than 10% of our common stock and other equity securities.
Code of Ethics and Business Conduct and Corporate Governance Guidelines
Our Code of Ethics and Business Conduct and Corporate Governance Guidelines provides information to guide employees, including our Chief Executive Officer, Chief Financial Officer, and our Directors, so that their business conduct is consistent with our ethical standards and improves the understanding of our ethical standards among customers, suppliers and others outside our Company. Our Code of Ethics and Business Conduct and Corporate Governance Guidelines are available on our website at www.gshi-steel.com. We intend to post any amendments to or waivers from our Code of Ethics and Business Conduct at this location on its website. This website address is not intended to function as a hyperlink, and the information contained in our website is not intended to be a part of this filing.
Our Code of Ethics and Business Conduct and Corporate Governance Guidelines may also be obtained free of charge by contacting Investor Relations at jenny.wang@gshi-steel.com or by phone: +86-10-5775-7691.
ITEM 11. EXECUTIVE COMPENSATION
Employment Agreements
We have not entered into employment agreements with any of our named executive officers.
Severance Arrangements
We do not have any severance agreements or other arrangements with any of our named executive officers.
Change of Control Arrangements
We do not have any change of control agreements or other arrangements with any of our named executive officers.
No Policies Regarding Equity Ownership and Hedging
We do not have any equity or other security ownership requirements or guidelines that specify applicable amounts or forms of ownership. We do not have any policies regarding hedging the economic risk of equity ownership.
Executive Compensation
The table below sets forth all compensation awarded to, earned by or paid to our named executive officers for the fiscal years indicated. No other executive officers received more than $100,000 in total compensation.
134 |
Summary Compensation Table
Name and Principal Position | Year | Salary ($) (1) | Bonus ($) (1) | Stock Awards ($)(2) | Total ($) (1) | |||||||||||||||
Zuosheng Yu, | 2013 | 169,007 | — | 171,900 | 340,907 | |||||||||||||||
Chief Executive Officer | 2012 | 165,973 | — | 172,800 | 338,773 | |||||||||||||||
2011 | 161,632 | — | 272,700 | 434,332 | ||||||||||||||||
2010 | 154,769 | — | 464,800 | 619,569 | ||||||||||||||||
John Chen, | 2013 | 67,871 | — | 51,850 | 119,721 | |||||||||||||||
Chief Financial Officer | 2012 | 66,683 | — | 38,400 | 105,083 | |||||||||||||||
2011 | 64,351 | — | 60,600 | 124,951 | ||||||||||||||||
2010 | 50,629 | — | 116,200 | 166,829 | ||||||||||||||||
Xiao Zeng Xu | 2011 | 65,006 | — | 85,340 | 150,346 | |||||||||||||||
General Manager of Longmen Joint Venture | 2010 | 54,442 | — | 101,200 | 155,642 |
(1) | The amounts shown were paid in RMB and were translated into U.S. dollars at the rate of $0.16155 per RMB for 2013, and $0.15865 per RMB for 2012. |
(2) | The stock price assumption used to calculate the grant date fair value of all stock awards granted in the year indicated, as computed in accordance with FASB ASC Topic 718, and as disclosed in Note 22 to the financial statements in this Annual Report. |
Director Compensation
The table below sets forth information regarding compensation earned by directors, other than our Chief Executive Officer and Chief Financial Officer, as compensation for their service to our Company during the year ended December 31, 2013.
Name | Stock Awards ($) (1) | Total ($) (1) | ||||||
James Hu | $ | 14,325 | $ | 14,325 | ||||
Angela He | 14,325 | 14,325 | ||||||
Qinghai Du (2) | 1,910 | 1,910 | ||||||
Zhongkui Cao | 1,910 | 1,910 | ||||||
Wenbing Chris Wang (2) | 14,325 | 14,325 | ||||||
Yong Tao Si (2) | 9,550 | 9,550 |
(1) | The stock price assumption used to calculate the grant date fair value of all stock awards granted on the date indicated, as computed in accordance with FASB ASC Topic 718, and as disclosed in Note 22 to the financial statements in this Annual Report on Form 10-K. |
(2) | These directors no longer serve on our Board of Directors as a result of the Board election held during our annual meeting of the stockholders on December 27, 2013. |
Currently, we do not pay annual fees to our directors. During fiscal year 2013, we granted fully-vested unregistered shares of common stock to our directors on a quarterly basis. We determined the amount of each grant based on level of involvement, responsibility and length of service.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 2013, the members of the Compensation Committee were Angela He, James Hu and Wenbing Chris Wang. Wenbing Chris Wang no longer served on our Compensation Committee and was replaced by Zhongkui Cao as a result of the Board election held during our annual meeting of the stockholders on December 27, 2013. In fiscal 2013, no member of the Compensation Committee was an officer or employee of our Company or any of our subsidiaries.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information as of March 17, 2014, as to shares of common stock and preferred stock beneficially owned by: (i) each person who is known by our Company to own beneficially more than 5% of common stock and preferred stock, (ii) each of our current named executive officers, (iii) each of our current directors, and (iv) all of our current directors and named executive officers as a group. Unless otherwise stated below, the address of each beneficial owner listed on the table is c/o General Steel Holdings, Inc., Level 21, Tower B, Jia Ming Center, No. 27 Dong San Huan North Road, Chaoyang District, Beijing, China 100020.
135 |
Name of Beneficial Owner | Shares Beneficially Owned | Percentage Beneficial Ownership of Class (1) | Percentage of Voting Power | |||||||||||||
Common Stock | ||||||||||||||||
Directors and Named Executive Officers | Common Stock | Series A Preferred Stock | ||||||||||||||
Zuosheng Yu (2) Chief Executive Officer and Chairman of the Board of Directors | 8,203,900 | 14.7 | % | 10.3 | % | |||||||||||
John Chen Chief Financial Officer and Director | 195,000 | * | * | |||||||||||||
James Hu Independent Director | 55,000 | * | * | |||||||||||||
Angela He Independent Director | 48,750 | * | * | |||||||||||||
Zhongkui Cao Independent Director | 12,500 | * | * | |||||||||||||
Executive Officers and Directors as a group | 8,515,150 | 15.3 | % | 10.8 | % | |||||||||||
5% Owners | ||||||||||||||||
Golden Eight Investments Limited (2) | 14,000,000 | 25.1 | % | 17.9 | % | |||||||||||
Series A Preferred Stock | ||||||||||||||||
Victory New Holdings Limited (3) | 3,092,899 | 100 | % | 30.0 | % |
* Less than 1%
(1) Percentages based on 55,762,382 shares of Common Stock and 3,092,899 shares of Preferred Stock outstanding as of December 31, 2013.
(2) Mr. Yu is the beneficial owner of 8,203,900 shares of common stock held in his name and 14,000,000 shares of common stock held in the name of Golden Eight Investments Limited (“Golden Eight”). Mr. Yu is the sole director of Golden Eight. Golden Eight is wholly owned by The GSI Family Trust U/A/D 01/21/10 (the “Trust”). Mr. Yu has sole power of revocation over the Trust and is the sole member of the Investment Committee of the Trust. As such, Mr. Yu has voting and investment control directly over the securities held by the Trust and indirectly over the securities held by Golden Eight. Mr. Yu also has voting and investment control over 3,092,899 shares of Series A Preferred Stock held in the name of Victory New Holdings Limited, a British Virgin Islands registered company, which, while outstanding, have a voting power equal to 30% of the combined voting power of our common stock and Preferred Stock.
(3) Victory New Holdings Limited, a British Virgin Islands registered company (“Victory New”), is controlled by our Chairman and Chief Executive Officer, Zuosheng Yu. Victory New holds 3,092,899 shares of our Series A Preferred Stock which, while outstanding, have a voting power equal to 30% of the combined voting power of our common stock and preferred stock.
EQUITY INCENTIVE PLAN INFORMATION
The following table provides information as of December 31, 2013, about compensation plans under which shares of our Common Stock may be issued to employees, consultants or non-employee directors upon exercise of options, warrants or rights.
(a) | (b) | (c) | ||||||||||
Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights(1) | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights(1) | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a))(2) | |||||||||
Plans approved by stockholders | - | $ | - | 1,307,766 | ||||||||
Plans not approved by stockholders | - | - | - | |||||||||
Total | $ | 1,307,766 |
136 |
(1) | We grant fully vested, unregistered shares of our common stock to employees under our 2008 Equity Incentive Plan. Our stock grants are not restricted and therefore there are no securities to be issued upon exercise of outstanding options, warrants and rights. |
(2) | Represents the number of securities remaining available for issuance under our 2008 Equity Incentive Plan. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Set for below are our related party transactions.
Related party transactions
a. | Capital lease |
As disclosed in Notes 16 – “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:
December 31, 2013 | December 31, 2012 | December 31, 2011 | December 31, 2010 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
Machinery | $ | 605,839 | $ | 587,334 | $ | 581,413 | $ | - | ||||||||
Less:accumulated depreciation | (76,740 | ) | (46,497 | ) | (18,411 | ) | - | |||||||||
Carrying value of leased assets | $ | 529,099 | $ | 540,837 | $ | 563,002 | $ | - |
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 December 31, 2013 and such assessment did not result in any impairment charges.
For the year ended December 31, 2013, 2012, 2011 and 2010, General Steel (China) realized rental income $0 million, $1.6 million, $3.1 million and $3.1 million, respectively, which has been included in “other non-operating income (expense), net” in the consolidated statements of operations and comprehensive income (loss).
137 |
c. | The following chart summarized sales to related parties for the years ended December 31, 2013, 2012, 2011 and 2010. |
For the year ended | For the year ended | For the year ended | For the year ended | |||||||||||||||
Name of Related parties | Relationship | December 31, 2013 | December 31, 2012 | December 31, 2011 | December 31, 2010 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | $ | 255,859 | $ | 438,951 | $ | 337,359 | $ | 344,556 | |||||||||
Tianjin Hengying Trading Co., Ltd | Partially owned by CEO* through indirect shareholding | - | 5,953 | 94,984 | 47,268 | |||||||||||||
Tianjin Dazhan Industry Co, Ltd | Partially owned by CEO through indirect shareholding | - | - | 76,130 | 43,778 | |||||||||||||
Sichuan Yutai Trading Co., Ltd | Significant influence by Long Steel Group** | 73 | 147,968 | 187,689 | - | |||||||||||||
Shaanxi Yuchang Trading Co., Ltd | Significant influence by Long Steel Group | 21,570 | 92,724 | 160,422 | - | |||||||||||||
Shaanxi Haiyan Trade Co., Ltd | Significant influence by Long Steel Group | 16,273 | 46,998 | 58,299 | 38,545 | |||||||||||||
Shaanxi Shenganda Trading Co., Ltd | Significant influence by Long Steel Group | 77,899 | 53,866 | 37,432 | - | |||||||||||||
Tianjin General Qiugang Pipe Co., Ltd | Partially owned by CEO through indirect shareholding | - | - | 20,014 | - | |||||||||||||
Shaanxi Steel | Majority shareholder of Long Steel Group | 3,221 | 3,332 | 19,735 | 1,152 | |||||||||||||
Beijing Daishang Trading Co., Ltd. | Noncontrolling shareholder of Longmen Joint Venture’s subsidiary | - | - | - | 5,503 | |||||||||||||
Tianjin Daqiuzhuang Steel Plates Co., Ltd. | Partially owned by CEO through indirect shareholding | - | - | - | 8,385 | |||||||||||||
Shaanxi Coal and Chemical Industry Group Co., Ltd. | Shareholder of Shaanxi Steel | 27,911 | 24,515 | - | - | |||||||||||||
Shaanxi Long Steel Group Baoji Steel Rolling Co., Ltd | Subsidiary of Long Steel Group | 7,325 | 35,542 | 69,872 | - | |||||||||||||
Shaanxi Junlong Rolling Co., Ltd | Investee of Long Steel Group | 37,068 | 47,110 | 48,991 | - | |||||||||||||
Others | Entities either owned or have significant influence by our affiliates or management | - | 243 | 842 | 183 | |||||||||||||
Total | $ | 447,199 | $ | 897,202 | $ | 1,111,769 | $ | 489,370 |
*The CEO is referred to herein as the chief executive officer of General Steel Holdings, Inc.
**Long Steel Group has the ability to significantly influence the operating and financial decisions of the entity through equity ownership either directly or through key employees, commercial contractual terms, or the ability to assign management personnel.
138 |
d. | The following charts summarize purchases from related parties for the years ended December 31, 2013, 2012, 2011 and 2010. |
For the year ended | For the year ended | For the year ended | For the year ended | |||||||||||||||
Name of related parties | Relationship | December 31, 2013 | December 31, 2012 | December 31, 2011 | December 31, 2010 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | $ | 522,295 | $ | 483,058 | $ | 913,850 | $ | 553,752 | |||||||||
Hancheng Jinma Coking Co., Ltd | Investee of Longmen Joint Venture’s subsidiary (unconsolidated) | - | - | 4,772 | 8,489 | |||||||||||||
Tianjin Hengying Trading Co., Ltd. | Partially owned by CEO through indirect shareholding | - | 43,160 | - | - | |||||||||||||
Tianjin General Qiugang Pipe Co., Ltd. | Partially owned by CEO through indirect shareholding | - | 6,933 | - | - | |||||||||||||
Hancheng Haiyan Coking Co., Ltd | Noncontrolling shareholder of Long Steel Group | 180,401 | 255,800 | 391,065 | 234,479 | |||||||||||||
Xi’an Pinghe Metallurgical Raw Material Co., Ltd | Noncontrolling shareholder of Long Steel Group | 19,943 | 88,094 | 37,890 | - | |||||||||||||
Shaanxi Long Steel Group Baoji Steel Rolling Co., Ltd | Subsidiary of Long Steel Group | - | 6,379 | 19,076 | - | |||||||||||||
Shaanxi Junlong Rolling Co., Ltd | Investee of Long Steel Group | 213 | 7,334 | 19,110 | - | |||||||||||||
Shaanxi Huafu New Energy Co., Ltd | Significant influence by the Long Steel Group | 32,824 | 32,693 | 34,810 | - | |||||||||||||
Beijing Daishang Trading Co., Ltd. | Noncontrolling shareholder of Longmen Joint Venture’s subsidiary | 6,933 | 5,400 | - | - | |||||||||||||
Shaanxi Coal and Chemical Industry Group Co., Ltd. | Shareholder of Shaanxi Steel | 26,047 | - | - | - | |||||||||||||
Tianwu General Steel Material Trading Co., Ltd. | Investee of General Steel (China) | 76,735 | - | - | - | |||||||||||||
Shaanxi Shenganda Trading Co., Ltd. | Significant influence by the Long Steel Group | 20,213 | - | - | - | |||||||||||||
Beijing Daishang Trading Co., Ltd. | Noncontrolling shareholder of Longmen Joint Venture’s subsidiary | - | - | 6,509 | 1,984 | |||||||||||||
Others | Entities either owned or have significant influence by our affiliates or management | 797 | 154 | 1,471 | 1,019 | |||||||||||||
Total | $ | 886,401 | $ | 929,005 | $ | 1,428,553 | $ | 799,723 |
Related party balances
a. | Loans receivable – related parties: |
Name of related parties | Relationship | December 31, 2013 | December 31, 2012 | December 31, 2011 | December 31, 2010 | |||||||||||||
(in thousands) | (in thousands) | (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 | $ | - | $ | - |
See Note 4 – loans receivable – related parties for loan details.
b. | Accounts receivables – related parties: |
Name of related parties | Relationship | December 31, 2013 | December 31, 2012 | December 31, 2011 | December 31, 2010 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | $ | 548 | $ | 10,409 | $ | 9,187 | $ | 3,023 | |||||||||
Shaanxi Long Steel Group Baoji Steel Rolling Co., Ltd | Subsidiary of Long Steel Group | - | 2,017 | 3,141 | - | |||||||||||||
Tianjin Daqiuzhuang Steel Plates | Partially owned by CEO through indirect shareholding | 19 | 18 | 755 | - | |||||||||||||
Tianjin Hengying Trading Co., Ltd. | Partially owned by CEO through indirect shareholding | - | - | - | 1,054 | |||||||||||||
Shaanxi Steel | Majority shareholder of Long Steel Group | 1,741 | 2,435 | 7,207 | 83 | |||||||||||||
Others | 634 | 87 | 303 | - | ||||||||||||||
Total | $ | 2,942 | $ | 14,966 | $ | 20,593 | $ | 4,160 |
139 |
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 | December 31, 2013 | December 31, 2012 | December 31, 2011 | December 31, 2010 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | $ | 406 | $ | 301 | $ | 15,244 | $ | 993 | |||||||||
Shaanxi Steel | Majority shareholder of Long Steel Group | 46,439 | 65,981 | 66,869 | - | |||||||||||||
Maoming Shengze Trading Co., Ltd | Partially owned by CEO through indirect shareholding | - | - | 937 | 8,095 | |||||||||||||
Tianjin Daqiuzhuang Steel Plates Co., Ltd. | Partially owned by CEO through indirect shareholding | - | - | - | 1,078 | |||||||||||||
Shaanxi Huafu New Energy Co., Ltd | Significant influence by Long Steel Group | - | - | 2,441 | - | |||||||||||||
Teamlink Investment Co., Ltd | Owned by CEO through indirect shareholding | - | - | 2,000 | - | |||||||||||||
Tianjin General Quigang Pipe Co., Ltd | Partially owned by CEO through indirect shareholding | 1,247 | 1,195 | - | - | |||||||||||||
Tianjin Dazhan Industry Co, Ltd | Partially owned by CEO through indirect shareholding | 491 | 476 | - | 455 | |||||||||||||
Beijing Shenhua Xinyuan Metal Materials Co., Ltd. | Partially owned by CEO through indirect shareholding | 4,901 | - | - | - | |||||||||||||
Others | Entities either owned or have significant influence by our affiliates or management | 622 | 429 | 188 | 317 | |||||||||||||
Total | $ | 54,106 | $ | 68,382 | $ | 87,679 | $ | 10,938 |
140 |
d. | Advances on inventory purchase – related parties: |
Name of related parties | Relationship | December 31, 2013 | December 31, 2012 | December 31, 2011 | December 31, 2010 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | $ | 9,123 | $ | 1,367 | $ | 1,028 | $ | - | |||||||||
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 | 10,343 | - | - | - | |||||||||||||
Tianjin Hengying Trading Co., Ltd | Partially owned by CEO through indirect shareholding | 16,158 | - | - | - | |||||||||||||
Tianjin General Qiugang Pipe Co., Ltd | Partially owned by CEO through indirect shareholding | 555 | 41,316 | 15,678 | 6,187 | |||||||||||||
Maoming Shengze Trading Co., Ltd | Partially owned by CEO through indirect shareholding | 21,197 | 3,733 | 3,538 | - | |||||||||||||
Others | Entities either owned or have significant influence by our affiliates or management | 20 | - | - | - | |||||||||||||
Total | $ | 83,003 | $ | 46,416 | $ | 20,244 | $ | 6,187 |
e. | Accounts payable - related parties: |
Name of related parties | Relationship | December 31, 2013 | December 31, 2012 | December 31, 2011 | December 31, 2010 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||||
Hancheng Haiyan Coking Co., Ltd | Noncontrolling shareholder of Longmen Joint Venture | $ | 58,163 | $ | 58,661 | $ | 46,487 | $ | 25,708 | |||||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | 134,758 | 91,511 | 11,231 | 28,329 | |||||||||||||
Shaanxi Coal and Chemical Industry Group Co., Ltd. | Shareholder of Shaanxi Steel | 29,990 | 5,652 | - | - | |||||||||||||
Tianjin Dazhan Industry Co., Ltd | Partially owned by CEO through indirect shareholding | 958 | 3 | 25,511 | 2,764 | |||||||||||||
Xi’an Pinghe Metallurgical Raw Material Co., Ltd | Noncontrolling shareholder of Long Steel Group | 8,714 | 5,278 | 12,800 | - | |||||||||||||
Tianjin Hengying Trading Co., Ltd | Partially owned by CEO through indirect shareholding | 1 | 13,919 | 14,856 | 17,264 | |||||||||||||
Henan Xinmi Kanghua Fire Refractory Co., Ltd | Noncontrolling shareholder of Longmen Joint Venture’s subsidiary | 716 | 1,146 | 1,185 | 880 | |||||||||||||
Hancheng Jinma Coking Co., Ltd | Investee of Longmen Joint Venture’s subsidiary (unconsolidated) | - | - | - | 1,579 | |||||||||||||
Beijing Daishang Trading Co., Ltd | Noncontrolling shareholder of Longmen Joint Venture’s subsidiary | 1,004 | 875 | 1,600 | 1,101 | |||||||||||||
Maoming Shengze Trading Co., Ltd | Partially owned by CEO through indirect shareholding | - | - | - | 1,954 | |||||||||||||
Tianjin General Qiugang Pipe Co., Ltd | Partially owned by CEO through indirect shareholding | - | 52 | 8,034 | - | |||||||||||||
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 | 629 | 335 | 124 | 115 | |||||||||||||
Total | $ | 235,692 | $ | 177,432 | $ | 121,828 | $ | 79,694 |
141 |
f. | Short-term loans - related parties: |
Name of related parties | Relationship | December 31, 2013 | December 31, 2012 | December 31, 2011 | December 31, 2010 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||||
Shaanxi Steel | Majority shareholder of Long Steel Group | $ | 49,110 | $ | 35,839 | $ | - | $ | 14,548 | |||||||||
Shaanxi Coal and Chemical Industry Group Co., Ltd | Shareholder of Shaanxi Steel | 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 | 8,178 | 19,549 | 15,710 | - | |||||||||||||
Tianjin Dazhan Industry Co., Ltd | Partially owned by CEO through indirect shareholding | 6,548 | 21,397 | - | - | |||||||||||||
Beijing Shenhua Xinyuan Metal Materials Co., Ltd | Partially owned by CEO through indirect shareholding | - | 1,359 | - | - | |||||||||||||
Yangpu Capital Automobile | Partially owned by CEO through indirect shareholding | 1,458 | 1,413 | - | - | |||||||||||||
Total | $ | 126,693 | $ | 79,557 | $ | 15,710 | $ | 14,548 |
See Note 10 – Debt for the loan details.
g. | Current maturities of long-term loans – related parties |
Name of related party | Relationship | December 31, 2013 | December 31, 2012 | December 31, 2011 | December 31, 2010 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||||
Shaanxi Steel | Majority shareholder of Long Steel Group | $ | 53,013 | $ | 54,885 | $ | - | $ | - | |||||||||
Total | $ | 53,013 | $ | 54,885 | $ | - | $ | - |
142 |
h. | Other payables – related parties: |
Other payables – related parties are those nontrade payables arising from transactions between the Company and its related parties, such as advances or payments from these related parties on behalf of the Group.
Name of related parties | Relationship | December 31, 2013 | December 31, 2012 | December 31, 2011 | December 31, 2010 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||||
Tianjin Hengying Trading Co, Ltd | Partially owned by CEO through indirect shareholding | $ | 380 | $ | 2,770 | $ | - | $ | 10,168 | |||||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | 43,636 | 60,180 | 20,001 | - | |||||||||||||
Shaanxi Steel | Majority shareholder of Long Steel Group | 44,363 | - | - | - | |||||||||||||
Wendlar Investment & Management Group Co., Ltd | Common control under CEO | 895 | 836 | 241 | - | |||||||||||||
Yangpu Capital Automobile | Partially owned by CEO through indirect shareholding | 291 | 141 | 1,398 | 1,350 | |||||||||||||
Tianjin Daqiuzhuang Steel Plates Co., Ltd. | Partially owned by CEO through indirect shareholding | - | - | 5,771 | - | |||||||||||||
Tianjin General Qiugang Pipe Co., Ltd | Partially owned by CEO through indirect shareholding | - | - | - | 4,547 | |||||||||||||
Tianjin Hengying Trading Co., Ltd | Partially owned by CEO through indirect shareholding | - | - | 1,040 | - | |||||||||||||
Xi’an Pinghe Metallurgical Raw Material Co., Ltd | Noncontrolling shareholder of Long Steel Group | - | 4,761 | - | - | |||||||||||||
Wenchun Han | Director of General Steel (China) | - | - | - | 2,124 | |||||||||||||
Tianjin Dazhan Industry Co., Ltd | Partially owned by CEO through indirect shareholding | 473 | 3,695 | - | - | |||||||||||||
Maoming Shengze Trading Co., Ltd | Partially owned by CEO through indirect shareholding | 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 | 921 | 642 | 422 | 25 | |||||||||||||
Total | $ | 94,079 | $ | 73,025 | $ | 28,873 | $ | 18,214 |
i. | Customer deposits – related parties: |
Name of related parties | Relationship | December 31, 2013 | December 31, 2012 | December 31, 2011 | December 31, 2010 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||||
Hancheng Haiyan Coking Co., Ltd | Noncontrolling shareholder of Long Steel Group | $ | - | $ | - | $ | - | $ | 5,081 | |||||||||
Shaanxi Yuchang Trading Co., Ltd | Significant influence by Long Steel Group | 10 | 4,869 | 24,256 | - | |||||||||||||
Sichuan Yutai Trading Co., Ltd | Significant influence by Long Steel Group | - | 2,163 | 5,972 | - | |||||||||||||
Tianjin Hengying Trading Co, Ltd | Partially owned by CEO through indirect shareholding | - | 90 | 1,506 | - | |||||||||||||
Tianjin General Qiugang Pipe Co., Ltd | Partially owned by CEO through indirect shareholding | - | - | 9,102 | - | |||||||||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | 15,038 | 8,864 | 4,755 | 48,161 | |||||||||||||
Beijing Shenhua Xinyuan Metal Materials Co., Ltd | Partially owned by CEO through indirect shareholding | - | - | 1,345 | 1,299 | |||||||||||||
Shaanxi Haiyan Trade Co., Ltd | Significant influence by Long Steel Group | - | - | 6,822 | - | |||||||||||||
Shaanxi Junlong Rolling Co., Ltd | Investee of Long Steel Group | 2,748 | 5,615 | 1,540 | - | |||||||||||||
Tianjin Dazhan Industry Co., Ltd | Partially owned by CEO through indirect shareholding | - | - | 11,178 | - | |||||||||||||
Shaanxi Shenganda Trading Co., Ltd | Significant influence by Long Steel Group | 275 | 353 | 1,750 | ||||||||||||||
Tianwu General Steel Material Trading Co., Ltd. | Investee of General Steel (China) | 46,521 | - | - | - | |||||||||||||
Others | Entities either owned or have significant influence by our affiliates or management | 289 | 44 | 51 | 381 | |||||||||||||
Total | $ | 64,881 | $ | 21,998 | $ | 68,277 | $ | 54,922 |
143 |
j. | Deposits due to sales representatives – related parties |
Name of related parties | Relationship | December 31, 2013 | December 31, 2012 | December 31, 2011 | December 31, 2010 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||||
Hancheng Haiyan Coking Co., Ltd | Noncontrolling shareholder of Long Steel Group | $ | - | $ | 619 | $ | 471 | $ | 455 | |||||||||
Shaanxi Junlong Rolling Co., Ltd | Investee of Long Steel Group | - | 619 | 472 | - | |||||||||||||
Gansu Yulong Trading Co., Ltd. | Significant influence by Long Steel Group | 1,408 | - | - | - | |||||||||||||
Shaanxi Yuchang Trading Co., Ltd | Significant influence by Long Steel Group | 589 | - | - | - | |||||||||||||
Total | $ | 1,997 | $ | 1,238 | $ | 943 | $ | 455 |
k. | Long-term loans – related party: |
Name of related party | Relationship | December 31, 2013 | December 31, 2012 | December 31, 2011 | December 31, 2010 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||||
Shaanxi Steel | Majority shareholder of Long Steel Group | $ | 19,644 | $ | 38,088 | $ | 92,035 | $ | 91,020 | |||||||||
Total | $ | 19,644 | $ | 38,088 | $ | 92,035 | $ | 91,020 |
The Company also provided guarantee on related parties’ bank loans amounting to $205.8 million, $118.0 million, $56.6 million and $3.0 million as of December 31, 2013, 2012, 2011 and 2010, respectively.
l. | Long-term other payable – related party: |
Long-term other payable – related party is a nontrade payable arising from a transaction between the Company and its related party, Shaanxi Steel, in which the Company received an advance from Shaanxi Steel to make payment to a third party for a construction project.
Name of related party | Relationship | December 31, 2013 | December 31, 2012 | December 31, 2011 | December 31, 2010 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||||
Shaanxi Steel | Majority shareholder of Long Steel Group | $ | - | $ | 43,008 | $ | - | $ | - | |||||||||
Total | $ | - | $ | 43,008 | $ | - | $ | - |
144 |
m. | Deferred lease income |
December 31, 2013 | December 31, 2012 | December 31, 2011 | December 31, 2010 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
Beginning balance | $ | 77,199 | $ | 78,524 | $ | 57,591 | $ | 16,487 | ||||||||
Add: Reimbursement for dismantled assets | - | - | - | 568 | ||||||||||||
Add: Reimbursement for loss of efficiency | - | - | - | 20,676 | ||||||||||||
Add: Reimbursement for trial production costs | - | - | 14,042 | 13,584 | ||||||||||||
Add: Deferred depreciation cost during free use period | - | - | 6,904 | 6,656 | ||||||||||||
Less: Lease income realized | (2,158 | ) | (2,119 | ) | (2,008 | ) | (943 | ) | ||||||||
Exchange rate effect | 2,403 | 794 | 1995 | 563 | ||||||||||||
Ending balance | 77,444 | 77,199 | 78,524 | 57,591 | ||||||||||||
Current portion | (2,187 | ) | (2,120 | ) | (2,099 | ) | (1,971 | ) | ||||||||
Noncurrent portion | $ | 75,257 | $ | 75,079 | $ | 76,425 | $ | 55,620 |
For the year ended December 31, 2013, 2012, 2011 and 2010, the Company realized lease income from Shaanxi Steel, a related party, amounted to $2.2 million, $2.1 million, $2.0 million and $0.9 million, respectively.
n. | Equity |
On November 19, 2013, the Company sold its 28% equity interest of Tianwu held by Yangpu Shengtong to Tianjin Dazhan Industry Co., Ltd., a related party through indirect common ownership by the CEO, for $13.6 million (RMB 84.3 million) while retaining the 32% interest held by General Steel (China). As a result of this transaction, the Company met the criteria under ASC 810-10-40-4 to deconsolidate Tianwu as of the ownership disposal date and recognize a gain, which amounted to $1.0 million. After the deconsolidation of Tianwu, General Steel (China)’s 32% interest in Tianwu was accounted for as an equity method investment, which amounted to $15.8 million as of December 31, 2013.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
Fees for professional services provided by our independent registered public accounting firms in each of the last two fiscal years, in each of the following categories are as follows:
2013 | 2012 | 2011 | 2010 | |||||||||||||
Audit fees | $ | 870,000 | $ | 900,000 | $ | 3,037,675 | $ | 740,000 | ||||||||
Audit-related fees | $ | - | $ | - | $ | - | $ | - | ||||||||
Tax fees | $ | 29,000 | $ | 29,000 | $ | 29,000 | $ | 27,500 | ||||||||
All other fees | $ | - | $ | - | $ | - | $ | - |
Audit fees were for the audit of our annual financial statements and the review of our financial statements included in our quarterly reports on Form 10-Q and services that are normally provided by our independent registered public accounting firm in connection with the statutory and regulatory filings. Tax fees involved the preparation of our consolidated tax returns. Please note that the audit fees include services provided by both of our current and former independent registered public accounting firms. Our current auditor, Friedman LLP, fees are $870,000, $900,000, and $770,000 in fiscal year 2013, 2012, and 2011. We had terminated our former auditor, PricewaterhouseCoopers Zhong Tian CPAs Limited Company, on December 19, 2012, and their fees were $2,187,675 in fiscal year 2011. Our former auditor, Frazer Frost LLP (“Frazer Frost”), fees were $109,000, as Frazer Frost still provided services to us in through the transition of our auditors in fiscal year 2011 and fees were $767,500 in fiscal year 2010.
145 |
Audit Committee’s Pre-Approval Policies and Procedures
The Audit Committee’s policy is to pre-approve all audit and non-audit services provided by our independent registered public accounting firm. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. The Audit Committee has delegated pre-approval authority to the Audit Committee Chairman, or any Audit Committee member in his absence, when services are required on an expedited basis, with such pre-approval disclosed to the full Audit Committee at its next scheduled meeting. None of the fees paid to the independent auditors under the categories “Audit-Related fees” and “All other fees” described above were approved by the Audit Committee prior to services being rendered pursuant to the de minimis exception established by the SEC.
All of the Audit fees and Tax fees provided by our independent registered public accounting firm in fiscal 2013 and related fees were approved in advance by our Audit Committee.
Audit Committee Report
The Audit Committee oversees our financial reporting process on behalf of the Board of Directors. Management has the primary responsibility for the financial statements and the reporting process, including the system of internal controls. In fulfilling its oversight responsibilities, the Audit Committee reviewed and discussed the audited financial statements for this Annual Report on Form 10-K with management, including a discussion of the quality, not just the acceptability, of the accounting principles; the reasonableness of significant judgments; and the clarity of disclosures in the financial statements.
The Audit Committee discussed with Friedman LLP, our independent registered public accounting firm (independent auditors) for the fiscal year ended December 31, 2013, who are responsible for expressing an opinion on the conformity of those audited financial statements with U.S. generally accepted accounting principles, their judgments as to the quality, not just the acceptability, of our accounting principles and such other matters as are required to be discussed with the independent registered public accounting firm under generally accepted auditing standards including Statement on Auditing Standards No. 61, as amended by Statement on Auditing Standards No. 90 (Communication with Audit Committees), other standards of the Public Company Accounting Oversight Board (United States), rules of the SEC and other applicable regulations. In addition, the Audit Committee has discussed with the independent registered public accounting firm the auditors’ independence from management and our Company, including the matters in the written disclosures required by the applicable requirements of the Public Company Accounting Oversight Board regarding the independent registered public accounting firm’s communications with the Audit Committee concerning independence, which the Audit Committee received from the independent registered public accounting firm, and considered the compatibility of non-audit services with the independent registered public accounting firm’s independence.
The Audit Committee also reviewed management’s report on its assessment of the effectiveness of our internal control over financial reporting.
The Audit Committee discussed with our independent registered public accounting firm and the persons responsible for the internal audit function the overall scope and plans for their respective audits. The Audit Committee meets with the independent registered public accounting firm and the persons responsible for the internal audit function, with and without management present, to discuss the results of their examinations, their evaluations of the Company’s internal control, including internal control over financial reporting, and the overall quality of our financial reporting. During 2013, the Audit Committee held four meetings, including quarterly closing conferences with the independent registered public accounting firm and management during which financial results and related issues were reviewed and discussed prior to the release of quarterly results to the public.
The Audit Committee is governed by a charter which may be found on our website. The members of the Audit Committee are considered to be “independent” because they satisfy the independence requirements of the NYSE listing standards and Rule 10A-3 of the Securities Exchange Act of 1934.
Based on the reviews and discussions referred to above, the Audit Committee recommended to the Board of Directors and the Board of Directors has approved the inclusion of the audited financial statements and management’s assessment of the effectiveness of our internal control over financial reporting in this Annual Report on Form 10-K for filing with the SEC.
Audit Committee: | James Hu, Chairman |
Angela He, Member | |
Zhongkui Cao, Member |
The Audit Committee Report does not constitute soliciting material, and shall not be deemed to be filed or incorporated by reference into any other Company filing under the Securities Act or the Exchange Act, except to the extent that our Company specifically incorporates the Audit Committee Report by reference therein.
We have removed some of the material contracts (10 Exhibits). A 10 Exhibit can be removed, other than what we have removed, if: (1) they are not being performed in whole or in part at or after the filing of this Annual Report; and (2) if they were entered into more than two years before the filing of this Annual Report.
146 |
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) | (1) and (2) –LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES set forth below |
(3) See Item 15(b) below.
(b) | The following financial statements are included herein under Part II, Item 8, Financial Statements and Supplementary Data: |
• Reports of Independent Registered Public Accounting Firms
• Consolidated Balance Sheets —December 31, 2013, 2012, 2011 and 2010
• Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2013, 2012, 2011 and 2010
• Consolidated Statements of Changes in Deficiency for the years ended December 31, 2013, 2012, 2011 and 2010
• Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012, 2011 and 2010
• Notes to Consolidated Financial Statements
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions, are not applicable, or information required is included in the financial statements or notes thereto and, therefore, have been omitted.
(c) –LIST OF EXHIBITS
Exhibit Number | Description | |
3.1 | Articles of Incorporation of General Steel Holdings, Inc. (included as Exhibit 3.1 to the Form SB-2 filed with the Commission on June 6, 2003 and incorporated herein by reference). | |
3.2 | Amendment to the Articles of Incorporation dated February 22, 2005 (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 March 31, 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). | |
10.1 | General Steel Holdings, Inc. 2008 Equity Incentive Plan (included as Appendix A to the Schedule 14A filed June 20, 2008 and incorporated herein by reference). | |
10.2 | Lease Agreement, dated March 31, 2010, by and between General Steel (China) Co., Ltd. and Tianjin Daqiuzhuang Steel Plates Co., Ltd. (included as Exhibit 10.1 to the Form 8-K filed with the Commission on April 6, 2010 and incorporated herein by reference). | |
10.3 | Joint Venture Framework Agreement, dated May 13, 2010, by and between General Steel Holdings, Inc. and Shanxi Meijin Energy Group Co., Ltd. (included as Exhibit 10.1 to the Form 8-K filed with the Commission on May 18, 2010 and incorporated herein by reference). | |
10.4 | Cooperation Agreement (also referred to as the Unified Management Agreement), dated April 29, 2011, by and among General Steel Holdings, Inc., Shaanxi Coal and Chemical Industry Group Co., Ltd., Shaanxi Iron and Steel Group Co., Ltd., and Shaanxi Longmen Iron and Steel Co., Ltd. (included as Exhibit 10.1 to the Form 8-K filed with the Commission on May 5, 2011 and incorporated herein by reference). | |
10.5 | Debt Repayment Agreement, dated June 16, 2011, by and among Maoming Hengda Steel Co. Ltd., Tianjin Qiu Gang Investment Co., Ltd, Guangzhou Hengda Industrial Group Ltd., and Ms. Ding Yumei (included as Exhibit 10.1 to the Form 8-K filed with the Commission on June 20, 2011 and incorporated herein by reference). | |
21 | Subsidiaries of the registrant (filed herewith). | |
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. |
147 |
32.1* | Certification of the CEO and CFO 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. |
148 |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
GENERAL STEEL HOLDINGS, INC | ||
By: | /s/ Zuosheng Yu | |
Name: Zuosheng Yu | ||
Title: Chairman and Chief Executive Officer | ||
(Principal Executive Officer) | ||
Date: August 19, 2014 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE | TITLE | DATE | ||
/s/ Zuosheng Yu | Chairman and Chief Executive Officer and Director | August 19, 2014 | ||
YU, Zuosheng | (Principal Executive Officer) | |||
/s/ John Chen | Chief Financial Officer and Director | August 19, 2014 | ||
CHEN, John | (Principal Accounting and Financial Officer) | |||
/s/ James Hu | Independent Director | August 19, 2014 | ||
HU, James | ||||
/s/ Angela He | Independent Director | August 19, 2014 | ||
HE, Angela | ||||
/s/ Zhong Kui Cao | Independent Director | August 19, 2014 | ||
CAO, Zhong Kui | ||||
149 |
PART V — FINANCIAL INFORMATION – QUARTERLY
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands)
September 30, | June 30, | March 31, | December 31, | |||||||||||||
2013 | 2013 | 2013 | 2012 | |||||||||||||
ASSETS | ||||||||||||||||
CURRENT ASSETS: | ||||||||||||||||
Cash | $ | 62,091 | $ | 67,871 | $ | 65,799 | $ | 46,467 | ||||||||
Restricted cash | 405,781 | 380,670 | 270,167 | 323,420 | ||||||||||||
Notes receivable | 116,900 | 213,644 | 118,527 | 145,502 | ||||||||||||
Restricted notes receivable | 357,250 | 117,774 | 260,531 | 357,900 | ||||||||||||
Loans receivable - related parties | 4,540 | 6,000 | 6,000 | 69,319 | ||||||||||||
Accounts receivable, net | 8,577 | 42,273 | 17,154 | 6,695 | ||||||||||||
Accounts receivable - related parties | 3,252 | 6,212 | 8,231 | 14,966 | ||||||||||||
Other receivables, net | 56,494 | 53,525 | 11,455 | 8,407 | ||||||||||||
Other receivables - related parties | 51,501 | 63,223 | 89,015 | 68,382 | ||||||||||||
Inventories | 177,383 | 160,155 | 247,930 | 212,671 | ||||||||||||
Advances on inventory purchase | 79,855 | 57,909 | 57,341 | 79,715 | ||||||||||||
Advances on inventory purchase - related parties | 29,667 | 2,391 | 5,259 | 46,416 | ||||||||||||
Prepaid expense and other | 1,490 | 1,585 | 1,494 | 450 | ||||||||||||
Prepaid taxes | 16,415 | 21,846 | 23,202 | 24,116 | ||||||||||||
Short-term investment | 2,771 | 2,592 | 2,633 | 2,619 | ||||||||||||
TOTAL CURRENT ASSETS | 1,373,967 | 1,197,670 | 1,184,738 | 1,407,045 | ||||||||||||
PLANT AND EQUIPMENT, net | 1,250,542 | 1,214,558 | 1,172,318 | 1,167,836 | ||||||||||||
OTHER ASSETS: | ||||||||||||||||
Advances on equipment purchase | 21,715 | 16,458 | 14,549 | 6,499 | ||||||||||||
Long-term other receivable | - | - | 43,252 | 43,008 | ||||||||||||
Investment in unconsolidated entities | 1,161 | 1,106 | 958 | 1,166 | ||||||||||||
Long-term deferred expense | 713 | 764 | 807 | 1,062 | ||||||||||||
Intangible assets, net of accumulated amortization | 23,928 | 24,058 | 23,976 | 24,066 | ||||||||||||
TOTAL OTHER ASSETS | 47,517 | 42,386 | 83,542 | 75,801 | ||||||||||||
TOTAL ASSETS | $ | 2,672,026 | $ | 2,454,614 | $ | 2,440,598 | $ | 2,650,682 | ||||||||
LIABILITIES AND DEFICIENCY | ||||||||||||||||
CURRENT LIABILITIES: | ||||||||||||||||
Short term notes payable | $ | 987,988 | $ | 813,521 | $ | 785,519 | $ | 983,813 | ||||||||
Accounts payable | 495,488 | 407,683 | 411,776 | 352,052 | ||||||||||||
Accounts payable - related parties | 172,259 | 172,306 | 154,492 | 177,432 | ||||||||||||
Short term loans - bank | 254,929 | 208,731 | 117,124 | 147,124 | ||||||||||||
Short term loans - others | 130,170 | 151,245 | 148,023 | 147,323 | ||||||||||||
Short term loans - related parties | 48,889 | 81,975 | 104,390 | 79,557 | ||||||||||||
Current maturities of long-term loans - related party | 47,896 | 48,014 | 59,984 | 54,885 | ||||||||||||
Other payables and accrued liabilities | 52,272 | 60,775 | 56,785 | 54,589 | ||||||||||||
Other payable - related parties | 106,153 | 101,268 | 82,232 | 73,025 | ||||||||||||
Customer deposits | 95,695 | 122,339 | 104,609 | 125,890 | ||||||||||||
Customer deposits - related parties | 14,512 | 7,798 | 12,649 | 21,998 | ||||||||||||
Deposit due to sales representatives | 28,184 | 30,800 | 40,484 | 33,870 | ||||||||||||
Deposit due to sales representatives - related parties | 1,809 | 1,798 | 1,772 | 1,238 | ||||||||||||
Taxes payable | 9,716 | 10,310 | 12,334 | 16,674 | ||||||||||||
Deferred lease income, current | 2,178 | 2,164 | 2,132 | 2,120 | ||||||||||||
TOTAL CURRENT LIABILITIES | 2,448,138 | 2,220,727 | 2,094,305 | 2,271,590 | ||||||||||||
NON-CURRENT LIABILITIES: | ||||||||||||||||
Long-term loans - related party | 24,450 | 29,160 | 33,516 | 38,088 | ||||||||||||
Long-term other payable - related party | - | - | 43,252 | 43,008 | ||||||||||||
Deferred lease income, noncurrent | 75,480 | 75,558 | 74,971 | 75,079 | ||||||||||||
Capital lease obligations | 354,576 | 347,290 | 337,075 | 330,099 | ||||||||||||
Profit sharing liability at fair value | 241,090 | 278,788 | 283,831 | 328,827 | ||||||||||||
Other noncurrent liabilities | 1,402 | 1,393 | 1,373 | - | ||||||||||||
TOTAL NON-CURRENT LIABILITIES | 696,998 | 732,189 | 774,018 | 815,101 | ||||||||||||
TOTAL LIABILITIES | 3,145,136 | 2,952,916 | 2,868,323 | 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, June 30, 2013, March 31, 2013 and December 31, 2012 | 3 | 3 | 3 | 3 | ||||||||||||
Common stock, $0.001 par value, 200,000,000 shares authorized, 57,771,038, 57,607,888, 57,444,738 and 57,269,838 shares issued, 55,298,732, 55,135,582, 57,269,838 and 54,797,532 shares outstanding as of September 30, 2013, June 30, 2013, March 31, 2013 and December 31, 2012, respectively | 58 | 58 | 57 | 57 | ||||||||||||
Treasury stock, at cost, 2,472,306 shares as of September 30, 2013, June 30, 2013, March 31, 2013 and December 31, 2012 | (4,199 | ) | (4,199 | ) | (4,199 | ) | (4,199 | ) | ||||||||
Paid-in-capital | 106,405 | 106,194 | 105,959 | 105,714 | ||||||||||||
Statutory reserves | 6,263 | 6,204 | 6,103 | 6,076 | ||||||||||||
Accumulated deficits | (414,696 | ) | (418,497 | ) | (378,679 | ) | (381,782 | ) | ||||||||
Accumulated other comprehensive income | 2,471 | 4,201 | 8,621 | 10,185 | ||||||||||||
TOTAL GENERAL STEEL HOLDINGS, INC. DEFICIENCY | (303,695 | ) | (306,036 | ) | (262,135 | ) | (263,946 | ) | ||||||||
NONCONTROLLING INTERESTS | (169,415 | ) | (192,266 | ) | (165,590 | ) | (172,063 | ) | ||||||||
TOTAL DEFICIENCY | (473,110 | ) | (498,302 | ) | (427,725 | ) | (436,009 | ) | ||||||||
TOTAL LIABILITIES AND DEFICIENCY | $ | 2,672,026 | $ | 2,454,614 | $ | 2,440,598 | $ | 2,650,682 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
150 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands)
September 30, | June 30, | March 31, | December 31, | |||||||||||||
2012 | 2012 | 2012 | 2011 | |||||||||||||
ASSETS | ||||||||||||||||
CURRENT ASSETS: | ||||||||||||||||
Cash | $ | 83,602 | $ | 58,404 | $ | 84,516 | $ | 120,016 | ||||||||
Restricted cash | 436,302 | 407,430 | 455,501 | 398,216 | ||||||||||||
Notes receivable | 190,507 | 79,708 | 69,373 | 92,910 | ||||||||||||
Restricted notes receivable | 67,562 | 225,490 | 608,917 | 584,241 | ||||||||||||
Loans receivable - related parties | 67,159 | 67,239 | 63,199 | - | ||||||||||||
Accounts receivable, net | 7,656 | 8,927 | 18,577 | 12,601 | ||||||||||||
Accounts receivable - related parties | 28,346 | 87,373 | 53,056 | 20,593 | ||||||||||||
Other receivables, net | 20,129 | 12,908 | 11,410 | 22,411 | ||||||||||||
Other receivables - related parties | 65,250 | 54,400 | 76,052 | 87,679 | ||||||||||||
Inventories | 225,490 | 323,301 | 360,064 | 297,729 | ||||||||||||
Advances on inventory purchase | 82,060 | 97,822 | 97,321 | 63,585 | ||||||||||||
Advances on inventory purchase - related parties | 78,860 | 52,773 | 76,849 | 20,244 | ||||||||||||
Prepaid expense and other | 549 | 547 | 335 | 531 | ||||||||||||
Prepaid taxes | 20,212 | 22,647 | 18,891 | 24,189 | ||||||||||||
Short-term investment | 2,889 | 2,853 | 2,851 | 2,906 | ||||||||||||
TOTAL CURRENT ASSETS | 1,376,573 | 1,501,822 | 1,996,912 | 1,747,851 | ||||||||||||
PLANT AND EQUIPMENT, net | 1,197,472 | 1,216,493 | 1,228,772 | 1,257,236 | ||||||||||||
OTHER ASSETS: | ||||||||||||||||
Advances on equipment purchase | 6,748 | 14,690 | 12,780 | 10,420 | ||||||||||||
Investment in unconsolidated entities | 1,027 | 984 | 904 | 12,840 | ||||||||||||
Long-term loan receivable - related party | 2,000 | 2,000 | 2,000 | - | ||||||||||||
Long-term deferred expense | 517 | 506 | 549 | 631 | ||||||||||||
Intangible assets, net of accumulated amortization | 24,227 | 24,623 | 24,908 | 25,143 | ||||||||||||
TOTAL OTHER ASSETS | 34,519 | 42,803 | 41,141 | 49,034 | ||||||||||||
TOTAL ASSETS | $ | 2,608,564 | $ | 2,761,118 | $ | 3,266,825 | $ | 3,054,121 | ||||||||
LIABILITIES AND DEFICIENCY | ||||||||||||||||
CURRENT LIABILITIES: | ||||||||||||||||
Short term notes payable | $ | 867,769 | $ | 910,662 | $ | 1,248,235 | $ | 1,113,504 | ||||||||
Accounts payable | 338,812 | 362,692 | 282,613 | 413,345 | ||||||||||||
Accounts payable - related parties | 117,662 | 116,683 | 190,063 | 121,828 | ||||||||||||
Short term loans - bank | 139,752 | 199,421 | 318,662 | 253,954 | ||||||||||||
Short term loans - others | 212,720 | 240,125 | 299,707 | 246,657 | ||||||||||||
Short term loans - related parties | 82,069 | 81,524 | 82,992 | 15,710 | ||||||||||||
Current maturities of long-term loans - related party | 49,997 | - | - | - | ||||||||||||
Other payables and accrued liabilities | 74,582 | 44,643 | 34,461 | 49,538 | ||||||||||||
Other payables - related parties | 118,585 | 132,948 | 95,032 | 28,873 | ||||||||||||
Customer deposits | 81,761 | 88,938 | 80,669 | 90,556 | ||||||||||||
Customer deposits - related parties | 83,518 | 39,134 | 57,403 | 68,277 | ||||||||||||
Deposit due to sales representatives | 34,987 | 30,602 | 33,534 | 22,890 | ||||||||||||
Deposit due to sales representatives - related parties | 1,235 | 1,236 | 1,236 | 943 | ||||||||||||
Taxes payable | 6,498 | 6,921 | 5,355 | 11,374 | ||||||||||||
Deferred lease income, current | 2,115 | 2,117 | 2,116 | 2,099 | ||||||||||||
Derivative liabilities - warrants | 58 | 3 | 23 | 10 | ||||||||||||
TOTAL CURRENT LIABILITIES | 2,212,120 | 2,257,649 | 2,732,101 | 2,439,558 | ||||||||||||
NON-CURRENT LIABILITIES: | ||||||||||||||||
Long-term loans - related party | 42,741 | 92,856 | 92,797 | 92,035 | ||||||||||||
Deferred lease income, noncurrent | 75,418 | 76,043 | 76,524 | 76,425 | ||||||||||||
Capital lease obligations | 324,171 | 319,446 | 314,080 | 306,350 | ||||||||||||
Profit sharing liability at fair value | 322,386 | 317,174 | 311,358 | 303,233 | ||||||||||||
TOTAL NON-CURRENT LIABILITIES | 764,716 | 805,519 | 794,759 | 778,043 | ||||||||||||
TOTAL LIABILITIES | 2,976,836 | 3,063,168 | 3,526,860 | 3,217,601 | ||||||||||||
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, 2012, June 30, 2012, March 31, 2012 and December 31, 2011 | 3 | 3 | 3 | 3 | ||||||||||||
Common stock, $0.001 par value, 200,000,000 shares authorized, 57,100,688 56,932,788, 56,767,388 and 56,601,988 shares issued, 54,628,382, 54,460,482, 55,676,410 and 55,511,010 shares outstanding as of September 30, 2012, June 30, 2012, March 31, 2012 and December 31, 2011, respectively | 57 | 57 | 56 | 56 | ||||||||||||
Treasury stock, at cost, 2,472,306 shares as of September 30, 2012 and June 30, 2012 and 1,090,978 shares as of March 31, 2012 and December 31, 2011, respectively | (4,199 | ) | (4,199 | ) | (2,795 | ) | (2,795 | ) | ||||||||
Paid-in-capital | 105,475 | 105,190 | 105,059 | 107,940 | ||||||||||||
Statutory reserves | 6,078 | 6,106 | 6,227 | 6,388 | ||||||||||||
Accumulated deficits | (331,842 | ) | (290,244 | ) | (263,867 | ) | (229,083 | ) | ||||||||
Accumulated other comprehensive income | 10,008 | 9,982 | 8,751 | 10,200 | ||||||||||||
TOTAL GENERAL STEEL HOLDINGS, INC. DEFICIENCY | (214,420 | ) | (173,105 | ) | (146,566 | ) | (107,291 | ) | ||||||||
NONCONTROLLING INTERESTS | (153,852 | ) | (128,945 | ) | (113,469 | ) | (56,189 | ) | ||||||||
TOTAL DEFICIENCY | (368,272 | ) | (302,050 | ) | (260,035 | ) | (163,480 | ) | ||||||||
TOTAL LIABILITIES AND DEFICIENCY | $ | 2,608,564 | $ | 2,761,118 | $ | 3,266,825 | $ | 3,054,121 |
151 |
GENERAL STEEL HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands)
September 30, | June 30, | December 31, | ||||||||||
2011 | 2011 | 2010 | ||||||||||
ASSETS | ||||||||||||
CURRENT ASSETS: | ||||||||||||
Cash | $ | 91,713 | $ | 75,317 | $ | 65,271 | ||||||
Restricted cash | 190,681 | 186,495 | 197,797 | |||||||||
Notes receivable | 30,907 | 94,547 | 49,147 | |||||||||
Restricted notes receivable | 516,662 | 181,169 | 240,298 | |||||||||
Accounts receivable, net | 38,362 | 51,373 | 18,500 | |||||||||
Accounts receivable - related parties | 10,594 | 43,500 | 4,160 | |||||||||
Other receivables, net | 20,132 | 13,343 | 11,150 | |||||||||
Other receivables - related parties | 87,748 | 91,728 | 10,938 | |||||||||
Inventories | 432,144 | 473,204 | 453,636 | |||||||||
Advances on inventory purchase | 108,031 | 50,698 | 24,577 | |||||||||
Advances on inventory purchase - related parties | 79,893 | 13,143 | 6,187 | |||||||||
Prepaid expense | 898 | 302 | 5,018 | |||||||||
Prepaid value added tax | 15,170 | 15,514 | 37,323 | |||||||||
Short term investment | 2,660 | - | - | |||||||||
Deferred tax assets | 166 | 164 | 15,301 | |||||||||
TOTAL CURRENT ASSETS | 1,625,761 | 1,290,497 | 1,139,303 | |||||||||
PLANT AND EQUIPMENT, net | 1,213,799 | 1,192,496 | 602,612 | |||||||||
OTHER ASSETS: | ||||||||||||
Advances on equipment purchase | 11,268 | 13,633 | 14,898 | |||||||||
Investment in unconsolidated subsidiaries | 10,522 | 9,807 | 17,456 | |||||||||
Long-term deferred expense | 679 | 735 | 1,439 | |||||||||
Intangible assets, net of accumulated amortization | 23,824 | 23,854 | 23,672 | |||||||||
TOTAL OTHER ASSETS | 46,293 | 48,029 | 57,465 | |||||||||
TOTAL ASSETS | $ | 2,885,853 | $ | 2,531,022 | $ | 1,799,380 | ||||||
LIABILITIES AND EQUITY | ||||||||||||
CURRENT LIABILITIES: | ||||||||||||
Short term notes payable | $ | 554,931 | $ | 345,657 | $ | 480,152 | ||||||
Accounts payable | 404,960 | 326,420 | 241,367 | |||||||||
Accounts payable - related parties | 114,309 | 127,798 | 79,694 | |||||||||
Short term loans - bank | 402,428 | 311,697 | 285,198 | |||||||||
Short term loans - others | 227,198 | 205,190 | 127,712 | |||||||||
Short term loans - related parties | 15,650 | 15,637 | 14,548 | |||||||||
Other payables and accrued liabilities | 37,962 | 36,009 | 30,087 | |||||||||
Other payable - related parties | 14,905 | 18,216 | 18,214 | |||||||||
Customer deposit | 192,153 | 175,295 | 133,464 | |||||||||
Customer deposit - related parties | 54,385 | 65,806 | 54,922 | |||||||||
Deposit due to sales representatives | 21,488 | 23,660 | 52,079 | |||||||||
Taxes payable | 12,020 | 12,690 | 6,237 | |||||||||
Deferred lease income, current | 2,091 | 2,067 | 1,971 | |||||||||
Capital lease obligations, current | 18,505 | 11,552 | - | |||||||||
TOTAL CURRENT LIABILITIES | 2,072,985 | 1,677,694 | 1,525,645 | |||||||||
NON-CURRENT LIABILITIES: | ||||||||||||
Long-term loans - related party | 107,695 | 134,566 | 91,020 | |||||||||
Deferred lease income, noncurrent | 76,358 | 76,282 | 55,620 | |||||||||
Capital lease obligations | 281,510 | 282,895 | - | |||||||||
Profit sharing liability at fair value | 296,723 | 284,871 | - | |||||||||
Derivative liabilities - warrants | 48 | 182 | 5,573 | |||||||||
TOTAL NON-CURRENT LIABILITIES | 762,334 | 778,796 | 152,213 | |||||||||
TOTAL LIABILITIES | 2,835,319 | 2,456,490 | 1,677,858 | |||||||||
COMMITMENT AND CONTINGENCIES | ||||||||||||
EQUITY: | ||||||||||||
Preferred stock, $0.001 par value, 50,000,000 shares authorized, 3,092,899 shares issued and outstanding as of September 30, 2011 and December 31, 2010 | 3 | 3 | 3 | |||||||||
Common Stock, $0.001 par value, 200,000,000 shares authorized, 56,435,838, 56,246,188 and 54,678,803 issued, 55,344,860, 55,155,210 and 54,522,973 outstanding as of September 30, 2011, June 30, 2011 and December 31, 2010, respectively | 55 | 55 | 55 | |||||||||
Treasury stock, at cost, 1,090,978, 1,090,978, 713,660 and 316,760 shares as of September 30, 2011, June 30, 2011, March 31, 2011 and December 31, 2010, respectively | (2,795 | ) | (2,795 | ) | (871 | ) | ||||||
Paid-in-capital | 107,698 | 107,405 | 104,970 | |||||||||
Statutory reserves | 6,475 | 6,465 | 6,202 | |||||||||
Accumulated deficits | (97,455 | ) | (83,625 | ) | (51,793 | ) | ||||||
Accumulated other comprehensive income | 13,071 | 12,325 | 10,987 | |||||||||
TOTAL GENERAL STEEL HOLDINGS, INC. EQUITY | 27,052 | 39,833 | 69,553 | |||||||||
NONCONTROLLING INTERESTS | 23,482 | 34,699 | 51,969 | |||||||||
TOTAL EQUITY | 50,534 | 74,532 | 121,522 | |||||||||
TOTAL LIABILITIES AND EQUITY | $ | 2,885,853 | $ | 2,531,022 | $ | 1,799,380 |
152 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2013, 2012, 2011 AND 2010
(UNAUDITED)
(In thousands, except per share data)
For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2013 | 2012 | 2011 | 2010 | |||||||||||||||||||||||||
(Restated) | (Restated) | (Restated) | (Restated) | (Restated) | (Restated) | |||||||||||||||||||||||||||
SALES | $ | 514,549 | $ | 518,542 | $ | 662,437 | $ | 340,703 | $ | 1,534,330 | $ | 1,441,325 | $ | 1,978,515 | $ | 1,041,504 | ||||||||||||||||
SALES - RELATED PARTIES | 95,546 | 192,883 | 335,724 | 119,574 | 380,707 | 698,824 | 791,841 | 373,475 | ||||||||||||||||||||||||
TOTAL SALES | 610,095 | 711,425 | 998,161 | 460,277 | 1,915,037 | 2,140,149 | 2,770,356 | 1,414,979 | ||||||||||||||||||||||||
COST OF GOODS SOLD | 511,932 | 528,586 | 639,663 | 334,856 | 1,550,829 | 1,426,589 | 1,930,876 | 1,021,852 | ||||||||||||||||||||||||
COST OF GOODS SOLD - RELATED PARTIES | 89,932 | 196,435 | 324,448 | 111,832 | 387,446 | 693,482 | 777,041 | 366,428 | ||||||||||||||||||||||||
TOTAL COST OF GOODS SOLD | 601,864 | 725,021 | 964,111 | 446,688 | 1,938,275 | 2,120,071 | 2,707,917 | 1,388,280 | ||||||||||||||||||||||||
GROSS PROFIT (LOSS) | 8,231 | (13,596 | ) | 34,050 | 13,589 | (23,238 | ) | 20,078 | 62,439 | 26,699 | ||||||||||||||||||||||
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES | (19,661 | ) | (22,787 | ) | (24,309 | ) | (9,560 | ) | (59,464 | ) | (61,548 | ) | (65,843 | ) | (35,373 | ) | ||||||||||||||||
CHANGE IN FAIR VALUE OF PROFIT SHARING LIABILITY | 39,164 | (5,611 | ) | (5,407 | ) | - | 95,437 | (16,861 | ) | (8,743 | ) | - | ||||||||||||||||||||
INCOME (LOSS) FROM OPERATIONS | 27,734 | (41,994 | ) | 4,334 | 4,029 | 12,735 | (58,331 | ) | (12,147 | ) | (8,674 | ) | ||||||||||||||||||||
OTHER INCOME (EXPENSE) | ||||||||||||||||||||||||||||||||
Interest income | 2,835 | 4,337 | 1,201 | 1,739 | 8,657 | 13,039 | 3,080 | 3,476 | ||||||||||||||||||||||||
Finance/interest expense | (22,842 | ) | (31,004 | ) | (29,674 | ) | (10,190 | ) | (68,915 | ) | (122,068 | ) | (63,574 | ) | (37,617 | ) | ||||||||||||||||
Change in fair value of derivative liabilities - warrants | - | (55 | ) | 135 | (1,089 | ) | 1 | (48 | ) | 5,526 | 13,579 | |||||||||||||||||||||
Gain on debt settlement | - | - | - | - | - | - | 3,430 | - | ||||||||||||||||||||||||
Gain on disposal of equipment | 17 | 293 | 689 | (2,781 | ) | 113 | 177 | 679 | (3,124 | ) | ||||||||||||||||||||||
Government grant | - | - | - | 1,381 | - | - | - | 1,381 | ||||||||||||||||||||||||
Income from equity investments | 47 | 44 | 790 | 838 | 137 | 80 | 4,301 | 4,067 | ||||||||||||||||||||||||
Foreign currency transaction gain (loss) | 322 | (581 | ) | 1,271 | - | 448 | (1,169 | ) | 2,920 | - | ||||||||||||||||||||||
Lease income | 542 | 528 | 525 | 277 | 1,613 | 1,588 | 1,489 | 598 | ||||||||||||||||||||||||
Other non-operating income (expense), net | 770 | 2,314 | (1,047 | ) | 1,141 | 1,559 | 3,316 | (1,197 | ) | 2,154 | ||||||||||||||||||||||
Other expense, net | (18,309 | ) | (24,124 | ) | (26,110 | ) | (8,684 | ) | (56,387 | ) | (105,085 | ) | (43,346 | ) | (15,486 | ) | ||||||||||||||||
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES AND NONCONTROLLING INTEREST | 9,425 | (66,118 | ) | (21,776 | ) | (4,655 | ) | (43,652 | ) | (163,416 | ) | (55,493 | ) | (24,160 | ) | |||||||||||||||||
PROVISION FOR INCOME TAXES | ||||||||||||||||||||||||||||||||
Current | 25 | 100 | 410 | 5,332 | 201 | 510 | 617 | 860 | ||||||||||||||||||||||||
Deferred | - | - | 144 | (5,676 | ) | - | 169 | 15,384 | (5,944 | ) | ||||||||||||||||||||||
Provision for income taxes | 25 | 100 | 554 | (344 | ) | 201 | 679 | 16,001 | (5,084 | ) | ||||||||||||||||||||||
NET INCOME (LOSS) | 9,400 | (66,218 | ) | (22,330 | ) | (4,311 | ) | (43,853 | ) | (164,095 | ) | (71,494 | ) | (19,076 | ) | |||||||||||||||||
�� | ||||||||||||||||||||||||||||||||
Less: Net income (loss) attributable to noncontrolling interest | 5,599 | (24,620 | ) | (8,500 | ) | (527 | ) | (10,939 | ) | (61,336 | ) | (25,832 | ) | (7,676 | ) | |||||||||||||||||
NET INCOME (LOSS) ATTRIBUTABLE TO GENERAL STEEL HOLDINGS, INC. | $ | 3,801 | $ | (41,598 | ) | $ | (13,830 | ) | $ | (3,784 | ) | $ | (32,914 | ) | $ | (102,759 | ) | $ | (45,662 | ) | $ | (11,400 | ) | |||||||||
NET INCOME (LOSS) | $ | 9,400 | $ | (66,218 | ) | $ | (22,330 | ) | $ | (4,311 | ) | $ | (43,853 | ) | $ | (164,095 | ) | $ | (71,494 | ) | $ | (19,076 | ) | |||||||||
OTHER COMPREHENSIVE INCOME (LOSS) | ||||||||||||||||||||||||||||||||
Foreign currency translation adjustments | (2,547 | ) | (698 | ) | 999 | 3,295 | (12,283 | ) | (577 | ) | 2,399 | 3,446 | ||||||||||||||||||||
COMPREHENSIVE INCOME (LOSS) | 6,853 | (66,916 | ) | (21,331 | ) | (1,016 | ) | (56,136 | ) | (164,672 | ) | (69,095 | ) | (15,630 | ) | |||||||||||||||||
Less: Comprehensive income (loss) attributable to noncontrolling interest | 4,782 | (24,888 | ) | (8,247 | ) | 553 | (15,508 | ) | (61,721 | ) | (25,517 | ) | (6,479 | ) | ||||||||||||||||||
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO GENERAL STEEL HOLDINGS, INC. | $ | 2,071 | $ | (42,028 | ) | $ | (13,084 | ) | $ | (1,569 | ) | $ | (40,628 | ) | $ | (102,951 | ) | $ | (43,578 | ) | $ | (9,151 | ) | |||||||||
WEIGHTED AVERAGE NUMBER OF SHARES | ||||||||||||||||||||||||||||||||
Basic and Diluted | 55,141 | 54,466 | 55,166 | 53,941 | 54,976 | 54,946 | 54,547 | 52,577 | ||||||||||||||||||||||||
EARNINGS (LOSS) PER SHARE | ||||||||||||||||||||||||||||||||
Basic and Diluted | $ | 0.07 | $ | (0.76 | ) | $ | (0.25 | ) | $ | (0.07 | ) | $ | (0.60 | ) | $ | (1.87 | ) | $ | (0.84 | ) | $ | (0.22 | ) |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
153 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2013, 2012, 2011 AND 2010
(UNAUDITED)
(In thousands, except per share data)
For the three months ended June 30, | For the six months ended June 30, | |||||||||||||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2013 | 2012 | 2011 | 2010 | |||||||||||||||||||||||||
(Restated) | (Restated) | (Restated) | (Restated) | (Restated) | (Restated) | |||||||||||||||||||||||||||
SALES | $ | 517,350 | $ | 538,986 | $ | 814,599 | $ | 383,173 | $ | 1,019,781 | $ | 922,783 | $ | 1,316,078 | $ | 700,801 | ||||||||||||||||
SALES - RELATED PARTIES | 136,301 | 241,697 | 247,132 | 118,506 | 285,161 | 505,941 | 456,117 | 253,901 | ||||||||||||||||||||||||
TOTAL SALES | 653,651 | 780,683 | 1,061,731 | 501,679 | 1,304,942 | 1,428,724 | 1,772,195 | 954,702 | ||||||||||||||||||||||||
COST OF GOODS SOLD | 540,271 | 516,277 | 793,298 | 369,433 | 1,038,897 | 898,003 | 1,291,213 | 686,996 | ||||||||||||||||||||||||
COST OF GOODS SOLD - RELATED PARTIES | 148,916 | 236,362 | 245,093 | 124,882 | 297,514 | 497,047 | 452,593 | 254,596 | ||||||||||||||||||||||||
TOTAL COST OF GOODS SOLD | 689,187 | 752,639 | 1,038,391 | 494,315 | 1,336,411 | 1,395,050 | 1,743,806 | 941,592 | ||||||||||||||||||||||||
GROSS PROFIT (LOSS) | (35,536 | ) | 28,044 | 23,340 | 7,364 | (31,469 | ) | 33,674 | 28,389 | 13,110 | ||||||||||||||||||||||
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES | (20,848 | ) | (20,132 | ) | (27,033 | ) | (13,677 | ) | (39,803 | ) | (38,761 | ) | (41,534 | ) | (25,813 | ) | ||||||||||||||||
CHANGE IN FAIR VALUE OF PROFIT SHARING LIABILITY | 9,494 | (5,620 | ) | (3,336 | ) | - | 56,273 | (11,250 | ) | (3,336 | ) | - | ||||||||||||||||||||
INCOME (LOSS) FROM OPERATIONS | (46,890 | ) | 2,292 | (7,029 | ) | (6,313 | ) | (14,999 | ) | (16,337 | ) | (16,481 | ) | (12,703 | ) | |||||||||||||||||
OTHER INCOME (EXPENSE) | ||||||||||||||||||||||||||||||||
Interest income | 3,383 | 3,146 | 816 | 617 | 5,822 | 8,702 | 1,879 | 1,737 | ||||||||||||||||||||||||
Finance/interest expense | (21,216 | ) | (48,328 | ) | (19,781 | ) | (16,464 | ) | (46,073 | ) | (91,064 | ) | (33,900 | ) | (27,427 | ) | ||||||||||||||||
Change in fair value of derivative liabilities - warrants | - | 20 | 1,839 | 10,729 | 1 | 7 | 5,391 | 14,668 | ||||||||||||||||||||||||
Gain on debt settlement | - | - | 3,430 | - | - | - | 3,430 | - | ||||||||||||||||||||||||
Gain (loss) on disposal of equipment | (235 | ) | 3 | 387 | (227 | ) | 96 | (116 | ) | (10 | ) | (343 | ) | |||||||||||||||||||
Income from equity investments | 132 | 79 | 1,856 | 3,074 | 90 | 36 | 3,511 | 3,229 | ||||||||||||||||||||||||
Foreign currency transaction gain (loss) | 98 | (973 | ) | 1,030 | - | 126 | (588 | ) | 1,649 | - | ||||||||||||||||||||||
Lease income | 539 | 530 | 512 | 184 | 1,071 | 1,060 | 964 | 320 | ||||||||||||||||||||||||
Other non-operating income (expense), net | 521 | 1,145 | (455 | ) | 855 | 789 | 1,002 | (150 | ) | 1,014 | ||||||||||||||||||||||
Other expense, net | (16,778 | ) | (44,378 | ) | (10,366 | ) | (1,232 | ) | (38,078 | ) | (80,961 | ) | (17,236 | ) | (6,802 | ) | ||||||||||||||||
LOSS BEFORE PROVISION FOR INCOME TAXES AND NONCONTROLLING INTEREST | (63,668 | ) | (42,086 | ) | (17,395 | ) | (7,545 | ) | (53,077 | ) | (97,298 | ) | (33,717 | ) | (19,505 | ) | ||||||||||||||||
PROVISION FOR INCOME TAXES | ||||||||||||||||||||||||||||||||
Current | 105 | 43 | - | 170 | 176 | 410 | 207 | 584 | ||||||||||||||||||||||||
Deferred | - | - | 18,198 | (2,973 | ) | - | 169 | 15,240 | (5,324 | ) | ||||||||||||||||||||||
Provision for income taxes | 105 | 43 | 18,198 | (2,803 | ) | 176 | 579 | 15,447 | (4,740 | ) | ||||||||||||||||||||||
NET LOSS | (63,773 | ) | (42,129 | ) | (35,593 | ) | (4,742 | ) | (53,253 | ) | (97,877 | ) | (49,164 | ) | (14,765 | ) | ||||||||||||||||
Less: Net loss attributable to noncontrolling interest | (23,955 | ) | (15,752 | ) | (12,678 | ) | (2,738 | ) | (16,538 | ) | (36,716 | ) | (17,332 | ) | (7,149 | ) | ||||||||||||||||
NET LOSS ATTRIBUTABLE TO GENERAL STEEL HOLDINGS, INC. | $ | (39,818 | ) | $ | (26,377 | ) | $ | (22,915 | ) | $ | (2,004 | ) | $ | (36,715 | ) | $ | (61,161 | ) | $ | (31,832 | ) | $ | (7,616 | ) | ||||||||
NET LOSS | $ | (63,773 | ) | $ | (42,129 | ) | $ | (35,593 | ) | $ | (4,742 | ) | $ | (53,253 | ) | $ | (97,877 | ) | $ | (49,164 | ) | $ | (14,765 | ) | ||||||||
OTHER COMPREHENSIVE INCOME (LOSS) | ||||||||||||||||||||||||||||||||
Foreign currency translation adjustments | (7,210 | ) | 1,590 | (287 | ) | 312 | (9,736 | ) | 121 | 1,400 | 151 | |||||||||||||||||||||
COMPREHENSIVE LOSS | (70,983 | ) | (40,539 | ) | (35,880 | ) | (4,430 | ) | (62,989 | ) | (97,756 | ) | (47,764 | ) | (14,614 | ) | ||||||||||||||||
Less: Comprehensive loss attributable to noncontrolling interest | (26,745 | ) | (15,393 | ) | (12,858 | ) | (2,740 | ) | (20,290 | ) | (36,833 | ) | (17,270 | ) | (7,032 | ) | ||||||||||||||||
COMPREHENSIVE LOSS ATTRIBUTABLE TO GENERAL STEEL HOLDINGS, INC. | $ | (44,238 | ) | $ | (25,146 | ) | $ | (23,022 | ) | $ | (1,690 | ) | $ | (42,699 | ) | $ | (60,923 | ) | $ | (30,494 | ) | $ | (7,582 | ) | ||||||||
WEIGHTED AVERAGE NUMBER OF SHARES | ||||||||||||||||||||||||||||||||
Basic and Diluted | 54,980 | 54,857 | 54,318 | 52,112 | 54,893 | 55,188 | 54,233 | 51,883 | ||||||||||||||||||||||||
LOSS PER SHARE | ||||||||||||||||||||||||||||||||
Basic and Diluted | $ | (0.72 | ) | $ | (0.48 | ) | $ | (0.42 | ) | $ | (0.04 | ) | $ | (0.67 | ) | $ | (1.11 | ) | $ | (0.59 | ) | $ | (0.15 | ) |
154 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
FOR THE THREE MONTHS ENDED MARCH 31, 2013, 2012 AND 2011
(UNAUDITED)
(In thousands, except per share data)
2013 | 2012 | 2011 | ||||||||||
(Restated) | (Restated) | |||||||||||
SALES | $ | 502,431 | $ | 383,797 | $ | 501,479 | ||||||
SALES - RELATED PARTIES | 148,860 | 264,244 | 208,985 | |||||||||
TOTAL SALES | 651,291 | 648,041 | 710,464 | |||||||||
COST OF GOODS SOLD | 498,626 | 381,726 | 497,915 | |||||||||
COST OF GOODS SOLD - RELATED PARTIES | 148,598 | 260,685 | 207,500 | |||||||||
TOTAL COST OF GOODS SOLD | 647,224 | 642,411 | 705,415 | |||||||||
GROSS PROFIT | 4,067 | 5,630 | 5,049 | |||||||||
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES | (18,955 | ) | (18,629 | ) | (14,501 | ) | ||||||
CHANGE IN FAIR VALUE OF PROFIT SHARING LIABILITY | 46,779 | (5,630 | ) | - | ||||||||
INCOME (LOSS) FROM OPERATIONS | 31,891 | (18,629 | ) | (9,452 | ) | |||||||
OTHER INCOME (EXPENSE) | ||||||||||||
Interest income | 2,439 | 5,556 | 1,063 | |||||||||
Finance/interest expense | (24,857 | ) | (42,736 | ) | (14,119 | ) | ||||||
Change in fair value of derivative liabilities - warrants | 1 | (13 | ) | 3,552 | ||||||||
Gain (loss) on disposal of equipment | 331 | (119 | ) | (397 | ) | |||||||
Loss from equity investments | (42 | ) | (43 | ) | 1,655 | |||||||
Foreign currency transaction gain | 28 | 385 | 619 | |||||||||
Lease income | 532 | 530 | 452 | |||||||||
Other non-operating income (expense), net | 268 | (143 | ) | 305 | ||||||||
Other expense, net | (21,300 | ) | (36,583 | ) | (6,870 | ) | ||||||
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES AND NONCONTROLLING INTEREST | 10,591 | (55,212 | ) | (16,322 | ) | |||||||
PROVISION FOR INCOME TAXES | ||||||||||||
Current | 71 | 367 | 750 | |||||||||
Deferred | - | 169 | (3,501 | ) | ||||||||
Provision for income taxes | 71 | 536 | (2,751 | ) | ||||||||
NET INCOME (LOSS) | 10,520 | (55,748 | ) | (13,571 | ) | |||||||
Less: Net income (loss) attributable to noncontrolling interest | 7,417 | (20,964 | ) | (4,654 | ) | |||||||
NET INCOME (LOSS) ATTRIBUTABLE TO GENERAL STEEL HOLDINGS, INC. | $ | 3,103 | $ | (34,784 | ) | $ | (8,917 | ) | ||||
NET INCOME (LOSS) | $ | 10,520 | $ | (55,748 | ) | $ | (13,571 | ) | ||||
OTHER COMPREHENSIVE LOSS | ||||||||||||
Foreign currency translation adjustments | (2,526 | ) | (1,469 | ) | 1,687 | |||||||
COMPREHENSIVE INCOME (LOSS) | 7,994 | (57,217 | ) | (11,884 | ) | |||||||
Less: Comprehensive income (loss) attributable to noncontrolling interest | 6,455 | (21,440 | ) | (4,412 | ) | |||||||
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO GENERAL STEEL HOLDINGS, INC. | $ | 1,539 | $ | (35,777 | ) | $ | (7,472 | ) | ||||
WEIGHTED AVERAGE NUMBER OF SHARES | ||||||||||||
Basic and Diluted | 54,805 | 55,520 | 54,840 | |||||||||
EARNINGS (LOSS) PER SHARE | ||||||||||||
Basic and Diluted | $ | 0.06 | $ | (0.63 | ) | $ | (0.16 | ) |
155 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013, 2012, 2011 AND 2010
(UNAUDITED)
(In thousands)
Nine months ended September 30, | ||||||||||||||||
2013 | 2012 | 2011 | 2010 | |||||||||||||
(Restated) | (Restated) | (Restated) | ||||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||||||
Net loss | $ | (43,853 | ) | $ | (164,095 | ) | $ | (71,494 | ) | $ | (19,076 | ) | ||||
Adjustments to reconcile net loss to cash provided by (used in) operating activities: | ||||||||||||||||
Depreciation, amortization and depletion | 64,955 | 62,538 | 40,385 | 31,175 | ||||||||||||
