Summary of significant accounting policies (Policies) | 3 Months Ended |
Mar. 31, 2014 |
Accounting Policies [Abstract] | ' |
Basis of Accounting, Policy [Policy Text Block] | ' |
| (a) | Basis of presentation | | | | | | | | | | | | | | |
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The consolidated financial statements of the Company reflect the activities of the following major directly owned subsidiaries: |
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Subsidiary | | Percentage | | | | | | | | | | | |
of Ownership | | | | | | | | | | |
General Steel Investment Co., Ltd. | | British Virgin Islands | | | 100 | % | | | | | | | | | | |
General Steel (China) Co., Ltd. (“General Steel (China)”) | | PRC | | | 100 | % | | | | | | | | | | |
Baotou Steel – General Steel Special Steel Pipe Joint Venture Co., Ltd. | | PRC | | | 80 | % | | | | | | | | | | |
Yangpu Shengtong Investment Co., Ltd. (“Yangpu Shengtong”) | | PRC | | | 99.1 | % | | | | | | | | | | |
Tianjin Qiu Steel Investment Co., Ltd. (“Qiu Steel”) | | PRC | | | 98.7 | % | | | | | | | | | | |
Longmen Joint Venture | | PRC | | | VIE/60.0 | % | | | | | | | | | | |
Maoming Hengda Steel Company, Ltd. (“Maoming Hengda”) | | PRC | | | 99 | % | | | | | | | | | | |
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Tianwu |
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Prior to November 19, 2013, the Company held a 60.0% equity interest in Tianwu General Steel Material Trading Co., Ltd. (“Tianwu”). 32% interest was held by General Steel (China) and 28% interest was held by Yangpu Shengtong. On November 19, 2013, the Company sold its 28% equity interest of Tianwu held by Yangpu Shengtong to Tianjin Dazhan Industry Co., Ltd., a related party through indirect common ownership, for $13.6 million (RMB 84.3 million) while retaining 32% interest held by General Steel (China). Tianwu is in the process of registering the ownership change with the local State Administration for Industry and Commerce (“SAIC”) office. As a result of this transaction, the Company met the criteria under ASC 810-10-40-4 to deconsolidate Tianwu at disposal date and recognized a gain in accordance with ASC 810-10-40-5. At the same time, General Steel (China)’s remaining 32% interest is accounted for as an investment in unconsolidated subsidiaries using the equity method. See Note 2(t) - Investments in unconsolidated entities for details. |
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Consolidation, Policy [Policy Text Block] | ' |
| (b) | Principles of consolidation – subsidiaries | | | | | | | | | | | | | | |
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The accompanying consolidated financial statements include the financial statements of the Company, its subsidiaries, its variable interest entity (“VIE”) for which the Company is the ultimate primary beneficiary, and the VIE’s subsidiaries. |
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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. |
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A VIE is an entity in which the Company, or its subsidiary, through contractual arrangements, bears the risks of, and enjoys the rewards normally associated with ownership of the entity, and therefore the Company or its subsidiary is the primary beneficiary of the entity. |
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All significant inter-company transactions and balances have been eliminated upon consolidation. |
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Consolidation, Variable Interest Entity, Policy [Policy Text Block] | ' |
| (c) | Consolidation of VIE | | | | | | | | | | | | | | |
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Prior to entering into the Unified Management Agreement on April 29, 2011, Longmen Joint Venture had been consolidated as the Company’s 60% direct owned subsidiary. Upon entering into the Unified Management Agreement on April 29, 2011, Longmen Joint Venture was re-evaluated by the Company to determine if Longmen Joint Venture is a VIE and if the Company is the primary beneficiary. |
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Based on projected profits in this entity and future operating plans, Longmen Joint Venture ’s equity at risk is considered insufficient to finance its activities and therefore Longmen Joint Venture is considered to be a VIE. |
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The Company would be considered the primary beneficiary of the VIE if it has both of the following characteristics: |
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| 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. | | | | | | | | | | | | | | |
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A Supervisory Committee was formed during the negotiation of the Unified Management Agreement. Given there is both a Supervisory Committee and a Board with respect to Longmen Joint Venture , the powers (rights and roles) of both bodies were considered to determine which party has the power to direct the activities of Longmen Joint Venture , and by extension, whether the Company continues to have the power to direct Longmen Joint Venture ’s activities after this Supervisory Committee was formed and the significant investment in plant and equipment by owners of the Longmen Joint Venture partner. The Supervisory Committee, in which the Company holds 2 out of 4 seats, requires a ¾ majority vote, while the Board, which the Company holds 4 out of 7 seats, requires a simple majority vote. As the Supervisory Committee’s role is limited to supervising and monitoring management of Longmen Joint Venture and in the event there is any disagreement between the Board and the Supervisory Committee, the Board prevails, the Supervisory Committee is considered subordinate to the Board. Thus, the Board of Directors of Longmen Joint Venture continues to be the controlling decision-making body with respect to Longmen Joint Venture. The Company, which controls 60% of the voting rights of the Board of Directors, has control over the operations of Longmen Joint Venture and as such, has the power to direct the activities of the VIE that most significantly impact Longmen Joint Venture ’s economic performance. |
