UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended December 31, 2016
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) |
Suite 106, Tower H,
Phoenix Place, Shuguangxili
Chaoyang District, Beijing, China 100028
(Address of Principal Executive Office, Including Zip Code)
Registrant’s telephone number: +86 (10) 8572 3073
Securities registered pursuant to Section 12(b) of the Act:
| Common Stock, $0.001 par value per share | None |
| (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 ¨ No x
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 ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨ No x
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes x 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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ¨ | Accelerated filer ¨ | |
| Non-accelerated filer ¨ | Smaller reporting company x | |
| Emerging Growth Company ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
The aggregate market value of the voting common equity held by non-affiliates as of June 30, 2016, the last business day of the registrant’s most completed second fiscal quarter prior to December 31, 2016, based upon the price of $1.06 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 $7.6 million. The registrant has no non-voting common equity.
As of November 15, 2018, 24,774,881 (excluding 494,462 shares of treasury stock) shares of common stock, par value $0.001 per share, were outstanding.
TABLE OF CONTENTS
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Cautionary Statement
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements relate to future events or the Company’s future financial performance. The Company has attempted to identify forward-looking statements by terminology including “anticipates,” “believes,” “expects,” “can,” “continues,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should” or “will” or the negative of these terms or other comparable terminology. Such statements are subject to certain risks and uncertainties, including the matters set forth in this Annual Report on Form 10-K or other reports or documents the Company files with the Securities and Exchange Commission from time to time, which could cause actual results or outcomes to differ materially from those projected. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance or achievements. Undue reliance should not be placed on these forward-looking statements which speak only as of the date hereof. The Company’s expectations are as of the date this Annual Report on Form 10-K is filed, and the Company does not intend to update nor is obligated to update any of the forward-looking statements after the date this Annual Report on Form10-K is filed to confirm these statements to actual results, unless required by applicable law.
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Overview
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. and its subsidiaries.
We were incorporated on August 5, 2002, in the State of Nevada. We are headquartered in Beijing, China and through our 100% owned subsidiary, General Steel Investment, we have been operating steel companies serving various industries in the People’s Republic of China (“PRC”). Our main operation through December 30, 2015 had been the manufacturing and sales of steel products such as steel rebar, hot-rolled carbon and silicon sheets and spiral-weld pipes.
On November 4, 2015, the Board authorized the Company's management to pursue the potential sale of all its ownership in Maoming Hengda Steel Company, Ltd. ("Maoming Hengda") and Longmen Joint Venture to divest from and restructure the steel business. On December 30, 2015, we sold our equity interest in General Steel (China) Co., Ltd and Longmen Joint Venture. On March 21, 2016, we sold our equity interest in Maoming Hengda and completed the divestiture of our steel business as planned.
In October 2015, we completed our acquisition of an 84.5% equity interest in Catalon Chemical Corp. (“Catalon”), a Delaware corporation headquartered in Virginia that develops and manufactures De-NOx honeycomb catalysts and industrial ceramics. Prior to December 31, 2015, we became aware of operational issues related to Catalon. It was determined that such issues might have affected Catalon’s prior operations, as well as its ability to conduct business in the future. As such, at the time weexpected to cancel the shares issued to the 84.5% original owners of Catalon in accordance with the terms of the agreement. Because we have decided to dispose of Catalon in the near future, the Company presented Catalon’s remaining assets, after impairment charges, and liabilities as held for sale as of December 31, 2015. On March 31, 2016 the Company has decided to dispose of Catalon, so the result of operations of Catalon was presented as discontinued operations in December 31, 2016 in the consolidated financial statements. On September 21, 2018, the shares issued to Catalon were cancelled.
Our remaining steel business is primarily comprised of Tianjin Shuangsi Trading Co. Ltd, (“Tianjin Shuangsi”), a trading company that mainly sources overseas iron ore for steel mills. We acquired a 100% equity interest in Tianjin Shuangsi on February 16, 2016. On December 31, 2017, the Company sold Shuangsi to Wendler Investment & Management Group Co., Ltd, a related party, no consideration was received. Therefore the results of operations was presented as operations to be disposed in December 31, 2016 in the consolidated financial statements See Note 2(o) – Operations held for sale and operations disposed/to be disposed.
As a result of this restructuring, our former steel-related subsidiaries, including Longmen Joint Venture (prior to December 30, 2015), Maoming Hengda and our recently acquired non steel-related subsidiary, Catalon and Shuangsi, all of which represented a majority of our consolidated sales and operations, are presented as discontinued operations or operations held for sale in our Consolidated Balance Sheets and Consolidated Statements of Operations.
Recent Developments
On July 18, 2016, we received a notice from the staff of the New York Stock Exchange (the “NYSE”) stating that the NYSE had determined to commence proceedings to delist our common stock, and our common stock would be suspended at the close of trading on the same date.
In the notice and in a public announcement distributed by the NYSE on July 18, 2016, the NYSE stated that we were previously deemed below compliance with the NYSE’s continued listing standard requiring listed companies to maintain either (i) at least $50 million in stockholders’ equity or (ii) at least $50 million in total market capitalization on a 30 trading day average basis. The NYSE noted that they had previously accepted our 18-month plan to regain compliance with the listing standard. However, the NYSE stated that as of the expiration of the plan period on July 9, 2016, we were unable to demonstrate that we had regained compliance with the applicable continued listing standard. The NYSE also included in its public announcement that we were delayed in filing with the SEC of our Annual Report on Form 10-K for the year ended December 31, 2015 and our Quarterly Report on Form 10-Q for the quarter end March 31, 2016.
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We appealed the delisting determination by submitting a request for review in writing to the NYSE Regulations, Inc., Board of Directors’ Committee for Review (the “CFR”)
Prior to the NYSE notice, we had presented to the NYSE the steps we intended to take to address the deficiencies raised by the staff at NYSE. We reached an agreement with a number of our current debt holders to forgive existing debt and/or exchange debt for equity, which when completed, would have increased our stockholders’ equity to at least $50 million thereby satisfying the NYSE’s continued listing standard.
On October 20, 2016, we received a letter from the CFR that our appeal was denied. On October 25, 2016, our common stock was delisted.
Change in Control
On August 24, 2018, the Company entered into a subscription agreement with Hummingbird Holdings Limited, a BVI entity . Pursuant to the Subscription Agreement, the Investor purchased 7,352,941 shares of the Company’s common stock, par value $0.001 per share, representing 29.7% of our issued and outstanding common stock at a purchase price of $0.034 per share for aggregate gross proceeds of $250,000. Victory New Holdings Limited, a British Virgin Islands entity controlled by our chief executive officer. Mr. Zuosheng Yu, entered into a stock purchase agreement with Hummingbird whereby it sold 3,092,899 of our Series A Preferred Stock, representing 100% of our Series A Preferred Stock. In addition, Mr. Yu sold to Hummingbird (i) 944,780 shares of common stock held in his name and (ii) 4,800,000 shares of common stock held in the name of Golden Eight Investments Limited (‘‘Golden Eight’’), of which Mr. Yu is the sole director of Golden Eight. As a result of the transactions, Hummingbird owns 52.9% of our issued and outstanding common stock and through ownership of our Series A Preferred Stock has voting power of 30% of the combined voting power of our common stock and preferred stock.
Subsidiaries
We presently have controlling interests in one subsidiary under continuing operations:
| · | Tongyong Shengyuan (Tianjin) Technology Development Co., Ltd. (“Tongyong Shengyuan”) which is a holding company and its main operations is the 32% equity investment in in Tianwu General Steel Material Trading Co., Ltd. |
Operations held for sale:
Our remaining steel business is primarily comprised of Tianjin Shuangsi Trading Co. Ltd, (“Tianjin Shuangsi”), a trading company that mainly sources overseas iron ore for steel mills. We acquired a 100% equity interest in Tianjin Shuangsi on February 16, 2016. On December 31, 2017, the Company sold Shuangsi to Wendler Investment & Management Group Co., Ltd, a related party, no consideration was received.
Subsidiaries disposed:
Maoming Hengda Steel Co., Ltd
On June 25, 2008, through our subsidiary Qiu Steel, we paid approximately $7.1 million (RMB 50 million) in cash to purchase 99% of Maoming Hengda Steel Group, Ltd. (“Maoming Hengda”). The total registered capital of Maoming Hengda is approximately $77.8 million (RMB 544.6 million)
Maoming Hengda’s core business was the production of rebar products used in the construction industry. Located on 140 hectares (approximately 346 acres) in Maoming city, Guangdong Province, the Maoming Hengda facility previously had two production lines capable of annual production capacities of 1.8 million metric tons of 5.5mm to 16mm diameter high-speed wire and 12mm to 38mm diameter rebar. The products were sold through nine distributors that targeted customers in Guangxi Province and the western region of Guangdong. To take advantage of a stronger market demand in Shaanxi Province, between 2009 and 2010, we relocated the 1.8 million metric ton capacity rebar production line and high-speed wire production line from Maoming Hengda's facility to Longmen Joint Venture.
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In December 2010, we brought online a new 400,000 ton capacity rebar production line. 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.
Management evaluates the fair value of Maoming Hengda’s long-lived assets on an annual basis, or upon a triggering event which would require an assessment sooner. As of December 31, 2015, Management is of the opinion that the fair value of the property, plant and equipment exceeded their current carrying value.
On March 21, 2016, we sold our equity interest in Maoming Hengda to Tianwu Tongyong (Tianjin) International Trade Co., Ltd, ("Tianwu Tongyong"), for which the Company already had 32% equity interest in, for RMB 328.0 million in cash or approximately $50.5 million and with this transaction completed the full divestiture of our steel manufacturing and distribution business was completed. The agreement was further amended in September 2016 to set the sale price at RMB 155.3 million or approximately $23.9 million. The Company expected to receive its 99% ownership for the total proceeds of RMB 154.0 million (approximately $23.8 million), of which the full amount would be paid within one year after the signing of the Agreement.
Accordingly, the Company recorded the total amount of net consideration of $45.7 million in additional-paid-in capital.
Catalon Chemical Corp.
In October 2015, we acquired an 84.5% equity interest in Catalon Chemical Corp. (“Catalon”), a Delaware corporation headquartered in Virginia that develops and manufactures De-NOx honeycomb catalysts and industrial ceramics. Prior to December 31, 2015, we became aware of some operational issues related to Catalon. It was determined that such issues might have affected Catalon’s prior operations as well as its ability to conduct business in the future. As such, we are expected to cancel the shares issued to the 84.5% original owners of Catalon in accordance with the terms of the agreement at the end of 2016. Because we have decided to dispose of Catalon in the near future, we are presenting Catalon’s remaining assets, after impairment charges, and liabilities as held for sale as of December 31, 2015 in the consolidated financial statements. Due to operational issues, Catalon was not able to meet the Minimum Sales Target or Minimum Net Profit applicable as stipulated in the Stock Exchange agreement, therefore the board has voted unanimously to cancel the shares that were placed in escrow for the selling shareholders. As such the Company deconsolidated Catalon on March 31, 2016. See Note 2(o) in the accompanying notes to consolidated financial statements.
Steel Production Capacity Information Prior to Disposal in 2016
| Annual Production Capacity (metric tons) | Maoming Hengda (1) | |||||
| Crude Steel | - | |||||
| Processing | 400,000 | |||||
| Main Products | Rebar | |||||
| Main Application | Infrastructure and construction |
Marketing and Customers
Since we completed the divestiture of our steel manufacturing business the Company’s remaining business is primarily comprised of Tianjin Shuangsi Trading Co. Ltd. (“Tianjin Shuangsi”), a trading company in which the Company acquired 100% of the equity interest on February 16, 2016 for contract price of RMB19 million and debt assumed of RMB 18.8 million for a net purchase price of $0.03 million as Tianjin Shuangsi was established by the chief executive officer of a related entity of the Company, and the CEO’s relative. Tianjin Shuangsi primarily trades iron ore, nickel-iron-manganese alloys, and other steel-related products.
Our revenue is dependent, in large part, on significant contracts with a limited number of large customers, including related parties. For the year ended December 31, 2016, three of the Company’s customers, including related parties, individually accounted for 33.0%, 29.5% and 6.3% of total sales for the year ended December 31, 2016.
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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.
Industry Environment
China’s steel industry is highly fragmented, and the Chinese government continues to encourage industry consolidation. The Chinese central government has had a long-stated goal to consolidate 60% of domestic steel production among the top ten producers by 2015, and expanding to 70% by 2020. The top ten producers’ output fell to 39% of the national output in 2013 from 49% in 2010, which is still below the 60% target for 2015 set in the 12th year plan.
Despite the government’s initiatives to encourage industry consolidation and cut over-capacity, it is estimated that new capacity of approximately 20~25 million metric tons was added in 2014. Excess supply, weakening economic growth, and sagging prices have resulted in depressed margins and operating losses. According to statistics by China Iron and Steel Association, the blended net margin of China steel enterprises in 2014 was only 0.85%, with approximately 15% of major steel companies monitored by China Iron and Steel Association still incurring operating losses.
On July 12, 2010, the Ministry of Industry & Information Technology 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.
Since 2013, the government has exerted a more stringent environment protection policy on the steel industry. In January 2014, the Ministry of Industry and Information Technology of the People's Republic of China (the "MIIT") announced a List of Enterprises Fulfilling the Iron and Steel Industry Specification (the "List"). The List includes a highly-selected group of large and medium steel manufacturers that have met or exceeded more stringent national requirements and standards on product quality, environmental protection, energy consumption, workmanship and equipment, production scale, as well as work safety and social responsibility. The MIIT will collaborate with China's other governmental agencies to provide support to the List's members and to speed up the steel industry's restructuring and consolidation. Steel makers omitted from the List will most likely face higher electricity costs, more restrictive administrative measures, and adverse effects of forceful regulations intent on reducing the nation's overcapacity. Longmen Joint Venture, which was our major facility, is included on the List as one of the key steel enterprises in China’s Shaanxi Province.
In 2016, the state's efforts to promote the structural reform of the supply side, the steel industry was able to achieve the goals of steel production control and therefore demand steadily increased. Steel price and overall profitability of the industry was improved compared to 2016. However, due to weak demand growth, overall inventory level is still high. We therefore rely on the trading business of iron ore and steel, with the expectation that steel industry environment will gradually improve due to decrease in inventory level.
Employees
As of December 31, 2016, we had approximately 11 full-time employees.
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.
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Risks Related to Our Business
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 selected entities we believe have outstanding potential. Our growth strategy will require us to obtain additional financing. 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.
Future 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 in the past, 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 to prevent these from occurring again. 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. Such 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.
It is our current plan 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.
The divestiture of our steel business and the limited operating history of our newly acquired entity may adversely affect our growth and profitability.
We sold our entire equity interest in General Steel (China) Co., Ltd. together with Shaanxi Longmen Iron and Steel Co., Ltd. (“Longmen Joint Venture”) to Victory Energy Resource Limited, a HK registered company indirectly-owned by Zuosheng Yu, our Chairman, in December 2015. In addition, we sold our entire equity interest in Maoming Hengda Steel Company, Ltd. ("Maoming Hengda") to a non-related party and completed the divestiture of our steel manufacturing business due to certain near-term challenges in the steel sector. The majority of our operating assets and businesses were divested at the end of 2015 and in the first quarter of 2016 and our only operating entity, Tianjin Shuangsi, a trading company that primarily trades iron ore, nickel-iron-manganese alloys, and other steel-related products, which we acquired in February 2016, has a limited operating history. We are still in an early phase, and are just beginning to implement our business plan. The likelihood of our success should be considered in light of the problems, expenses, difficulties, complications and delays usually encountered by companies in their early stages of development, with low barriers to entry. We may not be successful in attaining the objectives necessary for us to overcome these risks and uncertainties. There can be no assurance that we can properly develop and operate our newly acquired entity and as a result our future growth and profitability may be adversely effected.
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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 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 price 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. Any such action could adversely affect our financial results and the market price of our stock.
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.
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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, 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 2.0% for full year of 2014 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.
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 on products. Such price controls could adversely affect our future results of operations.
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If relations between the United States and China continue to deteriorate, we may experience difficulties accessing the United States capital markets.
The United States and China have had disagreements over political and economic issues.. Any political or trade controversies between the United States and China could impact 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.
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.
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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.
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, 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.
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The PRC State Administration of Foreign Exchange, or SAFE, restrictions on currency exchange may limit our ability to receive and use our sales revenue effectively and to pay dividends.
All of our sales revenues and expenses are denominated in RMB. Under PRC law, RMB is currently convertible under the “current account,” which includes dividends and trade and service-related foreign exchange transactions, but not under the “capital account,” which includes foreign direct investment and loans. Currently, our PRC operating subsidiaries may purchase foreign currencies for settlement of current account transactions, including payments of dividends to us, without the approval of SAFE, by complying with certain procedural requirements. However, the relevant PRC government authorities may limit or eliminate our ability to purchase foreign currencies in the future. Since substantially all of our future revenue will be denominated in RMB, any existing and future restrictions on currency exchange may limit our ability to utilize revenue generated in RMB to fund our business activities outside China that are denominated in foreign currencies.
Foreign exchange transactions by PRC operating subsidiaries under the capital account continue to be subject to significant foreign exchange controls and require the approval of or need to register with PRC government authorities, including SAFE. In particular, if our PRC operating subsidiaries borrow foreign currency through loans from us or other foreign lenders, these loans must be registered with SAFE, and if we finance our PRC operating subsidiaries by means of additional capital contributions, these capital contributions must be approved by certain government authorities, including the Ministry of Commerce People’s Republic of China, or their respective local counterparts. These limitations could affect our PRC operating subsidiaries’ ability to obtain foreign exchange through debt or equity financing.
The PRC government also may at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining foreign currency, we may be unable to meet obligations that may be incurred in the future that require payment in foreign currency.
Under the New EIT Law, as defined below, we may be classified as a “resident enterprise” of China, which would likely result in unfavorable tax consequences to us and our non-PRC shareholders.
Under China’s Enterprise Income Tax Law, or the “EIT Law”, and its implementing rules, which became effective in 2008, an enterprise established with “de facto management bodies” within China is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. Under the implementing rules of the New EIT Law, de facto management means substantial and overall management and control over the production and operations, personnel, accounting, and properties of the enterprise. Because the New EIT Law and its implementing rules are new, it is unclear how tax authorities will determine tax residency based on the facts of each case.
In April 2009, the State Administration of Taxation (“SAT”) issued a new circular to clarify the criteria for recognizing the resident enterprise status for Chinese controlled foreign companies. According to the Circular Regarding the Determination Criteria on Chinese Controlled Offshore Companies as Resident Enterprises (Circular Guoshuifa 2009 No. 82), if a foreign company simultaneously satisfies the following four criteria it 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. |
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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.
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.
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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.
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.
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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 45.7% of our common stock. Mr. Zuosheng Yu, our major stockholder, Chief Executive Officer and Chairman of the Board, beneficially owns approximately 45.0% of our common stock in addition to Series A Preferred Stock which carries a voting power of 30% of the combined voting power of our common stock and preferred stock while outstanding. Mr. Yu can effectively control us and his interests may differ from other stockholders.
All of our subsidiaries and substantially all of our assets are located outside the United States.
All our subsidiaries are located in China and substantially all of our assets are located outside the United States. It may therefore be difficult for investors in the United States to enforce their legal rights based on the civil liability provisions of the U.S. federal securities laws against us in the courts of either the United States 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.
As a result of the delisting of our common stock from the NYSE, our common stock is quoted on the OTC Pink, which is less efficient than, and not as broad as, the NYSE.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not Applicable.
After the disposition of Maoming Hengda in March 2016, we no longer have land use rights.
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 involved in our business
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Until July 18, 2016, our common stock was listed on the NYSE under the symbol “GSI”. As of the close of trading on such date, our common stock was suspended from the NYSE. As of October 25, 2016 our common stock was delisted from the NYSE and is quoted on the OTC Pink.
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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 | ||||||||||||
| 2018 | ||||||||||||||||
| High | $ | 0.04 | $ | 0.04 | $ | 0.04 | $ | |||||||||
| Low | $ | 0.04 | $ | 0.03 | $ | 0.03 | $ | |||||||||
| 2017 | ||||||||||||||||
| High | $ | 0.11 | $ | 0.08 | $ | 0.06 | $ | 0.08 | ||||||||
| Low | $ | 0.09 | $ | 0.08 | $ | 0.06 | $ | 0.06 | ||||||||
| 2016 | ||||||||||||||||
| High | $ | 1.85 | $ | 1.11 | $ | 0.30 | $ | 0.13 | ||||||||
| Low | $ | 1.66 | $ | 1.05 | $ | 0.30 | $ | 0.11 | ||||||||
| 2015 | ||||||||||||||||
| High | $ | 5.15 | $ | 5.15 | $ | 4.15 | $ | 3.50 | ||||||||
| Low | $ | 3.15 | $ | 3.45 | $ | 3.00 | $ | 0.83 | ||||||||
As of September 11, 2018, there were approximately 336 holders of record of our common stock.
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.
Recent Sales of Unregistered Sale Securities
We’ve had no sales of unregistered securities that have not been disclosed on a Current Report on Form 8-K.
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.