Impairment of plant and equipment | - | - | 5,412 | 1,737 | ||||||||||||
Make whole shares interest expense on notes conversion | - | - | - | 1,130 | ||||||||||||
Change in fair value of derivative liabilities - warrants | (1 | ) | 48 | (5,526 | ) | (13,579 | ) | |||||||||
Change in fair value of profit sharing liability | (95,437 | ) | 16,861 | 8,743 | - | |||||||||||
Gain on stock issued as loan repayment | - | - | (3,430 | ) | - | |||||||||||
Gain on disposal of equipment | (113 | ) | (177 | ) | (679 | ) | 3,124 | |||||||||
Amortization of deferred note issuance cost and discount on convertible notes | - | - | - | 17 | ||||||||||||
Provision for doubtful accounts | (251 | ) | 2,316 | 127 | - | |||||||||||
Reservation of mine maintenance fee | 315 | 3 | - | - | ||||||||||||
Stock issued for services and compensation | 692 | 679 | 1,288 | 2,018 | ||||||||||||
Amortization of deferred financing cost on capital lease | 15,338 | 15,502 | 8,539 | - | ||||||||||||
Income from equity investments | (137 | ) | (80 | ) | (3,887 | ) | (3,983 | ) | ||||||||
Foreign currency transaction gain | (448 | ) | 1,169 | (2,920 | ) | - | ||||||||||
Deferred tax assets | - | 169 | 15,384 | (5,885 | ) | |||||||||||
Deferred lease income | (1,613 | ) | (1,588 | ) | 5,286 | 2,265 | ||||||||||
Changes in operating assets and liabilities | ||||||||||||||||
Notes receivable | 32,138 | (99,337 | ) | 19,497 | (36,702 | ) | ||||||||||
Accounts receivable | (483 | ) | 5,429 | (18,986 | ) | (12,190 | ) | |||||||||
Accounts receivable - related parties | 11,968 | (7,607 | ) | (6,207 | ) | - | ||||||||||
Other receivables | (3,466 | ) | (5,460 | ) | (8,626 | ) | 1,323 | |||||||||
Other receivables - related parties | (55,744 | ) | 4,784 | (50,311 | ) | (26,404 | ) | |||||||||
Inventories | 4,191 | 73,024 | 35,305 | (44,861 | ) | |||||||||||
Advances on inventory purchases | 1,996 | (23,365 | ) | (81,430 | ) | (12,921 | ) | |||||||||
Advances on inventory purchases - related parties | (27,882 | ) | (88,412 | ) | (72,402 | ) | (52,665 | ) | ||||||||
Prepaid expense and other | (1,016 | ) | (183 | ) | 4,214 | - | ||||||||||
Long-term deferred expense | 373 | 119 | 793 | - | ||||||||||||
Prepaid taxes | 8,250 | 4,168 | 22,982 | - | ||||||||||||
Accounts payable | 113,592 | (48,059 | ) | 153,604 | 12,513 | |||||||||||
Accounts payable - related parties | 54,364 | 31,353 | 31,609 | 30,294 | ||||||||||||
Other payables and accrued liabilities | (3,742 | ) | 34,286 | 6,819 | (3,542 | ) | ||||||||||
Other payables - related parties | (12,844 | ) | 95,746 | (3,827 | ) | 18,510 | ||||||||||
Customer deposits | (33,185 | ) | (9,490 | ) | 53,645 | (19,283 | ) | |||||||||
Customer deposits - related parties | (7,981 | ) | 14,740 | (2,241 | ) | 43,045 | ||||||||||
Taxes payable | (7,317 | ) | (5,195 | ) | 5,501 | 811 | ||||||||||
Other noncurrent liabilities | 1,384 | - | - | - | ||||||||||||
Net provided by (used in) operating activities | 14,043 | (90,114 | ) | 87,167 | (103,129 | ) | ||||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||||
Restricted cash | (72,676 | ) | (35,094 | ) | 13,173 | 9,281 | ||||||||||
Acquired long term investment | - | - | - | (1,277 | ) | |||||||||||
Proceeds from disposal of long-term investment | - | - | - | 3,678 | ||||||||||||
Dividend receivable | - | - | - | 938 | ||||||||||||
Loans to related parties | 1,460 | (69,247 | ) | - | - | |||||||||||
Cash proceeds from (made to) short term investment | (80 | ) | 40 | (2,620 | ) | - | ||||||||||
Cash proceeds from sales of equipment | 16 | 19 | 1,271 | 306 | ||||||||||||
Equipment purchase and intangible assets | (75,326 | ) | (15,909 | ) | (54,494 | ) | (69,604 | ) | ||||||||
Effect on cash due to deconsolidating of a subsidiary | - | (2,972 | ) | - | - | |||||||||||
Net cash used in investing activities | (146,606 | ) | (123,163 | ) | (42,670 | ) | (56,678 | ) | ||||||||
CASH FLOWS FINANCING ACTIVITIES: | ||||||||||||||||
Capital contributed by noncontrolling interest | 18,028 | - | - | 1,177 | ||||||||||||
Dividend made to dividend distribution | - | - | - | (3,835 | ) | |||||||||||
Payments made for treasury stock acquired | - | (1,404 | ) | (1,925 | ) | - | ||||||||||
Notes receivable - restricted | 10,218 | 521,866 | (264,708 | ) | (12,530 | ) | ||||||||||
Borrowings on short term notes payable | 1,348,631 | 1,382,976 | 446,532 | 224,425 | ||||||||||||
Payments on short term notes payable | (1,370,832 | ) | (1,637,570 | ) | (337,038 | ) | (198,770 | ) | ||||||||
Borrowings on short term loans - bank | 258,357 | 237,535 | 245,381 | 128,115 | ||||||||||||
Payments on short term loans - bank | (155,390 | ) | (355,008 | ) | (151,375 | ) | (137,413 | ) | ||||||||
Borrowings on short term loan - others | 148,678 | 160,554 | 15,414 | 91,202 | ||||||||||||
Payments on short term loans - others | (169,558 | ) | (193,964 | ) | (9,912 | ) | (11,783 | ) | ||||||||
Borrowings on short term loan - related parties | 362,202 | 269,362 | 859,561 | 573,413 | ||||||||||||
Payments on short term loans - related parties | (274,718 | ) | (221,134 | ) | (800,873 | ) | (531,850 | ) | ||||||||
Deposits due to sales representatives | (6,521 | ) | 11,939 | (31,753 | ) | (4,028 | ) | |||||||||
Deposit due to sales representatives - related parties | 531 | 285 | - | - | ||||||||||||
Borrowings on long term loans - related parties | - | - | 13,587 | - | ||||||||||||
Payments on current maturities of long-term loans - related party | (22,856 | ) | - | - | - | |||||||||||
Net cash provided by financing activities | 146,770 | 175,437 | (17,109 | ) | 118,123 | |||||||||||
EFFECTS OF EXCHANGE RATE CHANGE IN CASH | 1,417 | 1,426 | (946 | ) | 1,344 | |||||||||||
INCREASE (DECREASE) IN CASH | 15,624 | (36,414 | ) | 26,442 | (40,340 | ) | ||||||||||
CASH, beginning of period | 46,467 | 120,016 | 65,271 | 82,118 | ||||||||||||
CASH, end of period | $ | 62,091 | $ | 83,602 | $ | 91,713 | $ | 41,778 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
156 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2013, 2012, 2011 AND 2010
(UNAUDITED)
(In thousands)
Six months ended June 30, | ||||||||||||||||
2013 | 2012 | 2011 | 2010 | |||||||||||||
(Restated) | (Restated) | (Restated) | ||||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||||||
Net loss | $ | (53,253 | ) | $ | (97,877 | ) | $ | (49,164 | ) | $ | (14,765 | ) | ||||
Adjustments to reconcile net loss to cash provided by (used in) operating activities: | ||||||||||||||||
Depreciation, amortization and depletion | 43,067 | 41,329 | 22,022 | 19,334 | ||||||||||||
Impairment of plant and equipment | - | - | 5,361 | 1,733 | ||||||||||||
Change in fair value of derivative liabilities - warrants | (1 | ) | (7 | ) | (5,391 | ) | (14,668 | ) | ||||||||
Change in fair value of profit sharing liability | (56,273 | ) | 11,250 | 3,336 | - | |||||||||||
Gain on debt settlement | - | - | (3,430 | ) | - | |||||||||||
(Gain) loss on disposal of equipment | (96 | ) | 74 | 10 | 343 | |||||||||||
Amortization of deferred note issuance cost and discount on convertible notes | - | - | - | 13 | ||||||||||||
Provision for doubtful accounts | (169 | ) | 5 | - | - | |||||||||||
Reservation of mine maintenance fee | 215 | 50 | - | - | ||||||||||||
Stock issued for services and compensation | 480 | 394 | 994 | 1,507 | ||||||||||||
Amortization of deferred financing cost on capital lease | 10,217 | 10,377 | 3,362 | - | ||||||||||||
Income from equity investments | (90 | ) | (36 | ) | (3,511 | ) | (3,229 | ) | ||||||||
Foreign currency transaction gain | (126 | ) | 588 | (1,649 | ) | - | ||||||||||
Deferred tax assets | - | 169 | 15,240 | (5,434 | ) | |||||||||||
Deferred lease income | (1,071 | ) | (1,060 | ) | 5,746 | 42 | ||||||||||
Changes in operating assets and liabilities | ||||||||||||||||
Notes receivable | (64,424 | ) | 11,728 | (43,854 | ) | (26,939 | ) | |||||||||
Accounts receivable | (33,951 | ) | 3,789 | (32,086 | ) | (12,161 | ) | |||||||||
Accounts receivable - related parties | 8,969 | (66,664 | ) | (38,750 | ) | (1,015 | ) | |||||||||
Other receivables | (857 | ) | 2,403 | (1,947 | ) | (1,570 | ) | |||||||||
Other receivables - related parties | 10,275 | 15,729 | (54,657 | ) | (550 | ) | ||||||||||
Inventories | 38,014 | (24,713 | ) | (10,460 | ) | (79,299 | ) | |||||||||
Advances on inventory purchases | 23,215 | (36,985 | ) | (25,304 | ) | (11,512 | ) | |||||||||
Advances on inventory purchases - related parties | (48,019 | ) | (54,790 | ) | (6,745 | ) | (5,431 | ) | ||||||||
Prepaid expense and other | (1,115 | ) | (181 | ) | 4,753 | - | ||||||||||
Long-term deferred expense | 317 | 131 | 723 | - | ||||||||||||
Prepaid taxes | 2,742 | 1,760 | 22,256 | - | ||||||||||||
Accounts payable | 43,122 | (49,095 | ) | 79,242 | 35,734 | |||||||||||
Accounts payable - related parties | 55,227 | 54,720 | 45,926 | 37,605 | ||||||||||||
Other payables and accrued liabilities | 5,002 | 4,254 | 5,258 | 2,426 | ||||||||||||
Other payables - related parties | (16,987 | ) | 110,061 | (354 | ) | 22,656 | ||||||||||
Customer deposits | (6,103 | ) | (2,418 | ) | 38,685 | (20,270 | ) | |||||||||
Customer deposits - related parties | (14,502 | ) | (29,781 | ) | 9,671 | 25,081 | ||||||||||
Taxes payable | (6,639 | ) | (4,785 | ) | 6,248 | 4,966 | ||||||||||
Other noncurrent liabilities | 1,378 | - | - | |||||||||||||
Net cash used in operating activities | (61,436 | ) | (99,581 | ) | (8,469 | ) | (45,403 | ) | ||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||||
Restricted cash | (49,988 | ) | (5,671 | ) | 15,017 | (76,526 | ) | |||||||||
Acquired long term investment | - | - | - | (1,273 | ) | |||||||||||
Cash proceeds from disposal of long-term investment | - | - | - | 3,667 | ||||||||||||
Dividend receivable | - | - | - | (1,554 | ) | |||||||||||
Loans to related parties | - | (69,303 | ) | - | - | |||||||||||
Cash proceeds from (made to) short term investment | 80 | 79 | - | - | ||||||||||||
Cash proceeds from sales of equipment | 16 | 4 | 258 | 60 | ||||||||||||
Cash proceeds from investment in future contracts | - | - | 410 | - | ||||||||||||
Equipment purchase and intangible assets | (52,350 | ) | (20,550 | ) | (31,097 | ) | (39,508 | ) | ||||||||
Payments to original shareholders | - | - | - | (2,460 | ) | |||||||||||
Effect on cash due to deconsolidating of a subsidiary | - | (2,975 | ) | - | - | |||||||||||
Net cash used in investing activities | (102,242 | ) | (98,416 | ) | (15,412 | ) | (117,594 | ) | ||||||||
CASH FLOWS FINANCING ACTIVITIES: | ||||||||||||||||
Payments made for treasury stock acquired | - | (1,404 | ) | (1,924 | ) | - | ||||||||||
Notes receivable - restricted | 244,940 | 364,325 | 63,055 | (24,223 | ) | |||||||||||
Borrowings on short term notes payable | 812,577 | 921,101 | 400,543 | 131,882 | ||||||||||||
Payments on short term notes payable | (1,001,301 | ) | (1,134,080 | ) | (542,672 | ) | - | |||||||||
Borrowings on short term loans - bank | 141,484 | 184,477 | 235,006 | 133,196 | ||||||||||||
Payments on short term loans - bank | (83,433 | ) | (241,919 | ) | (212,768 | ) | (105,485 | ) | ||||||||
Borrowings on short term loan - others | 47,903 | 155,936 | 186,183 | 72,083 | ||||||||||||
Payments on short term loans - others | (47,055 | ) | (162,212 | ) | (112,199 | ) | (89,878 | ) | ||||||||
Borrowings on short term loan - related parties | 213,576 | 178,454 | 5,662 | - | ||||||||||||
Payments on short term loans - related parties | (124,059 | ) | (138,320 | ) | - | (4,401 | ) | |||||||||
Deposits due to sales representatives | (3,734 | ) | 7,515 | (29,068 | ) | 18,663 | ||||||||||
Deposit due to sales representatives - related parties | 529 | 286 | - | - | ||||||||||||
Borrowings on long term loan - related party | - | - | 76,350 | - | ||||||||||||
Payments on long-term loans - related party | (17,544 | ) | - | (35,144 | ) | - | ||||||||||
Net cash provided by financing activities | 183,883 | 134,159 | 33,024 | 131,837 | ||||||||||||
EFFECTS OF EXCHANGE RATE CHANGE IN CASH | 1,199 | 2,226 | 903 | (186 | ) | |||||||||||
INCREASE (DECREASE) IN CASH | 21,404 | (61,612 | ) | 10,046 | (31,346 | ) | ||||||||||
CASH, beginning of period | 46,467 | 120,016 | 65,271 | 82,118 | ||||||||||||
CASH, end of period | $ | 67,871 | $ | 58,404 | $ | 75,317 | $ | 50,772 |
157 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2013, 2012 AND 2011
(UNAUDITED)
(In thousands)
2013 | 2012 | 2011 | ||||||||||
(Restated) | (Restated) | |||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||
Net income (loss) | $ | 10,520 | $ | (55,748 | ) | $ | (13,571 | ) | ||||
Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: | ||||||||||||
Depreciation, amortization and depletion | 21,358 | 20,559 | 8,922 | |||||||||
Change in fair value of derivative liabilities - warrants | (1 | ) | 13 | (3,552 | ) | |||||||
Change in fair value of profit sharing liability | (46,779 | ) | 5,630 | - | ||||||||
(Gain) loss on disposal of equipment | (331 | ) | 119 | 397 | ||||||||
Provision for doubtful accounts | (42 | ) | 5 | 5 | ||||||||
Reservation of mine maintenance fee | 45 | 254 | - | |||||||||
Stock issued for services and compensation | 245 | 262 | 647 | |||||||||
Amortization of deferred financing cost on capital lease | 5,095 | 5,209 | - | |||||||||
Loss from equity investments | 42 | 43 | (1,655 | ) | ||||||||
Foreign currency transaction gain | (28 | ) | (385 | ) | (619 | ) | ||||||
Deferred tax assets | - | 169 | (2,730 | ) | ||||||||
Deferred lease income | (532 | ) | (530 | ) | 6,220 | |||||||
Changes in operating assets and liabilities | ||||||||||||
Notes receivable | 27,752 | 22,048 | (68,315 | ) | ||||||||
Accounts receivable | (9,426 | ) | (5,887 | ) | (7,269 | ) | ||||||
Accounts receivable - related parties | 6,808 | (32,374 | ) | 3,591 | ||||||||
Other receivables | (2,826 | ) | 3,371 | 3,686 | ||||||||
Other receivables - related parties | (20,212 | ) | (5,999 | ) | 17,436 | |||||||
Inventories | (37,526 | ) | (61,814 | ) | (41,747 | ) | ||||||
Advances on inventory purchases | 22,786 | (36,580 | ) | (7,451 | ) | |||||||
Advances on inventory purchases - related parties | (46,883 | ) | (68,061 | ) | (3,137 | ) | ||||||
Prepaid expense and other | (1,039 | ) | 32 | - | ||||||||
Long-term deferred expense | 260 | 88 | - | |||||||||
Prepaid taxes | 1,049 | 5,513 | - | |||||||||
Accounts payable | 57,648 | (104,700 | ) | 27,484 | ||||||||
Accounts payable - related parties | 39,661 | 103,918 | 34,958 | |||||||||
Other payables and accrued liabilities | 1,887 | (5,924 | ) | 8,246 | ||||||||
Other payables - related parties | 8,789 | 72,220 | (14,732 | ) | ||||||||
Customer deposits | (21,956 | ) | (10,653 | ) | 103,096 | |||||||
Customer deposits - related parties | (9,457 | ) | (11,467 | ) | (14,583 | ) | ||||||
Taxes payable | (4,427 | ) | (6,355 | ) | 18,791 | |||||||
Other noncurrent liabilities | 1,370 | - | - | |||||||||
Net cash provided by (used in) operating activities | 3,850 | (167,024 | ) | 54,118 | ||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||
Restricted cash | 54,991 | (54,126 | ) | (4,516 | ) | |||||||
Loans to related parties | - | (65,359 | ) | - | ||||||||
Cash proceeds from (made to) short term investment | - | 79 | - | |||||||||
Cash proceeds from sales of equipment | 4 | - | 328 | |||||||||
Equipment purchase and intangible assets | (24,093 | ) | (10,729 | ) | (11,102 | ) | ||||||
Effect on cash due to deconsolidating of a subsidiary | - | (2,977 | ) | - | ||||||||
Net cash provided by (used in) investing activities | 30,902 | (133,112 | ) | (15,290 | ) | |||||||
CASH FLOWS FINANCING ACTIVITIES: | ||||||||||||
Payments made for treasury stock acquired | (1,128 | ) | ||||||||||
Restricted notes receivable | 99,224 | (19,891 | ) | (81,509 | ) | |||||||
Borrowings on short term notes payable | 289,548 | 467,269 | 243,985 | |||||||||
Payments on short term notes payable | (493,064 | ) | (341,435 | ) | (169,105 | ) | ||||||
Borrowings on short term loans - bank | 32,563 | 150,252 | 85,312 | |||||||||
Payments on short term loans - bank | (63,315 | ) | (87,102 | ) | (59,876 | ) | ||||||
Borrowings on short term loan - others | 21,296 | 119,089 | 36,128 | |||||||||
Payments on short term loans - others | (21,432 | ) | (65,486 | ) | (44,664 | ) | ||||||
Borrowings on short term loan - related parties | 142,999 | 85,197 | - | |||||||||
Payments on short term loans - related parties | (30,430 | ) | (54,453 | ) | - | |||||||
Deposits due to sales representatives | 6,411 | 10,481 | (23,771 | ) | ||||||||
Deposit due to sales representatives - related parties | 526 | 286 | - | |||||||||
Net cash (used in) provided by financing activities | (15,674 | ) | 264,207 | (14,628 | ) | |||||||
EFFECTS OF EXCHANGE RATE CHANGE IN CASH | 254 | 429 | (161 | ) | ||||||||
INCREASE (DECREASE) IN CASH | 19,332 | (35,500 | ) | 24,039 | ||||||||
CASH, beginning of period | 46,467 | 120,016 | 65,271 | |||||||||
CASH, end of period | $ | 65,799 | $ | 84,516 | $ | 89,310 |
158 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(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% owned subsidiary, General Steel Investment, operates steel companies serving various industries in the People’s Republic of China (“PRC”). The Company’s main operation is manufacturing and sales of steel products such as steel rebar, hot-rolled carbon and silicon sheets and spiral-weld pipes. The Company, together with its subsidiaries, majority owned subsidiaries and variable interest entity, is referred to as the “Group”.
On April 29, 2011, a 20-year Unified Management Agreement (“the Agreement”) was entered into between the Company, the Company’s 60%-owned subsidiary Shaanxi Longmen Iron and Steel Co., Ltd. (“Longmen Joint Venture”), Shaanxi Coal and Chemical Industry Group Co., Ltd. (“Shaanxi Coal”) and Shaanxi Iron and Steel Group (“Shaanxi Steel”). Shaanxi Steel is the controlling shareholder of Shaanxi Longmen Iron and Steel Group Co., Ltd (“Long Steel Group”) which is the non-controlling interest holder in Longmen Joint Venture, and Shaanxi Coal, a state owned entity, is the parent company of Shaanxi Steel. Under the terms of the Agreement, all manufacturing machinery and equipment of Longmen Joint Venture and the $605.8 million (or approximately RMB 3.7 billion) of newly constructed iron and steel making facilities owned by Shaanxi Steel, which includes one 400 m2 sintering machine, two 1,280 m3 blast furnaces, two 120 ton converters and some auxiliary systems, are managed collectively as a single virtual asset pool (“Asset Pool”). Longmen Joint Venture manages the Asset Pool as the principal operating entity and is responsible for the daily operations of the new and existing facilities.
The Agreement leverages each of the parties’ operating strengths, allowing Longmen Joint Venture to derive the greatest benefit from the cooperation and the newly constructed iron and steel making facilities. At the designed efficiency level, these 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% of the pre-tax profit generated by the Asset Pool. The remaining 60% of the pre-tax profit is allocated to Longmen Joint Venture. As a result, the Company’s economic interest in the profit generated by Longmen Joint Venture decreased from 60% to 36%. However, the overall capacity under the management of Longmen Joint Venture has increased by three million tons, or 75%. The Agreement is also expected to 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. There has been no adjustment to the Agreement from its inception to the present time nor intention to make future adjustment by the Company and Shaanxi Steel.
The parties to the Agreement have agreed to 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 3(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 3 “Summary of significant accounting policies”, 16 “Capital lease obligations” and 17 “Profit sharing liability”.
Note 2- Restatement
These condensed financial statements contain restatements related to the classification, display and disclosure of the profit sharing liability (which is accounted for at fair value as a derivative instrument liability), which the Company concluded to be incomplete and inconsistent after communications with the Staff of the United States Securities and Exchange Commission following the Staff’s review of certain of the Company’s prior quarterly and annual reports and based on subsequent communications between the Staff of the Commission and the Company. The restatements do not impact the Company’s previously reported condensed consolidated balance sheets, nor do the restatements result in adjustment of reported net income/loss in the Company’s condensed consolidated statements of operations and comprehensive income (loss) or adjustment of reported cash flows in the Company’s condensed consolidated statements of cash flows for any period presented.
159 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
The impact of these restatements on the previously issued financial statements is reflected in the following table:
For the three months ended September 30, 2013 | ||||||||||||
Consolidated Statements of Operations | Original | Restatement | Restated | |||||||||
Change in fair value of profit sharing liability | $ | 41,825 | $ | (2,661 | ) | $ | 39,164 | |||||
Income from operations | 30,395 | (2,661 | ) | 27,734 | ||||||||
Finance/interest expense | (25,503 | ) | 2,661 | (22,842 | ) | |||||||
Other expense, net | (20,970 | ) | 2,661 | (18,309 | ) |
For the nine months ended September 30, 2013 | ||||||||||||
Consolidated Statements of Operations | Original | Restatement | Restated | |||||||||
Change in fair value of profit sharing liability | $ | 107,877 | $ | (12,440 | ) | $ | 95,437 | |||||
Income from operations | 25,175 | (12,440 | ) | 12,735 | ||||||||
Finance/interest expense | (81,355 | ) | 12,440 | (68,915 | ) | |||||||
Other expense, net | (68,827 | ) | 12,440 | (56,387 | ) |
For the nine months ended September 30, 2013 | ||||||||||||
Consolidated Statements of Cash Flows | Original | Restatement | Restated | |||||||||
Amortization of deferred financing cost on capital lease | $ | 27,778 | $ | (12,440 | ) | $ | 15,338 | |||||
Change in fair value of profit sharing liability | (107,877 | ) | 12,440 | (95,437 | ) |
For the three months ended June 30, 2013 | ||||||||||||
Consolidated Statements of Operations | Original | Restatement | Restated | |||||||||
Change in fair value of profit sharing liability | $ | 14,160 | $ | (4,666 | ) | $ | 9,494 | |||||
Loss from operations | (42,224 | ) | (4,666 | ) | (46,890 | ) | ||||||
Finance/interest expense | (25,882 | ) | 4,666 | (21,216 | ) | |||||||
Other expense, net | (21,444 | ) | 4,666 | (16,778 | ) |
For the six months ended June 30, 2013 | ||||||||||||
Consolidated Statements of Operations | Original | Restatement | Restated | |||||||||
Change in fair value of profit sharing liability | $ | 66,052 | $ | (9,779 | ) | $ | 56,273 | |||||
Loss from operations | (5,220 | ) | (9,779 | ) | (14,999 | ) | ||||||
Finance/interest expense | (55,852 | ) | 9,779 | (46,073 | ) | |||||||
Other expense, net | (47,857 | ) | 9,779 | (38,078 | ) |
For the six months ended June 30, 2013 | ||||||||||||
Consolidated Statements of Cash Flows | Original | Restatement | Restated | |||||||||
Amortization of deferred financing cost on capital lease | $ | 19,996 | $ | (9,779 | ) | $ | 10,217 | |||||
Change in fair value of profit sharing liability | (66,052 | ) | 9,779 | (56,273 | ) |
For the three months ended March 31, 2013 | ||||||||||||||||||
Consolidated Statements of Operations | Original | Restatement | Restated | |||||||||||||||
Change in fair value of profit sharing liability | $ | 51,892 | $ | (5,113 | ) | $ | 46,779 | |||||||||||
Income from operations | 37,004 | (5,113 | ) | 31,891 | ||||||||||||||
Finance/interest expense | (29,970 | ) | 5,113 | (24,857 | ) | |||||||||||||
Other expense, net | (26,413 | ) | 5,113 | (21,300 | ) |
For the three months ended March 31, 2013 | ||||||||||||
Consolidated Statements of Cash Flows | Original | Restatement | Restated | |||||||||
Amortization of deferred financing cost on capital lease | $ | 10,208 | $ | (5,113 | ) | $ | 5,095 | |||||
Change in fair value of profit sharing liability | (51,892 | ) | 5,113 | (46,779 | ) |
160 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
For the three months ended September 30, 2012 | ||||||||||||
Consolidated Statements of Operations | Original | Restatement | Restated | |||||||||
Change in fair value of profit sharing liability | $ | - | $ | (5,611 | ) | $ | (5,611 | ) | ||||
Loss from operations | (36,383 | ) | (5,611 | ) | (41,994 | ) | ||||||
Finance/interest expense | (36,615 | ) | 5,611 | (31,004 | ) | |||||||
Other expense, net | (29,735 | ) | 5,611 | (24,124 | ) |
For the nine months ended September 30, 2012 | ||||||||||||||||||
Consolidated Statements of Operations | Original | Restatement | Restated | |||||||||||||||
Change in fair value of profit sharing liability | $ | - | $ | (16,861 | ) | $ | (16,861 | ) | ||||||||||
Loss from operations | (41,470 | ) | (16,861 | ) | (58,331 | ) | ||||||||||||
Finance/interest expense | (138,929 | ) | 16,861 | (122,068 | ) | |||||||||||||
Other expense, net | (121,946 | ) | 16,861 | (105,085 | ) |
For the nine months ended September 30, 2012 | ||||||||||||
Consolidated Statements of Cash Flows | Original | Restatement | Restated | |||||||||
Amortization of deferred financing cost on capital lease | $ | 32,363 | $ | (16,861 | ) | $ | 15,502 | |||||
Change in fair value of profit sharing liability | - | 16,861 | 16,861 |
For the three months ended June 30, 2012 | ||||||||||||
Consolidated Statements of Operations | Original | Restatement | Restated | |||||||||
Change in fair value of profit sharing liability | $ | - | $ | (5,620 | ) | $ | (5,620 | ) | ||||
Income from operations | 7,912 | (5,620 | ) | 2,292 | ||||||||
Finance/interest expense | (53,948 | ) | 5,620 | (48,328 | ) | |||||||
Other expense, net | (49,998 | ) | 5,620 | (44,378 | ) |
For the six months ended June 30, 2012 | ||||||||||||||||||
Consolidated Statements of Operations | Original | Restatement | Restated | |||||||||||||||
Change in fair value of profit sharing liability | $ | - | $ | (11,250 | ) | $ | (11,250 | ) | ||||||||||
Loss from operations | (5,087 | ) | (11,250 | ) | (16,337 | ) | ||||||||||||
Finance/interest expense | (102,314 | ) | 11,250 | (91,064 | ) | |||||||||||||
Other expense, net | (92,211 | ) | 11,250 | (80,961 | ) |
For the six months ended June 30, 2012 | ||||||||||||
Consolidated Statements of Cash Flows | Original | Restatement | Restated | |||||||||
Amortization of deferred financing cost on capital lease | $ | 21,627 | $ | (11,250 | ) | $ | 10,377 | |||||
Change in fair value of profit sharing liability | - | 11,250 | 11,250 |
For the three months ended March 31, 2012 | ||||||||||||
Consolidated Statements of Operations | Original | Restatement | Restated | |||||||||
Change in fair value of profit sharing liability | $ | - | $ | (5,630 | ) | $ | (5,630 | ) | ||||
Loss from operations | (12,999 | ) | (5,630 | ) | (18,629 | ) | ||||||
Finance/interest expense | (48,366 | ) | 5,630 | (42,736 | ) | |||||||
Other expense, net | (42,213 | ) | 5,630 | (36,583 | ) |
For the three months ended March 31, 2012 | ||||||||||||
Consolidated Statements of Cash Flows | Original | Restatement | Restated | |||||||||
Amortization of deferred financing cost on capital lease | $ | 10,839 | $ | (5,630 | ) | $ | 5,209 | |||||
Change in fair value of profit sharing liability | - | 5,630 | 5,630 |
161 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
For the three months ended September 30, 2011 | ||||||||||||
Consolidated Statements of Operations | Original | Restatement | Restated | |||||||||
Change in fair value of profit sharing liability | $ | - | $ | (5,407 | ) | $ | (5,407 | ) | ||||
Income from operations | 9,741 | (5,407 | ) | 4,334 | ||||||||
Finance/interest expense | (35,081 | ) | 5,407 | (29,674 | ) | |||||||
Other expense, net | (31,517 | ) | 5,407 | (26,110 | ) |
For the nine months ended September 30, 2011 | ||||||||||||
Consolidated Statements of Operations | Original | Restatement | Restated | |||||||||
Change in fair value of profit sharing liability | $ | - | $ | (8,743 | ) | $ | (8,743 | ) | ||||
Loss from operations | (3,404 | ) | (8,743 | ) | (12,147 | ) | ||||||
Finance/interest expense | (72,317 | ) | 8,743 | (63,574 | ) | |||||||
Other expense, net | (52,089 | ) | 8,743 | (43,346 | ) |
For the nine months ended September 30, 2011 | ||||||||||||
Consolidated Statements of Cash Flows | Original | Restatement | Restated | |||||||||
Amortization of deferred financing cost on capital lease | $ | 17,282 | $ | (8,743 | ) | $ | 8,539 | |||||
Change in fair value of profit sharing liability | - | 8,743 | 8,743 |
For the three months ended June 30, 2011 | ||||||||||||
Consolidated Statements of Operations | Original | Restatement | Restated | |||||||||
Change in fair value of profit sharing liability | $ | - | $ | (3,336 | ) | $ | (3,336 | ) | ||||
Loss from operations | (3,693 | ) | (3,336 | ) | (7,029 | ) | ||||||
Finance/interest expense | (23,117 | ) | 3,336 | (19,781 | ) | |||||||
Other expense, net | (13,702 | ) | 3,336 | (10,366 | ) |
For the six months ended June 30, 2011 | ||||||||||||
Consolidated Statements of Operations | Original | Restatement | Restated | |||||||||
Change in fair value of profit sharing liability | $ | - | $ | (3,336 | ) | $ | (3,336 | ) | ||||
Loss from operations | (13,145 | ) | (3,336 | ) | (16,481 | ) | ||||||
Finance/interest expense | (37,236 | ) | 3,336 | (33,900 | ) | |||||||
Other expense, net | (20,572 | ) | 3,336 | (17,236 | ) |
For the six months ended June 30, 2011 | ||||||||||||
Consolidated Statements of Cash Flows | Original | Restatement | Restated | |||||||||
Amortization of deferred financing cost on capital lease | $ | 6,698 | $ | (3,336 | ) | $ | 3,362 | |||||
Change in fair value of profit sharing liability | - | 3,336 | 3,336 |
In addition, the Company revised and enhanced the disclosure in Note 3(c)– Consolidation of VIE, Note 3(h) – Financial instruments, Note 16–Capital Lease Obligations, Note 17 – Profit Sharing Liability, and Note 26 – Segments to reflect the classification of the profit sharing liability and to provide a more complete display and disclosure of the profit sharing liability which is accounted for at fair value as a derivative instrument liability.
Note 3 – Summary of significant accounting policies (restated– sections 3(c) and 3(h) only)
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information pursuant to the rules and regulations of the Securities 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 2013 annual report filed on Form 10-K filed on March 27, 2014.
162 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
(a) | Basis of presentation |
The unaudited condensed consolidated financial statements of the Company reflect the activities of the following major directly owned subsidiaries:
Subsidiary | Percentage of Ownership | |||||
General Steel Investment Co., Ltd. | British Virgin Islands | 100.0 | % | |||
General Steel (China) Co., Ltd. (“General Steel (China)”) | PRC | 100.0 | % | |||
Baotou Steel – General Steel Special Steel Pipe Joint Venture Co., Ltd. | PRC | 80.0 | % | |||
Yangpu Shengtong Investment Co., Ltd. | PRC | 99.1 | % | |||
Tianjin Qiu Steel Investment Co., Ltd. (“Qiu Steel”) | PRC | 98.7 | % | |||
Longmen Joint Venture | PRC | VIE/60.0 | % | |||
Maoming Hengda Steel Company, Ltd. (“Maoming Hengda”) | PRC | 99.0 | % | |||
Tianwu General Steel Material Trading Co., Ltd (“Tianwu Joint Venture”) | PRC | 60.0 | % |
(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 (restated) |
Prior to entering into the Unified Management Agreement on April 29, 2011, Longmen Joint Venture had been consolidated as the Company’s 60% direct owned subsidiary. Upon entering into the Unified Management Agreement on April 29, 2011, Longmen Joint Venture was re-evaluated by the Company to determine if Longmen Joint Venture is a VIE and if the Company is the primary beneficiary.
Based on projected profits in this entity and future operating plans, Longmen Joint Venture ’s equity at risk is considered insufficient to finance its activities and therefore Longmen Joint Venture is considered to be a VIE.
The Company would be considered the primary beneficiary of the VIE if it has both of the following characteristics:
a. | The power to direct the activities of the VIE that most significantly impact the VIE’s economic performance; and |
b. | The obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. |
A Supervisory Committee was formed during the negotiation of the Unified Management Agreement. Given there is both a Supervisory Committee and a Board with respect to Longmen Joint Venture , the powers (rights and roles) of both bodies were considered to determine which party has the power to direct the activities of Longmen Joint Venture , and by extension, whether the Company continues to have the power to direct Longmen Joint Venture ’s activities after this Supervisory Committee was formed and the significant investment in plant and equipment by owners of the Longmen Joint Venture partner. The Supervisory Committee, in which the Company holds 2 out of 4 seats, requires a ¾ majority vote, while the Board, which the Company holds 4 out of 7 seats, requires a simple majority vote. As the Supervisory Committee’s role is limited to supervising and monitoring management of Longmen Joint Venture and in the event there is any disagreement between the Board and the Supervisory Committee, the Board prevails, the Supervisory Committee is considered subordinate to the Board. Thus, the Board of Directors of Longmen Joint Venture continues to be the controlling decision-making body with respect to Longmen Joint Venture. The Company, which controls 60% of the voting rights of the Board of Directors, has control over the operations of Longmen Joint Venture and as such, has the power to direct the activities of the VIE that most significantly impact Longmen Joint Venture ’s economic performance.
163 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
In connection with the Unified Management Agreement, the Company, Shaanxi Coal and Shaanxi Steel may provide such support on a discretionary basis or as needed in the future. See Note 3 item (d) Liquidity.
The Company has the obligation to absorb losses and the rights to receive benefits based on the profit allocation as stipulated by the Unified Management Agreement that are significant to the VIE. As both conditions are met, the Company is the primary beneficiary of Longmen Joint Venture and therefore, continues to consolidate Longmen Joint Venture as a VIE.
The Company believes that the Unified Management Agreement between Longmen Joint Venture and Shaanxi Coal is in compliance with PRC law and is legally enforceable. The Board of Directors of Longmen Joint Venture continues to be the controlling decision-making body with respect to Longmen Joint Venture. The Company, which controls 60% of the voting rights of the Board of Directors, has control over the operations of Longmen Joint Venture and as such, has the power to direct the activities of the VIE. However, PRC law and/or uncertainties in the PRC legal system could limit the Company’s ability to enforce the Unified Management Agreement, which in turn, may lead to reconsideration of the VIE assessment and the potential for a different conclusion. If the Unified Management Agreement cannot be enforced, the Company would not consolidate Longmen Joint Venture as a VIE. However, the current PRC legal system has not limited the Company’s ability to enforce the Unified Management Agreement nor does the Company believe it is likely to do so in the future. The Company makes 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 | June 30, 2013 | March 31, 2013 | December 31, 2012 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
Current assets | $ | 1,253,672 | $ | 1,129,402 | $ | 1,129,118 | $ | 1,285,967 | ||||||||
Plant and equipment, net | 1,239,805 | 1,203,026 | 1,160,089 | 1,154,811 | ||||||||||||
Other noncurrent assets | 44,475 | 39,291 | 80,424 | 72,428 | ||||||||||||
Total assets | 2,537,952 | 2,371,719 | 2,369,631 | 2,513,206 | ||||||||||||
Total liabilities | (3,006,938 | ) | (2,852,083 | ) | (2,784,151 | ) | (2,943,761 | ) | ||||||||
Net liabilities | $ | (468,986 | ) | $ | (480,364 | ) | $ | (415,520 | ) | $ | (430,555 | ) |
September 30, 2012 | June 30, 2012 | March 31, 2012 | December 31, 2011 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
Current assets | $ | 1,244,486 | $ | 1,409,756 | $ | 1,857,257 | $ | 1,674,171 | ||||||||
Plant and equipment, net | 1,160,515 | 1,178,383 | 1,189,687 | 1,217,264 | ||||||||||||
Other noncurrent assets | 29,665 | 37,851 | 36,069 | 45,836 | ||||||||||||
Total assets | 2,434,666 | 2,625,990 | 3,083,013 | 2,937,271 | ||||||||||||
Total liabilities | (2,827,446 | ) | (2,952,712 | ) | (3,370,233 | ) | (3,132,766 | ) | ||||||||
Net liabilities | $ | (392,780 | ) | $ | (326,722 | ) | $ | (287,220 | ) | $ | (195,495 | ) |
September 30, 2011 | June 30, 2011 | December 31, 2010 | ||||||||||
(in thousands) | (in thousands) | (in thousands) | ||||||||||
Current assets | $ | 1,508,221 | $ | 1,203,128 | $ | 1,087,108 | ||||||
Plant and equipment, net | 1,172,982 | 1,150,732 | 553,688 | |||||||||
Other noncurrent assets | 42,995 | 44,641 | 54,099 | |||||||||
Total assets | 2,724,198 | 2,398,501 | 1,694,895 | |||||||||
Total liabilities | (2,720,490 | ) | (2,369,035 | ) | (1,612,925 | ) | ||||||
Net liabilities | $ | 3,708 | $ | 29,466 | $ | 81,970 |
164 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
VIE and its subsidiaries’ liabilities consist of the following:
September 30, 2013 | June 30, 2013 | March 31, 2013 | December 31, 2012 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
Current liabilities: | ||||||||||||||||
Short term notes payable | $ | 950,498 | $ | 792,234 | $ | 785,296 | $ | 971,117 | ||||||||
Accounts payable | 466,631 | 395,962 | 386,434 | 324,563 | ||||||||||||
Accounts payable - related parties | 171,759 | 171,806 | 154,146 | 177,160 | ||||||||||||
Short term loans - bank | 215,955 | 174,252 | 84,753 | 114,935 | ||||||||||||
Short term loans - others | 123,974 | 145,086 | 141,956 | 141,290 | ||||||||||||
Short term loans - related parties | 42,613 | 68,879 | 97,766 | 35,839 | ||||||||||||
Current maturities of long-term loans – related party | 56,372 | 56,026 | 55,196 | 54,885 | ||||||||||||
Other payables and accrued liabilities | 43,978 | 41372 | 38,490 | 29,769 | ||||||||||||
Other payables - related parties | 96,901 | 91,623 | 67,261 | 64,941 | ||||||||||||
Customer deposits | 94,767 | 121,736 | 104,328 | 109,120 | ||||||||||||
Customer deposits - related parties | 14,512 | 7,798 | 12,649 | 21,998 | ||||||||||||
Deposit due to sales representatives | 28,184 | 30,800 | 40,484 | 33,870 | ||||||||||||
Deposit due to sales representatives – related parties | 1,809 | 1,798 | 1,772 | 1,238 | ||||||||||||
Taxes payable | 8,258 | 9,050 | 11,106 | 15,339 | ||||||||||||
Deferred lease income | 2,178 | 2,164 | 2,132 | 2,120 | ||||||||||||
Intercompany payable to be eliminated | - | 17,320 | 21,576 | 30,476 | ||||||||||||
Total current liabilities | 2,318,416 | 2,127,906 | 2,005,345 | 2,128,660 | ||||||||||||
Non-current liabilities: | ||||||||||||||||
Long term loans - related parties | 15,974 | 21,148 | 38,304 | 38,088 | ||||||||||||
Long-term other payable – related party | - | - | 43,252 | 43,008 | ||||||||||||
Deferred lease income | 75,480 | 75,558 | 74,971 | 75,079 | ||||||||||||
Capital lease obligations, noncurrent | 354,576 | 347,290 | 337,075 | 330,099 | ||||||||||||
Profit sharing liability at fair value | 241,090 | 278,788 | 283,831 | 328,827 | ||||||||||||
Other noncurrent liabilities | 1,402 | 1,393 | 1,373 | - | ||||||||||||
Total non-current liabilities | 688,522 | 724,177 | 778,806 | 815,101 | ||||||||||||
Total liabilities of consolidated VIE | $ | 3,006,938 | $ | 2,852,083 | $ | 2,784,151 | $ | 2,943,761 |
165 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2012 | June 30, 2012 | March 31, 2012 | December 31, 2011 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
Current liabilities: | ||||||||||||||||
Short term notes payable | $ | 855,105 | $ | 897,982 | $ | 1,227,564 | $ | 1,105,570 | ||||||||
Accounts payable | 296,300 | 353,215 | 253,936 | 401,158 | ||||||||||||
Accounts payable - related parties | 117,601 | 116,479 | 156,738 | 81,403 | ||||||||||||
Short term loans - bank | 102,895 | 160,162 | 277,136 | 209,234 | ||||||||||||
Short term loans - others | 206,702 | 234,099 | 293,686 | 240,684 | ||||||||||||
Short term loans - related parties | 45,506 | 15,892 | 31,682 | 15,710 | ||||||||||||
Current maturities of long-term loans – related party | 49,997 | - | - | |||||||||||||
Other payables and accrued liabilities | 34,379 | 35,140 | 25,819 | 31,249 | ||||||||||||
Other payables - related parties | 105,402 | 120,104 | 85,053 | 20,677 | ||||||||||||
Customer deposits | 80,219 | 88,172 | 75,495 | 84,767 | ||||||||||||
Customer deposits - related parties | 83,233 | 39,134 | 49,483 | 66,932 | ||||||||||||
Deposit due to sales representatives | 34,987 | 30,602 | 33,534 | 22,890 | ||||||||||||
Deposit due to sales representatives – related parties | 1,235 | 1,236 | 1,236 | 943 | ||||||||||||
Taxes payable | 5,472 | 5,583 | 4,478 | 5,386 | ||||||||||||
Deferred lease income - current | 2,115 | 2,117 | 2,116 | 2,099 | ||||||||||||
Intercompany payable to be eliminated | 41,582 | 47,276 | 57,518 | 66,021 | ||||||||||||
Total current liabilities | 2,062,730 | 2,147,193 | 2,575,474 | 2,354,723 | ||||||||||||
Non-current liabilities: | ||||||||||||||||
Long term loans - related parties | 42,741 | 92,856 | 92,797 | 92,035 | ||||||||||||
Deferred lease income - noncurrent | 75,418 | 76,043 | 76,524 | 76,425 | ||||||||||||
Capital lease obligations | 324,171 | 319,446 | 314,080 | 306,350 | ||||||||||||
Profit sharing liability | 322,386 | 317,174 | 311,358 | 303,233 | ||||||||||||
Total non-current liabilities | 764,716 | 805,519 | 794,759 | 778,043 | ||||||||||||
Total liabilities of consolidated VIE | $ | 2,827,446 | $ | 2,952,712 | $ | 3,370,233 | $ | 3,132,766 |
September 30, 2011 | June 30, 2011 | December 31, 2010 | ||||||||||
(in thousands) | (in thousands) | (in thousands) | ||||||||||
Current liabilities: | ||||||||||||
Short term notes payable | $ | 548,671 | $ | 321,782 | $ | 447,992 | ||||||
Accounts payable | 339,163 | 292,834 | 230,753 | |||||||||
Accounts payable - related parties | 62,958 | 102,771 | 56,742 | |||||||||
Short term loans - bank | 369,225 | 277,053 | 260,977 | |||||||||
Short term loans - others | 221,249 | 84,018 | 113,328 | |||||||||
Short term loans - related parties | 15,650 | 15,637 | 14,548 | |||||||||
Other payables and accrued liabilities | 27,693 | 27,545 | 27,932 | |||||||||
Other payables - related parties | 5,937 | 9,368 | 2,132 | |||||||||
Customer deposits | 190,440 | 287,882 | 129,832 | |||||||||
Customer deposits - related parties | 53,045 | 64,482 | 53,624 | |||||||||
Deposit due to sales representatives | 21,488 | 23,660 | 52,079 | |||||||||
Taxes payable | 10,604 | 11,188 | 5,159 | |||||||||
Deferred lease income | 2,091 | 2,067 | 1,971 | |||||||||
Capital lease obligations, current | 18505 | 11552 | - | |||||||||
Intercompany payable to be eliminated | 71,485 | 58,582 | 69,216 | |||||||||
Total current liabilities | 1,958,204 | 1,590,421 | 1,466,285 | |||||||||
Non-current liabilities: | ||||||||||||
Long term loans - related parties | 107,695 | 134,566 | 91,020 | |||||||||
Deferred lease income - noncurrent | 76,358 | 76,282 | 55,620 | |||||||||
Capital lease obligations, noncurrent | 281,510 | 282,895 | - | |||||||||
Profit sharing liability at fair value | 296,723 | 284,871 | - | |||||||||
Total non-current liabilities | 762,286 | 778,614 | 146,640 | |||||||||
Total liabilities of consolidated VIE | $ | 2,720,490 | $ | 2,369,035 | $ | 1,612,925 |
166 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
VIE and its subsidiaries’ statements of operations are as follows:
Three months ended September 30, 2013 | Three months ended September 30, 2012 | |||||||
(in thousands) | (in thousands) | |||||||
Sales | $ | 606,444 | $ | 708,974 | ||||
Gross profit (loss) | $ | 8,122 | $ | (18,417 | ) | |||
Income (loss) from operations | $ | 30,306 | $ | (42,611 | ) | |||
Net income (loss) attributable to controlling interest | $ | 8,284 | $ | (39,494 | ) |
Three months ended September 30, 2011 | Three months ended September 30, 2010 | |||||||
(in thousands) | (in thousands) | |||||||
Sales | $ | 986,938 | $ | 455,028 | ||||
Gross profit (loss) | $ | 29,400 | $ | 14,304 | ||||
Income (loss) from operations | $ | 1,773 | $ | 6,734 | ||||
Net income (loss) attributable to controlling interest | $ | (14,766 | ) | $ | (1,351 | ) |
Nine months ended September 30, 2013 | Nine months ended 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 | $ | 20,558 | $ | (56,932 | ) | |||
Net loss attributable to controlling interest | $ | (18,335 | ) | $ | (92,974 | ) |
Nine months ended September 30, 2011 | Nine months ended September 30, 2010 | |||||||
(in thousands) | (in thousands) | |||||||
Sales | $ | 2,752,918 | $ | 1,389,215 | ||||
Gross profit (loss) | $ | 56,215 | $ | 28,450 | ||||
Income (loss) from operations | $ | (5,599 | ) | $ | 1,905 | |||
Net loss attributable to controlling interest | $ | (44,654 | ) | $ | (15,913 | ) |
Three months ended June 30, 2013 | Three months ended June 30, 2012 | |||||||
(in thousands) | (in thousands) | |||||||
Sales | $ | 650,741 | $ | 774,306 | ||||
Gross profit (loss) | $ | (36,193 | ) | $ | 25,770 | |||
Income (loss) from operations | $ | (44,685 | ) | $ | 2,903 | |||
Net loss attributable to controlling interest | $ | (34,944 | ) | $ | (23,132 | ) |
167 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
Three months ended June 30, 2011 | Three months ended June 30, 2010 | |||||||
(in thousands) | (in thousands) | |||||||
Sales | $ | 1,056,675 | $ | 499,361 | ||||
Gross profit (loss) | $ | 22,300 | $ | 8,120 | ||||
Income (loss) from operations | $ | 138 | $ | (1,046 | ) | |||
Net loss attributable to controlling interest | $ | (19,707 | ) | $ | (7,472 | ) |
Six months ended June 30, 2013 | Six months ended June 30, 2012 | |||||||
(in thousands) | (in thousands) | |||||||
Sales | $ | 1,297,489 | $ | 1,417,582 | ||||
Gross profit (loss) | $ | (31,826 | ) | $ | 31,045 | |||
Loss from operations | $ | (9,748 | ) | $ | (14,321 | ) | ||
Net loss attributable to controlling interest | $ | (26,619 | ) | $ | (53,480 | ) |
Six months ended June 30, 2011 | Six months ended June 30, 2010 | |||||||
(in thousands) | (in thousands) | |||||||
Sales | $ | 1,765,980 | $ | 934,187 | ||||
Gross profit (loss) | $ | 26,818 | $ | 14,146 | ||||
Loss from operations | $ | (7,370 | ) | $ | (4,828 | ) | ||
Net loss attributable to controlling interest | $ | (29,885 | ) | $ | (14,562 | ) |
Three months ended March 31, 2013 | Three months ended March, 2012 | Three months ended March, 2011 | ||||||||||
(in thousands) | (in thousands) | (in thousands) | ||||||||||
Sales | $ | 646,748 | $ | 643,276 | $ | 709,305 | ||||||
Gross profit | $ | 4,367 | $ | 5,275 | $ | 4,518 | ||||||
Income (loss) from operations | $ | 34,937 | $ | (17,224 | ) | $ | (7,508 | ) | ||||
Net income (loss) attributable to controlling interest | $ | 8,325 | $ | (30,348 | ) | $ | (10,178 | ) |
Longmen Joint Venture has two 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 acquired 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.
168 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
Hualong
Longmen Joint Venture, the single largest shareholder, holds a 36.0% equity interest in Hualong. The other two shareholders, who own 34.67% and 29.33% respectively, assigned their voting rights to Longmen Joint Venture in writing at the time of the acquisition of Hualong. The voting rights have been assigned through the date Hualong ceases its business operations or the other two shareholders sell their interest in Hualong. Hualong’s main business is to supply refractory. The assets, liabilities and the operating results of Hualong are immaterial to the Company’s condensed consolidated financial statements as of September 30, 2013, June 30, 2013, March 31, 2013, December 31, 2012, September 30, 2012, June 30, 2012, March 31, 2012, December 31, 2011, September 30, 2011, June 30, 2011 and December 31, 2010, for the three and nine months ended September 30, 2013, 2012, 2011 and 2010, three and six months ended June 30, 2013, 2012, 2011 and 2010, and three months ended March 31, 2013, 2012 and 2011, respectively.
Tongxing
Prior to March 1, 2012, Longmen Joint Venture held a 22.76% equity interest in Tongxing while hundreds of employees of Longmen Joint Venture owned the remaining 77.24%. Each individual employee shareholder comprising the remaining 77.24% assigned its voting rights to Longmen Joint Venture in writing at the time of the acquisition of Tongxing. The voting rights assigned were effective until Tongxing ceased its business operations or Longmen Joint Venture liquidated its equity interest of Tongxing, whichever came first. The assets, liabilities and the operating results of Tongxing were immaterial to the Company’s consolidated financial statements as of December 31, 2011, September 30, 2011, June 30, 2011 and December 31, 2010, for the three and nine months ended September 30, 2011 and 2010, for the three and six months ended June 30, 2011 and 2010, and for the three months ended March 31, 2011, respectively.
On March 1, 2012, Longmen Joint Venture sold its 22.76% equity interest of Tongxing to two individuals, who are the representatives from Long Steel Group. As of March 1, 2012, Tongxing had a carrying value of net assets of $40.5 million which were included in the consolidated net assets of the Company and a noncontrolling interest in Tongxing of $32.5 million. The Company retained the land use right associated with the Tongxing property adjacent to the Longmen Joint Venture facility, which had a carrying value of $3.6 million immediately prior to the transaction and relinquished its controlling interest in the remaining net assets (primarily operating assets). In connection with the transaction, the Company also settled with a payable in cash of $0.3 million and transferred the dividend receivable of $0.9 million from Tongxing to the two individuals. These arrangements meet the criteria of ASC 810-10-40-6b and 6d, deconsolidation of a Subsidiary with multiple arrangements treated as a single transaction. As the land use rights held in Tongxing have been included as part of the Company’s consolidated assets, this transaction was considered as a change in the Company’s ownership interest in the land use right similar to a change in a parent company’s ownership interest in a subsidiary in accordance with ASC 810-10-45-23 and therefore the carrying value of the land use right was not stepped up to fair value. The net impact of these transactions resulted in a reduction of $3.1 million paid-in capital on March 1, 2012.
Huatianyulong
Longmen Joint Venture holds a 50.0% equity interest in Huatianyulong and the other unrelated shareholder holds the remaining 50.0%. The other shareholder assigned its voting rights to Longmen Joint Venture in writing at the time of acquisition of Huatianyulong. The voting rights have been assigned through the date Huatianyulong ceases its business operation or the other unrelated shareholder sells its interest in Huatianyulong. Huatianyulong mainly sells imported iron ore. The assets, liabilities and the operating results of Hualong are immaterial to the Company’s consolidated financial statements as of September 30, 2013, June 30, 2013, March 31, 2013, December 31, 2012, September 30, 2012, June 30, 2012, March 31, 2012, December 31, 2011, September 30, 2011, June 30, 2011 and December 31, 2010, for the three and nine months ended September 30, 2013, 2012, 2011 and 2010, three and six months ended June 30, 2013, 2012, 2011 and 2010, and three months ended March 31, 2013, 2012 and 2011, respectively.
The Company has determined that it is appropriate for Longmen Joint Venture to consolidate Hualong and Huatianyulong with appropriate recognition in the Company’s financial statements of the non-controlling interests in each entity, beginning on the acquisition dates as these were also the effective dates of the agreements with other stockholders granting a majority voting rights in each entity, and thereby, the power of control, to Longmen Joint Venture. 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.
169 |
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, 2013, June 30, 2013, March 31, 2013, December 31, 2012, September 30, 2012, June 30, 2012, March 31, 2012, December 31, 2011, September 30, 2011, June 30, 2011 and December 31, 2010 were (6.6), (5.9), (6.7), (7.1), (8.1), (10.1), (13.6), (19.8), 56.1, 33.0 and 13.8, respectively. As of September 30, 2013, the Company’s current liabilities exceed current assets (excluding non-cash item) by $1.1 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 million with expiration dates ranging from September 27, 2014 to October 26, 2014.
Banks | Amount of Line of Credit (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 |
* Management expects the line of credit will be extended after September 27, 2014.
As of the date of this report, the Company utilized $61.9 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 million with the following companies:
Company | Financing period covered | Financing Amount (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 A, a related party company and Company B, a third party company, are both Longmen Joint Venture’s major coke suppliers. They have been doing business with Longmen Joint Venture for years. Each company has signed a two-year agreement with Longmen Joint Venture which was effective on January 6, 2013 to finance Longmen Joint Venture for its coke purchase for a two-year period. Company B signed an additional two-year agreement with Longmen Joint Venture effective on November 7, 2013. According to the above signed agreement, both Company A and B will not demand any cash payments for next two years. As of the date of this report, our payables to Company A and Company B were approximately $64.3 million and $51.9 million, respectively.
As a critical business stakeholder to the Company’s Tianwu Joint Venture, Company C is a Fortune 500 Company. In October 2012, Company C signed a one year agreement with Longmen Joint Venture to finance Longmen Joint Venture’s purchase of iron ore for an amount up to $158.3 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 commence 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. Subject to the terms of the agreement, Longmen Joint Venture is subject to a penalty of 0.05% of the daily outstanding balance owed to Company C in an event of late payment. 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 million.
170 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
Financing sales
As part of our working capital management, Longmen Joint Venture has entered into an additional financing sales agreement with a third party company, Company D and two 100% owned subsidiaries of Longmen Joint Venture, named Yuxin Trading Co., Ltd. (“Yuxin”) and Yuteng Trading Co., Ltd. (“Yuteng”) (“financing sales”) to provide liquidity to the Company in the total amount of $81.5 million. See Note 10 for financing sales details.
Based on the contract terms, from December 31, 2012 until the earlier of the expiration date of the contract or December 31, 2013, the advance payment balance from Company D cannot be less than $81.5 million. The contract has been extended to December 31, 2014. The remaining financing sales balance can be paid by installment based on Longmen Joint Venture’s goods delivery volume. As of the date of this report, our payable to Company D is approximately $24.5 million.
Other financing
On January 7, 2013, November 6, 2013 and November 7, 2013, Longmen Joint Venture signed a payment extension agreement with each company listed below. In total, Longmen Joint Venture can get $77.4 million in financial support from a two-year balancing payment extension granted by the following five companies:
Company | Financing period covered | Financing Amount (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 |
According to the contract terms, Company E, Company F, Company G, Company H and Company I have agreed to grant a two year payment extension in the amounts of $16.3 million, $21.2 million, $7.3 million, $16.3 million and $16.3 million respectively. As of the date of this report, our payables to Company E, Company F, Company G, Company H and Company I are approximately $17.9 million, $14.0 million, $18.9 million, $7.5 million and $0, 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, Longmen Joint Venture has collected a total amount of $30.0 million. Historically, this amount is quite stable and we do not expect a big fluctuation in this amount for the next twelve months from September 30, 2013 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. The detailed breakdown of Longmen Joint Venture’s estimated cash flows items are listed below.
171 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
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 |
As a result, the unaudited condensed consolidated financial statements for the period ended September 30, 2013 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 fluctuation of raw materials and energy prices as part of its normal operations. As of September 30, 2013, June 30, 2013, March 31, 2013, December 31, 2012, September 30, 2012, June 30, 2012, March 31, 2012, December 31, 2011, September 30, 2011, June 30, 2011 and December 31, 2010, the Company does 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, 2013, June 30, 2013, March 31, 2013, December 31, 2012, September 30, 2012, June 30, 2012, March 31, 2012, December 31, 2011, September 30, 2011, June 30, 2011 and December 31, 2010 amounted to $467.9 million, $448.5 million, $336.0 million, $369.9 million, $519.9 million, $465.8 million, $540.0 million, $518.2 million, $282.4 million, $261.8 million and $263.1 million, including $3.1 million, $9.5 million, $9.5 million and $2.3 million that were deposited in Shaanxi Coal and Chemical Industry Group Financial Co., Ltd., a related party as of September 30, 2013, June 30, 2013, March 31, 2013 and December 31, 2012, respectively. As of September 30, 2013, $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% 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% of the Company’s total sales for the three months and nine months ended September 30, 2012, respectively. The Company’s five major customers are all distributors and collectively represented approximately 20.4% and 30.7% of the Company’s total sales for the three months and nine months ended September 30, 2011, respectively. The company had five major customers, which represented approximately 29.2% and 28.5% of the company’s total sales for the three and nine months ended September 30, 2010, respectively. The Company's five major customers are all distributors and collectively represented approximately 27.8% and 23.3% of the Company's total sales for the three and six months ended June 30, 2013, respectively. The Company had five major customers, which represented approximately 34.7% and 36.8% of the Company's total sales for the three months and six months ended June 30, 2012, respectively. The Company had five major customers, which represented approximately 40.6% and 36.5% of the Company’s total sales for the three and six months ended June 30, 2011, respectively. The Company had five major customers, which represented approximately 24.5% and 27.3% of the Company’s total sales for the three months and six months ended June 30, 2010, respectively. The Company’s five major customers are all distributors and collectively represented approximately 20.4%, 45.0% and 32.3% of the Company’s total sales for the three months ended March 31, 2013, 2012 and 2011, respectively. These five major customers accounted for 15.9%, 0%, 0%, 47.8%, 32.0%, 76.3%, 48.9%, 27.2%, 15.6%, 0% and 0% of total accounts receivable, including related parties, as of September 30, 2013, June 30, 2013, March 31, 2013, December 31, 2012, September 30, 2012, June 30, 2012, March 31, 2012, December 31, 2011, September 30, 2011, June 30, 2011 and December 31, 2010, respectively. One of the five major customers accounted for more than 10% of total accounts receivable as of September 30, 2013, December 31, 2012, September 30, 2012, March 31, 2012, December 31, 2011, September 30, 2011, June 30, 2011 and December 31, 2010, respectively. Two of the five major customers accounted for more than 10% of total accounts receivable as of June 30, 2012. None of the five major customers accounted for more than 10% of total accounts receivable as of June 30, 2013 and March 31 2013
172 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
For the three and nine months ended September 30, 2013, the Company purchased approximately 15.3% and 29.3% of its raw materials from five major suppliers, respectively. None of the five major suppliers individually accounted for more than 10% of the total purchases for the three and nine months ended September 30, 2013. The purchases from the five major suppliers represent approximately 25.4% and 39.6% of the Company’s total purchases for the three months and nine months ended September 30, 2012, respectively. For the three months and nine months ended September 30, 2011, the Company purchased approximately 49.0% and 44.8% of its raw materials from five major suppliers, respectively. Two of the five major suppliers individually accounted for more than 10% of the total purchase for the three and nine months ended September 30, 2011. The purchase from the five major suppliers represents approximately 40.2% and 45.6% of the company’s total purchase for the three months and nine months ended September 30, 2010, respectively, of which two of the five vendors account individually more than 10% of the total purchase. Two of the five major suppliers individually accounted for more than 10% of the total purchases for the nine months ended September 30, 2012. For the three and six months ended June 30, 2013, the Company purchased approximately 45.0% and 38.4% of its raw materials from five major suppliers, respectively. Two of the five major suppliers individually accounted for more than 10% of the total purchases for the three months ended June 30, 2013 and one of the five major suppliers individually accounted for more than 10% of the total purchases for the six months ended June 30, 2013. The purchases from the five major suppliers represent approximately 37.9% and 48.3% of the Company's total purchases for the three months and six months ended June 30, 2012, respectively. Two of the five major suppliers individually accounted for more than 10% of the total purchases for the six months ended June 30, 2012.The purchases from the five major suppliers represent approximately 29.6% and 41.6% of the Company’s total purchases for the three months and six months ended June 30, 2011, respectively. Two of the five major suppliers individually accounted for more than 10% of the total purchases for the six months ended June 30, 2011. The purchases from the five major suppliers represent approximately 47.2% and 48.5% of the company’s total purchases for the three months and six months ended June 30, 2010, respectively. For the three months ended March 31, 2013, 2012 and 2011, the Company purchased approximately 32.6%, 65.3% and 60.3% of its raw materials from five major suppliers, respectively. These five vendors accounted for 28.9%, 32.7%, 30.2%, 33.8%, 26.8%, 16.7%, 26.0%, 16.9%, 9.8%, 26.5% and 23.1% of total accounts payable, including related parties, as of September 30, 2013, June 30, 2013, March 31, 2013, December 31, 2013, September 30, 2012, June 30, 2012, March 31, 2012, December 31, 2012, September 30, 2011, June 30, 2011 and December 31, 2010, respectively. None of the five major suppliers individually accounted for more than 10% of total accounts payable as September 30, 2013, June 30, 2013, September 30, 2012, June 30, 2012, December 31, 2011, September 30, 2011, December 31, 2010 and one of the five major suppliers individually accounted for more than 10% of total accounts payable as March 31, 2013, December 31, 2012, March 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 in China use the local currency, Renminbi (RMB), as their functional currency. Assets and liabilities are translated at the unified exchange rate as quoted by the People’s Bank of China at the end of the period. The statement of operations accounts are translated at the average translation rates and the equity accounts are translated at historical rates. Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statement of equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.
173 |
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 million, $4.2 million, $8.6 million, $10.2 million, $10.0 million, $10.0 million, $8.8 million, $10.2 million, $13.1 million, $11.2 million and $11.0 million as of September 30, 2013, June 30, 2013, March 31, 2013, December 31, 2012, September 30, 2012, June 30, 2012, March 31, 2012, December 31, 2011, September 30, 2011, June 30, 2011 and December 31, 2010, respectively. The balance sheet amounts, with the exception of equity at September 30, 2013, June 30, 2013, March 31, 2013, December 31, 2012, September 30, 2012, June 30, 2012, March 31, 2012, December 31, 2011, September 30, 2011, June 30, 2011 and December 31, 2010 were translated at 6.13 RMB, 6.17 RMB, 6.27 RMB, 6.30 RMB, 6.32 RMB, 6.31 RMB, 6.31 RMB, 6.37 RMB, 6.39 RMB, 6.46 RMB and 6.59 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, 2013, 2012, 2011 and 2010 were 6.16 RMB, 6.33 RMB, 6.41 RMB and 6.77 RMB, respectively. The average translation rates applied to statement of operations accounts for the nine months ended September 30, 2013, 2012, 2011 and 2010 were 6.21 RMB, 6.31 RMB, 6.49 RMB and 6.80 RMB, respectively. The average translation rates applied to statement of operations accounts for the three months ended June 30, 2013, 2012, 2011 and 2010 6.20 RMB, 6.32 RMB, 6.51 RMB and 6.84 RMB, respectively. The average translation rates applied to statement of operations accounts for the six months ended June 30, 2013, 2012, 2011 and 2010 were 6.24 RMB, 6.30 RMB, 6.55 RMB and 6.82 RMB, respectively. The average translation rates applied to statement of operations accounts for the three months ended March 30, 2013, 2012 and 2011 were 6.28 RMB, 6.30 RMB and 6.59 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 (restated) |
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 carrying value of the long term loans-related party approximates its fair value as of the reporting date as their stated interest rates approximate current rates available.
The accounting standards define fair value, establish a three-level valuation hierarchy for disclosures of fair value measurement and enhance disclosure requirements for fair value measures. The three levels are defined as follow:
· | Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
· | Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments. |
· | Level 3 inputs to the valuation methodology are unobservable and significant to the fair value. |
The Company analyzes all financial instruments with features of both liabilities and equity, pursuant to which the Company’s warrants were required to be recorded as a liability at fair value and marked to market each reporting period. The warrants were accounted for as derivative liabilities and recorded at their fair value, with the change in fair value charged or credited to income each period. The warrants expired unexercised on May 13, 2013. Prior to their expiration, the fair value of the warrants was estimated using a binomial lattice model, using level 3 inputs. See Note 13– “Convertible notes and derivative liabilities” for the variables used in the Cox Rubenstein Binomial model.
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 income each period.
The Company determines the fair value of the profit sharing liability using Level 3 inputs by considering the present value of Longmen Joint Venture’s projected profits/losses, discounted based on our average borrowing rate, which is currently 7.3%.
The fair value of the profit sharing liability will change each period as a result of (a) any changes in our estimate of Longmen Joint Venture’s projected profits/losses over the remaining term of the Agreement, (b) any change in the discount rate used, based on changes in our current or expected borrowing rate, (c) the change in fair value related to the passage of time and change in the number of future periods over which the present value of future cash flows is estimated and (d) any difference between the previously estimated operating results for the current period and actual results.
174 |
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 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:
· | because the joint venture partner of Longmen Joint Venture is a state-owned enterprise with an excellent credit history, PRC banks grant similar credit treatment to Longmen Joint Venture in terms of credit availability |
· | the current average borrowing rate of enterprises in the steel industry in the PRC is similar to this borrowing rate |
· | the current new/renewal borrowing rates of the Company’s bank loans are similar to prior periods |
· | the People’s Bank of China has not recently adjusted any borrowing rate |
· | PRC bank interest rates are not industry specific. The downtrend in the steel industry did not materially impact the bank borrowing rates for steel companies |
· | the bank interest rates are assessed by each individual bank and governed by the Chinese banking regulatory bodies. Reports from credit rating research firms are not commonly used by PRC banks |
The projected profits/losses in Longmen Joint Venture were based upon, but not limited to, the following assumptions:
· | projected selling units and growth in the steel market |
· | projected unit selling price in the steel market |
· | projected unit purchase cost in the coal and iron ore markets |
· | selling and general and administrative expenses to be in line with the growth in the steel market |
· | projected bank borrowings |
· | interest rate index |
· | gross national product index |
· | industry index |
· | government policy |
The above assumptions were reviewed by the Company at September 30, 2013 and the Company changed those assumptions compared with the assumptions used at December 31, 2012 because of the changes in market conditions in the PRC. Since the Company had 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 trend 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 $39.2 million and $95.4 million for the three and nine months ended September 30, 2013, respectively.