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In connection with the Unified Management Agreement, the Company, Shaanxi Coal and Shaanxi Steel may provide such support on a discretionary basis or as needed in the future. See Note 2 item (d) Liquidity. |
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The Company has the obligation to absorb losses and the rights to receive benefits based on the profit allocation as stipulated by the Unified Management Agreement that are significant to the VIE. As both conditions are met, the Company is the primary beneficiary of Longmen Joint Venture and therefore, continues to consolidate Longmen Joint Venture as a VIE. |
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The Company believes that the Unified Management Agreement between Longmen Joint Venture and Shaanxi Coal is in compliance with PRC law and is legally enforceable. The Board of Directors of Longmen Joint Venture continues to be the controlling decision-making body with respect to Longmen Joint Venture. The Company, which controls 60% of the voting rights of the Board of Directors, has control over the operations of Longmen Joint Venture and as such, has the power to direct the activities of the VIE. However, PRC law and/or uncertainties in the PRC legal system could limit the Company’s ability to enforce the Unified Management Agreement, which in turn, may lead to reconsideration of the VIE assessment and the potential for a different conclusion. If the Unified Management Agreement cannot be enforced, the Company would not consolidate Longmen Joint Venture as a VIE. However, the current PRC legal system has not limited the Company’s ability to enforce the Unified Management Agreement nor does the Company believe it is likely to do so in the future. The Company makes ongoing assessment to determine whether Longmen Joint Venture is a VIE. |
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The carrying amount of the VIE and its subsidiaries’ consolidated assets and liabilities are as follows: |
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| | March 31, 2014 | | December 31, 2013 | | | | | | | | | | |
| | (in thousands) | | (in thousands) | | | | | | | | | | |
Current assets | | $ | 1,174,775 | | $ | 1,282,054 | | | | | | | | | | |
Plant and equipment, net | | | 1,260,199 | | | 1,262,144 | | | | | | | | | | |
Other noncurrent assets | | | 77,116 | | | 29,014 | | | | | | | | | | |
Total assets | | | 2,512,090 | | | 2,573,212 | | | | | | | | | | |
Total liabilities | | | -3,039,135 | | | -3,040,879 | | | | | | | | | | |
Net liabilities | | $ | -527,045 | | $ | -467,667 | | | | | | | | | | |
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VIE and its subsidiaries’ liabilities consist of the following: |
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| | March 31, 2014 | | December 31, 2013 | | | | | | | | | | |
| | (in thousands) | | (in thousands) | | | | | | | | | | |
Current liabilities: | | | | | | | | | | | | | | | | |
Short term notes payable | | $ | 937,389 | | $ | 988,364 | | | | | | | | | | |
Accounts payable | | | 479,154 | | | 393,816 | | | | | | | | | | |
Accounts payable - related parties | | | 281,899 | | | 235,116 | | | | | | | | | | |
Short term loans - bank | | | 189,219 | | | 267,688 | | | | | | | | | | |
Short term loans - others | | | 42,525 | | | 55,844 | | | | | | | | | | |
Short term loans - related parties | | | 103,635 | | | 125,236 | | | | | | | | | | |
Current maturities of long-term loans – related party | | | 56,130 | | | 56,614 | | | | | | | | | | |
Other payables and accrued liabilities | | | 51,991 | | | 37,028 | | | | | | | | | | |
Other payables - related parties | | | 76,370 | | | 88,914 | | | | | | | | | | |
Customer deposits | | | 106,959 | | | 87,661 | | | | | | | | | | |
Customer deposits - related parties | | | 27,020 | | | 18,359 | | | | | | | | | | |
Deposit due to sales representatives | | | 23,713 | | | 24,343 | | | | | | | | | | |
Deposit due to sales representatives – related parties | | | 1,980 | | | 1,997 | | | | | | | | | | |
Taxes payable | | | 6,013 | | | 3,357 | | | | | | | | | | |
Deferred lease income | | | 2,168 | | | 2,187 | | | | | | | | | | |
Capital lease obligations, current | | | 4,774 | | | 4,321 | | | | | | | | | | |
Intercompany payable to be eliminated | | | 21,237 | | | 21,420 | | | | | | | | | | |
Total current liabilities | | | 2,412,176 | | | 2,412,265 | | | | | | | | | | |
Non-current liabilities: | | | | | | | | | | | | | | | | |
Long term loans - related parties | | | 15,906 | | | 16,043 | | | | | | | | | | |
Deferred lease income - noncurrent | | | 74,072 | | | 75,257 | | | | | | | | | | |
Capital lease obligations, noncurrent | | | 376,025 | | | 375,019 | | | | | | | | | | |
Profit sharing liability | | | 160,956 | | | 162,295 | | | | | | | | | | |
Total non-current liabilities | | | 626,959 | | | 628,614 | | | | | | | | | | |
Total liabilities of consolidated VIE | | $ | 3,039,135 | | $ | 3,040,879 | | | | | | | | | | |
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| | Three months ended | | Three months ended | | | | | | | | | | |
March 31, 2014 | March 31, 2013 | | | | | | | | | |
| | (in thousands) | | (in thousands) | | | | | | | | | | |
Sales | | $ | 594,014 | | $ | 646,748 | | | | | | | | | | |
Gross (loss) profit | | $ | -22,219 | | $ | 4,367 | | | | | | | | | | |
Income (loss) from operations | | $ | -39,294 | | $ | 34,937 | | | | | | | | | | |
Net income (loss) attributable to controlling interest | | $ | -38,034 | | $ | 8,325 | | | | | | | | | | |