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OVERVIEW
On November 4, 2015, our Board of Directors (the "Board"), including the audit committee, committed to a plan and authorized our management to pursue the potential sale of all our ownership interest in Maoming Hengda and Longmen Joint Venture in order to unlock the hidden value in Maoming Hengda's land assets, as well as divest from and restructure our steel business. On December 30, 2015, we sold our equity interest in General Steel (China) Co., Ltd and Longmen Joint Venture. On March 21, 2016, we sold our equity interest in Maoming Hengda and completed the divestiture of our steel business as planned. As a result, General Steel (China) Co., Ltd. which included Longmen Joint Venture and subsidiaries’ financial information was presented as operation disposed and Maoming Hengda’s financial information was presented as operations to be disposed and assets and liabilities held for sale for the year ended December 31, 2015. Maoming Hengda’s financial information was presented as disposed operations for the year ended December 31, 2016 in the consolidated financial statements.
In October 2015, the Company completed its acquisition of an 84.5% equity interest in Catalon Chemical Corp. (“Catalon”), a Delaware corporation headquartered in Virginia that develops and manufactures De-NOx honeycomb catalysts and industrial ceramics. Prior to December 31, 2015, the Company became aware of some operational issues related to Catalon. It was determined that such issues might have affected the prior operations of Catalon as well as the ability to conduct business in the future. As such, the Company expected to cancel the shares issued to the 84.5% original owners of Catalon in accordance with the terms of the agreement. Therefore the Company presented Catalon’s remaining assets, after impairment charges, and liabilities as held for sale as of December 31, 2015. On March 31, 2016 the Company disposed of Catalon, so the result of operations of Catalon is being presented herein as discontinued operations.
Our growth strategy is a combination of optimizing operating efficiencies in our steel-related trading business and expanding into other high-growth and high-margin non-steel industries. We aim to drive profitability through improved operational efficiencies and optimization of our cost structure and continual cooperation and partnerships with leading state-owned enterprises (SOEs).We also intend to expand into other high-growth and high-margin non-steel industries.
RESULTS OF OPERATIONS
Since we completed the divestiture of our steel manufacturing business as planned through the December 30, 2015 and the March 21, 2016 sale and disposition of Longmen Joint Venture, Maoming Hengda and Catalon, respectively, the Company’s remaining business is primarily comprised of Tianjin Shuangsi, a trading company in which the Company received a 100% equity interest on February 16, 2016 for contract price of RMB19 million and debt assumed of RMB 18.8 million for a net purchase price of $0.03 million as Tianjin Shuangsi was established by the chief executive officer of an entity related to the Company and the chief executive officer’s relative. Tianjin Shuangsi primarily trades iron ore, nickel-iron-manganese alloys, and other steel-related products. On December 31, 2017, the Company sold Shuangsi for RMB 20,000,000 (approximately $2.88 million) so the result of operations was presented as operations to be disposed on December 31, 2016 in the consolidated financial statements
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Statements of Operations for the years ended December 31, 2016 and 2015:
| (In thousands except share data) | 2016 | 2015 | Change | Percentage Change | ||||||||||||
| Selling, General and Administrative Expenses | $ | (2,710 | ) | $ | (10,811 | ) | 8,101 | (74.9 | )% | |||||||
| Loss from Operations | (2,710 | ) | (10,811 | ) | 8,101 | (74.9 | )% | |||||||||
| Other Income (Loss) | 7,380 | (3 | ) | 7,383 | (246100.0 | )% | ||||||||||
| Income (Loss) Before Provision for Income Taxes and Noncontrolling Interest | 4,670 | (10,814 | ) | 15,484 | (143.2 | )% | ||||||||||
| Provision for Income Taxes | - | - | - | - | % | |||||||||||
| Income (Loss) from Continuing Operations | 4,670 | (10,814 | ) | 15,484 | (143.2 | )% | ||||||||||
| Net Income (Loss) from Operations to Be Disposed, Net of Income Taxes | 122 | (13,680 | ) | 13,802 | (100.9 | )% | ||||||||||
| Net Loss from Operations Disposed, Net of Income Taxes | (2,530 | ) | (1,279,820 | ) | 1,277,290 | (99.8 | )% | |||||||||
| Net Income (Loss) | 2,262 | (1,304,314 | ) | 1,306,576 | (100.2 | )% | ||||||||||
| Less: Net Income (Loss )Attributable to Noncontrolling Interest from Operations to Be Disposed | - | (1,933 | ) | 1,933 | (100.0 | )% | ||||||||||
| Less: Net Loss Attributable to Noncontrolling Interest from Operations Disposed | (26 | ) | (513,092 | ) | 513,066 | (100.0 | )% | |||||||||
| Net Income (Loss) Attributable to General Steel Holdings, Inc. | $ | 2,288 | $ | (789,289 | ) | 791,577 | (100.3 | )% | ||||||||
| Net Income (Loss) | $ | 2,262 | $ | (1,304,314 | ) | 1,306,576 | (100.2 | )% | ||||||||
| Foreign Currency Translation Adjustments | (645 | ) | 93,824 | (94,469 | ) | (100.7 | )% | |||||||||
| Comprehensive Income (Loss) | 1,617 | (1,210,490 | ) | 1,212,107 | (100.1 | )% | ||||||||||
| Less Comprehensive Loss Attributable to noncontrolling interest | (34 | ) | (483,442 | ) | 483,408 | (100.0 | )% | |||||||||
| Comprehensive Income (Loss) Attributable to General Steel Holding, Inc. | $ | 1,651 | $ | (727,048 | ) | 728,699 | (100.2 | )% | ||||||||
| Weighted Average Number of Shares | 17,302 | 13,749 | 3,553 | 25.8 | % | |||||||||||
| Income (Loss) Per Share – Basic and Diluted | ||||||||||||||||
| Continuing Operations | $ | 0.27 | $ | (0.79 | ) | 1.06 | (134.2 | )% | ||||||||
| Operations to be disposed | 0.00 | (0.85 | ) | 0.85 | (100.0 | )% | ||||||||||
| Operations disposed | (0.15 | ) | (55.77 | ) | 55.62 | (99.7 | )% | |||||||||
| Net Income (Loss) per share | $ | 0.13 | $ | (57.41 | ) | 57.54 | (100.2 | )% | ||||||||
General and Administrative Expenses (“G&A”)
Fiscal year ended December 31, 2016 compared with fiscal year ended December 31, 2015
| (in thousands) | December 31, 2016 | December 31, 2015 | Change % | |||||||||
| General and administrative expenses | $ | (2,710 | ) | $ | (10,811 | ) | (74.9 | )% | ||||
G&A expenses decreased by 74.9% to $(2.7) million for the year ended December 31, 2016, compared to $(10.8) million for the same period in 2015. The decrease was mainly due to the decrease in professional expenses related to our listing expenses as a public company due to the delisting, as well as the decrease in corporate office expenses. Since we completed the divestiture of our steel manufacturing business the Company’s professional expenses in relation to the accounting and auditing of these entities was also reduced. In addition, we downsized our corporate office in Beijing, and as a result, our rental expense, salary expenses, office expense and travel expenses also reduced significantly.
Loss from Operations
Fiscal year ended December 31, 2016 compared with fiscal year December 31, 2015
| (in thousands) | 2016 | 2015 | Change % | |||||||||
| Loss from operations | $ | (2,710 | ) | $ | (10,811 | ) | (74.9 | )% | ||||
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Loss from operations for the year ended December 31, 2016 was $2.7 million as compared to a loss of $10.8 million for the same period in 2015. The decrease in loss from operations was predominantly due to the decrease in G&A expenses as discussed above.
Other Income (Expense)
Fiscal year ended December 31, 2016 compared with fiscal year ended December 31, 2015
| (in thousands) | 2016 | 2015 | Change % | |||||||||
| Loss from equity investment | (1,204 | ) | - | (100.0 | )% | |||||||
| Gain from debt settlement | 2,455 | - | 100.0 | % | ||||||||
| Gain from disposal of Catalon | 6,269 | - | 100.0 | % | ||||||||
| Finance/interest expense | - | (3 | ) | (100.0 | )% | |||||||
| Other expense | (140 | ) | - | 100.0 | % | |||||||
| Total other income (expense), net | $ | 7,380 | $ | (3 | ) | (246,100.0 | )% | |||||
Total other income (expense), net, for the year ended December 31, 2016 was $7.4 million, a 246,100.0% increase compared to $0 million other expense for the same period in 2015. The increase in other income is mainly due to gain from debt settlement and disposal of Catalon. The Company also had a loss from its 32% equity investment in Tianwu of $1.2 million.
On March 31, 2016, the Company decided to dispose of Catalon. The net efficiency of Catalon at the time of disposal was $1.93 million, the cancellation of shares was valued at $4.3 million resulting in a gain of $6.27 million.
On August 19, 2016, the Company signed a debt cancellation agreement with Oriental Ace Limited, an unrelated third party, in conversion of short-term loan payable of $3.6 million into 3,272,727 shares of Common Stock at $0.35per share resulting in a gain on debt extinguishment of $2,454,546.
The Company has not filed its federal income taxes as of the date of filing and has accrued $140,000 in penalties for the year ended 2016.
Net Income (Loss) from Continuing Operations
Fiscal year ended December 31, 2016 compared with fiscal year ended December 31, 2015
| (in thousands) | 2016 | 2015 | Change % | |||||||||
| Net income (loss) from continuing operations | $ | 4,670 | $ | (10,814 | ) | (143.2 | )% | |||||
Net income from continuing operations for the year ended December 31, 2016 was $4.7 million as compared to a loss of approximately $(10.8) million for the same period in 2015. The increase income from operations was predominantly due to decreased general and administrative expenses and other income as discussed above.
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Net Income (Loss) from Operations to be Disposed
Fiscal year ended December 31, 2016 compared with fiscal ended December 31, 2015
| (in thousands) | 2016 | 2015 | Change % | |||||||||
| Net income (loss)from operations to be disposed, net of applicable income taxes | $ | 122 | $ | (13,680 | ) | (100.9 | )% | |||||
Net income of $0.12 million was from Tianjin Shuangsi at December 31, 2016 as compared to a loss of $(14.0) million for the same period in 2015. The loss from operations to be disposed was predominantly due to the impairment charge of $12.2 million from Catalon after we became aware of operational issues related to Catalon which was disposed of in March 2016.
Net Loss from Operations Disposed
Fiscal year ended December 31, 2016 compared with fiscal ended December 31, 2015
| (in thousands) | 2016 | 2015 | Change % | |||||||||
| Net loss from operations to be disposed, net of applicable income taxes | $ | (2,530 | ) | $ | (1,279,820 | ) | (99.8 | )% | ||||
Net loss from operations disposed for the year ended December 31, 2016 was approximately $(2.5) million as compared to a loss of approximately $(1.3) billion for the same period in 2015.
For the year ended 2016, loss from operations to be disposed mainly consist of Maoming Hengda’s loss of $(2.5) million compared with $(1.3) billion of loss from Longmen Joint Venture. There was no loss from operations of Catalon for the year ended December 31, 2016.
Net Loss attributable to General Steel Holdings, Inc.
Fiscal year ended December 31, 2016 compared with the year ended December 31, 2015
| (in thousands) | 2016 | 2015 | Change % | |||||||||
| Net income (loss) | $ | 2,262 | $ | (1,304,314 | ) | (100.2 | )% | |||||
| Less: Net loss attributable to the noncontrolling interest from continuing operations | - | - | - | |||||||||
| Less: Net loss attributable to the noncontrolling interest from operations to be disposed | - | (1,933 | ) | (100.0 | )% | |||||||
| Less: Net loss attributable to the noncontrolling interest from operations disposed | (26 | ) | (513,092 | ) | (100.0 | )% | ||||||
| Net income (loss) attributable to General Steel Holdings, Inc. | $ | 2,288 | $ | (789,289 | ) | (100.3 | )% | |||||
Net income attributable to us for the year ended December 31, 2016 was $2.3 million as compared to loss $(789.3) million for the same period in 2015. The decrease in net loss attributable to us for the year ended December 31, 2016 was mainly a result of the loss from our Longmen Joint Venture operations, which we disposed of on December 30, 2015.
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.
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LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2016, our current liabilities exceeded the current assets by approximately $8.24 million. Given our expected expenditures in the foreseeable future together with our cash flow from trading operations, we have comprehensively considered our available sources of funds as follows:
| · | Financial support and credit guarantee from related parties; and |
| · | Additional equity or debt financing |
Based on the above considerations, our Board of Directors is of the opinion that are able to obtain sufficient funds to meet our working capital requirements and debt obligations as they become due over the twelve months from the balance sheet date. In addition, we have completed the divestiture of our steel manufacturing business as planned on terms favorable to the Company by reducing our net deficiency and although recently acquired businesses are not yet profitable or proven, they are not expected to result in net working capital deficiency as compared to our steel business.
Substantially all of 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.
Short-term Loans – Other
For the year ended December 31, 2016, we had no short term loans outstanding. On August 19, 2016, we signed a debt cancellation agreement with Oriental Ace Limited, an unrelated third party, to convert short-term loans payable in the amount of $3.6 million into 3,272,727 shares of Common Stock at $0.35 per share resulting in a gain on debt extinguishment of $2,454,546.
Going Concern
These consolidated financial statements have been prepared on a going concern basis, which assumes the Company will continue to realize its assets and discharge its liabilities in the normal course of business. The continuation of the Company as a going concern is dependent upon the continued financial support from its shareholders, the ability of the Company to repay its debt obligations, to obtain necessary financing resources to continue operations, along with the market and general economic condition. Management anticipates that the Company will be dependent, for the near future, on debt financing in the form of short-term loans, loans from related parties, to finance the working capital requirements of the Company. However, there is no assurance that the Company will be successful in this or any of its endeavors or become financially viable and continue as a going concern.
The Company had working capital deficit of $8.2 million for the year ended December 31, 2016 and working capital deficit $75.9 million for the year ended December 31, 2015. In addition, the Company had an accumulated deficit of $1.25 billion at December 31, 2016 and incurred negative cash flows from operating activities totaling $(2.9) million as of December 31, 2016. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is dependent on its ability to obtain financial support and credit guarantee from the Company’s shareholders or other available resources from the PRC banks and other financial institutions given the Company’s credit history. The Company’s consolidated financial statements do not include any adjustments relating to the recoverability and classification of reported asset amounts or the amount and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
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Cash-flow
Operating Activities
Net cash used in operating activities for the year ended December 31, 2016 and 2015 was $2.9 million compared to $16.6 million net cash used by operating activities, respectively. This change was mainly due to the combination of the following factors:
| · | The impact of some non-cash items included in net income from continuing operations of $4.6 million for the year ended December 31, 2016, compared to $(10.8) million in the same period in 2015. The non-cash items include the following: |
| - |
Stock issued for service and compensation decreased by $7 million. $6.3 million gain from disposal of Catalon , and $2.5 million gain from debt settlement of $3.6 million short term loan. |
| · | The primary reasons for the material fluctuations in cash inflow were as follows: |
| - | Other payables and accrued labilities: The increase in other payables and accrued labilities was mainly because we incurred more professional expense that we had not paid for prior to December 31, 2016; and |
| · | The primary reasons for material fluctuations in cash outflow were as follows: |
| - |
Net cash used in operating activities from operations to be disposed/operations disposed: The cash outflow was mainly from Maoming Hengda from January 1, 2016 to March 15, 2016. |
Investing activities
Net cash used by investing activities was $0.001 million for the year ended December 31, 2016 compared to net cash provided by investing activities of $151.2 million for the year ended December 31, 2015. Fluctuation in cash inflow between the two periods was mainly due to the net cash provided by the investing activities from operations to be disposed and from our disposed entity, Longmen Joint Venture, from January 1, 2015 to December 30, 2015 resulting in the decrease of restricted cash. Restricted cash was used as a pledge for our notes payable as required by the bank. During the period, Longmen Joint Venture needed less notes payable to settle with suppliers.
Financing activities
Net cash provided by financing activities was $3.0 million for the year ended December 31, 2016 compared to $148.7 million used in financing activities for the year ended December 31, 2015. Compared to the same period in 2015, the increase of cash inflow from financing activities was mainly due to issuance of 1.5 million shares of our common stock, resulting in cash inflow of $1.5 million and additional borrowing from related party of 1.5 million, mainly to fund operations and cost of public company maintenance.
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.
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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, 2016. 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.
OFF-BALANCE SHEET ARRANGEMENTS
There were no off-balance sheet arrangements for the 2016 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.
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, operating income, payments collected from 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, 2016 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) | ||||||||||||||||||||
| Other payables - related parties | $ | 49,832 | $ | 49,832 | - | - | - | |||||||||||||
| Total | $ | 49,832 | $ | 49,832 | $ | - | $ | - | $ | - | ||||||||||
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Critical Accounting Policies
Management’s discussion and analysis of its financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. Our consolidated financial statements reflect the selection and application of accounting policies which require management to make significant estimates and judgments. See Note 2 to our Consolidated Financial Statements “Summary of Significant Accounting Policies”. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
We believe that the following reflect the more critical accounting policies that currently affect our financial condition and results of operations.
Principles of consolidation – subsidiaries
The accompanying consolidated financial statements include the financial statements of our Company and our subsidiaries.
The consolidated financial statements have been prepared on a historical cost basis to reflect the financial position and results of operations of the Company in accordance with the accounting principles generally accepted in the United States of America (“U.S. GAAP”).
Subsidiaries are those entities in which our Company, directly or indirectly, controls more than one half of the voting power; or has the power to govern the financial and operating policies, to appoint or remove the majority of the members of the board of directors, or to cast a majority of votes at the meeting of directors.
All significant inter-company transactions and balances have been eliminated upon consolidation.
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.
Gross versus Net Revenue Reporting
In the normal course of the Company’s trading business, the Company orders directly the iron ore, nickel-iron-manganese alloys, and other steel-related products from its suppliers and drop ships the products directly to its customers. In these situations, the Company generally collects the sales proceed directly from its customers and pay for the inventory purchases to its suppliers separately. The determination of whether revenues should be reported on a gross or net basis is based on the Company’s assessment of whether it is the principal or an agent in the transaction. In determining whether the Company is the principal or an agent, the Company follows the accounting guidance for principal-agent considerations. Because the Company is not the primary obligor and are not responsible for (i) fulfilling the steel-related products delivery, (ii) establishing the selling prices for delivery of the steel-related products, (iii) performing all billing and collection activities including retaining credit risk and (iv) baring the back-end risk of inventory loss with respect to any product return from its customer, the Company has concluded that it is the agent in these arrangements, and therefore report revenues and cost of revenues on a net basis. We infrequently engage in trading transactions in which we acts as an agent between the suppliers and the customers. The trading arrangements are such that the suppliers are the primary obligators, we do not have any general inventory risk, physical inventory loss risk or credit risk, and we do not have latitude in establishing price. Sales and cost of goods sold from these trading arrangements are recorded at the net amount retained in accordance with ASC 605-45.
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.
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On December 28, 2015 General Steel (China) sold its 32% equity interest in Tianwu General Steel Material Trading Co., Ltd. to Tongyong Shengyuan, one of our wholly owned subsidiaries, for $14.9 million (RMB 96.6 million). As of December 31, 2016, Tongyong Shengyuan’s net investment in the unconsolidated entity was $12.8 million
Operations held for sale
In accordance with ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, a disposal of a component of an entity or a group of components of an entity is required to be reported as discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when the components of an entity meets the criteria in paragraph 205-20-45-1E to be classified as held for sale. When all of the criteria to be classified as held for sale are met, including management, having the authority to approve the action, commits to a plan to sell the entity, the major current assets, other assets, current liabilities, and noncurrent liabilities shall be reported as components of total assets and liabilities separate from those balances of the continuing operations. At the same time, the results of all discontinued operations (which we presented as operations to be disposed and operations disposed), less applicable income taxes (benefit), shall be reported as components of net income (loss) separate from the net income (loss) of continuing operations in accordance with ASC 205-20-45.
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.
One of our most significant estimates is the determination of fair value of the profit sharing liability. Since the liability is calculated and largely based on management’s expectations of product demand, pricing, raw materials cost and projected manufacturing efficiencies, it is susceptible to material changes when actual results deviate from those expectations. While we believe our current assumptions are reasonable and achievable, there is no assurance that those future expectations will be met or that significant adjustments won’t be required in the future.
Financial instruments
The accounting standard regarding “Disclosures about fair value of financial instruments” defines financial instruments and requires disclosure of the fair value of financial instruments held by us. We consider the carrying amount of cash, accounts receivable, other receivables, accounts payable and accrued liabilities to approximate their fair values because of the short period of time between the origination of such instruments and their expected realization. For short-term loans and notes payable, we concluded the carrying values are a reasonable estimate of fair value because of the short period of time between the origination and repayment and their stated interest rate approximates current rates available.
We also analyze all financial instruments with features of both liabilities and equity under the accounting standard establishing, “accounting for certain financial instruments with characteristics of both liabilities and equity,” the accounting standard regarding “accounting for derivative instruments and hedging activities” and “accounting for derivative financial instruments indexed to, and potentially settled in, a company’s own stock.” Additionally, we analyze registration rights agreements associated with any equity instruments issued to determine if penalties triggered for late filing should be accrued under accounting standard establishing “accounting for registration payment arrangements.”
Fair value measurements
The accounting standards regarding fair value of financial instruments and related fair value measurement define fair value, establish a three-level valuation hierarchy for disclosures of fair value measurement and enhance disclosures requirements for fair value measures. The three levels are defined as follow:
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| 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. |
Income Taxes
We did not conduct any business and did not maintain any branch office in the United States during the years ended December 31, 2016 and 2015. 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), our disposed entity, is located in Tianjin Costal Economic Development Zone and is subject to an income tax rate of 25%.