The estimated fair value of the profit sharing liability at September 30, 2013 is $241.1 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 borrowing rate by 1.0% and other factors remained unchanged, our profit sharing liability as of September 30, 2013 would have been $254.9 million and we would reduce the gain from the change in the fair value of the profit sharing liabilities by $13.8 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 September 30, 2013 would have been $214.3 million and we would increase the gain from the change in the fair value of profit sharing liabilities by $26.8 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:
(in thousands) | Carrying Value as of September 30, 2013 | Fair Value Measurements at September 30, 2013 Using Fair Value Hierarchy | ||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||
Profit sharing liability | $ | 241,090 | $ | - | $ | - | $ | 241,090 | ||||||||
Total | $ | 241,090 | $ | - | $ | - | $ | 241,090 |
175 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
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 June 30, 2013:
(in thousands) | Carrying Value as of June 30, 2013 | Fair Value Measurements at June 30, 2013 Using Fair Value Hierarchy | ||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||
Profit sharing liability | $ | 278,788 | $ | - | $ | - | $ | 278,788 | ||||||||
Total | $ | 278,788 | $ | - | $ | - | $ | 278,788 |
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, 2013:
(in thousands) | Carrying Value as of March 31, 2013 | Fair Value Measurements at March 31, 2013 Using Fair Value Hierarchy | ||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||
Profit sharing liability | $ | 283,831 | $ | - | $ | - | $ | 283,831 | ||||||||
Total | $ | 283,831 | $ | - | $ | - | $ | 283,831 |
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:
(in thousands) | Carrying Value as of December 31, 2012 | Fair Value Measurements at December 31, 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 | $ | - | $ | - | $ | 328,828 |
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, 2012:
(in thousands) | Carrying Value as of September 30, 2012 | Fair Value Measurements at September 30, 2012 Using Fair Value Hierarchy | ||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||
Derivative liabilities | $ | 58 | $ | - | $ | - | $ | 58 | ||||||||
Profit sharing liability | 322,386 | - | - | 322,386 | ||||||||||||
Total | $ | 322,444 | $ | - | $ | - | $ | 322,444 |
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 June 30, 2012:
(in thousands) | Carrying Value as of June 30, 2012 | Fair Value Measurements at June 30, 2012 Using Fair Value Hierarchy | ||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||
Derivative liabilities | $ | 3 | $ | - | $ | - | $ | 3 | ||||||||
Profit sharing liability | 317,174 | - | - | 317,174 | ||||||||||||
Total | $ | 317,177 | $ | - | $ | - | $ | 317,177 |
176 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
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, 2012:
(in thousands) | Carrying Value as of March 31, 2012 | Fair Value Measurements at March 31, 2012 Using Fair Value Hierarchy | ||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||
Derivative liabilities | $ | 23 | $ | - | $ | - | $ | 23 | ||||||||
Profit sharing liability | 311,358 | - | - | 311,358 | ||||||||||||
Total | $ | 311,381 | $ | - | $ | - | $ | 311,381 |
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, 2011:
(in thousands) | Carrying Value as of December 31, 2011 | Fair Value Measurements at December 31, 2011 Using Fair Value Hierarchy | ||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||
Derivative liabilities | $ | 10 | $ | - | $ | - | $ | 10 | ||||||||
Profit sharing liability | 303,233 | - | - | 303,233 | ||||||||||||
Total | $ | 303,243 | $ | - | $ | - | $ | 303,243 |
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, 2011:
(in thousands) | Carrying Value as of September 30, 2011 | Fair Value Measurements at September 30, 2011 Using Fair Value Hierarchy | ||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||
Derivative liabilities | $ | 48 | $ | - | $ | - | $ | 48 | ||||||||
Profit sharing liability | 296,723 | - | - | 296,723 | ||||||||||||
Total | $ | 296,771 | $ | - | $ | - | $ | 296,771 |
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 June 30, 2011:
(in thousands) | Carrying Value as of June 30, 2011 | Fair Value Measurements at June 30, 2011 Using Fair Value Hierarchy | ||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||
Derivative liabilities | $ | 182 | $ | - | $ | - | $ | 182 | ||||||||
Profit sharing liability | 284,871 | - | - | 284,871 | ||||||||||||
Total | $ | 285,053 | $ | - | $ | - | $ | 285,053 |
The following table sets forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2010:
(in thousands) | Carrying Value as of December 31, 2010 | Fair Value Measurements at December 31, 2010 Using Fair Value Hierarchy | ||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||
Derivative liabilities | $ | 5,573 | $ | - | 5,573 |
177 |
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 following periods:
September 30, 2013 | June 30, 2013 | March 31, 2013 | December 31, 2012 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
Beginning balance | $ | 328,828 | $ | 328,828 | $ | 328,828 | $ | 303,243 | ||||||||
Change in fair value of profit sharing liability: | ||||||||||||||||
Change in estimate of future operating profits | (99,170 | ) | (63,537 | ) | (51,892 | ) | - | |||||||||
Change in discount rate | - | - | - | - | ||||||||||||
Change in the number of future periods over which the present value of future cash flows is estimated | 12,440 | 9,779 | 5,113 | 22,499 | ||||||||||||
Difference between the previously estimated operating results for the current period and actual results | (8,707 | ) | (2,515 | ) | - | - | ||||||||||
Change of derivative liabilities charged to earnings | 1 | 1 | (1 | ) | 9 | |||||||||||
Exchange rate effect | 7,698 | 6,232 | 1,783 | 3,077 | ||||||||||||
Ending balance | $ | 241,090 | $ | 278,788 | $ | 283,831 | $ | 328,828 |
September 30, 2012 | June 30, 2012 | March 31, 2012 | December 31, 2011 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
Beginning balance | $ | 303,243 | $ | 303,243 | $ | 303,243 | $ | 5,573 | ||||||||
Initial measurement and recognition of the 40% profit sharing liability on April 29, 2011 | - | - | - | 280,857 | ||||||||||||
Change in fair value of profit sharing liability: | ||||||||||||||||
Change in estimate of future operating profits | - | - | - | - | ||||||||||||
Change in discount rate | - | - | - | - | ||||||||||||
Change in the number of future periods over which the present value of future cash flows is estimated | 16,860 | 11,250 | 5,630 | 14,047 | ||||||||||||
Difference between the previously estimated operating results for the current period and actual results | - | - | - | - | ||||||||||||
Change of derivative liabilities charged to earnings | 48 | (7 | ) | 13 | (5,563 | ) | ||||||||||
Exchange rate effect | 2,293 | 2,691 | 2,495 | 8,329 | ||||||||||||
Ending balance | $ | 322,444 | $ | 317,177 | $ | 311,381 | $ | 303,243 |
September 30, 2011 | June 30, 2011 | December 31, 2010 | ||||||||||
(in thousands) | (in thousands) | (in thousands) | ||||||||||
Beginning balance | $ | 5,573 | $ | 5,573 | $ | 24,390 | ||||||
Initial measurement and recognition of the 40% profit sharing liability on April 29, 2011 | 280,857 | 280,857 | - | |||||||||
Change in fair value of profit sharing liability: | ||||||||||||
Change in estimate of future operating profits | - | - | - | |||||||||
Change in discount rate | - | - | - | |||||||||
Change in the number of future periods over which the present value of future cash flows is estimated | 8,743 | 3,336 | - | |||||||||
Difference between the previously estimated operating results for the current period and actual results | - | - | - | |||||||||
Current period interest expense accreted | - | - | 389 | |||||||||
Current period payments made for principal and stated interest | - | - | (217 | ) | ||||||||
Current period note converted carrying value | - | - | (3,934 | ) | ||||||||
Change of derivative liabilities charged to earnings | (5,526 | ) | (5,391 | ) | (15,055 | ) | ||||||
Exchange rate effect | 7,124 | 678 | ||||||||||
Ending balance | $ | 296,771 | $ | 285,053 | $ | 5,573 |
178 |
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.
(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 for the three months ended September 30, 2013, 2012, 2011 and 2010 amounted to $9.6 million, $16.3 million, $9.0 million and $5.2 million, respectively, and amounted to $26.9 million, $65.6 million, $20.4 million and $19.8 million, respectively, for the nine months ended September 30, 2013, 2012, 2011 and 2010.
Interest expenses for early submission request of payment for the three months ended June 30, 2013, 2012, 2011 and 2010 amounted to $6.5 million, $28.4 million, $6.2 million and $9.0 million, respectively, and amounted to $17.3 million, $49.3 million, $11.4 million and $14.6 million, respectively, for the six months ended June 30, 2013, 2012, 2011 and 2010.
Interest expenses for early submission request of payment for the three months ended March 31, 2013, 2012 and 2011 amounted to $10.8 million, $20.9 million and $5.2 million, respectively.
(j) | Plant and equipment, net |
Plant and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets with a 3%-5% residual value. The depreciation expense on assets acquired under capital leases is included with depreciation expense on owned assets. The estimated useful lives are as follows:
Buildings and Improvements | 10-40 Years | ||
Machinery | 10-30 Years | ||
Machinery and equipment under capital lease | 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.
179 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
(j) | 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, the Company expects these assets to be fully recoverable.
Land use rights
All land in the PRC is owned by the government. However, the government grants “land use rights.” General Steel (China) acquired land use rights in 2001 for a total of $3.9 million (RMB 23.7 million). These land use rights are for 50 years and expire in 2050 and 2053. The Company amortizes the land use rights over the twenty-year business term because its business license had a twenty-year term.
Long Steel Group contributed land use rights for a total amount of $24.2 million (RMB 148.6 million) to the Longmen Joint Venture. The contributed land use rights are for 50 years and expire in 2048 to 2052.
Maoming Hengda has land use rights amounting to $2.7 million (RMB 16.6 million) for 50 years that expire in 2054.
Other than the land use rights that General Steel (China) acquired in 2001, the Company amortizes the land use rights over their 50 year term.
Entity | Original Cost | Expires on | ||||||
(in thousands) | ||||||||
General Steel (China) | $ | 3,867 | 2050 & 2053 | |||||
Longmen Joint Venture | $ | 24,226 | 2048 & 2052 | |||||
Maoming Hengda | $ | 2,705 | 2054 |
Mining right
Mining rights are capitalized at cost when acquired, including amounts associated with any value beyond proven and probable reserves, and amortized to operations as depletion expense using the units-of-production method over the estimated proven and probable recoverable tons. Longmen Joint Venture has iron ore mining right amounting to $2.4 million (RMB 15.0 million), which is amortized over the estimated recoverable reserve of 4.2 million tons.
(k) | Investments in unconsolidated entities |
Entities in which the Company has the ability to exercise significant influence, but does not have a controlling interest, are accounted for using the equity method. Significant influence is generally considered to exist when the Company has an ownership interest in the voting stock between 20% and 50%, and other factors, such as representation on the Board of Directors, voting rights and the impact of commercial arrangements, are considered in determining whether the equity method of accounting is appropriate. The Company accounts for investments with ownership less than 20% using the cost method.
The table below summarizes Longmen Joint Venture’s investment holdings as of September 30, 2013, June 30, 2013, March 31, 2013, December 31, 2012, September 30, 2012, June 30, 2012, March 31, 2012, December 31, 2011, September 30, 2011, June 30, 2011 and December 31, 2010.
Unconsolidated entities | Year acquired | Owned % | September 30, 2013 Net investment (In thousands) | June 30, 2013 Net investment (In thousands) | March 31, 2013 Net investment (In thousands) | December 31, 2012 Net investment (In thousands) | ||||||||||||||||||
Xian Delong Powder Engineering Materials Co., Ltd. | 2007 | 24.1 | $ | 1,161 | $ | 1,106 | $ | 958 | 1,166 |
180 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
Unconsolidated entities | Year acquired | September 30, 2012 Net investment (In thousands) | Owned % | June 30, 2012 Net investment (In thousands) | Owned % | March 31, 2012 Net investment (In thousands) | Owned % | December 31, 2011 Net investment (In thousands) | Owned % | |||||||||||||||||||||||||||
Shaanxi Daxigou Mining Co., Ltd | 2004 | $ | - | - | $ | - | - | $ | - | - | $ | 8,304 | 22.1 | |||||||||||||||||||||||
Huashan Metallurgical Equipment Co., Ltd. | 2003 | - | - | - | - | - | - | 3,067 | 25.0 | |||||||||||||||||||||||||||
Shaanxi Long Steel Group Baoji Steel Rolling Co., Ltd | 2003 | - | - | - | - | - | - | 428 | 25.0 | |||||||||||||||||||||||||||
Xian Delong Powder Engineering Materials Co., Ltd. | 2007 | 1,027 | 24.1 | 984 | 24.1 | 904 | 24.1 | 1,041 | 27.0 | |||||||||||||||||||||||||||
Total | $ | 1,027 | $ | 984 | $ | 904 | $ | 12,840 |
Unconsolidated entities | Year acquired | September 30, 2011 Net investment (In thousands) | Owned % | June 30, 2011 Net investment (In thousands) | Owned % | December 31, 2010 Net investment (In thousands) | Owned % | |||||||||||||||||||||
Xi’an Delong Powder Engineering Materials Co., Ltd. | 2007 | $ | 1,014 | 24.1 | $ | 995 | 24.1 | $ | 1,236 | 27.0 | ||||||||||||||||||
Shaanxi Daxigou Mining Co., Ltd | 2004 | 6,134 | 22.1 | 5,568 | 22.1 | 4,779 | 22.1 | |||||||||||||||||||||
Shaanxi Xinglong Thermoelectric Co., Ltd. | 2004-2007 | - | - | - | - | 8,534 | 20.7 | |||||||||||||||||||||
Huashan Metallurgical Equipment Co., Ltd. | 2003 | 2,998 | 25.0 | 3,009 | 25.0 | 2,907 | 25.0 | |||||||||||||||||||||
Shaanxi Long Steel Group Baoji Steel Rolling Co., Ltd | 2003 | 376 | 23.8 | 235 | 23.8 | - | 25.0 | |||||||||||||||||||||
Total | $ | 10,522 | $ | 9,807 | $ | 17,456 |
Total investment income in unconsolidated subsidiaries amounted to $0.05 million, $0.04 million, $0.8 million and $0.8 million for the three months ended September 30, 2013, 2012, 2011 and 2010, respectively, and $0.1 million, $0.1 million, $2.8 million and $4.1 million for the nine months ended September 30, 2013, 2012, 2011 and 2010, respectively, which was included in “Loss from equity investments” in the unaudited condensed consolidated statements of operations and comprehensive income (loss).
181 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
Total investment income in unconsolidated subsidiaries amounted to $0.1 million, $0.08 million, $0.4 million and $3.1 million, for the three months ended June 30, 2013, 2012, 2011 and 2010 respectively, and $0.09 million, $0.04 million, $2.0 million and $3.2 million, for the six months ended June 30, 2013, 2012, 2011 and 2010 respectively, which was included in "Loss from equity investments" in the unaudited condensed consolidated statements of operations and comprehensive income (loss).
Total investment income (loss) in unconsolidated subsidiaries amounted to $(0.04) million, $(0.04) million and $1.7 million for the three months ended March 31, 2013, 2012 and 2011, respectively, which was included in “Loss from equity investments” in the unaudited condensed consolidated statements of operations and comprehensive income (loss).
On April 30, 2011, a share transfer agreement was signed with the Labor Union Trust of Long Steel Group, transferring Tongxing’s 20.7% share of Shaanxi Xinglong (“Xinglong”) Thermoelectric Co., Ltd to the Labor Union Trust of Long Steel Group for $11.3 million (RMB 72.9 million) on April 30, 2011. As of April 30, 2011, the Company’s investment in Xinglong is approximately $9.8 million and this transaction resulted in a gain of $1.5 million, which is included in “Income from equity investments” in the unaudited condensed consolidated statements of operations and other comprehensive income (loss).
(l) | Reclassifications |
Certain prior year amounts have been reclassified to conform to the current year presentation. These reclassifications have no effect on the accompanying consolidated statements of operations and cash flows.
Note 4 – 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 | June 30, 2013 | March 31, 2013 | December 31, 2012 | |||||||||||||
(in thousands) | (in thousands) | (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 | 6,000 | 6,000 | ||||||||||||
Total loans receivable – related parties | $ | 4,540 | $ | 6,000 | $ | 6,000 | $ | 69,319 |
September 30, 2012 | June 30, 2012 | March 31, 2012 | December 31, 2011 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
Loans to Long Steel Group; due on demand and non-interest bearing. | $ | 63,159 | $ | 63,239 | $ | 63,199 | $ | - | ||||||||
Loan to Teamlink Investment Co., Ltd; due in June 2013; interest rate was 4.75% | 4,000 | 4,000 | - | - | ||||||||||||
Total loans receivable – related parties | $ | 67,159 | $ | 67,239 | $ | 63,199 | $ | - |
182 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
The Company had the following long-term loan receivable – related party as of:
September 30, 2012 | June 30, 2012 | March 31, 2012 | December 31, 2011 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
Loan to Teamlink Investment Co., Ltd.; due in December 2013; interest rate was 4.75% | $ | 2,000 | $ | 2,000 | $ | 2,000 | $ | - | ||||||||
Total long-term loan receivable – related party | $ | 2,000 | $ | 2,000 | $ | 2,000 | $ | - |
See Note 21“Related party transactions and balances” for the nature of the relationship of related parties.
Total interest income for the loans amounted to $0.1 million, $0, $0 and $0 for the three months ended September 30, 2013, 2012, 2011 and 2010, respectively.
Total interest income for the loans amounted to $0.2 million, $1.8 million, $0 and $0 for the nine months ended September 30, 2013, 2012, 2011 and 2010, respectively.
Total interest income for the loans amounted to $0 million, $0.9 million, $0, and $0 for the three months ended June 30, 2013, 2012, 2011 and 2010.
Total interest income for the loans amounted to $0.1 million, $1.8 million, $0, and $0 for the six months ended June 30, 2013, 2012, 2011 and 2010.
Total interest income for the loans amounted to $0.1 million, $0.9 million and $0 for the three months ended March 31, 2013, 2012 and 2011.
Note 5 – 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 | June 30, 2013 | March 31, 2013 | December 31, 2012 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
Accounts receivable | $ | 9,729 | $ | 43,499 | $ | 18,489 | $ | 8,062 | ||||||||
Less: allowance for doubtful accounts | (1,152 | ) | (1,226 | ) | (1,335 | ) | (1,367 | ) | ||||||||
Accounts receivable – related parties | 3,252 | 6,212 | 8,231 | 14,966 | ||||||||||||
Net accounts receivable | $ | 11,829 | $ | 48,485 | $ | 25,385 | $ | 21,661 |
September 30, 2012 | June 30, 2012 | March 31, 2012 | December 31, 2011 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
Accounts receivable | $ | 9,299 | $ | 10,954 | $ | 20,602 | $ | 14,624 | ||||||||
Less: allowance for doubtful accounts | (1,643 | ) | (2,027 | ) | (2,025 | ) | (2,023 | ) | ||||||||
Accounts receivable – related parties | 28,346 | 87,373 | 53,056 | 20,593 | ||||||||||||
Net accounts receivable | $ | 36,002 | $ | 96,300 | $ | 71,633 | $ | 33,194 |
September 30, 2011 | June 30, 2011 | December 31, 2010 | ||||||||||
(in thousands) | (in thousands) | (in thousands) | ||||||||||
Accounts receivable | $ | 38,383 | $ | 51,391 | $ | 18,796 | ||||||
Less: allowance for doubtful accounts | (21 | ) | (18 | ) | (296 | ) | ||||||
Accounts receivable – related parties | 10,594 | 43,500 | 4,160 | |||||||||
Net accounts receivable | $ | 48,956 | $ | 94,873 | $ | 22,660 |
183 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
Movement of allowance for doubtful accounts is as follows:
September 30, 2013 | June 30, 2013 | March 31, 2013 | December 31, 2012 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
Beginning balance | $ | 1,367 | $ | 1,367 | $ | 1,367 | $ | 2,023 | ||||||||
Charge to expense | - | - | - | 433 | ||||||||||||
Less: recovery | (249 | ) | (168 | ) | (40 | ) | (1,109 | ) | ||||||||
Exchange rate effect | 34 | 27 | 8 | 20 | ||||||||||||
Ending balance | $ | 1,152 | $ | 1,226 | $ | 1,335 | $ | 1,367 |
September 30, 2012 | June 30, 2012 | March 31, 2012 | December 31, 2011 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
Beginning balance | $ | 2,023 | $ | 2,023 | $ | 2,023 | $ | 292 | ||||||||
Charge to expense | 411 | - | - | 1,972 | ||||||||||||
Less: recovery | (807 | ) | (14 | ) | - | (284 | ) | |||||||||
Exchange rate effect | 16 | 18 | 2 | 39 | ||||||||||||
Ending balance | $ | 1,643 | $ | 2,027 | $ | 2,025 | $ | 2,023 |
September 30, 2011 | June 30, 2011 | December 31, 2010 | ||||||||||
(in thousands) | (in thousands) | (in thousands) | ||||||||||
Beginning balance | $ | 296 | $ | 296 | $ | 490 | ||||||
Charge to expense | - | - | 174 | |||||||||
Less: recovery | (280 | ) | (280 | ) | (386 | ) | ||||||
Exchange rate effect | 5 | 2 | 18 | |||||||||
Ending balance | $ | 21 | $ | 18 | $ | 296 |
Note 6 – Inventories
Inventories consist of the following:
September 30, 2013 | June 30, 2013 | March 31, 2013 | December 31, 2012 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
Supplies | $ | 23,302 | $ | 23,768 | $ | 23,609 | $ | 23,123 | ||||||||
Raw materials | 138,951 | 98,312 | 141,756 | 141,503 | ||||||||||||
Finished goods | 22,527 | 51,980 | 96,030 | 57,630 | ||||||||||||
Less: allowance for inventory valuation | (7,397 | ) | (13,905 | ) | (13,465 | ) | (9,585 | ) | ||||||||
Total inventories | $ | 177,383 | $ | 160,155 | $ | 247,930 | $ | 212,671 |
September 30, 2012 | June 30, 2012 | March 31, 2012 | December 31, 2011 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
Supplies | $ | 23,403 | $ | 24,428 | $ | 22,035 | $ | 20,869 | ||||||||
Raw materials | 132,626 | 232,418 | 276,931 | 279,041 | ||||||||||||
Finished goods | 83,456 | 83,366 | 74,528 | 35,962 | ||||||||||||
Less: allowance for inventory valuation | (13,995 | ) | (16,911 | ) | (13,430 | ) | (38,143 | ) | ||||||||
Total inventories | $ | 225,490 | $ | 323,301 | $ | 360,064 | $ | 297,729 |
184 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
September 30, 2011 | June 30, 2011 | December 31, 2010 | ||||||||||
(in thousands) | (in thousands) | (in thousands) | ||||||||||
Supplies | $ | 41,103 | $ | 22,578 | $ | 13,733 | ||||||
Raw materials | 294,518 | 329,763 | 381,178 | |||||||||
Finished goods | 99,220 | 122,148 | 59,813 | |||||||||
Less: allowance for inventory valuation | (2,697 | ) | (1,285 | ) | (1,088 | ) | ||||||
Total inventories | $ | 432,144 | $ | 473,204 | $ | 453,636 |
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, 2013, June 30, 2013, March 31, 2013, December 31, 2013, September 30, 2012, June 30, 2012, March 31, 2012, December 31, 2012, September 30, 2011, June 30, 2011 and December 31, 2010, the Company had provided allowance for inventory valuation in the amounts of $7.3 million, $13.8 million, $13.4 million, $9.6 million, $14.0 million, $16.9 million, $13.4 million, $38.1 million, $2.7 million, $1.3 million and $1.1 million, respectively.
Movement of allowance for inventory valuation is as follows:
September 30, 2013 | June 30, 2013 | March 31, 2013 | December 31, 2012 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
Beginning balance | $ | 9,585 | $ | 9,585 | $ | 9,585 | $ | 38,143 | ||||||||
Addition | 7,305 | 13,757 | 13,441 | 9,582 | ||||||||||||
Less: write-off | (9,722 | ) | (9,681 | ) | (9,623 | ) | (38,519 | ) | ||||||||
Exchange rate effect | 229 | 244 | 62 | 379 | ||||||||||||
Ending balance | $ | 7,397 | $ | 13,905 | $ | 13,465 | $ | 9,585 |
September 30, 2012 | June 30, 2012 | March 31, 2012 | December 31, 2011 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
Beginning balance | $ | 38,143 | $ | 38,143 | $ | 38,143 | $ | - | ||||||||
Addition | 14,015 | 16,928 | 13,464 | 37,512 | ||||||||||||
Less: write-off | (38,488 | ) | (38,522 | ) | (38,556 | ) | - | |||||||||
Exchange rate effect | 325 | 362 | 379 | 631 | ||||||||||||
Ending balance | $ | 13,995 | $ | 16,911 | $ | 13,430 | $ | 38,143 |
September 30, 2011 | June 30, 2011 | December 31, 2010 | ||||||||||
(in thousands) | (in thousands) | (in thousands) | ||||||||||
Beginning balance | $ | 1,088 | $ | 1,088 | $ | - | ||||||
Addition | 2,656 | 1,266 | 1,061 | |||||||||
Less: write-off | (1,301 | ) | (1,266 | ) | - | |||||||
Exchange rate effect | 254 | 197 | 27 | |||||||||
Ending balance | $ | 2,697 | $ | 1,285 | $ | 1,088 |
185 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
Note 7 – Advances on inventory purchases
Advances on inventory purchases are monies deposited or advanced to outside vendors 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 million, $60.3 million, $62.6 million, $126.1 million, $160.9 million, $150.6 million, $174.2 million, $83.8 million, $187.9 million, $63.8 million and $30.8 million as of September 30, 2013, June 30, 2013, March 31, 2013, December 31, 2013, September 30, 2012, June 30, 2012, March 31, 2012, December 31, 2012, September 30, 2011, June 30, 2011 and December 31, 2010, respectively.
Note 8 – Plant and equipment, net
Plant and equipment consist of the following:
September 30, 2013 | June 30, 2013 | March 31, 2013 | December 31, 2012 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
Buildings and improvements | $ | 253,621 | $ | 221,645 | $ | 216,924 | $ | 214,661 | ||||||||
Machinery | 616,813 | 591,160 | 579,267 | 573,572 | ||||||||||||
Machinery under capital lease | 603,248 | 599,547 | 590,665 | 587,334 | ||||||||||||
Transportation and other equipment | 22,085 | 21,840 | 21,197 | 20,274 | ||||||||||||
Construction in progress | 58,111 | 60,380 | 19,232 | 4,645 | ||||||||||||
Subtotal | 1,553,878 | 1,494,572 | 1,427,285 | 1,400,486 | ||||||||||||
Less: accumulated depreciation | (303,336 | ) | (280,014 | ) | (254,967 | ) | (232,650 | ) | ||||||||
Total | $ | 1,250,542 | $ | 1,214,558 | $ | 1,172,318 | $ | 1,167,836 |
September 30, 2012 | June 30, 2012 | March 31, 2012 | December 31, 2011 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
Buildings and improvements | $ | 186,986 | $ | 186,462 | $ | 182,925 | $ | 181,644 | ||||||||
Machinery | 615,099 | 607,181 | 603,931 | 623,162 | ||||||||||||
Machinery under capital lease | 585,854 | 586,594 | 586,224 | 581,413 | ||||||||||||
Transportation and other equipment | 18,893 | 18,991 | 18,431 | 18,132 | ||||||||||||
Construction in progress | 3,212 | 9,375 | 9,035 | 8,203 | ||||||||||||
Subtotal | 1,410,044 | 1,408,603 | 1,400,546 | 1,412,554 | ||||||||||||
Less: accumulated depreciation | (212,572 | ) | (192,110 | ) | (171,774 | ) | (155,318 | ) | ||||||||
Total | $ | 1,197,472 | $ | 1,216,493 | $ | 1,228,772 | $ | 1,257,236 |
September 30, 2011 | June 30, 2011 | December 31, 2010 | ||||||||||
(in thousands) | (in thousands) | (in thousands) | ||||||||||
Buildings and improvements | $ | 173,838 | $ | 126,070 | $ | 116,294 | ||||||
Machinery | 548,662 | 515,350 | 502,958 | |||||||||
Machinery under capital lease | 579,192 | 572,531 | - | |||||||||
Transportation and other equipment | 17,178 | 15,483 | 13,253 | |||||||||
Construction in progress | 31,115 | 82,051 | 65,749 | |||||||||
Subtotal | 1,349,985 | 1,311,485 | 698,254 | |||||||||
Less: accumulated depreciation | (136,186 | ) | (118,989 | ) | (95,642 | ) | ||||||
Total | $ | 1,213,799 | $ | 1,192,496 | $ | 602,612 |
186 |
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 |
The Group 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. The carrying value of assets acquired under the capital lease consists of the following:
September 30, 2013 | June 30, 2013 | March 31, 2013 | December 31, 2012 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
Machinery | $ | 603,248 | $ | 599,547 | $ | 590,665 | $ | 587,334 | ||||||||
Less: accumulated depreciation | (69,248 | ) | (61,703 | ) | (53,775 | ) | (46,497 | ) | ||||||||
Carrying value of leased assets | $ | 534,000 | $ | 537,844 | $ | 536,890 | $ | 540,837 |
September 30, 2012 | June 30, 2012 | March 31, 2012 | December 31, 2011 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
Machinery | $ | 585,854 | $ | 586,594 | $ | 586,224 | $ | 581,413 | ||||||||
Less: accumulated depreciation | (39,423 | ) | (32,507 | ) | (25,525 | ) | (18,411 | ) | ||||||||
Carrying value of leased assets | $ | 546,431 | $ | 554,087 | $ | 560,699 | �� | $ | 563,002 |
September 30, 2011 | June 30, 2011 | December 31, 2010 | ||||||||||
(in thousands) | (in thousands) | (in thousands) | ||||||||||
Machinery | $ | 579,192 | $ | 572,531 | $ | - | ||||||
Less: accumulated depreciation | (11,463 | ) | (4,533 | ) | - | |||||||
Carrying value of leased assets | $ | 567,729 | $ | 567,998 | $ | - |
The Company assessed the recoverability of all of its remaining long-lived assets at December 31, 2012, and the sum of the discounted future cash flows expected to result from the long-lived assets and their disposition was less than the carrying value by $20.2 million (RMB 127.2 million), which was impaired and included in the selling, general and administrative expenses for the year ended December 31, 2012. The discounted cash flows were determined using certain expected changes to the current operational assumptions. If those expectations are not met, the Company may be required to record additional impairment charges in future periods.
187 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
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.
Depreciation expense for the three months ended September 30, 2013, 2012, 2011 and 2010 amounted to $21.6 million, $20.8 million, $18.1 million and $11.6 million, respectively, and for the nine months ended September 30, 2013, 2012, 2011 and 2010, amounted to $64.1 million, $61.4 million, $39.6 million and $30.4 million, respectively. These amounts include depreciation of assets held under capital leases for the three months ended September 30, 2013, 2012, 2011 and 2010, which amounted to $7.1 million, $7.0 million, $6.8 million and $0, respectively, and for the nine months ended September 30, 2013, 2012, 2011 and 2010, amounted to $21.2, $20.9 million, $11.3 million and $0, respectively.
Depreciation expense for the three months ended June 30, 2013, 2012, 2011 and 2010 amounted to $21.4 million, $20.5 million, $12.8 million and $9.5 million, respectively, and for the six months ended June 30, 2013, 2012, 2011 and 2010 amounted to $42.5, $40.6 million, $21.5 million and $18.8 million, respectively. These amounts include depreciation of assets held under capital leases for the three months ended June 30, 2013, 2012, 2011 and 2010, which amounted to $7.1 million, $6.9 million, $4.5 million and $0, respectively, and for the six months ended June 30, 2013, 2012, amounted to $14.1, $13.9 million, $4.5 million and $0, respectively.
Depreciation expenses for the three months ended March 31, 2013, 2012 and 2011 amounted to $21.1 million, $20.1 million and $8.7 million, respectively. These amounts include depreciation of assets held under capital leases for the three months ended March 31, 2013, 2012 and 2011, which amounted to $7.0 million, $7.0 million and $0, respectively.
Note 9 – Intangible assets, net
Intangible assets consist of the following:
September 30, 2013 | June 30, 2013 | March 31, 2013 | December 31, 2012 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
Land use rights | $ | 30,798 | $ | 30,609 | $ | 30,156 | $ | 29,986 | ||||||||
Mining right | 2,448 | 2,433 | 2,397 | 2,384 | ||||||||||||
Software | 742 | 738 | 727 | 692 | ||||||||||||
Subtotal | 33,988 | 33,780 | 33,280 | 33,062 | ||||||||||||
Less: | ||||||||||||||||
Accumulated amortization – land use rights | (8,387 | ) | (8,130 | ) | (7,786 | ) | (7,577 | ) | ||||||||
Accumulated amortization – mining right | (1,144 | ) | (1,096 | ) | (1,057 | ) | (993 | ) | ||||||||
Accumulated amortization – software | (529 | ) | (496 | ) | (461 | ) | (426 | ) | ||||||||
Subtotal | (10,060 | ) | (9,722 | ) | (9,304 | ) | (8,996 | ) | ||||||||
Intangible assets, net | $ | 23,928 | $ | 24,058 | $ | 23,976 | $ | 24,066 |
September 30, 2012 | June 30, 2012 | March 31, 2012 | December 31, 2011 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
Land use rights | $ | 29,917 | $ | 29,954 | $ | 29,936 | $ | 29,685 | ||||||||
Mining right | 2,350 | 2,351 | 2,326 | 2,338 | ||||||||||||
Software | 688 | 689 | 689 | 685 | ||||||||||||
Subtotal | 32,955 | 32,994 | 32,951 | 32,708 | ||||||||||||
Less: | ||||||||||||||||
Accumulated amortization – land use rights | (7,325 | ) | (7,075 | ) | (6,811 | ) | (6,442 | ) | ||||||||
Accumulated amortization – mining right | (999 | ) | (926 | ) | (893 | ) | (822 | ) | ||||||||
Accumulated amortization – software | (404 | ) | (370 | ) | (339 | ) | (301 | ) | ||||||||
Subtotal | (8,728 | ) | (8,371 | ) | (8,043 | ) | (7,565 | ) | ||||||||
Intangible assets, net | $ | 24,227 | $ | 24,623 | $ | 24,908 | $ | 25,143 |
188 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
September 30, 2011 | June 30, 2011 | December 31, 2010 | ||||||||||
(in thousands) | (in thousands) | (in thousands) | ||||||||||
Land use rights | $ | 29,571 | $ | 29,231 | $ | 28,462 | ||||||
Software | 683 | 675 | 660 | |||||||||
Subtotal | 30,254 | 29,906 | 29,122 | |||||||||
Less: | ||||||||||||
Accumulated amortization – land use rights | (6,162 | ) | (5,831 | ) | (5,316 | ) | ||||||
Accumulated amortization – software | (268 | ) | (221 | ) | (134 | ) | ||||||
Subtotal | (6,430 | ) | (6,052 | ) | (5,450 | ) | ||||||
Intangible assets, net | $ | 23,824 | $ | 23,854 | $ | 23,672 |
The gross amount of the intangible assets amounted to $34.0 million, $33.8 million, $33.3 million, $33.1 million, $33.0 million, $33.0 million, $33.0 million, $32.7 million, $30.3 million, $29.9 million and $29.1 million as of September 30, 2013, June 30, 2013, March 31, 2013, December 31, 2012, September 30, 2012, June 30, 2012, March 31, 2012, December 31, 2011, September 30, 2011, June 30, 2011 and December 31, 2010, respectively. The remaining weighted average amortization period is 33.7 years as of September 30, 2013.
Total amortization expense for the three months ended September 30, 2013, 2012, 2011 and 2010 amounted to $0.2 million, $0.3 million, $0.3 million and $0.3 million, respectively, and for the nine months ended September 30, 2013, 2012, 2011 and 2010, amounted to $0.7 million, $0.9 million, $0.8 million and $0.8 million, respectively.
Total amortization expense for the three months ended June 30, 2013, 2012, 2011 and 2010 amounted to $0.3 million, $0.3 million, $0.3 million and $0.2 million, respectively, and for the six months ended June 30, 2013, 2012, 2011 and 2010, amounted to $0.5 million, $0.6 million, $0.5 million and $0.5 million, respectively.
Total amortization expense for the three months ended March 31, 2013, 2012 and 2011 amounted to $0.2 million, $0.3 million and $0.2 million, respectively.
Total depletion expense for the three months ended September 30, 2013, 2012, 2011 and 2010 amounted to $0.02 million, $0.1 million, $0 and $0, respectively, and for the nine months ended September 30, 2013, 2012, 2011 and 2010, amounted to $0.1 million, $0.2 million, $0 and $0, respectively.
Total depletion expense for the three months ended June 30, 2013, 2012, 2011 and 2010 amounted to $0.02 million, $0.04 million, $0 and $0, respectively, and for the six months ended June 30, 2013, 2012, 2011 and 2010, amounted to $0.1 million and $0.1 million, $0 and $0, respectively.
Total depletion expense for the three months ended March 31, 2013, 2012 and 2011 amounted to $0.1 million, $0.06 million and $0, respectively.
189 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
The estimated aggregate amortization and depletion expenses for each of the five succeeding years is as follows:
Year ending | Estimated amortization and depletion expenses | Gross carrying amount | ||||||
(in thousands) | (in thousands) | |||||||
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 |
Note 10 – Debt
Short-term notes payable
Short-term notes payable are lines of credit extended by banks. Banks in turn issue the Company a bank acceptance note, which can be endorsed and assigned to vendors as payments for purchases. The notes payable are generally payable within three to six months. This short-term note payable is guaranteed by the bank for its complete face value. The banks do not charge interest on these notes, but usually charge a transaction fee of 0.05% of the notes value. In addition, the banks usually require the Company to deposit either a certain amount of cash at the bank as a guarantee deposit, which is classified on the balance sheet as restricted cash, or provide notes receivable as security, which are classified on the balance sheet as restricted notes receivable. Restricted cash as a guarantee for the notes payable amounted to $405.8 million, $380.6 million, $269.4 million, $322.7 million, $418.3 million, $407.4 million, $440.0 million, $363.3 million, $161.7 million, $182.8 million and $167.7 million as of September 30, 2013, June 30, 2013, March 31, 2013, December 31, 2013, September 30, 2012, June 30, 2012, March 31, 2012, December 31, 2012, September 30, 2011, June 30, 2011 and December 31, 2010, respectively. Restricted notes receivable as a guarantee for the notes payable amounted to $237.2 million, $98.3 million, $248.4 million, $345.8 million, $67.6 million, $115.7 million, $401.4 million, $451.1 million, $248.9 million, $55.7 million and $159.3 million as of September 30, 2013, June 30, 2013, March 31, 2013, December 31, 2013, September 30, 2012, June 30, 2012, March 31, 2012, December 31, 2012, September 30, 2011, June 30, 2011 and December 31, 2010, respectively.
The Company had the following short-term notes payable as of:
September 30, 2013 | June 30, 2013 | March 31, 2013 | December 31, 2012 | |||||||||||||
(in thousands) | (in thousands) | (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, $14.8 million, $0.2 million and $6.3 million as of September 30, 2013 and December 31, 2012as of September 30, 2013, June 30, 2013, March 31, 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 | $ | 21,287 | $ | 223 | $ | 12,696 | ||||||||
Longmen Joint Venture: Notes payable to various banks in China, due various dates from October 2013 to August 2014. Restricted cash required of $381.3 million, $365.8 million, $269.2 million and $316.4 million as of September 30, 2013 and December 31, 2012as of September 30, 2013, June 30, 2013, March 31, 2013 and December 31, 2012, respectively; Restricted notes receivable required of $237.2 million, $98.3 million, $248.4 million and $345.8 million as of September 30, 2013 and December 31, 2012as of September 30, 2013, June 30, 2013, March 31, 2013 and 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 | 792,234 | 785,296 | 971,117 | ||||||||||||
Total short-term notes payable | $ | 987,988 | $ | 813,521 | $ | 785,519 | $ | 983,813 |
190 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
September 30, 2012 | June 30, 2012 | March 31, 2012 | December 31, 2011 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
General Steel (China): Notes payable to China Minsheng Bank, due February 2013. Restricted cash required of $6.3 million, $6.3 million, $14.3 million and $7.9 million as of September 30, 2012, June 30, 2012, March 31, 2012 and December 31, 2011, respectively; guaranteed by third parties. These notes payable were either repaid or renewed subsequently on the due dates. | $ | 12,664 | $ | 12,680 | $ | 20,671 | $ | 7,934 | ||||||||
Longmen Joint Venture: Notes payable to various banks in China, due various dates from October 2012 to March 2013. Restricted cash required of $412.0 million, $401.1 million, $425.7 million and $355.4 million as of September 30, 2012, June 30, 2012, March 31, 2012 and December 31, 2011, respectively; Restricted notes receivable required of $67.6 million, $115.7 million, $401.4 million and $451.1 million as of September 30, 2012, June 30, 2012, March 31, 2012 and December 31, 2011, respectively; some notes are further guaranteed by third parties while others are secured by equipment and land use rights. These notes payable were either repaid or renewed subsequently on the due dates. | 855,105 | 897,982 | 1,227,564 | 1,105,570 | ||||||||||||
Total short-term notes payable | $ | 867,769 | $ | 910,662 | $ | 1,248,235 | $ | 1,113,504 |
September 30, 2011 | June 30, 2011 | December 31, 2010 | ||||||||||
(in thousands) | (in thousands) | (in thousands) | ||||||||||
General Steel (China): Notes payable to various banks in China, due December 2011. Restricted cash required of $3.1 million, $20.8 million and $11.7 million as of September 30, 2011, June 30, 2011 and December 31, 2010, respectively; guaranteed by third parties. These notes payable were either repaid or renewed subsequently on the due dates. | $ | 6,260 | $ | 23,875 | $ | 21,541 | ||||||
Longmen Joint Venture: Notes payable to various banks in China, due various dates from October 2011 to March 2012. $158.6 million restricted cash and $248.9 million notes receivable are secured for notes payable as of September 30, 2011, and comparatively $162.0 million restricted cash and $55.7 million notes receivable are secured for notes payable as of June 30, 2011 and $150.7 million restricted cash and $159.3 million notes receivable are secured for notes payable as of December 31, 2010, respectively; some notes are further guaranteed by third parties while others are secured by equipment and land use rights. These notes payable were either repaid or renewed subsequently on the due dates. | 548,671 | 321,782 | 447,992 | |||||||||
Bao Tou: Notes payable to various banks in China, due in April 2011. Restricted cash required of $5.3 million as of December 31, 2010, guaranteed by third parties. | - | - | 10,619 | |||||||||
Total short-term notes payable | $ | 554,931 | $ | 345,657 | $ | 480,152 |
191 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
Short-term loans
Short-term loans represent amounts due to various banks, other companies and individuals, including related parties, normally due within one year. The principal of the loans are due at maturity but can be renewed at the bank’s option. Accrued interest is due either monthly or quarterly.
Short term loans due to banks, related parties and other parties consisted of the following as of:
Due to banks
September 30, 2013 | June 30, 2013 | March 31, 2013 | December 31, 2012 | |||||||||||||
(in thousands) | (in thousands) | (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%, 7.2%, 7.2% and 7.6% per annum as of September 30, 2013, June 30, 2013, March 31, 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 | $ | 34,478 | $ | 32,372 | $ | 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%, 6.7%, 6.7% and 6.8% per annum as of September 30, 2013, June 30, 2013, March 31, 2013 and December 31, 2012, respectively; some are guaranteed by third parties, restricted cash or notes receivables. $120.0 million, $0, $0 and $76.0 million restricted notes receivable were secured for the loans as of September 30, 2013, June 30, 2013, March 31, 2013 and December 31, 2012, respectively; These loans were either repaid or renewed subsequently on the due dates. | 215,956 | 174,253 | 84,752 | 114,935 | ||||||||||||
Total short-term loans - bank | $ | 254,929 | $ | 208,731 | $ | 117,124 | $ | 147,124 |
192 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
September 30, 2012 | June 30, 2012 | March 31, 2012 | December 31, 2011 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
General Steel (China): Loans from various banks in China, due various dates from November 2012 to August 2013. Weighted average interest rate was 7.6%, 7.6%, 7.5% and 7.5% per annum as of September 30, 2012, June 30, 2012, March 31, 2012 and December 31, 2011, 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. | $ | 35,274 | $ | 37,674 | 41,526 | 43,149 | ||||||||||
Longmen Joint Venture: Loans from various banks in China, due various dates from December 2012 to September 2013. Weighted average interest rate was 4.8%, 6.7%, 6.6% and 8.3% per annum as of September 30, 2012, June 30, 2012, March 31, 2012 and December 31, 2011, respectively; some are guaranteed by third parties, restricted cash or notes receivables while others are secured by equipment, buildings, land use right and inventory. These loans were either repaid or renewed subsequently on the due dates. | 102,895 | 160,162 | 277,136 | 209,234 | ||||||||||||
Tianwu: Loans from Industrial and Commercial Bank of China Limited, due date various from October to December 2012. Interest rate was 10% additional to standard bank interest rate, and secured by accounts receivables. These loans were either repaid or renewed subsequently on the due dates. | 1,583.00 | 1,585.00 | - | 1,571 | ||||||||||||
Total short-term loans - bank | $ | 139,752 | $ | 199,421 | 318,662 | 253,954 |
September 30, 2011 | June 30, 2011 | December 31, 2010 | ||||||||||
(in thousands) | (in thousands) | (in thousands) | ||||||||||
General Steel (China): Loans from various banks in China, due various dates from December 2011 to August 2012. Weighted average interest rate 7.0% per annum; some are guaranteed by third parties while others are secured by equipment and inventory. These loans were either repaid or renewed subsequently on the due dates | $ | 33,203 | $ | 34,644 | 24,220 | |||||||
Longmen Joint Venture: Loans from various banks in China, due various dates from October 2011 to September 2012. Weighted average interest rate 6.6% per annum; some are guaranteed by third parties, restricted cash or notes receivables while others are secured by equipment, buildings, land use right and inventory. These loans were either repaid or renewed subsequently on the due dates. | 369,225 | 277,053 | 260,978 | |||||||||
Total short-term loans - bank | $ | 402,428 | $ | 311,697 | 285,198 |
As of September 30, 2013, June 30, 2013, March 31, 2013, December 31, 2012, September 30, 2012, June 30, 2012, March 31, 2012, December 31, 2011, September 30, 2011, June 30, 2011 and December 31, 2010, the Company had not met its financial covenants stipulated by certain loan agreements related to the Company’s debt to asset ratio. Based on the financial covenants, the Company should have kept its debt to asset ratio below 20% and 85% as of September 30, 2013, June 30, 2013, March 31, 2013, December 31, 2012, September 30, 2012, June 30, 2012, March 31, 2012, December 31, 2011, September 30, 2011, June 30, 2011 and December 31, 2010, respectively. However, as of September 30, 2013, June 30, 2013, March 31, 2013, December 31, 2012, September 30, 2012, June 30, 2012, March 31, 2012, December 31, 2011, September 30, 2011, June 30, 2011 and December 31, 2010, the Company's debt to asset ratio was 117.7%, 120.9%, 117.5%,116.4%, 114.4%, 110.9%, 108.0%, 105.4%, 98.2%, 97.1% and 93.2%, 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, 2013, June 30, 2013, March 31, 2013, December 31, 2012, September 30, 2012, June 30, 2012, March 31, 2012, December 31, 2011, September 30, 2011, June 30, 2011 and December 31, 2010 was $6.4 million, $7.9 million, $7.8 million, $12.7 million, $12.7 million, $12.7 million, $12.7 million, $12.6 million, $12.5 million, $24.8 million and $12.1 million, respectively. According to the Company’s short term loan agreements, the banks have the rights to request for more collateral or additional guarantees if the breach of covenant is not remedied or request early repayment of the loan if the Company does not cure such breach within a certain period of time. As of the date of this report, the Company has not received any notice from the banks to request more collateral, additional guarantees or early repayment of the short term loans due to the breach of covenant.
193 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
Due to unrelated parties
September 30, 2013 | June 30, 2013 | March 31, 2013 | December 31, 2012 | |||||||||||||
(in thousands) | (in thousands) | (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%, 5.2%, 5.2% and 6.0% per annum as of September 30, 2013, June 30, 2013, March 31, 2013, December 31, 2012, respectively. These loans were either repaid or renewed subsequently on the due dates. | $ | 33,294 | $ | 46,980 | $ | 46,003 | $ | 25,324 | ||||||||
Longmen Joint Venture: Loans from financing sales. | 90,680 | 98,106 | 95,953 | 115,966 | ||||||||||||
Maoming Hengda: Loans from one unrelated parties and one related party, due on demand, none interest bearing. | 6,196 | 6,159 | 6,067 | 6,033 | ||||||||||||
Total short-term loans – others | $ | 130,170 | $ | 151,245 | $ | 148,023 | $ | 147,323 |
September 30, 2012 | June 30, 2012 | March 31, 2012 | December 31, 2011 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
Longmen Joint Venture: Loans from various unrelated companies and individuals, due various dates from October 2012 to March 2013; Weighted average interest rate was 6.4%, 6.5%, 6.6% and 6.2% per annum as of September 30, 2012, June 30, 2012, March 31, 2012 and December 31, 2011, respectively. These loans were either repaid or renewed subsequently on the due dates. | $ | 32,911 | $ | 55,935 | $ | 104,227 | $ | 143,102 | ||||||||
Longmen Joint Venture: Loans from financing sales. | 173,791 | 178,165 | 189,458 | 97,583 | ||||||||||||
Maoming Hengda: Loans from one unrelated parties and one related party, due on demand, none interest bearing. | 6,018 | 6,025 | 6,022 | 5,972 | ||||||||||||
Total short-term loans – others | $ | 212,720 | $ | 240,125 | $ | 299,707 | $ | 246,657 |
September 30, 2011 | June 30, 2011 | December 31, 2010 | ||||||||||
(in thousands) | (in thousands) | (in thousands) | ||||||||||
Longmen Joint Venture: Loans from various unrelated companies and individuals, due various dates from October 2011 to September 2012. Weighted average interest rates 5.9% per annum. These loans were either repaid or renewed subsequently on the due dates. | $ | 61,467 | $ | 84,018 | $ | 75,380 | ||||||
Longmen Joint Venture: Loans from financing sales. | 159,782 | 115,291 | 37,947 | |||||||||
Maoming Hengda: Loans from one unrelated parties and one related party, due on demand, none interest bearing. | 5,949 | 5,881 | 14,385 | |||||||||
Total short-term loans – others | $ | 227,198 | $ | 205,190 | $ | 127,712 |
194 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
The Company had various loans from unrelated companies amounting to $130.2 million, $151.2 million, $148.0 million, $147.3 million, $212.7 million, $240.1 million, $299.7 million, $246.7 million, 227.2 million, $205.2 million and $127.7 million as of September 30, 2013, June 30, 2013, March 31, 2013, December 31, 2012, September 30, 2012, June 30, 2012, March 31, 2012, December 31, 2011, September 30, 2011, June 30, 2011 and December 31, 2010, respectively. Of the $130.2 million, $6.2 million loans carry no interest, $90.7 million of financing sales are subject to interest rates ranging between 4.2% and 5.9%, and the remaining $33.3 million are subject to interest rates ranging from 4.7% to 12.0%. All short term loans from unrelated companies are payable on demand and unsecured.
As part of its working capital management, Longmen Joint Venture has entered into a number of sale and purchase back contracts ("contracts") with third party companies and 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% 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 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% 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, 2013, 2012, 2011 and 2010 amounted to $166.2 million, $307.1 million, $297.4 million and $178.3 million, respectively, and for the nine months ended September 30, 2013, 2012, 2011 and 2010, amounted to $519.5 million, $600.8 million, $705.2 million and $576.5 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, 2013, 2012, 2011 and 2010, accounted to $1.1 million, $2.1 million, $2.2 million and $1.5 million, respectively, and for the nine months ended September 30, 2013, 2012, 2011 and 2010, amounted to $4.2 million, $6.8 million, $6.1 million and $5.5 million, respectively.
Total financing sales for the three months ended June 30, 2013, 2012, 2011 and 2010 amounted to $188.1 million, $149.5 million, $248.1 million and $211.1 million, respectively, and for the six months ended June 30, 2013, 2012, 2011 and 2010, amounted to $353.3 million, $293.7 million, $407.8 million $398.2 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 June 30, 2013, 2012, 2011 and 2010 accounted to $1.5 million, $3.5 million, $2.3 million and $2.2 million, respectively, and for the six months ended June 30, 2013, 2012, amounted to $3.1 million, $4.7 million, $3.9 million $4.0 million, respectively.
Total financing sales for the three months ended March 31, 2013, 2012 and 2011 amounted to $165.2 million, $144.2 million and $159.7 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 March 31, 2013, 2012 and 2011, amounted to $1.6 million, $1.2 million and $1.6 million, respectively.
195 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
Short term loans due to related parties
September 30, 2013 | June 30, 2013 | March 31, 2013 | December 31, 2012 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
Baotou Steel: Loans from Tianjin Hengying Trading Co., Ltd, due on demand, and interest rates is 10% per annum. | $ | 3430 | $ | 3409 | $ | 3,837 | $ | 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. | - | 6858 | - | 21,397 | ||||||||||||
General Steel China: Loans from Beijing Shenhua Xinyuan Metal Materials Co., Ltd., due on demand, and interest rates is 10% per annum. | 1395 | 1387 | 1,366 | 1,359 | ||||||||||||
General Steel China: Loans from Yangpu Capital Automobile, due on demand, and interest rates is 10% per annum. | 1,451 | 1,442 | 1,421 | 1,413 | ||||||||||||
Longmen Joint Venture: Loan from Shaanxi Coal and Chemical Industry Group Co., Ltd., due on demand, and interest rate is 7.0% per annum. | 33,580 | 42,836 | 56,977 | - | ||||||||||||
Longmen Joint Venture: Loan from Xi’an Pinhe Steel Material Co., Ltd., due in July 2013, and interest rate is 7.2% per annum. | - | - | 15,960 | - | ||||||||||||
Longmen Joint Venture: Loans from financing sales. | 9,033 | 26,043 | 24,829 | 35,839 | ||||||||||||
Total short-term loans - related parties | $ | 48,889 | $ | 81,975 | $ | 104,390 | $ | 79,557 |
September 30, 2012 | June 30, 2012 | March 31, 2012 | December 31, 2011 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
Baotou Steel: Loans from Tianjin Hengying Trading Co., Ltd, due on demand, and interest rates is 10% per annum. | $ | 5,072 | $ | 5,078 | $ | 5,075 | $ | - | ||||||||
General Steel China: Loans from Tianjin Hengying Trading Co., Ltd., due on demand, and interest rates is 10% per annum. | 19,756 | 6,802 | 18,795 | - | ||||||||||||
General Steel China: Loans from Tianjin Dazhan Industry Co, Ltd., due on demand, and interest rates is 10% per annum. | 8,972 | 50,984 | 24,674 | - | ||||||||||||
General Steel China: Loans from Beijing Shenhua Xinyuan Metal Materials Co., Ltd., due on demand, and interest rates is 10% per annum. | 1,355 | 1,357 | 1,356 | - | ||||||||||||
General Steel China: Loans from Yangpu Capital Automobile, due on demand, and interest rates is 10% per annum. | 1,409 | 1,411 | 1,410 | - | ||||||||||||
Longmen Joint Venture: Loans from Tianjin Hengying Trading Co., Ltd, due in April 2012, and interest rate was 5.2% per annum. This loan was repaid subsequently on the due date. | 15,840 | 15,710 | ||||||||||||||
Longmen Joint Venture: Loans from financing sales. | 45,505 | 15,892 | 15,842 | - | ||||||||||||
Total short-term loans - related parties | $ | 82,069 | $ | 81,524 | $ | 82,992 | $ | 15,710 |
196 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
September 30, 2011 | June 30, 2011 | December 31, 2010 | ||||||||||
(in thousands) | (in thousands) | (in thousands) | ||||||||||
Longmen Joint Venture: Loans from Shaanxi Steel, due July 2011, and interest rates 5.6% per annum. | 14,548 | |||||||||||
Longmen Joint Venture: Loans from Tianjin Hengying Trading Co., Ltd, due in October 2011, and interest rate 4.8% per annum. This loan was renewed subsequently on the due dates. | 15,650 | 15,470 | - | |||||||||
Longmen Joint Venture: Loans from financing sales. | 167 | - | ||||||||||
Total short-term loans - related parties | $ | 15,650 | $ | 15,637 | $ | 14,548 |
Long-term loans due to related party
September 30, 2013 | June 30, 2013 | March 31, 2013 | December 31, 2012 | |||||||||||||
(in thousands) | (in thousands) | (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 | $ | 77,174 | $ | 93,500 | $ | 92,973 | ||||||||
Less: Current maturities of long-term loans – related party | (47,896 | ) | (48,014 | ) | (59,984 | ) | (54,885 | ) | ||||||||
Long-term loans - related party | $ | 24,450 | $ | 29,160 | $ | 33,516 | $ | 38,088 |
September 30, 2012 | June 30, 2012 | March 31, 2012 | December 31, 2011 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
Longmen Joint Venture: Loans from Shaanxi Steel Group, due between July 2013 and November 2015 and interest rates are 5.6% - 5.9% per annum | $ | 92,738 | $ | 92,856 | $ | 92,797 | $ | 92,035 | ||||||||
Less: Current maturities of long-term loans – related party | (49,997 | ) | - | - | - | |||||||||||
Long-term loans - related party | $ | 42,741 | $ | 92,856 | $ | 92,797 | $ | 92,035 |
September 30, 2011 | December 31, 2012 | December 31, 2010 | ||||||||||
(in thousands) | (in thousands) | (in thousands) | ||||||||||
Longmen Joint Venture: Loans from Shaanxi Steel Group, due various dates from July 2013 to November 2015 and interest rates of 5.6% - 7.3% per annum. | $ | 107,695 | $ | 134,566 | $ | 91,020 |
Total interest expense, net of capitalized interest, amounted to $15.5 million, $36.6 million, $35.1 million and $10.2 million for the three months ended September 30, 2013, 2012, 2011 and 2010, respectively.
Total interest expense, net of capitalized interest, amounted to $54.5 million, $138.9 million, $72.3 million and $37.6 million for the nine months ended September 30, 2013, 2012, 2011 and 2010, respectively.
Capitalized interest amounted to $1.3 million, $0.2 million, $0 and $0.5 million for the three months ended September 30, 2013, 2012, 2011 and 2010, respectively.
197 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
Capitalized interest amounted to $2.1 million, $0.6 million, $2.8 million and $1.6 million for the nine months ended September 30, 2013, 2012, 2011 and 2010, respectively.
Total interest expense, net of capitalized interest, amounted to $19.4 million, $25.5 million, $23.1 million and $16.5 million, for the three months ended June 30, 2013, 2012, 2011 and 2010, respectively.
Total interest expense, net of capitalized interest, amounted to $38.6 million, $53.0 million, $37.2 million and $27.4 million, for the six months ended June 30, 2013, 2012, 2011 and 2010, respectively.
Capitalized interest amounted to $0.6 million, $0.4 million, $2.1 million and 0.7 million, for the three months ended June 30, 2013, 2012, 2011 and 2010 respectively.
Capitalized interest amounted to $0.8 million, $0.4 million, $2.8 million and $1.1 million for the six months ended June 30, 2013, 2012, 2011 and 2010, respectively.
Total interest expense, net of capitalized interest, amounted to $19.1 million, $27.5 million and $14.1 million for the three months ended March 31, 2013, 2012 and 2011, respectively.
Capitalized interest amounted to $0.2 million, $0.03 million and $0.7 million for the three months ended March 31, 2013, 2012 and 2011, respectively.
Note 11 – Customer deposits
Customer deposits represent amounts advanced by customers on product orders. The product normally is shipped within one month after receipt of the advance payment, and the related sale is recognized in accordance with the Company’s revenue recognition policy. As of September 30, 2013, June 30, 2013, March 31, 2013, December 31, 2012, September 30, 2012, June 30, 2012, March 31, 2012, December 31, 2011, September 30, 2011, June 30, 2011 and December 31, 2010, customer deposits amounted to $110.2 million, $130.1 million, $117.3 million, $147.9 million, $165.3 million, $128.1 million, $138.1 million, $158.8 million, $246.5 million, $241.1 million and $188.4 million, respectively, including deposits received from related parties, which amounted to $14.5 million, $7.8 million, $12.6 million, $22.0 million, $83.5 million, $39.1 million, $57.4 million, $68.3 million, $54.4 million, $65.8 million and $54.9 million, respectively.
Note 12 – Deposits due to sales representatives
Longmen Joint Venture entered into agreements with various entities to act as the Company’s exclusive sales agent in a specified geographic area. These exclusive sales agents must meet certain criteria and are required to deposit a certain amount of money with the Company. In return the sales agents receive exclusive sales rights in a specified area and at discounted prices on products they order. These deposits bear no interest and are required to be returned to the sales agent once the agreement is terminated. The agreement is normally entered/or renewed on an annual basis. Termination of the agreement can be mutually agreed to by both parties at any time. The Company had $30.0 million, $32.6 million, $42.3 million, $35.1 million, $36.2 million, $31.8 million, $34.8 million, $23.8 million, $21.5 million, $23.7 million and $52.1 million in deposits due to sales representatives, including deposits due to related parties, as of September 30, 2013, June 30, 2013, March 31, 2013, December 31, 2012, September 30, 2012, June 30, 2012, March 31, 2012, December 31, 2011, September 30, 2011, June 30, 2011 and December 31, 2010, respectively.
Note 13 – Convertible notes and derivative liabilities
The Company had 3,900,871 outstanding warrants in connection with the $40 million convertible notes issued in 2007, which expired on May 13, 2013, and 2,777,778 warrants in connection with a registered direct offering in 2009, which expired on June 24, 2012. 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.
198 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
The fair value of the warrants as of December 31, 2012 was calculated using the Cox Rubenstein Binomial model based on the following variables:
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 |
As of September 30, 2013, June 30, 2013, March 31, 2013, December 31, 2012, September 30, 2012, June 30, 2012, March 31, 2012, December 31, 2011, September 30, 2011, June 30, 2011 and December 31, 2010, derivative liabilities - warrants amounted to $0, $0, $0, $1.0 thousand, $58.4 thousand, $3.3 thousand, $23.1 thousand, $10.2 thousand, $47.6 thousand, $0.2 million and $5.6 million, respectively.
The Company has the following warrants outstanding:
Outstanding as of December 31, 2010 | 6,678,649 | |||
Granted | - | |||
Forfeited / expired | - | |||
Exercised | - | |||
Outstanding as of December 31, 2011 | 6,678,649 | |||
Granted | - | |||
Forfeited / expired | (2,777,778 | ) | ||
Exercised | - | |||
Outstanding as of December 31, 2012 | 3,900,871 | |||
Granted | - | |||
Forfeited / expired | (3,900,871 | ) | ||
Exercised | - | |||
Outstanding as of September 30, 2013 | - |
Note 14 - Supplemental disclosure of cash flow information
Interest paid, net of capitalized, amounted to $11.5 million, $20.2 million, $8.6 million and $13.2 million for the nine months ended September 30, 2013, 2012, 2011 and 2010, respectively.
The Company paid income tax amounted to $0.3 million, $0.1 million, $0.5 million and $1.6 million for the nine months ended September 30, 2013, 2012, 2011 and 2010, respectively.
During the nine months ended September 30, 2013 and 2012, the Company had receivables of $1.0 million and $0.5 million as a result of the disposal of equipment that has not been collected.
During the nine months ended September 30, 2013 and 2012, the Company converted $1.0 million and $0.2 million of equipment into inventory productions.
During the nine months ended September 30, 2013, the Company used $37.3 million inventory in plant and equipment constructions.
During the nine 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 nine months ended September 30, 2013 and 2012, the Company offset $119.9 million and $29.9 million, respectively, advance on inventory purchases and other receivables to related parties as short-term loan repayments.
During the nine months ended September 30, 2013, the Company reclassified $3.8 million refundable advances on inventory purchase – related parties to other receivables – related parties.
During the nine months ended September 30, 2013, the Company incurred $18.7 million accounts payable to be paid for constructions in process.
During the nine months ended September 30, 2013 and 2012, one of the Company’s unconsolidated entities declared dividend and the Company was entitled for the dividend amounted to $0.2 million and $0.1 million, respectively, which was not yet collected.
199 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
During the nine 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.
During the nine months ended September 30, 2012, the Company converted $48.0 million of our accounts payable and other payables from our related parties to short term loans upon the execution of the loan agreements.
During the nine months ended September 30, 2011 and 2010, the Company recognized $13.6 million and $28.6 million of lease income in related to other receivables – related parties that have not been collected.
During the nine months ended September 30, 2011, the Company issued 974,571 shares of common stock for repayment of debt of $4.9 million.
The Company capitalized all the fixed assets constructed by Shaanxi Steel for a price of $572.5 million through a 20 year capital lease starting from April 29, 2011 upon the inception of the Unified Management Agreement. See Note 16 – “ Capital lease obligations”.
On April 30, 2011, a share transfer agreement was signed with the Labor Union Trust of Shaanxi Long Steel Group, transferring Tongxing’s 20.7% share of Shaanxi Xinglong (“Xinglong”) Theromoelectric Co., Ltd. to the Labor Union Trust of Shaanxi Long Steel Group for $11.3 million on April 30, 2011. This transaction resulted in gain of $1.4 million, which is included in “Income from equity investments” in the unaudited condensed consolidated statements of operations and comprehensive loss. As of September 30, 2011, the unpaid amount of $11.3 million was included in the other –receivable – related parties.
Interest paid, net of capitalized, amounted to $7.6 million, $15.4 million, $8.6 million and $8.7 million for the six months ended June 30, 2013, 2012, 2011 and 2010, respectively.
The Company paid income tax amounted to $0.2 million, $0.2 million, $0.5 million and $1.3 million for the six months ended June 30, 2013, 2012, 2011 and 2010, respectively.
During the six months ended June 30, 2013 and 2012, the Company had receivables of $1.0 million and $0.5 million as a result of the disposal of equipment that has not been collected.
During the six months ended June 30, 2013, the Company converted $0.7 million of equipment into inventory productions.
During the six months ended June 30, 2013, the Company used $19.0 million inventory in plant and equipment constructions.
During the six months ended June 30, 2013 and 2012, the Company offset $63.9 million and $0, respectively, accounts payable to related party as loan receivable – related party repayment.
During the six months ended June 30, 2013 and 2012, the Company offset $88.8 million and $22.4 million, respectively, advance on inventory purchases to related parties as short-term loan repayments.
During the six months ended June 30, 2013, the Company reclassified $3.7 million refundable advances on inventory purchase – related parties to other receivables – related parties.
During the six months ended June 30, 2013, the Company incurred $4.7 million accounts payable to be paid for constructions in process.
During the six months ended June 30, 2013 and 2012, one of the Company’s unconsolidated entities declared dividend and the Company was entitled for the dividend amounted to $0.2 million and $0.1 million, respectively, which was not yet collected.
During the six months ended June 30, 2012, one of the Company’s unconsolidated entities declared dividend and the Company was entitled for the dividend amounted to $0.1 million, which was not yet collected.
200 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
During the six months ended June 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.
During the six months ended June 30, 2012, the Company converted $48.0 million of our accounts payable and other payables from our related parties to short term loans upon the execution of the loan agreements.
During the six months ended June 30, 2012, the Company offset $22.4 million advance on inventory purchases to related parties as short-term loans repayments.
During the six months ended June 30, 2011, the Company recognized $13.6 million of deferred lease income in related to other receivables – related parties that have not been collected.
During the six months ended June 30, 2011, the Company issued 974,571 shares of common stock for repayment of debt of $4.9 million.
Interest paid, net of capitalized, amounted to $3.6 million, $7.5 million and $4.7 million for the three months ended March 31, 2013, 2012 and 2011, respectively.
The Company paid income tax amounted to $0.1 million, $0.1 million and $0.4 million for the three months ended March 31, 2013, 2012 and 2011, respectively.
During the three months ended March 31, 2013, the Company had receivables of $1.0 million as a result of the disposal of equipment that has not been collected.
During the three months ended March 31, 2013, the Company converted $0.5 million of equipment into inventory productions.
During the three months ended March 31, 2013, the Company used $4.1 million inventory in plant and equipment constructions.
During the three months ended March 31, 2013, the Company offset $63.6 million accounts payable to related party as loan receivable – related party repayment.
During the three months ended March 31, 2013 and 2012, the Company offset $88.2 million and $11.5 million, respectively, advance on inventory purchases to related parties as short-term loan repayments.
During the three months ended March 31, 2013 and 2012, one of the Company’s unconsolidated entities declared dividend and the Company was entitled for the dividend amounted to $0.2 million and $0.1 million, respectively, which was not yet collected.
During the three months ended March 31, 2012, the Company converted $48.1 million of our accounts payable and other payables from our related parties to short term loans upon the execution of the loan agreements.
During the three months ended March 31, 2011, the Company recognized $13.8 million of deferred lease income in related to other receivables – related parties that have not been collected.
Other receivables – related parties from Shaanxi Steel of $59.3 was offset with short-term loans due to the same related party as of March 31, 2011.
Note 15 - Deferred lease income
To compensate the Group for costs and economic losses incurred during construction of the iron and steel making facilities owned by Shaanxi Steel, Shaanxi Steel reimbursed Longmen Joint Venture $11.4 million (RMB 70.1 million) in the fourth quarter of 2010 for the value of assets dismantled and rent under a 40-year property sub-lease that was entered into by the parties in June 2009 (the "Longmen Sub-lease"), and $29.8 million (RMB 183.1 million) for the reduced production efficiency caused by the construction. In addition, in 2010 and 2011, Shaanxi Steel reimbursed Longmen Joint Venture $14.6 million (RMB 89.5 million) and $14.6 million (RMB 89.3 million), respectively, for trial production costs related to the new equipment.
201 |
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 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, 2013, 2012, 2011 and 2010, the Company recognized $0.5 million, $0.5 million, $0.5 million and $0.3 million, respectively. For the nine months ended September 30, 2013, 2012, 2011 and 2010, the Company recognized $1.6 million, $1.6 million, $1.5 million and $0.6 million, respectively. For the three months ended June 30, 2013, 2012, 2011 and 2010, the Company recognized $0.5 million, $0.5 million, $0.5 million and $0.2 million, respectively. For the six months ended June 30, 2013, 2012, 2011 and 2010, the Company recognized $1.1 million, $1.1 million, $1.0 million and $0.3 million, respectively. For the three months ended March 31, 2013, 2012 and 2011, the Company recognized $0.5 million in each period.
As of September 30, 2013, June 30, 2013, March 31, 2013, December 31, 2012, September 30, 2012, June 30, 2012, March 31, 2012, December 31, 2011, September 30, 2011, June 30, 2011 and December 31, 2010, the balance of deferred lease income amounted to $77.7 million, $77.7 million, $77.1 million, $77.2 million, $77.5 million, $78.1 million, $78.6 million, $78.5 million, $78.4 million, $78.3 million and $57.6 million, respectively, of which $2.2 million, $2.2 million, $2.1 million, $2.1 million, $2.1 million, $2.1 million, $2.1 million, $2.1 million, $2.1 million, $2.1 million and $2.0 million represents balance to be amortized within one year.
Note 16 - Capital lease obligation (restated)
On April 29, 2011, the Company’s subsidiary, Longmen Joint Venture entered into a Unified Management Agreement with Shaanxi Steel and Shaanxi Coal under which Longmen Joint Venture uses new iron and steel making facilities including one sintering machine, two converters, two blast furnaces and other auxiliary systems constructed by Shaanxi Steel. As the 20-year term of the agreement exceeds 75% of the assets’ useful lives, this arrangement is accounted for as a capital lease. The ongoing lease payments are comprised of two elements: (1) a monthly payment of $2.3 million (RMB 14.6 million) based on Shaanxi Steel’s cost to construct the assets to be paid over the term of the Unified Management Agreement of 20 years and (2) 40% of any remaining pre-tax profits from the Asset Pool which includes Longmen Joint Venture and the newly constructed iron and steel making facilities. In February 2014, Shaanxi Steel agreed that it will not demand capital lease payment from Longmen Joint Venture until February 2017. The profit sharing component does not meet the definition of contingent rent because it is based on future revenue and is therefore considered part of the financing for the capital leased assets which is related to the Unified Management Agreement. After determining the value of the leased asset and obligation at the inception of the lease, the lease liability is then reduced by the value of the profit sharing component, which is recognized as a derivative liability, which is carried at fair value. See Note 17 – “Profit sharing liability”.
Presented below is a schedule of estimated minimum lease payments on the capital lease obligation for the next five years as of September 30, 2013:
Year ending September 30, | Capital Lease Obligation Minimum Lease Payments | |||
(in thousands) | ||||
2014 | $ | - | ||
2015 | 126,557 | |||
2016 | 28,654 | |||
2017 | 28,654 | |||
2018 | 28,654 | |||
Thereafter | 360,567 | |||
Total minimum lease payments | 573,086 | |||
Less: amounts representing interest | (218,510 | ) | ||
Ending balance | $ | 354,576 |
Interest expense for the three months ended September 30, 2013, 2012, 2011 and 2010 on the minimum lease payments were $5.1 million, $5.1 million, $5.1 million and $0, respectively.
202 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
Interest expense for the nine months ended September 30, 2013, 2012, 2011 and 2010 on the minimum lease payments were $15.3 million, $15.5 million, $8.5 million and $0, respectively.
Interest expense for the three months ended June 30, 2013, 2012, 2011 and 2010 on the minimum lease payments were $5.1 million, $5.2 million, $3.4 million and $0, respectively.
Interest expense for the six months ended June 30, 2013, 2012, 2011 and 2010 on the minimum lease payments were $10.2 million, $10.4 million, $3.4 million and $0, respectively.
Interest expense for the three months ended March 31, 2013, 2012 and 2011 on the minimum lease payments were $5.1 million, $5.2 million and $0, respectively.
Note 17 –Profit sharing liability(restated)
The profit sharing liability component of the capital lease obligation was recognized initially at its estimated fair value at the lease commencement date and included in the initial measurement and recognition of the capital lease, in addition to the fixed payment component of the minimum lease payments. The profit sharing liability is accounted for separately from the fixed portion of the capital lease obligation (see Note 16 - “Capital lease obligation”) and is accounted for as a derivative instrument in accordance with ASC 815-10-15-83. The estimated fair value of the profit sharing liability is reassessed at the end of each reporting period, with any change in fair value charged or credited to income as “Change in Fair Value of Profit Sharing Liability”. See Note 3(h) – “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 has been made since inception.
Note 18 – 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, 2013, 2012, 2011 and 2010, the Company recognized $0.5 million, $0.5 million, $0.5 million and $0.3 million, respectively. For the nine months ended September 30, 2013, 2012, 2011 and 2010, the Company recognized $1.6 million, $1.6 million, $1.5 million and $0.6 million, respectively. For the three months ended June 30, 2013, 2012, 2011 and 2010, the Company recognized $0.5 million, $0.5 million, $0.5 million and $0.2 million, respectively. For the six months ended June 30, 2013, 2012, 2011 and 2010, the Company recognized $1.1 million, $1.1 million, $1.0 million and $0.3 million, respectively. For the three months ended March 31, 2013, 2012 and 2011, the Company recognized $0.5 million in each period.
Gain from debt settlement
On June 16, 2011, the Company and Maoming Hengda entered into a Debt Repayment Agreement with Guangzhou Hengda, an unrelated party, and its sole shareholder Ms Ding Yumei whereby the Company issued 974,571 shares of its common stock (the “Shares”) to Ms Ding Yumei, the designee and sole shareholder of Guangzhou Hengda, to partially repay the outstanding balance due to Guangzhou Hengda by $4.9 million. The Company recorded paid-in-capital based on the market price of its common stock on the date of debt settlement at $1.48 per share, totaling $1.4 million and a gain from debt settlement totaling $0 and $3.4 million for the three and nine months ended September 30, 2011, respectively, which was the difference between the amount of debt extinguished and the fair value of the Shares issued in the settlement.