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Longmen Joint Venture has two 100% owned subsidiaries, Yuxin Trading Co., Ltd. (“Yuxin”) and Yuteng Trading Co., Ltd. (“Yuteng”). Longmen Joint Venture has two consolidated subsidiaries, Hualong and Huatianyulong, in which it does not hold a controlling interest. Hualong and Huatianyulong are separate legal entities which were established in the PRC as limited liability companies and subsequently invested in by Longmen Joint Venture in June 2007 and July 2008, respectively. However, these two entities do not meet the definition of variable interest entities. Further consideration was given to whether consolidation was appropriate under the voting interest model, specifically where the power of control may exist with a lesser percentage of ownership (i.e. less than 50%), for example, by contract, lease, agreement with other stockholders or by court decree. |
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Hualong |
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Longmen Joint Venture, the single largest shareholder, holds a 36.0% equity interest in Hualong. The other two shareholders, who own 34.67% and 29.33% respectively, assigned their voting rights to Longmen Joint Venture in writing at the time of the acquisition of Hualong. The voting rights have been assigned through the date Hualong ceases its business operations or the other two shareholders sell their interest in Hualong. Hualong’s main business is to supply refractory. The assets, liabilities and the operating results of Hualong are immaterial to the Company’s consolidated financial statements as of March 31, 2014 and December 31, 2013 and for the three months ended March 31, 2014 and 2013, respectively. |
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Huatianyulong |
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Longmen Joint Venture holds a 50.0% equity interest in Huatianyulong and the other unrelated shareholder holds the remaining 50.0%. The other shareholder assigned its voting rights to Longmen Joint Venture in writing at the time of acquisition of Huatianyulong. The voting rights have been assigned through the date Huatianyulong ceases its business operation or the other unrelated shareholder sells its interest in Huatianyulong. Huatianyulong mainly sells imported iron ore. The assets, liabilities and the operating results of Huatianyulong are immaterial to the Company’s consolidated financial statements as of March 31, 2014 and December 31, 2013 and for the three months ended March 31, 2014 and 2013, respectively. |
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The Company has determined that it is appropriate for Longmen Joint Venture to consolidate Hualong and Huatianyulong with appropriate recognition in the Company’s financial statements of the non-controlling interests in each entity, beginning on the acquisition dates as these were also the effective dates of the agreements with other stockholders granting a majority voting rights in each entity, and thereby, the power of control, to Longmen Joint Venture. |
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Liquidity Disclosure [Policy Text Block] | ' |
| (d) | Liquidity | | | | | | | | | | | | | | |
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The Company’s accounts have been prepared in accordance with U.S. GAAP on a going concern basis. The going concern basis assumes that assets are realized and liabilities are extinguished in the ordinary course of business at amounts disclosed in the financial statements. The Company’s ability to continue as a going concern depends upon aligning its sources of funding (debt and equity) with the expenditure requirements of the Company and repayment of the short-term debt facilities as and when they fall due. |
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The steel business is capital intensive and as a normal industry practice in PRC, the Company is highly leveraged. Debt financing in the form of short term bank loans, loans from related parties, financing sales, bank acceptance notes, and capital leases have been utilized to finance the working capital requirements and the capital expenditures of the Company. As a result, the Company’s debt to equity ratio as of March 31, 2014 and December 31, 2013 were (5.8) and (6.5), respectively. As of March 31, 2014, the Company’s current liabilities exceed current assets (excluding non-cash item) by $1.3 billion. |
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Longmen Joint Venture, as the most important entity of the Company, accounted for majority of total sales of the Company. As such, the majority of the Company’s working capital needs come from Longmen Joint Venture. The Company’s ability to continue as a going concern depends heavily on Longmen Joint Venture’s operations. Longmen Joint Venture has obtained different types of financial supports, which are listed below by category: |
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Line of credit |
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The Company received lines of credit from the listed major banks totaling $229.0 million with expiration dates ranging from March 23, 2015 to July 17, 2015. |
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Banks | | Amount of | | Repayment Date | | | | | | | | | | | |
Line of Credit | | | | | | | | | | |
(in millions) | | | | | | | | | | |
Bank of Chongqing | | | 48.7 | | March 23, 2015* | | | | | | | | | | | |
Industrial Bank Co., Ltd. | | | 48.7 | | 5-May-15 | | | | | | | | | | | |
China Merchant Bank | | | 48.7 | | 19-May-15 | | | | | | | | | | | |
China CITIC Bank | | | 32.5 | | 16-Jun-15 | | | | | | | | | | | |
Bank of Communication | | | 17.9 | | 17-Jul-15 | | | | | | | | | | | |
Bank of Jinzhou | | | 32.5 | | March 23, 2015* | | | | | | | | | | | |
Total | | $ | 229 | | | | | | | | | | | | | |
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*Management expects the lines of credit will be extended after the repayment dates. |
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As of the date of this report, the Company utilized $181.0 million of these lines of credit. |