Longmen Joint Venture, our disposed entity, 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.
Maoming Hengda is located in Guangdong Province and is subject to an income tax rate of 25%.
Recently issued accounting pronouncements
In January 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information. The update requires equity investments (except those accounted for under the equity method or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. It eliminated the requirement for public entities to disclose the method(s) and significant assumptions used to estimate the fair value that is require to be disclosed for financial instruments measured at amortized cost on the balance sheet. For public entities, the ASU is effective for the fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The company has evaluated and determined that the adoption would not have a material effect on the company’s financial statements.
In February 2016, the FASB issued ASU 2016-02 Amendments to the ASC 842 Leases. This update requires lessee to recognize the assets and liability (the lease liability) arising from operating leases on the balance sheet for the lease term. When measuring assets and liabilities arising from a lease, a lessee (and a lessor) should include payments to be made in optional periods only if the lessee is reasonably certain to exercise an option to extend the lease or not to exercise an option to terminate the lease. Within a twelve months or less lease term, a lessee is permitted to make an accounting policy election not to recognize lease assets and liabilities. If a lessee makes this election, it should recognize lease expense on a straight-line basis over the lease term. In transition, this update will be effective for public entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The company has evaluated and determined that the adoption would not have a material effect on the company’s financial statements.
In April 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The ASU includes multiple provisions intended to simplify various aspects of the accounting for share-based payments. While aimed at reducing the cost and complexity of the accounting for share-based payments, the amendments are expected to significantly impact net income, EPS, and the statement of cash flows. Implementation and administration may present challenges for companies with significant share-based payment activities. The ASU is effective for public companies in annual periods beginning after December 15, 2016, and interim periods within those years. The company has evaluated and determined that the adoption would not have a material effect on the company’s financial statements.
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In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. The objective is to clarify the two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance, while retaining the related principles for these areas. The ASU affects the guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for this ASU are the same as the effective date and transition requirements in Topic 606 (and any other Topic amended by ASU 2014-09). ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date of ASU 2014-09 by one year. The company has evaluated and determined that the adoption would not have a material effect on the company’s financial statements.
In May 2016, the FASB issued ASU 2016-11, “Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting”, The amendments rescinds SEC paragraphs pursuant to two SEC Staff Announcements at the March 3, 2016 Emerging Issues Task Force (EITF) meeting. Specifically, registrants should not rely on the following SEC Staff Observer comments upon adoption of Topic 606: 1) Revenue and Expense Recognition for Freight Services in Process, which is codified in paragraph 605-20-S99-2; 2) Accounting for Shipping and Handling Fees and Costs, which is codified in paragraph 605-45-S99-1; 3) Accounting for Consideration Given by a Vendor to a Customer (including Reseller of the Vendor's Products), which is codified in paragraph 605-50-S99-1; 4) Accounting for Gas-Balancing Arrangements (i.e., use of the "entitlements method"), which is codified in paragraph 932-10-S99-5, which is effective upon adoption of ASU 2014-09. The company has evaluated and determined that the adoption would not have a material effect on the company’s financial statements.
In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. The object is to address certain issues identified by the FASB-IASB Joint Transition Resource Group for Revenue Recognition. The amendments in this Update affect the guidance in Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements for Topic 606 (and any other Topic amended by Update 2014-09). Accounting Standards Update 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date of Update 2014-09 by one year. The company has evaluated and determined that the adoption would not have a material effect on the company’s financial statements.
In August 2016, the FASB has issued Accounting Standards Update (ASU) No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments provide guidance on the following eight specific cash flow issues: (1) Debt Prepayment or Debt Extinguishment Costs; (2) Settlement of Zero-Coupon Debt Instruments or Other Debt Instruments with Coupon Interest Rates That Are Insignificant in Relation to the Effective Interest Rate of the Borrowing; (3) Contingent Consideration Payments Made after a Business Combination; (4)Proceeds from the Settlement of Insurance Claims; (5) Proceeds from the Settlement of Corporate-Owned Life Insurance Policies, including Bank-Owned; (6) Life Insurance Policies; (7) Distributions Received from Equity Method Investees; (8) Beneficial Interests in Securitization Transactions; and Separately Identifiable Cash Flows and Application of the Predominance Principle. The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The amendments should be applied using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. The company has evaluated and determined that the adoption would not have a material effect on the company’s financial statements.
In October 2016, the FASB has issued Accounting Standards Update (ASU) No. 2016-17, Consolidation (Topic 810): Interests held through related parties that are under common control. The amendments in this ASU require that the reporting entity, in determining whether it satisfies the second characteristic of a primary beneficiary, to include all of its direct variable interests in a VIE and, on a proportionate basis, its indirect variable interests in a VIE held through related parties, including related parties that are under common control with the reporting entity. The amendments are effective for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The adoption of this ASU did not have a material effect on the Company’s consolidated financial statements. The company has evaluated and determined that the adoption would not have a material effect on the company’s financial statements.
| 28 |
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the definition of a business. The amendments in this ASU is to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The amendments are effective for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. For all other entities, the amendments in this ASU are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Management does not believe the adoption of this ASU would have a material effect on the Company’s consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, Scope of Modification Accounting, which amends the scope of modification accounting for share-based payment arrangements and provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718. For all entities, this ASU is effective for annual reporting periods, including interim periods within those annual reporting periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period. The Company does not believe the adoption of this ASU would have a material effect on the Company’s financial statements.
In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815). The amendments in Part I of the Update change the reclassification analysis of certain equity-lined financial instruments (or embedded features) with down round features. The amendments in Part II of this Update re-characterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a scope exception. For public business entities, the amendments in Part I of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other entities, the amendments in Part I of this Update are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted for all entities, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments in Part II of this Update do not require any transition guidance because those amendments do not have an accounting effect. Management plans to adopt this ASU during the year ending December 2019. The Company does not believe the adoption of this ASU would have a material effect on the Company’s financial statements.
In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this Update affect any entity that is required to apply the provisions of Topic 220, Income Statement – Reporting Comprehensive Income, and has items of other comprehensive income for which the related tax effects are presented in other comprehensive income as required by GAAP. The amendments in this Update are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of the amendments in this Update is permitted, including adoption in any interim period, (1) for public business entities for reporting periods for which financial statements have not yet been issued and (2) for all other entities for reporting periods for which financial statements have not yet been made available for issuance. The amendments in this Update should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The Company does not believe the adoption of this ASU would have a material effect on the Company’s financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
| 29 |
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
GENERAL STEEL HOLDINGS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
Index to consolidated financial statements
30
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 sheets of General Steel Holdings, Inc. and Subsidiaries (the “Company”) as of December 31, 2015 and 2014, and the related consolidated statements of operations and comprehensive loss, change 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 audit to obtain reasonable assurance about whether the consolidated 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, 2015 and 2014, 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.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As more fully discussed in Note 2(d) to the consolidated financial statements, the Company has an accumulated deficit, has incurred continued losses from operations, and has a working capital deficiency at December 31, 2015. In addition, the majority of the Company’s operating assets and business has been divested at year-end or in the first quarter of 2016 to related parties as disclosed in Note 1 and Note 2(d) and Note 2(v). These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans regarding this matter are also described in Note 2(d). The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. If the Company is unable to successfully obtain the alternative forms of financing specified in Note 2(d) and/or achieve operating profitability, there could be a material adverse effect on the Company.
/s/ Friedman LLP
New York, NY
August 30, 2016
31
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3230 Fallow Field Drive Diamond Bar, CA 91765 Tel: +1 (909) 839-0188 Fax: +1 (909) 839-1128
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and shareholders of General Steel Holdings, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheet of General Steel Holdings, Inc. and subsidiaries (the “Company”) as of December 31, 2016, and the related consolidated statements of operations and comprehensive loss, changes in stockholders’ equity and cash flows for the year then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2016, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
Going Concern Uncertainty
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered from recurring working capital deficit, negative cash flows from operating activities, and accumulated deficit that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinions
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting 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.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Simon & Edward, LLP
Los Angeles, California
December 4, 2018
We have served as the Company's auditor since 2017.
32
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and par value per share data)
| December 31, | December 31, | |||||||
| 2016 | 2015 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | 4 | $ | 4 | ||||
| Other receivables, net | 1 | 163 | ||||||
| Other receivables - related party | 40,750 | - | ||||||
| Prepaid expense and other | - | 481 | ||||||
| Current assets held for sale | 30,581 | 1,609 | ||||||
| TOTAL CURRENT ASSETS | 71,336 | 2,257 | ||||||
| OTHER ASSETS: | ||||||||
| Investment in unconsolidated entities | 12,759 | 14,886 | ||||||
Equipment, net | 1 | 18,618 | ||||||
| TOTAL OTHER ASSETS | 12,760 | 33,504 | ||||||
| TOTAL ASSETS | $ | 84,096 | $ | 35,761 | ||||
| LIABILITIES AND EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Short-term loan - other | $ | - | $ | 3,600 | ||||
| Accounts payable - related party | - | - | ||||||
| Other payables and accrued liabilities | 732 | 636 | ||||||
| Other payables - related parties | 49,832 | 42,756 | ||||||
| Customer deposit - related parties | - | - | ||||||
| Taxes payable | - | 14 | ||||||
| Current liabilities held for sale | 29,008 | 31,155 | ||||||
| TOTAL CURRENT LIABILITIES | 79,572 | 78,161 | ||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| EQUITY (DEFICIENCY): | ||||||||
| Series A - Preferred stock, $0.001 par value, 50,000,000 shares authorized, 3,092,899 shares issued and outstanding as of December 31, 2016 and December 31, 2015 | 3 | 3 | ||||||
| Series B - Preferred stock, $0.001 par value, 50,000,000 shares authorized, 0 shares issued and outstanding as of December 31, 2016 and December 31, 2015 | - | - | ||||||
| Common stock, $0.001 par value, 200,000,000 and 40,000,000 shares authorized, 20,494,670 and 17,802,357 shares issued, and 20,000,208 shares and 17,307,895 shares outstanding as of December 31, 2016 and December 31, 2015, respectively (given retroactive effect to the 1-for-5 reverse stock split effective on October 29, 2015) | 20 | 18 | ||||||
| Treasury stock, at cost, 494,462 shares as of December 31, 2016 and December 31, 2015 (given retroactive effect to the 1-for-5 reverse stock split effective on October 29, 2015) | (840 | ) | (840 | ) | ||||
Additional-paid-in-capital | 1,253,384 | 1,208,667 | ||||||
| Statutory reserves | 1,107 | 1,107 | ||||||
| Accumulated deficit | (1,250,522 | ) | (1,252,810 | ) | ||||
| Accumulated other comprehensive income | 1,372 | 2,009 | ||||||
| TOTAL GENERAL STEEL HOLDINGS, INC. EQUITY (DEFICIENCY) | 4,524 | (41,846 | ) | |||||
| NONCONTROLLING INTERESTS | - | (554 | ) | |||||
| TOTAL EQUITY (DEFICIENCY) | 4,524 | (42,400 | ) | |||||
| TOTAL LIABILITIES AND EQUITY | $ | 84,096 | $ | 35,761 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
33
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
(In thousands, except per share data)
| 2016 | 2015 | |||||||
| GENERAL AND ADMINISTRATIVE EXPENSES | $ | (2,710 | ) | $ | (10,811 | ) | ||
| LOSS FROM OPERATIONS | (2,710 | ) | (10,811 | ) | ||||
| OTHER INCOME (EXPENSE) | ||||||||
| Income (loss) from equity investment | (1,204 | ) | - | |||||
| Finance/interest expense | - | (3 | ) | |||||
| Gain from debt settlement | 2,455 | - | ||||||
| Gain from disposal of Catalon | 6,269 | - | ||||||
| Other expense | (140 | ) | - | |||||
| Other income (expense), net | 7,380 | (3 | ) | |||||
| INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES AND NONCONTROLLING INTEREST | 4,670 | (10,814 | ) | |||||
| PROVISION FOR INCOME TAXES | - | - | ||||||
| NET INCOME (LOSS) FROM CONTINUING OPERATIONS | 4,670 | (10,814 | ) | |||||
| DISCONTINUED OPERATIONS - Note 2(o): | ||||||||
| NET INCOME FROM OPERATIONS TO BE DISPOSED, net of applicable income taxes | 122 | (13,680 | ) | |||||
| NET LOSS FROM OPERATIONS DISPOSED, net of applicable income taxes | (2,530 | ) | (1,279,820 | ) | ||||
| NET INCOME (LOSS) | 2,262 | (1,304,314 | ) | |||||
| Less: Net loss attributable to noncontrolling interest from operations to be disposed | - | (1,933 | ) | |||||
| Less: Net loss attributable to noncontrolling interest from operations disposed | (26 | ) | (513,092 | ) | ||||
| NET INCOME (LOSS) ATTRIBUTABLE TO GENERAL STEEL HOLDINGS, INC. | $ | 2,288 | $ | (789,289 | ) | |||
| NET INCOME (LOSS) | $ | 2,262 | $ | (1,304,314 | ) | |||
| OTHER COMPREHENSIVE (LOSS) INCOME | ||||||||
| Foreign currency translation adjustments | (645 | ) | 93,824 | |||||
| COMPREHENSIVE INCOME (LOSS) | 1,617 | (1,210,490 | ) | |||||
| Less: Comprehensive loss attributable to noncontrolling interest | (34 | ) | (483,442 | ) | ||||
| COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO GENERAL STEEL HOLDINGS, INC. | $ | 1,651 | $ | (727,048 | ) | |||
| WEIGHTED AVERAGE NUMBER OF SHARES | ||||||||
| Basic and Diluted (given retroactive effect to the 1-for-5 reverse stock split effective on October 29, 2015) | 17,302 | 13,749 | ||||||
| INCOME (LOSS) PER SHARE - BASIC AND DILUTED | ||||||||
| Continuing operations | $ | 0.27 | $ | (0.79 | ) | |||
| Operations to be disposed | $ | 0.00 | $ | (0.85 | ) | |||
| Operations disposed | $ | (0.15 | ) | $ | (55.77 | ) | ||
| Net income (loss) per share | $ | 0.13 | $ | (57.41 | ) | |||
The accompanying notes are an integral part of these consolidated financial statements.
34
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(In thousands)
| Retained earnings / Accumulated deficits | Accumulated other | |||||||||||||||||||||||||||||||||||||||||||||||
| Preferred stock | Common stock (1) | Treasury stock (1) | Additional- paid-in | Statutory | comprehensive | Noncontrolling | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Par value | Shares | Par value | Shares | At cost | capital | reserves | Unrestricted | income | interest | Total | |||||||||||||||||||||||||||||||||||||
| BALANCE, December 31, 2014 | 3,093 | $ | 3 | 12,892 | $ | 13 | (494 | ) | $ | (840 | ) | $ | 112,186 | $ | 6,472 | $ | (463,521 | ) | $ | 644 | $ | (217,082 | ) | $ | (562,125 | ) | ||||||||||||||||||||||
| Net loss attributable to General Steel Holdings, Inc | (789,289 | ) | (789,289 | ) | ||||||||||||||||||||||||||||||||||||||||||||
| Net loss attributable to noncontrolling interest | (515,025 | ) | (515,025 | ) | ||||||||||||||||||||||||||||||||||||||||||||
| Addition to special reserve | 427 | 416 | 843 | |||||||||||||||||||||||||||||||||||||||||||||
| Usage of special reserve | (252 | ) | (283 | ) | (535 | ) | ||||||||||||||||||||||||||||||||||||||||||
| Common stock transferred by CEO for compensation | 2,211 | 2,211 | ||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for services | 1,300 | 1 | 4,088 | 4,089 | ||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued to senior management | 1,010 | 1 | 2,100 | 2,101 | ||||||||||||||||||||||||||||||||||||||||||||
| Common stock transferred by CEO for compensation | - | |||||||||||||||||||||||||||||||||||||||||||||||
| Contribution commitment from noncontrolling interest | 489 | 489 | ||||||||||||||||||||||||||||||||||||||||||||||
| Contribution receivable from noncontrolling interest | (489 | ) | (489 | ) | ||||||||||||||||||||||||||||||||||||||||||||
| Acquisition of Catalon | 2,600 | 3 | 8,317 | 1,526 | 9,846 | |||||||||||||||||||||||||||||||||||||||||||
| Sale of Steel Operations to entity under common control | 1,079,765 | (5,540 | ) | (60,876 | ) | 698,311 | 1,711,660 | |||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | 62,241 | 31,583 | 93,824 | |||||||||||||||||||||||||||||||||||||||||||||
| BALANCE, December 31, 2015 | 3,093 | $ | 3 | 17,802 | $ | 18 | (494 | ) | $ | (840 | ) | $ | 1,208,667 | $ | 1,107 | $ | (1,252,810 | ) | $ | 2,009 | $ | (554 | ) | $ | (42,400 | ) | ||||||||||||||||||||||
| Net income attributable to General Steel Holdings, Inc | 2,288 | 2,288 | ||||||||||||||||||||||||||||||||||||||||||||||
| Net loss attributable to noncontrolling interest | (26 | ) | (26 | ) | ||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued | 1,500 | 2 | 1,498 | 1,500 | ||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for services | 521 | - | 732 | 732 | ||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for debt cancellation | 3,273 | 3 | 1,142 | 1,145 | ||||||||||||||||||||||||||||||||||||||||||||
| Disposal of Catalon | (2,600 | ) | (3 | ) | (4,313 | ) | 359 | (3,957 | ) | |||||||||||||||||||||||||||||||||||||||
| Sale of Steel Operations to related party | 45,658 | 229 | 45,887 | |||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | (637 | ) | (8 | ) | (645 | ) | ||||||||||||||||||||||||||||||||||||||||||
| - | ||||||||||||||||||||||||||||||||||||||||||||||||
| BALANCE, December 31, 2016 | 3,093 | $ | 3 | 20,496 | $ | 20 | (494 | ) | $ | (840 | ) | $ | 1,253,384 | $ | 1,107 | $ | (1,250,522 | ) | $ | 1,372 | $ | - | $ | 4,524 | ||||||||||||||||||||||||
(1) Given retroactive effect to the 1-for-5 reverse stock split effective on October 29, 2015
The accompanying notes are an integral part of these consolidated financial statements.
35
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDEDS DECEMBER 31, 2016 AND 2015
(In thousands)
| 2016 | 2015 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net Income (loss) | $ | 2,262 | $ | (1,304,314 | ) | |||
| Net loss from operations to be disposed | 122 | (13,680 | ) | |||||
| Net loss from operations disposed | (2,530 | ) | (1,279,820 | ) | ||||
| Net income (loss) from continuing operations | 4,670 | (10,814 | ) | |||||
| Adjustments to reconcile net loss to cash provided by (used in) operating activities from continuing operations: | ||||||||
| Bad debt expenses | 169 | - | ||||||
| Share-based compensation | 847 | 7,918 | ||||||
| Loss from equity investment | 1,204 | - | ||||||
| Gain from debt settlement | (2,455 | ) | - | |||||
| Gain from disposal of Catalon | (6,269 | ) | - | |||||
| Changes in operating assets and liabilities | ||||||||
| Other receivables | (7 | ) | (27 | ) | ||||
| Prepaid expense and other | - | 29 | ||||||
| Other payables and accrued liabilities | 462 | 610 | ||||||
| Other payables - related party | - | (6,463 | ) | |||||
| Taxes payable | - | 13 | ||||||
| Net cash used in operating activities from operations to be disposed/ operations disposed | (1,524 | ) | (7,847 | ) | ||||
| Net cash used in operating activities | (2,903 | ) | (16,581 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of equipment | (1 | ) | - | |||||
| Net cash provided by investing activities from operations to be disposed / operations disposed | - | 151,249 | ||||||
| Net cash (used in) provided by investing activities | (1 | ) | 151,249 | |||||
| CASH FLOWS FINANCING ACTIVITIES: | ||||||||
| Borrowings from related parties | 1,454 | - | ||||||
| Proceed from private placement | 1,500 | - | ||||||
| Net cash provided by financing activities from operations to be disposed / operations disposed | - | (148,737 | ) | |||||
| Net cash provided by financing activities | 2,954 | (148,737 | ) | |||||
| EFFECTS OF EXCHANGE RATE CHANGE IN CASH | (38 | ) | 2,470 | |||||
| INCREASE (DECREASE) IN CASH | 12 | (11,599 | ) | |||||
| CASH, beginning of year | 44 | 11,641 | ||||||
| CASH, end of year | 56 | 42 | ||||||
| Less: cash from operations disposed, end of year | (52 | ) | (38 | ) | ||||
| CASH FROM CONTINUING OPERATIONS, end of year | $ | 4 | $ | 4 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
36
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, has been operating steel companies serving various industries in the People’s Republic of China (“PRC”). The Company’s main operation, since its disposal of its significant steel producing operating assets at December 31, 2016 and the disposal of its final steel producing operating assets on March 21, 2016, has been its trading business in iron ore, nickel-iron-manganese alloys, and other steel-related products. The Company, together with its subsidiaries, majority owned subsidiaries and variable interest entity, is referred to as the “Group”.