203 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
Note 19 – 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, 2013, 2012, 2011 and 2010 are as follows:
For the three months ended | For the nine months ended | |||||||||||||||
(In thousands) | September 30, 2013 | September 30, 2012 | September 30, 2013 | September 30, 2012 | ||||||||||||
Current | $ | 25 | $ | 100 | $ | 201 | $ | 510 | ||||||||
Deferred | - | - | - | 169 | ||||||||||||
Total provision for income taxes | $ | 25 | $ | 100 | $ | 201 | $ | 679 |
Three months ended | Nine months ended | |||||||||||||||
(In thousands) | September 30, 2011 | September 30, 2010 | September 30, 2011 | September 30, 2010 | ||||||||||||
Current | $ | 410 | $ | 5,332 | $ | 617 | $ | 860 | ||||||||
Deferred | 144 | (5,676 | ) | 15,384 | (5,944 | ) | ||||||||||
Total provision (benefit) for income taxes | $ | 554 | $ | (344 | ) | $ | 16,001 | $ | (5,084 | ) |
For the three months ended | For the six months ended | |||||||||||||||
(In thousands) | June 30, 2013 | June 30, 2012 | June 30, 2013 | June 30, 2012 | ||||||||||||
Current | $ | 105 | $ | 43 | $ | 176 | $ | 410 | ||||||||
Deferred | - | - | - | 169 | ||||||||||||
Total provision for income taxes | $ | 105 | $ | 43 | $ | 176 | $ | 579 |
Three months ended | Six months ended | |||||||||||||||
(In thousands) | June 30, 2011 | June 30, 2010 | June 30, 2011 | June 30, 2010 | ||||||||||||
Current | $ | - | $ | - | $ | 207 | $ | 606 | ||||||||
Deferred | 18,198 | (2,803 | ) | 15,240 | (5,346 | ) | ||||||||||
Provision (benefit) for income taxes | $ | 18,198 | $ | (2,803 | ) | $ | 15,447 | $ | (4,740 | ) |
(In thousands) | For the three months ended March 31, 2013 | For the three months ended March 31, 2012 | ||||||
Current | $ | 71 | $ | 367 | ||||
Deferred | - | 169 | ||||||
Total provision for income taxes | $ | 71 | $ | 536 |
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%.
Longmen Joint Venture is located in the Mid-West region of China and as such, qualifies for the “Go-West” tax rate of 15% promulgated by the government. In 2010, the Chinese government announced that the “Go-West” tax initiative would be extended for 10 years, and thus, the preferential tax rate of 15% will be in effect until 2020. This special tax treatment for Longmen Joint Venture will be evaluated on a year-to-year basis by the local tax bureau.
204 |
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 million will begin to expire in 2014. The Chinese government recently announced several policies to curb the real estate price increases across the country which led to a slowdown in demand for construction steel products. Additionally due to the continued global economic slowdown and the overcapacity issues in China's steel market, management expected there would be a sustained increase in margin pressure in the next five years until all the existing but outdated steel capacity across the whole industry are eliminated. Management took into consideration this potential negative impact on average selling price and gross margin of its products, re-performed an operating forecast for the next five years and concluded that the beginning-of-the-year balance of deferred tax assets mainly relating to the net operating loss carry forward may not be fully realizable due to the reduction in the projection of income to be available in the next 5 years. Management therefore decided to provide 100% valuation allowance for the deferred tax assets. The valuation allowance as of September 30, 2013, June 30, 2013, March 31, 2013, December 31, 2012, September 30, 2012, June 30, 2012, March 31, 2012, December 31, 2011, September 30, 2011, June 30, 2011 and December 31, 2010 was $86.9 million, $84.8 million, $75.8 million, $72.9 million, $59.9 million, $61.6 million, $54.9 million, $47.7 million, $23.8 million, $19.6 million and $0, respectively. Management will review this valuation allowance periodically and make adjustments as warranted. Temporary differences, representing 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 | June 30, 2013 | March 31, 2013 | December 31, 2012 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
Beginning balance | $ | 72,891 | $ | 72,891 | $ | 72,891 | $ | 47,703 | ||||||||
Current period addition | 12,776 | 11,006 | 2,912 | 25,180 | ||||||||||||
Current period reversal | (857 | ) | (694 | ) | (465 | ) | - | |||||||||
Deconsolidation of Tongxing | - | - | - | (216 | ) | |||||||||||
Exchange difference | 2,125 | 1626 | 417 | 224 | ||||||||||||
Ending balance | $ | 86,935 | $ | 84,829 | $ | 75,755 | $ | 72,891 |
September 30, 2012 | June 30, 2012 | March 31, 2012 | December 31, 2011 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
Beginning balance | $ | 47,703 | $ | 47,703 | $ | 47,703 | $ | - | ||||||||
Current period addition | 22,144 | 13,868 | 7,194 | 46,914 | ||||||||||||
Current period reversal | - | - | - | - | ||||||||||||
Deconsolidation of Tongxing | (216 | ) | (216 | ) | (216 | ) | - | |||||||||
Exchange difference | 185 | 202 | 198 | 789 | ||||||||||||
Ending balance | $ | 69,816 | $ | 61,557 | $ | 54,879 | $ | 47,703 |
September 30, 2011 | June 30, 2011 | December 31, 2010 | ||||||||||
(in thousands) | (in thousands) | (in thousands) | ||||||||||
Beginning balance | $ | - | $ | - | $ | - | ||||||
Current period addition | 23,670 | 19,571 | - | |||||||||
Current period reversal | - | - | - | |||||||||
Exchange difference | 131 | |||||||||||
Ending balance | $ | 23,801 | $ | 19,571 | $ | - |
205 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
Deferred taxes assets – U.S.
General Steel Holdings, Inc. was incorporated in the United States and has incurred net operating losses for income tax purposes for the nine months ended September 30, 2013. The net operating loss carry forwards for United States income taxes amounted to $1.6 million, which may be available to reduce future years’ taxable income. These carry forwards will expire, if not utilized, starting from 2026 through 2032. Management believes that the realization of the benefits from these losses appears uncertain due to the Company’s limited operating history and continuing losses for United States income tax purposes. Accordingly, the Company has provided a 100% valuation allowance on the deferred tax asset benefit to reduce the asset to zero. The valuation allowance as of September 30, 2013 was $0.5 million. The net change in the valuation allowance for the nine months ended September 30, 2013 was $0. Management will review this valuation allowance periodically and make adjustments as warranted.
The Company has cumulative proportionate retained earnings from profitable subsidiaries of approximately $0.1 million as of September 30, 2013. Accordingly, no provision has been made for U.S. deferred taxes related to future repatriation of these earnings, nor is it practicable to estimate the amount of income taxes that would have to be provided if we concluded that such earnings will be remitted in the future.
Value added tax
Enterprises or individuals who sell commodities, engage in repair and maintenance or import and export goods in the PRC are subject to a value added tax in accordance with PRC laws. The value added tax (“VAT”) standard rates are 13% to 17% of the gross sales price. A credit is available whereby VAT paid on the purchases of semi-finished products or raw materials used in the production of the Company’s finished products can be used to offset the VAT due on sales of the finished product. As of September 30, 2013, June 30, 2013, March 31, 2013, December 31, 2012, September 30, 2012, June 30, 2012, March 31, 2012, December 31, 2011, September 30, 2011, June 30, 2011 and December 31, 2010, the Company had $3.1 million, $3.0 million, $3.4 million, $4.2 million, $2.3 million, $2.9 million, $1.6 million, $5.8 million $15.2 million, $15.5 million and $37.3 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 million and $156.2 million, respectively, for the three months ended September 30, 2013, $209.7 million and $206.7 million, respectively, for the three months ended September 30, 2012, $307.3 million and $301.1 million, respectively, for the three months ended September 30, 2011, and $128.1 million and $131.4 million, respectively, for the three months ended September 30, 2010. 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, $775.5 million and $729.0 million, respectively, for the nine months ended September 30, 2011, $386.7 million and $357.8 million, respectively, for the nine months ended September 30, 2010.
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 $164.8 million and $154.4 million, respectively, for the three months ended June 30, 2013 and $226.1 million and $216.0 million, respectively, for the three months ended June 30, 2012, $253.7 million and $251.1 million, respectively, for the three months ended June 30, 2011, and $141.0 million and $138.6 million for the three months ended June 30, 2010, respectively. VAT on sales and VAT on purchases amounted to $353.2 million and $338.2 million, respectively, for the six months ended June 30, 2013, $407.3 million and $387.4 million, respectively, for the six months ended June 30, 2012, $468.2 million and $428.0 million, respectively, for the six months ended June 30, 2011, and $258.5 million and $226.4 million, respectively, for the six months ended June 30, 2010..
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 $183.2 million and $183.8 million, respectively, for the three months ended March 31, 2013 and $179.5 million and $171.3 million, respectively, for the three months ended March 31, 2012, and $214.5 million and $176.9 million, respectively, for the three months ended March 31, 2011.
Taxes payable consisted of the following:
September 30, 2013 | June 30, 2013 | March 31, 2013 | December 31, 2012 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
VAT taxes payable | $ | 7,309 | $ | 6,993 | $ | 8,432 | $ | 13,579 | ||||||||
Income taxes payable | 20 | 67 | 44 | 68 | ||||||||||||
Misc. taxes | 2,387 | 3,250 | 3,858 | 3,027 | ||||||||||||
Total | $ | 9,716 | $ | 10,310 | $ | 12,334 | $ | 16,674 |
206 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
September 30, 2012 | June 30, 2012 | March 31, 2012 | December 31, 2011 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
VAT taxes payable | $ | 3,869 | $ | 2,351 | $ | 30 | $ | 4,856 | ||||||||
Income taxes payable | 124 | 153 | 147 | 96 | ||||||||||||
Misc. taxes | 2,505 | 4,417 | 5,178 | 6,422 | ||||||||||||
Total | $ | 6,498 | $ | 6,921 | $ | 5,355 | $ | 11,374 |
September 30, 2011 | June 30, 2011 | December 31, 2010 | ||||||||||
(in thousands) | (in thousands) | (in thousands) | ||||||||||
VAT taxes payable | $ | 6,402 | $ | 7,818 | $ | 3,921 | ||||||
Income taxes payable | 873 | 586 | 840 | |||||||||
Misc. taxes | 4,745 | 4,286 | 1,476 | |||||||||
Total | $ | 12,020 | $ | 12,690 | $ | 6,237 |
Note 20 – Earnings (Loss) per share
The computation of earnings (loss) per share is as follows:
(in thousands, except per share data)
For the three months ended September 30, 2013 | For the three months ended 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 | ) |
(in thousands except per share data)
For the three months ended September 30, 2011 | For the three months ended September 30, 2010 | |||||||
Loss attributable to holders of common shares | $ | (13,830 | ) | $ | (3,784 | ) | ||
Basic and diluted weighted average number of common shares outstanding | 55,166 | 53,941 | ||||||
Loss per share | ||||||||
Basic and diluted | $ | (0.25 | ) | $ | (0.07 | ) |
For the nine months ended September 30, 2013 | For the nine months ended 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 | ) |
207 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
For the nine months ended | For the nine months ended | |||||||
(in thousands except per share data) | September 30, 2011 | September 30, 2010 | ||||||
Loss attributable to holders of common shares | $ | (45,662 | ) | $ | (11,400 | ) | ||
Basic and diluted weighted average number of common shares outstanding | 54,547 | 52,577 | ||||||
Loss per share | ||||||||
Basic and diluted | $ | (0.84 | ) | $ | (0.22 | ) |
For the three months ended June 30, 2013 | For the three months ended June 30, 2012 | |||||||
Loss attributable to holders of common stock | $ | (39,818 | ) | $ | (26,377 | ) | ||
Basic and diluted weighted average number of common shares outstanding | 54,980 | 54,857 | �� | |||||
Loss per share | ||||||||
Basic and diluted | $ | (0.72 | ) | $ | (0.48 | ) |
For the six months ended June 30, 2013 | For the six months ended June 30, 2012 | |||||||
Loss attributable to holders of common stock | $ | (36,715 | ) | $ | (61,161 | ) | ||
Basic and diluted weighted average number of common shares outstanding | 54,893 | 55,188 | ||||||
Loss per share | ||||||||
Basic and diluted | $ | (0.67 | ) | $ | (1.11 | ) |
Three months ended June 30 | Six months ended June 30 | |||||||||||||||
(in thousands except per share data) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Loss attributable to holders of common stock | $ | (22,915 | ) | $ | (2,004 | ) | $ | (31,832 | ) | $ | (7,616 | ) | ||||
Basic and diluted weighted average number of common shares outstanding | 54,318 | 52,112 | 54,233 | 51,883 | ||||||||||||
Loss per share | ||||||||||||||||
Basic and diluted | $ | (0.42 | ) | $ | (0.04 | ) | $ | (0.59 | ) | $ | (0.15 | ) |
For the three months ended March 31, 2013 | For the three months ended March 31, 2012 | |||||||
Income (loss) attributable to holders of common stock | $ | 3,103 | $ | (34,784 | ) | |||
Basic and diluted weighted average number of common shares outstanding | 54,805 | 55,520 | ||||||
Earnings (loss) per share | ||||||||
Basic and diluted | $ | 0.06 | $ | (0.63 | ) |
The Company had warrants exercisable for 3,900,871 shares of the Company’s common stock at September 30, 2012. For the three and nine months ended September 30, 2012, 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, 2013 and 2012.
208 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
Note 21 – Related party transactions and balances
Related party transactions
a. | Capital lease |
As disclosed in Notes 16 – “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 | June 30, 2013 | March 31, 2013 | December 31, 2012 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
Machinery | $ | 603,248 | $ | 599,547 | $ | 590,665 | $ | 587,334 | ||||||||
Less:accumulated depreciation | (69,248 | ) | (61,703 | ) | (53,775 | ) | (46,497 | ) | ||||||||
Carrying value of leased assets | $ | 534,000 | $ | 537,844 | $ | 536,890 | $ | 540,837 |
September 30, 2012 | June 30, 2012 | March 31, 2012 | December 31, 2011 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
Machinery | $ | 585,854 | $ | 586,594 | $ | 586,224 | $ | 581,413 | ||||||||
Less: accumulated depreciation | (39,423 | ) | (32,507 | ) | (25,525 | ) | (18,411 | ) | ||||||||
Carrying value of leased assets | $ | 546,431 | $ | 554,087 | $ | 560,699 | $ | 563,002 |
September 30, 2011 | June 30, 2011 | December 31, 2010 | ||||||||||
(in thousands) | (in thousands) | (in thousands) | ||||||||||
Machinery | $ | 579,192 | $ | 572,531 | $ | - | ||||||
Less: accumulated depreciation | (11,463 | ) | (4,533 | ) | - | |||||||
Carrying value of leased assets | $ | 567,729 | $ | 567,998 | $ | - |
b. On April 30, 2011, Tongxing completed its transfer of 20.7% share of Shaanxi Xinglong Thermoelectric Co., Ltd to the Labor Union Trust of Shaanxi Long Steel Group. The transfer price of $11.3 million (RMB 72.9 million) was considered to be at fair value based on management assessment. As of April 30, 2011, our investment in Xinglong was approximately $9.8 million and this transaction resulted in a gain of $1.5 million, which is included in “Income from equity investments” in the unaudited condensed consolidated statements of operation and other comprehensive income (loss).
c. 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.
For the three months ended September 30, 2013, 2012, 2011 and 2010, General Steel (China) realized rental income of $0, $0, $0.8 million and $0.8 million, and for the nine months ended September 30, 2013, 2012, 2011 and 2010, General Steel (China) realized rental income $0 million, $1.6 million, $1.5 million and $2.3 million, respectively, which has been included in “other non-operating income (expense), net” in the unaudited condensed consolidated statements of operations and comprehensive income (loss).
For the three months ended June 30, 2013, 2012, 2011 and 2010, General Steel (China) realized rental income in each period of $0, $0.8 million, $0.8 million and $0.8 million, respectively, and for the six months ended June30, 2013, 2012, 2011 and 2010, General Steel (China) realized rental income $0 million, $1.6 million, $1.0 million and 1.5 million, respectively, which has been included in “other non-operating income (expense), net” in the unaudited condensed consolidated statements of operations and comprehensive income (loss).
209 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
For the three months ended March 31, 2013, 2012 and 2011, General Steel (China) realized rental income in each period of $0, $0.8 million and $0.8 million, respectively, which has been included in “other non-operating income (expense), net” in the unaudited condensed consolidated statements of operations and comprehensive income (loss).
d. The following chart summarized sales to related parties for the three and nine months ended September 30, 2013, 2012, 2011 and 2010, for the three and six months ended June 30, 2013, 2012, 2011 and 2010, and for the three months ended March 31, 2013, 2012 and 2011.
Name of related parties | Relationship | Three months ended September 30, 2013 | Three months ended 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 |
*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.
210 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
Name of related parties | Relationship | Three months ended September 30, 2011 (in thousands) | Three months ended September 30, 2010 (in thousands) | |||||||
Long Steel Group | Non-controlling shareholder of Longmen Joint Venture | $ | 118,181 | $ | 79,244 | |||||
Sichuan Yutai Trading Co., Ltd. | Significant influence by Long Steel Group** | 57,350 | - | |||||||
Tianjin Hengying Trading Co., Ltd. | Partially owned by CEO* through indirect shareholding | 26,742 | 14,036 | |||||||
Tianjin Dazhan Industry Co., Ltd. | Partially owned by CEO through indirect shareholding | 24,348 | 13,381 | |||||||
Shaanxi Yuchang Trading Co., Ltd. | Significant influence by Long Steel Group | 45,792 | - | |||||||
Hancheng Haiyan Coking Co., Ltd. | Non-controlling shareholder of Long Steel Group | 18,231 | 9,765 | |||||||
Junlong Steel Rolling Co., Ltd. | Joint Stock company of Long Steel Group | 16,090 | - | |||||||
Shaanxi Shenganda Trading Co., Ltd. | Significant influence by Long Steel Group | 12,278 | - | |||||||
Tianjin General Qiugang Pipe Co., Ltd. | Partially owned by CEO through indirect shareholding | 9,305 | ||||||||
Shaanxi Steel | Majority shareholder of Long Steel Group | 4,826 | 1,035 | |||||||
Shaanxi Huafu New Energy Co., Ltd. | Significant influence by Long Steel Group | 5 | - | |||||||
Beijing Daishang Trade Co., Ltd. | Non-controlling shareholder of Longmen Joint Venture’s subsidiary | - | 15 | |||||||
Tianjin Daqiuzhuang Steel Plates Co., Ltd. | Partially owned by CEO through indirect shareholding | 23 | ||||||||
Others | Entities either owned or have significant influence by our affiliates or management | 2,576 | 2,075 | |||||||
Total Related Party Sales | $ | 335,724 | $ | 119,574 |
Name of related parties | Relationship | Nine months ended September 30, 2013 | Nine months ended 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 |
Name of related parties | Relationship | Nine months ended September 30, 2011 (in thousands) | Nine months ended September 30, 2010 (in thousands) | |||||||
Long Steel Group | Non-controlling shareholder of Longmen Joint Venture | $ | 297,162 | $ | 262,912 | |||||
Sichuan Yutai Trading Co., Ltd. | Significant influence by Long Steel Group | 120,260 | - | |||||||
Tianjin Hengying Trading Co., Ltd. | Partially owned by CEO* through indirect shareholding | 83,210 | 33,304 | |||||||
Tianjin Dazhan Industry Co., Ltd. | Partially owned by CEO through indirect shareholding | 67,639 | 29,284 | |||||||
Shaanxi Yuchang Trading Co., Ltd. | Significant influence by Long Steel Group | 85,907 | - | |||||||
Hancheng Haiyan Coking Co., Ltd. | Non-controlling shareholder of Long Steel Group | 43,340 | 29,133 | |||||||
Junlong Steel Rolling Co., Ltd. | Joint Stock company of Long Steel Group | 36,171 | - | |||||||
Shaanxi Shenganda Trading Co., Ltd. | Significant influence by Long Steel Group | 28,428 | - | |||||||
Tianjin General Qiugang Pipe Co., Ltd. | Partially owned by CEO through indirect shareholding | 19,967 | - | |||||||
Shaanxi Steel | Majority shareholder of Long Steel Group | 5,926 | 1,968 | |||||||
Shaanxi Huafu New Energy Co., Ltd. | Significant influence by the Company | 470 | - | |||||||
Beijing Daishang Trade Co., Ltd. | Non-controlling shareholder of Longmen Joint Venture’s subsidiary | - | 5,471 | |||||||
Tianjin Daqiuzhuang Steel Plates Co., Ltd. | Partially owned by CEO through indirect shareholding | - | 8,337 | |||||||
Others | Entities either owned or have significant influence by our affiliates or management | 3,361 | 3,066 | |||||||
Total Related Party Sales | $ | 791,841 | $ | 373,475 |
211 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
Name of related parties | Relationship | Three months ended June 30, 2013 | Three months ended June 30, 2012 | |||||||
(in thousands) | (in thousands) | |||||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | $ | 82,286 | $ | 140,648 | |||||
Sichuan Yutai Trading Co., Ltd | Significant influence by Long Steel Group | - | 54,110 | |||||||
Shaanxi Yuchang Trading Co., Ltd | Significant influence by Long Steel Group | 5,975 | - | |||||||
Shaanxi Haiyan Trade Co.,Ltd | Significant influence by Long Steel Group | 5,004 | 16,091 | |||||||
Shaanxi Shenganda Trading Co., Ltd | Significant influence by Long Steel Group | 18,393 | 9,566 | |||||||
Shaanxi Steel | Majority shareholder of Long Steel Group | 448 | 27 | |||||||
Shaanxi Long Steel Group Baoji Steel Rolling Co., Ltd | Subsidiary of Long Steel Group | 114 | 12,756 | |||||||
Shaanxi Junlong Rolling Co., Ltd | Investee of Long Steel Group | 11,289 | 7,170 | |||||||
Shaanxi Coal and Chemical Industry Group Co., Ltd | Shareholder of Shaanxi Steel | 12,792 | - | |||||||
Others | Entities either owned or have significant influence by our affiliates or management | - | 1,329 | |||||||
Total | $ | 136,301 | $ | 241,697 |
Three months | Three months | |||||||||
ended | ended | |||||||||
June 30, 2011 | June 30, 2010 | |||||||||
Name of related parties | Relationship | (in thousands) | (in thousands) | |||||||
Long Steel Group | Non-controlling shareholder of Longmen Joint Venture | $ | 35,273 | $ | 79,215 | |||||
Sichuan Yutai Trading Co., Ltd | Significant influence by Long Steel Group** | 62,910 | - | |||||||
Tianjin Hengying Trading Co., Ltd | Partially owned by CEO*** through indirect shareholding | 30,982 | 9,418 | |||||||
Tianjin Dazhan Industry Co., Ltd | Partially owned by CEO through indirect shareholding | 23,030 | 15,903 | |||||||
Shaanxi Yuchang Trading Co., Ltd | Significant influence by Long Steel Group | 40,115 | - | |||||||
Hancheng Haiyan Coking Co., Ltd | Non-controlling shareholder of Long Steel Group | 13,716 | 9,043 | |||||||
Junlong Steel Rolling Co., Ltd | Joint stock company of Long Steel Group | 20,081 | - | |||||||
Shaanxi Shenganda Trading Co., Ltd | Significant influence by Long Steel Group | 16,150 | - | |||||||
Tianjin General Qiugang Pipe Co., Ltd | Partially owned by CEO through indirect shareholding | 3,512 | - | |||||||
Shaanxi Steel | Majority shareholder of Long Steel Group | 579 | 933 | |||||||
Beijing Daishang Trade Co., Ltd. | Non-controlling shareholder of Longmen Joint Venture’s subsidiary | - | 3,051 | |||||||
Tianjin Daqiuzhuang Steel Plates Co., Ltd. | Partially owned by CEO through indirect shareholding | - | 2 | |||||||
Others | Entities either owned or have significant influence by our affiliates or management | 784 | 941 | |||||||
Total Related Party Sales | $ | 247,132 | $ | 118,506 |
212 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
Name of related parties | Relationship | Six months ended June 30, 2013 | Six months ended June 30, 2012 | |||||||
(in thousands) | (in thousands) | |||||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | $ | 162,961 | $ | 237,189 | |||||
Sichuan Yutai Trading Co., Ltd | Significant influence by Long Steel Group | 72 | 130,849 | |||||||
Shaanxi Yuchang Trading Co., Ltd | Significant influence by Long Steel Group | 20,410 | 41,433 | |||||||
Shaanxi Haiyan Trade Co.,Ltd | Significant influence by Long Steel Group | 15,596 | 30,535 | |||||||
Shaanxi Shenganda Trading Co., Ltd | Significant influence by Long Steel Group | 36,679 | 26,533 | |||||||
Shaanxi Steel | Majority shareholder of Long Steel Group | 1,411 | 609 | |||||||
Shaanxi Long Steel Group Baoji Steel Rolling Co., Ltd | Subsidiary of Long Steel Group | 2,113 | 20,093 | |||||||
Shaanxi Junlong Rolling Co., Ltd | Investee of Long Steel Group | 31,293 | 17,207 | |||||||
Shaanxi Coal and Chemical Industry Group Co., Ltd | Shareholder of Shaanxi Steel | 14,626 | - | |||||||
Others | Entities either owned or have significant influence by our affiliates or management | - | 1,493 | |||||||
Total | $ | 285,161 | $ | 505,941 |
Six months ended | Six months ended | |||||||||
Name of related parties | Relationship | June 30, 2011 | June 30, 2010 | |||||||
(in thousands) | (in thousands) | |||||||||
Long Steel Group | Non-controlling shareholder of Longmen Joint Venture | $ | 179,446 | $ | 183,668 | |||||
Sichuan Yutai Trading Co., Ltd | Significant influence by Long Steel Group | 62,910 | - | |||||||
Tianjin Hengying Trading Co., Ltd | Partially owned by CEO through indirect shareholding | 56,468 | 19,268 | |||||||
Tianjin Dazhan Industry Co., Ltd | Partially owned by CEO through indirect shareholding | 43,291 | 15,903 | |||||||
Shaanxi Yuchang Trading Co., Ltd | Significant influence by Long Steel Group | 40,115 | - | |||||||
Hancheng Haiyan Coking Co., Ltd | Non-controlling shareholder of Long Steel Group | 25,109 | 19,368 | |||||||
Junlong Steel Rolling Co., Ltd | Joint Stock company of Long Steel Group | 20,081 | - | |||||||
Shaanxi Shenganda Trading Co., Ltd | Significant influence by Long Steel Group | 16,150 | - | |||||||
Tianjin General Qiugang Pipe Co., Ltd | Partially owned by CEO through indirect shareholding | 10,662 | - | |||||||
Shaanxi Steel | Majority shareholder of Long Steel Group | 1,100 | 933 | |||||||
Beijing Daishang Trade Co., Ltd. | Non-controlling shareholder of Longmen Joint Venture’s subsidiary | - | 5,456 | |||||||
Tianjin Daqiuzhuang Steel Plates Co., Ltd. | Partially owned by CEO through indirect shareholding | - | 8,314 | |||||||
Others | Entities either owned or have significant influence by our affiliates or management | 785 | 991 | |||||||
Total Related Party Sales | $ | 456,117 | $ | 253,901 |
213 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
Name of | Three months ended | Three months ended | Three months ended | |||||||||||
related parties | Relationship | March 31, 2013 | March 31, 2012 | March 31, 2011 | ||||||||||
(in thousands) | (in thousands) | (in thousands) | ||||||||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | $ | 80,675 | $ | 96,541 | $ | 144,173 | |||||||
Sichuan Yutai Trading Co., Ltd | Significant influence by Long Steel Group | 72 | 76,739 | |||||||||||
Shaanxi Yuchang Trading Co., Ltd | Significant influence by Long Steel Group | 14,435 | 41,482 | - | ||||||||||
Shaanxi Haiyan Trade Co., Ltd | Significant influence by Long Steel Group | 10,592 | 14,444 | - | ||||||||||
Shaanxi Shenganda Trading Co., Ltd | Significant influence by Long Steel Group | 18,286 | 16,967 | - | ||||||||||
Shaanxi Steel | Majority shareholder of Long Steel Group | 963 | 582 | 521 | ||||||||||
Shaanxi Long Steel Group Baoji Steel Rolling Co., Ltd | Subsidiary of Long Steel Group | 1,999 | 7,337 | - | ||||||||||
Shaanxi Junlong Rolling Co., Ltd | Investee of Long Steel Group | 20,004 | 10,037 | - | ||||||||||
Shaanxi Coal and Chemical Industry Group Co., Ltd | Shareholder of Shaanxi Steel | 1,834 | - | - | ||||||||||
Tianjin Hengying Trading CO., Ltd | Common control under CEO | - | - | 25,486 | ||||||||||
Tianjin Dazhan Industry Co., Ltd | Common control under CEO | - | - | 20,261 | ||||||||||
Hancheng Haiyan Coking | Investee of Long Steel Group | - | - | 11,393 | ||||||||||
Tianjin General Qiugang Pipe Co., Ltd | Partially owned by CEO through indirect shareholding | - | - | 7,150 | ||||||||||
Others | Entities either owned or have significant influence by our affiliates or management | - | 115 | 1 | ||||||||||
Total | $ | 148,860 | $ | 264,244 | $ | 208,985 |
e. The following charts summarize purchases from related parties for the three and nine months ended September 30, 2013, 2012, 2011 and 2010, for the three and six months ended June 30, 2013, 2012, 2011 and 2010, and for the three months ended March 31, 2013, 2012 and 2011..
Name of related parties | Relationship | Three months ended September 30, 2013 | Three months ended 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 |
214 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
Name of related parties | Relationship | Three months ended September 30, 2011 (in thousands) | Three months ended September 30,2010 (in thousands) | |||||||
Long Steel Group | Non-controlling shareholder of Longmen Joint Venture | $ | 418,537 | $ | 96,753 | |||||
Shaanxi Huafu New Energy Co., Ltd. | Significant influence by the Company | 15,123 | - | |||||||
Hancheng Jinma Coking Co., Ltd. | Equity investee of Longmen Joint Venture’s subsidiary (unconsolidated) | - | 1,463 | |||||||
Hancheng Haiyan Coking Co., Ltd. | Non-controlling shareholder of Long Steel Group | 102,535 | 49,060 | |||||||
Xian Pinghe Metallurgical Raw Material Co., Ltd. | Non-controlling shareholder of Long Steel Group | 14,727 | - | |||||||
Beijing Daishang Trading Co., Ltd. | Non-controlling shareholder of Longmen Joint Venture’s subsidiary | 1,704 | 108 | |||||||
Others | Entities either owned or have significant influence by our affiliates or management | 193 | 349 | |||||||
Total Related Party Purchases | $ | 552,819 | $ | 147,733 |
Name of related parties | Relationship | Nine months ended September 30, 2013 | Nine months ended 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 |
215 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
Name of related parties | Relationship | Nine months ended September 30, 2011 (in thousands) | Nine months ended September 30, 2010 (in thousands) | |||||||
Long Steel Group | Non-controlling shareholder of Longmen Joint Venture | $ | 838,495 | $ | 350,593 | |||||
Shaanxi Huafu New Energy Co., Ltd. | Significant influence by the Company | 15,123 | - | |||||||
Hancheng Jinma Coking Co., Ltd. | Equity investee of Longmen Joint Venture’s subsidiary (unconsolidated) | 4,717 | 8,441 | |||||||
Hancheng Haiyan Coking Co., Ltd. | Non-controlling shareholder of Long Steel Group | 307,791 | 166,895 | |||||||
Xian Pinghe Metallurgical Raw Material Co., Ltd. | Non-controlling shareholder of Long Steel Group | 27,641 | - | |||||||
Beijing Daishang Trading Co., Ltd. | Non-controlling shareholder of Longmen Joint Venture’s subsidiary | 5,068 | 1,119 | |||||||
Others | Entities either owned or have significant influence by our affiliates or management | 825 | 664 | |||||||
Total Related Party Purchases | $ | 1,199,660 | $ | 527,712 |
Name of related parties | Relationship | Three months ended June 30, 2013 | Three months ended June 30, 2012 | |||||||
(in thousands) | (in thousands) | |||||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | $ | 170,005 | $ | 128,286 | |||||
Hancheng Haiyan Coking Co., Ltd | Noncontrolling shareholder of Long Steel Group | 53,193 | 72,390 | |||||||
Xi’an Pinghe Metallurgical Raw Material Co., Ltd | Noncontrolling shareholder of Long Steel Group | 742 | 15,196 | |||||||
Shaanxi Long Steel Group Baoji Steel Rolling Co., Ltd | Subsidiary of Long Steel Group | - | 2,220 | |||||||
Shaanxi Junlong Rolling Co., Ltd | Investee of Long Steel Group | 1 | 26 | |||||||
Shaanxi Huafu New Energy Co., Ltd | Significant influence by the Long Steel Group | 8,560 | 8,744 | |||||||
Beijing Daishang Trading Co., Ltd. | Noncontrolling shareholder of Longmen Joint Venture’s subsidiary | 1,432 | 2,202 | |||||||
Others | Entities either owned or have significant influence by our affiliates or management | 166 | 126 | |||||||
Total | $ | 234,099 | $ | 229,190 |
Three months ended | Three months ended | |||||||||
Name of related parties | Relationship | June 30, 2011 | June 30, 2010 | |||||||
(in thousands) | (in thousands) | |||||||||
Long Steel Group | Non-controlling shareholder of Longmen Joint Venture | $ | 225,597 | $ | 141,088 | |||||
Hancheng Jinma Coking Co., Ltd. | Equity investee of Longmen Joint Venture’s subsidiary (unconsolidated) | 28 | 3,551 | |||||||
Hancheng Haiyan Coking Co., Ltd. | Non-controlling shareholder of Long Steel Group | 105,220 | 65,777 | |||||||
Xian Pinghe Metallurgical Raw Material Co., Ltd. | Non-controlling shareholder of Long Steel Group | 12,914 | - | |||||||
Beijing Daishang Trading Co., Ltd. | Non-controlling shareholder of Longmen Joint Venture’s subsidiary | 3,364 | - | |||||||
Others | Entities either owned or have significant influence by our affiliates or management | 609 | 284 | |||||||
Total Related Party Purchases | $ | 347,732 | $ | 210,700 |
Name of related parties | Relationship | Six months ended June 30, 2013 | Six months ended June, 2012 | |||||||
(in thousands) | (in thousands) | |||||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | $ | 274,498 | $ | 330,310 | |||||
Hancheng Haiyan Coking Co., Ltd | Noncontrolling shareholder of Long Steel Group | 116,991 | 148,374 | |||||||
Xi’an Pinghe Metallurgical Raw Material Co., Ltd | Noncontrolling shareholder of Long Steel Group | 12,497 | 66,577 | |||||||
Shaanxi Long Steel Group Baoji Steel Rolling Co., Ltd | Subsidiary of Long Steel Group | 53 | 3,764 | |||||||
Shaanxi Junlong Rolling Co., Ltd | Investee of Long Steel Group | 211 | 2,160 | |||||||
Shaanxi Huafu New Energy Co., Ltd | Significant influence by the Long Steel Group | 18,089 | 14,025 | |||||||
Beijing Daishang Trading Co., Ltd. | Noncontrolling shareholder of Longmen Joint Venture’s subsidiary | 4,909 | 2,604 | |||||||
Others | Entities either owned or have significant influence by our affiliates or management | 236 | 214 | |||||||
Total | $ | 427,484 | $ | 568,028 |
216 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
Six months ended | Six months ended | |||||||||
Name of related parties | Relationship | June 30, 2011 | June 30, 2010 | |||||||
(in thousands) | (in thousands) | |||||||||
Long Steel Group | Non-controlling shareholder of Longmen Joint Venture | $ | 419,958 | $ | 253,840 | |||||
Hancheng Jinma Coking Co., Ltd. | Equity investee of Longmen Joint Venture’s subsidiary (unconsolidated) | 4,717 | 6,978 | |||||||
Hancheng Haiyan Coking Co., Ltd. | Non-controlling shareholder of Long Steel Group | 205,256 | 117,835 | |||||||
Xian Pinghe Metallurgical Raw Material Co., Ltd. | Non-controlling shareholder of Long Steel Group | 12,914 | - | |||||||
Beijing Daishang Trading Co., Ltd. | Non-controlling shareholder of Longmen Joint Venture’s subsidiary | 3,364 | 1,011 | |||||||
Others | Entities either owned or have significant influence by our affiliates or management | 632 | 315 | |||||||
Total Related Party Purchases | $ | 646,841 | $ | 379,979 |
Three months ended | Three months ended | Three months ended | ||||||||||||
Name of related parties | Relationship | March 31, 2013 | March 31, 2012 | March 31, 2011 | ||||||||||
(in thousands) | (in thousands) | (in thousands) | ||||||||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | $ | 104,493 | $ | 202,024 | $ | 194,361 | |||||||
Hancheng Haiyan Coking Co., Ltd | Noncontrolling shareholder of Long Steel Group | 63,798 | 75,984 | 100,036 | ||||||||||
Xi’an Pinghe Metallurgical Raw | Noncontrolling shareholder of Long Steel Group | 11,755 | 51,381 | - | ||||||||||
Material Co., Ltd | ||||||||||||||
Shaanxi Long Steel Group Baoji Steel Rolling Co., Ltd | Subsidiary of Long Steel Group | 53 | 1,544 | - | ||||||||||
Shaanxi Junlong Rolling Co., Ltd | Investee of Long Steel Group | 210 | 2,134 | - | ||||||||||
Shaanxi Huafu New Energy Co., Ltd | Significant influence by the Long Steel Group | 9,529 | 5,281 | - | ||||||||||
Beijing Daishang Trading Co., Ltd. | Noncontrolling shareholder of Longmen Joint Venture’s subsidiary | 3,477 | 402 | - | ||||||||||
Hancheng Jinma Coking Co., Ltd | Investee of Longmen Joint Venture’s subsidiary(unconsolidated) | - | - | 4,689 | ||||||||||
Others | Entities either owned or have significant influence by our affiliates or management | 70 | 88 | 23 | ||||||||||
Total | $ | 193,385 | $ | 338,838 | $ | 299,109 |
217 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
Related party balances
a. | Loans receivable – related parties: |
Name of related parties | Relationship | September 30, 3013 | June 30, 2013 | March 31, 2013 | December 31, 2012 | |||||||||||||
(in thousands) | (in thousands) | (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 | 6,000 | 6,000 | |||||||||||||
Total | $ | 4,540 | $ | 6,000 | $ | 6,000 | $ | 69,319 |
**The CEO is referred to herein as the chief executive officer of General Steel Holdings, Inc.
Name of related parties | Relationship | September 30, 2012 | June 30, 2012 | March 31, 2012 | December 31, 2011 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | $ | 63,159 | $ | 63,239 | $ | 63,199 | $ | - | |||||||||
Teamlink Investment Co., Ltd | Partially owned by CEO through indirect shareholding | 4,000 | 4,000 | - | - | |||||||||||||
Total | $ | 67,159 | $ | 67,239 | $ | 63,199 | $ | - |
See Note 4 – loans receivable – related parties for loan details.
b. | Accounts receivables – related parties: |
Name of related parties | Relationship | September 30, 3013 | June 30, 2013 | March 31, 2013 | December 31, 2012 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | $ | 1,834 | $ | 1,319 | $ | 3,441 | $ | 10,409 | |||||||||
Shaanxi Long Steel Group Baoji Steel Rolling Co., Ltd | Subsidiary of Long Steel Group | - | 3,183 | 3,019 | 2,017 | |||||||||||||
Tianjin Daqiuzhuang Steel Plates | Partially owned by CEO through indirect shareholding | 19 | 19 | 18 | 18 | |||||||||||||
Shaanxi Steel | Majority shareholder of Long Steel Group | 1,227 | 1,521 | 1,102 | 2,435 | |||||||||||||
Others | 172 | 170 | 651 | 87 | ||||||||||||||
Total | $ | 3,252 | $ | 6,212 | $ | 8,231 | $ | 14,966 |
218 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
Name of related parties | Relationship | September 30, 2012 | June 30, 2012 | March 31, 2012 | December 31, 2011 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | $ | 12,306 | $ | 56,445 | $ | 35,650 | $ | 9,187 | |||||||||
Shaanxi Long Steel Group Baoji Steel Rolling Co., Ltd | Subsidiary of Long Steel Group | 3,178 | 3,725 | 4,749 | 3,141 | |||||||||||||
Tianjin Daqiuzhuang Steel Plates | Partially owned by CEO through indirect shareholding | 761 | 762 | 762 | 755 | |||||||||||||
Tianjin Hengying Trading Co., Ltd. | Partially owned by CEO through indirect shareholding | 4,071 | - | - | - | |||||||||||||
Hancheng Haiyan Coking Co., Ltd. | Non-controlling shareholder of Longmen Joint Venture | - | - | - | - | |||||||||||||
Gansu Yulong Trading Co., Ltd. | Significant influence by Long Steel Group | - | 17,438 | 2,525 | - | |||||||||||||
Shaanxi Steel | Majority shareholder of Long Steel Group | 7,106 | 8,697 | 9,064 | 7,207 | |||||||||||||
Others | 924 | 306 | 306 | 303 | ||||||||||||||
Total | $ | 28,346 | $ | 87,373 | $ | 53,056 | $ | 20,593 |
Name of related parties | Relationship | September 30, 2011 | June 30, 2011 | December 31, 2010 | ||||||||||
(in thousands) | (in thousands) | (in thousands) | ||||||||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | $ | 7,618 | $ | 36,003 | $ | 3,023 | |||||||
Shaanxi Long Steel Group Baoji Steel Rolling Co., Ltd | Subsidiary of Long Steel Group | - | 2,543 | - | ||||||||||
Tianjin Daqiuzhuang Steel Plates | Partially owned by CEO through indirect shareholding | 752 | 1081 | - | ||||||||||
Tianjin Hengying Trading Co., Ltd. | Partially owned by CEO through indirect shareholding | - | - | 1,054 | ||||||||||
Hancheng Haiyan Coking Co., Ltd. | 318 | - | - | |||||||||||
Tianjin Hancheng Haiyan Coking Co., Ltd. | Partially owned by CEO through indirect shareholding | - | 2,111 | - | ||||||||||
Shaanxi Steel | Majority shareholder of Long Steel Group | 1,860 | 1,654 | 83 | ||||||||||
Others | 46 | 108 | ||||||||||||
Total | $ | 10,594 | $ | 43,500 | $ | 4,160 |
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, 3013 | June 30, 2013 | March 31, 2013 | December 31, 2012 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | $ | 561 | $ | 3114 | $ | 17438 | $ | 301 | |||||||||
Shaanxi Steel | Majority shareholder of Long Steel Group | 44,811 | 54,082 | 69,455 | 65,981 | |||||||||||||
Tianjin General Quigang Pipe Co., Ltd | Partially owned by CEO through indirect shareholding | 1,228 | 1,220 | 1,202 | 1,195 | |||||||||||||
Tianjin Dazhan Industry Co, Ltd | Partially owned by CEO through indirect shareholding | 489 | 486 | 479 | 476 | |||||||||||||
Maoming Shengze Trading Co., Ltd | Partially owned by CEO through indirect shareholding | 3,834 | 3,811 | - | - | |||||||||||||
Others | Entities either owned or have significant influence by our affiliates or management | 578 | 510 | 441 | 429 | |||||||||||||
Total | $ | 51,501 | $ | 63,223 | $ | 89,015 | $ | 68,382 |
219 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
Name of related parties | Relationship | September 30, 2012 | June 30, 2012 | March 31, 2012 | December 31, 2011 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | $ | 3,734 | $ | 1,847 | $ | - | $ | 15,244 | |||||||||
Shaanxi Steel | Majority shareholder of Long Steel Group | 60,674 | 51,347 | 64,855 | 66,869 | |||||||||||||
Maoming Shengze Trading Co., Ltd | Partially owned by CEO through indirect shareholding | - | 325 | 747 | 937 | |||||||||||||
Tianjin Daqiuzhuang Steel Plates Co., Ltd. | Partially owned by CEO through indirect shareholding | - | - | 55 | - | |||||||||||||
Tianjin General Qiugang Pipe Co., Ltd. | Partially owned by CEO through indirect shareholding | - | 4 | 9,508 | - | |||||||||||||
Shaanxi Huafu New Energy Co., Ltd | Significant influence by Long Steel Group | - | - | - | 2,441 | |||||||||||||
Tianjin Dazhan Industry Co, Ltd | Partially owned by CEO through indirect shareholding | 475 | 476 | 475 | ||||||||||||||
Teamlink Investment Co., Ltd | Owned by CEO through indirect shareholding | - | - | - | 2,000 | |||||||||||||
Others | Entities either owned or have significant influence by our affiliates or management | 367 | 401 | 412 | 188 | |||||||||||||
Total | $ | 65,250 | $ | 54,400 | $ | 76,052 | $ | 87,679 |
Name of related parties | Relationship | September 30, 2011 | June 30, 2011 | December 31, 2010 | ||||||||||
(in thousands) | (in thousands) | (in thousands) | ||||||||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | $ | 14,436 | $ | 14,834 | $ | 993 | |||||||
Shaanxi Steel | Majority shareholder of Long Steel Group | 69,209 | 69,028 | - | ||||||||||
Maoming Shengze Trading Co., Ltd | Partially owned by CEO through indirectshareholding | - | 4,355 | 8,095 | ||||||||||
Tianjin Daqiuzhuang Steel Plates Co., Ltd. | Partially owned by CEO through indirectshareholding | 54 | 58 | 1,078 | ||||||||||
Shaanxi Huafu New Energy Co., Ltd | Significant influence by Long Steel Group | 3,506 | 2,404 | - | ||||||||||
Tianjin Dazhan Industry Co, Ltd | Partially owned by CEO through indirect shareholding | - | 464 | 455 | ||||||||||
Others | Entities either owned or have significant influence by our affiliates or management | 543 | 585 | 317 | ||||||||||
Total | $ | 87,748 | $ | 91,728 | $ | 10,938 |
220 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
d. | Advances on inventory purchase – related parties: |
Name of related parties | Relationship | September 30, 3013 | June 30, 2013 | March 31, 2013 | December 31, 2012 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | $ | 1,377 | $ | 1,393 | $ | 1,373 | $ | 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 | 34 | 34 | 41,316 | |||||||||||||
Maoming Shengze Trading Co., Ltd | Partially owned by CEO through indirect shareholding | - | - | 3,754 | 3,733 | |||||||||||||
Others | Entities either owned or have significant influence by our affiliates or management | 21 | 964 | 98 | - | |||||||||||||
Total | $ | 29,667 | $ | 2,391 | $ | 5,259 | $ | 46,416 |
Name of related parties | Relationship | September 30, 2012 | June 30, 2012 | March 31, 2012 | December 31, 2011 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | $ | 13,757 | $ | 2 | $ | - | $ | 1,028 | |||||||||
Shaanxi Steel | Majority shareholder of Long Steel Group | 5,672 | - | - | - | |||||||||||||
Tianjin Hengying Trading Co., Ltd | Partially owned by CEO through indirect shareholding | 9,471 | - | - | - | |||||||||||||
Tianjin General Qiugang Pipe Co., Ltd | Partially owned by CEO through indirect shareholding | 46,236 | 49,043 | 73,123 | 15,678 | |||||||||||||
Maoming Shengze Trading Co., Ltd | Partially owned by CEO through indirect shareholding | 3724 | 3728 | 3,726 | 3538 | |||||||||||||
Total | $ | 78,860 | $ | 52,773 | $ | 76,849 | $ | 20,244 |
221 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
Name of related parties | Relationship | September 30, 2011 | June 30, 2011 | December 31, 2010 | ||||||||||
(in thousands) | (in thousands) | (in thousands) | ||||||||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | $ | 40,116 | $ | - | $ | - | |||||||
Tianjin General Qiugang Pipe Co., Ltd | Partially owned by CEO through indirect shareholding | 36,377 | 11,335 | 6,187 | ||||||||||
Maoming Shengze Trading Co., Ltd | Partially owned by CEO through indirect shareholding | 3,055 | 1,643 | |||||||||||
Others | Entities either owned or have significant influence by our affiliates or management | 345 | 165 | - | ||||||||||
Total | $ | 79,893 | $ | 13,143 | $ | 6,187 |
e. | Accounts payable - related parties: |
Name of related parties | Relationship | September 30, 3013 | June 30, 2013 | March 31, 2013 | December 31, 2012 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||||
Hancheng Haiyan Coking Co., Ltd | Noncontrolling shareholder of Longmen Joint Venture | $ | 60,463 | $ | 56,187 | $ | 66,042 | $ | 58,661 | |||||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | 100,579 | 108,045 | 77,254 | 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 | 63 | 3 | 3 | |||||||||||||
Xi’an Pinghe Metallurgical Raw Material Co., Ltd | Noncontrolling shareholder of Long Steel Group | 7,838 | 5,684 | 7,223 | 5,278 | |||||||||||||
Tianjin Hengying Trading Co., Ltd | Partially owned by CEO through indirect shareholding | 1 | 1 | 1 | 13,919 | |||||||||||||
Henan Xinmi Kanghua Fire Refractory Co., Ltd | Noncontrolling shareholder of Longmen Joint Venture’s subsidiary | 722 | 692 | 1,011 | 1,146 | |||||||||||||
Beijing Daishang Trading Co., Ltd | Noncontrolling shareholder of Longmen Joint Venture’s subsidiary | 1,149 | 1,080 | 2,548 | 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 | 554 | 410 | 335 | |||||||||||||
Total | $ | 172,259 | $ | 172,306 | $ | 154,492 | $ | 177,432 |
222 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
Name of related parties | Relationship | September 30, 2012 | June 30, 2012 | March 31, 2012 | December 31, 2011 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||||
Hancheng Haiyan Coking Co., Ltd | Noncontrolling shareholder of Longmen Joint Venture | $ | 45,057 | $ | 44,328 | $ | 37,984 | $ | 46,487 | |||||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | 42,247 | 43,414 | 56,582 | 11,231 | |||||||||||||
Tianjin Dazhan Industry Co., Ltd | Partially owned by CEO through indirect shareholding | 3 | 3 | 3 | 25,511 | |||||||||||||
Xi’an Pinghe Metallurgical Raw Material Co., Ltd | Noncontrolling shareholder of Long Steel Group | 4,846 | 17,615 | 48,920 | 12,800 | |||||||||||||
Tianjin Hengying Trading Co., Ltd | Partially owned by CEO through indirect shareholding | 23,844 | 8,974 | 40,115 | 14,856 | |||||||||||||
Henan Xinmi Kanghua Fire Refractory Co., Ltd | Noncontrolling shareholder of Longmen Joint Venture’s subsidiary | 905 | 1,010 | 1,008 | 1,185 | |||||||||||||
Beijing Daishang Trading Co., Ltd | Noncontrolling shareholder of Longmen Joint Venture’s subsidiary | 584 | 1,021 | 93 | 1,600 | |||||||||||||
Tianjin General Qiugang Pipe Co., Ltd | Partially owned by CEO through indirect shareholding | 52 | 52 | 5,233 | 8,034 | |||||||||||||
Others | Entities either owned or have significant influence by our affiliates or management | 124 | 266 | 125 | 124 | |||||||||||||
Total | $ | 117,662 | $ | 116,683 | $ | 190,063 | $ | 121,828 |
223 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
Name of related parties | Relationship | September 30, 2011 | June 30, 2011 | December 31, 2010 | ||||||||||
(in thousands) | (in thousands) | (in thousands) | ||||||||||||
Hancheng Haiyan Coking Co., Ltd | Noncontrolling shareholder of Longmen Joint Venture | $ | 30,141 | $ | 39,744 | $ | 25,708 | |||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | 23,108 | 42,893 | 28,329 | ||||||||||
Shaanxi Huafu New Energy Co., Ltd | Significant influence by Long Steel Group | 4,182 | - | - | ||||||||||
Tianjin Dazhan Industry Co., Ltd | Partially owned by CEO through indirect shareholding | 32,034 | 23,990 | 2,764 | ||||||||||
Xi’an Pinghe Metallurgical Raw Material Co., Ltd | Noncontrolling shareholder of Long Steel Group | 3,912 | 15,557 | - | ||||||||||
Tianjin Hengying Trading Co., Ltd | Partially owned by CEO through indirect shareholding | 19,049 | 845 | 17,264 | ||||||||||
Henan Xinmi Kanghua Fire Refractory Co., Ltd | Noncontrolling shareholder of Longmen Joint Venture’s subsidiary | 417 | 1,031 | 880 | ||||||||||
Hancheng Jinma Coking Co., Ltd | Investee of Longmen Joint Venture’s subsidiary(unconsolidated) | - | 1,678 | 1,579 | ||||||||||
Beijing Daishang Trading Co., Ltd | Noncontrolling shareholder of Longmen Joint Venture’s subsidiary | 1,200 | 1,803 | 1,101 | ||||||||||
Maoming Shengze Trading Co., Ltd | Partially owned by CEO through indirect shareholding | - | - | 1,954 | ||||||||||
Others | Entities either owned or have significant influence by our affiliates or management | 266 | 257 | 115 | ||||||||||
Total | $ | 114,309 | $ | 127,798 | $ | 79,694 |
f. | Short-term loans - related parties: |
Name of related parties | Relationship | September 30, 3013 | June 30, 2013 | March 31, 2013 | December 31, 2012 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||||
Shaanxi Steel | Majority shareholder of Long Steel Group | $ | - | $ | - | $ | 24,829 | $ | 35,839 | |||||||||
Shaanxi Coal and Chemical Industry Group Co., Ltd | Shareholder of Shaanxi Steel | 33,580 | 42,836 | 56,977 | - | |||||||||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | 1,547 | 1,538 | 15,960 | - | |||||||||||||
Tianjin Hengying Trading Co., Ltd | Partially owned by CEO through indirect shareholding | 10,916 | 10,849 | 3,837 | 19,549 | |||||||||||||
Tianjin Dazhan Industry Co., Ltd | Partially owned by CEO through indirect shareholding | - | 23,923 | - | 21,397 | |||||||||||||
Beijing Shenhua Xinyuan Metal Materials Co., Ltd | Partially owned by CEO through indirect shareholding | 1,395 | 1,387 | 1,366 | 1,359 | |||||||||||||
Yangpu Capital Automobile | Partially owned by CEO through indirect shareholding | 1,451 | 1,442 | 1,421 | 1,413 | |||||||||||||
Total | $ | 48,889 | $ | 81,975 | $ | 104,390 | $ | 79,557 |
224 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
Name of related parties | Relationship | September 30, 2012 | June 30, 2012 | March 31, 2012 | December 31, 2011 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||||
Shaanxi Steel | Majority shareholder of Long Steel Group | $ | 45,505 | $ | 15,892 | $ | 15,842 | $ | - | |||||||||
Tianjin Hengying Trading Co., Ltd | Partially owned by CEO through indirect shareholding | 24,828 | 11,880 | 39,710 | 15,710 | |||||||||||||
Tianjin Dazhan Industry Co., Ltd | Partially owned by CEO through indirect shareholding | 8,972 | 50,984 | 24,674 | - | |||||||||||||
Beijing Shenhua Xinyuan Metal Materials Co., Ltd | Partially owned by CEO through indirect shareholding | 1,355 | 1,357 | 1,356 | - | |||||||||||||
Yangpu Capital Automobile | Partially owned by CEO through indirect shareholding | 1,409 | 1,411 | 1,410 | - | |||||||||||||
Total | $ | 82,069 | $ | 81,524 | $ | 82,992 | $ | 15,710 |
Name of related parties | Relationship | September 30, 2011 | June 30, 2011 | December 31, 2010 | ||||||||||
(in thousands) | (in thousands) | (in thousands) | ||||||||||||
Shaanxi Steel | Majority shareholder of Long Steel Group | $ | - | $ | - | $ | 14,548 | |||||||
Tianjin Hengying Trading Co., Ltd | Partially owned by CEO through indirect shareholding | 15,650 | 15,470 | |||||||||||
Shaanxi Hong Guang Steel Logistic Co., Ltd | Subsidiary of Long Steel Group | - | 167 | - | ||||||||||
Total | $ | 15,650 | $ | 15,637 | $ | 14,548 |
See Note 10 – Debt for the loan details.
g. | Current maturities of long-term loans – related parties |
Name of related party | Relationship | September 30, 3013 | June 30, 2013 | March 31, 2013 | December 31, 2012 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||||
Shaanxi Steel | Majority shareholder of Long Steel Group | $ | 47,896 | $ | 48,014 | $ | 59,984 | $ | 54,885 | |||||||||
Total | $ | 47,896 | $ | 48,014 | $ | 59,984 | $ | 54,885 |
225 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
Name of related party | Relationship | September 30, 2012 | June 30, 2012 | March 31, 2012 | December 31, 2011 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||||
Shaanxi Steel | Majority shareholder of Long Steel Group | $ | 49,997 | $ | - | $ | - | $ | - | |||||||||
Total | $ | 49,997 | $ | - | $ | - | $ | - |
h. | Other payables – related parties: |
Other payables – related parties are those nontrade payables arising from transactions between the Company and its related parties, such as advances or payments from these related parties on behalf of the Group.
Name of related parties | Relationship | September 30, 3013 | June 30, 2013 | March 31, 2013 | December 31, 2012 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||||
Tianjin Hengying Trading Co, Ltd | Partially owned by CEO through indirect shareholding | $ | 876 | $ | 871 | $ | 858 | $ | 2,770 | |||||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | 51,919 | 46,401 | 61,899 | 60,180 | |||||||||||||
Shaanxi Steel | Majority shareholder of Long Steel Group | 44,173 | 43,902 | - | ||||||||||||||
Wendlar Investment & Management Group Co., Ltd | Common control under CEO | 911 | 887 | 848 | 836 | |||||||||||||
Yangpu Capital Automobile | Partially owned by CEO through indirect shareholding | 254 | 216 | 178 | 141 | |||||||||||||
Xi’an Pinghe Metallurgical Raw Material Co., Ltd | Noncontrolling shareholder of Long Steel Group | - | - | 4,788 | 4,761 | |||||||||||||
Tianjin Dazhan Industry Co., Ltd | Partially owned by CEO through indirect shareholding | 4,020 | 5,609 | 4,554 | 3,695 | |||||||||||||
Maoming Shengze Trading Co., Ltd | Partially owned by CEO through indirect shareholding | 1,566 | 1,014 | 1,021 | - | |||||||||||||
Victory Energy Resource Co., Ltd | Partially owned by CEO through indirect shareholding | 1,375 | 835 | 7,335 | - | |||||||||||||
Others | Entities either owned or have significant influence by our affiliates or management | 1,059 | 1,532 | 751 | 642 | |||||||||||||
Total | $ | 106,153 | $ | 101,267 | $ | 82,232 | $ | 73,025 |
226 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
Name of related parties | Relationship | September 30, 2012 | June 30, 2012 | March 31, 2012 | December 31, 2011 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||||
Tianjin Hengying Trading Co, Ltd | Partially owned by CEO through indirect shareholding | $ | 2,176 | $ | 1,813 | $ | 939 | $ | 1,040 | |||||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | 71,392 | 86,998 | 85,052 | 20,001 | |||||||||||||
Shaanxi Steel | Majority shareholder of Long Steel Group | 13,445 | - | - | - | |||||||||||||
Wendlar Investment & Management Group Co., Ltd | Common control under CEO | 361 | 343 | 263 | 241 | |||||||||||||
Yangpu Capital Automobile | Partially owned by CEO through indirect shareholding | 106 | 71 | - | 1,398 | |||||||||||||
Tianjin Daqiuzhuang Steel Plates Co., Ltd. | Partially owned by CEO through indirect shareholding | - | 744 | - | 5,771 | |||||||||||||
Sichuan Yutai Trading Co., Ltd | Significant influence by Long Steel Group | 20,565 | 33,106 | - | - | |||||||||||||
Tianjin Dazhan Industry Co., Ltd | Partially owned by CEO through indirect shareholding | 3,198 | 2,481 | - | - | |||||||||||||
Victory Energy Resource Co., Ltd | Partially owned by CEO through indirect shareholding | 7,240 | 7,320 | 7,320 | - | |||||||||||||
Others | Entities either owned or have significant influence by our affiliates or management | 102 | 72 | 1,458 | 422 | |||||||||||||
Total | $ | 118,585 | $ | 132,948 | $ | 95,032 | $ | 28,873 |
Name of related parties | Relationship | September 30, 2011 | June 30, 2011 | December 31, 2010 | ||||||||||
(in thousands) | (in thousands) | (in thousands) | ||||||||||||
Tianjin Hengying Trading Co, Ltd | Partially owned by CEO through indirect shareholding | $ | 7,360 | $ | 7,275 | $ | 10,168 | |||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | 5,299 | 2,041 | - | ||||||||||
Long Steel Comprehensive Service Co.,Ltd. | Owned by Long Steel Group | 397 | 7,327 | - | ||||||||||
Yangpu Capital Automobile | Partially owned by CEO through indirect shareholding | 1,393 | 1,377 | 1,350 | ||||||||||
Tianjin General Qiugang Pipe Co., Ltd | Partially owned by CEO through indirect shareholding | - | - | 4,547 | ||||||||||
Wenchun Han | Director of General Steel (China) | - | - | 2,124 | ||||||||||
Others | Entities either owned or have significant influence by our affiliates or management | 456 | 196 | 25 | ||||||||||
Total | $ | 14,905 | $ | 18,216 | $ | 18,214 |
227 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
i. | Customer deposits – related parties: |
Name of related parties | Relationship | September 30, 3013 | June 30, 2013 | March 31, 2013 | December 31, 2012 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||||
Shaanxi Yuchang Trading Co., Ltd | Significant influence by Long Steel Group | $ | 10 | $ | 1,181 | $ | 1,401 | $ | 4,869 | |||||||||
Sichuan Yutai Trading Co., Ltd | Significant influence by Long Steel Group | - | - | 1,708 | 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 | 5,380 | 4,406 | 8,864 | |||||||||||||
Shaanxi Junlong Rolling Co., Ltd | Investee of Long Steel Group | 679 | 672 | 4,611 | 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 | 565 | 523 | 44 | |||||||||||||
Total | $ | 14,512 | $ | 7,798 | $ | 12,649 | $ | 21,998 |
Name of related parties | Relationship | September 30, 2012 | June 30, 2012 | March 31, 2012 | December 31, 2011 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||||
Shaanxi Yuchang Trading Co., Ltd | Significant influence by Long Steel Group | $ | 2,845 | $ | 3,813 | $ | 13,205 | $ | 24,256 | |||||||||
Sichuan Yutai Trading Co., Ltd | Significant influence by Long Steel Group | 3,462 | - | 10,738 | 5,972 | |||||||||||||
Tianjin Hengying Trading Co, Ltd | Partially owned by CEO through indirect shareholding | 12,668 | - | 20,592 | 1,506 | |||||||||||||
Tianjin General Qiugang Pipe Co., Ltd | Partially owned by CEO through indirect shareholding | 1,157 | - | - | 9,102 | |||||||||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | 10,372 | 22,516 | 1,713 | 4,755 | |||||||||||||
Shaanxi Coal Sourcing Co., Ltd | Shareholder of Longmen Joint Venture | 13,663 | - | - | - | |||||||||||||
Beijing Shenhua Xinyuan Metal Materials Co., Ltd | Partially owned by CEO through indirect shareholding | - | - | - | 1,345 | |||||||||||||
Shaanxi Haiyan Trade Co.,Ltd | Significant influence by Long Steel Group | 4,576 | 6,985 | 5,911 | 6,822 | |||||||||||||
Shaanxi Junlong Rolling Co., Ltd | Investee of Long Steel Group | 3,283 | 5,770 | 2,026 | 1,540 | |||||||||||||
Tianjin Dazhan Industry Co., Ltd | Partially owned by CEO through indirect shareholding | 17,844 | - | 3,169 | 11,178 | |||||||||||||
Shaanxi Shenganda Trading Co., Ltd | Significant influence by Long Steel Group | 13,160 | - | - | 1,750 | |||||||||||||
Others | Entities either owned or have significant influence by our affiliates or management | 488 | 50 | 49 | 51 | |||||||||||||
Total | $ | 83,518 | $ | 39,134 | $ | 57,403 | $ | 68,277 |
228 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
Name of related parties | Relationship | September 30, 2011 | June 30, 2011 | December 31, 2010 | ||||||||||
(in thousands) | (in thousands) | (in thousands) | ||||||||||||
Hancheng Haiyan Coking Co., Ltd | Noncontrolling shareholder of Long SteelGroup | $ | 7,965 | $ | 5,741 | $ | 5,081 | |||||||
Shaanxi Yuchang Trading Co., Ltd | Significant influence by Long Steel Group | 23,256 | 31,768 | - | ||||||||||
Sichuan Yutai Trading Co., Ltd | Significant influence by Long Steel Group | 9,321 | 89 | - | ||||||||||
Tianjin Hengying Trading Co, Ltd | Partially owned by CEO through indirect shareholding | 6,384 | 4,902 | - | ||||||||||
Tianjin General Qiugang Pipe Co., Ltd | Partially owned by CEO through indirect shareholding | 23 | 2,700 | - | ||||||||||
Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | 171 | 1,149 | 48,161 | ||||||||||
Beijing Shenhua Xinyuan Metal Materials Co., Ltd | Partially owned by CEO through indirect shareholding | - | 1,324 | 1,299 | ||||||||||
Shaanxi Steel | Majority shareholder of Long Steel Group | 2,377 | - | - | ||||||||||
Shaanxi Junlong Rolling Co., Ltd | Investee of Long Steel Group | 2,775 | 2,748 | - | ||||||||||
Tianjin Dazhan Industry Co., Ltd | Partially owned by CEO through indirect shareholding | 2,113 | - | - | ||||||||||
Shaanxi Shenganda Trading Co., Ltd | Significant influence by Long Steel Group | - | 15,337 | - | ||||||||||
Others | Entities either owned or have significant influence by our affiliates or management | - | 48 | 381 | ||||||||||
Total | $ | 54,385 | $ | 65,806 | $ | 54,922 |
j. | Deposits due to sales representatives – related parties |
Name of related parties | Relationship | September 30, 3013 | June 30, 2013 | March 31, 2013 | December 31, 2012 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||||
Hancheng Haiyan Coking Co., Ltd | Noncontrolling shareholder of Long Steel Group | $ | 587 | $ | 583 | $ | 575 | $ | 619 | |||||||||
Shaanxi Junlong Rolling Co., Ltd | Investee of Long Steel Group | 635 | 632 | 622 | 619 | |||||||||||||
Shaanxi Yuchang Trading Co., Ltd | Significant influence by Long Steel Group | 587 | 583 | 575 | - | |||||||||||||
Total | $ | 1,809 | $ | 1,798 | $ | 1,772 | $ | 1,238 |
229 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
Name of related parties | Relationship | September 30, 2012 | June 30, 2012 | March 31, 2012 | December 31, 2011 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||||
Hancheng Haiyan Coking Co., Ltd | Noncontrolling shareholder of Long Steel Group | $ | 617 | $ | 618 | $ | 618 | $ | 471 | |||||||||
Shaanxi Junlong Rolling Co., Ltd | Investee of Long Steel Group | 618 | 618 | 618 | 472 | |||||||||||||
Total | $ | 1,235 | $ | 1,236 | $ | 1,236 | $ | 943 |
k. | Long-term loans – related party: |
Name of related party | Relationship | September 30, 3013 | June 30, 2013 | March 31, 2013 | December 31, 2012 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||||
Shaanxi Steel | Majority shareholder of Long Steel Group | $ | 24,450 | $ | 29,160 | $ | 33,516 | $ | 38,088 | |||||||||
Total | $ | 24,450 | $ | 29,160 | $ | 33,516 | $ | 38,088 |
Name of related party | Relationship | September 30, 2012 | June 30, 2012 | March 31, 2012 | December 31, 2011 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||||
Shaanxi Steel | Majority shareholder of Long Steel Group | $ | 42,741 | $ | 92,856 | $ | 92,797 | $ | 92,035 | |||||||||
Total | $ | 42,741 | $ | 92,856 | $ | 92,797 | $ | 92,035 |
Name of related party | Relationship | September 30, 2011 | June 30, 2011 | December 31, 2010 | ||||||||||
(in thousands) | (in thousands) | (in thousands) | ||||||||||||
Shaanxi Steel | Majority shareholder of Long Steel Group | $ | 107,695 | $ | 134,566 | $ | 91,020 | |||||||
Total | $ | 107,695 | $ | 134,566 | $ | 91,020 |
The Company also provided guarantee on related parties’ bank loans amounting to $139.9 million, $139.9 million, $191.6 million, $118.0 million, $61.8 million, $118.1 million, $159.2 million, $56.6 million, $85.0 million, $139.5 million and $3.0 million as of September 30, 2013, June 30, 2013, March 31, 2013, December 31, 2012, September 30, 2012, June 30, 2012, March 31, 2012, December 31, 2011, September 30, 2011, June 30, 2011 and December 31, 2010, respectively.
l. | Long-term other payable – related party: |
Long-term other payable – related party is a nontrade payable arising from a transaction between the Company and its related party, Shaanxi Steel, in which the Company received an advance from Shaanxi Steel to make payment to a third party for a construction project.
Name of related party | Relationship | September 30, 3013 | June 30, 2013 | March 31, 2013 | December 31, 2012 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||||
Shaanxi Steel | Majority shareholder of Long Steel Group | $ | - | $ | - | $ | 43,252 | $ | 43,008 | |||||||||
Total | $ | - | $ | - | $ | 43,252 | $ | 43,008 |
230 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
m. | Deferred lease income |
September 30, 2013 | June 30, 2013 | March 31, 2013 | December 31, 2012 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
Beginning balance | $ | 77,199 | $ | 77,199 | $ | 77,199 | $ | 78,524 | ||||||||
Less: Lease income realized | (1,613 | ) | (1,071 | ) | (532 | ) | (2,119 | ) | ||||||||
Exchange rate effect | 2,072 | 1,594 | 436 | 794 | ||||||||||||
Ending balance | 77,658 | 77,722 | 77,103 | 77,199 | ||||||||||||
Current portion | (2,178 | ) | (2,164 | ) | (2,132 | ) | (2,120 | ) | ||||||||
Noncurrent portion | $ | 75,480 | $ | 75,558 | $ | 74,971 | $ | 75,079 |
September 30, 2012 | June 30, 2012 | March 31, 2012 | December 31, 2011 | |||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||
Beginning balance | $ | 78,524 | $ | 78,524 | $ | 78,524 | $ | 57,591 | ||||||||
Add: Reimbursement for trial production costs | - | - | - | 14,042 | ||||||||||||
Add: Deferred depreciation cost during free use period | - | - | - | 6,904 | ||||||||||||
Less: Lease income realized | (1,588 | ) | (1,060 | ) | (530 | ) | (2,008 | ) | ||||||||
Exchange rate effect | 597 | 696 | 646 | 1995 | ||||||||||||
Ending balance | 77,533 | 78,160 | 78,640 | 78,524 | ||||||||||||
Current portion | (2,115 | ) | (2,117 | ) | (2,116 | ) | (2,099 | ) | ||||||||
Noncurrent portion | $ | 75,418 | $ | 76,043 | $ | 76,524 | $ | 76,425 |
September 30, 2011 | June 30, 2011 | December 31, 2010 | ||||||||||
(in thousands) | (in thousands) | (in thousands) | ||||||||||
Beginning balance | $ | 57,591 | $ | 57,591 | $ | 16,487 | ||||||
Add: Reimbursement for dismantled assets | - | - | 568 | |||||||||
Add: Reimbursement for loss of efficiency | - | - | 20,676 | |||||||||
Add: Reimbursement for trial production costs | 13,988 | 14,096 | 13,584 | |||||||||
Add: Deferred depreciation cost during free use period | 6,878 | 6,799 | 6,656 | |||||||||
Less: Lease income realized | (1,489 | ) | (964 | ) | (943 | ) | ||||||
Exchange rate effect | 1,481 | 827 | 563 | |||||||||
Ending balance | 78,449 | 78,349 | 57,591 | |||||||||
Current portion | (2,091 | ) | (2,067 | ) | (1,971 | ) | ||||||
Noncurrent portion | $ | 76,358 | $ | 76,282 | $ | 55,620 |
For the three months ended September 30, 2013, 2012, 2011 and 2010, the Company recognized lease income of $0.5 million, $0.5 million, $0.5 million and $0.3 million, respectively. For the nine months ended September 30, 2013, 2012, 2011 and 2010, the Company recognized $1.6 million, $1.6 million, $1.5 million and $0.6 million, respectively. For the three months ended June 30, 2013, 2012, 2011 and 2010, the Company recognized $0.5 million, $0.5 million, $0.5 million and $0.2 million, respectively. For the six months ended June 30, 2013, 2012, 2011 and 2010, the Company recognized $1.1 million, $1.1 million, $1.0 million and $0.3 million, respectively. For the three months ended March 31, 2013, 2012 and 2011, the Company recognized $0.5 million in each period.
231 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
Note 22 - Equity
2011 Equity Transactions
On March 31, 2011, the Company granted senior management and directors 240,734 shares of common stock at $2.40 per share, as compensation under the Company’s 2008 Equity Incentive Plan. The shares were valued at the quoted market price on the grant date. The Company recorded compensation expense of $0.6 million.
On June 1, 2011, the Company announced an increase of additional 1,000,000 shares of common stock may be purchased under the Share Repurchase Program launched in December 2010, bringing the total authorized shares of its common stock available for purchase to 2,000,000. During the year ended December 31, 2011, the Company has repurchased 774,218 shares with $1.9 million pursuant to the Share Repurchase Program. The Company had a total of 1,090,978 shares of treasury stock as of December 31, 2011.
On June 16, 2011, the Company and Maoming Hengda entered into a Debt Repayment Agreement with Guangzhou Hengda and its sole shareholder Ms Ding Yumei whereby the Company issued 974,571 shares of its common stock to Ms Ding Yumei, the designee and sole shareholder of Guangzhou Hengda, to repay loan balance of $4.8 million due to Guangzhou Hengda.
On June 28, 2011, the Company granted senior management and directors 191,150 shares of common stock at $1.44 per share, as compensation under the Company’s 2008 Equity Incentive Plan. The shares were valued at the quoted market price on the grant date. The Company recorded compensation expense of $0.3 million.
On September 26, 2011, the Company granted senior management and directors 189,650 shares of common stock at $1.18 per share, as compensation under the Company’s 2008 Equity Incentive Plan. The shares were valued at the quoted market price on the grant date. The Company recorded compensation expense of $0.2 million.
On December 28, 2011, the Company granted senior management and directors 166,150 shares of common stock at $1.04 per share, as compensation under the Company’s 2008 Equity Incentive Plan. The shares were valued at the quoted market price on the grant date. The Company recorded compensation expense of $0.2 million.