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Vendor financing |
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Longmen Joint Venture signed additional vendor financing agreements, which will provide liquidity to the Company in a total amount of $811.5 million with the following companies: |
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Company | | Financing period covered | | Financing Amount | | | | | | | | | | | |
(in millions) | | | | | | | | | | |
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Company A – related party | | July 1, 2013 – June 30, 2015 | | $ | 162.3 | | | | | | | | | | | |
Company B – third party | | January 22, 2014 – January 22, 2017 | | | 162.3 | | | | | | | | | | | |
Company C – third party | | October 1, 2013 – March 31, 2015 | | | 486.9 | | | | | | | | | | | |
Total | | | | $ | 811.5 | | | | | | | | | | | |
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Company A, a related party company and Company B, a third party company, are both Longmen Joint Venture’s major coke suppliers. They have been doing business with Longmen Joint Venture for years. On January 6, 2013, Company A signed a two-year agreement with Longmen Joint Venture to finance its coke purchase up to $81.9 million. On July 1, 2013, Company A agreed to increase the financing amount to $162.3 million and extend the financing period to June 30, 2015. Company B signed a two-year agreement with Longmen Joint Venture on November 7, 2013 to finance its coke purchase up to $162.3 million and agreed to extend the financing period for another three years effective on January 22, 2014. According to the above signed agreements, both Company A and B will not demand any cash payments during their respective financing periods. As of the date of this report, our payables to Company A and Company B were approximately $67.2 million and $94.9 million, respectively. |
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Company C is a Fortune 500 Company. On June 28, 2013, Company C signed an agreement with Longmen Joint Venture to finance Longmen Joint Venture’s purchase of iron ore for an amount up to $486.9 million to commence on October 1, 2013 and end on March 31, 2015. Subject to the terms of the agreement, Longmen Joint Venture is subject to a penalty of 0.05% of the daily outstanding balance owed to Company C in an event of late payment. As of the date of this report, our payable to Company C is approximately $5.8 million. |
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Other financing |
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On February 20, 2014, March 5, 2014, April 22, 2014 and April 23, 2014 Longmen Joint Venture signed payment extension agreements with each company listed below. In total, Longmen Joint Venture can obtain $362.0 million in financial support from two-year and three-year balancing payment extensions granted by the following five companies: |
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Company | | Financing period covered | | Financing Amount | | | | | | | | | | | |
(in millions) | | | | | | | | | | |
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Company D – related party | | April 22, 2014 – April 22, 2017 | | $ | 81.2 | | | | | | | | | | | |
Company E – related party | | April 23, 2014 – April 23, 2017 | | | 86 | | | | | | | | | | | |
Company F – related party | | April 22, 2014 – April 22, 2017 | | | 81.2 | | | | | | | | | | | |
Company G – related party | | March 5, 2014 – March 5, 2016 | | | 56.8 | | | | | | | | | | | |
Company H – related party | | March 5, 2014 – March 5, 2016 | | | 56.8 | | | | | | | | | | | |
Total | | | | $ | 362 | | | | | | | | | | | |
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According to the contract terms, Company D, Company E, Company F, Company G and Company H have agreed to grant payment extensions in the amounts of $81.2 million, $86.0 million, $81.2 million, $56.8 million and $56.8 million respectively. As of the date of this report, our payables to Company D, Company E, Company F, Company G and Company H are approximately $20.3 million, $14.2 million, $16.1 million, $7.5 million and $9.6 million, respectively. |
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Amount due to sales representatives |
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Longmen Joint Venture entered into agreements with various entities to act as the Company’s exclusive sales agents in specified geographic areas. These exclusive sales agents must meet certain criteria and are required to deposit a certain amount of money with the Company. In return, the sales agents receive exclusive sales rights in a specified area and discounted prices on products they order. These deposits bear no interest and are required to be returned to the sales agent once the agreement is terminated. As of March 31, 2014, Longmen Joint Venture has collected a total amount of $25.7 million. Historically, this amount is quite stable and we do not expect a big fluctuation in this amount for the next twelve months from March 31, 2014 onwards. |
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With the financial support from the banks and the companies above, management is of the opinion that the Company has sufficient funds to meet its future operations, working capital requirements and debt obligations until the end of March 31, 2015. The detailed breakdown of Longmen Joint Venture’s estimated cash flows items are listed below. |
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| | Cash inflow (outflow) | | | | | | | | | | | | | |
(in millions) | | | | | | | | | | | | |
| | For the twelve months | | | | | | | | | | | | | |
ended March 31, 2015 | | | | | | | | | | | | |
Current liabilities over current assets (excluding non-cash items) as of March 31, 2014 (unaudited) | | $ | -1,295.40 | | | | | | | | | | | | | |
Projected cash financing and outflows: | | | | | | | | | | | | | | | | |
Cash provided by line of credit from banks | | | 229 | | | | | | | | | | | | | |