In view of the near-term challenges for the steel manufacturing sector, the Company strategically accelerated its business transformation between 2016 and 2017. The Company’s transformation strategy is to pursue opportunities that offer compelling benefits to the Company’s organization and shareholders, and includes:
• First, strengthen the Company’s financials while providing the financial flexibility to pursue higher return, higher growth opportunities;
• Second, reduce the complexity of the Company’s business structure, which is consistent with the Company’s objectives for internal simplification and operating efficiency;
• Third, diversify operating risk in order to lower the Company’s high reliance on steel business, while at the same time leverage on the Company’s vast vertical resources in the steel industry; and
• Fourth, pursue opportunities for additional value creation.
On November 4, 2015, the Company's Board of Directors (the "Board"), including the audit committee, committed to a plan and authorized the Company's management to pursue the potential sale of all its ownership interest in Maoming Hengda Steel Company, Ltd. ("Maoming Hengda") and Shaanxi Longmen Iron and Steel Co., Ltd. (“Longmen Joint Venture”) in order to unlock the value in Maoming Hengda's land assets, as well as divest from and restructure the steel business. The results of operations for Maoming Hengda were classified in net loss from operations to be disposed and assets and liabilities held for sale for the year ended December 31, 2015.
On December 30, 2015, the Company entered into an agreement to sell its wholly-owned General Steel (China) and its entire equity interest in all of its subsidiaries for $1 million to Victory Energy Resource Limited, a HK registered company indirectly-owned by Zuosheng Yu, the Company's Chairman. As a result of this transaction, the Company met the criteria under ASC 810-10-40-4 to deconsolidate General Steel (China), General Shengyuan, Yangpu Shengtong, Qiu Steel, and Longmen Joint Venture and subsidiaries at disposal date. The disposed entities’ net loss through the disposal date were consolidated and presented as operations disposed for the year ended December 31, 2015 in the consolidated financial statements. See Note 2(o) “Summary of significant accounting policies – operations held for sale and operations disposed/to be disposed” for details.
On March 21, 2016, the Company sold its interest in Maoming Hengda thereby fully completing the divestiture of its steel manufacturing business as planned. As a result, Maoming Hengda’s financial information was presented as operation disposed and assets and liabilities held for sales for the years ended December 31, 2016 and 2015 in the consolidated financial statements.
Other Business Operations:
The Company established a subsidiary wholly owned by General Steel Investment Co., Ltd., Tongyong Shengyuan (Tianjin) Technology Development Co., Ltd. (“Tongyong Shengyuan”) in June 2015. Tongyong Shengyuan is the holding company for Tianjin Shuangsi Trading Co. Ltd. (“Tianjin Shuangsi”).
In October 2015, the Company completed its acquisition of an 84.5% equity interest in Catalon Chemical Corp. (“Catalon”), a Delaware corporation headquartered in Virginia that develops and manufactures De-NOx honeycomb catalysts and industrial ceramics. Prior to December 31, 2015, the Company became aware of some operational issues related to Catalon. It was determined that such issues might have affected the prior operations of Catalon as well as the ability to conduct business in the future. As such, the Company is expected to cancel the shares issued to the 84.5% original owners of Catalon in accordance with the terms of the agreement. Therefore the Company presented Catalon’s remaining assets, after impairment charges, and liabilities as held for sale as of December 31, 2015. On March 31, 2016 the Company decided to dispose of Catalon, so the result of operations of Catalon was presented as operations disposed in December 31, 2016 in the consolidated financial statements.
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GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company’s remaining business is primarily comprised of Tianjin Shuangsi Trading Co. Ltd. (“Tianjin Shuangsi”), a trading company in which the Company acquired 100% equity interest on February 16, 2016 for consideration of $0.03 million as Tianjin Shuangsi was established by the chief executive officer of the Company’s related entity and his relative. Tianjin Shuangsi primarily trades iron ore, nickel-iron-manganese alloys, and other steel-related products. On December 31, 2017, the Company sold Shuangsi to Wendler Investment & Management Group Co., Ltd, a related party, no consideration was received. Therefore the result of operations was presented as operations to be disposed in December 31, 2016 in the consolidated financial statements See Note 2(o) – Operations held for sale and operations disposed/to be disposed.
Note 2 – Summary of significant accounting policies
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 interim financial information pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The financial statements include the accounts of all directly, indirectly owned subsidiaries and the variable interest entity listed below. All material intercompany transactions and balances have been eliminated in consolidation. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the financial statements have been included.
| (a) | Basis of presentation |
The consolidated financial statements of the Company reflect the activities of the following major directly owned subsidiaries as of December 31, 2016:
| Subsidiary | Percentage of Ownership | |||||
| General Steel Investment Co., Ltd. | British Virgin Islands | 100.0 | % | |||
| Tongyong Shengyuan (Tianjin) Technology Development Co., Ltd. (“Tongyong Shengyuan”) | PRC | 100.0 | % | |||
| Tianjin Shuangsi Trading Co. Ltd. (“Tianjin Shuangsi”) | PRC | 100.0 | % | |||
| (b) | Principles of consolidation |
Subsidiaries:
The accompanying consolidated financial statements include the financial statements of the Company and its 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.
All significant inter-company transactions and balances have been eliminated upon consolidation.
VIE:
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.
Longmen Joint Venture’s equity at risk was and continues to be insufficient to finance its activities and therefore Longmen Joint Venture was 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. |
38
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A Supervisory Committee was formed during the negotiation of the Unified Management Agreement. Given there is both a Supervisory Committee and a Board of Directors with respect to Longmen Joint Venture , the powers (rights and roles) of both bodies were considered to determine which party has the power to direct the activities of Longmen Joint Venture, and by extension, whether the Company continued 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 held 2 out of 4 seats, required a ¾ majority vote, while the Board of Directors, on which the Company held 4 out of 7 seats, required 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 prevailed, the Supervisory Committee was considered subordinate to the Board. Thus, the Board of Directors of Longmen Joint Venture continued to be the controlling decision-making body with respect to Longmen Joint Venture. The Company, which controlled 60% of the voting rights of the Board of Directors, had control over the operations of Longmen Joint Venture and as such, had the power to direct the activities of the VIE that most significantly impact Longmen Joint Venture’s economic performance.
The Company had the obligation to absorb losses and the rights to receive benefits based on the profit allocation as stipulated by the Unified Management Agreement that were significant to the VIE. As both conditions were met, the Company was the primary beneficiary of Longmen Joint Venture and therefore, continued to consolidate Longmen Joint Venture as a VIE until its disposal on December 30, 2015.
| For the year ended December 31, 2015 through date of disposal (December 30, 2015) | ||||
| (in thousands) | ||||
| Sales | $ | 1,541,564 | ||
| Gross loss | $ | (188,153 | ) | |
| (Loss) income from operations | $ | (1,189,740 | ) | |
| Net loss attributable to controlling interest | $ | (763,512 | ) | |
| (c) | Going concern |
Pursuant to ASU 2014-15, the Company has assessed its ability to continue as a going concern for a period of one year from the date of the issuance of these consolidated financial statements. Substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year from the financial statement issuance date. The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principle, which contemplate continuation of the Company as a going concern. The Company currently has an accumulated deficit, working capital deficit, and incurred negative cash flows from operating activities. These conditions raise substantial doubt as to its ability to continue as a going concern. These consolidated financial statements do not include adjustments relating to the recoverability and classification of reported asset amounts or the amount and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Management anticipates that the Company will be dependent, for the near future, on its ability to obtain financial support and credit guarantee from the Company’s shareholders or other available resources from the PRC banks and other financial institutions given the Company’s credit history. However, there is no assurance that the Company will be successful in this or any of its endeavors or become financially viable to continue as a going concern.
| (d) | 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. Actual results could differ from these estimates.
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GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| (e) | Concentration of risks and other uncertainties |
The Company’s operations are carried out in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC’s economy. The Company’s operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in North America and Western Europe. The Company’s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.
The Company has significant exposure to the price fluctuation of raw materials and energy prices as part of its normal operations. As of December 31, 2016 and 2015, the Company did not have any open commodity contracts to mitigate such risks.
Cash includes demand deposits in accounts maintained with banks within the PRC, Hong Kong and the United States. Total cash (including restricted cash balances) in these banks on December 31, 2016 and 2015 amounted to $0.03 million and $0.04 million, respectively. As of December 31, 2016, $0.03 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.
Three of the Company’s customers from operations held for sales, including related parties, individually accounted for 33.0%, 29.5% and 6.3% of total gross sales for the year ended December 31, 2016 respectively. One of the Company’s customers individually accounted for 15.1% total sales from operations disposed for the year ended December 31, 2015.
One of the Company’s customers, a related party, accounted for 100% of the total customer deposit as of December 31, 2016 from operations held for sale. One of the Company’s customers from operation held for sale individually accounted 96.2% of total accounts receivable, including related parties as of December 31, 2015.
Three of the Company’s suppliers, including two related parties, individually accounted for 29.6%, 15.0% and 40.1% of the total purchases for the year ended December 31, 2016 from operations held for sale. None of the Company’s suppliers individually accounted for more than 10% of the total purchases for the year ended December 31, 2015.
Three of the Company’s suppliers, all related parties, individually accounted for 46.8%, 16.0% and 37.2% of total accounts payable as of December 31, 2016 from operations held for sale, while none of the Company’s suppliers individually accounted for more than 10% of total accounts payable as of December 31, 2015.
| (f) | 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 $1.37 million and $2.0 million as of December 31, 2016 and 2015, respectively. The balance sheet amounts, with the exception of equity at December 31, 2016 and 2015 were translated at 6.94 RMB and 6.49 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, 2016 and 2015 were 6.64 RMB and 6.23 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.
40
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| (g) | Financial instruments |
The accounting standard 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 investments, accounts receivable, other receivables, accounts payable and accrued liabilities, to approximate their fair values because of the short period of time between the origination of such instruments and their expected realization.
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. |
As described in Note 15 - Capital lease obligations, payments related to the capital lease of the Asset Pool consist of two components: (1) a fixed monthly payment of $2.3 million (RMB 14.6 million), based on Shaanxi Steel’s cost to construct the assets, to be paid for the 20 year term of the Unified Management Agreement; and (2) 40% of any remaining pre-tax profits from the Asset Pool, which included Longmen Joint Venture and the constructed iron and steel making facilities. The aforementioned profit sharing component met the definition of a derivative instrument under ASC 815-10-15-83 and, accordingly, the profit sharing liability was accounted for separately as a derivative liability. It was recognized initially at its estimated fair value at inception. The estimated fair value was adjusted each reporting period, with changes in the estimated fair value of the profit sharing liability charged or credited to operating income each period.
The Company determined 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 was 6.5%.
The fair value of the profit sharing liability would 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 reporting period, the Company considered 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. On November 22, 2014, the People’s Bank of China decreased standard bank borrowing rate across the board by 0.4%. Accordingly, the Company adjusted down the present value discount rate for profit sharing liability by 0.4% from 7.3% to 6.9%. On May 11, 2015, the People’s Bank of China decreased the standard bank borrowing rate again across the board by 0.25%. Accordingly, the Company adjusted down the present value discount rate for profit sharing liability by 0.25% from 6.9% to 6.7%. On June 27, 2015 the People’s Bank of China decreased the standard bank borrowing rate again across the board by 0.25%. Accordingly, the Company adjusted down the present value discount rate for profit sharing liability by 0.25% from 6.7% to 6.5%.
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 |
For the three months ended March 31, 2015, the Company recognized a $12.9 million reduction in the fair value of profit sharing liability resulting from the change in estimates of future operating profits based on the April 2015 actual operating results and consideration for the Chinese steel market trends in April 2015 as well as the May 11, 2015 change to the Borrowing Rate by 0.25%. These further recent changes in market conditions resulted in a decrease in the expected liability of $16.6 million primarily from adjustments to the 2015 and 2016 expected cash flows as well as a $2.5 million loss from the reduction in the present value discount rate of 0.25% and a $1.2 million loss from the present value discount.
The variables and the impact on the Company’s inputs to the first quarter of 2015 valuation of profit sharing fair value, as compared to the 2014 valuation of the profit sharing fair value can be summarized as follows:
| - | Volume Inputs: the Company reduced our projected sales volume in 2015 by 3% versus the forecast used in 2014. | |
| - | Steel Sales Price Inputs: the Company reduced our projected selling price in 2015 by 12% versus the forecast used in 2014 and reduced our projected selling price in 2016 by 7% versus the forecast used in 2014. |
For the three months ended June 30, 2015, the Company recognized a $57.5 million reduction in the fair value of profit sharing liability resulting from the change in estimates of future operating profits based on the actual operating results through June 2015 and the continued deterioration of steel market conditions in the second quarter of 2015, which deviated from our previously anticipated industry environment improvement, as well as the June 27, 2015 change to the Borrowing Rate by 0.25%. These further recent changes in market conditions resulted in a decrease in the expected liability of $54.8 million primarily from adjustments to the 2015 to 2031 expected cash flows as well as a $2.6 million loss from the reduction in the present value discount rate of 0.25%, a $1.2 million loss from the present value discount, and a $6.5 million gain resulting from the Asset Pool’s operating results for the three months ended June 30, 2015 being less favorable than previously estimated as of March 31, 2015. The estimated fair value of the profit sharing liability at June 30, 2015 and through the date of the business disposition on December 30, 2016 was reduced to $0. At the same time, the reduction in the estimated future cash flows expected to be generated from Longmen Joint Venture’s operations caused the value of the Assets Pool to fall below the carrying value of Longmen Joint Venture’s long-lived assets, which triggered an impairment of $973.9 million (see Note 2(r)).
The variables and the impact on the Company’s inputs to the second quarter of 2015 valuation of profit sharing fair value, as compared to the first quarter valuation of the profit sharing fair value can be summarized as follows:
| - | Volume Inputs: the Company increased our projected sales volume between 2015 and 2031 in response to recent policy initiatives from the Chinese government to boost infrastructure investment and further steel industry consolidation. | |
| - | Steel Sales Price Inputs: the Company reduced the projected selling price in 2015 by 19% versus the forecast used in the first quarter of 2015 and reduced the projected selling price between 2016 and 2031 proportionally based on the reduction for 2015. | |
| - | Raw Material Cost Inputs: based on the actual results in the second quarter of 2015 and the latest market trends, the Company reduced cost of goods sold in 2015 by 12% versus the forecast used in the first quarter of 2015 and reduced our projected cost of goods sold between 2016 and 2031 proportionally based on the reduction for 2015. |
The following is a reconciliation of the beginning and ending balance of the assets and liabilities measured at fair value on a recurring basis in operations disposed for the year ended December 31, 2015:
| December 31, 2015 | ||||
| (in thousands) | ||||
| Beginning balance | $ | 70,422 | ||
| Change in fair value of profit sharing liability: | ||||
| Change in preset value of estimate of future operating profits | (71,395 | ) | ||
| Change in discount rate | 5,012 | |||
| Interest expense - present value discount amortization | 2,443 | |||
| Difference between the previously estimated operating results for the current period and actual results | (6,483 | ) | ||
| Exchange rate effect | 1 | |||
| Ending balance | $ | - | ||
The Company did not identify any assets or liabilities that are required to be presented on the balance sheet at fair value.
| (h) | Cash |
Cash includes cash on hand and demand deposits in banks with original maturities of less than three months.
| (i) | 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.
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GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| (j) | 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.
| (k) | Inventories |
Inventories are mainly finished goods and are stated at the lower of cost or market using the first-in, first-out 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.
| (l) | 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 |
Through their respective disposals long lived assets, including buildings and improvements, equipment and intangible assets are reviewed if events and changes in circumstances indicate that their 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. Impairment loss of $973.9 million to reduce its carrying value to its fair value has been recognized for the year ended December 31, 2015 in operations disposed. No impairment was recognized in 2016.
| (m) | 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.
On December 28, 2015 General Steel (China) sold its 32% equity interest in Tianwu General Steel Material Trading Co., Ltd. (“Tianwu”) to Tongyong Shengyuan, one of our wholly owned subsidiaries, for $14.9 million (RMB 96.6 million). As of December 31, 2016, Tongyong Shengyuan’s net investment in the unconsolidated entity was $12.8 million
Total investment loss in unconsolidated subsidiaries from continuing operations amounted to $1.2 million and $0 for the years ended December 31, 2016 and 2015, respectively, which was included in “Income (loss) from equity investment” in the consolidated statements of operations and comprehensive loss.
Total investment income (loss) in unconsolidated subsidiaries from operations disposed amounted to $0 and $0.3 million for the years ended December 31, 2016 and 2015, respectively, which was included in net loss from operations disposed in the consolidated statements of operations and comprehensive loss.
The Company performed a significance test in accordance with SEC Rule 1-02(w) of Regulation S-X and determined Tianwu qualify as a significant equity investee for the year ended December 31, 2016. Tianwu was not deemed a significant investee for 2015 due to insignificant operating results from acquisition date of December 28, 2015. The condensed financial statements of Tianwu is presented as follows:
42
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED BALANCE SHEET
(In thousands)
| December 31,2016 | ||||
| CURRENT ASSETS: | ||||
| Cash | $ | 207 | ||
| Other receivables, net | 4,828 | |||
| Prepayments | 80,243 | |||
| Inventory | 1,713 | |||
| Total current assets | 86,991 | |||
| OTHER ASSETS: | ||||
| Property and equipment, net | 98 | |||
| Operations held for sale | 20,355 | |||
| Total other assets | 20,453 | |||
| TOTAL ASSETS | $ | 107,444 | ||
| CURRENT LIABILITIES: | ||||
| Accounts payable | $ | 4,133 | ||
| Short term loans | 2,880 | |||
| Other payables and accrued liabilities | 24,594 | |||
| Taxes payable | 56 | |||
| Total current liabilities | 31,663 | |||
| NON-CURRENT LIABILITIES | ||||
| Long term loans | 35,998 | |||
| TOTAL LIABILITIES | 67,661 | |||
| CAPITAL | 48,860 | |||
| RETAINED DEFICIT | (9,077 | ) | ||
| TOTAL EQUITY AND LIABILITIES | $ | 107,444 | ||
CONDENSED STATEMENT OF OPERATIONS
(In thousands)
| NET SALES | $ | 2,818 | ||
| SELLING, GENERAL AND ADMINISTRATIVE EXPENSES | 570 | |||
| FINANCE EXPENSES | 3,905 | |||
| OTHER EXPENSES (INCOME) | (74 | ) | ||
| TOTAL EXPENSES | 4,401 | |||
| INCOME BEFORE PROVISION FOR INCOME TAXES | (1,583 | ) | ||
| PROVISION FOR INCOME TAXES | 19 | |||
| NET LOSS FOR CONTINUING OPERATIONS | (1,602 | ) | ||
| NET LOSS FROM OPERATIONS HELD FOR SALE | (2,160 | ) | ||
| NET LOSS | $ | (3,762 | ) |
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GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| (n) | 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.
Gross versus Net Revenue Reporting
In the normal course of the Company’s trading business, the Company orders directly the iron ore, nickel-iron-manganese alloys, and other steel-related products from its suppliers and drop ships the products directly to its customers. In these situations, the Company generally collects the sales proceeds directly from its customers and pays for the inventory purchases to its suppliers separately. The determination of whether revenues should be reported on a gross or net basis is based on the Company’s assessment of whether it is the principal or an agent in the transaction. In determining whether the Company is the principal or an agent, the Company follows the accounting guidance for principal-agent considerations. Because the Company is not the primary obligor and is not responsible for (i) fulfilling the steel-related products delivery, (ii) establishing the selling prices for delivery of the steel-related products, (iii) performing all billing and collection activities including retaining credit risk and (iv) baring the back-end risk of inventory loss with respect to any product return from its customer, the Company has concluded that it is the agent in these arrangements, and therefore report revenues and cost of revenues on a net basis.
Sales in trading transactions, which were netted against corresponding cost of goods sold, amounted to $336.6 million for the years ended December 31, 2015. The net gain (loss) included in either net sales or cost of sales from operations disposed amounted to $1.0 million for the year ended December 31, 2015.
For the year ended December 31, 2016, the Company had gross sales of $140.9 million, of from operations held for sale which $89.2 million were related party sales. Net revenue for related party sales were $0.01 million and $0.22 million for non related party. See details of related party sales and purchases in Note 14.
| (o) | Operations held for sale and operations disposed/to be disposed |
In accordance with ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, a disposal of a component of an entity or a group of components of an entity is required to be reported as discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when the components of an entity meet the criteria in paragraph 205-20-45-1E to be classified as held for sale. When all of the criteria to be classified as held for sale are met, including management, having the authority to approve the action, commits to a plan to sell the entity, the major current assets, other assets, current liabilities, and noncurrent liabilities shall be reported as components of total assets and liabilities separate from those balances of the continuing operations. At the same time, the results of all discontinued operations (which we presented as operations to be disposed and operations disposed), less applicable income taxes (benefit), shall be reported as components of net income (loss) separate from the net income (loss) of continuing operations in accordance with ASC 205-20-45.
Reconciliation of the Carrying Amounts of Major Classes of Assets and Liabilities of Discontinued Operations Classified as Held for Sale in the Consolidated Balance Sheet which include Shuangsi’ operations as of December 31, 2016, Catalon and Maoming Hengda’s operations as of December 31, 2015, respectively.