2012 Equity Transactions
On March 1, 2012, Longmen Joint Venture sold its 22.76% equity interest of Tongxing to two individuals, who are the representatives from Long Steel Group. As of March 1, 2012, Tongxing had a carrying value of net assets of $40.5 million which were included in the consolidated net assets of the Company and a noncontrolling interest in Tongxing of $32.5 million. The Company retained the land use right associated with the Tongxing property adjacent to the Longmen Joint Venture facility, which had a carrying value of $3.6 million immediately prior to the transaction and relinquished its controlling interest in the remaining net assets (primarily operating assets). In connection with the transaction, the Company also settled with a payable in cash of $0.3 million and transferred the dividend receivable of $0.9 million from Tongxing to the two individuals. These arrangements meet the criteria of ASC 810-10-40-6b and 6d, deconsolidation of a Subsidiary with multiple arrangements treated as a single transaction. As the land use rights held in Tongxing have been included as part of the Company’s consolidated assets, this transaction was considered as a change in the Company’s ownership interest in the land use right similar to a change in a parent company’s ownership interest in a subsidiary in accordance with ASC 810-10-45-23 and therefore the carrying value of the land use right was not stepped up to fair value. The net impact of these transactions resulted in a reduction of $3.1 million paid-in capital.
The following is a reconciliation of Tongxing’s noncontrolling interest for the nine months ended September 30, 2012:
(in thousands) | Noncontrolling interest | |||||||||||
Total | Tongxing | Others | ||||||||||
Balance at December 31, 2011 | $ | (56,189 | ) | $ | 32,934 | $ | (89,123 | ) | ||||
Net income (loss) attributable to noncontrolling interest | (61,336 | ) | 341 | (61,677 | ) | |||||||
Addition to special reserve | 351 | - | 351 | |||||||||
Usage of special reserve | (350 | ) | - | (350 | ) | |||||||
Deconsolidation of Tongxing | (35,943 | ) | (33,654 | ) | (2,289 | ) | ||||||
Foreign currency translation adjustments | (385 | ) | 379 | (764 | ) | |||||||
Balance at September 30, 2012 | $ | (153,852 | ) | $ | - | $ | (153,852 | ) |
232 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
On March 26, 2012, the Company granted senior management and directors 165,400 shares of common stock at $0.75 per share, as compensation under the Company’s 2008 Equity Incentive Plan. The shares were valued at the quoted market price on the grant date. The Company recorded compensation expense of $0.1 million.
On March 27, 2012, we launched another share repurchase program to repurchase up to an aggregate of 2,000,000 shares of our common stock. Together with the previous share repurchase program launched in December 2010 and this newly announced Share Repurchase Program, it brought the total authorized shares of our common stock available for purchase to 4,000,000. During the nine months ended September 30, 2012, the Company has repurchased 1,381,328 shares with $1.4 million pursuant to the Share Repurchase Program. The Company had a total of 2,472,306 shares of treasury stock as of September 30, 2012.
On June 28, 2012, the Company granted senior management and directors 165,400 shares of common stock at $0.80 per share, as compensation under the Company’s 2008 Equity Incentive Plan. The shares were valued at the quoted market price on the grant date. The Company recorded compensation expense of $0.1 million.
On September 27, 2012, the Company granted senior management and directors 167,900 shares of common stock at $1.29 per share, as compensation under the Company’s 2008 Equity Incentive Plan. The shares were valued at the quoted market price on the grant date. The Company recorded compensation expense of $0.2 million.
2013 Equity Transactions
On March 28, 2013, the Company granted senior management and directors 174,900 shares of common stock at $1.01 per share, as compensation under the Company’s 2008 Equity Incentive Plan. The shares were valued at the quoted market price on the grant date.
On June 27, 2013, the Company granted senior management and directors 163,150 shares of common stock at $1.02 per share, as compensation under the Company’s 2008 Equity Incentive Plan. The shares were valued at the quoted market price on the grant date.
On August 16, 2013, an additional $45.1 million (or RMB 280 million) was contributed to Tianwu Joint Venture with $27.0 million (or RMB 168 million) contributed by the Company and $18.0 million (or RMB 112 million) contributed by Tianjin Material and Equipment Group Corporation (“TME Group”). The Company’s controlling interest of Tianwu Joint Venture remains at 60% after the capital contribution.
On September 28, the Company granted senior management and directors 163,150 shares of common stock at $0.88 per share as compensation under the Company’s 2008 Equity Incentive Plan. The shares were valued at the quoted market price on the grant date.
Note 23 – Retirement plan
Regulations in the PRC require the Company to contribute to a defined contribution retirement plan for all employees. All the employees of the Company’s entities in China are entitled to a retirement pension amount calculated based upon their salary at their date of retirement and their length of service in accordance with a government managed pension plan. The PRC government is responsible for the pension liability to the retired staff. The Company’s entities in China are required to contribute based on the higher of 20% of the employees’ monthly base salary or 12% of the minimum social average salary of the city where the facilities are located. Employees are required to contribute 8% of their base salary to the plan. The minimum social average salary is announced by the local Social Security bureau and updated annually. Total pension expense incurred by the Company was $2.3 million, $1.7 million, $1.5 million and $1.2 million for the three months ended September 30, 2013, 2012, 2011 and 2010, respectively, and for the nine months ended September 30, 2013, 2012, 2011 and 2010 amounted to $6.4 million, $5.5 million, $4.7 million $3.4 million, respectively. Total pension expense incurred by the Company was $1.9 million, $2.0 million, $1.7 million and $1.1 million, for the three months ended June 30, 2013, 2012, 2011 and 2010, respectively, and for the six months ended June 30, 2013, 2012, 2011 and 2010 amounted to $4.1 million, $3.8 million, $3.2 million and $2.2 million, respectively. Total pension expense incurred by the Company was $2.2 million, $1.8 million and $1.5 million for the three months ended March 31, 2013, 2012 and 2011, respectively.
Note 24 – 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.
233 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
Surplus reserve fund
The Company is required to transfer 10% of its net income, as determined in accordance with the PRC accounting rules and regulations, to a statutory surplus reserve fund until such reserve balance reaches 50% of the Company’s registered capital.
The transfer to this reserve must be made before distribution of any dividend to shareholders. The surplus reserve fund is non-distributable other than during liquidation and can be used to fund previous years’ losses, if any, and may be utilized for business expansion or converted into share capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing the par value of the shares currently held by them, provided that the remaining reserve balance after such issue is not less than 25% of the registered capital. For the periods ended September 30, 2013, 2012, 2011, and 2010, June 30, 2013, 2012, 2011 and 2010, and March 31, 2013, 2012 and 2011, 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 nine months ended September 30, 2013, 2012, 2011 and 2010, the Company made contributions of $0.7 million, $0.9 million, $0.3 million and $0 to these reserves, respectively and used $0.4 million, $0.9 million, $0 and $0 of safety and maintenance expense, respectively. For the six months ended June 30, 2013, 2012, 2011 and 2010, the Company made contributions of $0.5 million, $0.7 million, $0.3 million and $0 to these reserves, respectively and used $0.3 million, $0.3 million, $0 and $0 of safety and maintenance expense, respectively. For the three months ended March 31, 2013, 2012 and 2011, the Company made contributions of $0.2 million, $0.4 million and $0.1 million to these reserves, respectively and used $0.1 million, $0.2 million and $0 of safety and maintenance expense, respectively.
Note 25 – 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, 2013 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 |
Total rental expense was $0.8 million, $0.8 million, $0.3 million and $0.07 million for the three months ended September 30, 2013, 2012, 2011 and 2010, respectively, and $2.4 million, $2.4 million, $0.9 million and $0.2 million for the nine months ended September 30, 2013, 2012, 2011 and 2010, respectively.
Total rental expense was $0.8 million, $0.9 million, $0.3 million and $0.07 million for the three months ended June 30, 2013, 2012, 2011 and 2010, respectively, and $1.6 million, $1.6 million, $0.6 million and $0.1 million, for the six months ended June 30, 2013, 2012, 2011 and 2010, respectively
Total rental expense was $0.8 million, $0.7 million and $0.3 million for the three months ended March 31, 2013, 2012 and 2011, respectively.
234 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
Contractual Commitments
Longmen Joint Venture has $211.6 million contractual obligations related to construction projects as of September 30, 2013 estimated to be fulfilled between November 2013 and September 2014.
Contingencies
As of September 30, 2013, Longmen Joint Venture provided guarantees to related parties’ and third parties’ bank loans, including lines of credit and others, amounting to $304.6 million.
Nature of guarantee | 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 |
Name of parties being guaranteed | Guarantee 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 |
As of September 30, 2013, 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 26 – Segments (Restated)
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.
235 |
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, 2013, 2012, 2011 and 2010:
(In thousands) | ||||||||||||||||
Sales: | 2013 | 2012 | 2011 | 2010 | ||||||||||||
Longmen Joint Venture | $ | 606,444 | $ | 708,974 | $ | 986,938 | $ | 455,028 | ||||||||
Maoming Hengda | 252 | 1,134 | 3,938 | 1,960 | ||||||||||||
Baotou Steel Pipe Joint Venture | 2,921 | 1,322 | 3,436 | 3,267 | ||||||||||||
General Steel (China) & Tianwu Joint Venture | 4,236 | 129,341 | 91,727 | 15,994 | ||||||||||||
Total sales | 613,853 | 840,771 | $ | 1,086,039 | $ | 476,249 | ||||||||||
Interdivision revenue | (3,758 | (129,346 | ) | (87,878 | ) | (15,972 | ) | |||||||||
Consolidated sales | $ | 610,095 | $ | 711,425 | $ | 998,161 | $ | 460,277 |
Gross profit | 2013 | 2012 | 2011 | 2010 | ||||||||||||
Longmen Joint Venture | $ | 8,122 | $ | (18,417 | ) | $ | 29,400 | $ | 14,304 | |||||||
Maoming Hengda | (57 | ) | (761 | ) | 31 | (828 | ) | |||||||||
Baotou Steel Pipe Joint Venture | 160 | 120 | 439 | 78 | ||||||||||||
General Steel (China) & Tianwu Joint Venture | 6 | 5,462 | 4,163 | 172 | ||||||||||||
Total profit | 8,231 | (13,596 | ) | $ | 34,033 | $ | 13,726 | |||||||||
Interdivision gross profit | - | - | 17 | (137 | ) | |||||||||||
Consolidated profit | $ | 8,231 | $ | (13,596 | ) | $ | 34,050 | $ | 13,589 |
Income (loss) from operations: | 2013 | 2012 | 2011 | 2010 | ||||||||||||
Longmen Joint Venture | $ | 30,306 | $ | (42,611 | ) | $ | 1,773 | $ | 6,734 | |||||||
Maoming Hengda | (719 | ) | (1,062 | ) | (477 | ) | (1,075 | ) | ||||||||
Baotou Steel Pipe Joint Venture | 20 | 630 | 200 | (188 | ) | |||||||||||
General Steel (China) & Tianwu Joint Venture | (695 | ) | 2,399 | 3,766 | (72 | ) | ||||||||||
Total income (loss) from operations | 28,912 | (40,644 | ) | $ | 5,262 | $ | 5,399 | |||||||||
Interdivision income from operations | - | - | 17 | - | ||||||||||||
Reconciling item (1) | (1,177 | ) | (1,350 | ) | (945 | ) | (1,370 | ) | ||||||||
Consolidated income (loss) from operations | $ | 27,735 | $ | (41,994 | ) | $ | 4,334 | $ | 4,029 |
Net loss attributable to General Steel Holdings, Inc: | 2013 | 2012 | 2011 | 2010 | ||||||||||||
Longmen Joint Venture | $ | 8,284 | $ | (39,494 | ) | $ | (14,766 | ) | $ | (1,351 | ) | |||||
Maoming Hengda | (694 | (1,073 | ) | 2,573 | (1,076 | ) | ||||||||||
Baotou Steel Pipe Joint Venture | 16 | 403 | 163 | (128 | ) | |||||||||||
General Steel (China) & Tianwu Joint Venture | (2,689 | ) | (26 | ) | 2,437 | (424 | ) | |||||||||
Total net loss attributable to General Steel Holdings, Inc. | 4,917 | (40,190 | ) | $ | (9,593 | ) | $ | (2,979 | ) | |||||||
Interdivision net income | - | - | (3,434 | ) | - | |||||||||||
Reconciling item (1) | (1,116 | ) | (1,408 | ) | (803 | ) | (805 | ) | ||||||||
Consolidated net loss attributable to General Steel Holdings, Inc. | $ | 3,801 | $ | (41,598 | ) | $ | (13,830 | ) | $ | (3,784 | ) |
236 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
Depreciation and amortization: | 2013 | 2012 | 2011 | 2010 | ||||||||||||
Longmen Joint Venture | $ | 21,014 | $ | 19,915 | $ | 16,979 | $ | 10,086 | ||||||||
Maoming Hengda | 307 | 451 | 531 | 928 | ||||||||||||
Baotou Steel | 62 | 52 | 60 | 74 | ||||||||||||
General Steel (China) & Tianwu Joint Venture | 505 | 790 | 793 | 753 | ||||||||||||
Consolidated depreciation and amortization | $ | 21,888 | $ | 21,208 | $ | 18,363 | $ | 11,841 |
Finance/interest expenses: | 2013 | 2012 | 2011 | 2010 | ||||||||||||
Longmen Joint Venture | $ | 20,591 | $ | 28,378 | $ | 25,925 | $ | 10,957 | ||||||||
Maoming Hengda | 1 | 35 | 217 | 85 | ||||||||||||
Baotou Steel | - | 127 | - | (7 | ) | |||||||||||
General Steel (China) & Tianwu Joint Venture | 2,249 | 2,467 | 3,539 | 682 | ||||||||||||
Less: interdivision expenses | - | - | (6 | ) | - | |||||||||||
Reconciling item (1) | 1 | (3 | ) | (1 | ) | (1,527 | ) | |||||||||
Consolidated interest expenses | $ | 22,842 | $ | 31,004 | $ | 29,674 | $ | 10,190 |
Capital expenditures: | 2013 | 2012 | 2011 | 2010 | ||||||||||||
Longmen Joint Venture | $ | 16,455 | $ | 3,259 | $ | 19,889 | $ | 19,605 | ||||||||
Maoming Hengda | - | 23 | 3,505 | 8,045 | ||||||||||||
Baotou Steel | - | 1 | 3 | 12 | ||||||||||||
General Steel (China) & Tianwu Joint Venture | - | 15 | - | 4 | ||||||||||||
Reconciling item (1) | - | - | - | - | ||||||||||||
Consolidated capital expenditures | $ | 16,455 | $ | 3,298 | $ | 23,397 | $ | 27,666 |
The following represents results of division operations for nine months ended September 30, 2013, 2012, 2011 and 2010:
(In thousands) | ||||||||||||||||
Sales: | 2013 | 2012 | 2011 | 2010 | ||||||||||||
Longmen Joint Venture | $ | 1,903,933 | $ | 2,126,556 | $ | 2,752,918 | $ | 1,389,215 | ||||||||
Maoming Hengda | 3,124 | 4,003 | 6,399 | 7,839 | ||||||||||||
Baotou Steel Pipe Joint Venture | 3,902 | 3,923 | 6,865 | 9,587 | ||||||||||||
General Steel (China) & Tianwu Joint Venture | 58,416 | 141,668 | 189,370 | 35,048 | ||||||||||||
Total sales | 1,969,375 | 2,276,150 | $ | 2,955,552 | $ | 1,441,689 | ||||||||||
Interdivision revenue | (54,338 | ) | (136,001 | ) | (185,196 | ) | (26,710 | ) | ||||||||
Consolidated sales | $ | 1,915,037 | $ | 2,140,149 | $ | 2,770,356 | $ | 1,414,979 |
237 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
Gross profit | 2013 | 2012 | 2011 | 2010 | ||||||||||||
Longmen Joint Venture | $ | (23,704 | ) | $ | 12,628 | $ | 56,215 | $ | 28,450 | |||||||
Maoming Hengda | 188 | (1,174 | ) | (886 | ) | (2,347 | ) | |||||||||
Baotou Steel Pipe Joint Venture | 249 | 193 | 491 | 535 | ||||||||||||
General Steel (China) & Tianwu Joint Venture | 29 | 8,431 | 4,783 | 192 | ||||||||||||
Total profit | (23,238 | ) | 20,078 | $ | 60,603 | $ | 26,830 | |||||||||
Interdivision gross profit | - | - | 1,836 | (131 | ) | |||||||||||
Consolidated profit | $ | (23,238 | ) | $ | 20,078 | $ | 62,439 | $ | 26,699 |
Income (loss) from operations: | 2013 | 2012 | 2011 | 2010 | ||||||||||||
Longmen Joint Venture | �� | $ | 20,558 | $ | (56,932 | ) | $ | (5,599 | ) | $ | 1,905 | |||||
Maoming Hengda | (1,741 | ) | (2,498 | ) | (2,537 | ) | (4,947 | ) | ||||||||
Baotou Steel Pipe Joint Venture | (285 | ) | 224 | (285 | ) | (462 | ) | |||||||||
General Steel (China) & Tianwu Joint Venture | (2,293 | ) | 4,878 | (1,867 | ) | (546 | ) | |||||||||
Total income (loss) from operations | 16,239 | (54,328 | ) | $ | (10,288 | ) | $ | (4,050 | ) | |||||||
Interdivision income from operations | - | - | 1,836 | - | ||||||||||||
Reconciling item (1) | (3,504 | ) | (4,003 | ) | (3,695 | ) | (4,624 | ) | ||||||||
Consolidated income (loss) from operations | $ | 12,735 | $ | (58,331 | ) | $ | (12,147 | ) | $ | (8,674 | ) |
Net loss attributable to General Steel Holdings, Inc: | 2013 | 2012 | 2011 | 2010 | ||||||||||||
Longmen Joint Venture | $ | (18,335 | ) | $ | (92,974 | ) | $ | (44,654 | ) | $ | (15,913 | ) | ||||
Maoming Hengda | (1,681 | ) | (2,393 | ) | 3,770 | (4,975 | ) | |||||||||
Baotou Steel Pipe Joint Venture | (227 | ) | (263 | ) | (77 | ) | (304 | ) | ||||||||
General Steel (China) & Tianwu Joint Venture | (9,373 | ) | (3,079 | ) | (5,876 | ) | (1,038 | ) | ||||||||
Total net loss attributable to General Steel Holdings, Inc. | (29,616 | ) | (98,709 | ) | $ | (46,837 | ) | $ | (22,230 | ) | ||||||
Interdivision net income | - | - | (1,461 | ) | - | |||||||||||
Reconciling item (1) | (3,298 | ) | (4,050 | ) | 2,636 | 10,830 | ||||||||||
Consolidated net loss attributable to General Steel Holdings, Inc. | $ | (32,914 | ) | $ | (102,759 | ) | $ | (45,662 | ) | $ | (11,400 | ) |
Depreciation and amortization: | 2013 | 2012 | 2011 | 2010 | ||||||||||||
Longmen Joint Venture | $ | 62,295 | $ | 58,573 | $ | 35,983 | $ | 25,937 | ||||||||
Maoming Hengda | 933 | 1,447 | 1,879 | 2,756 | ||||||||||||
Baotou Steel | 185 | 134 | 184 | 220 | ||||||||||||
General Steel (China) & Tianwu Joint Venture | 1,542 | 2,384 | 2,339 | 2,262 | ||||||||||||
Consolidated depreciation and amortization | $ | 64,955 | $ | 62,538 | $ | 40,385 | $ | 31,175 |
Finance/interest expenses: | 2013 | 2012 | 2011 | 2010 | ||||||||||||
Longmen Joint Venture | $ | 60,984 | $ | 112,822 | $ | 58,046 | $ | 37,506 | ||||||||
Maoming Hengda | 1 | 47 | 218 | 109 | ||||||||||||
Baotou Steel | - | 381 | - | 13 | ||||||||||||
General Steel (China) & Tianwu Joint Venture | 7,927 | 8,819 | 6,016 | 1,501 | ||||||||||||
Less: interdivision expenses | - | - | (707 | ) | - | |||||||||||
Reconciling item (1) | 3 | (1 | ) | 1 | (1,512 | ) | ||||||||||
Consolidated interest expenses | $ | 68,915 | $ | 122,068 | $ | 63,574 | $ | 37,617 |
238 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
Capital expenditures: | 2013 | 2012 | 2011 | 2010 | ||||||||||||
Longmen Joint Venture | $ | 60,461 | $ | 19,604 | $ | 50,661 | $ | 48,583 | ||||||||
Maoming Hengda | 2 | 38 | 3,790 | 8,281 | ||||||||||||
Baotou Steel | 8 | 6 | 32 | 36 | ||||||||||||
General Steel (China) & Tianwu Joint Venture | 3 | 18 | 8 | 6 | ||||||||||||
Reconciling item (1) | - | - | 3 | - | ||||||||||||
Consolidated capital expenditures | $ | 60,474 | $ | 19,666 | $ | 54,494 | $ | 56,906 |
The following represents results of division operations for three months ended June 30, 2013, 2012, 2011 and 2010:
Sales: | 2013 | 2012 | 2011 | 2010 | ||||||||||||
Longmen Joint Venture | $ | 650,741 | $ | 774,306 | $ | 1,056,675 | $ | 499,361 | ||||||||
Maoming Hengda | 1,349 | 889 | 1,917 | 2,006 | ||||||||||||
Baotou Steel Pipe Joint Venture | 972 | 2,424 | 2,815 | 5,142 | ||||||||||||
General Steel (China) & Tianwu Joint Venture | 5,454 | 7,135 | 87,277 | 5,909 | ||||||||||||
Total sales | 658,516 | 784,754 | 1,148,684 | 512,418 | ||||||||||||
Interdivision revenue | (4,865 | ) | (4,071 | ) | (86,953 | ) | (10,739 | ) | ||||||||
Consolidated sales | $ | 653,651 | $ | 780,683 | $ | 1,061,731 | $ | 501,679 |
Gross profit | 2013 | 2012 | 2011 | 2010 | ||||||||||||
Longmen Joint Venture | $ | (36,193 | ) | $ | 25,770 | $ | 22,300 | $ | 8,120 | |||||||
Maoming Hengda | 473 | (330 | ) | (495 | ) | (1,202 | ) | |||||||||
Baotou Steel Pipe Joint Venture | 167 | 54 | 179 | 425 | ||||||||||||
General Steel (China) & Tianwu Joint Venture | 17 | 2,550 | 1,115 | 15 | ||||||||||||
Total gross profit | (35,536 | ) | 28,044 | 23,099 | 7,358 | |||||||||||
Interdivision profit | - | - | 241 | 6 | ||||||||||||
Consolidated gross profit | $ | (35,536 | ) | $ | 28,044 | $ | 23,340 | $ | 7,364 |
Income (loss) from operations: | 2013 | 2012 | 2011 | 2010 | ||||||||||||
Longmen Joint Venture | $ | (44,685 | ) | $ | 2,903 | $ | 138 | $ | (1,046 | ) | ||||||
Maoming Hengda | (225 | ) | (734 | ) | (1,168 | ) | (3,275 | ) | ||||||||
Baotou Steel Pipe Joint Venture | 55 | (240 | ) | (64 | ) | 43 | ||||||||||
General Steel (China) & Tianwu Joint Venture | (790 | ) | 2,480 | (4,636 | ) | (236 | ) | |||||||||
Total loss from operations | (45,645 | ) | 4,409 | (5,730 | ) | (4,514 | ) | |||||||||
Interdivision income from operations | - | - | 241 | - | ||||||||||||
Reconciling item (1) | (1,245 | ) | (2,117 | ) | (1,540 | ) | (1,799 | ) | ||||||||
Consolidated loss from operations | $ | (46,890 | ) | $ | 2,292 | $ | (7,029 | ) | $ | (6,313 | ) |
239 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
Net loss attributable to General Steel Holdings, Inc.: | 2013 | 2012 | 2011 | 2010 | ||||||||||||
Longmen Joint Venture | $ | (34,944 | ) | $ | (23,132 | ) | $ | (19,707 | ) | $ | (7,472 | ) | ||||
Maoming Hengda | (216 | ) | (784 | ) | 2,292 | (3,300 | ) | |||||||||
Baotou Steel Pipe Joint Venture | 46 | (292 | ) | - | 25 | |||||||||||
General Steel (China) & Tianwu Joint Venture | (3,528 | ) | (75 | ) | (6,991 | ) | (333 | ) | ||||||||
Total net loss attributable to General Steel Holdings, Inc. | (38,642 | ) | (24,283 | ) | (24,406 | ) | (11,080 | ) | ||||||||
Interdivision net income | - | - | 398 | - | ||||||||||||
Reconciling item (1) | (1,176 | ) | (2,094 | ) | 1,093 | 9,076 | ||||||||||
Consolidated net loss attributable to General Steel Holdings, Inc. | $ | (39,818 | ) | $ | (26,377 | ) | $ | (22,915 | ) | $ | (2,004 | ) |
Depreciation and amortization: | 2013 | 2012 | 2011 | 2010 | ||||||||||||
Longmen Joint Venture | $ | 20,850 | $ | 19,412 | $ | 11,501 | $ | 8,021 | ||||||||
Maoming Hengda | 315 | 492 | 758 | 899 | ||||||||||||
Baotou Steel | 26 | 71 | 64 | 74 | ||||||||||||
General Steel (China) & Tianwu Joint Venture | 518 | 795 | 777 | 754 | ||||||||||||
Consolidated depreciation and amortization | $ | 21,709 | $ | 20,770 | $ | 13,100 | $ | 9,748 |
Finance / interest expenses: | 2013 | 2012 | 2011 | 2010 | ||||||||||||
Longmen Joint Venture | $ | 18,243 | $ | 44,879 | $ | 18,391 | $ | 15,932 | ||||||||
Maoming Hengda | - | - | 1 | 24 | ||||||||||||
Baotou Steel | - | 126 | - | 20 | ||||||||||||
General Steel (China) & Tianwu Joint Venture | 2,972 | 3,321 | 2,088 | 473 | ||||||||||||
Less: interdivision expense | - | - | (701 | ) | - | |||||||||||
Reconciling item (1) | 1 | 2 | 2 | 15 | ||||||||||||
Consolidated interest expenses | $ | 21,216 | $ | 48,328 | $ | 19,781 | $ | 16,464 |
Capital expenditures: | 2013 | 2012 | 2011 | 2010 | ||||||||||||
Longmen Joint Venture | $ | 27,922 | $ | 7,903 | $ | 20,110 | $ | 22,274 | ||||||||
Maoming Hengda | - | 15 | 69 | 130 | ||||||||||||
Baotou Steel | 1 | - | 6 | 19 | ||||||||||||
General Steel (China) & Tianwu Joint Venture | 2 | 2 | - | - | ||||||||||||
Reconciling item (1) | - | - | - | - | ||||||||||||
Consolidated capital expenditures | $ | 27,925 | $ | 7,920 | $ | 20,185 | $ | 22,423 |
240 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
The following represents results of division operations for six months ended June 30, 2013, 2012, 2011 and 2010:
(In thousands) | ||||||||||||||||
Sales: | 2013 | 2012 | 2011 | 2010 | ||||||||||||
Longmen Joint Venture | $ | 1,297,489 | $ | 1,417,582 | $ | 1,765,980 | $ | 934,187 | ||||||||
Maoming Hengda | 2,872 | 2,869 | 2,461 | 5,880 | ||||||||||||
Baotou Steel Pipe Joint Venture | 981 | 2,601 | 3,429 | 6,320 | ||||||||||||
General Steel (China) & Tianwu Joint Venture | 54,180 | 12,327 | 97,643 | 19,054 | ||||||||||||
Total sales | 1,355,522 | 1,435,379 | 1,869,513 | 965,441 | ||||||||||||
Interdivision revenue | (50,580 | ) | (6,655 | ) | (97,318 | ) | (10,739 | ) | ||||||||
Consolidated sales | $ | 1,304,942 | $ | 1,428,724 | $ | 1,772,195 | $ | 954,702 |
Gross profit | 2013 | 2012 | 2011 | 2010 | ||||||||||||
Longmen Joint Venture | $ | (31,826 | ) | $ | 31,045 | $ | 26,818 | $ | 14,146 | |||||||
Maoming Hengda | 245 | (413 | ) | (917 | ) | (1,519 | ) | |||||||||
Baotou Steel Pipe Joint Venture | 89 | 73 | 52 | 457 | ||||||||||||
General Steel (China) & Tianwu Joint Venture | 23 | 2,969 | 620 | 20 | ||||||||||||
Total gross profit | (31,469 | ) | 33,674 | 26,573 | 13,104 | |||||||||||
Interdivision profit | - | - | 1,816 | 6 | ||||||||||||
Consolidated gross profit | $ | (31,469 | ) | $ | 33,674 | $ | 28,389 | $ | 13,110 |
Income (loss) from operations: | 2013 | 2012 | 2011 | 2010 | ||||||||||||
Longmen Joint Venture | $ | (9,748 | ) | $ | (14,321 | ) | $ | (7,370 | ) | $ | (4,828 | ) | ||||
Maoming Hengda | (1,022 | ) | (1,436 | ) | (2,060 | ) | (3,872 | ) | ||||||||
Baotou Steel Pipe Joint Venture | (305 | ) | (406 | ) | (485 | ) | (274 | ) | ||||||||
General Steel (China) & Tianwu Joint Venture | (1,598 | ) | 2,479 | (5,633 | ) | (475 | ) | |||||||||
Total loss from operations | (12,673 | ) | (13,684 | ) | (15,548 | ) | $ | (9,449 | ) | |||||||
Interdivision income from operations | - | - | 1,816 | - | ||||||||||||
Reconciling item (1) | (2,326 | ) | (2,653 | ) | (2,749 | ) | (3,254 | ) | ||||||||
Consolidated loss from operations | $ | (14,999 | ) | $ | (16,337 | ) | $ | (16,481 | ) | $ | (12,703 | ) |
Net loss attributable to General Steel Holdings, Inc.: | 2013 | 2012 | 2011 | 2010 | ||||||||||||
Longmen Joint Venture | $ | (26,619 | ) | $ | (53,480 | ) | $ | (29,885 | ) | $ | (14,562 | ) | ||||
Maoming Hengda | (987 | ) | (1,320 | ) | 1,197 | (3,899 | ) | |||||||||
Baotou Steel Pipe Joint Venture | (243 | ) | (666 | ) | (240 | ) | (176 | ) | ||||||||
General Steel (China) & Tianwu Joint Venture | (6,684 | ) | (3,053 | ) | (8,313 | ) | (614 | ) | ||||||||
Total net loss attributable to General Steel Holdings, Inc. | (34,533 | ) | (58,519 | ) | (37,241 | ) | (19,251 | ) | ||||||||
Interdivision net income | - | - | 1,973 | - | ||||||||||||
Reconciling item (1) | (2,182 | ) | (2,642 | ) | 3,436 | 11,635 | ||||||||||
Consolidated net loss attributable to General Steel Holdings, Inc. | $ | (36,715 | ) | $ | (61,161 | ) | $ | (31,832 | ) | $ | (7,616 | ) |
241 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
Depreciation and amortization: | 2013 | 2012 | 2011 | 2010 | ||||||||||||
Longmen Joint Venture | $ | 41,281 | $ | 38,658 | $ | 19,004 | $ | 15,851 | ||||||||
Maoming Hengda | 626 | 996 | 1,348 | 1,828 | ||||||||||||
Baotou Steel | 123 | 82 | 124 | 146 | ||||||||||||
General Steel (China) & Tianwu Joint Venture | 1,037 | 1,593 | 1,546 | 1,509 | ||||||||||||
Consolidated depreciation and amortization | $ | 43,067 | $ | 41,329 | $ | 22,022 | $ | 19,334 |
Finance / interest expenses: | 2013 | 2012 | 2011 | 2010 | ||||||||||||
Longmen Joint Venture | $ | 40,393 | $ | 84,444 | $ | 32,121 | $ | 26,549 | ||||||||
Maoming Hengda | - | 12 | 1 | 24 | ||||||||||||
Baotou Steel | - | 254 | - | 20 | ||||||||||||
General Steel (China) & Tianwu Joint Venture | 5,678 | 6,352 | 2,477 | 819 | ||||||||||||
Less: interdivision expense | - | - | (701 | ) | - | |||||||||||
Reconciling item (1) | 2 | 2 | 2 | 15 | ||||||||||||
Consolidated interest expenses | $ | 46,073 | $ | 91,064 | $ | 33,900 | $ | 27,427 |
Capital expenditures: | 2013 | 2012 | 2011 | 2010 | ||||||||||||
Longmen Joint Venture | $ | 44,006 | $ | 16,345 | $ | 30,772 | $ | 28,979 | ||||||||
Maoming Hengda | 2 | 15 | 285 | 235 | ||||||||||||
Baotou Steel | 8 | 5 | 29 | 24 | ||||||||||||
General Steel (China) & Tianwu Joint Venture | 3 | 3 | 8 | 2 | ||||||||||||
Reconciling item (1) | - | - | 3 | - | ||||||||||||
Consolidated capital expenditures | $ | 44,019 | $ | 16,368 | $ | 31,097 | $ | 29,240 |
The following represents results of division operations for three months ended March 31, 2013, 2012 and 2011:
(In thousands) | ||||||||||||
Sales: | 2013 | 2012 | 2011 | |||||||||
Longmen Joint Venture | $ | 646,748 | $ | 643,276 | $ | 709,305 | ||||||
Maoming Hengda | 1,523 | 1,980 | 544 | |||||||||
Baotou Steel Pipe Joint Venture | 9 | 177 | 614 | |||||||||
General Steel (China) & Tianwu Joint Venture | 48,726 | 5,192 | 10,366 | |||||||||
Total sales | 697,006 | 650,625 | 720,829 | |||||||||
Interdivision sales | (45,715 | ) | (2,584 | ) | (10,365 | ) | ||||||
Consolidated sales | $ | 651,291 | $ | 648,041 | $ | 710,464 |
242 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
Gross profit: | 2013 | 2012 | 2011 | |||||||||
Longmen Joint Venture | $ | 4,367 | $ | 5,275 | $ | 4,518 | ||||||
Maoming Hengda | (228 | ) | (83 | ) | (422 | ) | ||||||
Baotou Steel | (78 | ) | 19 | (127 | ) | |||||||
General Steel (China) & Tianwu Joint Venture | 6 | 419 | (494 | ) | ||||||||
Total gross profit | 4,067 | 5,630 | 3,474 | |||||||||
Interdivision gross profit | - | - | 1,575 | |||||||||
Consolidated gross profit | $ | 4,067 | $ | 5,630 | $ | 5,049 |
Income (loss) from operations: | 2013 | 2012 | 2011 | |||||||||
Longmen Joint Venture | $ | 34,937 | $ | (17,224 | ) | $ | (7,508 | ) | ||||
Maoming Hengda | (797 | ) | (702 | ) | (892 | ) | ||||||
Baotou Steel | (361 | ) | (166 | ) | (421 | ) | ||||||
General Steel (China) & Tianwu Joint Venture | (808 | ) | (1 | ) | (997 | ) | ||||||
Total loss from operations | 32,971 | (18,093 | ) | (9,818 | ) | |||||||
Interdivision income (loss) from operations | - | - | 1,575 | |||||||||
Reconciling item (1) | (1,080 | ) | (536 | ) | (1,209 | ) | ||||||
Consolidated income (loss) from operations | $ | 31,891 | $ | (18,629 | ) | $ | (9,452 | ) |
Net income (loss) attributable to General Steel Holdings, Inc.: | 2013 | 2012 | 2011 | |||||||||
Longmen Joint Venture | $ | 8,325 | $ | (30,348 | ) | $ | (10,178 | ) | ||||
Maoming Hengda | (771 | ) | (536 | ) | (1,095 | ) | ||||||
Baotou Steel | (289 | ) | (374 | ) | (240 | ) | ||||||
General Steel (China) & Tianwu Joint Venture | (3,156 | ) | (2,978 | ) | (1,322 | ) | ||||||
Total net loss attributable to General Steel Holdings, Inc. | 4,109 | (34,236 | ) | (12,835 | ) | |||||||
Interdivision net income | - | - | 1,575 | |||||||||
Reconciling item (1) | (1,006 | ) | (548 | ) | 2,343 | |||||||
Consolidated net income (loss) attributable to General Steel Holdings, Inc. | $ | 3,103 | $ | (34,784 | ) | $ | (8,917 | ) |
Depreciation, amortization and depletion: | 2013 | 2012 | 2011 | |||||||||
Longmen Joint Venture | $ | 20,431 | $ | 19,246 | $ | 7,503 | ||||||
Maoming Hengda | 311 | 504 | 590 | |||||||||
Baotou Steel | 97 | 11 | 60 | |||||||||
General Steel (China) & Tianwu Joint Venture | 519 | 798 | 769 | |||||||||
Consolidated depreciation, amortization and depletion | $ | 21,358 | $ | 20,559 | $ | 8,922 |
Finance/interest expenses: | 2013 | 2012 | 2011 | |||||||||
Longmen Joint Venture | $ | 22,150 | $ | 39,565 | $ | 13,730 | ||||||
Maoming Hengda | - | 12 | - | |||||||||
Baotou Steel | - | 128 | - | |||||||||
General Steel (China) & Tianwu Joint Venture | 2,706 | 3,031 | 389 | |||||||||
Reconciling item (1) | 1 | - | - | |||||||||
Consolidated interest expenses | $ | 24,857 | $ | 42,736 | $ | 14,119 |
243 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
Capital expenditures: | 2013 | 2012 | 2011 | |||||||||
Longmen Joint Venture | $ | 16,084 | $ | 10,723 | $ | 10,662 | ||||||
Maoming Hengda | 2 | - | 216 | |||||||||
Baotou Steel | 7 | 5 | 23 | |||||||||
General Steel (China) & Tianwu Joint Venture | 1 | 1 | 8 | |||||||||
Reconciling item (1) | - | - | 3 | |||||||||
Consolidated capital expenditures | $ | 16,094 | $ | 10,729 | $ | 10,912 |
The following represents total assets by division operations for as of September 30, 2013, June 30, 2013, March 31, 2013, December 31, 2012, September 30, 2012, June 30, 2012, March 31, 2012, December 31, 2011, September 30, 2011, June 30, 2011 and December 31, 2010:
Total Assets as of: | September 30, 2013 | June 30, 2013 | March 31, 2013 | December 31, 2012 | ||||||||||||
Longmen Joint Venture | $ | 2,537,952 | $ | 2,371,719 | $ | 2,369,631 | $ | 2,513,206 | ||||||||
Maoming Hengda | 29,340 | 29,459 | 29,762 | 29,687 | ||||||||||||
Baotou Steel Pipe Joint Venture | 5,116 | 4,855 | 4,318 | 5,186 | ||||||||||||
General Steel (China) & Tianwu Joint Venture | 178,844 | 88,192 | 71,308 | 152,965 | ||||||||||||
Interdivision assets | (84,880 | ) | (46,877 | ) | (43,797 | ) | (57,436 | ) | ||||||||
Reconciling item (2) | 5,654 | 7,266 | 9,376 | 7,074 | ||||||||||||
Total Assets | $ | 2,672,026 | $ | 2,454,614 | $ | 2,440,598 | $ | 2,650,682 |
Total Assets as of: | September 30, 2012 | June 30, 2012 | March 31, 2012 | December 31, 2011 | ||||||||||||
Longmen Joint Venture | $ | 2,434,666 | $ | 2,625,990 | $ | 3,083,013 | $ | 2,937,271 | ||||||||
Maoming Hengda | 46,008 | 46,373 | 47,787 | 48,350 | ||||||||||||
Baotou Steel Pipe Joint Venture | 7,658 | 6,230 | 8,044 | 8,093 | ||||||||||||
General Steel (China) & Tianwu Joint Venture | 161,640 | 163,032 | 197,443 | 146,150 | ||||||||||||
Interdivision assets | (52,640 | ) | (88,292 | ) | (78,892 | ) | (88,326 | ) | ||||||||
Reconciling item (2) | 11,232 | 7,785 | 9,430 | 2,583 | ||||||||||||
Total Assets | $ | 2,608,564 | $ | 2,761,118 | $ | 3,266,825 | $ | 3,054,121 |
Total Assets as of: | September 30, 2011 | June 30, 2011 | December 31, 2010 | |||||||||
Longmen Joint Venture | $ | 2,724,198 | $ | 2,398,501 | $ | 1,694,895 | ||||||
Maoming Hengda | 51,708 | 52,055 | 47,839 | |||||||||
Baotou Steel Pipe Joint Venture | 9,512 | 9,190 | 31,852 | |||||||||
General Steel (China) & Tianwu Joint Venture | 273,186 | 217,307 | 194,966 | |||||||||
Less: interdivision assets | (173,330 | ) | (147,058 | ) | (173,076 | ) | ||||||
Reconciling item (2) | 579 | 1,027 | 2,904 | |||||||||
Consolidated Assets | $ | 2,885,853 | $ | 2, 531,022 | $ | 1,799,380 |
244 |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
(1) | Reconciling item represents the unallocated income or expenses of the Company, arising from General Steel Investment Co., Ltd, Yangpu Shengtong Investment Co., Ltd and Qiu Steel for the three and nine months ended September 30, 2013 and 2012. |
(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 September 30, 2013, June 30, 2013, March 31, 2013, December 31, 2012, September 30, 2012, June 30, 2012, March 31, 2012, December 31, 2011, September 30, 2011, June 30, 2011 and December 31, 2010. |
245 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Note Regarding Forward-Looking Statements
The following discussion of the financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and related notes thereto. The following discussion contains forward-looking statements. General Steel Holdings, Inc. is referred to herein as “we,” “our,” “us” and “the Company.” The words or phrases “would be,” “will allow,” “expect to,” “intends to,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” or similar expressions are intended to identify forward-looking statements. Such statements include those concerning our expected financial performance, our corporate strategy and operational plans. Actual results could differ materially from those projected in the forward-looking statements as a result of a number of risks and uncertainties, including: (a) those risks and uncertainties related to general economic conditions in the People’s Republic of China, including regulatory factors that may affect such economic conditions; (b) whether we are able to manage our planned growth efficiently and operate profitable operations, including whether our management will be able to identify, hire, train, retain, motivate and manage required personnel or that management will be able to successfully manage and exploit existing and potential market opportunities; (c) whether we are able to generate sufficient revenues or obtain financing to sustain and grow our operations; and (d) whether we are able to successfully fulfill our primary requirements for cash which are explained below under “Liquidity and Capital Resources.” Unless otherwise required by applicable law, we do not undertake, and we specifically disclaim any obligation, to update any forward-looking statements to reflect occurrences, developments, unanticipated events or circumstances after the date of such statement. Additional information regarding certain factors which could cause actual results to differ from such forward-looking statements include, but are not limited to, those described in Item 1A, “Risk Factors” of this Annual Report on Form 10-K for the fiscal year ended December 31, 2013 filed herewith.
Recent Developments and 2013 Third Quarter Highlights
The third quarter of 2013 was highlighted with the following:
· | Sales in the third quarter of 2013 decreased by 14.2% to $610.1 million, from $711.4 million in the third quarter of 2012, due to a decrease in both the sales volume and the average selling price of our products. For the third quarter of 2013, sales volume of rebar in Shaanxi Longmen Iron and Steel Co., Ltd. (“Longmen Joint Venture”) totaled 1.24 million metric tons, a decrease of 8.9%, compared to 1.36 million metric tons in the third quarter of 2012, with an average selling price of $489.6 per ton, as compared to $521.2 per ton in the third quarter of 2012. |
· | Gross profit in the third quarter of 2013 was $8.2 million, or 1.3% of total revenue, as compared to a gross loss of $13.6 million, or (1.9)% of total revenue in the third quarter of 2012. |
· | Total finance expenses in the third quarter of 2013 were $22.8 million, as compared to $31.0 million for the same period in 2012. Finance expenses mainly consisted of interest expense on capital lease, which was $5.1 million and $5.1 million in the third quarter of 2013 and 2012, respectively, and interest expense on bank loans and discounted notes receivable, which was $17.7 million and $25.9 million in the third quarter of 2013 and 2012, respectively. |
· | Gain (loss) per share was $0.07 and $(0.76) in the third quarter of 2013 and 2012, respectively. The increase in the income in the third quarter was mainly due to the average cost decreasing more than the average selling price, leading to a gross profit. |
Recent Developments and 2013 Second Quarter Highlights
The second quarter of 2013 was highlighted with the following:
· | Sales in the second quarter of 2013 decreased by 16.3% to $653.7 million, from $780.7 million in the second quarter of 2012, due to a decrease in the average selling price of our products despite an increase in sales volume. For the second quarter of 2013, sales volume of rebar in Shaanxi Longmen Iron and Steel Co., Ltd. (“Longmen Joint Venture”) totaled 1.35 million metric tons, an increase of 3.8%, compared to 1.30 million metric tons in the second quarter of 2012, with an average selling price of $482.7 per ton, as compared to $596.2 per ton in the second quarter of 2012. |
· | Gross loss in the second quarter of 2013 was $35.5 million, or (5.4)% of total revenue, as compared to a gross profit of $28.0 million, or 3.6% of total revenue in the second quarter of 2012. |
· | Total finance expenses in the second quarter of 2013 were $21.2 million, as compared to $48.3 million for the same period in 2012. Finance expenses mainly consisted of interest expense on capital lease, which was $5.1 million and $5.1 million in the second quarter of 2013 and 2012, respectively, and interest expense on bank loans and discounted notes receivable, which was $16.1 million and $43.2 million in the second quarter of 2013 and 2012, respectively. |
246 |
· | Loss per share was $0.72 and $0.48 in the second quarter of 2013 and 2012, respectively. The increase in the loss in the second quarter was mainly due to the average selling price decreasing more than the average cost, leading to a gross loss. |
Recent Developments and 2013 First Quarter Highlights
The first quarter of 2013 was highlighted with the following:
· | Sales in the first quarter of 2013 increased by 0.5% to $651.3 million, from $648.0 million in the first quarter of 2012, due to increased sales volume despite a decrease in the average selling price of our products. For the first quarter of 2013, sales volume of rebar in Shaanxi Longmen Iron and Steel Co., Ltd. (“Longmen Joint Venture”) totaled 1.3 million metric tons, an increase of 14.9%, compared to 1.1 million metric tons in the first quarter of 2012, with an average selling price of $515.3 per ton, as compared to $588.7 per ton in the first quarter of 2012. |
· | Gross profit in the first quarter of 2013 was $4.1 million, or 0.6% of total revenue, as compared to a gross profit of $5.6 million, or 0.9% of total revenue in the first quarter of 2012. |
· | Total finance expenses in the first quarter of 2013 was $24.9 million, as compared to $42.7 million for the same period in 2012. Finance expenses mainly consisted of interest expense on capital lease, which was $5.1 million and $5.2 million in the first quarter of 2013 and 2012, respectively, and interest expense on bank loans and discounted notes receivable, which was $19.8 million and $37.5 million in the first quarter of 2013 and 2012, respectively. |
· | Earnings per share were $0.06 in the first quarter of 2013, compared to a loss of $0.63 per share in the first quarter of 2012. The increase in the earnings in the first quarter was mainly due to the decreased interest expenses on bank loans and discounted notes receivable and the gain in change in fair value of profit sharing liability. |
Recent Developments and 2012 Third Quarter Highlights
The third quarter of 2012 was highlighted with the following:
· | Sales in the third quarter of 2012 decreased by 28.7% to $711.4 million, from $998.2 million in the third quarter of 2011, due to decreased sales volume as well as a decrease in the average selling price of our products. For the third quarter of 2012, sales volume of rebar in Shaanxi Longmen Iron and Steel Co., Ltd. (“Longmen Joint Venture”) totaled 1.4 million metric tons, a decrease of 15.7%, compared to 1.7 million metric tons in the third quarter of 2011, with an average selling price of $521.2 per ton, compared to $664.8 per ton in the third quarter of 2011. |
· | Gross loss in the third quarter of 2012 totaled $13.6 million, or (1.9)% of total revenue, as compared to a gross profit of $34.1 million, or 3.4% of total revenue in the third quarter of 2011. |
· | Total finance expenses in the third quarter of 2012 totaled $31.0 million, of which, $5.1 million was the interest expense on capital lease as compared to $5.2 million in the same period of 2011, and $25.9 million was the interest expense on bank borrowings and discounted notes receivable as compared to $24.5 million in the third quarter of 2011. |
· | Loss per share was $0.76 in the third quarter of 2012, compared to a loss of $0.25 per share in the third quarter of 2011. The increase in the loss in the third quarter was mainly due to the increased interest expenses on capital lease, bank borrowings and discounted notes receivable. |
Recent Developments and 2012 Second Quarter Highlights
The second quarter of 2012 was highlighted with the following:
· | Sales in the second quarter of 2012 decreased by 26.5% to $780.7 million, from $1,061.7 million in second quarter of 2011, due to decreased sales volume as well as a decrease in the average selling price of our products. For the second quarter of 2012, sales volume of rebar in Shaanxi Longmen Iron and Steel Co. Ltd. (“Longmen Joint Venture”) totaled 1.3 million metric tons, a decrease of 23.2%, compared to 1.7 million metric tons in the second quarter of 2011, with an average selling price of $596.2 per ton, compared to $619.3 per ton in the second quarter of 2011. |
· | Gross profit in the second quarter of 2012 totaled $28.0 million, or 3.6% of total revenue, as compared to a gross profit of $23.3 million, or 2.2% of total revenue in the second quarter of 2011. |
· | Total finance expenses in the second quarter of 2012 totaled $48.3 million, of which $5.1 million was interest expense on capital lease as compared to $3.4 million in the same period of 2011, and $43.2 million was interest expense on bank borrowings, related parties borrowings and discounted notes receivable as compared to $16.4 million in the second quarter of 2011. |
247 |
· | Loss per share was $0.48 in the second quarter of 2012, compared to a loss of $0.42 per share in the second quarter of 2011. The increase in the loss in the second quarter was mainly due to the increased interest expenses on capital lease, bank borrowings and discounted notes receivable. |
Recent Developments and 2012 First Quarter Highlights
The first quarter of 2012 was highlighted with the following:
· | Sales in the first quarter of 2012 decreased by 8.8% to $648.0 million, from $710.5 million in first quarter of 2011, due to decreased sales volume as well as a decrease in the average selling price of our products. For the first quarter of 2012, sales volume of rebar in Shaanxi Longmen Iron and Steel Co. Ltd. ("Longmen Joint Venture") totaled 1.1 million metric tons, a decrease of 6.6%, compared to 1.2 million metric tons in the first quarter of 2011, with an average selling price of $588.7 per ton, compared to $606.6 per ton in the first quarter of 2011. |
· | Gross profit in the first quarter of 2012 totaled $5.6 million, or 0.9% of total revenue, as compared to a gross profit of $5.0 million, or 0.7% of total revenue in the first quarter of 2011. Gross profit in the first quarter of 2012 also had a turnaround as compared to a gross loss of $150.7 million, or (19.0)% of total revenue in the fourth quarter of 2011. |
· | Total finance expenses in the first quarter of 2012 totaled $42.7 million, of which, $5.2 million was the interest expense on capital lease as compared to $0 in the same period of 2011, and $37.5 million was the interest expense on bank borrowings, related parties borrowings and discounted notes receivable as compared to $14.1 million in the first quarter of 2011. |
· | Loss per share was $0.63 in the first quarter of 2012, compared to a loss of $0.16 per share in the first quarter of 2011. The increase in the loss in the first quarter was mainly due to the increased interest expenses on capital lease, bank borrowings, related parties borrowings and discounted notes receivable expenses. |
· | On March 27, 2012, we launched another share repurchase program to repurchase up to an aggregate of 2,000,000 shares of our common stock (the “Share Repurchase Program”). Together with the previous share repurchase program launched in December 2010 and this newly announced Share Repurchase Program, it brought the total authorized shares of our common stock available for purchase to 4,000,000. As of March 31, 2012, we had repurchased 1,090,978 shares of common stock in open market transactions at an average price of $1.70 per share pursuant to the above mentioned expansion of the Share Repurchase Program. |
Recent Developments and 2011 Third Quarter Highlights
The third quarter of 2011 was highlighted by record sales revenue, driven from both increased sales volume and average selling prices, and capacity expansion from Unified Management Agreement with Shaanxi Iron and Steel Group Co., Ltd. (“Shaanxi Steel “) and Shaanxi Coal and Chemical Industry Group Co., Ltd. (“Shaanxi Coal”), which was entered in April 2011:
· | Sales revenue in the third quarter of 2011 increased by 116.9% to $1.0 billion, from $0.5 billion in third quarter of 2010, due to the increased sales volume as well as average selling price of our products. For the third quarter of 2011, sales volume totaled 1.7 million metric tons, an increase of 76.2%, compared to 0.9 million metric tons in third quarter of 2010, with average selling price of $602.3 per ton, compared to $489.4 per ton in the third quarter of 2010. |
· | Gross profit in the third quarter of 2011 totaled $34.1 million, or 3.4% of total revenue, up from $13.6 million, or 3.0% of total revenue in the third quarter of 2010. |
· | Loss per share was $0.25 in the third quarter of 2011, compared with a loss of $0.07 per share in the third quarter of 2010. The increase in the loss in the third quarter was mainly due to the increased financial expenses related to capital lease and profit sharing obligations under the Unified Management Agreement. See our Overview section below under caption “Shaanxi Longmen Iron and Steel Co., Ltd” for more details. |
· | We expanded our production capacity of crude steel, to 7 million metric tons annually, and can produce approximately the same volume of rebar through our collaboration with Shaanxi Steel and Shaanxi Coal under the terms of the Unified Management Agreement signed on April 29, 2011, which added a production capacity of 3 million metric tons of crude steel annually under our management. |
· | On June 1, 2011, we announced an increase of additional 1,000,000 shares of our common stock which will be purchased under our share repurchase program launched in December 2010 (the “Share Repurchase Program”), bringing the total authorized shares of our common stock available for purchase to 2,000,000. As of September 30, 2011, we had repurchased 1,090,978 shares of common stock in open market transactions at an average price of $2.56 per share pursuant to the above mentioned expansion of the Share Repurchase Program. |
248 |
· | In July 2011, we completed the installation and started testing the 1,000,000 metric ton capacity high speed wire production line, which was re-located from Maoming facility to Longmen Joint Venture in December 2010, in order to consume less energy when running at maximum efficiencies than our previous production line. |
Recent Developments and 2011 Second Quarter Highlights
The second quarter of 2011 was highlighted by record sales revenue, driven from both increased sales volume and average selling prices, and capacity expansion from the Unified Management Agreement with Shaanxi Iron and Steel Group Co., Ltd. (“Shaanxi Steel “) and Shaanxi Coal and Chemical Industry Group Co., Ltd. (“Shaanxi Coal”):
· | Sales revenue increased by 111.6% to $ 1.1 billion, up from $0.5 billion in the second quarter of 2010, due to increased sales volumes as well as average selling price of our products. For the second quarter of 2011, sales volume totaled 1.8 million metric tons, an increase of 76.4%, compared to 1.0 million metric tons in the second quarter of 2010, with an average selling price of $595.5 per ton, compared to $496.3 per ton in the second quarter of 2010. |
· | Gross profit in the second quarter of 2011 totaled $23.3 million, or 2.2% of total revenue, up from $7.4 million, or 1.5% of total revenue in the second quarter of 2010. |
· | Loss per share was $0.42 in the second quarter of 2011, compared with a loss of $0.04 per share in the second quarter of 2010. The increase in the loss in the second quarter was mainly due to increased financial expenses of $6.7 million related to capital lease and profit sharing obligations under the Unified Management Agreement. See our Overview section below under caption “Shaanxi Longmen Iron and Steel Co., Ltd” for more details. |
· | We expanded our production capacity of crude steel, to 7 million metric tons annually, and can produce approximately the same volume of rebar through our collaboration with Shaanxi Steel and Shaanxi Coal under the terms of the Unified Management Agreement signed on April 29, 2011, which added production capacity of 3 million metric tons of crude steel annually under our management. |
· | On June 1, 2011, we announced an increase of an additional 1,000,000 shares of our common stock which may be purchased under our share repurchase program launched in December 2010 (the “Share Repurchase Program”), bringing the total authorized shares of our common stock available for purchase to 2,000,000. As of June 30, 2011, we had repurchased 1,090,978 shares of common stock in open market transactions at an average price of $2.56 per share pursuant to the above mentioned expansion of the Share Repurchase Program. |
· | In July 2011, we completed installing and started testing the 1,000,000 metric ton capacity high speed wire production line, which was re-located from our Maoming facility to Longmen Joint Venture in December 2010, in order to consume less energy when running at maximum efficiencies than our previous production line. |
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 steel products is 7 million metric tons of crude steel. Our individual product categories 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 owned steel companies in the People’s Republic of China (the “PRC”). Our mission is to grow our business organically and through the acquisition of Chinese steel companies to increase their profitability and efficiencies 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 our revenue by increasing capacity and through continual cooperation and partnerships with leading state-owned enterprises (SOEs). |
· | We aim to drive profitability through improved operational efficiencies and optimization of our cost structure. |
Unless the context indicates otherwise, as used herein the terms “General Steel”, the “Company”, “we”, “our” and “us” refer to General Steel Holdings, Inc.
249 |
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 |
· | Tianwu General Steel Material Trading Co., Ltd. (“Tianwu Joint Venture”). |
Our Company, together with our subsidiaries, majority owned subsidiaries and variable interest entity, are referred to as the Group.
General Steel (China) Co., Ltd
General Steel (China), formerly known as “Tianjin Daqiuzhuang Metal Sheet Co., Ltd.”, 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) leases its facility located at No. 1, Tonga Street, Daqiuzhuang Town, Jinghai County, Tianjin City to the Lessee (the “Lease Agreement”). The Lease Agreement provides approximately 776,078 square feet of workshops, land, equipment and other facilities to the Lessee and allows the Company to reduce overhead costs while providing a recurring monthly income stream resulting from payments due under the lease. The initial term of the Lease Agreement was from January 1, 2010 to December 31, 2012 and the monthly base rental rate due to General Steel (China) was approximately $0.3 million (RMB 1.7 million). On July 28, 2011, General Steel (China) signed a supplemental agreement with the Lessee to extend the lease for an additional five years to December 31, 2016. However, due to current steel market conditions, the Lessee had informed us that they do not intend to continue with the lease at June 30, 2012. There was no penalty for early termination. General Steel (China) currently does not have plans to lease the facility to another company and as such, a write-down in the carrying value of property, plant and equipment in relation to this event had been assessed and the estimated impairment amount of $5.5 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 million (RMB 127.2 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 is a triggering event, which would require an assessment sooner.
Baotou Steel - General Steel Special Steel Pipe Joint Venture Company Limited
On April 27, 2007, General Steel (China) and Baotou Iron and Steel Group Co., Ltd. (“Baotou Steel”) entered into an Amended and Restated Joint Venture Agreement, amending the Joint Venture Agreement entered into on September 28, 2005, to increase General Steel (China)'s ownership interest in the related joint venture to 80%. The joint venture’s name is Baotou Steel - General Steel Special Steel Pipe Joint Venture Company Limited, a Chinese limited liability company (“Baotou Steel Pipe Joint Venture”). Baotou Steel Pipe Joint Venture obtained its business license from government authorities in the PRC on May 25, 2007, and started its 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 company of General Steel (China), we entered into a Joint Venture Agreement with Shaanxi Longmen Iron & Steel Group Co., Ltd. (“Long Steel Group”) to form Shaanxi Longmen Iron and Steel Co., Ltd. (“Longmen Joint Venture”). Through 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”) with Longmen Joint Venture, Shaanxi Coal and Chemical Industry Group Co., Ltd. (“Shaanxi Coal”) and Shaanxi Iron and Steel Group Co., Ltd. (“Shaanxi Steel”). Longmen Joint Venture was determined to be 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 Group 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.
250 |
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 9,600 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 185 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 their shape). Rebar is generally considered a regional product because its weight and dimensions 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 approximate 72% share of the Xi’an market for rebar.
An established regional network of approximately 128 distributors together with those small distributors and three sales offices sell Longmen Joint Venture’s products. All products sell 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 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% ownership interest in Longmen Iron and Steel Group. Environmental Protection Industry Development Co., Ltd. (“Longmen EPID”). At the same time, Longmen Joint Venture entered into an equity transfer agreement with Long Steel Group to acquire a 36% ownership interest in its subsidiary, 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% 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 8.7 million. Longmen EPID then became a branch of Longmen Joint Venture.
From June 2009 to March 2011, we worked with Shaanxi Steel to build new iron and steel making facilities including two 1,280 cubic meter blast furnaces, two 120 metric ton converters, one 400 square meter sintering machine and some auxiliary systems. As a result, Longmen Joint Venture incurred certain costs of construction as well as economic losses on suspended production of certain small furnaces and other equipment to accommodate the construction of the new equipment, on behalf of Shaanxi Steel.
Dismantling of certain assets and a sub-lease of Longmen Joint Venture’s land associated with the construction by Shaanxi Steel began in June 2009. At the beginning of the construction in June 2009, Longmen Joint Venture reached an oral agreement with Shaanxi Steel that all costs incurred related to the construction would be reimbursed by Shaanxi Steel. From that point forward through construction and testing until completion of the project in March 2011, Longmen Joint Venture recorded the related costs as they were incurred according to the nature of these costs and recognized the related receivable from Shaanxi Steel. In December 2010, Shaanxi Steel and Longmen Joint Venture were able to finalize the amount of costs incurred by the Longmen Joint Venture to be reimbursed and executed two signed agreements between the two parties on December 20, 2010. Therefore, to compensate us, in the fourth quarter of 2010, Shaanxi Steel reimbursed Longmen Joint Venture $11.4 million (RMB 70.1 million) related 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 million (RMB 183.1 million) for the reduced production efficiency caused by the construction. In addition, in 2010 and 2012, Shaanxi Steel reimbursed Longmen Joint Venture $14.6 million (RMB 89.5 million) and $14.6 million (RMB 89.3 million), respectively, for trial production costs related to the new equipment.
During the period from June 2010 to March 2011, as construction progressed and certain of the assets came online, Longmen Joint Venture used the assets free of charge to produce saleable units of steel products during this period. As such, the cost of using these assets and 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 this period. This cost of $7.2 million (RMB 43.9 million) each year were deferred and will be recognized over the term of the land sub-lease similar to the other charges and credits related to the construction of these assets.
The amount of reimbursement is deferred as lease income and recognized as a component of the property that was sub-leased during the construction, and is to be amortized to income over the remaining terms of the 40-year sub-lease.
For the three months ended September 30, 2013 and 2012, we recognized lease income of $0.5 million and $0.5 million, respectively, and $1.6 million and $1.6 million for the nine months ended September 30, 2013 and 2012, respectively. As of September 30, 2013 and December 31, 2012, the deferred lease income on the land sub-lease was $77.7 million and $77.2 million, respectively. The remaining life of amortization was 35.8 years as of September 30, 2013.
On April 29, 2011, we entered into a 20-year 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. Under the terms of the Unified Management Agreement, all manufacturing machinery and other equipment of Longmen Joint Venture plus $603.2 million (or approximately RMB 3.7 billion) of the newly constructed iron and steel making facilities owned by Shaanxi Steel which includes one 400m2 sintering machine, two 1,280m3 blast furnaces, two 120 ton converters and some auxiliary systems, are managed collectively as a single virtual asset pool (“Asset Pool”). Longmen Joint Venture manages the Asset Pool as the principal operating entity and is responsible for the daily operation of the new and existing facilities.
251 |
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, Shaanxi Steel agreed that it will not demand capital lease payment 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 equaling the depreciation expense on the equipment constructed by Shaanxi Steel in addition to 40% of the pre-tax profit generated by the Asset Pool. The remaining 60% of the pre-tax profit is allocated to Longmen Joint Venture. As a result, our economic interest in the profits generated by the Asset Pool decreased from 60% to 36%. However, the overall capacity under the management of Longmen Joint Venture has increased by three million tons, or 75%. The Unified Management 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 therefore, the lease is accounted for as such by Longmen Joint Venture. See Note 15 - “Capital lease obligations” and Note 16 -“Profit sharing liability” of the Notes to Condensed Consolidated Financial Statements included herein.
In November 2010, we brought online a 1,200,000 metric ton capacity rebar production line which was renovated based on an existing 800,000 metric ton capacity rebar production line. In July 2011, we brought online a 1,000,000 metric ton capacity high speed wire production line. These two installed production lines were both relocated from the Maoming Hengda (as defined below) facility, which consume less energy when running at maximum efficiencies 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 is 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 targeting customers in Guangxi Province and the Western region of Guangdong.
To take advantage of a stronger market demand in Shaanxi Province, in the second quarter 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 $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 rate of 10% annually. The interest expense incurred was recorded in finance expense.
Tianwu General Steel Material Trading Co., Ltd
We formed Tianwu General Steel Material Trading Co., Ltd. (“Tianwu Joint Venture”) with Tianjin Material and Equipment Group Corporation (“TME Group”). The contributed capital of Tianwu Joint Venture is approximately $2.9 million (or RMB 20 million), 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 contributed 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%.
252 |
Tianwu Joint Venture sources raw materials, mainly overseas iron ore, and is expected to supply approximately 20% to 50% of our imported iron-ore needs, amounting to approximately two to three million metric tons on an annual basis.
Production Capacity Information Summary by Subsidiary
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, approximately 25.5% and 23.4% of our sales were to five customers, respectively. We believe that revenue derived from our current and future large customers will continue to represent a significant portion of our total revenue.
Moreover, our success will depend in part upon our ability to obtain orders from new customers, as well as the financial condition and success of our customers and general economic conditions in China.
Demand for our Products
Overall, domestic economic growth is an important driver of our products, especially from construction and infrastructure projects, rural income growth and energy demand.
At Longmen Joint Venture, growth in regional construction and infrastructure projects drives demand for our products. According to the 12th Five Year National Economic and Social Development Plan (“NESDP”) (2011-2015), development of China’s Western region is one of the top five economic priorities of the nation. Shaanxi Province, where Longmen Joint Venture is located, has been designated as a focal point for development in the Western region. Longmen Joint Venture is 180 km 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, the GDP increase of 11.1% 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%. We have a sales office in Chengdu City, Sichuan Province to meet the increasing demand for the construction of steel.
According to the Shaanxi provincial government, the total fixed asset investment for the Shaanxi Province was approximately $198.4 billion (RMB 1.25 trillion) for the year ended December 31, 2012, an increase of 28.9% 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 the investment of approximately $41.5 billion (RMB 260 billion) by 2015 and 8,080 kilometers of highway by 2020. The infrastructure and constructions projects provide strong and stable demand for our steel product in this area, in which we have over 70% of the market share.
In January 2011, the central government announced a new low-income housing policy. Under this policy, 10 million low-income houses will be built in 2011, with a total of 36 million low-income houses to be built over a five-year period. To ensure the construction of the low-income housing, the central government has announced that it will increase its investment in the project by 34.7% over its 2010 investment to approximately $16.6 billion (RMB 103 billion), and the local governments are expected to increase their investment as well.
253 |
As part of this policy, the Shaanxi provincial government also targeted to build 470,000 low-income houses in 2011, covering approximately 30 million square meters, which is 2.5 times the amount of low-income houses initiated in 2010. This will generate a stable demand for steel construction within the Shaanxi Province.
In January 2011, the Shaanxi provincial government announced that it will invest approximately $12.2 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, 5,000 kilometers of high-speed railway will be built in 2011, with 16,000 total kilometers to be built by 2020.
In May 2011, the central government passed the Cheng-Yu Economic Zone Plan focusing on Chongqing City and Sichuan Province, covering 206,000 square kilometers, to further accelerate the development of the Western region of China. We anticipate that in the near future, the demand for our products will increase in those areas, and we expect that our expanded production capacity will be able to successfully meet the increase in demand. Furthermore, we have a sales office located in Chengdu to help facilitate such increased demand.
In February 2012, the government approved the Western Development 12th Five Year Plan, which continues the efforts to develop the Western regions. The Plan is centered on the infrastructure and construction, highlighted by the development of economic zones, construction of roads/railway and hydro project, which drive the local demand for steel products.
As of the date 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 Western region development efforts.
At Baotou Steel Pipe Joint Venture, energy sector growth, which spurs the need to transport oil, natural gas and steam, drives demand for spiral-weld steel pipe. Presently, demand is fueled by smaller pipeline projects and municipal energy infrastructure projects within the Inner Mongolia Autonomous Region.
At Maoming Hengda, infrastructure growth and business development in Maoming city, the surrounding Guangxi cities and the Western region of Guangdong Province, drive demand for our construction steel products. As a third tier city, the industrialization and urbanization of Maoming city is one of the focuses of economic development in the west Guangdong Province.
Supply of Raw Materials
The primary raw materials we use for steel production are iron ore, coke, hot-rolled steel coil and steel billets. 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 are the main raw material used to produce hot-rolled steel coil and steel billets. As a result, 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% of production costs are associated with raw materials, with iron ore being the largest component.
According to the China Iron and Steel Association, approximately 60% of the Chinese domestic steel industry demand for iron ore must be filled by imports. At Longmen Joint Venture, we purchase iron ore from four primary sources: Mulonggou mine (owned by Longmen Joint Venture), Daxigou mine (owned by Long Steel Group, our partner in Longmen Joint Venture), surrounding local mines and mines located abroad. According to the terms of Longmen Joint Venture’s Agreement with the Long Steel Group, we have a first right of refusal for sales from the Daxigou mine and for its development. We presently purchase all of the products from this mine.
Coke
Coke, produced from metallurgical coal (also known as coking coal), is our second most consumed raw material, after iron ore. It requires approximately 550kg to 600kg of coke to make one metric ton of crude steel.
Under the terms of the Unified Management Agreement, our partner, Shaanxi Coal has committed to providing coke and coal to us at a cost not higher than the market price.
Our Longmen Joint Venture facility is located in the center of China’s coal belt. We source all coke used at Longmen Joint Venture from the town in which Longmen Joint Venture is located. This ensures a dependable, local supply and minimum transportation costs.
254 |
The sources and/or our top five major suppliers of our raw materials for the three months ended September 30, 2013 are as follows:
% of Total Raw | ||||||||
Raw Material | Material | Relationship with | ||||||
Name of Major Supplier | Purchased | �� | Purchased | Company | ||||
Shaanxi Longmen Coal Chemical Industry Co., Ltd. | Coke | 5.9 | % | Third Party | ||||
Shaanxi Electricity Company Weinan Branch | Coke | 3.2 | % | Third Party | ||||
China Railroad Logistics Xi'an Co., Ltd. | Iron Ore | 2.4 | % | Third Party | ||||
Shahe City Feilong Mining Industry Co., Ltd. | Iron Ore | 2.1 | % | Third Party | ||||
Rizhaolu Island Shipping & Trading Co., Ltd. | Coke | 1.7 | % | Third Party | ||||
Total | 15.3 | % |
The sources and/or our top five major suppliers of our raw materials for the nine months ended September 30, 2013 are as follows:
% of Total Raw | ||||||||
Raw Material | Material | Relationship with | ||||||
Name of Major Supplier | Purchased | Purchased | Company | |||||
Longgang Group Import & Export Co., Ltd. | Iron Ore | 7.9 | % | Related Party | ||||
Shaanxi Longmen Coal Chemical Industry Co., Ltd | Coke | 7.9 | % | Third Party | ||||
Shaanxi Haiyan Coal Chemical Industry Co., Ltd. | Coke | 6.1 | % | Related Party | ||||
Long Steel Group | Iron Ore | 4.7 | % | Related Party | ||||
Shaanxi Electricity Company Weinan Branch | Coke | 2.7 | % | Third Party | ||||
Total | 29.3 | % |
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.
At the same time, the overall nationwide steelmaking capacity still exceeds steel demand in China. There is a significant over-capacity in the Chinese steel industry which is putting pressure on operators’ profitability. This became the most significant challenge in the steel manufacturing business. For the nine months of 2013, China’s crude steel production increased by 7.8% to 521.8 million tons from the same period last year, while the consumption of crude steel increased by 7.8% to 488.1 million tons from the same period last year, according to the China Iron & Steel Association. However, due to the rapid economic development and urbanization in the Western region of China, which is the core market we serve, steel demand in the region has seen a stable growth compared to the rest of the country.
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 two 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 consumers due to the market overcapacity and fragmentation.
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.
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 December 2011, the central government published an industry target to eliminate 96 million tons of inefficient iron and steel capacity during the 12th five-year plan. The central government had successfully reduced obsolete iron production capacities by 31.9 million tons 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.
255 |
Results of Operations for the Three and Nine months ended September 30, 2013
Sales
Three months ended September 30, 2013 compared with three months ended September 30, 2012
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 | )% |
Total sales for the three months ended September 30, 2013 decreased by 14.2% to $610.1 million from $711.4 million for the same period in 2012. The decrease in sales was due to a decrease in sales volume and the average selling price. Longmen Joint Venture comprised approximately 99.4% and 99.7% of total sales for the third quarter of 2013 and 2012, respectively. Sales volume of rebar decreased by 8.9% to 1.24 million metric tons, as compared to 1.36 million metric tons in the same period in 2012. The average selling price of rebar decreased by 6.1% to approximately $489.6 per ton in the third quarter of 2013 compared to approximately $521.2 per ton in the same period in 2012.
Our product demands and prices had been rising in the first three quarters of 2011. As a result of the China and global steel industry over-capacity, Chinese economic control polices and the financial crisis, commodity prices abruptly plummeted in the fourth quarter of 2011. With weakened demand, market forces kicked-in and the price of steel dropped substantially. As such, our sales prices have dropped since the fourth quarter of 2011, evidencing a continued decline. The over-capacity issue continued to impact our results during the third quarter of 2013. 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% of our total sales for the three months ended September 30, 2013 as compared to 27.2% 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. 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
The following table sets forth sales and volume in metric tons.
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 | )% |
Total sales for the nine months ended September 30, 2013 decreased by 10.5% to $1.9 billion from $2.1 billion for the same period in 2012. The decrease in sales was predominantly due to the decrease in the average selling price. Longmen Joint Venture comprised approximately 99.4% of total sales for both the nine months ended September 30, 2013 and 2012. Sales volume of rebar increased by 2.4% to 3.84 million metric tons, compared to 3.75 million metric tons in the same period in 2012. The average selling price of rebar decreased by 12.6% to approximately $495.6 per ton in the nine months ended September 30, 2013 compared to approximately $566.8 per ton in the same period of 2012.
Our product demands and prices had been rising in the first three quarters of 2011. As a result of the China and global steel industry over-capacity, Chinese economic control polices and the financial crisis, commodity prices abruptly plummeted in the fourth quarter of 2011. With weakened demand, market forces kicked-in and the price of steel dropped substantially. As such, our sales prices have dropped since the fourth quarter of 2011, evidencing a continued decline. The over-capacity issue continued to impact our results during the nine months ended September 30, 2013. 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 of 2012. However, our sales volume of rebar in Longmen Joint Venture increased by 2.4% to 3.84 million metric tons in the nine months ended September 30, 2013 from 3.75 million metric tons in the nine months ended September 30, 2012. The increase in sales volume was mainly due to our lowering the selling price of rebar to extend our market share in the Northwest region in the nine months of 2013.
256 |
Our five major customers were distributors and collectively represented approximately 23.4% of our total sales for the nine months ended September 30, 2013 as compared to 34.1% of our total sales for the nine months ended September 30, 2012. The decrease in the concentration of our five major customers in the nine months ended September 30, 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. These five customers included related parties and major distributors owned by the central government. As we are the largest supplier in Shaanxi Province, we maintain a good relationship with these five customers to stabilize our sales channel.