Cash provided by vendor financing | | | 811.5 | | | | | | | | | | | | | |
Cash provided by other financing | | | 362 | | | | | | | | | | | | | |
Cash provided by sales representatives | | | 25.7 | | | | | | | | | | | | | |
Cash projected to be used in operations in the twelve months ended March 31, 2015 | | | -29.5 | | | | | | | | | | | | | |
Cash projected to be used for financing cost in the twelve months ended March 31, 2015 | | | -74 | | | | | | | | | | | | | |
Net projected change in cash for the twelve months ended March 31, 2015 | | $ | 29.3 | | | | | | | | | | | | | |
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As a result, the consolidated financial statements for the three months ended March 31, 2014 have been prepared on a going concern basis. |
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Use of Estimates, Policy [Policy Text Block] | ' |
| (e) | Use of estimates | | | | | | | | | | | | | | |
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The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the accompanying consolidated financial statements and footnotes. Significant accounting estimates reflected in the Company’s consolidated financial statements include the fair value of the profit sharing liability, the useful lives of and impairment for property, plant and equipment, and potential losses on uncollectible receivables, allowance for inventory valuation, the interest rate used in the financing sales, the fair value of the assets recorded under capital lease and the present value of the net minimum lease payments of the capital lease. Actual results could differ from these estimates. |
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Concentration Risk, Credit Risk, Policy [Policy Text Block] | ' |
| (f) | Concentration of risks and uncertainties | | | | | | | | | | | | | | |
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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. |
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The Company has significant exposure to the price fluctuation of raw materials and energy prices as part of its normal operations. As of March 31, 2014 and December 31, 2013, the Company did not have any open commodity contracts to mitigate such risks. |
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Cash includes demand deposits in accounts maintained with banks within the PRC, Hong Kong and the United States. Total cash (including restricted cash balances) in these banks on March 31, 2014 and December 31, 2013 amounted to $465.0 million and $431.3 million, including $0.4 million and $2.0 million that were deposited in Shaanxi Coal and Chemical Industry Group Financial Co., Ltd., a related party, respectively. As of March 31, 2014, $0.2 million cash in the bank was covered by insurance. The Company has not experienced any losses in other bank accounts and believes it is not exposed to any risks on its cash in bank accounts. |
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The Company’s five major customers are all distributors and collectively represented approximately 20.4% and 20.4% of the Company’s total sales for the three months ended March 31, 2014 and 2013, respectively. None of the five major customers accounted for more than 10% of total sales for the three months ended March 31, 2014 and 2013, respectively. These five major customers accounted for 0% of total accounts receivable, including related parties, as of March 31, 2014 and December 31, 2013. None of the five major customers accounted for more than 10% of total accounts receivable as of March 31, 2014 and December 31, 2013. |
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For the three months ended March 31, 2014 and 2013, the Company purchased approximately 43.9% and 32.6% of its raw materials from five major suppliers, respectively. One of the five major suppliers individually accounted for more than 10% of the total purchases for the three months ended March 31, 2014, and none of the five major suppliers individually accounted for more than 10% of the total purchases for the three months ended March 31, 2013. These five vendors accounted for 39.6% and 29.1% of total accounts payable, including related parties, as of March 31, 2014 and December 31, 2013, respectively. Two of the five major suppliers individually accounted for more than 10% of total accounts payable as March 31, 2014, and none of the five major suppliers individually accounted for more than 10% of total accounts payable as December 31, 2013. |
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Foreign Currency Transactions and Translations Policy [Policy Text Block] | ' |
| (g) | Foreign currency translation and other comprehensive income | | | | | | | | | | | | | | |
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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. |
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Translation adjustments included in accumulated other comprehensive income amounted to $3.6 million and $0.7 million as of March 31, 2014 and December 31, 2013, respectively. The balance sheet amounts, with the exception of equity at March 31, 2014 and December 31, 2013 were translated at 6.16 RMB and 6.11 RMB to $1.00, respectively. The equity accounts were stated at their historical rate. The average translation rates applied to statement of operations accounts for the three months ended March 31, 2014 and 2013 were 6.12 RMB and 6.28 RMB, respectively. Cash flows are also translated at average translation rates for the periods, therefore, amounts reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheet. |
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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. |
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Fair Value of Financial Instruments, Policy [Policy Text Block] | ' |
| (h) | Financial instruments | | | | | | | | | | | | | | |