44
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| December 31, | December 31, | |||||||
| (In thousands) | 2016 | 2015 | ||||||
| Carrying amounts of major classes of assets included as part of discontinued operations: | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | 26 | $ | 38 | ||||
| Accounts receivable, net | 1 | 342 | ||||||
| Other receivables, net | - | 11 | ||||||
| Other receivables - related parties, net | 30,554 | - | ||||||
| Prepaid taxes | - | 1,218 | ||||||
| Total current assets held for sale | 30,581 | 1,609 | ||||||
| OTHER ASSETS: | ||||||||
| Property and equipment, net | 1 | 16,593 | ||||||
| Long-term deferred expense | - | 2 | ||||||
| Intangible assets, net of accumulated amortization | - | 2,023 | ||||||
| Total other assets held for sale | 1 | 18,618 | ||||||
| Total assets of the disposal group classified as held for sale | $ | 30,582 | $ | 20,227 | ||||
| Carrying amounts of major classes of liabilities included as part of discontinued operations: | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable | $ | - | $ | 6,336 | ||||
| Accounts payable - related parties | 13,448 | - | ||||||
| Short term loans - others | - | 461 | ||||||
| Other payables and accrued liabilities | 2,448 | 2,551 | ||||||
| Other payables - related parties | 773 | 21,807 | ||||||
| Customer deposits - related parties | 12,242 | - | ||||||
| Taxes payable | 97 | - | ||||||
| Total current liabilities held for sale | 29,008 | 31,155 | ||||||
| Total liabilities of the disposal group classified as held for sale | $ | 29,008 | $ | 31,155 | ||||
45
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Reconciliation of the Amounts of Major Classes of Income and Losses from Operations to be Disposed Classified as Held for Sale and Disposed in the Consolidated Statements of Operations and Comprehensive Loss.
| For the years ended December 31, | ||||||||
| 2016 | 2015 | |||||||
| Operations to be disposed: | ||||||||
| SALES | $ | 218 | $ | 125 | ||||
| SALES – RELATED PATIES | 12 | - | ||||||
TOTAL SALES | 230 | 125 | ||||||
| COST OF GOODS SOLD | - | 242 | ||||||
| GROSS (LOSS) PROFIT | 230 | (117 | ) | |||||
| SELLING, GENERAL AND ADMINISTRATIVE EXPENSES | (60 | ) | (13,394 | )* | ||||
| INCOME (LOSS) FROM OPERATIONS | 170 | (13,511 | ) | |||||
| OTHER INCOME (EXPENSE) | ||||||||
| Finance/interest expense | (8 | ) | - | |||||
| (Loss) gain on disposal of equipment and intangible assets | - | (9 | ) | |||||
| Other non-operating expense, net | - | (160 | ) | |||||
| Other expense, net | (8 | ) | (169 | ) | ||||
| LOSS BEFORE PROVISION FOR INCOME TAXES AND NONCONTROLLING INTEREST | 162 | (13,680 | ) | |||||
| PROVISION FOR INCOME TAXES | 40 | - | ||||||
| NET LOSS FROM OPERATIONS TO BE DISPOSED | 122 | (13,680 | ) | |||||
| Less: Net loss attributable to noncontrolling interest from operations to be disposed | - | (1,933 | ) | |||||
| NET LOSS FROM OPERATIONS TO BE DISPOSED ATTRIBUTABLE TO GENERAL STEEL HOLDINGS, INC. | $ | 122 | $ | (11,747 | ) | |||
*Included an impairment charge of $12.2 million in December 2015 associated with Catalon intangible assets (See Note 16)
| For the years ended December 31, | ||||||||
| 2016 | 2015 | |||||||
| Operations Disposed: | ||||||||
| SALES | $ | - | $ | 993,744 | ||||
| SALES - RELATED PARTIES | - | 549,197 | ||||||
| TOTAL SALES | - | 1,542,941 | ||||||
| COST OF GOODS SOLD | - | 1,123,690 | ||||||
| COST OF GOODS SOLD - RELATED PARTIES | - | 606,414 | ||||||
| TOTAL COST OF GOODS SOLD | - | 1,730,104 | ||||||
| GROSS LOSS | - | (187,163 | ) | |||||
| SELLING, GENERAL AND ADMINISTRATIVE EXPENSES | (2,530 | ) | (72,827 | ) | ||||
| EXCESS OVERHEAD DURING MAINTENANCE | - | (27,701 | ) | |||||
| IMPAIRMENT CHARGE | - | (973,860 | ) | |||||
| CHANGE IN FAIR VALUE OF PROFIT SHARING LIABILITY | - | 70,423 | ||||||
| (LOSS) INCOME FROM OPERATIONS | (2,530 | ) | (1,191,128 | ) | ||||
| OTHER INCOME (EXPENSE) | ||||||||
| Interest income | - | 7,242 | ||||||
| Finance/interest expense | - | (97,734 | ) | |||||
| Loss on disposal of equipment and intangible assets | - | (29 | ) | |||||
| Government grant | - | 2,056 | ||||||
| Income from equity investments | - | 342 | ||||||
| Foreign currency transaction (loss) gain | - | (3,174 | ) | |||||
| Lease income | - | 2,145 | ||||||
| Gain on deconsolidated of a subsidiary | - | - | ||||||
| Other non-operating income (expense), net | - | 1,063 | ||||||
| Other expense, net | - | (88,089 | ) | |||||
| LOSS BEFORE PROVISION FOR INCOME TAXES AND NONCONTROLLING INTEREST | (2,530 | ) | (1,279,217 | ) | ||||
| PROVISION FOR INCOME TAXES | - | 603 | ||||||
| NET LOSS FROM OPERATIONS DISPOSED | (2,530 | ) | (1,279,820 | ) | ||||
| Less: Net loss attributable to noncontrolling interest from operations disposed | (26 | ) | (513,092 | ) | ||||
| NET LOSS FROM OPERATIONS DISPOSED ATTRIBUTABLE TO GENERAL STEEL HOLDINGS, INC. | $ | (2,504 | ) | $ | (766,728 | ) | ||
46
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
General Steel (China)
On December 30, 2015, the Company entered into an agreement to sell its wholly-owned General Steel (China) and its entire equity interest in all of its subsidiaries for $1 million to Victory Energy Resource Limited, a HK registered company indirectly-owned by Zuosheng Yu, the Company's Chairman. As Victory Energy Resource Limited is a related party under common control with the Company under Mr. Zuosheng Yu, the net consideration has recognized as a contribution to capital as opposed to a gain. As of December 30, 2015, the net deficiency of GS China amounted to $1.0 billion and a net consideration of $1.0 million. Accordingly, the Company recorded the total amount of net consideration of $1.0 billion in additional-paid-in capital. The net deficiency of GS China as of December 30, 2015 is as follows:
| December 30, | ||||
| (In thousands) | 2015 | |||
| CURRENT ASSETS: | ||||
| Cash | $ | 122,577 | ||
| Restricted cash | 12,336 | |||
| Notes receivable | 9,010 | |||
| Loan receivable – related parties | 5,769 | |||
| Accounts receivable, net | 4,966 | |||
| Accounts receivable - related parties, net | 173,287 | |||
| Other receivables, net | 118,106 | |||
| Other receivables - related parties, net | 236,162 | |||
| Inventories | 72,024 | |||
| Advances on inventory purchase, net | 39,463 | |||
| Advances on inventory purchase - related parties | 15,968 | |||
| Prepaid expense and other | 26 | |||
| Prepaid taxes | 762 | |||
| Short-term investment | 2,064 | |||
| Total current | 812,520 | |||
| OTHER ASSETS: | ||||
| Property and equipment, net | 515,169 | |||
| Advances on equipment purchase | 9,140 | |||
| Investment in unconsolidated entities | 1,024 | |||
| Long-term deferred expense | 412 | |||
| Intangible assets, net of accumulated amortization | 19,048 | |||
| Total other assets | 544,793 | |||
| Total assets | $ | 1,357,313 | ||
| CURRENT LIABILITIES: | ||||
| Short term notes payable | $ | 273,632 | ||
| Accounts payable | 571,366 | |||
| Accounts payable - related parties | 465,858 | |||
| Short term loans - bank | 45,151 | |||
| Short term loans - related parties | 23,038 | |||
| Other payables and accrued liabilities | 93,193 | |||
| Other payables - related parties | 191,276 | |||
| Customer deposits | 42,515 | |||
| Customer deposits - related parties | 203,413 | |||
| Taxes payable | 1,849 | |||
| Deferred lease income, current | 2,059 | |||
| Capital lease obligations, current | 11,201 | |||
| Total current liabilities | 1,924,551 | |||
| NON-CURRENT LIABILITIES HELD FOR SALE | ||||
| Long-term loans | 702,261 | |||
| Deferred lease income, noncurrent | 68,407 | |||
| Capital lease obligations, noncurrent | 385,576 | |||
| Total non-current liabilities held for sale | 1,156,244 | |||
| NON-CONTROLLING INTEREST | (698,311 | ) | ||
| Total net deficiency | (1,025,171 | ) | ||
| Net consideration | (1,000 | ) | ||
| Currency translation adjustment | 12,822 | |||
| Total addition to paid-in capital | $ | (1,013,349 | ) | |
Maoming Hengda
On March 21, 2016, the Company, along with its 1% minority interest holder, jointly signed an equity transfer agreement (the "Agreement") to sell 100% of the equity interest in Maoming Hengda to Tianwu Tongyong (Tianjin) International Trade Co., Ltd, ("Tianwu Tongyong"), a related party, in which the Company has a 32% equity interest. The Company expects to receive its 99% ownership for the total proceeds of RMB 328.0 million (approximately $50.5 million), of which RMB 262.3 million (approximately $40.4 million) will be paid within five days after the signing of the Agreement, and the remainder RMB 65.7 million (approximately $10.1 million) will be paid within one year. On August 10, 2016, the Company has signed two offset agreements with Tianwu Tongyuan and two of its debtors to offset its payables of RMB 262.3 million (approximately $40.4 million) to its debtors with Tianwu Tongyong. The agreement was amended in April 2017 to set the sale price at RMB 155.3 million or approximately $23.9 million. The Company received total proceeds of RMB 154.0 million (approximately $23.9 million), the full amount was collected in April 2017.
47
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accordingly, the Company recorded the total amount of net consideration of $45.7 million in additional-paid-in capital. The net deficiency of Maoming Hengda as of March 21, 2016 is as follows:
| (In thousands) | March 21, 2016 | |||
| (Unaudited) | ||||
| CURRENT ASSETS: | ||||
| Cash | $ | 2 | ||
| Accounts receivable, net | 344 | |||
| Other receivables, net | 15 | |||
| Total current | 361 | |||
| OTHER ASSETS: | ||||
| Property and equipment, net | 16,321 | |||
| Long-term deferred expense | 2 | |||
| Intangible assets, net of accumulated amortization | 2,023 | |||
| Total other assets | 18,346 | |||
| Total assets | $ | 18,707 | ||
| CURRENT LIABILITIES: | ||||
| Accounts payable | 6,377 | |||
| Short term loans - other | 464 | |||
| Other payables and accrued liabilities | 3,033 | |||
| Other payables - related parties | 430 | |||
| Other payables - intercompany | 30,650 | |||
| Total current liabilities | 40,954 | |||
| NON-CONTROLLING INTEREST | (16 | ) | ||
| Total net deficiency | (22,232 | ) | ||
| Net consideration | (23,507 | ) | ||
| Currency translation adjustment | 81 | |||
| Total addition to paid-in capital | $ | (45,658 | ) | |
Catalon:
Due to operational issues, Catalon was not able to meet the Minimum Sales Target or Minimum Net Profit applicable as stipulated in the Stock Exchange agreement, therefore the board has voted unanimously to cancel the shares that were placed in escrow for the selling shareholders. As such the Company deconsolidated Catalon on March 31, 2016. The net deficiency of Catalon as of March 31, 2016 is as follows:
| (In thousands) | March 31, 2016 | |||
| CURRENT ASSETS: | ||||
| Cash | $ | 24 | ||
| Total current | 24 | |||
| CURRENT LIABILITIES: | ||||
| Other payables - related parties | 2,279 | |||
| Total current liabilities | 2,279 | |||
| NON-CONTROLLING INTEREST | (358 | ) | ||
| Total net deficiency | (1,953 | ) | ||
| Net consideration | (4,316 | ) | ||
| Gain in disposal of subsidiary | $ | (6,269 | ) | |
| (p) | 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.
48
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| (q) | Non-controlling interest |
Non-controlling interest mainly consists of an individual’s 1% interest in Maoming Hengda prior to March 21, 2016, and two individuals’ 15.5% interest in Catalon prior to March 31, 2016. 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.
| (r) | 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.
| (s) | 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 both December 31, 2016 and 2015, the Company had repurchased 494,462 total shares of its common stock, given retroactive effect to the 1-for-5 reverse stock split effective on October 29, 2015, under the share repurchase plan approved by the Board of Directors in December 2010.
| (t) | 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.
49
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. As of December 31, 2016, the Company’s income tax returns filed for December 31, 2015, 2014, 2013 and 2012 remain subject to examination by the taxing authorities. The Company has not filed its 2016 federal tax return as of the date of the filing and has accrued $140,000 in estimated penalty for the year.
| (u) | 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.
| (v) | 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, 2016 and 2015 amounted to $0 and $26.9million, respectively, from operations disposed.
| (w) | Recently issued accounting pronouncements |
In January 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information. The update requires equity investments (except those accounted for under the equity method or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. It eliminated the requirement for public entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. For public entities, the ASU is effective for the fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The company has evaluated and determined that the adoption would not have a material effect on the company’s financial statements.
In February 2016, the FASB issued ASU 2016-02 Amendments to the ASC 842 Leases. This update requires lessee to recognize the assets and liability (the lease liability) arising from operating leases on the balance sheet for the lease term. When measuring assets and liabilities arising from a lease, a lessee (and a lessor) should include payments to be made in optional periods only if the lessee is reasonably certain to exercise an option to extend the lease or not to exercise an option to terminate the lease. Within a twelve months or less lease term, a lessee is permitted to make an accounting policy election not to recognize lease assets and liabilities. If a lessee makes this election, it should recognize lease expense on a straight-line basis over the lease term. In transition, this update will be effective for public entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The company has evaluated and determined that the adoption would not have a material effect on the company’s financial statements.
In April 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The ASU includes multiple provisions intended to simplify various aspects of the accounting for share-based payments. While aimed at reducing the cost and complexity of the accounting for share-based payments, the amendments are expected to significantly impact net income, EPS, and the statement of cash flows. Implementation and administration may present challenges for companies with significant share-based payment activities. The ASU is effective for public companies in annual periods beginning after December 15, 2016, and interim periods within those years. The company has evaluated and determined that the adoption would not have a material effect on the company’s financial statements.
50
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. The objective is to clarify the two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance, while retaining the related principles for these areas. The ASU affects the guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for this ASU are the same as the effective date and transition requirements in Topic 606 (and any other Topic amended by ASU 2014-09). ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date of ASU 2014-09 by one year. The company has evaluated and determined that the adoption would not have a material effect on the company’s financial statements.
In May 2016, the FASB issued ASU 2016-11, “Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting”, The amendments rescinds SEC paragraphs pursuant to two SEC Staff Announcements at the March 3, 2016 Emerging Issues Task Force (EITF) meeting. Specifically, registrants should not rely on the following SEC Staff Observer comments upon adoption of Topic 606: 1) Revenue and Expense Recognition for Freight Services in Process, which is codified in paragraph 605-20-S99-2; 2) Accounting for Shipping and Handling Fees and Costs, which is codified in paragraph 605-45-S99-1; 3) Accounting for Consideration Given by a Vendor to a Customer (including Reseller of the Vendor's Products), which is codified in paragraph 605-50-S99-1; 4) Accounting for Gas-Balancing Arrangements (i.e., use of the "entitlements method"), which is codified in paragraph 932-10-S99-5, which is effective upon adoption of ASU 2014-09. The company has evaluated and determined that the adoption would not have a material effect on the company’s financial statements.
In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. The object is to address certain issues identified by the FASB-IASB Joint Transition Resource Group for Revenue Recognition. The amendments in this Update affect the guidance in Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements for Topic 606 (and any other Topic amended by Update 2014-09). Accounting Standards Update 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date of Update 2014-09 by one year. The company has evaluated and determined that the adoption would not have a material effect on the company’s financial statements.
In August 2016, the FASB has issued Accounting Standards Update (ASU) No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments provide guidance on the following eight specific cash flow issues: (1) Debt Prepayment or Debt Extinguishment Costs; (2) Settlement of Zero-Coupon Debt Instruments or Other Debt Instruments with Coupon Interest Rates That Are Insignificant in Relation to the Effective Interest Rate of the Borrowing; (3) Contingent Consideration Payments Made after a Business Combination; (4)Proceeds from the Settlement of Insurance Claims; (5) Proceeds from the Settlement of Corporate-Owned Life Insurance Policies, including Bank-Owned; (6) Life Insurance Policies; (7) Distributions Received from Equity Method Investees; (8) Beneficial Interests in Securitization Transactions; and Separately Identifiable Cash Flows and Application of the Predominance Principle. The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The amendments should be applied using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. The company has evaluated and determined that the adoption would not have a material effect on the company’s financial statements.
In October 2016, the FASB has issued Accounting Standards Update (ASU) No. 2016-17, Consolidation (Topic 810): Interests held through related parties that are under common control. The amendments in this ASU require that the reporting entity, in determining whether it satisfies the second characteristic of a primary beneficiary, to include all of its direct variable interests in a VIE and, on a proportionate basis, its indirect variable interests in a VIE held through related parties, including related parties that are under common control with the reporting entity. The amendments are effective for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The company has evaluated and determined that the adoption would not have a material effect on the company’s financial statements.
51
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the definition of a business. The amendments in this ASU is to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The amendments are effective for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Management does not believe the adoption of this ASU would have a material effect on the Company’s consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, Scope of Modification Accounting, which amends the scope of modification accounting for share-based payment arrangements and provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718. For all entities, this ASU is effective for annual reporting periods, including interim periods within those annual reporting periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period. The Company does not believe the adoption of this ASU would have a material effect on the Company’s financial statements.
In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815). The amendments in Part I of the Update change the reclassification analysis of certain equity-lined financial instruments (or embedded features) with down round features. The amendments in Part II of this Update re-characterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a scope exception. For public business entities, the amendments in Part I of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted for all entities, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments in Part II of this Update do not require any transition guidance because those amendments do not have an accounting effect. Management plans to adopt this ASU during the year ending December 2019. The Company does not believe the adoption of this ASU would have a material effect on the Company’s financial statements.
In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this Update affect any entity that is required to apply the provisions of Topic 220, Income Statement – Reporting Comprehensive Income, and has items of other comprehensive income for which the related tax effects are presented in other comprehensive income as required by GAAP. The amendments in this Update are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of the amendments in this Update is permitted, including adoption in any interim period, (1) for public business entities for reporting periods for which financial statements have not yet been issued. The amendments in this Update should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The Company does not believe the adoption of this ASU would have a material effect on the Company’s financial statements.
The Company does not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on the consolidated financial position, statements of operations and cash flows.
52
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 – Accounts receivable (including related party), net
Accounts receivable, including related party receivables, net of allowance for doubtful accounts consists of the following:
| December 31, 2016 | December 31, 2015 | |||||||
| (in thousands) | (in thousands) | |||||||
| Accounts receivable | $ | 1 | $ | 342 | ||||
| Accounts receivable – related party | - | - | ||||||
| Net accounts receivable | 1 | 342 | ||||||
| Less: accounts receivables – held for sale | (1 | ) | (342 | ) | ||||
| Net accounts receivables – continuing operations | $ | - | $ | - | ||||
Movement of allowance for doubtful accounts is as follows:
| December 31, 2016 | December 31, 2015 | |||||||
| (in thousands) | (in thousands) | |||||||
| Beginning balance | $ | - | $ | 609 | ||||
| Charge to expense | - | 201 | ||||||
| Less: recovery | - | - | ||||||
| Deconsolidation | - | (769 | ) | |||||
| Exchange rate effect | - | (41 | ) | |||||
| Ending balance | $ | - | $ | - | ||||
Note 4 – Other receivables (including related parties), net
Other receivables, including related party receivables, net of allowance for doubtful accounts consists of the following:
| December 31,2016 | December 31, 2015 | |||||||
| (in thousands) | (in thousands) | |||||||
| Other receivables | $ | 170 | $ | 174 | ||||
| Other receivables – related party | 71,304 | - | ||||||
| Less: allowance for doubtful accounts | (169 | ) | - | |||||
| Net other receivables | 71,305 | 174 | ||||||
| Less: other receivables – held for sale | (30,554 | ) | (11 | ) | ||||
| Net other receivables – continuing operations | $ | 40,751 | $ | 163 | ||||
Movement of allowance for doubtful accounts, including related parties, is as follows:
| December 31, 2016 | December 31, 2015 | |||||||
| (in thousands) | (in thousands) | |||||||
| Beginning balance | $ | - | $ | 10,262 | ||||
| Charge to expense | 169 | 5,007 | ||||||
| Less: recovery | - | (5 | ) | |||||
| Less: deconsolidation | - | (15,119 | ) | |||||
| Exchange rate effect | - | (145 | ) | |||||
| Ending balance | 169 | - | ||||||
| Less: balance – held for sale | - | - | ||||||
| Ending balance – continuing operations | $ | 169 | $ | - | ||||
53
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 – Inventories
Inventories consist of the following:
| December
31, 2016 | December 31, 2015 | |||||||
| (in thousands) | (in thousands) | |||||||
| Finished goods | - | - | ||||||
| Less: allowance for inventory valuation | - | - | ||||||
| Inventories | $ | - | $ | - |
The cost of finished goods includes direct inventory purchase costs and indirect costs. 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 first-in, first-out method, or net realizable value.