Cost of Goods Sold
Three months ended September 30, 2013 compared with three months ended September 30, 2012
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 | )% |
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 accounted for approximately 58.8% of our total cost of sales in the third quarter of 2013. The cost of goods sold decreased by 17.0% to $601.9 million in the third quarter of 2013 from $725.0 million in the same period of 2012. The decrease was driven by the 10.0% decrease in sales volume, as well as the decreased unit costs of raw materials as a result of the decline in iron ore and coke purchase prices of approximately 0.9% and approximately 18.3%, respectively, for the three months ended September 30, 2013 as compared to the same period in 2012. As such, the average costs of rebar manufactured decreased 9.0% to approximately $483.0 per ton in the third quarter of 2013 from approximately $530.7 per ton in the same period in 2012.
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 | |||||||||||||||||||||||||||||
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 | )% |
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% of our total cost of sales for the nine months ended September 30, 2013. The cost of goods sold decreased by 8.6% to $1.9 billion in the nine months ended September 30, 2013 from $2.1 billion in the same period of 2012. 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% and approximately 24.5%, respectively, for the nine months ended September 30, 2013 as compared to the same period in 2012. As such, the average costs of rebar manufactured decreased 10.6% to approximately $501.7 per ton in nine months ended September 30, 2013 from approximately $561.3 per ton in the same period 2012.
Gross Profit (Loss)
Three months ended September 30, 2013 compared with three months ended September 30, 2012
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 | )% |
257 |
Gross profit for the third quarter in 2013 was $8.2 million, or 1.3% of total sales, as compared to a gross loss of $13.6 million, or (1.9)% 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 compared with nine months ended September 30, 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 | )% |
Gross loss for the nine months ended September 30, 2013 was $23.2 million, or (1.2)% of total sales, as compared to gross profit of $20.1 million, or 0.9% of total sales in the same period in 2012. The decrease in gross margin percentage was mainly attributable to the percentage decrease of average rebar selling price of 12.6% was slightly higher to the percentage decrease of costs of rebar manufactured of 10.6% for the nine months ended September 30, 2013 as compared to the same period in 2012.
Selling, General and Administrative Expenses (“SG&A”)
Three months ended September 30, 2013 compared with three months ended September 30, 2012
(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 | )% |
SG&A expenses, such as travel expenses and transportation fees, entertainment, employee benefit, training, and travel expenses decreased by 13.7% to $19.7 million for the three months ended September 30, 2013, compared to $22.8 million for the same period in 2012.
Selling expenses decreased by 16.5% to $7.3 million for three months ended September 30, 2013 as compared to $8.7 million in the same period of 2012. The decrease was mainly due to a special fund related to the sales 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 million and $14.1 million for three months ended September 30, 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.
Nine months ended September 30, 2013 compared with nine months ended September 30, 2012
(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 | )% |
SG&A expenses, such as travel expenses and transportation fees, entertainment, employee benefit, training, and travel expenses decreased by 3.4% to $59.5 million for the nine months ended September 30, 2013, compared to $61.5 million for the same period in 2012.
258 |
Selling expenses decreased by 11.9% to $24.6 million for nine months ended September 30, 2013 as compared to $27.9 million in the same period of 2012. The decrease was mainly due to a special fund related to the sales of our products for which Longmen Joint Venture received tax exemption from the PRC tax authorities in 2013 while $4.5 million of the special fund was imposed in the nine months ended September 30, 2012, offset by a $0.6 million increase in freight expenses in connection with the 0.9% increase in sales volume for the nine months ended September 30, 2013 as compared to the same period in 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, G&A expenses were approximately $34.9 million and $33.7 million for nine months ended September 30, 2013 and 2012, respectively. The 3.6% increase was mainly due to the $1.9 million write-off of prepaid special fund offset by a $0.7 million decrease in bad debt expenses.
Change in Fair Value of Profit Sharing Liability
Three months ended September 30, 2013 compared with three months ended September 30, 2012
(in thousands) | Three months ended | |||||||||||
September 30, | September 30, | |||||||||||
2013 | 2012 | Change % | ||||||||||
(Restated) | (Restated) | |||||||||||
Change in fair value of profit sharing liability | $ | 39,164 | $ | (5,611 | ) | (798.0 | )% |
Our profit sharing liability relates to equipment operated by Longmen Joint Venture under a capital lease arrangement. Part of the payments under the capital lease are a portion of our future operating profits. Our estimate of those future profit sharing payments are accounted for as a derivative liability at fair value. We have considered the recent changes in China’s economic situation, which includes a new estimation and downgrade of 2014 GDP by major investment bankers in June 2013, and a steel industry outlook reports issued for 2014. As a result, we have re-evaluated our projected operating profit (loss) taking into consideration the recent macroeconomic events in China, as well as our third quarter and year to date operating results. Due to the continued decrease in our rebar selling price, the market slow-down in the third quarter of 2013, and the lack of gross profit recovery as quickly as expected in the third quarter of 2013, we have foreseen a further downward trend in 2014 through 2016 than anticipated in the second quarter of 2013. As such, the fair value of our profit sharing liability has been reduced compared to our previous estimates and we have recognized a gain of $41.8 million offset by a loss of $2.6 million related to the passage of time and change in the number of future periods over which the present value of future cash flows was estimated with a total gain in change in fair value of profit sharing liability of $39.2 million in our income from operations for the three months ended September 30, 2013. Loss from change in fair value of profit sharing liability of $5.6 million for the three months ended September 30, 2012 represent the change in fair value related to the passage of time and change in the number of future periods over which the present value of future cash flows was estimated as there were no change in estimates in 2012.
Nine months ended September 30, 2013 compared with nine months ended September 30, 2012
(in thousands) | Nine months ended | |||||||||||
September 30, | September 30, | |||||||||||
2013 | 2012 | Change % | ||||||||||
(Restated) | (Restated) | |||||||||||
Change in fair value of profit sharing liability | $ | 95,437 | $ | (16,861 | ) | (666.0 | )% |
We have considered the recent changes in China’s economic situation, which includes a new estimation and downgrade of 2014 GDP by major investment bankers in June 2013, and a steel industry outlook reports issued for 2014. As a result, we have re-evaluated our projected operating profit (loss) taking into consideration the recent macroeconomic events in China, as well as our third quarter and year to date operating results. Due to the continued decrease in our rebar selling price, the market slow-down in the third quarter of 2013, and the lack of gross profit recovery as quickly as expected in the nine months ended September 30, 2013, we have foreseen a downward trend in 2014 through 2016 than previously anticipated. As such, the fair value of our profit sharing liability has been reduced compared to our previous estimates and we have recognized a gain of $107.9 million offset by a loss of $12.5 million related to the passage of time and change in the number of future periods over which the present value of future cash flows was estimated with a total gain in change in fair value of profit sharing liability of $95.4 million in our income from operations for the nine months ended September 30, 2013. Loss from change in fair value of profit sharing liability of $16.8 million for the nine months ended September 30, 2012 represent the change in fair value related to the passage of time and change in the number of future periods over which the present value of future cash flows was estimated as there were no change in estimates in 2012.
259 |
Income (Loss) from Operations
Three months ended September 30, 2013 compared with three months ended September 30, 2012
(in thousands) | Three months ended | |||||||||||
September 30, | September 30, | |||||||||||
2013 | 2012 | Change % | ||||||||||
(Restated) | (Restated) | |||||||||||
Income (loss) from operations | $ | 27,734 | $ | (41,994 | ) | (166.0 | )% |
Income from operations for the three months ended September 30, 2013 was $27.7 million as compared to $42.0 million loss from operations for the same period in 2012. The increase in income from operations was predominantly due to the increase in gross profit and the gain from change in fair value of profit sharing liability.
Nine months ended September 30, 2013 compared with nine months ended September 30, 2012
(in thousands) | Nine months ended | |||||||||||
September 30, | September 30, | |||||||||||
2013 | 2012 | Change % | ||||||||||
(Restated) | (Restated) | |||||||||||
Income (loss) from operations | $ | 12,735 | $ | (58,331 | ) | (121.8 | )% |
Income from operations for the nine months ended September 30, 2013 was $12.7 million as compared to $58.3 million loss from operations for the same period in 2012. The increase in income from operations was predominantly due to the gain from change in fair value of profit sharing liability offset by the increase in gross loss.
Other Income (Expense)
Three months ended September 30, 2013 compared with three months ended September 30, 2012
(in thousands) | Three months ended | |||||||||||
September 30, | September 30, | |||||||||||
2013 | 2012 | Change % | ||||||||||
(Restated) | (Restated) | |||||||||||
Interest income | $ | 2,835 | $ | 4,337 | (34.6 | )% | ||||||
Finance/interest expense | (17,721 | ) | (25,879 | ) | (31.5 | )% | ||||||
Financing cost on capital lease | (5,121 | ) | (5,125 | ) | (0.0 | )% | ||||||
Change in fair value of derivative liabilities - warrants | - | (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 | $ | (18,309 | ) | $ | (24,124 | ) | (24.1 | )% |
Total other expense, net, for the three months ended September 30, 2013 was $18.3 million, a 24.1% decrease compared to $24.1 million for the same period in 2012. The decrease was mainly a result of the $8.2 million decrease in finance/interest expenses. The decrease was offset by the $1.5 million decrease in interest income as a result of decrease in loans receivable-related parties. The decrease in finance/interest expenses was mainly a result of the reduction in the amount of bank notes receivable that were redeemed and the amount borrowed from banks and third parties in the third quarter of 2013 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, 2013 amounted to $9.6 million, a $6.7 million or 41.5% decrease from $16.3 million for the same period in 2012, and interest expense on loan borrowings for the three months ended September 30, 2013 amounted to $8.1 million, a $1.5 million or 15.1% decrease from $9.6 million for the same period in 2012.
260 |
Nine months ended September 30, 2013 compared with nine months ended September 30, 2012
(in thousands) | Nine months ended | |||||||||||
September 30, | September 30, | |||||||||||
2013 | 2012 | Change % | ||||||||||
(Restated) | (Restated) | |||||||||||
Interest income | $ | 8,657 | $ | 13,039 | (33.6 | )% | ||||||
Finance/interest expense | (53,577 | ) | (106,566 | ) | (49.7 | )% | ||||||
Financing cost on capital lease | (15,338 | ) | (15,502 | ) | (0.0 | )% | ||||||
Change in fair value of derivative liabilities - warrants | 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 | $ | (56,387 | ) | $ | (105,085 | ) | (46.3 | )% |
Total other expense, net, for the nine months ended September 30, 2013 was $56.4 million, a 46.3% decrease compared to $105.1 million for the same period in 2012. The decrease was mainly a result of a decrease of interest income on loan receivables of $1.8 million offset by a $53.0 million decrease in finance/interest expenses. The decrease in finance/interest expenses was mainly a result of the reduction the amount of bank notes receivable that were redeemed early and the amount borrowed from banks and third parties in the nine months ended September 30, 2013 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 nine months ended September 30, 2013 amounted to $26.9 million, a $38.7 million or 59.1% decrease from $65.6 million for the same period in 2012, and interest expense on loan borrowings for the nine months ended September 30, 2013 amounted to $26.7 million, a $14.2 million or 34.7% decrease from $40.9 million for the same period in 2012. The decrease in interest expense on loan borrowings for the nine months ended September 30, 2013 as compared to the same period in 2012 was mainly due to the decrease in interest rates on loans from financing sales.
Income Taxes
For the three months ended September 30, 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 three months ended September 30, 2013 and 2012, we had effective tax rates of 0.3% and (0.2%), respectively. The negative effective tax rates for the three months ended September 30, 2012 was mainly due to a consolidated loss before income tax while we accrued tax provision for our profitable subsidiaries.
For the nine months ended September 30, 2013 and 2012, we had a total tax provision of $0.2 million and $0.7 million, respectively. For the nine months ended September 30, 2013 and 2012, we had current income tax provisions for our profitable subsidiaries, amounting to $0.2 million and $0.5 million, respectively. For the nine months ended September 30, 2012, we evaluated the deferred tax assets of Longmen Joint Venture and Baotou Steel Pipe Joint Venture and concluded the net operating loss may not be fully realizable and to provide 100% valuation allowance for the deferred tax assets. No deferred income tax benefit was recorded for the nine months ended September 30, 2013 as the resulting deferral of tax assets had been fully reserved because the benefit was not considered to be realizable due to recent historical experience.
For the nine months ended September 30, 2013 and 2012, we had effective tax rates of (0.5%) and (0.4%), 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, 2013 compared with three months ended September 30, 2012
(in thousands) | Three months ended | |||||||||||
September 30, | September 30, | |||||||||||
2013 | 2012 | Change % | ||||||||||
Net income (loss) | $ | 9,400 | $ | (66,218 | ) | (114.2 | )% |
Nine months ended September 30, 2013 compared with nine months ended September 30, 2012
(in thousands) | Nine months ended | |||||||||||
September 30, | September 30, | |||||||||||
2013 | 2012 | Change % | ||||||||||
Net loss | $ | (43,853 | ) | $ | (164,095 | ) | (73.3 | )% |
261 |
Net Income (Loss) Attributable to General Steel Holdings, Inc.
Three months ended September 30, 2013 compared with three months ended September 30, 2012
(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 | )% |
Net income attributable to us for the three months ended September 30, 2013 increased to $3.8 million as compared to $41.6 million net loss attributable to us for the same period in 2012. The increase in net income attributable to us for the three months ended September 30, 2013 was mainly a result of a $8.2 million gross profit, a $41.8 million increase in change in fair value of profit sharing liability and a $8.2 million decrease in finance/interest expense for the three months ended September 30, 2013.
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 multiplied by the subsidiaries’ net income or loss.
Nine months ended September 30, 2013 compared with nine months ended September 30, 2012
(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 | )% |
Net loss attributable to us for the nine months ended September 30, 2013 decreased to $32.9 million compared to $102.8 million for the same period in 2012. The decrease in net loss attributable to us for the nine months ended September 30, 2013 was mainly a result of a gross loss of $23.2 million offset by a $107.9 million gain from change in fair value of profit sharing liability and a decrease in finance/interest expense of $53.0 million for the nine months ended September 30, 2013.
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.
Results of Operations for the Three and Six Months Ended June 30, 2013
Sales
Three months ended June 30, 2013 compared with three months ended June 30, 2012
The following table sets forth sales and volume in metric tons.
Three months ended | ||||||||||||||||||||||||||||||||
June 30, 2013 | June 30, 2012 | Change | Change | |||||||||||||||||||||||||||||
in thousands, except metric tons | Volume | Sales | % | Volume | Sales | % | Volume % | Sales % | ||||||||||||||||||||||||
Longmen Joint Venture | 1,348,173 | $ | 650,741 | 99.6 | % | 1,298,730 | $ | 774,306 | 99.2 | % | 3.8 | % | (16.0 | )% | ||||||||||||||||||
Others | 36,731 | 2,910 | 0.4 | % | 40,021 | 6,377 | 0.8 | % | (8.2 | )% | (54.4 | )% | ||||||||||||||||||||
Total Sales | 1,384,904 | $ | 653,651 | 100.0 | % | 1,338,751 | $ | 780,683 | 100.0 | % | 3.4 | % | (16.3 | )% |
Total sales for the three months ended June 30, 2013 decreased by 16.3% to $653.7 million from $780.7 million for the same period in 2012. The decrease in sales was predominantly due to a decrease in the average selling price. Longmen Joint Venture comprised approximately 99.6% and 99.2% of total sales for the second quarter of 2013 and 2012, respectively. Sales volume of rebar increased by 3.8% to 1.35 million metric tons, as compared to 1.30 million metric tons in the same period in 2012. The average selling price of rebar decreased by 19.0% to approximately $482.7 per ton in the second quarter of 2013 compared to approximately $596.2 per ton in the same period in 2012.
262 |
Our product demands and prices had been rising in the first three quarters of 2011 until the end of the second quarter of 2012. As a result of the China and global steel industry over-capacity, Chinese economic control polices and the financial crisis, commodity prices abruptly plummeted in the fourth quarter of 2011. With weakened demand, market forces kicked-in and the price of steel dropped substantially. As such, our sales prices have dropped since the fourth quarter of 2011, evidencing a continued decline. The over-capacity issue continued to impact our results during the second quarter of 2013. 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. However, our sales volume of rebar in Longmen Joint Venture increased by 3.8% to 1.35 million metric tons from 1.30 million metric tons. The increase in sales volume was mainly due to our lowering the selling price of rebar to extend our market share in the Northwest region.
Our five major customers were distributors and collectively represented approximately 27.8% of our total sales for the three months ended June 30, 2013 as compared to 34.7% of our total sales for the three months ended June 30, 2012. The decrease in the concentration of our five major customers in the second 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. These five customers included related parties and major distributors owned by the central government. As we are the largest supplier in Shaanxi Province, we maintain a good relationship with these five customers to stabilize our sales channel.
Six months ended June 30, 2013 compared with six months ended June 30, 2012
The following table sets forth sales and volume in metric tons.
Six months ended | ||||||||||||||||||||||||||||||||
June 30, 2013 | June 30, 2012 | Change | Change | |||||||||||||||||||||||||||||
in thousands, except metric tons | Volume | Sales | % | Volume | Sales | % | Volume % | Sales % | ||||||||||||||||||||||||
Longmen Joint Venture | 2,603,296 | $ | 1,297,489 | 99.4 | % | 2,391,345 | $ | 1,417,581 | 99.2 | % | 8.9 | % | (8.5 | )% | ||||||||||||||||||
Others | 86,031 | 7,453 | 0.6 | % | 122,706 | 11,143 | 0.8 | % | (29.9 | )% | (33.1 | )% | ||||||||||||||||||||
Total Sales | 2,689,327 | $ | 1,304,942 | 100.0 | % | 2,514,051 | $ | 1,428,724 | 100.0 | % | 7.0 | % | (8.7 | )% |
Total sales for the six months ended June 30, 2013 decreased by 8.7% to $1.3 billion from $1.4 billion for the same period in 2012. The decrease in sales was predominantly due to the decrease in the average selling price. Longmen Joint Venture comprised approximately 99.4% and 99.2% of total sales for the six months ended June 30, 2013 and 2012, respectively. Sales volume of rebar increased by 8.9% to 2.6 million metric tons, compared to 2.4 million metric tons in the same period in 2012. The average selling price of rebar decreased by 15.9% to approximately $498.4 per ton in the six months ended June 30, 2013 compared to approximately $592.8 per ton in the same period of 2012.
Our product demands and prices had been rising in the first three quarters of 2011 until the end of the second quarter of 2012. As a result of the China and global steel industry over-capacity, Chinese economic control polices and the financial crisis, commodity prices abruptly plummeted in the fourth quarter of 2011. With weakened demand, market forces kicked-in and the price of steel dropped substantially. As such, our sales prices have dropped since the fourth quarter of 2011, evidencing a continued decline. The over-capacity issue continued to impact our results during the six months ended June 30, 2013. 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. However, our sales volume of rebar in Longmen Joint Venture increased by 8.9% to 2.6 million metric tons from 2.4 million metric tons The increase in sales volume was mainly due to our lowering the selling price of rebar to extend our market share in the Northwest region.
Our five major customers were distributors and collectively represented approximately 23.3% of our total sales for the six months ended June 30, 2013 as compared to 36.8% of our total sales for the six months ended June 30, 2012. The decrease in the concentration of our five major customers in the six months ended June 30, 2013 as compared to the same period in 2012 was mainly due the decrease in sales to Long Steel Group and its surrounding Southwest region and shifts in market demands being concentrated in the Northwest region. These five customers included related parties and major distributors owned by the central government. As we are the largest supplier in Shaanxi Province, we maintain a good relationship with these five customers to stabilize our sales channel.
Cost of Goods Sold
Three months ended June 30, 2013 compared with three months ended June 30, 2012
Three months ended | ||||||||||||||||||||||||||||||||
June 30, 2013 | June 30, 2012 | 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 | 1,348,173 | $ | 686,934 | 99.7 | % | 1,298,730 | $ | 746,779 | 99.2 | % | 3.8 | % | (8.0 | )% | ||||||||||||||||||
Others | 36,731 | 2,253 | 0.3 | % | 40,021 | 5,860 | 0.8 | % | (8.2 | )% | (61.6 | )% | ||||||||||||||||||||
Total Cost of Goods Sold | 1,384,904 | $ | 689,187 | 100.0 | % | 1,338,751 | $ | 752,639 | 100.0 | % | 3.4 | % | (8.4 | )% |
263 |
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 58.8% of our total cost of sales in the second quarter of 2013. The cost of goods sold decreased by 8.4% to $689.2 million in the second quarter of 2013 from $752.6 million in the same period of 2012. 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 11.5% and approximately 30.9%, respectively, for the three months ended June 30, 2013 as compared to the same period in 2012. As such, the average costs of rebar manufactured decreased 11.4% to approximately $509.5 per ton in the second quarter of 2013 from approximately $575.0 per ton in the same period in 2012.
Six months ended June 30, 2013 compared with six months ended June 30, 2012
Six months ended | ||||||||||||||||||||||||||||||||
June 30, 2013 | June 30, 2012 | Change | Change | |||||||||||||||||||||||||||||
in thousands, except metric tons | Volume | Cost of Goods Sold | % | Volume | Cost of Goods Sold | % | Volume % | Cost of Goods Sold % | ||||||||||||||||||||||||
Longmen Joint Venture | 2,603,296 | $ | 1,329,315 | 99.5 | % | 2,391,345 | $ | 1,383,955 | 99.2 | % | 8.9 | % | (3.9 | )% | ||||||||||||||||||
Others | 86,031 | 7,096 | 0.5 | % | 122,706 | 11,095 | 0.8 | % | (29.9 | )% | (36.0 | )% | ||||||||||||||||||||
Total Cost of Goods Sold | 2,689,327 | $ | 1,336,411 | 100.0 | % | 2,514,051 | $ | 1,395,050 | 100.0 | % | 7.0 | % | (4.2 | )% |
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 63.2% of our total cost of sales for the six months ended June 30, 2013. The cost of goods sold decreased by 4.2% to $1.3 billion in the six months ended June 30, 2013 from $1.4 billion in the same period of 2012. 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 9.8% and approximately 27.6%, respectively, for the six months ended June 30, 2013 as compared to the same period in 2012. As such, the average costs of rebar manufactured decreased 11.8% to approximately $510.6 per ton in six months ended June 30, 2013 from approximately $578.7 per ton in the same period 2012.
Gross Profit (Loss)
Three months ended June 30, 2013 compared with three months ended June 30, 2012
Three months ended | ||||||||||||||||||||||||||||
June 30, 2013 | June 30, 2012 | Change | ||||||||||||||||||||||||||
in thousands, except metric tons | Volume | Gross Profit (Loss) | Margin % | Volume | Gross Profit (Loss) | Margin % | Gross Profit | |||||||||||||||||||||
Longmen Joint Venture | 1,348,173 | $ | (36,193 | ) | (5.6 | )% | 1,298,730 | $ | 27,527 | 3.6 | % | (231.5 | )% | |||||||||||||||
Others | 36,731 | 657 | 22.6 | % | 40,021 | 517 | 8.1 | % | 27.1 | % | ||||||||||||||||||
Total Gross Profit (Loss) | 1,384,904 | $ | (35,536 | ) | (5.4 | )% | 1,338,751 | $ | 28,044 | 3.6 | % | (226.7 | )% |
Gross loss for the second quarter in 2013 was $35.5 million, or (5.4)% of total sales, as compared to gross profit of $28.0 million, or 3.6% of total sales in the same period in 2012. The decrease in gross margin percentage was mainly attributable to the percentage decrease of average rebar selling price of 19.0% being higher than the percentage decrease of costs of rebar manufactured of 11.4% for the second quarter in 2013 as compared to the same period in 2012.
Six months ended June 30, 2013 compared with six months ended June 30, 2012
Six months ended | ||||||||||||||||||||||||||||
June 30, 2013 | June 30, 2012 | Change | ||||||||||||||||||||||||||
in thousands, except metric tons | Volume | Gross Profit (Loss) | Margin % | Volume | Gross Profit (Loss) | Margin % | Gross Profit | |||||||||||||||||||||
Longmen Joint Venture | 2,603,296 | $ | (31,826 | ) | (2.5 | )% | 2,391,345 | $ | 33,626 | 2.4 | % | (194.6 | )% | |||||||||||||||
Others | 86,031 | 357 | 4.8 | % | 122,706 | 48 | 0.4 | % | 643.8 | % | ||||||||||||||||||
Total Gross Profit (Loss) | 2,689,327 | $ | (31,469 | ) | (2.4 | )% | 2,514,051 | $ | 33,674 | 2.4 | % | (193.5 | )% |
Gross loss for the six months ended June 30, 2013 was $31.5 million, or (2.4)% of total sales, as compared to gross profit of $33.7 million, or 2.4% of total sales in the same period in 2012. The decrease in gross margin percentage was mainly attributable to the percentage decrease of average rebar selling price of 15.9% was slightly higher to the percentage decrease of costs of rebar manufactured of 11.8% for the six months ended June 30, 2013 as compared to the same period in 2012.
264 |
Selling, General and Administrative Expenses (“SG&A”)
Three months ended June 30, 2013 compared with three months ended June 30, 2012
(in thousands) | Three months ended | |||||||||||
June 30, 2013 | June 30, 2012 | Change % | ||||||||||
Selling, general and administrative expenses | $ | (20,848 | ) | $ | (20,132 | ) | 3.6 | % | ||||
SG&A expenses as a percentage of total revenue | (3.2 | )% | (2.6 | )% |
SG&A expenses, such as travel expenses and transportation fees, entertainment, employee benefit, training, and travel expenses increased by 3.6% to $20.8 million for the three months ended June 30, 2013, compared to $20.1 million for the same period in 2012.
Selling expenses decreased by 9.9% to $9.3 million for three months ended June 30, 2013 as compared to $10.3 million in the same period of 2012. The decrease was mainly due to a sales tax imposed by the PRC (“special fund”) related to the sales of our products which was no longer imposed by the PRC tax authorities in 2013 while $1.6 million of the special fund was imposed in the second quarter of 2012.
In addition, general and administrative (“G&A”) expenses were approximately $11.6 million and $9.8 million for three months ended June 30, 2013 and 2012, respectively. The 17.6% increase was mainly due to the $1.2 million write-off of prepaid special fund.
Six months ended June 30, 2013 compared with six months ended June 30, 2012
(in thousands) | Six months ended | |||||||||||
June 30, 2013 | June 30, 2012 | Change % | ||||||||||
Selling, general and administrative expenses | $ | (39,803 | ) | $ | (38,761 | ) | 2.7 | % | ||||
SG&A expenses as a percentage of total revenue | (3.1 | )% | (2.7 | )% |
SG&A expenses, such as travel expenses and transportation fees, entertainment, employee benefit, training, and travel expenses increased by 2.7% to $39.8 million for the six months ended June 30, 2013, compared to $38.8 million for the same period in 2012.
Selling expenses decreased by 9.7% to $17.3 million for six months ended June 30, 2013 as compared to $19.2 million in the same period of 2012. The decrease was mainly due to a special fund related to the sales of our products which was no longer imposed by the PRC tax authorities in 2013 while $2.9 million of the special fund was imposed in the six months ended June 30, 2012.
In addition, G&A expenses were approximately $22.5 million and $19.6 million for six months ended June 30, 2013 and 2012, respectively. The 14.9% increase was mainly due to the $1.2 million write-off of prepaid special fund and $0.9 million increase in depreciation expenses as a result of more of General Steel (China)’s depreciation expense being allocated to G&A expenses than non-operating expense after the termination of its lease agreement with Tianjin Daqiuzhuang Steel Plates Co., Ltd in June 2012.
Change in Fair Value of Profit Sharing Liability
Three months ended June 30, 2013 compared with three months ended June 30, 2012
(in thousands) | Three months ended | |||||||||||
June 30, 2013 | June 30, 2012 | Change % | ||||||||||
(Restated) | (Restated) | |||||||||||
Change in fair value of profit sharing liability | $ | 9,494 | $ | (5,620 | ) | (268.9 | )% |
Our profit sharing liability relates to equipment operated by Longmen Joint Venture under a capital lease arrangement. Part of the payments under the capital lease are a portion of our future operating profits. Our estimate of those future profit sharing payments are accounted for as a derivative liability at fair value. We have considered the recent changes in China’s economic situation, which includes a new estimation and downgrade of 2014 GDP by the major investment bankers in June 2013, and a steel industry outlook reports issued for 2014. As a result, we have re-evaluated our projected operating profit (loss) taking into consideration the recent macroeconomic events in China, as well as our second quarter and year to date operating results. We have foreseen a further downward trend than anticipated in the first quarter of 2013. As such, the fair value of our profit sharing liability has been reduced compared to our previous estimates and we have recognized a gain of $14.2 million offset by a loss of $4.7 million related to the passage of time and change in the number of future periods over which the present value of future cash flows was estimated with a total gain from change in fair value of profit sharing liability of $9.5 million in our income from operations for the three months ended June 30, 2013. Loss from change in fair value of profit sharing liability of $5.6 million for the three months ended June 30, 2012 represent the change in fair value related to the passage of time and change in the number of future periods over which the present value of future cash flows was estimated as there were no change in estimates in 2012.
265 |
Six months ended June 30, 2013 compared with six months ended June 30, 2012
(in thousands) | Six months ended | |||||||||||
June 30, 2013 | June 30, 2012 | Change % | ||||||||||
(Restated) | (Restated) | |||||||||||
Change in fair value of profit sharing liability | $ | 56,273 | $ | (11,250 | ) | (600.2 | )% |
We have considered the recent changes in China’s economic situation, which includes a new estimation and downgrade of 2014 GDP by the major investment bankers in June 2013, and a steel industry outlook reports issued for 2014. As a result, we have re-evaluated our projected operating profit (loss) taking into consideration the recent macroeconomic events in China, as well as our second quarter and year to date operating results. We have foreseen a downward trend. As such, the fair value of our profit sharing liability has been reduced compared to our previous estimates and we have recognized a gain of $66.1 million offset by a loss of $9.8 million related to the passage of time and change in the number of future periods over which the present value of future cash flows was estimated with a total gain from change in fair value of profit sharing liability of $56.3 million in our income from operations for the six months ended June 30, 2013. Loss from change in fair value of profit sharing liability of $11.3 million for the six months ended June 30, 2012 represent the change in fair value related to the passage of time and change in the number of future periods over which the present value of future cash flows was estimated as there were no change in estimates in 2012.
Income (Loss) from Operations
Three months ended June 30, 2013 compared with three months ended June 30, 2012
(in thousands) | Three months ended | |||||||||||
June 30, 2013 | June 30, 2012 | Change % | ||||||||||
(Restated) | (Restated) | |||||||||||
Income (loss) from operations | $ | (46,890 | ) | $ | 2,292 | (2,145.8 | )% |
Loss from operations for the three months ended June 30, 2013 was $46.9 million as compared to $2.3 million income from operations for the same period in 2012. The increase in loss from operations was predominantly due to the increase in gross loss offset by the gain from change in fair value of profit sharing liability.
Six months ended June 30, 2013 compared with six months ended June 30, 2012
(in thousands) | Six months ended | |||||||||||
June 30, 2013 | June 30, 2012 | Change % | ||||||||||
(Restated) | (Restated) | |||||||||||
Loss from operations | $ | (14,999 | ) | $ | (16,337 | ) | (8.2 | )% |
Loss from operations for the six months ended June 30, 2013 was $15.0 million as compared to $16.3 million for the same period in 2012. The decrease in loss from operations was predominantly due to the increase in gross loss offset by the gain from change in fair value of profit sharing liability.
Other Income (Expense)
Three months ended June 30, 2013 compared with three months ended June 30, 2012
(in thousands) | Three months ended | |||||||||||
June 30, 2013 | June 30, 2012 | Change % | ||||||||||
(Restated) | (Restated) | |||||||||||
Interest income | $ | 3,383 | $ | 3,146 | 7.5 | % | ||||||
Finance/interest expense | (16,094 | ) | (43,160 | ) | (62.7 | )% | ||||||
Financing cost on capital lease | (5,122 | ) | (5,168 | ) | (0.0 | )% | ||||||
Change in fair value of derivative liabilities - warrants | - | 20 | (100.0 | )% | ||||||||
Gain on disposal of equipment | (235 | ) | 3 | (7,933.3 | )% | |||||||
Income from equity investment | 132 | 79 | (67.1 | )% | ||||||||
Foreign currency transaction gain (loss) | 98 | (973 | ) | (110.1 | )% | |||||||
Lease income | 539 | 530 | 1.7 | % | ||||||||
Other non-operating income (expense), net | 521 | 1,145 | (54.5 | )% | ||||||||
Total other expense, net | $ | (16,778 | ) | $ | (44,378 | ) | (62.2 | )% |
266 |
Total other expense, net, for the three months ended June 30, 2013 was $16.8 million, a 62.2% decrease compared to $44.4 million for the same period in 2012. The decrease was mainly a result of a $27.1 million decrease in finance/interest expenses. The decrease in finance/interest expenses was mainly a result of the reduction in the amount of bank notes receivable redemption and the amount borrowed from banks and third parties in the second quarter of 2013 as compared to the same period in 2012. We utilized more vendor financings during second quarter in 2013. As a result, notes receivable early redemption expenses for the three months ended June 30, 2013 amounted to $6.5 million, a $21.9 million or 77.1% decrease from $28.4 million for the same period in 2012, and interest expense on loan borrowings for the three months ended June 30, 2013 amounted to $9.6 million, a $5.2 million or 35.1% decrease from $14.8 million for the same period in 2012.
Six months ended June 30, 2013 compared with six months ended June 30, 2012
(in thousands) | Six months ended | |||||||||||
June 30, 2013 | June 30, 2012 | Change % | ||||||||||
(Restated) | (Restated) | |||||||||||
Interest income | $ | 5,822 | $ | 8,702 | (33.1 | )% | ||||||
Finance/interest expense | (35,856 | ) | (80,687 | ) | (55.6 | )% | ||||||
Financing cost on capital lease | (10,217 | ) | (10,377 | ) | (1.5 | )% | ||||||
Change in fair value of derivative liabilities - warrants | 1 | 7 | (85.7 | )% | ||||||||
Gain on disposal of equipment | 96 | (116 | ) | (182.8 | )% | |||||||
Income from equity investment | 90 | 36 | 150.0 | % | ||||||||
Foreign currency transaction gain (loss) | 126 | (588 | ) | (121.4 | )% | |||||||
Lease income | 1,071 | 1,060 | 1.0 | % | ||||||||
Other non-operating income (expense), net | 789 | 1,002 | (21.3 | )% | ||||||||
Total other expense, net | $ | (38,078 | ) | $ | (80,961 | ) | (53.0 | )% |
Total other expense, net, for the six months ended June 30, 2013 was $38.1 million, a 53.0% decrease compared to $81.0 million for the same period in 2012. The decrease was mainly a result of a decrease of interest income on loan receivables of $2.9 million offset by a $44.8 million decrease in finance/interest expenses. The decrease in finance/interest expenses was mainly a result of the reduction the amount of bank notes receivable redeemed early and the amount borrowed from banks and third parties in the six months ended June 30, 2013 as compared to the same period in 2012. We utilized more vendor financings during the second quarter in 2013. As a result, notes receivable early redemption expenses for the six months ended June 30, 2013 amounted to $17.3 million, a $32.0 million or 64.9% decrease from $49.3 for the same period in 2012, and interest expense on loan borrowings for the six months ended June 30, 2013 amounted to $18.6 million, a $12.8 million or 41.0% decrease from $31.4 million for the same period in 2012. The decrease in interest expense on loan borrowings for the six months ended June 30, 2013 as compared to the same period in 2012 was mainly due to the decrease in loan borrowings of approximately 22.3%.
Income Taxes
For the three months ended June 30, 2013 and 2012, we had total and current income tax provisions for our profitable subsidiaries, amounting to $0.1 million and $0.04 million, respectively. No deferred income tax provision was recorded for the three months ended June 30, 2013 and 2012 as the deferred tax assets had been fully reserved.
For the three months ended June 30, 2013 and 2012, we had effective tax rates of (0.1%) and (0.1%), respectively. The negative effective tax rates for the three months ended June 30, 2013 and 2012 were mainly due to a consolidated loss before income tax while we accrued tax provision for our profitable subsidiaries.
For the six months ended June 30, 2013 and 2012, we had a total tax provision of $0.2 million and $0.6 million, respectively. For the six months ended June 30, 2013 and 2012, we had current income tax provisions for our profitable subsidiaries, amounting to $0.2 million and $0.4 million, respectively. For the six months ended June 30, 2012, we evaluated the deferred tax assets of Longmen Joint Venture and Baotou Steel Pipe Joint Venture and concluded the net operating loss may not be fully realizable and to provide 100% valuation allowance for the deferred tax assets. No deferred income tax provision was recorded for the six months ended June 30, 2013 as the deferred tax assets had been fully reserved.
For the six months ended June 30, 2013 and 2012, we had effective tax rates of (0.3%) and (0.6%), respectively. The negative effective tax rates for the three months ended June 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.
267 |
Net Loss
Three months ended June 30, 2013 compared with three months ended June 30, 2012
(in thousands) | Three months ended | |||||||||||
June 30, 2013 | June 30, 2012 | Change % | ||||||||||
Net loss | $ | (63,773 | ) | $ | (42,129 | ) | 51.4 | % |
Six months ended June 30, 2013 compared with six months ended June 30, 2012
(in thousands) | Six months ended | |||||||||||
June 30, 2013 | June 30, 2012 | Change % | ||||||||||
Net loss | $ | (53,253 | ) | $ | (97,877 | ) | (45.6 | )% |
Net Loss attributable to General Steel Holdings, Inc.
Three months ended June 30, 2013 compared with three months ended June 30, 2012
(in thousands) | Three months ended | |||||||||||
June 30, 2013 | June 30, 2012 | Change % | ||||||||||
Net loss | $ | (63,773 | ) | $ | (42,129 | ) | 51.4 | % | ||||
Less: Net loss attributable to the noncontrolling interest | (23,955 | ) | (15,752 | ) | 52.1 | % | ||||||
Net loss attributable to General Steel Holdings, Inc. | $ | (39,818 | ) | $ | (26,377 | ) | 51.0 | % |
Net loss attributable to us for the three months ended June 30, 2013 increased to $39.8 million as compared to $26.4 million for the same period in 2012. The increase in net loss attributable to us for the three months ended June 30, 2013 was mainly a result of a $35.5 million gross loss offset by a $14.1 million increase in change in fair value of profit sharing liability and a $27.1 million decrease in finance/interest expense for the three months ended June 30, 2013.
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.
Six months ended June 30, 2013 compared with six months ended June 30, 2012
(in thousands) | Six months ended | |||||||||||
June 30, 2013 | June 30, 2012 | Change % | ||||||||||
Net loss | $ | (53,253 | ) | $ | (97,877 | ) | (45.6 | )% | ||||
Less: Net loss attributable to the noncontrolling interest | (16,538 | ) | (36,716 | ) | (55.0 | )% | ||||||
Net loss attributable to General Steel Holdings, Inc. | $ | (36,715 | ) | $ | (61,161 | ) | (40.0 | )% |
Net loss attributable to us for the six months ended June 30, 2013 decreased to $36.7 million compared to $61.2 million for the same period in 2012. The decrease in net loss attributable to us for the six months ended June 30, 2013 was mainly a result of a gross loss of $31.5 million offset by a $66.1 million gain from change in fair value of profit sharing liability and a decrease in finance/interest expense of $44.8 million for the six months ended June 30, 2013.
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.
268 |
Results of Operations for the Three Months Ended March 31, 2013
Sales
Three months ended March 31, 2013 compared with three months ended March 31, 2012
The following table sets forth sales and volume in metric tons.
Three months ended | ||||||||||||||||||||||||||||||||
March 31, 2013 | March 31, 2012 | Change | Change | |||||||||||||||||||||||||||||
in thousands, except metric tons | Volume | Sales | % | Volume | Sales | % | Volume % | Sales % | ||||||||||||||||||||||||
Longmen Joint Venture | 1,255,123 | $ | 646,748 | 99.3 | % | 1,092,615 | $ | 643,275 | 99.3 | % | 14.9 | % | 0.5 | % | ||||||||||||||||||
Others | 49,300 | 4,543 | 0.7 | % | 82,685 | 4,766 | 0.7 | % | (40.4 | )% | (4.7 | )% | ||||||||||||||||||||
Total Sales | 1,304,423 | $ | 651,291 | 100.0 | % | 1,175,300 | $ | 648,041 | 100.0 | % | 11.0 | % | 0.5 | % |
Total sales for the three months ended March 31, 2013 increased by 0.5% to $651.3 million from $648.0 million for the same period in 2012. The increase in sales compared to the same period in 2012 was predominantly due to the combined effects of increased sales volume and decreased average selling price. Longmen Joint Venture comprised approximately 99.3% and 99.3% of total sales for the first quarter of 2013 and 2012, respectively. Sales volume of rebar increased by 14.9% to 1.3 million metric tons, compared to 1.1 million metric tons in the same period in 2012. The average selling price of rebar decreased by 12.5% to approximately $515.3 per ton in the first quarter of 2013 compared to approximately $588.7 per ton in the same period of 2012.
Our product demands and prices had been rising in the first three quarters of 2011 until the end of the first quarter of 2012. In the fourth quarter of 2011, as a result of the China and global steel industry over-capacity, Chinese economic control polices and the financial crisis, commodity prices abruptly plummeted in the fourth quarter of 2011. With weakened demand, market forces kicked-in and the price of steel dropped substantially. As such, our sales prices have dropped since the fourth quarter of 2011, evidencing a continued decline. The over-capacity issue continued to be impacting our results during the first quarter of 2013 and 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 the period in comparison to the same period of 2012. However, our sales volume of rebar in Longmen Joint Venture increased by 14.9% to 1.3 million metric tons from 1.1 million metric tons. The increase in sales volume was mainly due to our slightly lowering the selling price of rebar to extend our market share in the Northwest region.
Our five major customers were distributors and collectively represented approximately 20.4% of our total sales for the three months ended March 31, 2013 as compared to 45.0% of our total sales for the three months ended March 31, 2012. The decrease in the concentration of our five major customers in the first 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. These five customers included related parties and major distributors owned by the central government. As we are the largest supplier in Shaanxi Province, we maintain a good relationship with these five customers to stabilize our sales channel.
Cost of Goods Sold
Three months ended March 31, 2013 compared with three months ended March 31, 2012
Three months ended | ||||||||||||||||||||||||||||||||
March 31, 2013 | March 31, 2012 | 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 | 1,255,123 | $ | 642,381 | 99.3 | % | 1,092,615 | $ | 637,177 | 99.2 | % | 14.9 | % | 0.8 | % | ||||||||||||||||||
Others | 49,300 | 4,843 | 0.7 | % | 82,685 | 5,234 | 0.8 | % | (40.4 | )% | (7.5 | )% | ||||||||||||||||||||
Total Cost of Goods Sold | 1,304,423 | $ | 647,224 | 100.0 | % | 1,175,300 | $ | 642,411 | 100.0 | % | 11.0 | % | 0.7 | % |
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 67.4% of our total cost of sales. The cost of goods sold increased by 0.7% to $647.2 million in the first quarter of 2013 from $642.4 million in the same period of 2011. The increase was mainly driven by the increasing sales volume and decreased unit costs of raw materials as a result of the decline in iron ore and coke purchase prices of approximately 8.3% and approximately 24.7%, respectively, for the three months ended March 31, 2013 as compared to the same period in 2012. As such, the average costs of rebar manufactured decreased 12.2% to approximately $511.8 per ton in the first quarter of 2013 from approximately $583.2 per ton in the same period of 2012.
269 |
Gross Profit
Three months ended March 31, 2013 compared with three months ended March 31, 2012
Three months ended | ||||||||||||||||||||||||||||
March 31, 2013 | March 31, 2012 | Change | ||||||||||||||||||||||||||
in thousands, except metric tons | Volume | Gross Profit (Loss) | Margin % | Volume | Gross Profit (Loss) | Margin % | Gross Profit | |||||||||||||||||||||
Longmen Joint Venture | 1,255,123 | $ | 4,367 | 0.7 | % | 1,092,615 | $ | 6,098 | 0.9 | % | (28.4 | )% | ||||||||||||||||
Others | 49,300 | (300 | ) | (6.6 | )% | 82,685 | (468 | ) | (9.8 | )% | (35.9 | )% | ||||||||||||||||
Total Gross Profit | 1,304,423 | $ | 4,067 | 0.6 | % | 1,175,300 | $ | 5,630 | 0.9 | % | (27.8 | )% |
Gross profit for the first quarter in 2013 was $4.1 million, or 0.6% of total sales, as compared to a gross profit of $5.6 million, or 0.9% of total sales in the same period in 2012. The decrease in gross margin percentage was mainly attributable to the percentage decrease of average rebar selling price of 12.5% being slightly higher than the percentage decrease of costs of rebar manufactured of 12.2% for the first quarter in 2013 as compared to the same period in 2012.
Selling, General and Administrative Expenses (“SG&A”)
Three months ended March 31, 2013 compared with three months ended March 31, 2012
(in thousands) | Three months ended | |||||||||||
March 31, 2013 | March 31, 2012 | Change % | ||||||||||
Selling, general and administrative expenses | $ | (18,955 | ) | $ | (18,629 | ) | 1.7 | % | ||||
SG&A expenses as a percentage of total revenue | (2.9 | )% | (2.9 | )% |
SG&A expenses, such as travel expenses and transportation fees, entertainment, employee benefit, training, and travel expenses increased by 1.7% to $19.0 million for the three months ended March 31, 2013, compared to $18.6 million for the same period in 2012.
Selling expenses decreased by 9.6% to $8.1 million for three months ended March 31, 2013 as compared to $8.9 million in the same period of 2012. The decrease was mainly due to a special fund related to the sales of our products which was no longer imposed by the PRC tax authorities in 2013 while $1.3 million of the special fund was imposed in the first quarter of 2012.
In addition, general and administrative (“G&A”) expenses were approximately $10.9 million and $9.7 million for three months ended March 31, 2013 and 2012, respectively. The 12.2% increase was mainly due to the rise in executive compensation, salaries and wages, legal and accounting and facility maintenance expenses.
Change in Fair Value of Profit Sharing Liability
Three months ended March 31, 2013 compared with three months ended March 31, 2012
(in thousands) | Three months ended | |||||||||||
March 31, 2013 | March 31, 2012 | Change % | ||||||||||
(Restated) | (Restated) | |||||||||||
Change in fair value of profit sharing liability | $ | 46,779 | $ | (5,630 | ) | (930.9 | )% |
Our profit sharing liability relates to equipment operated by Longmen Joint Venture under a capital lease arrangement. Part of the payments under the capital lease are a portion of our future operating profits. Our estimate of those future profit sharing payments are accounted for as a derivative liability at fair value. We have considered the recent changes in China’s economic situation, which includes a new estimation and downgrade of 2014 GDP by the major investment bankers in June 2013, and a steel industry outlook reports issued for 2014. As a result, we have re-evaluated our projected operating profit (loss) taking into consideration the recent macroeconomic events in China and the region, as well as our expected second quarter and year to date operating results, and we have foreseen a downtrend. As such, the fair value of our profit sharing liability has been reduced compared to our previous estimates and we have recognized a gain of $51.9 million offset by a loss of $5.1 million related to the passage of time and change in the number of future periods over which the present value of future cash flows was estimated with a total gain from change in fair value of profit sharing liability of $46.8 million in our income from operations. Loss from change in fair value of profit sharing liability of $5.6 million for the three ended March 31, 2012 represent the change in fair value related to the passage of time and change in the number of future periods over which the present value of future cash flows was estimated as there were no change in estimates in 2012.
270 |
Income (Loss) from Operations
Three months ended March 31, 2013 compared with three months ended March 31, 2012
(in thousands) | Three months ended | |||||||||||
March 31, 2013 | March 31, 2012 | Change % | ||||||||||
(Restated) | (Restated) | |||||||||||
Income (loss) from operations | $ | 31,891 | $ | (18,629 | ) | (271.2 | )% |
Income from operations for the three months ended March 31, 2013 was $31.9 million as compared to $18.6 million loss from operations for the same period in 2012. The increase in income from operations was predominantly due to the gain from change in fair value of profit sharing liability.
Other Income (Expense)
Three months ended March 31, 2013 compared with three months ended March 31, 2012
(in thousands) | Three months ended | |||||||||||
March 31, 2013 | March 31, 2012 | Change % | ||||||||||
(Restated) | (Restated) | |||||||||||
Interest income | $ | 2,439 | $ | 5,556 | (56.1 | )% | ||||||
Finance/interest expense | (19,762 | ) | (37,527 | ) | (47.3 | )% | ||||||
Financing cost on capital lease | (5,095 | ) | (5,209 | ) | (2.2 | )% | ||||||
Change in fair value of derivative liabilities - warrants | 1 | (13 | ) | (107.7 | )% | |||||||
Gain on disposal of equipment | 331 | (119 | ) | (378.2 | )% | |||||||
Income from equity investment | (42 | ) | (43 | ) | (2.3 | )% | ||||||
Foreign currency transaction gain (loss) | 28 | 385 | (92.7 | )% | ||||||||
Lease income | 532 | 530 | 0.4 | % | ||||||||
Other non-operating income (expense), net | 268 | (143 | ) | (287.4 | )% | |||||||
Total other expense, net | $ | (21,300 | ) | $ | (36,583 | ) | (41.8 | )% |
Total other expense, net, for the three months ended March 31, 2013 was $21.3 million, a 41.8% decrease compared to $36.6 million for the same period in 2012. The decrease was mainly a result of a decrease of interest income on loan receivables of $3.1 million offset by a $17.8 million decrease in finance/interest expenses. The decrease in finance/interest expenses was mainly a result of positive operating cash flows allowing us to reduce the amount of bank notes receivable redeemed early and the amount borrowed from banks and third parties in the first quarter of 2013 as compared to the same period in 2012. As a result, notes receivable early redemption expenses for the three months ended March 31, 2013 amounted to $10.8 million, a $10.1 million or 48.3% decrease from $20.9 for the same period in 2012, and interest expense on loan borrowings for the three months ended March 31, 2013 amounted to $9.0 million, a $7.6 million or 45.8% decrease from $16.6 million for the same period in 2012.
Income Taxes
For the three months ended March 31, 2013 and 2012, we had a total tax provision of $0.1 million and $0.5 million, respectively. For the three months ended March 31, 2013 and 2012, we had current income tax provisions for our profitable subsidiaries, amounting to $0.1 million and $0.4 million, respectively. For the three months ended March 31, 2012, we evaluated the deferred tax assets of Longmen Joint Venture and Baotou Steel Pipe Joint Venture and concluded the net operating loss may not be fully realizable and to provide 100% valuation allowance for the deferred tax assets. No deferred income tax provision was recorded for the three months ended March 31, 2013 as the deferred tax assets had been fully reserved.
For the three months ended March 31, 2013 and 2012, we had effective tax rates of 0.7% and (1.0%), respectively. The negative effective tax rates for the three months ended March 31, 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 March 31, 2013 compared with three months ended March 31, 2012
(in thousands) | Three months ended | |||||||||||
March 31, 2013 | March 31, 2012 | Change % | ||||||||||
Net income (loss) | $ | 10,520 | $ | (55,748 | ) | (118.9 | )% |
271 |
Net Income (Loss) attributable to General Steel Holdings, Inc.
Three months ended March 31, 2013 compared with three months ended March 31, 2012
(in thousands) | Three months ended | |||||||||||
March 31, 2013 | March 31, 2012 | Change % | ||||||||||
Net income (loss) | $ | 10,520 | $ | (55,748 | ) | (118.9 | )% | |||||
Less: Net income (loss) attributable to the noncontrolling interest | 7,417 | (20,964 | ) | (135.4 | )% | |||||||
Net income (loss) attributable to General Steel Holdings, Inc. | $ | 3,103 | $ | (34,784 | ) | (108.9 | )% |
Net income (loss) attributable to us for the three months ended March 31, 2013 increased to $3.1 million income compared to $(34.8) million loss for the same period in 2012. The increase in net income attributable to us for the three months ended March 31, 2013 was mainly a result of $51.9 million gain from change in fair value of profit sharing liability and a decrease in finance/interest expense of $18.4 million.
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.
Results of Operations for the Three and Nine Months Ended September 30, 2012
Sales
Three months ended September 30, 2012 compared with three months ended September 30, 2011
The following table sets forth sales and volume in metric tons.
Three months ended | ||||||||||||||||||||||||||||||||
September 30, 2012 | September 30, 2011 | Change | Change | |||||||||||||||||||||||||||||
in thousands, except metric tons | Volume | Sales | % | Volume | Sales | % | Volume % | Sales % | ||||||||||||||||||||||||
Longmen Joint Venture | 1,360,226 | $ | 708,974 | 99.7 | % | 1,484,508 | $ | 986,854 | 98.9 | % | (8.4 | )% | (28.2 | )% | ||||||||||||||||||
Others | 36,553 | 2,451 | 0.3 | % | 172,654 | 11,307 | 1.1 | % | (78.8 | )% | (78.3 | )% | ||||||||||||||||||||
Total Sales | 1,396,779 | $ | 711,425 | 100.0 | % | 1,657,162 | $ | 998,161 | 100.0 | % | (15.7 | )% | (28.7 | )% |
Total sales for the three months ended September 30, 2012 decreased by 28.7% to $711.4 million from $998.2 million for the same period in 2011. The decrease in sales compared to the same period in 2011 was predominantly due to the combined effects of decreased sales volume and average selling price. Longmen Joint Venture comprised approximately 99.7% and 98.9% of total sales for the third quarter of 2012 and 2011, respectively. Sales volume of rebar decreased by 8.4% to 1.4 million metric tons, compared to 1.5 million metric tons in the same period in 2011. The average selling price of rebar decreased by 21.6% to approximately $521.2 per ton in the third quarter of 2012 from approximately $664.8 per ton in the same period of 2011.
Our product demands and prices had been rising in the first three quarters of 2011 until the end of the third quarter of 2011. In the fourth quarter of 2011, as a result of the Chinese and global steel industry over-capacity, Chinese economic control polices and the financial crisis, commodity prices abruptly plummeted in the fourth quarter of 2011. With weakened demand, market forces kicked-in and the price of steel dropped substantially. As such, both our sales volume and prices have dropped since the fourth quarter of 2011, evidencing a continued decline. The over-capacity issue continued to impact our results during the third quarter of 2012 and the Chinese economy remained weak, which also had an indirect impact on our industry. Because of these factors, the selling price of our products was reduced considerably during the period in comparison to the same period of 2011 where the selling price was at its peak.
Our five major customers are distributors and collectively represented approximately 27.2% of our total sales for the three months ended September 30, 2012 as compared to 20.4% of our total sales for the three months ended September 30, 2011. These five customers included related parties and major distributors owned by 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.
272 |
Nine months ended September 30, 2012 compared with nine months ended September 30, 2011
The following table sets forth sales and volume in metric tons.
Nine months ended | ||||||||||||||||||||||||||||||||
September 30, 2012 | September 30, 2011 | Change | Change | |||||||||||||||||||||||||||||
in thousands, except metric tons | Volume | Sales | % | Volume | Sales | % | Volume % | Sales % | ||||||||||||||||||||||||
Longmen Joint Venture | 3,751,571 | $ | 2,126,556 | 99.4 | % | 4,345,793 | $ | 2,744,023 | 99.0 | % | (13.7 | )% | (22.5 | )% | ||||||||||||||||||
Others | 159,259 | 13,593 | 0.6 | % | 283,303 | 26,333 | 1.0 | % | (43.8 | )% | (48.4 | )% | ||||||||||||||||||||
Total Sales | 3,910,830 | $ | 2,140,149 | 100.0 | % | 4,629,096 | $ | 2,770,356 | 100.0 | % | (15.5 | )% | (22.7 | )% |
Total sales for the nine months ended September 30, 2012 decreased by 22.7% to $2.1 billion from $2.8 billion for the same period in 2011. The decrease in sales compared to the same period in 2011 was predominantly due to the combined effects of decreased sales volume and average selling price. Longmen Joint Venture comprised approximately 99.4% and 99.0% of total sales for the nine months ended September 30, 2012 and 2011, respectively. Sales volume of rebar decreased by 22.7% to 3.9 million metric tons, compared to 2.8 million metric tons in the same period in 2011. The average selling price of rebar decreased by 10.2% to approximately $566.8 per ton in the third quarter of 2012 from approximately $631.4 per ton in the same period of 2011.
Our product demands and prices had been rising in the first three quarters of 2011 until the end of the third quarter of 2011. In the fourth quarter of 2011, as a result of the China and global steel industry over-capacity, Chinese economic control polices and the financial crisis, commodity prices abruptly plummeted. With weakened demand, market forces kicked-in and the price of steel dropped substantially. As such, both our sales volume and prices dropped during the nine months ended September 30, 2012 in comparison to the same period of 2011.
Our five major customers were all distributors and collectively represented approximately 34.1% of our total sales for the nine months ended September 30, 2012 as compared to 30.7% of our total sales for the nine months ended September 30, 2011. These five customers included related parties and major distributors owned by central government. As we are the largest supplier in Shaanxi Province, we maintain a good relationship with these five customers to stabilize our sales channel.
Cost of Goods Sold
Three months ended September 30, 2012 compared with three months ended September 30, 2011
Three months ended | ||||||||||||||||||||||||||||||||
September 30, 2012 | September 30, 2011 | 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 | 1,360,226 | $ | 721,853 | 99.6 | % | 1,484,508 | $ | 951,132 | 98.7 | % | (8.4 | )% | (24.1 | )% | ||||||||||||||||||
Others | 36,553 | 3,168 | 0.4 | % | 172,654 | 12,979 | 1.3 | % | (78.8 | )% | (75.6 | )% | ||||||||||||||||||||
Total Cost of Goods Sold | 1,396,779 | $ | 725,021 | 100.0 | % | 1,657,162 | $ | 964,111 | 100.0 | % | (15.7 | )% | (24.8 | )% |
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 85% of our total cost of sales. The cost of goods sold decreased by 24.8% to $725.0 million in the third quarter of 2012 from $964.1 million in the same period of 2011. The decrease was mainly driven by the decreasing sales volume and unit costs of raw materials as a result of the decline in iron ore and coke purchase prices. The purchase price of iron ore declined approximately 21.7% for the three months ended September 30, 2012 as compared to the same period in 2011 and coke declined approximately 26.7% for the three months ended September 30, 2012 as compared to the same period in 2011. The purchase price was offset by the higher overhead cost rate being allocated to each individual unit. As such, the average costs of rebar manufactured decreased 17.2% to approximately $530.7 per ton in the third quarter of 2012 from approximately $640.7 per ton in the same period of 2011.
Nine months ended September 30, 2012 compared with nine months ended September 30, 2011
Nine months ended | ||||||||||||||||||||||||||||||||
September 30, 2012 | September 30, 2011 | 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 | 3,751,571 | $ | 2,105,808 | 99.3 | % | 4,345,793 | $ | 2,682,411 | 99.1 | % | (13.7 | )% | (21.5 | )% | ||||||||||||||||||
Others | 159,259 | 14,263 | 0.7 | % | 283,303 | 25,506 | 0.9 | % | (43.8 | )% | (44.1 | )% | ||||||||||||||||||||
Total Cost of Goods Sold | 3,910,830 | $ | 2,120,071 | 100.0 | % | 4,629,096 | $ | 2,707,917 | 100.0 | % | (15.5 | )% | (21.7 | )% |
273 |
The cost of goods sold decreased by 21.7% to $2.1 billion, in the first nine months of 2012 from $2.7 billion in the same period of 2011. The decrease was mainly driven by the decreasing sales volume and unit costs of raw materials as a result of the decline in iron ore and coke purchase prices. The purchase price of iron ore declined approximately 14.7% for the nine months ended September 30, 2012 as compared to the same period in 2011 and coke declined approximately 13.4% for the nine months ended September 30, 2012 as compared to the same period in 2011. The purchase price was offset by the higher overhead cost rate being allocated to each individual unit. In addition, we provided allowance for inventory valuation of approximately $14.0 million for both our raw materials and finished goods due to the drop in market price of iron ore, coke and our rebar products as of September 30, 2012. As such, the average costs of rebar manufactured decreased by 9.1% to approximately $561.3 per ton in the nine month period ended September 30, 2012 from approximately $617.2 per ton in the same period of 2011.
Gross Profit (Loss)
Three months ended September 30, 2012 compared with three months ended September 30, 2011
Three months ended | ||||||||||||||||||||||||||||
September 30, 2012 | September 30, 2011 | Change | ||||||||||||||||||||||||||
in thousands, except metric tons | Volume | Gross Loss | Margin % | Volume | Gross Profit (Loss) | Margin % | Gross Profit % | |||||||||||||||||||||
Longmen Joint Venture | 1,360,226 | $ | (12,879 | ) | (1.8 | )% | 1,484,508 | $ | 35,721 | 3.6 | % | (136.1 | )% | |||||||||||||||
Others | 36,553 | (717 | ) | (29.2 | )% | 172,654 | (1,671 | ) | (14.8 | )% | (57.1 | )% | ||||||||||||||||
Total Gross Profit | 1,396,779 | $ | (13,596 | ) | (1.9 | )% | 1,657,162 | $ | 34,050 | 3.4 | % | (139.9 | )% |
Gross loss for the third quarter 2012 was $13.6 million, or (1.9)% of total sales, as compared to a gross profit of $34.1 million, or 3.4% of total sales in the same period in 2011. The decrease in gross margin percentage was mainly attributable to the percentage decrease of average rebar selling price of 21.6%, which was higher than the percentage decrease of costs of rebar manufactured of 17.2% for the three months ended September 30, 2012 as compared to the same period of 2011.
We, like many other steel producers in China, experienced significant losses in the fourth quarter as we were forced to manufacture with high priced raw material inventories that we had previously purchased while the market selling prices for finished goods had dropped below the cost of goods during the third quarter of 2012. This resulted in negative margins.
Nine months ended September 30, 2012 compared with nine months ended September 30, 2011
Nine months ended | ||||||||||||||||||||||||||||
September 30, 2012 | September 30, 2011 | Change | ||||||||||||||||||||||||||
in thousands, except metric tons | Volume | Gross Profit (Loss) | Margin % | Volume | Gross Profit | Margin % | Gross Profit % | |||||||||||||||||||||
Longmen Joint Venture | 3,751,571 | $ | 20,748 | 1.0 | % | 4,345,793 | $ | 61,612 | 2.2 | % | (66.3 | )% | ||||||||||||||||
Others | 159,259 | (670 | ) | (4.9 | )% | 283,303 | 827 | 3.1 | % | (181.0 | )% | |||||||||||||||||
Total Gross Profit | 3,910,830 | $ | 20,078 | 0.9 | % | 4,629,096 | $ | 62,439 | 2.3 | % | (67.8 | )% |
Gross profit for the nine months ended September 30, 2012 was $20.1 million, or 0.9% of total sales, as compared to a gross profit of $62.4 million, or 2.3% of total sales in the same period in 2011. The decrease in gross margin percentage was mainly attributable to the percentage decrease of average rebar selling price of 10.2% was higher than the percentage decrease of costs of rebar manufactured of 9.1% for the nine months ended September 30, 2012 as compared to the same period of 2011.
Selling, General and Administrative Expenses (“SG&A”)
Three months ended September 30, 2012 compared with three months ended September 30, 2011
(in thousands) | Three months ended | |||||||||||
September 30, 2012 | September 30, 2011 | Change % | ||||||||||
Selling, General and Administrative Expenses | $ | (22,787 | ) | $ | (24,309 | ) | (6.3 | )% | ||||
SG&A Expenses As a Percentage of Total Revenue | (3.2 | )% | (2.4 | )% |
274 |
SG&A expenses, such as travel expenses and transportation fees, entertainment, employee benefit, training, and travel expenses decreased by 6.3% to $22.8 million for the three months ended September 30, 2012, compared to $24.3 million for the same period in 2011.
Selling expenses decreased by 14.9% to $8.7 million for three months ended September 30, 2012 as compared to $10.2 million in the same period of 2011. The decrease was mainly due to the decline of transportation and sales agent charges at Longmen Joint Venture related to the decrease of shipment volume and long distance sales deliveries to markets in rural areas in Xian city, Sichuan Province and Gansu Province during the third quarter of 2012 as compared to the same period in 2011.
In addition, general and administrative (“G&A”) expenses were both approximately $14.1 million for three months ended September 30, 2012 and 2011. The decrease was mainly due to our management establishing a policy to minimize our G&A expenses starting in the third quarter of 2012. As such, our entertainment expenses, employee benefit expenses, training expenses, and travel expenses are lower in the third quarter of 2012 as compared to the same period of 2011 offset by the rise of executive compensation, salaries and wages, legal and accounting and facility maintenance expenses. In addition, our flood prevention and security fund expenses are also lower in the third quarter of 2012 as compared to the same period of 2011 because such expenses are contributed based on the certain fixed percentage of our sales.
Nine months ended September 30, 2012 compared with nine months ended September 30, 2011
(in thousands) | Nine months ended | |||||||||||
September 30, 2012 | September 30, 2011 | Change % | ||||||||||
Selling, General and Administrative Expenses | $ | (61,548 | ) | $ | (65,843 | ) | (6.5 | )% | ||||
SG&A Expenses As a Percentage of Total Revenue | (2.9 | )% | (2.4 | )% |
SG&A expenses, such as travel expenses and transportation fees, executive compensation, salaries and wages, legal and accounting fees, decreased by 6.5% to $61.5 million for the nine months ended September 30, 2012, compared to $65.8 million for the same period in 2011.
Selling expenses decreased by 7.3% to $27.9 million for nine months ended September 30, 2012 as compared to $30.1 million in the same period of 2011. The decrease was mainly due to the decline of transportation and sales agent charges at Longmen Joint Venture related to the decrease of shipment volume and long distance sales deliveries to markets in rural areas in Xian city, Sichuan Province and Gansu Province during the nine months ended September 30, 2012 as compared to the same period in 2011.
In addition, G&A expenses decreased by 5.9% to $33.7 million for nine months ended September 30, 2012 as compared to $35.7 million in the same period of 2011. The decrease was mainly due to the equipment impairment charge in the amount of $5.4 million in General Steel (China) in the second quarter of 2011 and we did not have any equipment impairment charge during the same period in 2012 offset by to the rise of executive compensation, salaries and wages, legal and accounting and facility maintenance expenses.
Change in Fair Value of Profit Sharing Liability
Three months ended September 30, 2012 compared with three months ended September 30, 2011
(in thousands) | Three months ended | |||||||||||
September 30, | September 30, | |||||||||||
2012 | 2011 | Change % | ||||||||||
(Restated) | (Restated) | |||||||||||
Change in fair value of profit sharing liability | $ | (5,611 | ) | $ | (5,407 | ) | 3.8 | % |
Our profit sharing liability relates to equipment operated by Longmen Joint Venture under a capital lease arrangement. Part of the payments under the capital lease are a portion of our future operating profits. Our estimate of those future profit sharing payments are accounted for as a derivative liability at fair value. Loss from change in fair value of profit sharing liability of $5.6 million and $5.4 million for the three months ended September 30, 2012 and 2011, respectively, represent the change in fair value related to the passage of time and change in the number of future periods over which the present value of future cash flows was estimated as there were no changes in estimates in 2012 as compared to 2011.
Nine months ended September 30, 2012 compared with nine months ended September 30, 2011
(in thousands) | Nine months ended | |||||||||||
September 30, | September 30, | |||||||||||
2012 | 2011 | Change % | ||||||||||
(Restated) | (Restated) | |||||||||||
Change in fair value of profit sharing liability | $ | (16,861 | ) | $ | (8,743 | ) | 92.9 | % |
275 |
Our profit sharing liability relates to equipment operated by Longmen Joint Venture under a capital lease arrangement. Part of the payments under the capital lease are a portion of our future operating profits. Our estimate of those future profit sharing payments are accounted for as a derivative liability at fair value. We recognized a loss from change in fair value of profit sharing liability of $16.9 million in our loss from operations for the nine months ended September 30, 2012 as compared to $8.7 million in the same period of 2011 primarily due to the change in fair value related to the passage of time and change in the number of future periods over which the present value of future cash flows was estimated, which we started to incur in May 2011 for a four months periods in 2011 as compared to the full nine months period during the nine months ended September 30, 2012.
Income (Loss) from Operations
Three months ended September 30, 2012 compared with three months ended September 30, 2011
(in thousands) | Three months ended | |||||||||||
September 30, 2012 | September 30, 2011 | Change % | ||||||||||
(Restated) | (Restated) | |||||||||||
(Loss) Income from Operations | $ | (41,994 | ) | $ | 4,334 | (1,068.9 | )% |
Loss from operations for the three months ended September 30, 2012 was $42.0 million from an income of $4.3 million for the same period in 2011. The increase in loss from operations was predominantly due to the increase in gross loss.
Nine months ended September 30, 2012 compared with nine months ended September 30, 2011
(in thousands) | Nine months ended | |||||||||||
September 30, 2012 | September 30, 2011 | Change % | ||||||||||
(Restated) | (Restated) | |||||||||||
Loss from Operations | $ | (58,331 | ) | $ | (12,147 | ) | 380.2 | % |
Loss from operations for the nine months ended September 30, 2012 increased to $58.3 million from a loss of $12.1 million for the same period in 2011. The increase in loss from operations was predominantly due to the decrease in gross profit during the nine months ended September 30, 2012, as compared to the same period in 2011.
Other Income (Expense)
Three months ended September 30, 2012 compared with three months ended September 30, 2011
(in thousands) | Three months ended | |||||||||||
September 30, 2012 | September 30, 2011 | Change % | ||||||||||
(Restated) | (Restated) | |||||||||||
Interest income | $ | 4,337 | $ | 1,201 | 261.1 | % | ||||||
Finance/interest expense | (25,879 | ) | (24,497 | ) | 5.6 | % | ||||||
Financing cost on capital lease | (5,125 | ) | (5,177 | ) | 1.0 | % | ||||||
Change in fair value of derivative liabilities - warrants | (55 | ) | 135 | (140.7 | )% | |||||||
Gain on disposal of equipment | 293 | 689 | (57.5 | )% | ||||||||
Income from equity investment | 44 | 790 | (94.4 | )% | ||||||||
Foreign currency transaction gain (loss) | (581 | ) | 1,271 | (145.7 | )% | |||||||
Lease income | 528 | 525 | 0.6 | % | ||||||||
Other non-operating income (expense), net | 2,314 | (1,047 | ) | (321.0 | )% | |||||||
Total other expense, net | $ | (24,124 | ) | $ | (26,110 | ) | (7.6 | )% |
Total other expense, net, for the three months ended September 30, 2012 were $24.1 million, a 7.6% decrease compared to $26.1 million for the same period in 2011. The decrease was mainly a result of an increase of interest income on loan receivables of $3.1 million and $3.4 million of non-operating income, offset by financing expenses as well as foreign currency transaction loss. Non-operating income for the three months ended September 30, 2012 mainly attributable by our General Steel (China) facility rental income of $1.4 million.
The change in fair value of derivative liabilities for the three months ended September 30, 2012 was a gain of $0.01 million compared to a gain of $0.1 million for the same period in 2011.
276 |
According to U.S. GAAP, our December 2007 notes, December 2007 warrants and the December 2009 warrants are considered derivatives and therefore are carried at their fair market value at each financial reporting date with any changes in the fair value reported as gains or losses in our income statements. One of the major drivers used to calculate the value of the derivatives is our stock price.
Nine months ended September 30, 2012 compared with nine months ended September 30, 2011
(in thousands) | Nine months ended | |||||||||||
September 30, 2012 | September 30, 2011 | Change % | ||||||||||
(Restated) | (Restated) | |||||||||||
Interest income | $ | 13,039 | $ | 3,080 | 323.3 | % | ||||||
Finance/interest expense | (106,566 | ) | (55,035 | ) | 93.6 | % | ||||||
Financing cost on capital lease | (15,502 | ) | (8,539 | ) | 81.5 | % | ||||||
Change in fair value of derivative liabilities - warrants | (48 | ) | 5,526 | (100.9 | )% | |||||||
Gain from debt extinguishment | - | 3,430 | (100.0 | )% | ||||||||
Loss on disposal of equipment | 177 | 679 | (73.9 | )% | ||||||||
Income from equity investment | 80 | 4,301 | (98.1 | )% | ||||||||
Foreign currency transaction gain (loss) | (1,169 | ) | 2,920 | (140.0 | )% | |||||||
Lease income | 1,588 | 1,489 | 6.6 | % | ||||||||
Other non-operating income (expense), net | 3,316 | (1,197 | ) | (377.0 | )% | |||||||
Total other expense, net | $ | (105,085 | ) | $ | (43,346 | ) | 142.4 | % |
Total other expense, net, for the nine months ended September 30, 2012 were $105.1 million, a 142.4% increase compared to $43.3 million for the same period in 2011. The increase was mainly a result of an increase of $58.5 million in financial expense, of which $7.0 million was increased interest expense on capital lease, which we did not start incurring until May 2011, and $51.5 million was interest expense increase, which was primarily due to increased discounted notes receivable during the nine months ended September 30, 2012 as compared to the same period in 2011 which resulted from a higher discount rate as compared to 2011 after the central government tightened its funding policy. The discount notes receivables in nine months ended September 30, 2012 increased as we intended to convert our notes receivables before the maturity date into cash to finance our operations.
The change in fair value of derivative liabilities for the three months ended September 30, 2012 was a gain of $0.01 million compared to a gain of $5.5 million for the same period in 2011.
According to U.S. GAAP, our December 2007 notes, December 2007 warrants and the December 2009 warrants are considered derivatives and therefore are carried at their fair market value at each financial reporting date with any changes in the fair value reported as gains or losses in our income statements. One of the major drivers used to calculate the value of the derivatives is our stock price.
Income Taxes
For the three months ended September 30, 2012 and 2011, we had a total tax provision of $0.1 million and $0.6 million, respectively. For the three months ended September 30, 2012 and 2011, we had current income tax provisions for our profitable subsidiaries, amounting to $0.1 million and $0.4 million, respectively. After the filing of the Form 10-K/A for the year ended December 31, 2010, management evaluated our future operating forecast based on the current steel market condition, and concluded the net operating loss may not be fully realizable and decided to provide 100% valuation allowance for the deferred tax assets. For the three months ended September 30, 2011, we evaluated the deferred tax assets of Longmen Joint Venture and Baotou Steel Pipe Joint Venture and concluded the net operating loss may not be fully realizable and to provide 100% valuation allowance for the deferred tax assets. As such, we provided an allowance against the deferred tax assets and continue to have $0.2 million of deferred provision for income taxes. No deferred income tax provision was recorded for the three months ended September 30, 2012 as the deferred tax assets had been fully reserved.
For the three months ended September 30, 2012 and 2011, we had effective tax rates of (0.2%) and (2.5%), respectively. The negative effective tax rates for the three months ended September 30, 2012 and 2011 were mainly due to a consolidated loss before income tax while we needed to accrue tax provision for our profitable subsidiaries.
For the nine months ended September 30, 2012 and 2011, we had a total tax provision of $0.7 million and $16.0 million, respectively. For the nine months ended September 30, 2012 and 2011, we had current income tax provisions for our profitable subsidiaries, amounting to $0.5 million and $0.6 million, respectively. After the filing of the Form 10-K/A for the year ended December 31, 2010, management evaluated our future operating forecast based on the current steel market condition, and concluded the net operating loss may not be fully realizable and decided to provide 100% valuation allowance for the deferred tax assets. For the nine months ended September 30, 2012, we continued to evaluate the deferred tax assets remained in Baotou Steel Pipe Joint Venture and concluded the net operating loss may not be fully realizable and to provide 100% valuation allowance for the deferred tax assets. As such, we provided an allowance against the remaining deferred tax assets as of December 31, 2011 and had $0.2 million of deferred provision for income taxes. For the nine months ended September 30, 2011, we provided an allowance for the deferred tax assets as of December 31, 2010 and had $15.4 million of deferred provision for income taxes.