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The accounting standards regarding fair value of financial instruments and related fair value measurements defines financial instruments and requires disclosure of the fair value of financial instruments held by the Company. The Company considers the carrying amount of cash, short term investment, accounts receivable, other receivables, accounts payable and accrued liabilities, to approximate their fair values because of the short period of time between the origination of such instruments and their expected realization. For short term loans and notes payable, the Company concluded the carrying values are a reasonable estimate of fair values because of the short period of time between the origination and repayment and as their stated interest rates approximate current rates available. |
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The Company analyzes all financial instruments with features of both liabilities and equity, pursuant to which the Company’s warrants were required to be recorded as a liability at fair value and marked to market each reporting period. |
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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: |
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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. | | | | | | | | | | | | | | |
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| ⋅ | Level 3 inputs to the valuation methodology are unobservable and significant to the fair value. | | | | | | | | | | | | | | |
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On December 13, 2007, the Company entered into a Securities Purchase Agreement with certain institutional investors for the sale of $40 million of Notes and 1,154,958 common stock warrants, initially exercisable at $13.51 per share. On December 24, 2009, the warrant holders entered into an agreement with the Company that reset the exercise price from $13.51 to $5 per share and increased the number of warrants from 1,154,958 to 3,900,871. The warrants were accounted for as derivative liabilities and recorded at their fair value, with the change in fair value charged or credited to income each period. The warrants expired unexercised on May 13, 2013. Prior to their expiration, the fair value of the warrants was estimated using a binomial lattice model, using level 3 inputs. |
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Payments related to the capital lease of the Asset Pool consist of two components: (1) a fixed monthly payment of $2.3 million (RMB 14.6 million), based on Shaanxi Steel’s cost to construct the assets, to be paid for the 20 year term of the Unified Management Agreement; and (2) 40% of any remaining pre-tax profits from the Asset Pool, which includes Longmen Joint Venture and the constructed iron and steel making facilities. The aforementioned profit sharing component meets the definition of a derivative instrument under ASC 815-10-15-83 and, accordingly, the profit sharing liability is accounted for separately as a derivative liability. It was recognized initially at its estimated fair value at inception. The estimated fair value is adjusted each reporting period, with changes in the estimated fair value of the profit sharing liability charged or credited to income each period. |
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The Company determines the fair value of the profit sharing liability using Level 3 inputs by considering the present value of Longmen Joint Venture’s projected profits/losses with a discount rate of 7.3%, based on the Company’s average borrowing rate. The projected profits/losses in Longmen Joint Venture are based upon, but not limited to, the following assumptions: |
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| ⋅ | projected selling units and growth in the steel market | | | | | | | | | | | | | | |
| ⋅ | projected unit selling price in the steel market | | | | | | | | | | | | | | |
| ⋅ | projected unit purchase cost in the coal and iron ore markets | | | | | | | | | | | | | | |
| ⋅ | selling and general and administrative expenses to be in line with the growth in the steel market | | | | | | | | | | | | | | |
| ⋅ | projected bank borrowings | | | | | | | | | | | | | | |
| ⋅ | interest rate index | | | | | | | | | | | | | | |
| ⋅ | gross nation product index | | | | | | | | | | | | | | |
| ⋅ | industry index | | | | | | | | | | | | | | |
| ⋅ | government policy | | | | | | | | | | | | | | |
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From inception to December 31, 2012, the assumptions underlying the estimated fair value did not change significantly. Beginning in the first quarter of 2013, the assumptions related to unit selling prices and costs were revised, resulting in a reduction of the estimated profit sharing liability. These assumptions were further revised during 2013. The above assumptions were again reviewed by the Company at March 31, 2014 but no major change was deemed necessary to the assumptions used at December 31, 2013. For the three months ended March 31, 2014, the Company recognized a loss on the change in the fair value of the profit sharing liability of $0.05 million, due to a $2.81 million reduction in the present value discount offset by a $2.76 million gain resulting from the Asset Pool’s operating results for the three months ended March 31, 2014 being slightly lower than previously estimated as of December 31, 2013. |
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The estimated fair value of the profit sharing liability at March 31, 2014 is $161.0 million. Changes in any of the assumptions used to estimate the fair value of the profit sharing liability will change the liability accordingly. If we were to reduce the projected bank borrowings rate used to discount the liability to a present value by 1.0% and other factors remained unchanged, our profit sharing liability as of March 31, 2014 would have been $184.2 million and we would increase the loss from the change in the fair value of the profit sharing liability by $23.2 million. If we were to reduce the projected selling units and growth in the steel market rate by 1.0% and other factors remained unchanged, our profit sharing liability as of March 31, 2014 would have been $158.4 million and we would increase the gain from the change in the fair value of the profit sharing liability by $1.8 million. |