Movement of allowance for inventory valuation is as follows:
| December 31, 2016 | December 31, 2015 | |||||||
| (in thousands) | (in thousands) | |||||||
| Beginning balance | $ | - | $ | 18,375 | ||||
| Addition | - | 22,192 | ||||||
| Less: write-off | - | (18,115 | ) | |||||
| Less: inventory disposed of - Note 2(p) | - | (22,192 | ) | |||||
| Exchange rate effect | - | (260 | ) | |||||
| Ending balance | $ | - | $ | - | ||||
Note 6 – Advances on inventory purchases
Advances on inventory purchases, including related party, net of allowance for doubtful accounts consists of the following:
| December 31, 2016 | December 31, 2015 | |||||||
| (in thousands) | (in thousands) | |||||||
| Advances on inventory purchases | $ | - | $ | 439 | ||||
| Advances on inventory purchases – related party | - | - | ||||||
| Less: allowance for doubtful accounts | - | (439 | ) | |||||
| Net advances on inventory purchases | $ | - | $ | - | ||||
Movement of allowance for doubtful accounts, including related parties, is as follows:
| December 31, 2016 | December 31, 2015 | |||||||
| (in thousands) | (in thousands) | |||||||
| Beginning balance | $ | 439 | $ | 2,501 | ||||
| Charge to expense | - | - | ||||||
| Less recovery | - | (462 | ) | |||||
| Less deconsolidation | (439 | ) | (1,927 | ) | ||||
| Exchange rate effect | - | 327 | ||||||
| Ending balance | $ | - | $ | 439 | ||||
54
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 – Plant and equipment, net
Plant and equipment consist of the following:
| December 31, 2016 | December 31, 2015 | |||||||
| (in thousands) | (in thousands) | |||||||
| Buildings and improvements | $ | - | $ | 21,895 | ||||
| Machinery | - | 9,344 | ||||||
| Machinery under capital lease | - | 262 | ||||||
| Transportation and other equipment | 7 | - | ||||||
| Subtotal | 7 | 31,501 | ||||||
| Less: accumulated depreciation | (6 | ) | (14,908 | ) | ||||
| Equipment, net – held for sale | $ | 1 | $ | 16,593 | ||||
| Less: equipment, net – held for sale | (1 | ) | (16,593 | ) | ||||
| Net equipment, net – continuing operations | $ | - | $ | - | ||||
Depreciation expense for the years ended December 31, 2016 and 2015 amounted to $0. Depreciation expense from operations disposed for the year ended December 31, 2015 amounted to $78.2 million. These amounts include depreciation of assets held under capital leases for the year ended December 31, 2015, which amounted to $31.0 million.
Note 8 – Intangible assets, net – held for sale
Intangible assets consist of the following:
| December 31, 2016 | December 31, 2015 | |||||||
| (in thousands) | (in thousands) | |||||||
| Land use rights | $ | - | $ | 2,558 | ||||
| Mining right | - | - | ||||||
| Software | - | 10 | ||||||
| Subtotal | - | 2,568 | ||||||
| Less: | ||||||||
| Accumulated amortization – land use rights | - | (535 | ) | |||||
| Accumulated amortization – mining right | - | - | ||||||
| Accumulated amortization – software | - | (10 | ) | |||||
| Subtotal | - | (545 | ) | |||||
| Intangible assets, net – held for sale | $ | - | $ | 2,023 | ||||
The gross amount of the intangible assets amounted to $0 and $2.6 million as of December 31, 2016 and 2015, respectively.
Total amortization expense from operations disposed for the years ended December 31, 2016 and 2015 amounted to $0 million and $0.8 million, respectively.
Total depletion expense from operations disposed for the years ended December 31, 2016 and 2015 amounted to $0 million and $0.2 million, respectively.
Note 9 – Debt
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 is 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:
55
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Short-term Loan – other
| December 31, 2016 | December 31, 2015 | |||||||
| (in thousands) | (in thousands) | |||||||
| Maoming Hengda: Loans from one unrelated party and one related party, due on demand, non-interest bearing. | $ | - | $ | 461 | ||||
| General Steel Investment Co., Ltd.: Loan from one unrelated party, due to demand, the interest rate was 5% per annum as of December 31, 2016. | - | 3,600 | ||||||
| Total short-term loans – others | - | 4,061 | ||||||
| Less: short-term loans – others – held for sale | - | (461 | ) | |||||
| Short-term loans – others – continuing operations | $ | - | $ | 3,600 | ||||
On August 19, 2016, the Company signed a debt cancellation agreement with Oriental Ace Limited, an unrelated third party, in conversion of short-term loan payable of $3.6 million into 3,272,727 shares of Common Stock at $0.35per share resulting in a gain on debt extinguishment of $2.45 million.
All short term loans from unrelated companies are payable on demand and unsecured.
As part of its working capital management until the disposition of Longmen Joint Venture on December 30, 2015, Longmen Joint Venture entered into a number of sale and purchase back contracts ("contracts") with third party companies, Longmen Joint Venture 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 would sell rebar to the third party companies at a certain price, and within the same month, Yuxin and Yuteng would purchase back the rebar from the third party companies at a price of 4.6% to 12.0% higher than the original selling price from Longmen Joint Venture. Based on the contract terms, Longmen Joint Venture would be paid in advance for the rebar sold to the third party companies and Yuxin and Yuteng would be given a credit for a period of several months to one year from the third party companies. There was no physical movement of the inventory during the sale and purchase back arrangement. The margin of 4.6% to 12.0% was determined by reference to the bank loan interest rates at the time when the contracts were entered into, plus an estimated premium based on the financing sale amount, which represented 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 were eliminated and the incremental amounts paid by Yuxin and Yuteng to purchase back the goods were treated as financing costs included in the unaudited consolidated financial statements.
Longmen Joint Venture’s total financing sales for the years ended December 31, 2016 and 2015 amounted to $0 million and $329.3 million, respectively, which were eliminated in the Company’s consolidated financial statements. The financial cost related to financing sales for the years ended December 31, 2016 and 2015 amounted to $0 million and $1.5 million, respectively, and classified in net loss from operation disposed included in the consolidated statements of operations.
Total interest expense, net of capitalized interest, from operations disposed amounted to $0 million and $55.6 million for the years ended December 31, 2016 and 2015. Capitalized interest from operations disposed amounted to $0 and $8.8 million for the years ended December 31, 2016 and 2015.
Note 10 - Supplemental disclosure of cash flow information
Interest paid, net of capitalized interest, amounted to $0 and $9.1 million for the years ended December 31, 2016 and 2015, respectively.
Income tax paid amounted to $0 and $0.2 million for the years ended December 31, 2016 and 2015, respectively.
During the year ended December 31, 2016, the Company increased additional paid-in capital of $45.6 million as a result of the gain on sale of subsidiary to a related party. As of December 31, 2016, the unpaid receivable resulted from this transaction amounted to $23.8 million.
During the year ended December 31, 2016, the Company incurred $0.61 million share-based compensation expense to pay off its accrued liabilities.
On August 10, 2016, the Company signed two offset agreements with Tianwu Tongyuan and two of its debtors, GS China and Qiu Steel, to offset its payables of RMB 262.3 million (approximately $40.4 million) to its debtors with Tianwu Tongyong.
56
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company offset $10.6 million of other receivable – related parties with other payable – related parties for the year ended December 31, 2016.
On August 19, 2016, the Company signed a debt cancellation agreement with Oriental Ace Limited, an unrelated third party, in conversion of short-term loan payable of $3.6 million into 3,272,727 shares of Common Stock at $0.35 per share resulting in a gain on debt extinguishment of $2,454,546.
During the year ended December 31, 2016, the Company incurred $0.24 million share-based compensation expense for consulting services.
During the years ended December 31, 2015, the Company used $21.3 million inventory in plant and equipment constructions for the disposed operation.
The Company had $24.4 million notes receivable from financing sales loans to be converted to cash as of December 31, 2015.
The Company transferred $24.9 million purchase deposits - related parties from loan receivables – related parties for the disposed operations as of December 31, 2015.
The Company transferred $3.6 million other payable – related parties to short-term loan – other during the year ended December 31, 2015.
The Company prepaid $0.5 million for consulting services through the issuance of common stocks for the year ended December 31, 2015.
The Company offset $2.6 million other receivables – related parties and other payables – related parties during the years ended December 31, 2015.
The Company incurred unpaid equity investment in Tianwu Tongyong and investment in Maoming Hengda of $56.2 million due to the disposed operations.
The Company issued $8.3 million in common stocks to acquire Catalon on October 23, 2015.
Note 11 - Deferred lease income – operations disposed
To compensate Longmen Joint Venture 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 $29.9 million (RMB 183.1 million) for the reduced production efficiency caused by the construction. In addition, in 2010 and 2011, Shaanxi Steel reimbursed Longmen Joint Venture $14.6 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 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 from operations disposed is amortized to income over the remaining term of the 40-year land sub-lease. For the years ended December 31, 2015, the Company recognized $2.1 million. As of December 31, 2015, the balance of deferred lease income held for sale amounted to $0.
57
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 - Capital lease obligations/ Profit sharing liability – operations disposed
Iron and steel production facilities
On April 29, 2011, Longmen Joint Venture entered into a Unified Management Agreement with Shaanxi Steel and Shaanxi Coal under which Longmen Joint Venture used 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 exceeded 75% of the assets’ useful lives, this arrangement was accounted for as a capital lease. The ongoing lease payments were comprised of two elements: (1) a monthly payment based on Shaanxi Steel’s cost to construct the assets of $2.3 million (RMB 14.6 million) to be paid over the term of the Unified Management Agreement of 20 years and (2) 40% of any remaining pre-tax profits from the Asset Pool which includes Longmen Joint Venture and the newly constructed iron and steel making facilities. In February 2014, Shaanxi Steel agreed that it will not demand capital lease payment from Longmen Joint Venture until February 2017. For purposes of 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 was recognized as a derivative liability, which was carried at fair value.
Energy-saving equipment
During 2013 and 2014, 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 used the energy-saving equipment for which the vendors were 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 varied between four to six years, began 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 were accounted for as capital leases.
The minimum lease payments were based on the energy cost saved during the lease periods, which was determined by the estimated annual equipment operating hours per the lease agreements. If the actual annual equipment operating hours were less than the estimated amount, the lease periods might be extended, subject to further negotiation and agreement between Longmen Joint Venture and the vendors. If the actual annual equipment operating hours exceeded the estimated amount, Longmen Joint Venture was obligated to make additional lease payments based on the additional energy cost saved during the lease period and would recognize the additional lease payments as contingent rent expense. $23.0 million (RMB $146.5) energy-saving equipment under these lease agreements had been capitalized through the date of the Company’s disposal of Longmen Joint Venture and no contingent rent expense had been incurred.
Interest expense for the years ended December 31, 2016 and 2015 on the capital lease obligations from operations disposed was $0 million and $20.2 million, respectively.
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 was accounted for separately from the fixed portion of the capital lease obligation (see Note 11 - “Capital lease obligation – operations disposed”) and was accounted for as a derivative instrument in accordance with ASC 815-10-15-83. The estimated fair value of the profit sharing liability was 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”. As of December 30, 2015, date of disposal of GS China, the profit sharing liability was reduced to $0.
Payments to Shaanxi Steel for the profit sharing liability are not required until net cumulative profits are achieved. Based on the performance of the Asset Pool, no profit sharing payment was made from inception through ultimate disposition in December 30, 2015.
Note 13 – 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, 2016 and 2015 are as follows:
| (In thousands) | For the year ended December 31, 2016 | For the year ended December 31, 2015 | ||||||
| Current | $ | 40 | $ | 603 | ||||
| Total provision for income taxes – Discontinued operations | $ | 40 | $ | 603 | ||||
Under the Income Tax Laws of the PRC, Tianjin Shuangsi and Maoming Hengda (located in Guangdong province) are subject to income tax at a rate of 25%.
58
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2016 and 2015 are as follows:
| December 31, 2016 | December 31, 2015 | |||||||
| U.S. Statutory rates | 34.0 | % | 34.0 | % | ||||
| Foreign income not recognized in the U.S. | (34.0 | )% | (34.0 | )% | ||||
| China income tax rate | 25.0 | % | 25.0 | % | ||||
| Effect of tax rate differential of subsidiaries/VIE | - | (9.1 | )% | |||||
| Effect of change in deferred tax assets valuation allowance | (25 | )% | (15.3 | )% | ||||
| Effect of permanent difference – change in fair value of profit sharing liability | - | 0.9 | % | |||||
| Effect of permanent difference – capital lease obligation for iron and steel production facilities | - | (1.1 | )% | |||||
| Nondeductible expenses | - | (0.4 | )% | |||||
| Total provision for income taxes | 0.0 | % | 0.0 | % | ||||
Deferred taxes assets – China
According to Chinese tax regulations, net operating losses can be carried forward to offset operating income for the next five years. The Company’s losses carried forward from operations disposed of $930.6 million has begun to expire in 2016. However, the balance was disposed after the disposed operations in Longman Joint Venture on December 30, 2015 and after the disposed operations in Maoming Hengda on March 21, 2016. The Chinese government recently announced several policies to curb the real estate price increases across the country which led to a slowdown in demand for construction steel products. Additionally due to the continued global economic slowdown and the overcapacity issues in China's steel market, management expected there would be a sustained increase in margin pressure in the next five years until all the existing but outdated steel capacity across the whole industry is 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 for operations held for sale as of December 31, 2016 and December 31, 2015 was $0 million and $4.1 million, respectively. Management will review this valuation allowance periodically and make adjustments as warranted. Temporary differences represent tax and book differences in various items, such as receivable allowances, inventory allowances, impairments on fixed assets and deferred lease income.
The movement of the deferred income tax assets arising from carried forward losses is as follows:
| December 31, 2015 | ||||
| (in thousands) | ||||
| Beginning balance | $ | - | (A) | |
| (Tax assets realized) net operating losses carried forward for subsidiaries subject to a 25% tax rate | 7,140 | |||
| Effective tax rate | 25 | % | ||
| Addition (deduction) in deferred tax asset | 1,785 | (B) | ||
| Net operating losses carried forward for Longmen Joint Venture and subsidiaries subject to a 15% tax rate | 317,027 | |||
| Effective tax rate | 15 | % | ||
| Addition in deferred tax asset | 47,554 | (C) | ||
| Temporary difference carried forward for subsidiaries subject to a 25% tax rate | (991 | ) | ||
| Effective tax rate | 25 | % | ||
| Addition (deduction) in deferred tax asset | (248 | )(D) | ||
| Temporary difference carried forward for subsidiaries subject to a 15% tax rate | 893,881 | |||
| Effective tax rate | 15 | % | ||
| Addition (deduction) in deferred tax asset | 134,082 | (E) | ||
| Addition in valuation allowance | (190,899 | )(F) | ||
| Exchange difference | 7,726 | (H) | ||
| Total (A+B+C+D+E+F+G+H) | $ | - | ||
Movement of valuation allowance:
| December 31, 2015 | ||||
| (in thousands) | ||||
| Beginning balance | $ | 114,820 | ||
| Current period addition | 192,182 | |||
| Current period reversal | (1,283 | ) | ||
| Disposal and sale of subsidiaries | (299,499 | ) | ||
| Exchange difference | (2,148 | ) | ||
| Ending balance – held for sale | $ | 4,072 | ||
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, 2016. The net operating loss carry forwards for United States income taxes amounted to $6.4 million, which may be available to reduce future years’ taxable income. These carry forwards will expire, if not utilized, starting from 2027 through 2034. Management believes that the realization of the benefits from these losses appears uncertain due to the Company’s limited operating history and continuing losses for United States income tax purposes. Accordingly, the Company has provided a 100% valuation allowance on the deferred tax asset benefit to reduce the asset to zero. The valuation allowance as of December 31, 2016 was $2.3 million. The net change in the valuation allowance for the year ended December 31, 2016 was $0.4 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, 2016 and 2015, respectively. 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, 2015, the Company had $0 million in value added tax credit which are available to offset future VAT payables.
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 from disposed operations amounted to $654.4 million and $635.8 million, respectively, for the year ended December 31, 2015.
59
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Taxes payable consisted of the following:
| December 31, 2016 | December 31, 2015 | |||||||
| (in thousands) | (in thousands) | |||||||
| VAT taxes payable | $ | 58 | $ | - | ||||
| Income taxes payable | 39 | - | ||||||
| Misc. taxes | - | 14 | ||||||
| Totals | 97 | 14 | ||||||
| Less: taxes payable held for sale | (97 | ) | - | |||||
| Taxes payable – continuing operations | $ | - | $ | 14 | ||||
Note 14 – Related party transactions and balances
Related party transactions
a. The following chart summarized sales to related parties for the years ended December 31, 2016 and 2015.
| Name of related parties | Relationship | For the year ended December 31, 2016 | For the year ended December 31, 2015 | |||||||
| (in thousands) | (in thousands) | |||||||||
| Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | $ | - | $ | 76,939 | |||||
| Tianjin Dazhan Industry Co., Ltd | Partially owned by CEO through indirect shareholding** | 18 | 1,956 | |||||||
| Shaanxi Haiyan Trade Co., Ltd | Significant influence by Long Steel Group* | - | 45,031 | |||||||
| Shaanxi Shenganda Trading Co., Ltd | Partially owned by CEO through indirect shareholding** | - | 23,974 | |||||||
| Shaanxi Steel | Majority shareholder of Long Steel Group | - | 304,086 | |||||||
| Shaanxi Coal and Chemical Industry Group Co., Ltd. | Shareholder of Shaanxi Steel | - | 67,293 | |||||||
| Shaanxi Long Steel Group Baoji Group Co., Ltd | Subsidiary of Long Steel Group | 28,882 | ||||||||
| Tianjin Hengying Trading Co., Ltd | Partially owned by CEO through indirect shareholding | (558 | ) | 763 | ||||||
| Tianjin Daqiuzhuang Steel Plates Co., Ltd | Partially owned by CEO through indirect shareholding | 178 | - | |||||||
| Tianwu General Steel International Trading Co., Ltd | Investee of Tongyong Shengyuan | - | 273 | |||||||
| Wendlar Tianjin Industry Co., Ltd. (Formerly known as Qiu Steel) | Partially owned by CEO through indirect shareholding | 374 | $ | - | ||||||
| Total | 12 | 549,197 | ||||||||
| Less: Sales to related parties from operations disposed/held for sale | (12 | ) | (549,197 | ) | ||||||
| Sales–related parties – continuing operations | $ | - | $ | - | ||||||
**The CEO is referred to herein as the chief executive officer of General Steel Holdings, Inc. Mr. Zuosheng Yu.
60
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
b. The following charts summarize purchases from related parties for the years ended December 31, 2016 and 2015.
| Name of related parties | Relationship | For the year ended December 31, 2016 | For the year ended December 31, 2015 | |||||||
| (in thousands) | (in thousands) | |||||||||
| Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | $ | - | $ | 177,436 | |||||
| Hancheng Haiyan Coking Co., Ltd | Noncontrolling shareholder of Long Steel Group | - | 89,755 | |||||||
| Xi’an Pinghe Metallurgical Raw Material Co., Ltd , | Noncontrolling shareholder of Long Steel Group | - | 3,446 | |||||||
| Shaanxi Haiyan Trade Co., Ltd | Significant influence by Long Steel Group* | - | ||||||||
| Shaanxi Shenganda Trading Co., Ltd | Significant influence by Long Steel Group | - | 5,871 | |||||||
| Shaanxi Steel | Majority shareholder of Long Steel Group | - | 131,822 | |||||||
| Shaanxi Coal and Chemical Industry Group Co., Ltd. | Shareholder of Shaanxi Steel | - | 44,848 | |||||||
| Shaanxi Huafu New Energy Co., Ltd | Significant influence by the Long Steel Group | - | 8,049 | |||||||
| Tianwu General Steel Material Trading Co., Ltd | Investee of General Steel (China) | - | 95,261 | |||||||
| Wendlar Tianjin Industry Co., Ltd.(Formerly known as Qiu Steel) | Partially owned by CEO through indirect shareholding | 21,192 | - | |||||||
| Tianjin Hengying Trading Co., Ltd | Partially owned by CEO through indirect shareholding | 9,579 | - | |||||||
| Shaanxi Long Steel Group Baoji Steel Rolling Co., Ltd | Subsidiary of Long Steel Group | - | ||||||||
| General Steel (China) Co., Ltd | Partially owned by CEO through indirect shareholding | 56,515 | - | |||||||
| Tianjin DazhenTrading Co., Ltd | Partially owned by CEO through indirect shareholding | 11,855 | - | |||||||
| Others | Entities either owned or have significant influence by our affiliates or management | - | 701 | |||||||
| Total | $ | 99,141 | $ | 557,189 | ||||||
| Less: Purchases from related parties from operations disposed/held for sale | (99,141 | ) | (557,189 | ) | ||||||
| Purchases–related parties – continuing operations | $ | - | $ | - | ||||||
c. On December 30, 2015, the Company entered into an agreement to sell its wholly-owned General Steel (China) and its entire equity interest in all of its subsidiaries for $1 million to Victory Energy Resource Limited, a HK registered company indirectly-owned by Zuosheng Yu, the Company's Chairman.
d. On March 21, 2016, the Company, along with its 1% minority interest holder, jointly signed an equity transfer agreement (the "Agreement") to sell 100% of the equity interest in Maoming Hengda to Tianwu Tongyong (Tianjin) International Trade Co., Ltd, ("Tianwu Tongyong"), a related party, in which the Company has 32% equity interest for RMB 331.3 million or approximately $51 million. The agreement was further amended in April 2017 to set the sale price at RMB 155.3 million or approximately $23.9 million. The Company expected to receive its 99% ownership for the total proceeds of RMB 154.0 million (approximately $23.8 million), of which the full amount would be paid within one year after the signing of the Agreement. Accordingly, the Company recorded the total amount of net consideration of $45.7 million in additional-paid-in capital.
e. For the year ended December 31, 2015, the Company’s operations disposed realized lease income from Shaanxi Steel, a related party, amounting to $2.1 million.