277 |
For the nine months ended September 30, 2012 and 2011, we had effective tax rates of (0.4%) and (28.8%), respectively. The negative effective tax rates for the six months ended September 30, 2012 and 2011 were mainly due to a consolidated loss before income tax while we provided 100% valuation allowance for the deferred tax assets at Longmen Joint Venture and Baotou Steel Pipe Joint Venture.
Net Loss
Three months ended September 30, 2012 compared with three months ended September 30, 2011
(in thousands) | Three months ended | |||||||||||
September 30, 2012 | September 30, 2011 | Change % | ||||||||||
�� | ||||||||||||
Net Loss | $ | (66,218 | ) | $ | (22,330 | ) | 196.5 | % |
Nine months ended September 30, 2012 compared with nine months ended September 30, 2011
(in thousands) | Nine months ended | |||||||||||
September 30, 2012 | September 30, 2011 | Change % | ||||||||||
Net Loss | $ | (164,095 | ) | $ | (71,494 | ) | 129.5 | % |
Net Loss attributable to General Steel Holdings, Inc.
Three months ended September 30, 2012 compared with three months ended September 30, 2011
(in thousands) | Three months ended | |||||||||||
September 30, 2012 | September 30, 2011 | Change % | ||||||||||
Net loss | $ | (66,218 | ) | $ | (22,330 | ) | 196.5 | % | ||||
Less: Net loss attributable to the noncontrolling interest | (24,620 | ) | (8,500 | ) | 189.6 | % | ||||||
Net loss attributable to General Steel Holdings, Inc. | $ | (41,598 | ) | $ | (13,830 | ) | 200.8 | % |
Net loss attributable to us for the three months ended September 30, 2012 increased to $41.6 million compared to $13.8 million for the same period in 2011. The increase in net loss attributable to us for the three months ended September 30, 2012 was mainly a result of an increase in loss from operations of $53.1 million.
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.
Nine months ended September 30, 2012 compared with nine months ended September 30, 2011
(in thousands) | Nine months ended | |||||||||||
September 30, 2012 | September 30, 2011 | Change % | ||||||||||
Net loss | $ | (164,095 | ) | $ | (71,494 | ) | 129.5 | % | ||||
Less: Net loss attributable to the noncontrolling interest | (61,336 | ) | (25,832 | ) | 137.4 | % | ||||||
Net loss attributable to General Steel Holdings, Inc. | $ | (102,759 | ) | $ | (45,662 | ) | 125.0 | % |
Net loss attributable to us for the nine months ended September 30, 2012 increased to $102.8 million compared to $45.7 million for the same period in 2011. The increase in net loss attributable to us for the nine months ended September 30, 2012 was mainly a result of an increase in loss from operations of $38.1 million, an increase of $15.1 million of interest expense on the capital lease and an increase of $51.5 million in interest expense on bank borrowings, related parties borrowings and discounted notes receivables.
278 |
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.
Results of Operations for the Three and Six Months Ended June 30, 2012
Sales
Three months ended June 30, 2012 compared with three months ended June 30, 2011
The following table sets forth sales and volume in metric tons.
Three months ended | ||||||||||||||||||||||||||||||||
June 30, 2012 | June 30, 2011 | Change | Change | |||||||||||||||||||||||||||||
in thousands, except metric tons | Volume | Sales | % | Volume | Sales | % | Volume % | Sales% | ||||||||||||||||||||||||
Longmen Joint Venture | 1,298,730 | $ | 774,306 | 99.2 | % | 1,691,971 | $ | 1,047,863 | 98.7 | % | (23.2 | )% | (26.1 | )% | ||||||||||||||||||
Others | 40,021 | 6,377 | 0.8 | % | 91,024 | 13,868 | 1.3 | % | (56.0 | )% | (54.0 | )% | ||||||||||||||||||||
Total Sales | 1,338,751 | $ | 780,683 | 100.0 | % | 1,782,995 | $ | 1,061,731 | 100.0 | % | (24.9 | )% | (26.5 | )% |
Total sales for the three months ended June 30, 2012 decreased by 26.5% to $780.7 million from $1,061.7 million for the same period in 2011. The decrease in sales compared to the same period in 2011 was predominantly due to the combined effects of decreased sales volume and average selling price. Longmen Joint Venture comprised approximately 99.2% and 98.7% of total sales for the second quarter of 2012 and 2011, respectively. Sales volume of rebar decreased by 23.2% to 1.3 million metric tons, compared to 1.7 million metric tons in the same period in 2011. The average selling price of rebar decreased by 3.7% to approximately $596.2 per ton in the second quarter of 2012 from approximately $619.3 per ton in the same period of 2011.
Our product demands and prices had been rising in the first three quarters of 2011 until the end of the third quarter of 2011. In the fourth quarter of 2011, as a result of the China and global steel industry over-capacity, Chinese economic control polices and the financial crisis, commodity prices abruptly plummeted in the fourth quarter of 2011. With weakened demand, market forces kicked-in and the price of steel dropped substantially. As such, both our sales volume and prices have dropped since the fourth quarter of 2011, evidencing a continued decline during the second quarter of 2012 in comparison to the same period of 2011.
Our five major customers were all distributors and collectively represented approximately 34.7% of our total sales for the three months ended June 30, 2012 as compared to 40.6% of our total sales for the three months ended June 30, 2011. These five customers included related parties and major distributors owned by central government. As we are the largest supplier in Shaanxi Province, we maintain a good relationship with these five customers to stabilize our sales channel.
Six months ended June 30, 2012 compared with six months ended June 30, 2011
The following table sets forth sales and volume in metric tons.
Six months ended | ||||||||||||||||||||||||||||||||
June 30, 2012 | June 30, 2011 | Change | Change | |||||||||||||||||||||||||||||
in thousands, except metric tons | Volume | Sales | % | Volume | Sales | % | Volume % | Sales % | ||||||||||||||||||||||||
Longmen Joint Venture | 2,391,345 | $ | 1,417,581 | 99.2 | % | 2,861,285 | $ | 1,757,169 | 99.2 | % | (16.4 | )% | (19.3 | )% | ||||||||||||||||||
Others | 122,706 | 11,143 | 0.8 | % | 110,649 | 15,026 | 0.8 | % | 10.9 | % | (25.8 | )% | ||||||||||||||||||||
Total Sales | 2,514,051 | $ | 1,428,724 | 100.0 | % | 2,971,934 | $ | 1,772,195 | 100.0 | % | (15.4 | )% | (19.4 | )% |
Total sales for the six months ended June 30, 2012 decreased by 19.4% to $1.4 billion from $1.8 billion for the same period in 2011. The decrease in sales compared to the same period in 2011 was predominantly due to the combined effects of decreased sales volume and average selling price. Longmen Joint Venture comprised approximately 99.2% and 99.2% of total sales for the six months ended June 30, 2012 and 2011, respectively. Sales volume of rebar decreased by 16.4% to 2.4 million metric tons, compared to 2.9 million metric tons in the same period in 2011. The average selling price of rebar decreased by 3.5% to approximately $592.8 per ton in the second quarter of 2012 from approximately $614.1 per ton in the same period of 2011.
279 |
Our product demands and prices had been rising in the first three quarters of 2011 until the end of the third quarter of 2011. In the fourth quarter of 2011, as a result of the China and global steel industry over-capacity, Chinese economic control polices and the financial crisis, commodity prices abruptly plummeted in the fourth quarter of 2011. With weakened demand, market forces kicked-in and the price of steel dropped substantially. As such, both our sales volume and prices dropped during the first half of 2012 in comparison to the same period of 2011.
For the six months ended June 30, 2012, sales to third parties decreased by 29.9% to $922.8 million as compared to $1,316.1 million for the same period in 2011, while sales to related parties increased by 10.9% to $505.9 million as compared to $456.1 million for the six months ended June 30, 2011. The increase in sales to related parties was mainly due to our marketing strategy to expand our markets in rural areas in Xian city and Sichuan Province and the sales network to the new related party customers were established after the first quarter of 2011. As such, we had sales to the new related party customers during the first half of 2012 while we had insignificant sales to these customers in the same period of 2011. However, the decrease of sales to third parties was mainly due to weakened demand resulting from the over-capacity issues discussed above, along with sales to third parties in the rural areas in Xian city and Sichuan Province being affected by the weakened demand.
Our five major customers were all distributors and collectively represented approximately 36.8% of our total sales for the six months ended June 30, 2012 as compared to 36.5% of our total sales for the six months ended June 30, 2011. These five customers included related parties and major distributors owned by central government. As we are the largest supplier in Shaanxi Province, we maintain a good relationship with these five customers to stabilize our sales channel.
Cost of Goods Sold
Three months ended June 30, 2012 compared with three months ended June 30, 2011
Three months ended | ||||||||||||||||||||||||||||||||
June 30, 2012 | June 30, 2011 | 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 | 1,298,730 | $ | 746,779 | 99.2 | % | 1,691,971 | $ | 1,024,531 | 98.7 | % | (23.2 | )% | (27.1 | )% | ||||||||||||||||||
Others | 40,021 | 5,860 | 0.8 | % | 91,024 | 13,860 | 1.3 | % | (56.0 | )% | (57.7 | )% | ||||||||||||||||||||
Total Cost of Goods Sold | 1,338,751 | $ | 752,639 | 100.0 | % | 1,782,995 | $ | 1,038,391 | 100.0 | % | (24.9 | )% | (27.5 | )% |
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 85% of our total cost of sales. The cost of goods sold decreased by 27.5% to $752.6 million in the second quarter of 2012 from $1,038.4 million in the same period of 2011. The decrease was mainly driven by the decreasing sales volume and unit costs of raw materials as a result of the decline in iron ore and coke purchase prices of approximately 15.4% and approximately 7.6%, respectively for the three months ended June 30, 2012 as compared to the same period in 2011, offset by the higher of overhead cost rate being allocated to each individual unit. In addition, we provided additional valuation allowance of approximately $3.4 million of inventory for impairment for both our raw materials and finished goods due to the drop in market price of iron ore, coke and our rebar products as of June 30, 2012 in addition to our March 31, 2012 inventory valuation allowance balance of $13.4 million. As such, the average costs of rebar manufactured decreased by 5.0% to approximately $575.0 per ton in the second quarter of 2012 from approximately $605.5 per ton in the same period of 2011. The percentage decrease in cost of goods sold was consistent with the percentage decrease in sales.
Six months ended June 30, 2012 compared with six months ended June 30, 2011
Six months ended | ||||||||||||||||||||||||||||||||
June 30, 2012 | June 30, 2011 | Change | Change | |||||||||||||||||||||||||||||
in thousands, except metric tons | Volume | Cost of Goods Sold | % | Volume | Cost of Goods Sold | % | Volume % | Cost of Goods Sold % | ||||||||||||||||||||||||
Longmen Joint Venture | 2,391,345 | $ | 1,383,955 | 99.2 | % | 2,861,285 | $ | 1,728,239 | 99.1 | % | (16.4 | )% | (19.9 | )% | ||||||||||||||||||
Others | 122,706 | 11,095 | 0.8 | % | 110,649 | 15,567 | 0.9 | % | 10.9 | % | (28.7 | )% | ||||||||||||||||||||
Total Cost of Goods Sold | 2,514,051 | $ | 1,395,050 | 100.0 | % | 2,971,934 | $ | 1,743,806 | 100.0 | % | (15.4 | )% | (20.0 | )% |
The cost of goods sold decreased by 20.0% to $1.4 billion, in the first half of 2012 from $1.7 billion in the same period of 2011. The decrease was mainly driven by the decreasing sales volume and unit costs of raw materials as a result of the decline in iron ore and coke purchase prices of approximately 11.4% and approximately 6.3%, respectively for the six months ended June 30, 2012 as compared to the same period in 2011, offset by higher overhead cost rate being allocated to each individual unit. In addition, we provided valuation allowance of approximately $16.9 million of inventory for impairment for both our raw materials and finished goods due to the drop in market price of iron ore, coke and our rebar products as of June 30, 2012. As such, the average costs of rebar manufactured decreased 4.2% to approximately $578.7 per ton in the first half of 2012 from approximately $604.0 per ton in the same period of 2011.
280 |
Gross Profit
Three months ended June 30, 2012 compared with three months ended June 30, 2011
Three months ended | ||||||||||||||||||||||||||||
June 30, 2012 | June 30, 2011 | Change | ||||||||||||||||||||||||||
in thousands, except metric tons | Volume | Gross Profit | Margin % | Volume | Gross Profit | Margin % | Gross Profit % | |||||||||||||||||||||
Longmen Joint Venture | 1,298,730 | $ | 27,527 | 3.6 | % | 1,691,971 | $ | 23,332 | 2.2 | % | 18.0 | % | ||||||||||||||||
Others | 40,021 | 517 | 8.1 | % | 91,024 | 8 | 0.1 | % | 6,362.5 | % | ||||||||||||||||||
Total Gross Profit | 1,338,751 | $ | 28,044 | 3.6 | % | 1,782,995 | $ | 23,340 | 2.2 | % | 20.2 | % |
Gross profit for the second quarter 2012 was $28.0 million, or 3.6% of total sales, as compared to a gross profit of $23.3 million, or 2.2% of total sales in the same period in 2011. The increase in gross margin percentage was mainly attributable to the percentage decrease of average rebar selling price of 3.7% was lower than the percentage decrease of costs of rebar manufactured of 5.0% for the three months ended June 30, 2012 as compared to the same period of 2011.
Six months ended June 30, 2012 compared with six months ended June 30, 2011
Six months ended | ||||||||||||||||||||||||||||
June 30, 2012 | June 30, 2011 | Change | ||||||||||||||||||||||||||
in thousands, except metric tons | Volume | Gross Profit | Margin % | Volume | Gross Profit (Loss) | Margin % | Gross Profit % | |||||||||||||||||||||
Longmen Joint Venture | 2,391,345 | $ | 33,626 | 2.4 | % | 2,861,285 | $ | 28,930 | 1.6 | % | 16.2 | % | ||||||||||||||||
Others | 122,706 | 48 | 0.4 | % | 110,649 | (541 | ) | (3.6 | )% | (109.0 | )% | |||||||||||||||||
Total Gross Profit | 2,514,051 | $ | 33,674 | 2.4 | % | 2,971,934 | $ | 28,389 | 1.6 | % | 18.6 | % |
Gross profit for the first half of 2012 was $33.7 million, or 2.4% of total sales, as compared to a gross profit of $28.4 million, or 1.6% of total sales in the same period in 2011. The increase in gross margin percentage was mainly attributable to the percentage decrease of average rebar selling price of 3.5% was lower than the percentage decrease of costs of rebar manufactured of 4.2% for the six months ended June 30, 2012 as compared to the same period of 2011.
Selling, General and Administrative Expenses (“SG&A”)
Three months ended June 30, 2012 compared with three months ended June 30, 2011
(in thousands) | Three months ended | |||||||||||
June 30, 2012 | June 30, 2011 | Change % | ||||||||||
Selling, General and Administrative Expenses | $ | (20,132 | ) | $ | (27,033 | ) | (25.5 | )% | ||||
SG&A Expenses As a Percentage of Total Revenue | (2.6 | )% | (2.5 | )% |
SG&A expenses, such as travel expenses and transportation fees, executive compensation, salaries and wages, land use rental fees, legal and accounting fees, decreased by 25.5% to $20.1 million for the three months ended June 30, 2012, compared to $27.0 million for the same period in 2011.
Selling expenses decreased by 29.7% to $10.3 million for the three months ended June 30, 2012 as compared to $14.6 million in the same period of 2011. The decrease was mainly due to the decline of transportation and sales agent charges at Longmen Joint Venture during the second quarter of 2012 as compared to the same period in 2011, which related to the decrease of shipment volume and long distance sales deliveries to markets in rural areas in Xian city, Sichuan Province and Gansu Province.
In addition, general and administrative (“G&A”) expenses decreased 20.6% to $9.8 million for three months ended June 30, 2012 as compared to $12.4 million in the same period of 2011. The decrease was mainly due to the equipment impairment charges in the amount of $5.4 million in General Steel (China) in the second quarter of 2011 and we did not have any equipment impairment charges during the same period in 2012 offset by the rise of executive compensation, salaries and wages, land use rental fees, legal and accounting and maintenance facility expenses.
281 |
Six months ended June 30, 2012 compared with six months ended June 30, 2011
(in thousands) | Six months ended | �� | ||||||||||
June 30,2012 | June 30,2011 | Change % | ||||||||||
Selling, General and Administrative Expenses | $ | (38,761 | ) | $ | (41,534 | ) | (6.7 | )% | ||||
SG&A Expenses As a Percentage of Total Revenue | (2.7 | )% | (2.3 | )% |
SG&A expenses, such as travel expenses and transportation fees, executive compensation, salaries and wages, land use rental fees, legal and accounting fees, decreased by 6.7% to $38.8 million for the six months ended June 30, 2012, compared to $41.5 million for the same period in 2011.
Selling expenses decreased by 3.4% to $19.2 million for the six months ended June 30, 2012 as compared to $19.9 million in the same period of 2011. The decrease was mainly due to the decline of transportation and sales agent charges at Longmen Joint Venture during the six months ended June 30, 2012, as compared to the same period in 2011, which related to the decrease of shipment volume and long distance sales deliveries to markets in rural areas in Xian city, Sichuan Province and Gansu Province.
In addition, G&A expenses decreased by 9.7% to $19.6 million for six months ended June 30, 2012 as compared to $21.6 million in the same period of 2011. The decrease was mainly due the equipment impairment charge in the amount of $5.4 million in General Steel (China) in the second quarter of 2011 and we did not have an equipment impairment charge during the same period in 2012 offset by to the rise of executive compensation, salaries and wages, land use rental fees, legal and accounting and maintenance facility expenses.
Change in Fair Value of Profit Sharing Liability
Three months ended June 30, 2012 compared with three months ended June 30, 2011
(in thousands) | Three months ended | |||||||||||
June 30, | June 30, | |||||||||||
2012 | 2011 | Change % | ||||||||||
(Restated) | (Restated) | |||||||||||
Change in fair value of profit sharing liability | $ | (5,620 | ) | $ | (3,336 | ) | 68.5 | % |
Our profit sharing liability relates to equipment operated by Longmen Joint Venture under a capital lease arrangement. Part of the payments under the capital lease are a portion of our future operating profits. Our estimate of those future profit sharing payments are accounted for as a derivative liability at fair value. We recognized a loss from change in fair value of profit sharing liability of $5.6 million in our loss from operations for the three months ended June 30, 2012 as compared to $3.3 million in the same period of 2011 primarily due to the change in fair value related to the passage of time and change in the number of future periods over which the present value of future cash flows was estimated, which we started to incur in May 2011 for a two months periods in 2011 compared to the full three months period during the three months ended June 30, 2012.
Six months ended June 30, 2012 compared with six months ended June 30, 2011
(in thousands) | Six months ended | |||||||||||
June 30, | June 30, | |||||||||||
2012 | 2011 | Change % | ||||||||||
(Restated) | (Restated) | |||||||||||
Change in fair value of profit sharing liability | $ | (11,250 | ) | $ | (3,336 | ) | 237.2 | % |
Our profit sharing liability relates to equipment operated by Longmen Joint Venture under a capital lease arrangement. Part of the payments under the capital lease are a portion of our future operating profits. Our estimate of those future profit sharing payments are accounted for as a derivative liability at fair value. We recognized a loss from change in fair value of profit sharing liability of $11.3 million in our loss from operations for the six months ended June 30, 2012 compared to $3.3 million in the same period of 2011 primarily due to the change in fair value related to the passage of time and change in the number of future periods over which the present value of future cash flows was estimated, which we started to incur in May 2011 for a two months periods in 2011 compared to the full six months period during the six months ended June 30, 2012.
282 |
Income (Loss) from Operations
Three months ended June 30, 2012 compared with three months ended June 30, 2011
(in thousands) | Three months ended | |||||||||||
June 30, 2012 | June 30, 2011 | Change % | ||||||||||
(Restated) | (Restated) | |||||||||||
Income (Loss) from Operations | $ | 2,292 | $ | (7,029 | ) | (132.6 | )% |
Income from operations for the three months ended June 30, 2012 increased to income from operations of $2.3 million from a loss of $7.0 million for the same period in 2011. The increase in income from operations was predominantly due to the increase in gross profit, the decrease in SG&A expenses offset by the increase in loss of change in fair value of profit sharing liability during the three months ended June 30, 2012, as compared to the same period in 2011.
Six months ended June 30, 2012 compared with six months ended June 30, 2011
(in thousands) | Six months ended | |||||||||||
June 30, 2012 | June 30, 2011 | Change % | ||||||||||
(Restated) | (Restated) | |||||||||||
Loss from Operations | $ | (16,337 | ) | $ | (16,481 | ) | (1.0 | )% |
Loss from operations for the six months ended June 30, 2012 decreased to $16.3 million from a loss of $16.5 million for the same period in 2011. The decrease in loss from operations was predominantly due to the increase in gross profit and the decrease in SG&A expenses offset by the increase in loss of change in fair value of profit sharing liability during the six months ended June 30, 2012, as compared to the same period in 2011.
Other Income (Expense)
Three months ended June 30, 2012 compared with three months ended June 30, 2011
(in thousands) | Three months ended | |||||||||||
June 30, 2012 | June 30, 2011 | Change % | ||||||||||
(Restated) | (Restated) | |||||||||||
Interest income | $ | 3,146 | $ | 816 | 285.5 | % | ||||||
Finance/interest expense | (43,160 | ) | (16,419 | ) | 162.9 | % | ||||||
Financing cost on capital lease | (5,168 | ) | (3,362 | ) | 53.7 | % | ||||||
Change in fair value of derivative liabilities - warrants | 20 | 1,839 | (98.9 | )% | ||||||||
Gain from debt extinguishment | - | 3,430 | (100.0 | )% | ||||||||
Gain on disposal of equipment | 3 | 387 | (99.2 | )% | ||||||||
Income from equity investment | 79 | 1,856 | (95.7 | )% | ||||||||
Foreign currency transaction gain (loss) | (973 | ) | 1,030 | (194.5 | )% | |||||||
Lease income | 530 | 512 | 3.5 | % | ||||||||
Other non-operating income (expense), net | 1,145 | (455 | ) | (351.6 | )% | |||||||
Total other expense, net | $ | (44,378 | ) | $ | (10,366 | ) | 328.1 | % |
Total other expense, net, for the three months ended June 30, 2012 was $44.3 million, a 328.1% increase compared to $10.4 million for the same period in 2011. The increase was mainly a result of an increase of $28.5 million in financial expense, of which, $1.8 million was increased interest expense on capital lease and $26.7 million of interest expense increase was primarily due to increased discounted notes receivable during the second quarter of 2012 as compared to same period in 2011 with higher discount rate than 2011 after the central government tightening the funding policy. The increased discount notes receivables in the second quarter of 2012 as we intended to cash out the notes receivables early before the maturity date to financing our operations
The change in fair value of derivative liabilities for the three months ended June 30, 2012 was a gain of $0.02 million compared to a gain of $1.8 million for the same period in 2011.
According to U.S. GAAP, our December 2007 notes, December 2007 warrants and the December 2009 warrants are considered derivatives and therefore are carried at their fair market value at each financial reporting date with any changes in the fair value reported as gains or losses in our income statements. One of the major drivers used to calculate the value of the derivatives is our stock price.
283 |
Six months ended June 30, 2012 compared with six months ended June 30, 2011
(in thousands) | Six months ended | |||||||||||
June 30, 2012 | June 30, 2011 | Change % | ||||||||||
(Restated) | (Restated) | |||||||||||
Interest income | $ | 8,702 | $ | 1,879 | 363.1 | % | ||||||
Finance/interest expense | (80,687 | ) | (30,538 | ) | 164.2 | % | ||||||
Financing cost on capital lease | (10,377 | ) | (3,362 | ) | 208.7 | % | ||||||
Change in fair value of derivative liabilities - warrants | 7 | 5,391 | (99.9 | )% | ||||||||
Gain from debt extinguishment | - | 3,430 | (100.0 | )% | ||||||||
Loss on disposal of equipment | (116 | ) | (10 | ) | (1,060.0 | )% | ||||||
Income from equity investment | 36 | 3,511 | (99.0 | )% | ||||||||
Foreign currency transaction gain (loss) | (588 | ) | 1,649 | (135.7 | )% | |||||||
Lease income | 1,060 | 964 | 10.0 | % | ||||||||
Other non-operating income (expense), net | 1,002 | (150 | ) | (768.0 | )% | |||||||
Total other expense, net | $ | (80,961 | ) | $ | (17,236 | ) | 369.7 | % |
Total other expense, net, for the six months ended June 30, 2012 were $81.0 million, a 369.7% increase compared to $17.2 million for the same period in 2011. The increase was mainly a result of an increase of $57.2 million in financial expense, of which, $7.0 million was increased interest expense on capital lease, which we did not start incurring the expenses until May 2011, and $50.2 million of interest expense increase was primarily due to increased discounted notes receivable during the first half of 2012 as compared to the same period in 2011 with higher discount rate than 2011 after the central government tightening the funding policy. The increased discount notes receivables in first half of 2012 as we intended to cash out the notes receivables early before the maturity date to finance our operations
The change in fair value of derivative liabilities for the six months ended June 30, 2012 was a gain of $0.01 million compared to a gain of $5.4 million for the same period in 2011.
According to U.S. GAAP, our December 2007 notes, December 2007 warrants and the December 2009 warrants are considered derivatives and therefore are carried at their fair market value at each financial reporting date with any changes in the fair value reported as gains or losses in our income statements. One of the major drivers used to calculate the value of the derivatives is our stock price.
Income Taxes
For the three months ended June 30, 2012 and 2011, we had a total tax provision of $0.01 million and $18.2 million, respectively. For the three months ended June 30, 2012 and 2011, we had current income tax provisions for our profitable subsidiaries, amounting to $0.01 million and $0, respectively. After the filing of the Form 10-K/A for the year ended December 31, 2010, management evaluated our future operating forecast based on the current steel market condition, and concluded the net operating loss may not be fully realizable and decided to provide 100% valuation allowance for the deferred tax assets. For the three months ended June 30, 2011, we evaluated the deferred tax assets of Longmen Joint Venture and Baotou Steel Pipe Joint Venture and concluded the net operating loss may not be fully realizable and to provide 100% valuation allowance for the deferred tax assets. As such, we wrote off the deferred tax assets and had $18.2 million of deferred provision for income taxes. No deferred income tax provision was recorded for the three months ended June 30, 2012 as the deferred tax assets had been fully reserved.
For the three months ended June 30, 2012 and 2011, we had effective tax rates of (0.1%) and (104.6%), respectively. The negative effective tax rates for the three months ended June 30, 2012 and 2011 were mainly due to a consolidated loss before income tax while we provided 100% valuation allowance for the deferred tax assets at Longmen Joint Venture and Baotou Steel Pipe Joint Venture.
For the six months ended June 30, 2012 and 2011, we had a total tax provision of $0.6 million and $15.4 million, respectively. For the six months ended June 30, 2012 and 2011, we had current income tax provisions for our profitable subsidiaries, amounting to $0.4 million and $0.2 million, respectively. After the filing of the Form 10-K/A for the year ended December 31, 2010, management evaluated our future operating forecast based on the current steel market condition, and concluded the net operating loss may not be fully realizable and decided to provide 100% valuation allowance for the deferred tax assets. For the six months ended June 30, 2012, we evaluated the deferred tax assets remained in Baotou Steel Pipe Joint Venture and concluded the net operating loss may not be fully realizable and to provide 100% valuation allowance for the deferred tax assets. As such, we provided an allowance against our remaining deferred tax assets as of December 31, 2011 and had $0.2 million of deferred provision for income taxes. For the six months ended June 30, 2011, we provided an allowance against the deferred tax assets as of December 31, 2010 and had $15.2 million of deferred provision for income taxes.
For the six months ended June 30, 2012 and 2011, we had effective tax rates of (0.6%) and (45.8%), respectively. The negative effective tax rates for the six months ended June 30, 2012 and 2011 were mainly due to a consolidated loss before income tax while we provided 100% valuation allowance for the deferred tax assets at Longmen Joint Venture and Baotou Steel Pipe Joint Venture.
284 |
Net Loss
Three months ended June 30, 2012 compared with three months ended June 30, 2011
(in thousands) | Three months ended | |||||||||||
June 30, 2012 | June 30, 2011 | Change % | ||||||||||
Net Loss | $ | (42,129 | ) | $ | (35,593 | ) | 18.4 | % |
Six months ended June 30, 2012 compared with six months ended June 30, 2011
(in thousands) | Three months ended | |||||||||||
June 30, 2012 | June 30, 2011 | Change % | ||||||||||
Net Loss | $ | (97,877 | ) | $ | (49,164 | ) | 99.1 | % |
Net Loss attributable to General Steel Holdings, Inc.
Three months ended June 30, 2012 compared with three months ended June 30, 2011
(in thousands) | Three months ended | |||||||||||
June 30, 2012 | June 30, 2011 | Change % | ||||||||||
Net loss | $ | (42,129 | ) | $ | (35,593 | ) | 18.4 | % | ||||
Less:Net loss attributable to the noncontrolling interest | (15,752 | ) | (12,678 | ) | 24.2 | % | ||||||
Net loss attributable to General Steel Holdings, Inc. | $ | (26,377 | ) | $ | (22,915 | ) | 15.1 | % |
Net loss attributable to us for the three months ended June 30, 2012 increased to $26.4 million compared to $22.9 million for the same period in 2011. The increase in net loss attributable to us for the three months ended June 30, 2012 was mainly a result of an increase of $4.1 million in interest expense on the capital lease and an increase of $26.7 million in interest expense on bank borrowings, related parties borrowings and discounted notes receivables offset by the increase in income from operations of $11.6 million.
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.
Six months ended June 30, 2012 compared with Six months ended June 30, 2011
(in thousands) | Six months ended | |||||||||||
June 30, 2012 | June 30, 2011 | Change % | ||||||||||
Net loss | $ | (97,877 | ) | $ | (49,164 | ) | 99.1 | % | ||||
Less:Net loss attributable to the noncontrolling interest | (36,716 | ) | (17,332 | ) | 111.8 | % | ||||||
Net loss attributable to General Steel Holdings, Inc. | $ | (61,161 | ) | $ | (31,832 | ) | 92.1 | % |
Net loss attributable to us for the six months ended June 30, 2012 increased to $61.2 million compared to $31.8 million for the same period in 2011. The increase in net loss attributable to us for the six months ended June 30, 2012 was mainly a result of an increase of $14.9 million in interest expense on the capital lease and an increase of $50.2 million in interest expense on bank borrowings, related parties borrowings and discounted notes receivables offset by the decrease in loss from operations of $8.1 million.
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.
Results of Operations for the Three Months Ended March 31, 2012
Sales
Three months ended March 31, 2012 compared with three months ended March 31, 2011
The following table sets forth sales and volume in metric tons for our Longmen Joint Venture.
Three months ended | ||||||||||||||||||||||||||||||||
March 31, 2012 | March 31, 2011 | Change | Change | |||||||||||||||||||||||||||||
in thousands, except metric tons | Volume | Sales | % | Volume | Sales | % | Volume % | Sales % | ||||||||||||||||||||||||
Longmen Joint Venture | 1,092,615 | $ | 643,275 | 99.3 | % | 1,169,314 | $ | 709,306 | 99.8 | % | (6.6 | )% | (9.3 | )% | ||||||||||||||||||
Others | 82,685 | 4,766 | 0.7 | % | 19,625 | 1,158 | 0.2 | % | 321.3 | % | 311.7 | % | ||||||||||||||||||||
Total Sales | 1,175,300 | $ | 648,041 | 100.0 | % | 1,188,939 | $ | 710,464 | 100.0 | % | (1.1 | )% | (8.8 | )% |
285 |
Total sales for the three months ended March 31, 2012 decreased by 8.8% to $648.0 million from $710.5 million for the same period in 2011. The decrease in sales compared to the same period in 2011 was predominantly due to the combined effects of decreased sales volume and average selling price. Longmen Joint Venture comprised approximately 99.3% and 99.8% of total sales for the first quarter 2012 and 2011, respectively. Sales volume of rebar decreased by 6.6% to 1.1 million metric tons, compared to 1.2 million metric tons in the same period in 2011. The average selling price of rebar decreased by 2.9% to approximately $588.7 per ton in the first quarter of 2012 from approximately $606.6 per ton in the same period of 2011. Our product demands and prices had been rising in the first three quarters of 2011 until the end of the third quarter of 2011. In the fourth quarter of 2011, as a result of the China and global steel industry over-capacity, Chinese economic control polices and the financial crisis, commodity prices abruptly plummeted in the fourth quarter of 2011. With weakened demand, market forces kicked-in and the price of steel dropped substantially. As such, both our sales volume and prices have dropped during the first quarter of 2012 in comparison to the same period of 2011.
For the three months ended March 31, 2012, sales to third parties decreased by 23.5% to $383.8 million as compared to $501.5 million for the same period in 2011, while sales to related parties increased by 26.4% to $264.2 million as compared to $209.0 million for the three months ended March 31, 2011. The increase of sales to related parties was mainly due to our marketing strategy to expand our markets in rural areas in Xian city, and Sichuan Province and the sales network to the new related party customers were established after the first quarter of 2011. As such, we had sales to the new related party customers during the first quarter of 2012 while we did not have any sales to these customers in the same period of 2011. However, the decrease of sales to third parties is mainly due to weakened demand resulting from the over-capacity issues discussed above, along with sales to third parties in the rural areas in Xian city and Sichuan Province being affected by the weakened demand.
Our five major customers were all distributors and collectively represented approximately 45.0% of our total sales for the three months ended March 31, 2012 as compared to 32.3% of our total sales for the three months ended March 31, 2011. These five customers included related parties and major distributors owned by central government. As we are the largest supplier in Shaanxi province, we maintain a good relationship with these five customers to stabilize our sales channel.
Cost of Goods Sold
Three months ended March 31, 2012 compared with three months ended March 31, 2011
Three months ended | ||||||||||||||||||||||||||||||||
March 31, 2012 | March 31, 2011 | 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 | 1,092,615 | $ | 637,177 | 99.2 | % | 1,169,314 | $ | 703,708 | 99.8 | % | (6.6 | )% | (9.5 | )% | ||||||||||||||||||
Others | 82,685 | 5,234 | 0.8 | % | 19,625 | 1,707 | 0.2 | % | 321.3 | % | 206.7 | % | ||||||||||||||||||||
Total Cost of Goods Sold | 1,175,300 | $ | 642,411 | 100.0 | % | 1,188,939 | $ | 705,415 | 100.0 | % | (1.1 | )% | (8.9 | )% |
Our primary cost of goods sold is the cost of raw materials such as iron ore, coke, alloy and scrap steel. The costs of iron ore and coke account for approximately 85% of our total cost of sales. The cost of goods sold decreased by 8.9% to $642.4 million in the first quarter of 2012 from $705.4 million in the same period of 2011. The decrease was mainly driven by the decreasing sales volume and unit costs of raw materials as a result of the decline in iron ore and coke purchase prices of approximately 6.3% and 4.7%, respectively for the three months ended March 31, 2012 as compared to the same period in 2011, offset by higher overhead cost rate being allocated to each individual unit. In addition, we provided valuation allowance of approximately $13.5 million of inventory for impairment for our raw materials due to the drop in market price of iron ore and coke products as of March 31, 2012. As such, the average costs of rebar manufactured decreased by 3.1% to approximately $583.2 per ton in the first quarter of 2012 from approximately $601.8 per ton in the same period of 2011.
Gross Profit
Three months ended March 31, 2012 compared with three months ended March 31, 2011
Three months ended | ||||||||||||||||||||||||||||
March 31, 2012 | March 31, 2011 | Change | ||||||||||||||||||||||||||
in thousands, except metric tons | Volume | Gross Profit (Loss) | Margin % | Volume | Gross Profit (Loss) | Margin % | Gross Profit % | |||||||||||||||||||||
Longmen Joint Venture | 1,092,615 | $ | 6,098 | 0.9 | % | 1,169,314 | $ | 5,598 | 0.8 | % | 8.9 | % | ||||||||||||||||
Others | 82,685 | (468 | ) | (9.8 | )% | 19,625 | (549 | ) | (47.4 | )% | (14.8 | )% | ||||||||||||||||
Total Gross Profit | 1,175,300 | $ | 5,630 | 0.9 | % | 1,188,939 | $ | 5,049 | 0.7 | % | 11.5 | % |
286 |
Gross profit for the first quarter of 2012 was $5.6 million, or 0.9% of total sales, as compared to a gross profit of $5.0 million, or 0.7% of total sales in the same period in 2011. The increase in gross margin percentage was mainly attributable to the percentage decrease of average rebar selling price of 2.9%, which was lower than the percentage decrease of costs of rebar manufactured of 3.1% for three months ended March 31, 2012 as compared to the same period of 2011.
Selling, General and Administrative Expenses (“SG&A”)
Three months ended March 31, 2012 compared with three months ended March 31, 2011
(in thousands) | Three months ended | |||||||||||
March 31, 2012 | March 31, 2011 | Change % | ||||||||||
Selling, General and Administrative Expenses | $ | (18,629 | ) | $ | (14,501 | ) | 28.5 | % | ||||
SG&A Expenses As a Percentage of Total Revenue | (2.9 | )% | (2.0 | )% |
SG&A expenses, such as travel expenses and transportation fees, executive compensation, salaries and wages, land use rental fees, legal and accounting fees, increased by 28.5% to $18.6 million for the three months ended March 31, 2012, compared to $14.5 million for the same period in 2011.
Selling expenses increased by 69.7% to $8.9 million as compared to $5.3 million in the same period of 2011. The increase was mainly due to the rise of transportation and sales agent charges at Longmen Joint Venture, which related to the increase of shipment volume and long distance sales deliveries expanding to markets in rural areas in Xian city, Sichuan Province and Gansu Province.
In addition, general and administration (“G&A”) expenses increased by 5.1% to $9.7 million as compared to $9.2 million in the same period of 2011. The increase was mainly due to the rise of executive compensation, salaries and wages, land use rental fees, legal and accounting and maintenance facility expenses.
Change in Fair Value of Profit Sharing Liability
Three months ended March 31, 2012 compared with three months ended March 31, 2011
(in thousands) | Three months ended | |||||||||||
March 31, | March 31, | |||||||||||
2012 | 2011 | Change % | ||||||||||
(Restated) | ||||||||||||
Change in fair value of profit sharing liability | $ | (5,630 | ) | $ | - | - |
Our profit sharing liability relates to equipment operated by Longmen Joint Venture under a capital lease arrangement. Part of the payments under the capital lease are a portion of our future operating profits. Our estimate of those future profit sharing payments are accounted for as a derivative liability at fair value. We recognized a loss from change in fair value of profit sharing liability of $5.6 million in our loss from operations for the three months ended March 31, 2012 compared to $0 in the same period of 2011 primarily due to the change in fair value related to the passage of time and change in the number of future periods over which the present value of future cash flows was estimated, which we started to incur in May 2011 while we did not have such loss for the three months ended March 31, 2011.
Loss from Operations
Three months ended March 31, 2012 compared with three months ended March 31, 2011
(in thousands) | Three months ended | |||||||||||
March 31, 2012 | March 31, 2011 | Change % | ||||||||||
(Restated) | ||||||||||||
Loss from Operations | $ | (18,629 | ) | $ | (9,452 | ) | 97.1 | % |
Loss from operations for the three months ended March 31, 2012 increased to $18.6 million from $9.5 million for the same period in 2011. The increase in loss from operations was predominantly due to the increase in SG&A expenses and increase in loss in change in fair value of profit sharing liability offset by the increase in gross profit during the three months ended March 31, 2012, as compared to the same period in 2011.
287 |
Other Income (Expense)
Three months ended March 31, 2012 compared with three months ended March 31, 2011
(in thousands) | Three months ended | |||||||||||
March 31, 2012 | March 31, 2011 | Change % | ||||||||||
(Restated) | ||||||||||||
Interest income | $ | 5,556 | $ | 1,063 | 422.7 | % | ||||||
Finance/interest expense | (37,527 | ) | (14,119 | ) | 165.8 | % | ||||||
Financing cost on capital lease | (5,209 | ) | - | - | ||||||||
Change in fair value of derivative liabilities - warrants | (13 | ) | 3,552 | (100.4 | )% | |||||||
Gain (loss) on disposal of equipment | (119 | ) | (397 | ) | (70.0 | )% | ||||||
Income (loss) from equity investment | (43 | ) | 1,655 | (102.6 | )% | |||||||
Foreign currency transaction gain | 385 | 619 | (37.8 | )% | ||||||||
Lease income | 530 | 452 | 17.3 | % | ||||||||
Other non-operating income (expense), net | (143 | ) | 305 | (146.9 | )% | |||||||
Total other expense, net | $ | (36,583 | ) | $ | (6,870 | ) | 432.5 | % |
Total other expense, net, for the three months ended March 31, 2012 were $36.6 million, a 432.5% increase compared to $6.9 million for the same period in 2011. The increase was mainly a result of an increase of $28.6 million in financial expense, of which, $5.2 million was interest expense on capital lease, which we did not have for the first three months ended March 31, 2011, and $23.4 million of interest expense increase was primarily due to increased discounted notes receivable during the quarter of 2012 as compared to the same period in 2011 with higher discount rate than 2011 after the central government tightened the funding policy. The increased discount notes receivables in the first quarter of 2012 as we intended to cash out the notes receivables early before the maturity date to finance our operations.
The change in fair value of derivative liabilities for the three months ended March 31, 2012 was a loss of $0.01 million compared to a gain of $3.6 million for the same period in 2011.
According to U.S. GAAP, our December 2007 notes, December 2007 warrants and the December 2009 warrants are considered derivatives and therefore are carried at their fair market value at each financial reporting date with any changes in the fair value reported as gains or losses in our income statements. One of the major drivers used to calculate the value of the derivatives is our stock price.
Income Taxes
For the three months ended March 31, 2012 and 2011, we had a total tax provision of $0.5 million and a tax benefit of $2.8 million, respectively. For the three months ended March 31, 2012 and 2011, we had current income tax provisions for our profitable subsidiaries, amounting to $0.3 million and $0.7 million, respectively. We had deferred income tax benefit of $3.5 million for the three months ended March 31, 2011, due to the Group’s net operating loss carried forward to offset operating income for the next five years. After the filing of the Form 10-K/A for the year ended December 31, 2010, management evaluated our future operating forecast based on the current steel market condition, and concluded the net operating loss may not be fully realizable and decided to provide 100% valuation allowance for the deferred tax assets. For the three months ended March 31, 2012, we evaluated the deferred tax assets remained in Baotou Steel Pipe Joint Venture and concluded the net operating loss may not be fully realizable and to provide 100% valuation allowance for the deferred tax assets. As such, we provided an allowance against the remaining deferred tax assets as of December 31, 2011 and had $0.2 million of deferred provision for income taxes.
For the three months ended March 31, 2012 and 2011, we had effective tax rates of (1.0%) and 16.9%, respectively. The negative effective tax rate for the three months ended March 31, 2012 was mainly due to a consolidated loss before income tax while we provided 100% valuation allowance for the deferred tax assets at Longmen Joint Venture and Baotou Steel Pipe Joint Venture.
Net Loss
Three months ended March 31, 2012 compared with three months ended March 31, 2011
(in thousands) | Three months ended | |||||||||||
March 31, 2012 | March 31, 2011 | Change % | ||||||||||
Net Loss | $ | (55,748 | ) | $ | (13,571 | ) | 310.8 | % |
288 |
Net Loss attributable to General Steel Holdings, Inc.
Three months ended March 31, 2012 compared with three months ended March 31, 2011
(in thousands) | Three months ended | |||||||||||
March 31, 2012 | March 31, 2011 | Change % | ||||||||||
Net loss | $ | (55,748 | ) | $ | (13,571 | ) | 310.8 | % | ||||
Less:Net loss attributable to the noncontrolling interest | (20,964 | ) | (4,654 | ) | 350.4 | % | ||||||
Net loss attributable to General Steel Holdings, Inc. | $ | (34,784 | ) | $ | (8,917 | ) | 290.1 | % |
Net loss attributable to us for the three months ended March 31, 2012 increased to $34.8 million compared to $8.9 million for the same period in 2011. The increase in net loss attributable to us for the three months ended March 31, 2012 was mainly a result of an increase of $10.8 million in interest expense on the capital lease and an increase in $23.4 million of interest expense on bank borrowings, related parties borrowings and discounted notes receivables.
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.
Results of Operations for the Three Months Ended September 30, 2011
Sales
Three months ended September 30, 2011 compared with three months ended September 30, 2010
The following table sets forth sales revenue and volume in metric tons for our Longmen Joint Venture.
SALES REVENUE | Three months ended | |||||||||||||||||||||||||||||||
September 30, 2011 | September 30, 2010 | Change | Change | |||||||||||||||||||||||||||||
in thousands, except metric tons | Volume | Revenue | % | Volume | Revenue | % | Volume % | Revenue % | ||||||||||||||||||||||||
Longmen Joint Venture | 1,484,508 | $ | 986,854 | 98.9 | % | 867,854 | $ | 455,050 | 98.9 | % | 71.1 | % | 116.9 | % | ||||||||||||||||||
Other | 172,654 | 11,307 | 1.1 | % | 72,707 | 5,227 | 1.1 | % | 137.5 | % | 116.3 | % | ||||||||||||||||||||
Total Revenue of General Steel | 1,657,162 | $ | 998,161 | 100 | % | 940,561 | $ | 460,277 | 100 | % | 76.2 | % | 116.9 | % |
Total sales revenue for the three months ended September 30, 2011 increased 116.9% to $1.0 billion from $0.5 billion for the same period in 2010. The increase in sales revenue compared to the same period in 2010 is predominantly due to the combined effects of increased production volume and average selling price. Sales volume increased 76.2% to 1.7 million metric tons, compared to 0.9 million metric tons in the same period in 2010. The average selling price of rebar increased 23.1% to approximately $602.3 per ton in the third quarter of 2011 from approximately $489.4 per ton in the same period of 2010.
Longmen Joint Venture comprised approximately 98.9% of total sales for the third quarter 2011 and 2010. Production volume of rebar at Longmen Joint Venture reached 1.5 million metric tons for the third quarter 2011, which increased 71.1% compared with 0.9 million metric tons in the same period in 2010. The increase of Longmen Joint Venture’s production was mainly due to the additional capacity contributed from the new blast furnaces brought online in January 2011 through our cooperation with Shaanxi Steel and Shaanxi Coal under the Unified Management Agreement. Our current total monthly production volume is approximately 555,000 tons of crude steel.
Our five major customers are all distributors and collectively represented approximately 20.4% of our total sales for the three months ended September 30, 2011 as compared to 29.2 % of our total sales for the three months ended September 30, 2010. These five customers include related parties and major distributors owned by central government. As we are the largest supplier in Shaanxi province, we normally maintain a good relationship with them to stabilize our sales channel. In addition, we have expanded our sales channel and increased our sales volume in rural area in Xian city, Sichuan province and Gansu province to other region other than the central area of Shaanxi province , the percentage of total sales from our top five major customers has decreased from 29.2% to 20.4% for the three months ended September 30, 2011 as compared to the same period in 2010.
289 |
Nine months ended September 30, 2011 compared with nine months ended September 30, 2010
The following table sets forth sales revenue and volume in metric tons for our Longmen Joint Venture.
SALES REVENUE | Nine months ended | |||||||||||||||||||||||||||||||
September 30, 2011 | September 30, 2010 | Change | Change | |||||||||||||||||||||||||||||
in thousands, except metric tons | Volume | Revenue | % | Volume | Revenue | % | Volume % | Revenue % | ||||||||||||||||||||||||
Longmen Joint Venture | 4,345,793 | $ | 2,744,023 | 99.0 | % | 2,705,964 | $ | 1,389,238 | 98.2 | % | 60.6 | % | 97.5 | % | ||||||||||||||||||
Other | 283,303 | 26,333 | 1.0 | % | 280,722 | 25,741 | 1.8 | % | 0.9 | % | 2.3 | % | ||||||||||||||||||||
Total Revenue of General Steel | 4,629,096 | $ | 2,770,356 | 100 | % | 2,986,686 | $ | 1,414,979 | 100 | % | 55.0 | % | 95.8 | % |
Total sales revenue for the nine months ended September 30, 2011 increased 95.8% to $2.8 billion from $1.4 billion for the same period in 2010. The increase sales revenue compared to the same period in 2010 is predominantly due to the combined effects of increased sales volume and average selling price. Sales volume increased 55.0% compared to the same period in 2010. The average selling price of rebar increased 26.3% to approximately $598.5 per ton in the nine months ended September 30, 2011 from approximately $473.8 per ton in the same period of 2010.
Longmen Joint Venture comprised approximately 99.0% of total sales for the nine months ended September 30, 2011, compared with 98.2% in the same period in 2010. Production volume of rebar in Longmen Joint Venture reached 4.3 million metric tons for the nine months ended September 30, 2011, which increased 60.6% compared with 2.7 million metric tons in the same period in 2010. The increase of Longmen Joint Venture’s production was mainly due to the abovementioned additional capacity contributed from the new blast furnaces brought online in January 2011.
Our five major customers are all distributors and collectively represented approximately 30.7% of our total sales for the nine months ended September 30, 2011 in comparison to 28.5 % of our total sales for the nine months ended September, 2010. These five customers include related parties and major distributors owned by central government. As we are the largest supplier in Shaanxi province, we normally maintained a good relationship with them to stabilize our sales channel.
Cost of Goods Sold
Three months ended September 30, 2011 compared with three months ended September 30, 2010
COSTS of GOODS SOLD | Three months ended | |||||||||||||||||||||||||||||||
September 30, 2011 | September 30, 2010 | Change | Change | |||||||||||||||||||||||||||||
in thousands, except metric tons | Volume | Cost | % | Volume | Cost | % | Volume % | Cost % | ||||||||||||||||||||||||
Longmen Joint Venture | 1,484,508 | $ | 951,132 | 98.7 | % | 867,853 | $ | 440,700 | 98.7 | % | 71.1 | % | 115.8 | % | ||||||||||||||||||
Other | 187,818 | 12,979 | 1.3 | % | 72,708 | 5,988 | 1.3 | % | 158.3 | % | 116.8 | % | ||||||||||||||||||||
Total Costs of Goods Sold of General Steel | 1,672,326 | $ | 964,111 | 100 | % | 940,561 | $ | 446,688 | 100 | % | 77.8 | % | 115.8 | % |
Nine months ended September 30, 2011 compared with nine months ended September 30, 2010
COSTS of GOODS SOLD | Nine months ended | |||||||||||||||||||||||||||||||
September 30, 2011 | September 30, 2010 | Change | Change | |||||||||||||||||||||||||||||
in thousands, except metric tons | Volume | Cost | % | Volume | Cost | % | Volume % | Cost % | ||||||||||||||||||||||||
Longmen Joint Venture | 4,345,793 | $ | 2,682,411 | 99.1 | % | 2,705,964 | $ | 1,360,743 | 98.0 | % | 60.6 | % | 97.1 | % | ||||||||||||||||||
Other | 283,303 | 25,506 | 0.9 | % | 280,722 | 27,537 | 2.0 | % | 0.9 | % | (7.4 | )% | ||||||||||||||||||||
Total Costs of Goods Sold of General Steel | 4,629,096 | $ | 2,707,917 | 100 | % | 2,986,686 | $ | 1,388,280 | 100 | % | 55.0 | % | 95.1 | % |
290 |
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 85% of our total cost of sales. As a result, the cost of goods sold increased by 115.8% to $1.0 billion, in the third quarter of 2011 from $0.5 billion in the same period of 2010, and increased by 95.1% to $2.7 billion in the nine months ended September 30, 2011 from $1.4 billion in the same period of 2010. The increase is mainly driven by the increasing sales volume and unit costs of raw materials as a result of the rise in iron ore and coke purchase prices for approximately 18.9% and approximately 17.7%, respectively for the three months ended September 30, 2011 as compared to the same period in 2010, and the rise in iron ore and coke purchase prices for approximately 14.6% and approximately 15.4%, respectively for the nine months ended September 30, 2011 as compared to the same period in 2010.
Gross Profit
Three months ended September 30, 2011 compared with three months ended September 30, 2010
GROSS PROFIT | Three months ended | |||||||||||||||||||||||||||
September 30, 2011 | September 30, 2010 | Change | ||||||||||||||||||||||||||
in thousands, except metric tons | Volume | Gross Profit | Margin % | Volume | Gross Profit | Margin % | Gross Profit % | |||||||||||||||||||||
Longmen Joint Venture | 1,484,508 | $ | 35,721 | 3.6 | % | 867,854 | $ | 14,350 | 3.2 | % | 148.9 | % | ||||||||||||||||
Other | 172,654 | (1,671 | ) | (14.8 | )% | 72,707 | (761 | ) | (14.7 | )% | 119.6 | % | ||||||||||||||||
Total Gross Profit of General Steel | 1,657,162 | $ | 34,050 | 3.4 | % | 940,561 | $ | 13,589 | 3.0 | % | 150.6 | % |
Gross profit for the third quarter 2011 increased by 150.6% to $34.1 million, or 3.4% of total sales, compared to $13.6 million, or 3.0% of total sales in the same period in 2010. The increases in gross margin was predominantly attributable to the expanded capacity and production at Longmen Joint Venture resulting in declining unit energy consumption and unit overhead expenses and the additional overhead costs incurred during the construction period of the new iron and steel making facilities in the third quarter of 2010 that we did not incurred such costs in the same period in 2011. In addition, the increase in gross margin also attributable to the percentage increase of average rebar selling price of 23.1% is higher than the percentage increase of iron ore and coke purchase prices of 18.9% and 17.7% for three months ended September 30, 2011 as compared to the same period of 2010.
Nine months ended September 30, 2011 compared with nine months ended September 30, 2010
GROSS PROFIT | Nine months ended | |||||||||||||||||||||||||||
September 30, 2011 | September 30, 2010 | Change | ||||||||||||||||||||||||||
in thousands, except metric tons | Volume | Gross Profit | Margin % | Volume | Gross Profit | Margin % | Gross Profit % | |||||||||||||||||||||
Longmen Joint Venture | 4,345,793 | $ | 61,612 | 2.2 | % | 2,705,964 | $ | 28,495 | 2.1 | % | 116.2 | % | ||||||||||||||||
Other | 283,303 | 827 | 3.1 | % | 280,722 | (1,796 | ) | (7.0 | )% | (146.0 | )% | |||||||||||||||||
Total Gross Profit of General Steel | 4,629,096 | $ | 62,439 | 2.3 | % | 2,986,686 | $ | 26,699 | 1.9 | % | 133.9 | % |
Gross profit for the nine months ended September 30, 2011 increased by 133.9% to $62.4 million from $26.7 million for the same period in 2010. The increase is primarily attributable to the doubled capacity from the two new blast furnaces constructed by Shaanxi Steel at Longmen Joint Venture’s facility under the Unified Management Agreement. Gross profit percentage for the nine months ended September 30, 2011 increased by 0.4% from 1.9% to 2.3%. The increase in gross margin was predominantly attributable to the expanded capacity and production at Longmen Joint Venture resulting from declining unit energy consumption and unit overhead expenses and the additional overhead costs incurred during the construction period of the new iron and steel making facilities in the first nine months of 2010 that we did not incurred such costs starting in April 2011 when the new iron and steel making facilities were launched. In addition, the increase in gross margin also attributable to the percentage increase of average rebar selling price of 26.3% is higher than the percentage increase of iron ore and coke purchase prices of 14.6% and 15.4% for nine months ended September 30, 2011 as compared to the same period of 2010.
The gross margin was higher in the third quarter of 2011 as compared to the second quarter of 2011 was predominantly attributable to the expanded capacity and production at Longmen Joint Venture resulting in declining unit energy consumption and unit overhead expenses as time go by where the new iron and steel making facilities were just recently launched in the second quarter of 2011.
291 |
Selling, General and Administrative Expenses (“SG&A”)
Three months ended September 30, 2011 compared with three months ended September 30, 2010
(in thousands) | Three months ended | |||||||||||
September 30, 2011 | September 30, 2010 | Change % | ||||||||||
Selling, General and Administrative Expenses | $ | (24,309 | ) | $ | (9,560 | ) | 154.3 | % | ||||
SG&A Expenses As of Percentage of Total Revenue | (2.4 | )% | (2.1 | )% |
SG&A expenses, such as executive compensation, office expenses, legal and accounting charges, travel charges and transportation fees increased 154.3% to $24.3 million for the three months ended September 30, 2011, compared to $9.6 million for the same period in 2010.
The increase was mainly due to the rise of transportation and sales agent charges at Longmen Joint Venture related to the increase in production volume, shipment volume and long distance sales deliveries to markets in rural areas in Xian city, Sichuan province and Gansu province as sales expanded to other regions other than the central area of Shaanxi province.
SG&A expenses as a percentage of revenue increased to 2.4% for the third quarter of 2011. The increase in SG&A expenses as a percentage of revenue was due to long distance sales deliveries to markets in the rural areas in Xian city, Sichuan and Gansu for this quarter.
Nine months ended September 30, 2011 compared with nine months ended September 30, 2010
(in thousands) | Nine months ended | |||||||||||
September 30, 2011 | September 30, 2010 | Change % | ||||||||||
Selling, General and Administrative Expenses | $ | (65,843 | ) | $ | (35,373 | ) | 86.1 | % | ||||
SG&A Expenses As of Percentage of Total Revenue | (2.4 | )% | (2.5 | )% |
SG&A expenses, such as impairment of long-lived assets, executive compensation, office expenses, legal and accounting charges, travel charges and transportation fees increased 86.1% to $65.8 million for the nine months ended September 30, 2011, compared to $35.4 million for the same period in 2010.
The increase was mainly due to the rise of transportation and sales agent charges at Longmen Joint Venture related to the increase in production volumes, shipment volume and long distance sales deliveries to markets in the rural area in Xian city, Henan, Hubei, Sichuan and Gansu as sales expanded to other regions other than the central area of Shaanxi province. In addition, we had an impairment charge in the amount of $5.5 million in General Steel (China) in the second quarter of 2011. Refer to “Note 6 - plant and equipment, net” in the Notes to Consolidated Financial Statements for details.
SG&A expenses as a percentage of revenue decreased to 2.4% for the nine months ended September 30, 2011 from 2.5% for the same period in 2010. The decrease in percentage of revenue was due to the increase of sales revenue as a result of expanded production capacity.
Change in Fair Value of Profit Sharing Liability
Three months ended September 30, 2011 compared with three months ended September 30, 2010
(in thousands) | Three months ended | |||||||||||
September 30, | September 30, | |||||||||||
2011 | 2010 | Change % | ||||||||||
(Restated) | ||||||||||||
Change in fair value of profit sharing liability | $ | (5,407 | ) | $ | - | - |
Our profit sharing liability relates to equipment operated by Longmen Joint Venture under a capital lease arrangement. Part of the payments under the capital lease are a portion of our future operating profits. Our estimate of those future profit sharing payments are accounted for as a derivative liability at fair value. We recognized a loss from change in fair value of profit sharing liability of $5.4 million in our loss from operations for the three months ended September 30, 2011 compared to $0 in the same period of 2010 primarily due to the change in fair value related to the passage of time and change in the number of future periods over which the present value of future cash flows was estimated, which we started to incur in May 2011 while we did not have such loss for the three months ended September 30, 2010.
Nine months ended September 30, 2011 compared with nine months ended September 30, 2010
(in thousands) | Nine months ended | |||||||||||
September 30, | September 30, | |||||||||||
2011 | 2010 | Change % | ||||||||||
(Restated) | ||||||||||||
Change in fair value of profit sharing liability | $ | (8,743 | ) | $ | - | - |
292 |
Our profit sharing liability relates to equipment operated by Longmen Joint Venture under a capital lease arrangement. Part of the payments under the capital lease are a portion of our future operating profits. Our estimate of those future profit sharing payments are accounted for as a derivative liability at fair value. We recognized a loss from change in fair value of profit sharing liability of $8.7 million in our loss from operations for the nine months ended September 30, 2011 compared to $0 in the same period of 2010 primarily due to the change in fair value related to the passage of time and change in the number of future periods over which the present value of future cash flows was estimated, which we started to incur in May 2011 while we did not have such loss for the nine months ended September 30, 2010.
Income (Loss) from Operations
Three months ended September 30, 2011 compared with three months ended September 30, 2010
(in thousands) | Three months ended | |||||||||||
September 30, 2011 | September 30, 2010 | Change % | ||||||||||
(Restated) | ||||||||||||
Income from Operations | $ | 4,334 | $ | 4,029 | 7.6 | % |
Nine months ended September 30, 2011 compared with nine months ended September 30, 2010
(in thousands) | Nine months ended | |||||||||||
September 30, 2011 | September 30, 2010 | Change % | ||||||||||
(Restated) | ||||||||||||
Loss from Operations | $ | (12,147 | ) | $ | (8,674 | ) | 40.0 | % |
Income from operations for the three months ended September 30, 2011 increased to $4.3 million from $4.0 million for the same period in 2010. The increase in income from operations was predominantly due to the increase in gross profit caused by the expanded capacity from the two new completed blast furnaces constructed by Shaanxi Steel at Longmen Joint Venture’s facility under the Unified Management Agreement and the additional overhead costs incurred in 2010 which was not incurred after April of 2011 offset by the increase in loss in Change in fair value of profit sharing liability.
Loss from operations for the nine months ended September 30, 2011 increased to $12.1 million from a loss of $8.7 million for the same period in 2010. The increase in loss from operations was due to the combined effect of the $5.5 million impairment loss and the increase in loss in change in fair value of profit sharing liability offset by the increase in gross profit caused by the expanded capacity from the two new completed blast furnaces constructed by Shaanxi Steel at Longmen Joint Venture’s facility under the Unified Management Agreement and the additional overhead costs incurred in 2010 which was not incurred after April of 2011.
Other Income (Expense)
Three months ended September 30, 2011 compared with three months ended September 30, 2010
(in thousands) | Three months ended | |||||||||||
September 30, 2011 | September 30, 2010 | Change % | ||||||||||
(Restated) | ||||||||||||
Interest income | $ | 1,201 | $ | 1,739 | (30.9 | )% | ||||||
Finance/interest expense | (24,497 | ) | (10,190 | ) | 140.4 | % | ||||||
Financing cost on capital lease | (5,177 | ) | - | - | ||||||||
Change in fair value of derivative liabilities - warrants | 135 | (1,089 | ) | (112.4 | )% | |||||||
Gain (loss) on disposal of equipment | 689 | (2,781 | ) | (124.8 | )% | |||||||
Government grant | - | 1,381 | (100.0 | )% | ||||||||
Income from equity investment | 790 | 838 | (5.7 | )% | ||||||||
Foreign currency transaction gain | 1,271 | - | - | |||||||||
Lease income | 525 | 277 | 89.5 | % | ||||||||
Other non-operating income (expense), net | (1,047 | ) | 1,141 | (191.8 | )% | |||||||
Total other expenses, net | $ | (26,110 | ) | $ | (8,684 | ) | 200.7 | % |
Total other expenses, net, for the three months ended September 30, 2011 were $26.1 million, a 200.7% increase compared to $8.7 million for the same period in 2010. The increase in total other expenses, net, was mainly a result of an increase of $19.5 million in financial expense, of which, $5.2 million interest expense on capital lease and $14.3 million interest expense increase was primarily due to increased borrowings during the quarter.
293 |
The foreign currency transaction gain was due to the loans we received in the second quarter of 2011 denominated in US Dollars. Prior to the second quarter of 2011, there were no other transactions denominated in US Dollars and therefore we did not incur any foreign currency gains or losses.
The change in fair value of derivative liabilities for the three months ended September 30, 2011 was a gain of $0.1 million compared to a loss of $1.1 million for the same period in 2010.
Nine months ended September 30, 2011 compared with nine months ended September 30, 2010
(in thousands) | Nine months ended | |||||||||||
September 30, 2011 | September 30, 2010 | Change % | ||||||||||
(Restated) | ||||||||||||
Interest income | $ | 3,080 | $ | 3,476 | (11.4 | )% | ||||||
Finance/Interest expense | (55,035 | ) | (37,617 | ) | 46.3 | % | ||||||
Financing cost on capital lease | (8,539 | ) | - | - | ||||||||
Change in fair value of derivative liabilities - warrants | 5,526 | 13,579 | (59.3 | )% | ||||||||
Gain on debt settlement | 3,430 | - | - | |||||||||
Gain (loss) on disposal of equipment | 679 | (3,124 | ) | (121.7 | )% | |||||||
Government grant | - | 1,381 | (100.0 | )% | ||||||||
Income from equity investment | 4,301 | 4,067 | 5.8 | % | ||||||||
Foreign currency transaction gain | 2,920 | - | - | |||||||||
Lease income | 1,489 | 598 | 149.0 | % | ||||||||
Other non-operating income (expense), net | (1,197 | ) | 2,154 | (155.6 | )% | |||||||
Total other expenses, net | $ | (43,346 | ) | $ | (15,486 | ) | 179.9 | % |
Total other expenses, net, for the nine months ended September 30, 2011 were $43.3 million, a 179.9% increase compared to $15.5 million for the same period in 2010. The difference between the expenses for the nine months ended September 30, 2011 and the same period in 2010 was mainly caused by a combined effect of an increase of $26.0 million in financial expenses, of which, $8.6 million interest expense on capital lease, and $17.4 million interest expense increase was primarily due to increased borrowings, as well as an $8.1 million reductions in income from the change in fair value of derivative liabilities.
The foreign currency transaction gain was due to the loans we received in the second quarter of 2011 denominated in US Dollars. Prior to the second quarter of 2011, there were no other transactions denominated in US Dollars and therefore we did not incur any foreign currency gains or losses.
According to U.S. GAAP, our December 2007 notes, December 2007 warrants and the December 2009 warrants are considered derivatives and therefore are carried at their fair market value at each financial reporting date with any changes in the fair value reported as gains or losses in our income statements. One of the major drivers used to calculate the value of the derivatives is our stock price.
The change in fair value of derivative liabilities for the nine months ended September 30, 2011 was a gain of $5.5 million compared to a gain of $13.6 million for the same period in 2010. This gain was mainly due to a change in the price of our common stock as of September 30, 2011 compared to fiscal year-ended December 31, 2010.
Income Taxes
For the three months ended September 30, 2011 and 2010, we had a total tax provision of $0.6 million and a tax benefit of $0.3 million, respectively.
For the nine months ended September 30, 2011 and 2010, we had a total tax provision of $16.0 million and a tax benefit of $5.1 million, respectively.
During the second quarter of 2011, we determined that the majority of our deferred tax assets will not be realizable and provided 100% valuation allowance for the deferred tax assets at Longmen Joint Venture. As such, our effective tax rate for the nine months ended September 30, 2011 is -28.8%, which is significantly lower than three months ended September 30, 2011 effective tax rate of -2.5%. See detail discussion in the section of “Deferred taxes assets – China”.
294 |
For the three months ended September 30, 2011 and 2010, we had effective tax rates of -2.5% and 7.4%, respectively. The negative effective tax rate for the three months ended September 30, 2011 is mainly due to a consolidated loss before income tax while we provided 100% valuation allowance for the deferred tax assets at Longmen Joint Venture and we incurred income tax expenses in our profitable subsidiaries. The positive effective tax rate for the three months ended September 30, 2010 is mainly due to a consolidated loss before income tax while we recognized the deferred tax assets that were incurred from the net operating losses to be carrying forwards.
For the nine months ended September 30, 2011 and 2010, we had effective tax rates of -28.8% and 21.0%, respectively. The reason of the decrease in effective tax rates is consistent with the decrease for the three month period in the foregoing paragraph.
Net Loss
Three months ended September 30, 2011 compared with three months ended September 30, 2010
(in thousands) | Three months ended | |||||||||||
September 30, 2011 | September 30, 2010 | Change % | ||||||||||
Net Loss | $ | (22,330 | ) | (4,311 | ) | 418.0 | % |
Nine months ended September 30, 2011 compared with nine months ended September 30, 2010
(in thousands) | Nine months ended | |||||||||||
September 30, 2011 | September 30, 2010 | Change % | ||||||||||
Net Loss | $ | (71,494 | ) | (19,076 | ) | 274.8 | % |
Net Loss attributable to General Steel Holdings, Inc.
Three months ended September 30, 2011 compared with three months ended September 30, 2010
(in thousands) | Three months ended | |||||||||||
September 30, 2011 | September 30, 2010 | Change % | ||||||||||
Net Loss | $ | (22,330 | ) | $ | (4,311 | ) | 418.0 | % | ||||
Less:Net Loss Attributable to the Noncontrolling Interest | (8,500 | ) | (527 | ) | 1,512.9 | % | ||||||
Net Loss Attributable to General Steel Holdings, Inc. | $ | (13,830 | ) | $ | (3,784 | ) | 265.5 | % |
Net loss attributable to us for the three months ended September 30, 2011 increased to $13.8 million compared to $3.8 million for the same period in 2010. The increase in net loss attributable to us for three months ended September 30, 2011 was mainly a result of the combined effect of an increase of $5.5 million in impairment charge on equipment, an increase of $10.6 million in interest expense on the capital lease and increase in $14.3 million interest expense on bank borrowings offset by income from operations of $9.7 million.
Nine months ended September 30, 2011 compared with nine months ended September 30, 2010
(in thousands) | Nine months ended | |||||||||||
September 30, 2011 | September 30, 2010 | Change % | ||||||||||
Net Loss | $ | (71,494 | ) | $ | (19,076 | ) | 274.8 | % | ||||
Less:Net Loss Attributable to the Noncontrolling Interest | (25,832 | ) | (7,676 | ) | 236.5 | % | ||||||
Net Loss Attributable to General Steel Holdings, Inc. | $ | (45,662 | ) | $ | (11,400 | ) | 300.5 | % |
Net loss attributable to us for the nine months ended September 30, 2011 increased to $45.7 million compared to of $11.4 million for the same period in 2010. The increase in net loss attributable to us for nine months ended September 30, 2011 was mainly a result of the combined effect of an increase of $5.5 million in impairment charge on equipment, an increase of $17.3 million in interest expense on the capital lease, and an increase of $17.4 million interest on increased borrowings.
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.
295 |
Results of Operations for the Three Months Ended June 30, 2011
Sales
Three months ended June 30, 2011 compared with three months ended June 30, 2010
The following table sets forth sales revenue and volume in metric tons for our Longmen Joint Venture.
SALES REVENUE | Three months ended | |||||||||||||||||||||||||||||||
June 30, 2011 | June 30, 2010 | Change | Change | |||||||||||||||||||||||||||||
in thousands, except metric tons | Volume | Revenue | % | Volume | Revenue | % | Volume % | Revenue % | ||||||||||||||||||||||||
Longmen Joint Venture | 1,691,971 | $ | 1,047,863 | 98.7 | % | 928,380 | $ | 499,361 | 99.5 | % | 82.2 | % | 109.8 | % | ||||||||||||||||||
Other | 91,024 | 13,868 | 1.3 | % | 82,375 | 2,318 | 0.5 | % | 10.5 | % | 498.3 | % | ||||||||||||||||||||
Total Revenue of General Steel | 1,782,995 | $ | 1,061,731 | 100 | % | 1,010,755 | $ | 501,679 | 100 | % | 76.4 | % | 111.6 | % |
Total sales revenue for the three months ended June 30, 2011 increased 111.6% to $1.1 billion from $0.5 billion for the same period in 2010. The increase in sales revenue compared to the same period in 2010 is predominantly due to the combined effects of increased production volume and average selling price. Sales volume increased 76.4% to 1.8 million metric tons, compared to 1.0 million metric tons in the same period in 2010. The average selling price of rebar increased 20.0% to approximately $595.5 per ton in the second quarter of 2011 from approximately $496.3 per ton in the same period of 2010.
Longmen Joint Venture comprised approximately 98.7% of total sales for the second quarter 2011, compared with 99.5% in the same period in 2010. Production volume of rebar at Longmen Joint Venture reached 1.7 million metric tons for the second quarter 2011, which increased 82.2% compared with 0.9 million metric tons in the same period in 2010. The increase of Longmen Joint Venture’s production was mainly due to the additional capacity contributed from the new blast furnaces brought online in January 2011 through our cooperation with Shaanxi Steel and Shaanxi Coal under the Agreement. Our current total monthly production volume is approximately 555,000 tons of crude steel.
The Company’s five major customers are all distributors and collectively represented approximately 40.6% of the Company’s total sales for the three months ended June 30, 2011 as compared to 24.5% of the Company’s total sales for the three months ended June 30, 2010. These five customers include related parties and major distributors owned by central government. As we are the largest supplier in Shaanxi province, we normally maintained a good relationship with them to stabilize our sales channel.
Six months ended June 30, 2011 compared with six months ended June 30, 2010
The following table sets forth sales revenue and volume in metric tons for our Longmen Joint Venture.
SALES REVENUE | Six months ended | |||||||||||||||||||||||||||||||
June 30, 2011 | June 30, 2010 | Change | Change | |||||||||||||||||||||||||||||
in thousands, except metric tons | Volume | Revenue | % | Volume | Revenue | % | Volume % | Revenue % | ||||||||||||||||||||||||
Longmen Joint Venture | 2,861,285 | $ | 1,757,169 | 99.2 | % | 1,838,111 | $ | 934,187 | 97.9 | % | 55.7 | % | 88.1 | % | ||||||||||||||||||
Other | 110,649 | 15,026 | 0.8 | % | 208,014 | 20,515 | 2.1 | % | (46.8 | )% | (26.8 | )% | ||||||||||||||||||||
Total Revenue of General Steel | 2,971,934 | $ | 1,772,195 | 100 | % | 2,046,125 | $ | 954,702 | 100 | % | 45.2 | % | 85.6 | % |
Total sales revenue for the six months ended June 30, 2011 increased 85.6% to $1.8 billion from $1.0 billion for the same period in 2010. The increase sales revenue compared to the same period in 2010 is predominantly due to the combined effects of increased sales volume and average selling price. Sales volume increased 45.2% compared to the same period in 2010. The average selling price increased 27.8% to approximately $596.3 per ton in the first half of 2011 from approximately $466.6 per ton in the same period of 2010.
Longmen Joint Venture comprised approximately 99.2% of total sales for the first half of 2011, compared with 97.9% in the same period in 2010. Production volume of rebar in Longmen Joint Venture reached 2.9 million metric tons for the first half of 2011, which increased 55.7% compared with 1.8 million metric tons in the same period in 2010. The increase of Longmen Joint Venture’s production was mainly due to the abovementioned additional capacity contributed from the new blast furnaces brought online in January 2011.
The Company’s five major customers are all distributors and collectively represented approximately 36.4% of the Company’s total sales for the six months ended June 30, 2011 as compared to 27.3% of t he Company’s total sales for the six months ended June 30, 2010. These five customers include related parties and major distributors owned by central government. As we are the largest supplier in Shaanxi province, we normally maintained a good relationship with them to stabilize our sales channel.