The following table sets forth by level within the fair value hierarchy, the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of March 31, 2014: |
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(in thousands) | | Carrying Value as | | Fair Value Measurements at March 31, 2014 | | | | |
of March 31, 2014 | Using Fair Value Hierarchy | | | |
| | | | | Level 1 | | Level 2 | | Level 3 | | | | |
Profit sharing liability | | $ | 160,956 | | $ | - | | $ | - | | $ | 160,956 | | | | |
Total | | $ | 160,956 | | $ | - | | $ | - | | $ | 160,956 | | | | |
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The following table sets forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2013: |
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(in thousands) | | Carrying Value as | | Fair Value Measurements at December 31, 2013 | | | | |
of December 31, 2013 | Using Fair Value Hierarchy | | | |
| | | | | Level 1 | | Level 2 | | Level 3 | | | | |
Profit sharing liability | | $ | 162,295 | | $ | - | | $ | - | | $ | 162,295 | | | | |
Total | | $ | 162,295 | | $ | - | | $ | - | | $ | 162,295 | | | | |
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The following is a reconciliation of the beginning and ending balance of the assets and liabilities measured at fair value on a recurring basis for the three months ended March 31, 2014 and for the year ended December 31, 2013: |
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| | March 31, 2014 | | December 31, 2013 | | | | | | | | | | |
| | (in thousands) | | (in thousands) | | | | | | | | | | |
Beginning balance | | $ | 162,295 | | $ | 328,828 | | | | | | | | | | |
Change in fair value of profit sharing liability: | | | | | | | | | | | | | | | | |
Present value discount amortization | | | 2,810 | | | 16,872 | | | | | | | | | | |
Change in estimate | | | -2,761 | | | -191,441 | | | | | | | | | | |
Change in derivative liabilities-warrants | | | - | | | 1 | | | | | | | | | | |
Exchange rate effect | | | -1,388 | | | 8,035 | | | | | | | | | | |
Ending balance | | $ | 160,956 | | $ | 162,295 | | | | | | | | | | |
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Except for the derivative liabilities related to the profit sharing liability and to the warrants issued by the Company, which expired on May 13, 2013, the Company did not identify any other assets or liabilities that are required to be presented on the balance sheet at fair value. The carrying value of the long term loans-related party approximates its fair value as of the reporting date. |
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Notes Receivable [Policy Text Block] | ' |
| (i) | Notes receivable | | | | | | | | | | | | | | |
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Notes receivable represents trade accounts receivable due from various customers where the customers’ banks have guaranteed the payment. The notes are non-interest bearing and normally paid within three to six months. The Company has the ability to submit request for payment to the customer’s bank earlier than the scheduled payment date, but will incur an interest charge and a processing fee. |
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Restricted notes receivable represents notes receivable pledged as collateral for short-term loans and short-term notes payable issued by banks. |
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Interest expenses for early submission request of payment amounted to $14.1 million and $10.8 million for the three months ended March 31, 2014 and 2013, respectively. |
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Property, Plant and Equipment, Policy [Policy Text Block] | ' |
| (j) | Plant and equipment, net | | | | | | | | | | | | | | |
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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: |
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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 | | | | | | | | | | | | | | |
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The Company assesses all significant leases for purposes of classification as either operating or capital. At lease inception, if the lease meets any of the four following criteria, the Company will classify it as a capital lease; otherwise it will be treated as an operating lease: a) transfer of ownership to lessee at the end of the lease term, b) bargain purchase option, c) lease term is equal to 75% or more of the estimated economic life of the leased property, d) the present value of the minimum lease payments is 90% or more of the fair value of the leased asset. |
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Construction in progress represents the costs incurred in connection with the construction of buildings or new additions to the Company’s plant facilities. No depreciation is provided for construction in progress until such time as the assets are completed and are placed into service, maintenance, repairs and minor renewals are charged directly to expense as incurred. Major additions and betterment to buildings and equipment are capitalized. Interest incurred during construction is capitalized into construction in progress. All other interest is expensed as incurred. |
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Long lived assets, including buildings and improvements, equipment and intangible assets are reviewed if events and changes in circumstances indicate that its carrying amount may not be recoverable, to determine whether their carrying value has become impaired. The Company considers assets to be impaired if the carrying value exceeds the future projected cash flows from related operations. The Company also re-evaluates the periods of depreciation and amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives. |