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GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Related party balances
| a. | Other receivable – related parties: |
Other receivables - related parties are those nontrade receivables arising from transactions through the sales of its subsidiary, which was bought by its related party or arising from transactions through accumulated intercompany payable upon the disposal of its subsidiary.
| Name of related parties | Relationship | December 31, 2016 | December 31, 2015 | |||||||
| (in thousands) | (in thousands) | |||||||||
| Wendler Investment & Management Group Co., Ltd | Common control under CEO | $ | 43 | $ | - | |||||
| Tianwu General Steel Material Trading Co., Ltd. | Investee of General Steel (China) | 22,137 | - | |||||||
| General Steel (China) Co., Ltd | Partially owned by CEO through indirect shareholding | 30,396 | - | |||||||
| Beijing Shenghua Xinyuan Metal Materials Co., Ltd | Partially owned by CEO through indirect shareholding | 116 | - | |||||||
| Maoming Hengda | Wholly owned by Tianwu Tongyong | 18,612 | - | |||||||
| Other receivable – related party | 71,304 | - | ||||||||
| Less: other receivable – related parties - held for sale | (30,554 | ) | - | |||||||
| Other receivable – related parties – continuing operations | $ | 40,750 | $ | - | ||||||
| b. | Accounts payable – related party: |
| Name of related parties | Relationship | December 31, 2016 | December 31, 2015 | |||||||
| (in thousands) | (in thousands) | |||||||||
| Tianjin Dazhen Industry Co., Ltd | Partially owned by CEO through indirect shareholding | $ | 6,289 | $ | - | |||||
| Wendlar Tianjin Industry Co., Ltd.(Formerly known as Qiu Steel) | Partially owned by CEO through indirect shareholding | 2,171 | - | |||||||
| Tianjin Daqiuzhuang Steel Plates Co., Ltd | Partially owned by CEO through indirect shareholding | 4,988 | - | |||||||
| Total | 13,448 | - | ||||||||
| Less: accounts payable – related parties - held for sale | (13,448 | ) | - | |||||||
| Accounts payable – related party – continuing operations | $ | - | $ | - | ||||||
62
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| c. | 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, 2016 | December 31, 2015 | |||||||
| (in thousands) | (in thousands) | |||||||||
| Wendlar Investment & Management Group Co., Ltd | Common control under CEO | $ | 32 | $ | 28 | |||||
| Yangpu Capital Automobile | Partially owned by CEO through indirect shareholding | 95 | - | |||||||
| Maoming Shengze Trading Co., Ltd | Partially owned by CEO through indirect shareholding | - | 483 | |||||||
| Lindenburg Investment & Management Group Co., Ltd | Minority Shareholder of Catalon Chemical | - | 1,405 | |||||||
| Wendlar Tianjin Industry Co., Ltd (Formerly known as Qiu Steel) | Partially owned by CEO through indirect shareholding | - | 38,987 | |||||||
| General Steel (China) Co., Ltd | Partially owned by CEO through indirect shareholding | 48,376 | 23,660 | |||||||
| Tianjin Dazhen Industry Co., Ltd | Partially owned by CEO through indirect shareholding | 773 | - | |||||||
| Zuosheng Yu | CEO | 1,329 | - | |||||||
| Total | 50,605 | 64,563 | ||||||||
| Less: other payables – related parties - held for sale | (773 | ) | (21,807 | ) | ||||||
| Other payables – related parties – continuing operations | $ | 49,832 | $ | 42,756 | ||||||
| d. | Customer deposit – related parties- operations held for sale |
| Name of related parties | Relationship | December 31, 2016 | December 31, 2015 | |||||||
| (in thousands) | (in thousands) | |||||||||
| Tianjin Hengying Trading Co., Ltd | Partially owned by CEO through indirect shareholding | $ | 12,242 | $ | - | |||||
| Customer deposit – related parties- operations held for sale | $ | 12,242 | $ | - | ||||||
| e. | Deferred lease income – operation disposed |
| Deferred lease income | December 31, 2016 | December 31, 2015 | ||||||
| (in thousands) | (in thousands) | |||||||
| Beginning balance | - | 74,889 | ||||||
| Less: Lease income realized | - | (2,145 | ) | |||||
| Exchange rate effect | - | (2,278 | ) | |||||
| Disposed on December 30, 2015 | $ | - | $ | (70,466 | ) | |||
| Ending balance | $ | - | $ | - | ||||
Note 15 – Equity
2015 Equity Transactions
On April 14, 2015, the Company granted 100,000 shares of common stock for investor relations consulting services under a service agreement dated April 14, 2015. The shares were valued at $4.9 per share, the quoted market price at the time the services were provided.
On June 9, 2015, the Company granted 299,600 shares of common stock to senior management personnel. The shares were valued at $3.85 per share, the quoted market price at the time the shares were granted.
On July 17, 2015, the Company granted 1,200,000 shares of common stock for business growth and strategic consulting services under two six-month service agreements dated July 1, 2015. The shares were valued at $3.00 per share, the quoted market price at the time the shares were granted.
63
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On October 23, 2015, the Company completed its acquisition of an 84.5% equity interest in Catalon Chemical Corp. ("Catalon"), a Delaware corporation headquartered in Virginia that develops and manufactures De-NOx honeycomb catalysts and industrial ceramics. Catalon's honeycomb technology is an integral part of the selective catalytic reduction ("SCR") process widely used in steel mills, thermal power stations, waste incinerators, stationary diesel motors, industrial plants, and heavy-duty trucks. Pursuant to the terms of the acquisition, the Company issued 13 million shares (2,600,000 "Payment Shares" after applying the retroactive effect of the one-for-five reverse stock split) of its common stock in exchange for a portion of their equity interests in Catalon, equating to 84.5% of all outstanding ownership interests in Catalon. The Payment Shares are being held in escrow, subject to minimum performance targets of Catalon. If those performance targets are not met in their entirety, the Payment Shares will be reduced proportionately to the percentage of the performance targets actually achieved. The Payment Shares are also subject to a lock-up period placing restrictions on the Selling Shareholders' ability to directly or indirectly transfer or otherwise dispose of the Payment Shares for a defined period. As a result of the issuance of the Payment Shares, the Company had 85,456,588 common stock (17,091,857 shares after applying the retroactive effect of the one-for-five reverse stock split) issued and outstanding as of October 23, 2015.
On October 20, 2015, the board of directors of the Company approved a 1-for-5 reverse stock split of its common stock, to be effectuated subject to approval by the Secretary of State of Nevada. The reverse stock split was effected on October 29, 2015. All shares and per share amounts used in the Company’s consolidated financial statements and notes thereto have been retroactively restated to reflect the 1-for-5 reverse stock split effected on October 29, 2015.
On December 1, 2015, the Company granted 710,500 shares of common stock to senior management personnel. The shares were valued at $1.33 per share, the quoted market price at the time the shares were granted.
On December 30, 2015, the Company entering into an agreement to sell its wholly-owned General Steel (China) and its entire equity interest in all of its subsidiaries for $1 million to Victory Energy Resource Limited, a HK registered company indirectly-owned by Zuosheng Yu, the Company's Chairman. As a result of this transaction, the Company met the criteria under ASC 810-10-40-4 to deconsolidate General Steel (China), General Shengyuan, Yangpu Shengtong, Qiu Steel, and Longmen Joint Venture at disposal date. Since the transaction was between related parties under common control, the net gain from the disposal of $1.1 billion was recorded as an addition in paid-in capital.
The following is a reconciliation of the Company’s noncontrolling interest for the year ended December 31, 2015:
| (in thousands) | Noncontrolling interest | |||||||||||
| Total | Deconsolidated subsidiaries | Others | ||||||||||
| Balance at December 31, 2014 | $ | (217,082 | ) | $ | (216,961 | ) | $ | (121 | ) | |||
| Net income (loss) attributable to noncontrolling interest | (515,025 | ) | (513,092 | ) | (1,933 | ) | ||||||
| Addition to special reserve | 416 | 416 | - | |||||||||
| Usage of special reserve | (283 | ) | (283 | ) | - | |||||||
| Contribution commitment from noncontrolling interest | 489 | 489 | - | |||||||||
| Contribution receivable from noncontrolling interest | (489 | ) | (489 | ) | - | |||||||
| Acquisition of Catalon | 1,526 | - | 1,526 | |||||||||
| Deconsolidation of subsidiaries | 698,311 | 698,311 | - | |||||||||
| Foreign currency translation adjustments | 31,583 | 31,609 | (26 | ) | ||||||||
| Balance at December 31, 2015 | $ | (554 | ) | $ | - | $ | (554 | ) | ||||
Equity Transactions
On December 17 and 18, 2015, the Company entered into service contracts for investor relation consulting services. The shares were valued at $0.90 and $0.91, respectively per share, based on the closing price of the ordinary shares on issuance date.
On January 20, 2016, the Company issued 242,466 restricted shares of common stock for financial reporting consulting services. The shares were valued at $1.80 per share, based on the average closing price of the ordinary shares for the three months immediately preceding the board’s approval.
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GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On March 16, 2016, the Company issued 30,000 restricted shares of common stock for financial advisory and research coverage services. The shares were valued at $1.26 per share, based on a negotiated price between the Company and the consultant.
On March 16, 2016, the Company issued 127,120 restricted shares of common stock for financial reporting services. The shares were valued at $1.18 per share, based on a negotiated price between the Company and the consultant.
On August 19, 2016, the Company executed a debt cancellation agreement with Oriental Ace Limited, an unrelated third party, in conversion of short-term loan payable of $3.6 million into 3,272,727 shares of Common Stock at $0.35 per share resulting in a gain on debt extinguishment of $2,454,546. These shares have not been issued as the date of the filing.
On September 30, 2016, the Company completed a private placement through the issuance of 1,500,000 shares of the Company’s common stock at $1.00 per shares and raised capital of RMB 10.0 million (approximately $1.5 million). The Company received proceeds in October 2016.
Note 16 – Acquisition
Catalon Acquisition
On October 23, 2015, the Company completed its acquisition of an 84.5% equity interest in Catalon. At the closing of the share exchange on October 23, 2015, the Selling Shareholders received 2.6 million shares (“Payment Shares”) of General Steel Common Stock valued at $3.20 per shares in exchange for a portion of their equity interests in Catalon, equating to 84.5% of all outstanding ownership interests in Catalon.
The Company’s acquisition of Catalon was accounted for as a business combination in accordance with ASC 805. The Company has allocated the purchase price of Catalon based upon the fair value of the identifiable assets acquired and liabilities assumed on the acquisition date. Except for cash, the Group estimated the fair values of the assets acquired and liabilities assumed at the acquisition date in accordance with the business combination standard issued by FASB with the following valuation methodologies with level 3 inputs: Other current assets, equipment and current liabilities were valued using the cost approach; Intangible asset (Honeycomb Catalyst technology) was valued using the income approach based on generally accepted relief from royalty appraisal methodology. Management of the Company is responsible for determining the fair value of assets acquired, liabilities assumed and intangible assets identified as of the acquisition date and considered a number of factors including valuations from independent appraisers. Acquisition-related costs incurred for the acquisitions are not material and have been expensed as incurred in general and administrative expense.
The following table summarizes the fair value of the identifiable assets acquired and liabilities assumed at the acquisition date, which represents the net purchase price allocation at the date of the acquisition of Catalon based on valuation performed by an independent appraisal firm engaged by the Company:
| (in thousands) | Fair Value | |||
| Cash | $ | 66,980 | ||
| Other current assets | 3,162,107 | |||
| Equipment | 11,791 | |||
| Intangible asset | 9,026,823 | |||
| Total asset | 12,267,701 | |||
| Total liabilities | (2,421,547 | ) | ||
| Net asset acquired | $ | 9,846,154 | ||
In accordance of SEC Reguation S-X Rule 3-05, Catalon was not a significant subsidiary as of acquisition date therefore no separate audited financial statements are presented.
Following the acquisition, the Company became aware of some operational issues related to Catalon. It was determined that such issues impacted the ability to operate the business and obtain any value for the related intangibles might have affected the operations of Catalon, which the Company is expected to cancel the shares that we have issued to the 84.5% original owners of Catalon in accordance with the term of the agreement. Thus, the Company does not expect Catalon to be able to produce any products or generate sales in the future. Accordingly, the Company considered its assets’ carrying amounts may not be recoverable and took an impairment charge of $12.2 million for the year ended December 31, 2015. The Company subsequently disposed Catalon on March 31, 2016, refer to Note 2(o) for details.
65
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Tianjin Shuangsi
On February 16, 2016, the Company received 100% equity interest for contract price of RMB19 million and debt assumed of RMB 18.8 million for a net purchase price of $0.03 million as Tianjin Shuangsi was established by the chief executive officer of the Company’s related entity and his relative. Tianjin Shuangsi primarily trades iron ore, nickel-iron-manganese alloys, and other steel-related products.
On December 31, 2017, the Company sold Shuangsi to Wandelar Investment , a related party, so the result of operations was presented as operations to be disposed in December 31, 2016 in the consolidated financial statements See Note 2(o) – Operations held for sale and operations disposed/to be disposed.
Note 17 – Retirement plan - operations disposed
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, 2016 and 2015 amounted to $0 million and $4.5 million, respectively.
Note 18 – 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, 2016 and 2015, the Company did not make any contributions to these reserves.
Special reserve
Longmen Joint Venture 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, 2015, Longmen Joint Venture made contributions of $0.8 million to these reserves and used $0.5 million of safety and maintenance expense.
Note 19– Other income (expense) – operations disposed
Government grant
For the year ended December 31, 2015, Longmen Joint Venture received government grants totaling $2.1 million (RMB 12.8 million) and recognized as income. These government grants included $0.2 million from local business growth awards, $0.03 million from technology innovation award, $0.8 million from technology upgrade fund, $0.1 million from bank loan interest reimbursement, and $0.9 million from unemployment insurance grants.
66
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Lease income
The deferred lease income from the reimbursement from Shaanxi Steel for the net book value of the fixed assets that were demolished and for the inefficiency costs caused by the construction and loss incurred in the beginning stages of the system production is amortized to income over the remaining sub-lease term. For the years ended December 31, 2015, the Company recognized lease income of $2.1 million from operation disposed.
Note 20 – Segments
Prior to January 1, 2016, 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 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) & General Shengyuan in Tianjin City. The Group had two business segments, one consisting of General Shengyuan and one consisting of three different divisions including Longmen Joint Venture, Maoming Hengda and General Steel (China). Starting 2016, since the Company has discontinued most of its operations, the chief operation decision maker believes the Company operates in one reportable segment.
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 (loss) from operations is generally the same as those applied at the consolidated financial statement level
| (In thousands) | ||||
| Sales: | 2015 | |||
| Longmen Joint Venture – operation disposed | $ | 1,541,564 | ||
| Maoming Hengda – held for sale | 125 | |||
| General Steel (China) – operation disposed | 1,377 | |||
| Catalon – operation to be disposed | - | |||
| Consolidated sales | 1,543,066 | |||
| Less: operation to be disposed | (125 | ) | ||
| Less: operations disposed | (1,542,941 | ) | ||
| Total from continuing operation | $ | - | ||
| Gross profit (loss): | 2015 | |||
| Longmen Joint Venture – operation disposed | $ | (188,153 | ) | |
| Maoming Hengda – held for sale | (117 | ) | ||
| General Steel (China) – operation disposed | 990 | |||
| Catalon – operation to be disposed | - | |||
| Consolidated gross (loss) profit | (187,280 | ) | ||
| Less: operation to be disposed | 117 | |||
| Less: operations disposed | 187,163 | |||
| Total from continuing operation | $ | - | ||
67
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| Income (loss) from operations: | 2015 | |||
| Longmen Joint Venture – operation disposed | $ | (1,189,740 | ) | |
| Maoming Hengda – held for sale | (1,351 | ) | ||
| General Steel (China) – operation disposed | (1,380 | ) | ||
| Catalon – operation to be disposed | (12,157 | ) | ||
| Total loss from operations | (1,204,628 | ) | ||
| Reconciling item (1) | (10,825 | ) | ||
| Consolidated (loss) income from operations | (1,215,453 | ) | ||
| Less: operation to be disposed | 13,511 | |||
| Less: operation disposed | 1,191,128 | |||
| Total from continuing operation | $ | (10,814 | ) | |
| Net income (loss) attributable to General Steel Holdings, Inc.: | 2015 | |||
| Longmen Joint Venture – operation disposed | $ | (763,512 | ) | |
| Maoming Hengda – held for sale | (1,471 | ) | ||
| General Steel (China) – operation disposed | (3,208 | ) | ||
| Catalon – operation to be disposed | (10,273 | ) | ||
| Total net loss attributable to General Steel Holdings, Inc. | (778,464 | ) | ||
| Reconciling item (1) | (10,825 | ) | ||
| Consolidated depreciation, amortization and depletion | (789,289 | ) | ||
| Less: operation to be disposed | 11,744 | |||
| Less: operations disposed | 766,731 | |||
| Total from continuing operation | $ | (10,814 | ) | |
| Finance/interest expenses: | 2015 | |||
| Longmen Joint Venture – operation disposed | $ | 93,937 | ||
| Maoming Hengda – held for sale | - | |||
| General Steel (China)– operation disposed | 3,798 | |||
| Catalon – operation to be disposed | - | |||
| Reconciling item (1) | 2 | |||
| Consolidated interest expenses | 97,737 | |||
| Less: operation to be disposed | - | |||
| Less: operations disposed | (97,734 | ) | ||
| Total from continuing operation | $ | 3 | ||
| Capital expenditures: | 2015 | |||
| Longmen Joint Venture – operation disposed | $ | 104,499 | ||
| Maoming Hengda – held for sale | - | |||
| General Steel (China) – operation disposed | - | |||
| Catalon – operation to be disposed | - | |||
| Consolidated capital expenditures | 104,499 | |||
| Less: operation to be disposed | - | |||
| Less: operations disposed | (104,499 | ) | ||
| Total from continuing operation | $ | - | ||
68
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| Total Assets as of: | December 31, 2015 | |||
| Longmen Joint Venture – operation disposed | $ | - | ||
| Maoming Hengda – held for sale | 20,202 | |||
| General Steel (China) – operation disposed | - | |||
| Catalon – operation to be disposed | 24 | |||
| Reconciling item (2) | 15,535 | |||
| Total assets | 35,761 | |||
| Total assets held for sale | (20,227 | ) | ||
| Total assets from continuing operations | $ | 15,534 | ||
| (1) | Reconciling item represents income or expenses of the Company, arising from General Steel Investment Co., Ltd, Yangpu Shengtong Investment Co., Ltd, Qiu Steel and Tongyong Shengyuan for the years ended December 31, 2015, which are non-operating entities. |
| (2) | Reconciling item represents assets held at General Steel Holdings, Inc., General Steel Investment Co., Ltd, Yangpu Shengtong Investment Co., Ltd, Qiu Steel and Tongyong as of December 31, 2015, which are non-operating entities. |
Note 21 – Subsequent events
The Company extended the due date of its other payable to related parties until December, 2018. These agreements were executed in July 2017.
On March 21, 2016, the Company, along with its 1% minority interest holder, have jointly signed an equity transfer agreement (the "Agreement") to sell 100% of the equity interest in Maoming Hengda to Tianwu Tongyong (Tianjin) International Trade Co., Ltd, ("Tianwu Tongyong"), for which the Company has 32% equity interest in, a related party. The agreement was further amended in April 2017 to set the sale price at RMB 155.3 million or approximately $23.9 million, the full amount was collected on April 2017.
On August 19, 2016, the Company signed a debt cancellation agreement with GS China, a related party, in conversion of the other payables – related party of approximately $21.6 million into 100,000 shares of Common Stock at $1.10 per share and 19,565,758 shares of Series B Preferred Stock at $1.10 per share, which Series B Stock. This agreement was subsequently cancelled and the board approved the cancellation in September 2017.
In March 2017, the board approved to issue 200,000 restricted shares to a consultant pursuant to consulting services performed in 2016.
On December 22, 2017, the “Tax Cuts and Jobs Act” (the “Act”) was enacted. Under the provisions of the Act, the U.S. corporate tax rate decreased from 35% to 21%. Additionally, the Tax Act imposes a one-time transition tax on deemed repatriation of historical earnings of foreign subsidiaries, and future foreign earnings are subject to U.S. taxation. The Company does not believe the Act will have any material effect on the Company’s financials as the Company has sufficient NOL to offset any tax impact and has provided full valuation allowance to its deferred tax assets.
On December 31, 2017, the Company sold Shuangsi to Wendler Investment & Management Group Co., Ltd, a related party, no consideration was received. Therefore the result of operations was presented as operations to be disposed in December 31, 2016 in the consolidated financial statements See Note 2(o) – Operations held for sale and operations disposed/to be disposed.