296 |
Cost of Goods Sold
Three months ended June 30, 2011 compared with three months ended June 30, 2010
COSTS of GOODS SOLD | Three months ended | |||||||||||||||||||||||||||||||
June 30, 2011 | June 30, 2010 | Change | Change | |||||||||||||||||||||||||||||
in thousands, except metric tons | Volume | Cost | % | Volume | Cost | % | Volume % | Cost % | ||||||||||||||||||||||||
Longmen Joint Venture | 1,691,971 | $ | 1,024,531 | 98.7 | % | 928,380 | $ | 491,241 | 99.4 | % | 82.2 | % | 108.6 | % | ||||||||||||||||||
Other | 91,024 | 13,860 | 1.3 | % | 82,375 | 3,074 | 0.6 | % | 10.5 | % | 350.9 | % | ||||||||||||||||||||
Total Costs of Goods Sold of General Steel | 1,782,995 | $ | 1,038,391 | 100 | % | 1,010,755 | $ | 494,315 | 100 | % | 76.4 | % | 110.1 | % |
Six months ended June 30, 2011 compared with six months ended June 30, 2010
COSTS of GOODS SOLD | Six months ended | |||||||||||||||||||||||||||||||
June 30, 2011 | June 30, 2010 | Change | Change | |||||||||||||||||||||||||||||
in thousands, except metric tons | Volume | Cost | % | Volume | Cost | % | Volume % | Cost % | ||||||||||||||||||||||||
Longmen Joint Venture | 2,861,285 | $ | 1,728,239 | 99.1 | % | 1,838,111 | $ | 920,042 | 97.7 | % | 55.7 | % | 87.8 | % | ||||||||||||||||||
Other | 110,649 | 15,567 | 0.9 | % | 208,014 | 21,550 | 2.3 | % | (46.8 | )% | (27.8 | )% | ||||||||||||||||||||
Total Costs of Goods Sold of General Steel | 2,971,934 | $ | 1,743,806 | 100 | % | 2,046,125 | $ | 941,592 | 100 | % | 45.2 | % | 85.2 | % |
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 85% of our total cost of sales. As a result, the cost of goods sold increased by 110.1% to $1.0 billion, in the second quarter of 2011 from $0.5 billion in the same period of 2010, and increased by 85.2% to $1.7 billion in the first half year of 2011 from $0.9 billion in the same period of 2010. The increase is mainly driven by the increasing sales volume and unit costs of raw materials as a result of the rise in iron ore and coke purchase prices for approximately 5.9% and approximately 12.2%, respectively for the three months ended June 30, 2011 as compared to the same period in 2010, and the rise in iron ore and coke purchase prices for approximately 12.9% and approximately 14.4%, respectively for the six months ended June 30, 2011 as compared to the same period in 2010.
Gross Profit
Three months ended June 30, 2011 compared with three months ended June 30, 2010
GROSS PROFIT | Three months ended | |||||||||||||||||||||||||||
June 30, 2011 | June 30, 2010 | Change | ||||||||||||||||||||||||||
in thousands, except metric tons | Volume | Gross Profit | Margin % | Volume | Gross Profit | Margin % | Gross Profit % | |||||||||||||||||||||
Longmen Joint Venture | 1,691,971 | $ | 23,332 | 2.2 | % | 928,380 | $ | 8,116 | 1.6 | % | 187.5 | % | ||||||||||||||||
Other | 91,024 | 8 | 0.1 | % | 82,375 | (752 | ) | (32.4 | )% | (101.1 | )% | |||||||||||||||||
Total Gross Profit of General Steel | 1,782,995 | $ | 23,340 | 2.2 | % | 1,010,755 | $ | 7,364 | 1.5 | % | 216.9 | % |
Gross profit for the second quarter 2011 increased by 216.9% to $23.3 million, or 2.2% of total sales, compared to $7.4 million, or 1.5% of total sales in the same period in 2010. The increase in gross margin was predominantly attributable to the increase in the average selling price of rebar and the expanded capacity and production at Longmen Joint Venture resulting in declining unit energy consumption and unit overhead expenses.
297 |
Six months ended June 30, 2011 compared with six months ended June 30, 2010
GROSS PROFIT | Six months ended | |||||||||||||||||||||||||||
June 30, 2011 | June 30, 2010 | Change | ||||||||||||||||||||||||||
in thousands, except metric tons | Volume | Gross Profit | Margin % | Volume | Gross Profit | Margin % | Gross Profit % | |||||||||||||||||||||
Longmen Joint Venture | 2,861,285 | $ | 28,930 | 1.6 | % | 1,838,111 | $ | 14,145 | 1.5 | % | 104.5 | % | ||||||||||||||||
Other | 110,649 | (541 | ) | (3.6 | )% | 208,014 | (1,035 | ) | (5.0 | )% | (47.7 | )% | ||||||||||||||||
Total Gross Profit of General Steel | 2,971,934 | $ | 28,389 | 1.6 | % | 2,046,125 | $ | 13,110 | 1.4 | % | 116.5 | % |
Gross profit for the six months ended June 30, 2011 increased by 116.5% to $28.4 million from $13.1 million for the same period in 2010. The increase is primarily attributable to the doubled capacity from the two new blast furnaces constructed by Shaanxi Steel at Longmen Joint Venture’s facility under the Agreement.
The gross margin was higher in the second quarter of 2011 as compared to the first quarter of 2011 due to the additional overhead costs incurred during the construction period of the new iron and steel making facilities in the first quarter of 2011 that we did not incurred such costs after April 2011.
Selling, General and Administrative (‘SG&A”) Expenses
Three months ended June 30, 2011 compared with three months ended June 30, 2010
(in thousands) | Three months ended | |||||||||||
June 30, 2011 | June 30, 2010 | Change % | ||||||||||
Selling, General and Administrative Expenses | $ | (27,033 | ) | $ | (13,677 | ) | 97.7 | % | ||||
SG&A Expenses as a Percentage of Total Revenue | (2.5 | )% | (2.7 | )% |
SG&A expenses, such as impairment of long-lived assets, executive compensation, office expenses, legal and accounting charges, travel charges, transportation fees and various taxes increased 97.7% to $27.0 million for the three months ended June 30, 2011, compared to $13.7 million for the same period in 2010.
The increase was mainly due to the rise of transportation and sales agent charges at Longmen Joint Venture related to the increase in shipment volume and long distance sales deliveries to markets in Henan, Hubei and Chongqing as sales expansion to other region other than Shaanxi province as a result of the increase in production volume. In addition, we had an impairment charge in the amount of $5.4 million in General Steel (China) in the second quarter of 2011. Refer to “Note 6- plant and equipment, net” for details.
SG&A expenses as a percentage of revenue decreased to 2.5% for the second quarter of 2011. The decrease in SG&A expenses as a percentage of revenue was due to the increase of sales revenue as a result of expanded production capacity
Six months ended June 30, 2011 compared with six months ended June 30, 2010
(in thousands) | Six months ended | |||||||||||
June 30, 2011 | June 30, 2010 | Change % | ||||||||||
Selling, General and Administrative Expenses | $ | (41,534 | ) | $ | (25,813 | ) | 60.9 | % | ||||
SG&A Expenses as a Percentage of Total Revenue | (2.3 | )% | (2.7 | )% |
SG&A expenses, such as impairment of long-lived assets , executive compensation, office expenses, legal and accounting charges, travel charges, transportation fees and various taxes increased 60.9% to $41.5 million for the six months ended June 30, 2011, compared to $25.8 million for the same period in 2010.
The increase was mainly due to the rise of transportation and sales agent charges at Longmen Joint Venture related to the increase in shipment volume and long distance sales deliveries to markets in Henan, Hubei and Chongqing. In addition, we had an impairment charge in the amount of $5.4 million in General Steel (China) in the second quarter of 2011. Refer to “Note 6- plant and equipment, net” in the Notes to Condensed Consolidated Financial Statements for details.
298 |
SG&A expenses as a percentage of revenue decreased to 2.3% for the six months ended June 30, 2011 from 2.7% for the same periods in 2010. The decrease in SG&A expenses as a percentage of revenue was due to the increase of sales revenue as a result of expanded production capacity.
Change in Fair Value of Profit Sharing Liability
Three months ended June 30, 2011 compared with three months ended June 30, 2010
(in thousands) | Three months ended | |||||||||||
June 30, | June 30, | |||||||||||
2011 | 2010 | Change % | ||||||||||
(Restated) | ||||||||||||
Change in fair value of profit sharing liability | $ | (3,336 | ) | $ | - | - |
Our profit sharing liability relates to equipment operated by Longmen Joint Venture under a capital lease arrangement. Part of the payments under the capital lease are a portion of our future operating profits. Our estimate of those future profit sharing payments are accounted for as a derivative liability at fair value. We recognized a loss from change in fair value of profit sharing liability of $3.3 million in our loss from operations for the three months ended June 30, 2011 compared to $0 in the same period of 2010 primarily due to the change in fair value related to the passage of time and change in the number of future periods over which the present value of future cash flows was estimated, which we started to incur in May 2011 while we did not have such loss for the three months ended June 30, 2010.
Six months ended June 30, 2011 compared with six months ended June 30, 2010
(in thousands) | Six months ended | |||||||||||
June 30, | June 30, | |||||||||||
2011 | 2010 | Change % | ||||||||||
(Restated) | ||||||||||||
Change in fair value of profit sharing liability | $ | (3,336 | ) | $ | - | - |
Our profit sharing liability relates to equipment operated by Longmen Joint Venture under a capital lease arrangement. Part of the payments under the capital lease are a portion of our future operating profits. Our estimate of those future profit sharing payments are accounted for as a derivative liability at fair value. We recognized a loss from change in fair value of profit sharing liability of $3.3 million in our loss from operations for the six months ended June 30, 2011 compared to $0 in the same period of 2011 primarily due to the change in fair value related to the passage of time and change in the number of future periods over which the present value of future cash flows was estimated, which we started to incur in May 2011 while we did not have such loss for the six months ended June 30, 2010.
Loss from Operations
Three months ended June 30, 2011 compared with three months ended June 30, 2010
(in thousands) | Three months ended | |||||||||||
June 30, 2011 | June 30, 2010 | Change % | ||||||||||
(Restated) | ||||||||||||
Loss from Operations | $ | (7,029 | ) | $ | (6,313 | ) | 11.3 | % |
Six months ended June 30, 2011 compared with six months ended June 30, 2010
(in thousands) | Six months ended | |||||||||||
June 30, 2011 | June 30, 2010 | Change % | ||||||||||
(Restated) | ||||||||||||
Loss from Operations | $ | (16,481 | ) | $ | (12,703 | ) | 29.7 | % |
Loss from operations for the three months ended June 30, 2011 increased to $7.0 million from $6.3 million for the same period in 2010. The increase in loss from operations for the three months ended June 30, 2011 was due to the combined effect of the $5.4 million impairment loss, the increase in transportation and sales agent charges expenses and the increase in $3.3 million loss in change in fair value of profit sharing liability offset by the increase in gross profit caused by the higher average selling price of rebar and expanded capacity from two new completed blast furnaces constructed by Shaanxi Steel at Longmen Joint Venture’s facility under the Agreement.
Loss from operations for the six months ended June 30, 2011 increased to $16.5 million from $12.7 million for the same period in 2010. The increase in loss from operations for the six months ended June 30, 2011 was due to the combined effect of the $5.4 million impairment loss, the increase in transportation and sales agent charges expenses and the increase in $3.3 million loss in change in fair value of profit sharing liability offset by the increase in gross profit caused by the higher average selling price of rebar and expanded capacity from two newly completed blast furnaces constructed by Shaanxi Steel at Longmen Joint Venture’s facility under the Agreement
299 |
Other Income (Expense)
Three months ended June 30, 2011 compared with three months ended June 30, 2010
(in thousands) | Three months ended | |||||||||||
June 30, 2011 | June 30, 2010 | Change % | ||||||||||
(Restated) | ||||||||||||
Interest income | $ | 816 | $ | 617 | 32.3 | % | ||||||
Finance/Interest expense | (16,419 | ) | (16,464 | ) | (0.3 | )% | ||||||
Financing cost on capital lease | (3,362 | ) | - | - | ||||||||
Change in fair value of derivative liabilities - warrants | 1,839 | 10,729 | (82.9 | )% | ||||||||
Gain from debt extinguishment | 3,430 | - | - | |||||||||
Loss on disposal of fixed assets | 387 | (227 | ) | (270.5 | )% | |||||||
Income from equity investments | 1,856 | 3,074 | (39.6 | )% | ||||||||
Foreign currency transaction gain | 1,030 | - | - | |||||||||
Lease income | 512 | 184 | 178.3 | % | ||||||||
Other non-operating income (expense), net | (455 | ) | 855 | (153.2 | )% | |||||||
Total other expenses, net | $ | (10,366 | ) | $ | (1,232 | ) | 741.4 | % |
Total other expenses, net, for the three months ended June 30, 2011 were $10.4 million, a 741.4 % increase compared to $1.2 million for the same period in 2010. The increase in total other expenses, net, was mainly a result of the combined effect of an increase of $3.4 million in interest expense on the capital lease and a decrease of $8.9 million in the change in fair value of derivative liabilities, a decrease of $1.2 million in income from equity investments, offset by an increase of $3.4 million gain from debt extinguishment.
The foreign currency transaction gain was due to the loans we received in the second quarter of 2011 denominated in US Dollars. Prior to the second quarter of 2011, there were no other transactions denominated in US Dollars and therefore we did not incur any foreign currency gains or losses.
Six months ended June 30, 2011 compared with six months ended June 30, 2010
(in thousands) | Six months ended | |||||||||||
June 30, 2011 | June 30, 2010 | Change % | ||||||||||
(Restated) | ||||||||||||
Interest income | $ | 1,879 | $ | 1,737 | 8.2 | % | ||||||
Finance/Interest expense | (30,538 | ) | (27,427 | ) | 11.3 | % | ||||||
Financing cost on capital lease | (3,362 | ) | - | - | ||||||||
Change in fair value of derivative liabilities - warrants | 5,391 | 14,668 | (63.2 | )% | ||||||||
Gain from debt extinguishment | 3,430 | - | - | |||||||||
Gain on disposal of equipment | (10 | ) | (343 | ) | (97.1 | )% | ||||||
Income from equity investments | 3,511 | 3,229 | 8.7 | % | ||||||||
Foreign currency transaction gain | 1,649 | - | - | |||||||||
Lease income | 964 | 320 | 201.3 | % | ||||||||
Other non-operating income (expense), net | (150 | ) | 1,014 | (114.8 | )% | |||||||
Total other expenses, net | $ | (17,236 | ) | $ | (6,802 | ) | 153.4 | % |
Total other expenses, net, for the six months ended June 30, 2011 were $17.2 million, a 153.4% increase compared to $6.8 million for the same period in 2010. The difference between the expenses for the six months ended June 30, 2011 and the same period in 2010 was mainly caused by a combined effect of an increase of $6.5 million in financial expenses consists of $3.1 million interest expense on bank loans and $3.4 million in interest expense on the capital lease and a decrease of $9.3 million in change in fair value of derivative liabilities, offset by an increase of $3.4 million gain from debt extinguishment.
According to U.S. GAAP, our December 2007 notes, December 2007 warrants and the December 2009 warrants are considered derivatives and therefore are carried at their fair market value at each financial reporting date with any changes in the fair value reported as gains or losses in our income statements. One of the major drivers used to calculate the value of the derivatives is our stock price.
The change in fair value of derivative liabilities for the three months ended June 30, 2011 was a gain of $1.8 million compared to a gain of $10.7 million for the same period in 2010. The change in fair value of derivative liabilities for the six months ended June 30, 2011 was a gain of $5.4 million compared to a gain of $14.7 million for the same period in 2010. This gain was mainly due to a change in the price of our common stock as of June 30, 2011 compared to fiscal year-ended December 31, 2010.
300 |
Income Taxes
For the three months ended June 30, 2011 and 2010, we had a total tax provision of $18.2 million and a tax benefit of $2.8 million, respectively.
For the six months ended June 30, 2011 and 2010, we had a total tax provision of $15.4 million and a tax benefit of $4.7 million, respectively.
During the second quarter of 2011, we determined that the majority of our deferred tax assets will not be realizable and provided 100% valuation allowance for the deferred tax assets at Longmen Joint Venture. As such, our effective tax rate for the three months ended June 30, 2011 is -104.6%, which is significantly lower than the six months ended June 30, 2011 effective tax rate of -45.8% that included the deferred tax assets that were incurred from the net operating losses to be carrying forwards during the first quarter of 2011. See detail discussion in the section of “Deferred taxes assets – China”.
For the three months ended June 30, 2011 and 2010, we had effective tax rates of -104.6% and 37.2%, respectively. The negative effective tax rate for the three months ended June 30, 2011 is mainly due to a consolidated loss before income tax while we provided 100% valuation allowance for the deferred tax assets at Longmen Joint Venture. The positive effective tax rate for the three months ended June 30, 2010 is mainly due to a consolidated loss before income tax while we recognized the deferred tax assets that were incurred from the net operating losses to be carrying forwards.
For the six months ended June 30, 2011 and 2010, we had effective tax rates of -45.8% and 24.3%, respectively. The reason of the decrease in effective tax rates is consistent with the decrease for the three month period in the foregoing paragraph.
Net Loss
Three months ended June 30, 2011 compared with three months ended June 30, 2010
(in thousands) | Three months ended | |||||||||||
June 30, 2011 | June 30, 2010 | Change % | ||||||||||
Net Loss | $ | (35,593 | ) | (4,742 | ) | 650.6 | % |
Six months ended June 30, 2011 compared with six months ended June 30, 2010
(in thousands) | Six months ended | |||||||||||
June 30, 2011 | June 30, 2010 | Change % | ||||||||||
Net Loss | $ | (49,164 | ) | (14,765 | ) | 233.0 | % |
Net Loss attributable to General Steel Holdings, Inc.
Three months ended June 30, 2011 compared with three months ended June 30, 2010
(in thousands) | Three months ended | |||||||||||
June 30, 2011 | June 30, 2010 | Change % | ||||||||||
Net Loss | $ | (35,593 | ) | $ | (4,742 | ) | 650.6 | % | ||||
Less :Net Loss Attributable to the Noncontrolling Interest | (12,678 | ) | (2,738 | ) | 363.0 | % | ||||||
Net Loss Attributable to General Steel Holdings, Inc. | $ | (22,915 | ) | $ | (2,004 | ) | 1,043.5 | % |
Net loss attributable to us for the three months ended June 30, 2011 increased 1,043.5% to $22.9 million compared to $2.0 million for the same period in 2010. The increase in net loss attributable to us for three months ended June 30, 2011 was mainly a result of the combined effect of an increase of $5.4 million in impairment charge on equipment, an increase of $6.7 million in interest expense on the capital lease and a decrease of $8.9 million in the change in fair value of derivative liabilities, offset by an increase of $3.4 million gain from debt extinguishment.
301 |
Six months ended June 30, 2011 compared with six months ended June 30, 2010
(in thousands) | Six months ended | |||||||||||
June 30, 2011 | June 30, 2010 | Change % | ||||||||||
Net Loss | $ | (49,164 | ) | $ | (14,765 | ) | 233.0 | % | ||||
Less :Net Loss Attributable to the Noncontrolling Interest | (17,332 | ) | (7,149 | ) | 142.4 | % | ||||||
Net Loss Attributable to General Steel Holdings, Inc. | $ | (31,832 | ) | $ | (7,616 | ) | 318.0 | % |
Net loss attributable to us for the six months ended June 30, 2011 increased 318.0% to $31.8 million compared to of $7.6 million for the same period in 2010. The increase in net loss attributable to us for six months ended June 30, 2011 was mainly a result of the combined effect of an increase of $5.4 million in impairment charge on equipment, an increase of $16.9 million in interest expense on the capital lease and a decrease of $9.3 million in change in fair value of derivative liabilities, offset by an increase of $3.4 million gain from debt extinguishment.
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, our current liabilities exceeded the current assets by approximately $1.1 billion. Given our expected capital expenditure in the foreseeable future, we have comprehensively considered our available sources of funds as follows:
· | Financial support and credit guarantee from related parties; and |
· | Other available sources of financing from domestic banks and other financial institutions given our credit history. |
Based on the above considerations, management and our Board of Directors is of the opinion that we have sufficient funds to meet our working capital requirements and debt obligations as they become due. As a result, our unaudited condensed consolidated financial statements for the period ended September 30, 2013 have been prepared on a going concern basis.
As of September 30, 2013, we had cash and restricted cash aggregating $467.9 million, of which $405.8 million was restricted.
We believe our cash flows generated from operations and financing, which include customer prepayments and vendor financing, existing cash balances, and credit facilities will be adequate to finance our working capital requirements, fund capital expenditures, make required debt and interest payments, pay taxes, and support our operating strategies.
The steel business is capital intensive and we utilize leverage greater than our industry peers, which we believe enables us to generate revenue compared to our shareholder equity at a rate higher than our industry peers. We utilize leverage in the form of credit from banks, vendor financing and customer deposits and from other sources. This blended form of financing reduces our reliance on any single source.
Substantially all our operations are conducted in China and all of our revenues are denominated in Renminbi (RMB). RMB 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's exchange control regulations that restrict its ability to convert RMB into U.S. Dollars.
Under applicable PRC regulations, foreign-invested enterprises in the PRC 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 PRC is required to set aside at least 10.0% of its after-tax profit based on PRC accounting standards each year to its general reserves until the accumulative amount of such reserves reaches 50.0% of its registered capital. These reserves are not distributable as cash dividends. The board of directors of a foreign-invested enterprise has the discretion to allocate a portion of its after-tax profits to staff welfare and bonus funds, which may not be distributed to equity owners except in the event of liquidation. Under PRC law, RMB is currently convertible into U.S. Dollars under a company’s “current account,” which includes dividends, trade and service-related foreign exchange transactions, without prior approval of the State Administration of Foreign Exchange (SAFE), but is not from a company’s “capital account,” which includes foreign direct investments and loans, without the prior approval of the SAFE.
As of September 30, 2013, the amount of our restricted net assets in our profitable subsidiaries in the PRC was $29.3 million.
We have previously raised money in the U.S. capital markets which provides the capital needed for our operation 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 operation of our Company and General Steel Investment.
302 |
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 July 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 by 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, we had $988.0 million in short-term notes payable liabilities, which were secured by restricted cash of $405.8 million and restricted notes receivable of $237.2 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, we had $254.9 million in short-term bank loans. These were bank loans with a one year maturity and must be paid in full upon maturity. PRC banks have not been impacted as heavily by the financial crisis as U.S. banks and we believe our current creditors will renew their loans to us after our loans mature as they did in the past.
We are able to repay our short-term notes payables and short term bank loans upon maturity using available capital resources.
For more details about our debt, see Note 10 in our Notes to the unaudited condensed consolidated financial statements included in this report.
For more details about our related party debt financing, see Note 21 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, 2013, 2012, 2011 and 2010 amounted to $166.3 million, $307.1 million, $297.4 million, and $178.3 million respectively, which were eliminated in our consolidated financial statements. The financial cost related to financing sales for the three months ended September 30, 2013, 2012, 2011 and 2010 amounted to $1.1 million, $2.1 million, $2.1 million, and $1.5 million, respectively.
Total financing sales for the nine months ended September 30, 2013, 2012, 2011 and 2010 amounted to $519.5 million, $600.8 million, $705.2 million and $576.5 million, respectively, which were eliminated in our consolidated financial statements. The financial cost related to financing sales for the three months ended September 30, 2013, 2012, 2011 and 2010 amounted to $4.2 million, $6.8 million, $6.1 million and $5.5 million, respectively.
Total financing sales for the three months ended June 30, 2013, 2012, 2011 and 2010 amounted to $188.1 million, $149.5 million, $248.1 million and $211.1 million, respectively, which were eliminated in our consolidated financial statements. The financial cost related to financing sales for the three months ended June 30, 2013, 2012, 2011 and 2010 amounted to $1.5 million, $3.5 million, $2.3 million and $2.2 million, respectively.
303 |
Total financing sales for the six months ended June 30, 2013, 2012, 2011 and 2010 amounted to $353.3 million, $293.7 million, $407.8 million and $398.2 million, respectively, which were eliminated in our consolidated financial statements. The financial cost related to financing sales for the three months ended June 30, 2013, 2012, 2011 and 2010, amounted to $3.1 million, $4.7 million, $3.9 million and $4.0 million, respectively.
Total financing sales for the three months ended March 31, 2013, 2012 and 2011 amounted to $165.2 million, $144.2 million and $159.7 million, respectively, which were eliminated in our consolidated financial statements. The financial cost related to financing sales for the three months ended March 31, 2013, 2012 and 2011 amounted to $1.6 million, $1.2 million and $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, 2013, June 30, 2013, March 31, 2013, December 31, 2012, September 30, 2012, June 30, 2012, March 31, 2012, December 31, 2011, September 30, 2011 and June 30, 2011 and December 30, 2010 were (6.6), (5.9), (6.7), (7.1), (8.1), (10.1), (13.6), (19.8), 56.1, 33.0 and 13.8, respectively. As of September 30, 2013, our current liabilities exceed current assets (excluding non-cash item) by $1.1 billion.
Longmen Joint Venture, as our most important operating subsidiary, accounted for the 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.
With the financial support from the banks and the companies above, 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. 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 |
As a result, the unaudited condensed consolidated financial statements for the nine month period ended September 30, 2013 have been prepared on a going concern basis.
Cash-flow
Nine months ended September 30, 2013 compared with nine months ended September 30, 2012
Operating Activities
Net cash provided by operating activities for the nine months ended September 30, 2013 was $14.0 million as compared to net cash used in operating activities of $90.1 million in the same period of 2012. This change was mainly due to the combination of the following factors:
· | The impact of some non-cash items included in net loss of $(16.7) million as compared to $97.4 million in the same period in 2012. The non-cash items include the following: |
- | Depreciation, amortization and depletion; |
- | change in fair value of derivative liabilities - warrants; |
- | (gain) loss on disposal of equipment; |
- | provision for doubtful accounts; |
- | reservation of mine maintenance fee; |
- | stock issued for service and compensation; |
- | amortization of deferred financing cost on capital lease; |
- | loss from equity investments; |
- | foreign currency transaction gain; |
- | deferred tax assets; |
- | deferred lease income; and |
- | change in fair value of profit sharing liability. |
· | The primary reasons for the material fluctuations in cash inflow were as follows: |
- | Notes receivable: The decrease of notes receivable was mainly due to our acceptance of fewer notes receivables as a substitute for cash receipts during the nine months ended September 30, 2013; |
- | Accounts receivable – related parties: The decrease of accounts receivable – related parties was mainly due to the decrease in sales to related parties while we sold less rebar to these related parties during the first nine months ended September 30, 2013; |
- | Inventory: The decrease in inventories in the nine months of 2013 was mainly due to the continued decrease in the cost of raw materials and increase in the consumption of raw materials to keep up with the increased sales volume and construction projects; |
- | Accounts payable: The increase in accounts payable was mainly due to Longmen Joint Venture making more purchases during the nine months ended September 30, 2013 as compared to the same period in 2012. Pursuant to the supplier financing agreements signed between Longmen Joint Venture and its suppliers, those suppliers agreed not to demand certain cash payment for a certain period. |
· | The primary reasons for material fluctuations in cash outflow were as follows: |
- | Other receivables – related parties: The increase was mainly due to an increase in receivables incurred with related parties for equipment we sold to these related parties and for cash flow purpose for doing business on our behalf; |
- | 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; |
- | Other payables, including related parties: The decrease in other payables, including related parties was mainly due to an increase in payables being paid to various third parties and related parties in the nine months ended September 30, 2013 compared to the prior year; and |
- | Customer deposits, including related parties: The decrease was mainly due to the Chinese and global steel industry over-capacity which led to lower demands of our products from our customers, as such, we received fewer advanced payments made by our customers. |
Investing activities
Net cash used in investing activities was $146.6 million and $123.2 million for the nine months ended September 30, 2013 and 2012, respectively. 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. Restricted cash was used as a pledge for our notes payable as required by the bank. In the first nine months of 2013, such balance increased along with the increase in the outstanding balance of notes payable to settle with our suppliers.
Financing activities
Net cash provided by financing activities was $146.8 million and 175.4 million for the nine months ended September 30, 2013 and 2012, respectively. Compared to the same period in 2012, the increase of cash inflow from financing activities was mainly driven by the following:
· | Capital contributed by noncontrolling interest: On August 16, 2013, additional capital of $45.1 million (or RMB 280 million) was contributed 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, the noncontrolling shareholder. Our controlling interest in Tianwu Joint Venture remains 60%; |
304 |
· | Short term loans: We borrowed more from banks and related parties for the nine months ended September 30, 2013 as compared to the same period in 2012. |
The cash inflow was offset by the following cash outflow:
· | Short term notes payable: We repaid fewer notes payable to banks for the nine months ended September 30, 2013 as they became due as compared to the same period in 2012 and borrowed fewer notes payable from the banks during the period as we utilized more vendor financing during this period, which allowed us to decrease our borrowings on notes payable; |
· | Short term loans: We repaid fewer loans to third parties for the nine months ended September 30, 2013 as they became due as compared to the same period in 2012; and |
· | Current maturities of long-term loans – related party: We repaid more current maturities of long-term loans to our related party for the nine months ended September 30, 2013 as they became due as compared to the same period in 2012. |
There are no restrictions to distribute or transfer other funds from General Steel Investment to us.
We have never declared or paid any cash dividends to our shareholders. If there are any declaration and payment of dividends, this, as well as the amount of dividends declared and paid will be subject to our By-Laws, charter and applicable Chinese and U.S. state and federal laws, including the approval from the shareholders of each subsidiary which intends to declare such dividends, if applicable.
Six months ended June 30, 2013 compared with six months ended June 30, 2012
Operating Activities
Net cash used in operating activities for the six months ended June 30, 2013 was $61.4 million as compared to $99.6 million in the same period of 2012. This change was mainly due to the combination of the following factors:
· | The impact of some non-cash items included in net loss of $3.8 million as compared to $63.1 million in the same period in 2012. The non-cash items include the following: |
- | Depreciation, amortization and depletion; |
- | change in fair value of derivative liabilities - warrants; |
- | (gain) loss on disposal of equipment; |
- | provision for doubtful accounts; |
- | reservation of mine maintenance fee; |
- | stock issued for service and compensation; |
- | amortization of deferred financing cost on capital lease; |
- | loss from equity investments; |
- | foreign currency transaction gain; |
- | deferred tax assets; |
- | deferred lease income; and |
- | change in fair value of profit sharing liability. |
· | The primary reasons for the material fluctuations in cash inflow were as follows: |
- | Accounts receivable – related parties: The decrease of accounts receivable – related parties was mainly due to the decrease in sales to related parties while we have collected more of accounts receivable from these related parties during the six months ended June 30, 2013; |
- | Inventory: The decrease in inventories in the six months of 2013 was mainly due to the continued decrease in the cost of raw materials and increase in the consumption of raw materials to keep up with the increased sales volume; |
- | Advances on inventory purchases: The decrease was mainly due to Longmen Joint Venture making fewer advance payments to third party suppliers for raw material purchases during the six months ended June 30, 2013; and |
- | Accounts payable, including related parties: The increase in accounts payable was mainly due to Longmen Joint Venture making more purchases during the six months ended June 30, 2013 as compared to the same period in 2012. The increase in accounts payable – related parties was mainly due to Longmen Joint Venture paid less to its suppliers during the second quarter of 2013. Pursuant to the supplier financing agreements signed between Longmen Joint Venture and its suppliers, those suppliers agreed not to demand certain cash payment for a certain period. |
· | The primary reasons for material fluctuations in cash outflow were as follows: |
- | Notes receivable: The increase in notes receivable in the six months ended June 30, 2013 was mainly due to more customers using notes as a form of payment as compared to the same period in 2012; |
305 |
- | Accounts receivable: The increase in the first six months of 2013 was mainly due to increase in sales to third parties; |
- | 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; |
- | Other payable – related parties: The decrease in other payable – related parties was mainly due to more payables being paid to related parties in the six months ended June 30, 2013 compared to the prior year; and |
- | Customer deposits, including related parties: The decrease was mainly due to the China and global steel industry over-capacity which led to lower demands of our products from our customers, as such, we received fewer advanced payments made by our customers. |
Investing activities
Net cash used in investing activities was $102.2 million and $98.4 million for the six months ended June 30, 2013 and 2012, respectively. Fluctuation in cash outflow between the two periods was mainly due to the decrease of restricted cash and the increase in constructions in process as the construction of two new rebar production lines are near completion. Restricted cash was used as a pledge for our notes payable as required by the bank. In the first six months of 2013, such balance decreased because we needed fewer notes payable to settle with our suppliers. In addition, the decrease in cash used was also due to $69.3 million loans to related parties being given in the first six months of 2012 while no additional loans were granted to related parties in the same period in 2013.
Financing activities
Net cash provided by financing activities was $183.9 million and 134.2 million for the six months ended June 30, 2013 and 2012, respectively. Compared to the same period in 2012, the increase of cash inflow from financing activities was mainly driven by the following:
· | Restricted notes receivable: The decrease of restricted notes receivable was mainly due to our strategy of using more of vendors financing by legally postponing our payments to our vendors during the six months ended June 30, 2013. |
· | Short term loans: We borrowed more from related parties for the six months ended June 30, 2013 as compared to the same period in 2012. |
The cash inflow was offset by the following cash outflow:
· | Short term notes payable: We repaid fewer notes payable to banks for the six months ended June 30, 2013 as they became due as compared to the same period in 2012 and borrowed fewer notes payable from the banks during the period as we utilized more vendor financing during this period, which allowed us to decrease our borrowings on notes payable; and |
· | Short term loans: We repaid fewer loans to banks and third parties for the six months ended June 30, 2013 as they became due as compared to the same period in 2012 and borrowed less from banks and third parties as well. |
There are no restrictions to distribute or transfer other funds from General Steel Investment to us.
We have never declared or paid any cash dividends to our shareholders. If there are any declaration and payment of dividends, this, as well as the amount of dividends declared and paid will be subject to our By-Laws, charter and applicable Chinese and U.S. state and federal laws, including the approval from the shareholders of each subsidiary which intends to declare such dividends, if applicable.
Three months ended March 31, 2013 compared with three months ended March 31, 2012
Operating Activities
Net cash provided by operating activities for the three months ended March 31, 2013 was $3.9 million as compared to net cash used in operating activities of $167.0 million in the same period of 2012. This change was mainly due to the combination of the following factors:
· | The impact of some non-cash items included in net income (loss) of $20.9 million, compared to $(31.3) million in the same period in 2012. The non-cash items include the following: |
- | Depreciation, amortization and depletion; |
- | change in fair value of derivative liabilities - warrants; |
- | (Gain) loss on disposal of equipment; |
- | provision for doubtful accounts; |
- | reservation of mine maintenance fee; |
- | stock issued for service and compensation; |
- | amortization of deferred financing cost on capital lease; |
- | loss from equity investments; |
306 |
- | foreign currency transaction gain; |
- | deferred tax assets; |
- | deferred lease income; and |
- | change in fair value of profit sharing liability. |
· | The primary reasons for the material fluctuations in cash inflow were as follows: |
- | Notes receivable: The decrease of notes receivable was mainly due to the collection of notes receivable when they became due during the three months ended March 31, 2013; |
- | Advances on inventory purchases: The decrease was mainly due to Longmen Joint Venture making fewer advance payments to third party suppliers for raw material purchases during the three months ended March 31, 2013; and |
- | Accounts payable, including related parties: The increase in accounts payable was mainly due to Longmen Joint Venture making more purchases during the three months ended March 31, 2013 as compared to the same period in 2012. The increase in accounts payable – related parties was mainly due to Longmen Joint Venture paid less to its suppliers during the first quarter of 2013. Pursuant to the supplier financing agreements signed between Longmen Joint Venture and its suppliers, those suppliers agreed not to demand certain cash payment for a certain period. |
· | The primary reasons for material fluctuations in cash outflow were as follows: |
- | Accounts receivable: The increase in the first three months of 2013 was mainly due to increase in sales to third parties; |
- | Inventory: The increase in inventories in the first three months of 2013 was mainly due to the increase in finished goods inventories as compared to the stocking level as of December 31, 2012. The sales volume for the first three months of the year was lower compared to the rest of the year due to Chinese holidays in February 2013. In addition, as the cost of raw materials continues to drop slightly during the first three months of 2013, we continued to stock up our raw materials by keeping them at a minimal level to meet our production needs; |
- | 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 |
- | Customer deposits, including related parties: The decrease was mainly due to the China and global steel industry over-capacity which led to lower demands of our products from our customers, as such, we received fewer advanced payments made by our customers. |
Investing activities
Net cash provided by investing activities was $30.9 million for the three months ended March 31, 2013 compared to net cash used in investing activities of $133.1 million for the three months ended March 31, 2012. Fluctuation in cash outflow between the two periods was mainly due to the decrease of restricted cash. Restricted cash was used as a pledge for our notes payable as required by the bank. In the first three months of 2013, such balance decreased because we needed fewer notes payable to settle with our suppliers. In addition, the decrease in cash used was also due to $65.4 million loans to related parties being given in the first three months of 2012 while no additional loans were granted to related parties in the same period in 2013.
Financing activities
Net cash used in financing activities was $15.7 million for the three months ended March 31, 2013 compared to net cash provided by financing activities of $264.2 million for the three months ended March 31, 2012. Compared to the same period in 2012, the decrease of cash inflow from financing activities was mainly driven by the following:
· | Restricted notes receivable: The decrease of restricted notes receivable was mainly due to positive operating cash flows in the first quarter of 2013 allowing us to decrease borrowings on notes payable and bank loans, for which the notes were restricted, as of March 31, 2013; and |
· | Short term loans – related parties: We borrowed more from related parties for the three months ended March 31, 2013 as compared to the same period in 2012. |
The cash inflow was offset by the following cash outflow:
· | Short term notes payable: We repaid more notes payable to banks for the three months ended March 31, 2013 as they became due compared to the same period in 2012 and borrowed fewer notes payable from the banks during the quarter as we generated positive operating cash flows in the first quarter of 2013 allowing us to decrease borrowings on notes payable; and |
· | Short term loans: We repaid more money to banks and other parties for the three months ended March 31, 2013 as they became due compared to the same period in 2012 and borrowed fewer short term loans from the banks and other parties during the quarter as we generated positive operating cash flows in the first quarter of 2013 allowing us to decrease borrowings on short term loans. |
307 |
There are no restrictions to distribute or transfer other funds from General Steel Investment to us.
We have never declared or paid any cash dividends to our shareholders. If there are any declaration and payment of dividends, this, as well as the amount of dividends declared and paid will be subject to our By-Laws, charter and applicable Chinese and U.S. state and federal laws, including the approval from the shareholders of each subsidiary which intends to declare such dividends, if applicable.
Nine months ended September 30, 2012 compared with nine months ended September 30, 2011
Operating Activities
Net cash used in operating activities for the nine months ended September 30, 2012 was $90.1 million compared to net cash provided by operating activities of $87.2 million in the same period of 2011. This change was mainly due to the combination of the following factors:
· | The impact of some non-cash items included in net income of $97.4 million, compared to $68.7 million in the same period in 2011. The non-cash items include the following: |
- | Depreciation, amortization and depletion; |
- | Impairment of plant and equipment |
- | change in fair value of derivative liabilities - warrants; |
- | change in fair value of profit sharing liability; |
- | Gain on debt settlement; |
- | loss on disposal of equipment; |
- | bad debt allowance; |
- | reservation of mine maintenance fee; |
- | stock issued for service and compensation; |
- | amortization of deferred financing cost on capital lease; |
- | income from equity investments; |
- | foreign currency transaction gain (loss); |
- | deferred tax assets; and |
- | deferred lease income. |
· | The primary reasons for the material fluctuations in cash inflow were as follows: |
- | Inventories: The decrease of inventories was mainly due to the significant decline in iron ore and coke purchase prices during the third quarter of 2012. As such, we did not stock our raw materials and instead kept them at the minimal level required to meet our production needs to minimize our risk of a further drop in iron ore and coke, which would potentially reduce our manufacturing cost during the fourth quarter of 2012; |
- | Accounts payable – related parties: The increase in accounts payable – related parties was mainly due to Longmen Joint Venture paying less as compared to the same period in 2011. Pursuant to the supplier financing agreements signed between Longmen Joint Venture and its suppliers, those suppliers agreed not to demand certain cash payment; |
- | Other payables and accrued liabilities, including related parties: The increase in other payables and accrued liabilities was mainly due to the increase of payables to our vendors for our equipment maintenance fee incurred during the nine months ended September 30, 2012. The increase in other payables – related parties was mainly due to Longmen Joint Venture paying less to its related parties during the nine months ended September 30, 2012. Pursuant to the related party financing agreements signed between Longmen Joint Venture and those related parties, they agreed not to demand certain cash payment; and |
- | Customer deposits – related parties: The increase in customer deposits – related parties was mainly to our related parties customers making prepayment to us prior to the end of third quarter of 2012. These deposits were immediately recognized as sales after September 30, 2012 in accordance with our sales recognition policy. |
· | The primary reasons for material fluctuations in cash outflow were as follows: |
- | Notes receivable: In order to increase and promote sales, we encouraged our customers to settle their payments by notes receivable, which resulted in an increase in notes receivable during the first nine months of 2012; |
- | Accounts receivable - related parties: The increase in the first nine months of 2012 was mainly due to fewer payments collected from sales made to related parties; |
- | Advances on inventory purchases, including related parties: The increase was mainly due to the fact that more advance payments were made for raw material purchases to meet future production capacity. Advance payment is a prevailing requirement on iron ore purchases in the steel production industry; |
308 |
- | Accounts payables: The decrease was mainly due to the payments that we made to our vendors when the credit terms were due while we were holding off our payments to our related parties vendors as discussed in the operating cash inflow section. In addition, we made an adjustment to reduce some of our accounts payables that we accrued in prior periods in related to our construction project upon completion of the project; and |
- | Customer deposits: The decrease was mainly due to the Chinese and global steel industry over-capacity which led to lower demands from our customers on our products, as such, we received fewer advanced payments made by our customers. |
Investing activities
Net cash used in investing activities was $123.2 million for the nine months ended September 30, 2012 compared to net cash used in investing activities of $42.7 million for the nine months ended September 30, 2011. Fluctuation in cash outflow between the two periods was mainly due to the increase of restricted cash. Restricted cash was used as a pledge for our notes payable as required by the bank. In the first nine months of 2012, such balance increased because we needed more notes payable to settle with suppliers. In addition, the increase in cash used was also due to more purchase payments made on equipment purchase in the first nine months of 2012 compared to the same period in 2011. Furthermore, $3.0 million cash held on Hancheng Tongxing Metallurgy Co., Ltd was deconsolidated on March 1, 2012.
Financing activities
Net cash provided by financing activities was $175.4 million for the nine months ended September 30, 2012 compared to net cash used in financing activities of $17.1 million for the nine months ended September 30, 2011. Compared to the same period in 2011, the increase of cash inflow from financing activities was mainly driven by the following:
· | Notes receivable – restricted: The decrease of notes receivable was mainly due to more notes receivable became due and collected by banks during the nine months ended September 30, 2012. |
The cash inflow was offset by the following cash outflow:
· | Short Term Notes Payable: We repaid more notes payable to banks for the nine months ended September 30, 2012 as they became due compared to the same period in 2011 as more of our notes payable were dues. |
· | Short Term Loan: We repaid more money to banks and other parties for the nine months ended September 30, 2012 as they became due compared to the same period in 2011. |
There are no restrictions to distribute or transfer other funds from General Steel Investment to us.
We have never declared or paid any cash dividends to our shareholders. If there are any declaration and payment of dividends, this, as well as the amount of dividends declared and paid will be subject to our By-Laws, charter and applicable Chinese and U.S. state and federal laws, including the approval from the shareholders of each subsidiary which intends to declare such dividends, if applicable.
Six months ended June 30, 2012 compared with six months ended June 30, 2011
Operating Activities
Net cash used in operating activities for the six months ended June 30, 2012 was $99.6 million compared to net cash used in operating activities of $8.5 million in the same period of 2011. This change was mainly due to the combination of the following factors:
· | The impact of some non-cash items included in net income of $63.1 million, compared to $42.1 million in the same period in 2011. The non-cash items included the following: |
- | Depreciation, amortization and depletion; |
- | Impairment of plant and equipment |
- | change in fair value of derivative liabilities; |
- | change in fair value of profit sharing liability - warrants; |
- | Gain on debt settlement |
- | loss on disposal of equipment; |
- | bad debt allowance; |
- | reservation of mine maintenance fee; |
- | stock issued for service and compensation; |
- | amortization of deferred financing cost on capital lease; |
- | income from equity investments; |
- | foreign currency transaction gain (loss); |
- | deferred tax assets; and |
- | deferred lease income. |
309 |
· | The primary reasons for the material fluctuations in cash inflow were as follows: |
- | Notes receivable: The decrease of notes receivable was mainly due to the collection of notes receivable that became due during the six months ended June 30, 2012; |
- | Other receivables – related party: The decrease in other receivables – related parties was mainly due to the return of funds from our related parties as they were no longer using the money performing business transactions on behalf of us; |
- | Accounts payable – related parties: The increase in accounts payable – related parties was mainly due to Longmen Joint Venture has tightened their payments to related parties as compared to the same period in 2011. Pursuant to the supplier financing agreements signed between Longmen Joint Venture and its suppliers, those suppliers agreed not to demand certain cash payment; and |
- | Other payables – related parties: The increase in other payables – related parties was mainly due to Longmen Joint Venture paying less to its related parties during the six months ended June 30, 2012. Pursuant to the related party financing agreements signed between Longmen Joint Venture and those related parties, they agreed not to demand certain cash payment. |
· | The primary reasons for material fluctuations in cash outflow were as follows: |
- | Accounts receivable, including related parties: The increase in the first six months of 2012 was mainly due to fewer payments collected from sales made to third parties and related parties; |
- | Inventories: The increase of inventories in the first six months of 2012 was mainly due to the increase of finished goods inventories as compared to the stocking level as of December 31, 2011 because the sales volume for the six months ended June 30, 2012 decreased. In addition, as the cost of raw materials continued to drop slightly during the first six months of 2012, we continued to stock up our raw materials by keeping them at a minimal level to meet our production needs; |
- | Advances on inventory purchases, including related parties: The increase was mainly due to the fact that more advance payments were made for raw material purchases to meet future production capacity. Advance payment is a prevailing requirement on iron ore purchases in the steel production industry; |
- | Accounts payables: The decrease was mainly due to the payments that we made to our vendors when the credit terms were due while we were holding off our payments to our related parties vendors as discussed in the operating cash inflow section. In addition, we made an adjustment to reduce reversed some of our accounts payable we accrued in prior periods which related to our construction project upon completion of the project; and |
- | Customer deposits, including related parties: The decrease was mainly due to the Chinese and global steel industry over-capacity which led to lower demands from our customers on our products, as such, we received fewer advanced payments made by our customers. |
Investing activities
Net cash used in investing activities was $98.4 million for the six months ended June 30, 2012 compared to net cash used in investing activities of $15.4 million for the six months ended June 30, 2011. Fluctuation in cash outflow between the two periods was mainly due to the increase of restricted cash. Restricted cash was used as a pledge for our notes payable as required by the bank. In the first six months of 2012, such balance increased because we needed more notes payable to settle with suppliers. We also loaned $69.3 million to our related parties, on which we were earning interest on these loans. In addition, the increase in cash used was also due to more advance or purchase payments made on equipment purchase in the first six months of 2012 compared to the same period in 2011. Furthermore, $3.0 million cash held on Hancheng Tongxing Metallurgy Co., Ltd was deconsolidated on March 1, 2012.
Financing activities
Net cash provided by financing activities was $134.2 million for the six months ended June 30, 2012 compared to net cash provided by financing activities of $33.0 million for the six months ended June 30, 2011. Compared to the same period in 2011, the increase of cash inflow from financing activities was mainly driven by the following:
· | Notes receivable - restricted: The decrease of notes receivable was mainly due to more notes receivable became due and collected by banks during the six months ended June 30, 2012. |
The cash inflow was offset by the following cash outflow:
· | Short Term Notes Payable: We repaid more notes payable to banks for the six months ended June 30, 2012 as they became due compared to the same period in 2011 as more of our notes payable were dues. |
· | Short Term Loan: We repaid more money to banks and other parties for the six months ended June 30, 2012 as they became due compared to the same period in 2011. |
310 |
There are no restrictions to distribute or transfer other funds from General Steel Investment to us.
We have never declared or paid any cash dividends to our shareholders. If there are any declaration and payment of dividends, this, as well as the amount of dividends declared and paid will be subject to our By-Laws, charter and applicable Chinese and U.S. state and federal laws, including the approval from the shareholders of each subsidiary which intends to declare such dividends, if applicable.
Three months ended March 31, 2012 compared with three months ended March 31, 2011
Operating Activities
Net cash used in operating activities for the three months ended March 31, 2012 was $167.0 million compared to net cash provided by operating activities of $54.1 million in the same period of 2011. This change was mainly due to the combination of the following factors:
· | The impact of some non-cash items included in net income of $31.3 million, compared to $7.6 million in the same period in 2011. The non-cash items included the following: |
- | Depreciation, amortization and depletion; |
- | change in fair value of derivative liabilities - warrants; |
- | change in fair value of profit sharing liability; |
- | loss on disposal of equipment; |
- | bad debt allowance; |
- | reservation of mine maintenance fee; |
- | stock issued for service and compensation; |
- | amortization of deferred financing cost on capital lease; |
- | income (loss) from equity investments; |
- | foreign currency transaction gain; |
- | deferred tax assets; and |
- | deferred lease income. |
· | The primary reasons for the material fluctuations in cash inflow were as follows: |
- | Notes receivable: The decrease of notes receivable was mainly due to the collection of notes receivable when they became due during the three months ended March 31, 2012; |
- | Accounts payable – related parties: The increase in accounts payable – related parties was mainly due to Longmen Joint Venture paying less to our related parties as compared to the same period in 2011. Pursuant to the supplier financing agreements signed between Longmen Joint Venture and its suppliers, those suppliers agreed not to demand certain cash payment; and |
- | Other payables – related party: The increase in other payables – related parties was mainly due to Longmen Joint Venture paying less to our related parties as compared to the same period in 2011. Pursuant to the related party financing agreements signed between Longmen Joint Venture and those related parties, they agreed not to demand certain cash payment. |
· | The primary reasons for material fluctuations in cash outflow were as follows: |
- | Accounts receivable, including related parties: The increase in the first three months of 2012 was mainly due to fewer payments collected from sales made to third parties and related parties; |
- | Other receivables, related parties: The increase in the first three months of 2012 was mainly due to the increase of interest receivable from our related parties and funding to one of our related parties and the balance was repaid during the second quarter of 2012; |
- | Inventories: The increase in inventories in the first three months of 2012 was mainly due to the increase in finished goods inventories as compared to the stocking level as of December 31, 2011 because the sales volume for the three months ended March 31, 2012 decreased. In addition, as the cost of raw materials continues to drop slightly during the first three months of 2012, we continued to stock up our raw materials by keeping them at a minimal level to meet our production needs; |
- | Advances on inventory purchases, including related parties: The increase was mainly due to the fact that more advance payments were made for raw material purchases to meet future production capacity. Advance payment is a prevailing requirement on iron ore purchases in the steel production industry; |
- | Accounts payables: The decrease was mainly due to the payments that we made to our vendors when the credit terms were due while we were holding off our payments to our related parties vendors as discussed in the operating cash inflow section. In addition, we made an adjustment to reduce our accounts payable we accrued in prior periods which related to our construction project upon completion of the project; and |
- | Customer deposits, including related parties: The decrease was mainly due to the Chinese and global steel industry over-capacity which led to lower demands from our customers on our products, and as such, we received fewer advanced payments made by our customers. |
311 |
Investing activities
Net cash used in investing activities was $133.1 million for the three months ended March 31, 2012 compared to net cash used in investing activities of $15.3 million for the three months ended March 31, 2011. Fluctuation in cash outflow between the two periods was mainly due to the increase of restricted cash. Restricted cash was used as a pledge for our notes payable as required by the bank. In the first three months of 2012, such balance increased because we needed more notes payable to settle with suppliers. We also loaned $65.3 million to our related parties, for which we were earning interest on these loans. In addition, the increase in cash used was also due to more advance or purchase payments made on equipment purchase in the first three months of 2012 compared to the same period in 2011. Furthermore, $3.0 million cash held on Hancheng Tongxing Metallurgy Co., Ltd was deconsolidated on March 1, 2012.
Financing activities
Net cash provided by financing activities was $264.2 million for the three months ended March 31, 2012 compared to net cash used in financing activities of $14.6 million for the three months ended March 31, 2011. Compared to the same period in 2011, the increase of cash inflow from financing activities was mainly driven by the following:
· | Notes receivable - restricted: The decrease of notes receivable was mainly due to more notes receivable became due and collected by banks during the three months ended March 31, 2012. |
· | Short Term Notes Payable: We issued more notes payable to banks for the three months ended March 31, 2012 as they became due compared to the same period in 2011. We collected more notes receivable resulting from our sales transaction and more of our notes receivable were pledged when settling with our suppliers with notes payable. |
· | Short Term Loan: We borrowed more money from banks, related parties and other parties for the three months ended March 31, 2012 as they became due compared to the same period in 2011. |
There are no restrictions to distribute or transfer other funds from General Steel Investment to us.
We have never declared or paid any cash dividends to our shareholders. If there are any declaration and payment of dividends, this, as well as the amount of dividends declared and paid will be subject to our By-Laws, charter and applicable Chinese and U.S. state and federal laws, including the approval from the shareholders of each subsidiary which intends to declare such dividends, if applicable.
Nine months ended September 30, 2011 compared with nine months ended September 30, 2010
Operating Activities
Net cash used in operating activities for the nine months ended September 30, 2011 was an inflow of $87.2 million compared to an outflow of $103.1 million in the same period of 2010. This change was mainly due to the combination of the following factors:
· | The impact of some non-cash items included in net income of $68.7 million, compared to $18.0 million in the same period in 2010. The non-cash items include the following: |
- | depreciation and amortization; |
- | impairment of plant and equipment; |
- | bad debt allowance; |
- | stock issued for service and compensation; |
- | make whole share interest expenses on notes conversion; |
- | change in fair value of derivative liabilities - warrants; |
- | change in fair value of profit sharing liability; |
- | gain on stock issued as loan repayment; |
- | gain/loss on disposal of equipment; |
- | amortization of deferred note issuance cost and discount on convertible notes; |
- | amortization of deferred financing cost on capital lease; |
- | income from equity investments; |
- | deferred tax assets; |
- | deferred lease income; and |
- | foreign currency transaction gain. |
312 |
· | The primary reasons for the material fluctuations in cash inflow are as follows: |
- | Inventories: The decrease of inventories in the first nine months of 2011 is mainly due to the de-stocking of raw material inventories as the raw material inventory reached its peak on December 31, 2010 because we were stocking for expanded capacity from our new blast furnaces while we are no longer stocking raw materials as of September 30, 2011, despite the increase in finished goods as a result of the increased daily production volume after the two new furnaces were put to use in May 2011. In addition, as the cost of raw materials continues to rise during the first nine months of 2011, we did not intend to stock up our raw materials by keeping them at a minimal level to meet our production needs. |
- | Account payable: The increase in accounts payable is mainly due to the increased raw material purchase as a result of the launch of full-scale production at Longmen Joint Venture in May 2011. |
- | Customer deposits: The increase is mainly due to increased sales during the nine months ended September 30, 2011 and we received more advanced payments made by our customers. |
· | The primary reasons for material fluctuations in cash outflow are as follows: |
- | Accounts receivable, including related parties: The increased in the first nine months of 2011 is mainly due to sales increases during the same period. |
- | Other receivables, including related parties: The increase of other receivable is due to the payment made to the Bureau of Land and Resource in Zhashui County for the land use rights deposit made on behalf of another party. The increase of other receivable – related parties in the first nine months of 2011 is mainly due to the increase of reimbursement for the costs and economic losses incurred during the construction of the new iron and steel making facilities to be reimbursed by Shaanxi Steel. |
- | Advances on inventory purchases, including related parties: The increase is mainly due to the fact that more advance payments were made to the suppliers for raw material purchases to meet the higher production capacity. Advance payment is a prevailing requirement on iron ore purchases in the steel production industry. |
Investing activities
Net cash used in investing activities was $42.7 million for the nine months ended September 30, 2011 compared to net cash used in investing activities of $56.7 million for the nine months ended September 30, 2010. Fluctuation in cash outflow between the two periods was mainly due to the decrease of restricted cash. Restricted cash is used as a pledge for our notes payable as required by the bank. In the first nine months of 2011, such balance decreased, because we settled with suppliers using more notes receivable endorsement in order to reduce financing costs on notes payable in 2011 or pledging our note receivable to issuing notes payable. In addition, the decrease in cash used is also due to less payments made on equipment purchase in the first nine months of 2011 since the relocation of production line was nearly completed in June 2011, whereas more advances and payments were paid on equipment purchase in the same period in 2010 for the production line relocated from Maoming Hengda to Longmen Joint Venture, which improved the useful life of the production line, as well as the quality of the inventories and efficiency of the production as a result of technical updates.
Financing activities
Net cash used in financing activities was $17.1 million for the nine months ended September 30, 2011 compared to net cash provided by financing activities of $118.1 million for the nine months ended September 30, 2010. Compared to the same period in 2010, the decrease of cash inflow from financing activities was mainly driven by the following:
· | Notes Receivable-Restricted: In the first nine months of 2011, we collected more note receivables as a result from our sales transaction and more of our notes receivable were pledged when settling with our supplies with notes payable, which resulted in the increase in our total restricted notes receivable in the first nine months of 2011. |
· | Short Term Loan: We borrowed more money from banks for the nine months ended September 30, 2011 compared to the same period in last year. |
· | Deposits due to sales representative: The decrease in deposits collected from sales representatives is a result of changing our deposit policy. Longmen Joint Venture entered into agreements with various entities to act as our exclusive sales agents in specified geographic areas. These exclusive sales agents must meet certain criteria and are required to deposit a certain amount of money with our Company. In return, the sales agents receive exclusive sales rights in a specified area and discounted prices on products they order . In order to reduce such interest expenses, we changed the deposit policy at the beginning of 2011 by reducing the deposit amount from $9-12 million to $2 million for four to five large strategic distributors, which resulted in a decrease in the deposits due to sales representative. After the change in the deposit policy, our sales representative is no longer charging us interest on their deposits. |
We recognize on our balance sheet, all the equipment constructed by Shaanxi Steel at Longmen Joint Venture’s facility for a price of $579.2 million through a 20 year capital lease starting from April 29, 2011 upon the inception of the Unified Management Agreement. We do not expect to make payments on the profit sharing liabilities until year 2021 when Longmen Joint Venture will start to generating accumulated profit after recovering from the previous years’ losses.
313 |
There are no restrictions to distribute or transfer other funds from General Steel Investment to us.
We have never declared or paid any cash dividends to our shareholders. If there are any declaration and payment of dividends, this, as well as the amount of dividends declared and paid will be subject to our By-Laws, charter and applicable Chinese and U.S. state and federal laws, including the approval from the shareholders of each subsidiary which intents to declare such dividends, if applicable.
Six months ended June 30, 2011 compared with six months ended June 30, 2010
Operating Activities
Net cash used in operating activities for the six months ended June 30, 2011 was a net outflow of $8.5 million compared to a net outflow of $45.4 million in the same period of 2010. This change was mainly due to the combination of the following factors:
· | The impact of non-cash items included in net income (loss) of $42.1 million compared to ($0.4) million in the same period in 2010. The non-cash items include the following: |
- | depreciation and amortization; |
- | impairment of long-lived assets; |
- | stock issued for service and compensation; |
- | change in fair value of derivative liabilities - warrants; |
- | change in fair value of profit sharing liability; |
- | loss on disposal of equipment; |
- | gain on stock issued as loan repayment; |
- | finance expense on capital lease, income from equity investments; |
- | deferred tax assets; |
- | deferred lease income; and |
- | foreign currency transaction gain. |
· | The primary reasons for the material fluctuations in cash inflow are as follows: |
- | Account payable: The increase in accounts payable is mainly due to increased raw material purchases as a result of the launch of full-scale production at Longmen Joint Venture in May 2011. |
- | Customer deposits: The increase is mainly due to increased sales during the six months ended June 30, 2011 and we received more advances payments made by our customers. |
- | Tax payable: the increase is mainly due to the decrease in pre-paid value-added tax as a result of the accelerated verification process by the local tax bureau in 2011. |
· | The primary reasons for material fluctuations in cash outflow are as follows: |
- | Notes receivable: In order to increase and promote sales, we encourage our customers to settle their payments by notes receivable, which resulted in an increase in notes receivable in the first six months of 2011, compared to the same period in 2010. |
- | Account receivable – related parties: Increased in the first six months of 2011 is due to the sales transactions occurred right before the balance sheet date of this report. The receivable balances were subsequently collected in July 2011. |
- | Inventories: The increase of inventories in the first six months of 2011 is less than the increase of inventories in the same period last year because we were in the process of building more raw material inventories at June 30, 2010 through the end of 2010, which exceeded the effect of greater finished goods as at June 30, 2011 as a result of the increased daily production volume after the two new furnaces were put to use in May 2011. |
- | Advances on inventory purchases: The increase is mainly due to the fact that more advance payments were made to suppliers for raw material purchases to secure our raw materials needs to meet the higher production capacity. Advance payment is a prevailing requirement on iron ore purchases in the steel production industry. |
Investing activities
Net cash used in investing activities was $15.4 million for the six months ended June 30, 2011 compared to cash outflow of $117.6 million for the six months ended June 30, 2010. Fluctuation in cash outflow between the two periods was mainly due to the decrease of restricted cash. Restricted cash is used as a pledge for our notes payable as required by the bank. In the first six months of 2011, such balance decreased, because our Company settled with suppliers using more notes receivable endorsement rather than issuing notes payable in order to reduce financing costs on notes payable in 2011. The notes payable increased in the same period last year due to increased purchases as a result of the expanding business. In addition, the decrease in cash used is also due to less advances being paid on equipment purchases in the first six months of 2011 since the relocation of the production lines was nearly completed in June 2011, whereas more advances were paid on equipment purchase in the same period in 2010 for the production line relocated from Maoming Hengda to Longmen Joint Venture, which improved the useful life of the production line, as well as the quality of the inventories and efficiency of the production as a result of technical updates.
314 |
Financing activities
Net cash provided by financing activities was $33.0 million for the six months ended June 30, 2011 compared to net cash provided by financing activities of $131.8 million for the six months ended June 30, 2010. Compared to the same period in 2010, the decrease of cash inflow from financing activities was mainly driven by the following:
· | Notes Receivable-Restricted: Instead of pledging our notes receivable to the banks, we increased the notes receivable endorsement when settling with our suppliers, thus reducing the total restricted notes receivable in the first six months of 2011. However in 2010, more of our notes receivable were pledged than our notes payable, which resulted in the decrease in our total restricted notes receivable in the first six months of 2011. |
· | Short Term Loans: We borrowed more money from banks to meet our working capital needs due to the increased capacity for the six months ended June 30, 2011 compared to the same period in last year. |
Notes Payable: The decrease in notes payable is consistent with the decrease in restricted cash as we paid off more notes payable in the second quarter of 2011. In addition, in order to reduce financing costs, we have been settling with our suppliers using more notes receivable endorsement, therefore, fewer notes payable were issued compared to the same period in 2010.
· | Deposits due to sales representative: The decrease in deposits collected from sales representatives is a result of changing our deposit policy. Longmen Joint Venture entered into agreements with various entities to act as 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. In order to reduce such interest expenses, we changed the deposit policy at the beginning of 2011 by reducing the deposit amount from $9-12 million to $2 million for four to five large strategic distributors, which resulted in a decrease in the deposits due to sales representative. |
We recognize on our balance sheet, all the equipment constructed by Shaanxi Steel at Longmen Joint Venture’s facility for a price of $572.5 million through a 20 year capital lease starting from April 29, 2011 upon the inception of the Unified Management Agreement. We do not expect to make payments on the profit sharing liability until year 2021 when Longmen Joint Venture will start to generating accumulated profit after recovering from the previous years’ losses
There are no restrictions on distributions or transferring other funds from General Steel Investment to the Company.
We have never declared or paid any cash dividends to our shareholders. If there are any declarations and payment of dividends, this, as well as the amount of dividends declared and paid will be subject to our By-Laws, charter and applicable Chinese and U.S. state and federal laws, including the approval from the shareholders of each subsidiary which intends to declare such dividends, if applicable.
Shelf Registration SEC Form S-3
On October 22, 2009, our shelf registration statement on Form S-3, for an aggregate offering amount of $60 million, was declared effective by the SEC. In December 2009, we consummated a registered direct offering using the Form S-3 shelf registration statement to issue common stock and warrants. We may sell the remaining securities registered on such Form S-3 to or through underwriters, directly to investors, through agents or any combination of the foregoing.
Each time we offer securities under our Form S-3 shelf registration statement, we will file a prospectus supplement with the SEC containing more specific information about the particular offering. The prospectus supplements may also add, update or change information contained in this prospectus. The Form S-3 shelf registration statement may not be used to offer or sell securities without a prospectus supplement which includes a description of the method of sale and terms of the offering.
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.
315 |
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, 2013 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, 2013 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 |
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.
316 |
As of September 30, 2013, Longmen Joint Venture guaranteed bank loans for related parties and third parties, including lines of credit, amounting to $304.6 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 |
As of September 30, 2013, 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 loss 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 3 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 our Company in accordance with the accounting principles generally accepted in the United States of America (“U.S. GAAP”).
Subsidiaries are those entities in which our Company, directly or indirectly, controls more than one half of the voting power or has the power to govern the financial and operating policies, to appoint or remove the majority of the members of the board of directors, or to cast a majority of votes at the meeting of directors.
A VIE is an entity in which our Company, or our subsidiary, through contractual arrangements, bears the risks of, and enjoys the rewards normally associated with, ownership of the entity, and therefore our Company or our subsidiary is the primary beneficiary of the entity.
All significant inter-company transactions and balances have been eliminated upon consolidation.
Consolidation of VIE
Prior to entering into the Unified Management Agreement on April 29, 2011, Longmen Joint Venture had been consolidated as our 60% direct 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’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. |
317 |
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 rights and roles of both bodies were considered to determine which has the authority to direct the activities of Longmen Joint Venture, and by extension, whether we continue to have the authority 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 of the operations of Longmen Joint Venture and as such, have the authority to direct the activities of the VIE that most significantly impact Longmen Joint Venture ’s economic performance.
In connection with the Unified Management Agreement, Shaanxi Coal, 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 1 to Condensed Consolidated Financial Statements - Background, we have the obligation to absorb losses and the rights to receive benefits based on the profit allocation as stipulated by the Unified Management Agreement. As both conditions are met, we are the primary beneficiary of Longmen Joint Venture and therefore, continue to consolidate Longmen Joint Venture.
We believe that the Unified Management Agreement between Longmen Joint Venture and Shaanxi Coal is in compliance with PRC law and is legally enforceable. The Board of Directors of Longmen Joint Venture continues to be the controlling decision-making body with respect to Longmen Joint Venture. We control 60% of the voting rights of the board of directors and have control over the operations of Longmen Joint Venture. As such, we have the authority to direct the activities of the VIE. However, uncertainties in the PRC legal system could limit our ability to enforce the Unified Management Agreement, which in turn, may lead to reconsideration of the VIE assessment.
Longmen Joint Venture has two 100% owned subsidiaries, Yuxin Trading Co., Ltd. (“Yuxin”) and Yuteng Trading Co., Ltd (“Yuteng”). In addition, Longmen Joint Venture has two consolidated subsidiaries, Hualong Fire Retardant Material Co., Ltd. (“Hualong”) and Beijing Huatianyulong International Steel Trading Co., Ltd. (“Huatianyulong”), in which Longmen Joint Venture 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 acquired 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 entities with appropriate recognition in our financial statements of the non-controlling interests in each entity, beginning on the acquisition dates as these were also the effective dates of the agreements with other stockholders granting a majority voting rights in each entity, and thereby, the power of control, to Longmen Joint Venture.
Revenue recognition
We follow the generally accepted accounting principles in the United States regarding revenue recognition. Sales were 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 represent 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.
318 |
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 discounted cash flow method. The estimation of future cash flows requires significant management judgment based on our historical results and anticipated results and is subject to many factors.
The discount rate that is commensurate with the risk inherent in our business model is determined by our management. An impairment charge would be recorded if we determined that the carrying value of long-lived assets may not be recoverable. The impairment to be recognized is measured by the amount by which the carrying values of the assets exceed the fair value of the assets.
Use of estimates
The preparation of financial statements in conformity with 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. 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 for certain financial instruments with characteristics of both liabilities and equity,” the accounting standard regarding “Accounting for derivative instruments and hedging activities” and “Accounting for derivative financial instruments indexed to, and potentially settled in, a company’s own stock.” Additionally, we analyze registration rights agreements associated with any equity instruments issued to determine if penalties triggered for late filing should be accrued under accounting standard establishing “Accounting for registration payment arrangements.”
319 |
Fair value measurements (restated)
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.
We determined that the carrying value of the profit sharing liability using Level 3 inputs by taking consideration of the present value of our projected profits/losses with the discount interest rate of 7.3%.
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) change in fair value related to the passage of time and change in the number of future periods over which the present value of future cash flows is estimated and (d) any difference between the previously estimated operating results for the current period and actual results.
Each period, we consider whether the discount rate based on our average borrowing rate should be adjusted based upon the current and expected future financial condition of the Company. To date, we have not considered any adjustment to be necessary based upon, but not limited to, the following assumptions:
· | because the joint venture partner of Longmen Joint Venture is a state-owned enterprise with an excellent credit history, PRC banks grant similar credit treatment to Longmen Joint Venture in terms of credit availability |
· | the current average borrowing rate of enterprises in the steel industry in the PRC is similar to this borrowing rate |
· | the current new/renewal borrowing rates of the Company’s bank loans are similar to prior periods |
· | the People’s Bank of China has not recently adjusted any borrowing rate |
· | PRC bank interest rates are not industry specific. The downtrend in the steel industry did not materially impact the bank borrowing rates for steel companies |
· | the bank interest rates are assessed by each individual bank and governed by the Chinese banking regulatory bodies. Reports from credit rating research firms are not commonly used by PRC banks |
The projected profits/losses in Longmen Joint Venture are based upon, but not limited to, the following assumptions:
· | projected selling units and growth in the steel market |
· | projected unit selling price in the steel market |
· | projected unit purchase cost in the coal and iron ore markets |
· | selling and general and administrative expenses to be in line with the growth in the steel market |
· | projected bank borrowings |
· | interest rate index |
· | gross national product index |
· | industry index |
· | government policy |
Income Taxes
Income tax
We did not conduct any business and did not maintain any branch office in the United States during the period from June 30, 2011 to September 30, 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.
320 |
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%.
Tianwu Joint Venture is located in Tianjin Coastal Economic Development Zone and is subject to an income tax rate at 25%.
Capital lease obligations
On April 29, 2011, we, along with Longmen Joint Venture entered into a Unified Management Agreement with Shaanxi Steel and Shaanxi Coal under which Longmen Joint Venture uses the new iron and steel making facilities including one sintering machine, two converters, two blast furnaces and other auxiliary systems constructed by Shaanxi Steel. As the 20-year term of the agreement exceeds 75% of the assets’ useful lives, this arrangement is accounted for as a capital lease. The ongoing lease payments are comprised of two elements: (1) a monthly payment of $2.3 million (RMB 14.6 million) based on Shaanxi Steel’s cost to construct the new iron and steel making facilities 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 17 – “Profit sharing liability” in the Notes to Condensed Consolidated Financial Statements.
Profit sharing liability (restated)
The profit sharing liability component of the capital lease obligation was recognized initially at its estimated fair value at the lease commencement date and included in the initial measurement and recognition of the capital lease, in addition to the fixed payment component of the minimum lease payments. The profit sharing liability is accounted for separately from the fixed portion of the capital lease obligation (See Note 16 - “Capital lease obligation” in the Notes to Condensed Consolidated Financial Statements) and is accounted for as a derivative instrument in accordance with ASC 815-10-15-83. The estimated fair value of the profit sharing liability is reassessed at the end of each reporting period, with any change in fair value charged or credited to income as “Change in Fair Value of Profit Sharing Liability”. See Note 3(h) - “Financial instruments” in the Notes to Condensed Consolidated Financial Statements 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 has been made since inception.
ITEM 4. CONTROLS AND PROCEDURES
Our Company, with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the design and operation of our disclosure controls and procedures, as defined under Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of September 30, 2013, June 30, 2013, March 31, 2013, September 30, 2012, June 30, 2012, March 31, 2012, September 30, 2011 and June 30, 2011. Our Company’s disclosure controls and procedures are designed (i) to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
During our evaluation of the effectiveness of our disclosure controls 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.
In addition, as a result of comments received from the Commission following the Staff’s review of certain of our prior quarterly and annual reports, and based on subsequent communications between the Staff of the Commission and us, we concluded that the classification, display and disclosure of our profit sharing liability (which is accounted for at fair value as a derivative instrument liability) had been incomplete and inconsistent. As a result, we have restated our financial statements and related disclosures for each of the reporting periods from the period ended June 30, 2011 to the period ended December 31, 2013. The restatements are set out in this Amendment No. 1. Although the restatements did not result in any restatement of the reported balance sheets nor adjustment of reported net income for any period presented, because of the restatement, management concluded that the restatements resulted from control deficiencies that represent a material weakness in our disclosure controls and procedures.
As a result of such material weakness, we have re-evaluated our disclosure controls and procedures, and on July 25, 2014 concluded that our Company’s disclosure controls and procedures were not effective as of September 30, 2013, June 30, 2013, March 31, 2013, September 30, 2012, June 30, 2012, March 31, 2012, September 30, 2011 and June 30, 2011.
Despite the existence of the material weakness in our controls and procedures, we believe that the condensed consolidated financial statements included in this Amendment No. 1 present, in all material aspects, our financial position, results of operations and comprehensive income (loss) and cash flows for the periods presented in conformity with U.S. GAAP.
321 |
Remediation
We have dedicated significant resources to ensure that we take proper steps to improve our disclosure controls and procedures and our internal control over financial reporting in the areas of accounting for complex and non-routine transactions.
We have taken a number of remediation actions that we believe will impact the effectiveness of our disclosure controls and procedures and our internal control over financial reporting including the following:
· | We have engaged outside professional consulting firms to supplement us with our internal control over financial reporting assessment and testing; |
· | We have implemented an internal review process over financial reporting to review all recent accounting pronouncements and to verify that any accounting treatment identified in such report has been fully implemented and confirmed by our outside professional consultants, and we continue to improve our ongoing review and supervision of our internal control over financial reporting; and |
· | We have established an enhanced training program, including, but not limited to, accounting and auditing updates, and review of consolidated guidance of variable interest entities, to update our employees on current accounting pronouncements. |
We believe the foregoing efforts will effectively remediate the material weakness described above in the future.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
PART VI – OTHER INFORMATION - QUARTERLY
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 herein relates to such risk factors, there have been no other changes in the risk factors described in “ITEM 1A. RISK FACTORS” above.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not Applicable.
ITEM 3. DEFAULT UPON SENIOR SECURITIES.
Not Applicable.
ITEM 4. MINE SAFETY DISCLOSURES.
Not Applicable.
Not Applicable.
322 |
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
323 |