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Goodwill and Intangible Assets, Policy [Policy Text Block] | ' |
| (k) | Intangible assets | | | | | | | | | | | | | | |
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Finite lived intangible assets of the Company are reviewed for impairment if events and circumstances require. The Company considers assets to be impaired if the carrying value exceeds the future projected cash flows from related operations. The Company also re-evaluates the periods of amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives. As of March 31, 2014, the Company expects these assets to be fully recoverable. |
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Land use rights |
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All land in the PRC is owned by the government. However, the government grants “land use rights.” General Steel (China) acquired land use rights in 2001 for a total of $3.9 million (RMB 23.7 million). These land use rights are for 50 years and expire in 2050 and 2053. The Company amortizes the land use rights over the twenty-year business term because its business license had a twenty-year term. |
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Long Steel Group contributed land use rights for a total amount of $24.1 million (RMB 148.3 million) to the Longmen Joint Venture. The contributed land use rights are for 50 years and expire in 2048 to 2052. |
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Maoming Hengda has land use rights amounting to $2.7 million (RMB 16.6 million) for 50 years that expire in 2054. |
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Other than the land use rights that General Steel (China) acquired in 2001, the Company amortizes the land use rights over their 50 year term. |
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Entity | | Original Cost | | Expires on | | | | | | | | | | | |
| | (in thousands) | | | | | | | | | | | | | |
General Steel (China) | | $ | 3,851 | | 2050 & 2053 | | | | | | | | | | | |
Longmen Joint Venture | | $ | 24,075 | | 2048 & 2052 | | | | | | | | | | | |
Maoming Hengda | | $ | 2,694 | | 2054 | | | | | | | | | | | |
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Mining right |
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Mining rights are capitalized at cost when acquired, including amounts associated with any value beyond proven and probable reserves, and amortized to operations as depletion expense using the units-of-production method over the estimated proven and probable recoverable tons. Longmen Joint Venture has iron ore mining right amounting to $2.4 million (RMB 15.0 million), which is amortized over the estimated recoverable reserve of 4.2 million tons. |
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Investment, Policy [Policy Text Block] | ' |
| (l) | Investments in unconsolidated entities | | | | | | | | | | | | | | |
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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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The table below summarizes Longmen Joint Venture’s investment holdings as of March 31, 2014 and December 31, 2013. |
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Unconsolidated entities | | Year | | March 31, 2014 | | Owned | | December 31, | | Owned | |
acquired | Net investment | % | 2013 | % |
| (In thousands) | | Net investment | |
| | | (In thousands) | |
Xi’an Delong Powder Engineering Materials Co., Ltd. | | | 2007 | | $ | 1,042 | | | 24.1 | | $ | 1,215 | | | 24.1 | |
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The table below summarizes General Steel (China)’s investment holding (see Note 2(a) - Basis of presentation) as of March 31, 2014 and December 31, 2013. |
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Unconsolidated entities | | Year | | March 31, 2014 | | Owned | | December 31, | | | Owned | |
acquired | Net investment | % | 2013 | % |
| (In thousands) | | Net investment | |
| | | (In thousands) | |
Tianwu General Steel Material Trading Co., Ltd. | | | 2010 | | $ | 15,593 | | | 32 | | $ | 15,728 | | | 32 | |
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Total investment income (loss) in unconsolidated subsidiaries amounted to $0.01 million and $(0.04) million for the three months ended March 31, 2014 and 2013, respectively, which was included in “Income from equity investments” in the condensed consolidated statements of operations and comprehensive (loss) income. |
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Revenue Recognition, Policy [Policy Text Block] | ' |
| (m) | Revenue recognition | | | | | | | | | | | | | | |
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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. |
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The Company infrequently engages in trading transactions in which the Company acts as an agent between the suppliers and the customers. The trading arrangements are such that the suppliers are the primary obligators, the Company does not have any general inventory risk, physical inventory loss risk or credit risk, and the Company does not have latitude in establishing price. Sales and cost of goods sold from these trading arrangements are recorded at the net amount retained in accordance with ASC 605-45. |
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Reclassification, Policy [Policy Text Block] | ' |
| (n) | Reclassifications | | | | | | | | | | | | | | |
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Certain prior year amounts have been reclassified to conform to the current year presentation. These reclassifications have no effect on the accompanying condensed consolidated statements of operations and cash flows. |
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