On August 24, 2018, the Company entered into a subscription agreement with Hummingbird Holdings Limited, a BVI entity. Pursuant to the Subscription Agreement, the Investor purchased 7,352,941 shares of the Company’s common stock, par value $0.001 per share, at a purchase price of $0.034 per share for aggregate gross proceeds of $250,000.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
On April 7, 2017, we engaged Simon & Edward, LLP (“S&E”) as our principal accountant and dismissed Friedman LLP (“Friedman”) from that role. The change in accountants was approved by our Audit Committee. The audit report of Friedman on our financial statements for the fiscal years ended December 31, 2015 and 2014 contained no adverse opinion or disclaimer of opinion, but the report raised substantial doubt about our ability to continue as a going concern.
During the two most recent fiscal years ended December 31, 2015 and 2014, which were audited by Friedman, and for the year ended December 31, 2016 and the subsequent interim period through April 7, 2017, we had no “disagreements” (as described in Item 304(a)(1)(iv) of Regulation S-K) with Friedman on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Friedman, would have caused it to make reference in connection with its opinion to the subject matter of the disagreements.
During the two most recent fiscal years ended December 31, 2015 and 2014, which were audited by Friedman, and for the year ended December 31, 2016 and the subsequent interim period through April 7, 2017, there was no “reportable event” within the meaning of Item 304(a)(1)(v) of Regulation S-K.
The retention of S&E was approved by the Audit Committee. During the two most recent fiscal years ended December 31, 2015 and 2014 and for the year ended December 31, 2016 and the subsequent interim period through April 7, 2017, neither we, nor anyone on behalf of us consulted with S&E regarding either: (i) the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on the our financial statements, or (ii) any matter that was either the subject of a disagreement as described in Item 304(a)(1)(iv) of Regulation S-K or a reportable event within the meaning of Item 304(a)(1)(v) of Regulation S-K.
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, 2016. 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 evaluations, our Chief Executive Officer and Chief Financial Officer have concluded that our Company’s disclosure controls and procedures were not effective as of December 31, 2016 due to the material weaknesses in our internal control over financial reporting described below:
| · | Ineffective review process in our accounting department |
| · | Ineffective due diligence procedure performed in our acquisition of Catalon |
| · | Lack of a qualified full-time accountant who possess U.S. GAAP knowledge to oversee the recording of our daily transaction. |
Despite the existence of the material weaknesses discussed above, our management, including our Chief Executive Officer and Chief Financial Officer, have concluded that the consolidated financials included in this Annual Report on Form 10-K present, in all material aspects, our financial position, results of operations, comprehensive income 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:
70
| · |
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.
Our management assessed the effectiveness of its internal control over financial reporting as of December 31, 2016. In making this assessment, management used the 2013 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.
As a result of such material weaknesses, our Chief Executive Officer and Chief Financial Officer concluded that our Company’s disclosure controls and procedures were not effective as of December 31, 2016.
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 after the completion of divesture of our steel business and current business model from our trading business.
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:
| · | Implement an internal review process over financial reporting to review all recent accounting pronouncements and to verify that the accounting treatment identified in such report have been fully implemented and confirmed by our internal control department. In the future, we will continue to improve our ongoing review and supervision of our internal control over financial reporting; |
| · | Hire a full-time individual that possesses the requisite U.S. GAAP experience and education. |
| · | Revise our internal control over financial reporting procedure on potential acquisition. |
Management believes the foregoing efforts will effectively remediate the material weaknesses described above.
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| c) | Changes in Internal Control 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.
None.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Directors and executive officers
The following table sets forth the names and ages of our current directors and executive officers, their principal offices and positions and the date each such person became our director or executive officer. Our executive officers are elected annually by the Board of Directors. Our directors serve one-year terms until they are re-elected or their successors are elected. The executive officers serve by election of the Board of Directors for one year terms or until their death, resignation, removal or renewal by the Board of Directors. The executive officers are all full-time employees of General Steel Holdings, Inc.
There are no 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 directors and executive officers as of December 31, 2016, are as follows:
| Name | Age | Position | Date of appointment | |||
| Zuosheng Yu | 52 | Chairman of the Board of Directors and Chief Executive Officer | 10/14/04 | |||
| John Chen | 45 | Director/Chief Financial Officer | 03/07/05 | |||
| James Hu | 44 | Independent Director | 02/15/10 | |||
| Tong Yin | 43 | Independent Director | 02/28/16 | |||
| Zhongkui Cao | 67 | 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 at www.gshi-steel.com.
Biographical information
Mr. Zuosheng Yu, age 53, Chairman of the Board of Directors and Chief Executive Officer. 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.
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Mr. John Chen, age 46, Director and Chief Financial Officer. 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 Lending Corporation (NASDAQ: CLDC), China Carbon Graphite Group, Inc. (OTCBB: CHGI), and China HGS Real Estate Inc. (NASDAQ: HGSH).
Mr. James Hu, age 45, 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. Tong Yin , age 44, Independent Director. Ms. Yin was appointed as an independent director in February 2016. Ms. Yin served as the Corporate Controller and subsequently VP Corporate Development of RB Energy Inc. (formerly Canada Lithium Corp., a TSX listed lithium producer) from 2011 to 2015. She served as the Corporate Controller of Torex Gold Resources Inc., a TSX listed gold producer, from 2010 to 2011. Prior to that, Ms. Yin practiced public accounting serving public and private audit clients in the industrial, automotive and energy sectors. She was Staff Accountant, Senior Auditor and Audit Manager with KPMG Toronto office from 2001 to 2010. Ms. Yin also has experience in the management and finance of Sino-foreign joint venture companies and has 20 years of accounting, finance and management experience in the manufacturing and mining sectors. Ms. Yin is a Canadian Chartered Public Accountant (CPA, CA) and holds a Master of Management and Professional Accounting degree from the University of Toronto and a Bachelor of Science degree from Qingdao University.
Mr. Zhongkui Cao, age 68, 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.
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.
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 once during the fiscal year ended December 31, 2016. Our Board of Directors acted by written consent ten times during the fiscal year ended December 31, 2015.
It is our policy to encourage all directors to attend the Annual Meeting.
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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
During fiscal 2016, the members of our Audit Committee were James Hu who served as the Chairman of the Audit Committee, Angela He, and Zhongkui Cao. On February 15, 2016, Ms. He resigned from her positions as a member of the Board of Directors and as a member of the Audit Committee. On February 28, 2016, the Board of Directors appointed Ms. Tong Yin as member of the Board of Directors and a member of the Audit Committee to replace Ms. He. 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, 2016.
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. Yin 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.
Compensation Committee
During fiscal 2016, the members of our Compensation Committee were Angela He who served as the Chairman of the Compensation Committee, James Hu, and Zhongkui Cao. On February 15, 2016, Ms. He resigned from her positions as a member of the Board of Directors and as a member of the Compensation Committee. On February 28, 2016, the Board of Directors appointed Ms. Tong Yin as member of the Board of Directors and the Chair of the Compensation Committee to replace Ms. He. 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, 2016.
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.
Governance and Nominating Committee
During fiscal 2016, the members of our Governance and Nominating Committee were Zhongkui Cao who served as the Chairman of the Governance and Nominating Committee, James Hu, Angela He. On February 15, 2016, Ms. He resigned from her positions as a member of the Board of Directors and as a member of the Governance and Nominating Committee. On February 28, 2016, the Board of Directors appointed Ms. Tong Yin as member of the Board of Directors and a member of the Governance and Nominating Committee to replace Ms. He. 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, 2016.
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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 Suite 106, Tower H, Phoenix Place, Shuguangxili, Chaoyang District, Beijing, China 100028. 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.
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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 Suite 106, Tower H, Phoenix Place, Shuguangxili, Chaoyang District, Beijing, China 100028. 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 2016 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 jchen@gshi-steel.com or by phone: +86-10-13910177819.
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.
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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
No director compensation was granted for the year ended December 31, 2016.
Director Compensation
No director compensation was granted for the year ended December 31, 2016.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 2016, the members of the Compensation Committee were Angela He, James Hu and Zhongkui Cao. Ms. He resigned as a member of our Board of Directors on February 15, 2016 and she was replaced by Ms. Tong Yin. In fiscal 2016, 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 December 31, 2016, 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., Suite 106, Tower H, Phoenix Place, Shuguangxili, Chaoyang District, Beijing, China 100028.
| Name of Beneficial Owner | Shares Beneficially Owned | Percentage Beneficial Ownership of Class (1) | Percentage of Voting Power | |||||||||||||
| Common Stock | ||||||||||||||||
| Common | Series A | |||||||||||||||
| Directors and Named Executive Officers | Stock | Preferred Stock | ||||||||||||||
| Zuosheng Yu (2) Chief Executive Officer and Chairman of the Board of Directors | 944,780 | 5.6 | % | 5.6 | % | |||||||||||
| John Chen Chief Financial Officer and Director | 203,000 | 1.2 | % | 1.2 | % | |||||||||||
| James Hu Independent Director | 23,000 | * | * | |||||||||||||
| Angela He(3) Independent Director | - | * | * | |||||||||||||
| Zhongkui Cao Independent Director | 4,100 | * | * | |||||||||||||
| Tong Yin (4) Independent Director | - | |||||||||||||||
| Executive Officers and Directors as a group | 1,174,880 | 6.9 | % | 6.9 | % | |||||||||||
| 5% Owners | ||||||||||||||||
| Golden Eight Investments Limited (2) | 4,800,000 | 28.7 | % | 28.7 | % | |||||||||||
| Series A Preferred Stock | ||||||||||||||||
| Victory New Holdings Limited (5) | 3,092,899 | 100 | % | 30.0 | % | |||||||||||
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* Less than 1%
(1) Percentages based on 16,800,361 (excluding 494,462 shares of treasury stock) shares of Common Stock and 3,092,899 shares of Preferred Stock outstanding as of August 19, 2016.
(2) Mr. Yu is the beneficial owner of 944,780 shares of common stock held in his name and 4,800,000 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) On February 15, 2016, Ms. He resigned as a member of our Board of Directors.
(4) On February 28, 2016, the Board of Directors appointed Ms. Yin to serve as a member of the Board, effective immediately, and to fill the vacancy caused by resignation of Ms. He.
(5) 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, 2016, 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 | - | $ | - | 1,243,866 | ||||||||
| Plans not approved by stockholders | - | - | - | |||||||||
| Total | - | $ | - | 1,243,866 | ||||||||
| (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.
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Related party transactions
a. The following chart summarized sales to related parties for the years ended December 31, 2016 and 2015.
| Name of related parties | Relationship | For the year ended December 31, 2016 | For the year ended December 31, 2015 | |||||||
| (in thousands) | (in thousands) | |||||||||
| Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | $ | - | $ | 76,939 | |||||
| Tianjin Dazhan Industry Co., Ltd | Partially owned by CEO through indirect shareholding** | 18 | 1,956 | |||||||
| Shaanxi Haiyan Trade Co., Ltd | Significant influence by Long Steel Group* | - | 45,031 | |||||||
| Shaanxi Shenganda Trading Co., Ltd | Partially owned by CEO through indirect shareholding** | - | 23,974 | |||||||
| Shaanxi Steel | Majority shareholder of Long Steel Group | - | 304,086 | |||||||
| Shaanxi Coal and Chemical Industry Group Co., Ltd. | Shareholder of Shaanxi Steel | - | 67,293 | |||||||
| Shaanxi Long Steel Group Baoji Group Co., Ltd | Subsidiary of Long Steel Group | - | 28,882 | |||||||
| Tianjin Hengying Trading Co., Ltd | Partially owned by CEO through indirect shareholding | (558 | ) | 763 | ||||||
| Tianjin Daqiuzhuang Steel Plates Co., Ltd | Partially owned by CEO through indirect shareholding | 178 | - | |||||||
| Tianwu General Steel International Trading Co., Ltd | Investee of Tongyong Shengyuan | - | 273 | |||||||
| Wendlar Tianjin Industry Co., Ltd. (Formerly known as Qiu Steel) | Partially owned by CEO through indirect shareholding | 374 | $ | - | ||||||
| Total | 12 | 549,197 | ||||||||
| Less: Sales to related parties from operations disposed/held for sale | (12 | ) | (549,197 | ) | ||||||
| Sales–related parties – continuing operations | $ | - | $ | - | ||||||
**The CEO is referred to herein as the chief executive officer of General Steel Holdings, Inc. Mr. Zuosheng Yu.
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b. The following charts summarize purchases from related parties for the years ended December 31, 2016 and 2015.
| Name of related parties | Relationship | For the year ended December 31, 2016 | For the year ended December 31, 2015 | |||||||
| (in thousands) | (in thousands) | |||||||||
| Long Steel Group | Noncontrolling shareholder of Longmen Joint Venture | $ | - | $ | 177,436 | |||||
| Hancheng Haiyan Coking Co., Ltd | Noncontrolling shareholder of Long Steel Group | - | 89,755 | |||||||
| Xi’an Pinghe Metallurgical Raw Material Co., Ltd , | Noncontrolling shareholder of Long Steel Group | - | 3,446 | |||||||
| Shaanxi Haiyan Trade Co., Ltd | Significant influence by Long Steel Group* | - | - | |||||||
| Shaanxi Shenganda Trading Co., Ltd | Significant influence by Long Steel Group | - | 5,871 | |||||||
| Shaanxi Steel | Majority shareholder of Long Steel Group | - | 131,822 | |||||||
| Shaanxi Coal and Chemical Industry Group Co., Ltd. | Shareholder of Shaanxi Steel | - | 44,848 | |||||||
| Shaanxi Huafu New Energy Co., Ltd | Significant influence by the Long Steel Group | - | 8,049 | |||||||
| Tianwu General Steel Material Trading Co., Ltd | Investee of General Steel (China) | - | 95,261 | |||||||
| Wendlar Tianjin Industry Co., Ltd.(Formerly known as Qiu Steel) | Partially owned by CEO through indirect shareholding | 21,192 | - | |||||||
| Tianjin Hengying Trading Co., Ltd | Partially owned by CEO through indirect shareholding | 9,579 | - | |||||||
| Shaanxi Long Steel Group Baoji Steel Rolling Co., Ltd | Subsidiary of Long Steel Group | - | - | |||||||
| General Steel (China) Co., Ltd | Partially owned by CEO through indirect shareholding | 56,515 | - | |||||||
| Tianjin DazhenTrading Co., Ltd | Partially owned by CEO through indirect shareholding | 11,855 | - | |||||||
| Others | Entities either owned or have significant influence by our affiliates or management | - | 701 | |||||||
| Total | $ | 99,141 | $ | 557,189 | ||||||
| Less: Purchases from related parties from operations disposed/held for sale | (99,141 | ) | (557,189 | ) | ||||||
| Sales–related parties – continuing operations | $ | - | $ | - | ||||||
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c. On December 30, 2015, the Company entered into an agreement to sell its wholly-owned General Steel (China) and its entire equity interest in all of its subsidiaries for $1 million to Victory Energy Resource Limited, a HK registered company indirectly-owned by Zuosheng Yu, the Company's Chairman.
d. On March 21, 2016, the Company, along with its 1% minority interest holder, have jointly signed an equity transfer agreement (the "Agreement") to sell 100% of the equity interest in Maoming Hengda to Tianwu Tongyong (Tianjin) International Trade Co., Ltd, ("Tianwu Tongyong"), for which the Company has 32% equity interest in, a related party, for RMB 331.3 million or approximately $51 million. The agreement was further amended in April 2017 to set the sale price at RMB 155.3 million or approximately $23.9 million. The Company expected to receive its 99% ownership for the total proceeds of RMB 154.0 million (approximately $23.8 million), of which the full amount would be paid within one year after the signing of the Agreement. Accordingly, the Company recorded the total amount of net consideration of $45.7 million in additional-paid-in capital.
Related party balances
a. Other receivable – related parties:
Other receivables - related parties are those nontrade receivables arising from transactions through the sales of its subsidiary, which was bought by its related party or arising from transactions through accumulated intercompany payable upon the disposal of its subsidiary.
| Name of related parties | Relationship | December 31, 2016 | December 31, 2015 | |||||||
| (in thousands) | (in thousands) | |||||||||
| Wendler Investment & Management Group Co., Ltd | Common control under CEO | $ | 43 | $ | - | |||||
| Tianwu General Steel Material Trading Co., Ltd. | Investee of General Steel (China) | 22,137 | - | |||||||
| General Steel (China) Co., Ltd | Partially owned by CEO through indirect shareholding | 30,396 | - | |||||||
| Beijing Shenghua Xinyuan Metal Materials Co., Ltd | Partially owned by CEO through indirect shareholding | 116 | - | |||||||
| Maoming Hengda | Wholly owned by Tianwu Tongyong | 18,612 | - | |||||||
| Other receivable – related party | 71,304 | - | ||||||||
| Less: other receivable – related parties - held for sale | (30,554 | ) | - | |||||||
| $ | 40,750 | $ | - | |||||||
b. Accounts payable, related parties – operations held for sale:
| Name of related parties | Relationship | December 31, 2016 | December 31, 2015 | |||||||
| (in thousands) | (in thousands) | |||||||||
| Tianjin Dazhen Industry Co., Ltd | Partially owned by CEO through indirect shareholding | $ | 6,289 | $ | - | |||||
| Wendlar Tianjin Industry Co., Ltd.(Formerly known as Qiu Steel) | Partially owned by CEO through indirect shareholding | 2,171 | - | |||||||
| Tianjin Daqiuzhuang Steel Plates Co., Ltd | Partially owned by CEO through indirect shareholding | 4,988 | - | |||||||
| Total | 13,448 | - | ||||||||
| Less: accounts payable – related parties - held for sale | (13,448 | ) | - | |||||||
| $ | - | $ | - | |||||||
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| c. | 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, 2016 | December 31, 2015 | |||||||
| (in thousands) | (in thousands) | |||||||||
| Wendlar Investment & Management Group Co., Ltd | Common control under CEO | $ | 32 | $ | 28 | |||||
| Yangpu Capital Automobile | Partially owned by CEO through indirect shareholding | 95 | - | |||||||
| Maoming Shengze Trading Co., Ltd | Partially owned by CEO through indirect shareholding | - | 483 | |||||||
| Lindenburg Investment & Management Group Co., Ltd | Minority Shareholder of Catalon Chemical | - | 1,405 | |||||||
| Wendlar Tianjin Industry Co., Ltd (Formerly known as Qiu Steel) | Partially owned by CEO through indirect shareholding | - | 38,987 | |||||||
| General Steel (China) Co., Ltd | Partially owned by CEO through indirect shareholding | 48,376 | 23,660 | |||||||
| Tianjin Dazhen Industry Co., Ltd | Partially owned by CEO through indirect shareholding | 773 | - | |||||||
| Zuosheng Yu | CEO | 1,329 | - | |||||||
| Total | 50,604 | 64,563 | ||||||||
| Less: other payables – related parties - held for sale | (773 | ) | (21,807 | ) | ||||||
| Other payables – related parties – continuing operations | $ | 49,832 | $ | 42,756 | ||||||
d. Customer deposit, related parties – operations held for sale:
| Name of related parties | Relationship | December 31, 2016 | December 31, 2015 | |||||||
| (in thousands) | (in thousands) | |||||||||
| Tianjin Hengying Trading Co., Ltd | Partially owned by CEO through indirect shareholding | $ | 12,242 | $ | - | |||||
| Total | $ | 12,242 | $ | - | ||||||
| e. | Deferred lease income – operation disposed |
| Deferred lease income | December 31, 2016 | December 31, 2015 | ||||||
| (in thousands) | (in thousands) | |||||||
| Beginning balance | - | 74,889 | ||||||
| Less: Lease income realized | - | (2,145 | ) | |||||
| Exchange rate effect | - | (2,278 | ) | |||||
| Disposed on December 30, 2015 | $ | - | $ | (70,466 | ) | |||
| Ending balance | $ | $ | - | |||||
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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:
| 2016 | 2015 | |||||||
| Audit fees | $ | 286,896 | $ | 1,010,000 | ||||
| Audit-related fees | $ | - | $ | - | ||||
| Tax fees | $ | - | $ | 29,000 | ||||
| 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. Our former auditor, Friedman LLP, fees were $1,010,000 for fiscal year 2015 and $199,896 for fiscal year 2016. Fees for our current auditor Simon and Edward, LLP was $66,000 for fiscal year 2016.
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 2015 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 Simon and Edward, LLP, our independent registered public accounting firm (independent auditors) who is 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.
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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.
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 |
| Tong Yin, 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.
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, 2016 and 2015 |
| • | Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2016 and 2015 |
| • | Consolidated Statements of Changes in Deficiency for the years ended December 31, 2016 and 2015 |
| • | Consolidated Statements of Cash Flows for the years ended December 31, 2016 and 2015 |
| • | 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
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| * | Filed herewith. |
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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: December 4, 2018 | ||
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 | December 4, 2018 | ||
| YU, Zuosheng | (Principal Executive Officer) | |||
| /s/ John Chen | Chief Financial Officer and Director | December 4, 2018 | ||
| CHEN, John | (Principal Accounting and Financial Officer) | |||
| /s/ James Hu | Independent Director | December 4, 2018 | ||
| HU, James | ||||
| /s/ Tong Yin | Independent Director | December 4, 2018 | ||
| Tong Yin | ||||
| /s/ Zhong Kui Cao | Independent Director | December 4, 2018 | ||
| CAO, Zhong Kui |
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