KINGOLD JEWELRY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN US DOLLARS)
(UNAUDITED)
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
(Restated)
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
129,649,710
|
|
|
$
|
3,100,569
|
|
Restricted cash
|
|
|
295,575,852
|
|
|
|
26,649,687
|
|
Accounts receivable
|
|
|
803,371
|
|
|
|
1,624,323
|
|
Inventories
|
|
|
164,560,088
|
|
|
|
298,303,185
|
|
Investment in gold - current
|
|
|
248,359,383
|
|
|
|
-
|
|
Other current assets and prepaid expenses
|
|
|
5,048,363
|
|
|
|
1,046,032
|
|
Value added tax recoverable
|
|
|
130,914,603
|
|
|
|
15,526,002
|
|
Total current assets
|
|
|
974,911,370
|
|
|
|
346,249,798
|
|
|
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT, NET
|
|
|
7,684,808
|
|
|
|
7,622,509
|
|
OTHER ASSETS
|
|
|
|
|
|
|
|
|
Deposit on land use right - Jewelry Park
|
|
|
9,047,947
|
|
|
|
9,296,763
|
|
Construction in progress- Jewelry Park
|
|
|
152,867,231
|
|
|
|
105,844,259
|
|
Restricted cash – non-current
|
|
|
3,296,753
|
|
|
|
-
|
|
Investment in gold – non-current
|
|
|
1,181,039,779
|
|
|
|
-
|
|
Other assets
|
|
|
144,733
|
|
|
|
148,713
|
|
Land use right
|
|
|
433,524
|
|
|
|
454,180
|
|
Deferred income tax assets
|
|
|
17,660,837
|
|
|
|
-
|
|
Total long-term assets
|
|
|
1,372,175,612
|
|
|
|
123,366,424
|
|
TOTAL ASSETS
|
|
$
|
2,347,086,982
|
|
|
$
|
469,616,222
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Short term loans
|
|
$
|
195,195,961
|
|
|
$
|
55,455,428
|
|
Debts payable, net
|
|
|
-
|
|
|
|
61,471,962
|
|
Construction payables-Jewelry Park
|
|
|
53,971,233
|
|
|
|
23,876,642
|
|
Deposit payable-Jewelry Park
|
|
|
170,908,906
|
|
|
|
22,182,171
|
|
Other payables and accrued expenses
|
|
|
9,935,272
|
|
|
|
6,355,979
|
|
Gold lease payable – related party
|
|
|
438,349,470
|
|
|
|
-
|
|
Related party loans
|
|
|
149,920,542
|
|
|
|
-
|
|
Third party loans
|
|
|
37,480,135
|
|
|
|
-
|
|
Due to related party
|
|
|
1,041,634
|
|
|
|
200,059
|
|
Income tax payable
|
|
|
24,962,897
|
|
|
|
1,119,918
|
|
Other taxes payable
|
|
|
977,152
|
|
|
|
710,104
|
|
Total current liabilities
|
|
|
1,082,743,202
|
|
|
|
171,372,263
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liability
|
|
|
-
|
|
|
|
1,774,993
|
|
Long term loans
|
|
|
896,971,914
|
|
|
|
30,808,571
|
|
TOTAL LIABILITIES
|
|
|
1,979,715,116
|
|
|
|
203,955,827
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value, 500,000 shares authorized, none issued or outstanding as of September 30, 2016 and December 31, 2015
|
|
|
-
|
|
|
|
-
|
|
Common stock $0.001 par value, 100,000,000 shares authorized, 66,018,867 and 65,963,502 shares issued and outstanding as of September 30, 2016 and December 31, 2015
|
|
|
66,018
|
|
|
|
65,963
|
|
Additional paid-in capital
|
|
|
80,219,824
|
|
|
|
79,990,717
|
|
Retained earnings
|
|
|
|
|
|
|
|
|
Unappropriated
|
|
|
235,522,046
|
|
|
|
184,564,147
|
|
Appropriated
|
|
|
967,543
|
|
|
|
967,543
|
|
Accumulated other comprehensive income (deficit)
|
|
|
50,523,224
|
|
|
|
(1,249
|
)
|
Total stockholders' equity
|
|
|
367,298,655
|
|
|
|
265,587,121
|
|
Non-controlling interest
|
|
|
73,211
|
|
|
|
73,274
|
|
Total Equity
|
|
|
367,371,866
|
|
|
|
265,660,395
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
2,347,086,982
|
|
|
$
|
469,616,222
|
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements
KINGOLD JEWELRY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(IN US DOLLARS)
(UNAUDITED)
|
|
For the three months ended September 30,
|
|
|
For the nine months ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
(Restated)
|
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
NET SALES
|
|
$
|
390,547,042
|
|
|
$
|
263,762,713
|
|
|
$
|
1,062,995,744
|
|
|
$
|
719,378,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OF SALES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
(339,845,689
|
)
|
|
|
(247,894,654
|
)
|
|
|
(937,138,523
|
)
|
|
|
(689,700,092
|
)
|
Depreciation
|
|
|
(286,710
|
)
|
|
|
(304,849
|
)
|
|
|
(869,075
|
)
|
|
|
(924,958
|
)
|
Total cost of sales
|
|
|
(340,132,399
|
)
|
|
|
(248,199,503
|
)
|
|
|
(938,007,598
|
)
|
|
|
(690,625,050
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
50,414,643
|
|
|
|
15,563,210
|
|
|
|
124,988,146
|
|
|
|
28,753,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
3,931,214
|
|
|
|
3,247,362
|
|
|
|
13,643,705
|
|
|
|
7,130,925
|
|
Stock compensation expenses
|
|
|
11,143
|
|
|
|
102,344
|
|
|
|
33,428
|
|
|
|
417,471
|
|
Depreciation
|
|
|
25,102
|
|
|
|
24,776
|
|
|
|
72,089
|
|
|
|
75,204
|
|
Amortization
|
|
|
2,836
|
|
|
|
3,034
|
|
|
|
8,617
|
|
|
|
9,203
|
|
Total operating expenses
|
|
|
3,970,295
|
|
|
|
3,377,516
|
|
|
|
13,757,839
|
|
|
|
7,632,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM OPERATIONS
|
|
|
46,444,348
|
|
|
|
12,185,694
|
|
|
|
111,230,307
|
|
|
|
21,121,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSES)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (expenses)
|
|
|
(75,748
|
)
|
|
|
3,209
|
|
|
|
(75,618
|
)
|
|
|
9,740
|
|
Interest Income
|
|
|
1,365,984
|
|
|
|
(575
|
)
|
|
|
2,182,472
|
|
|
|
150,497
|
|
Interest expense
|
|
|
(26,551,667
|
)
|
|
|
(273,953
|
)
|
|
|
(45,146,833
|
)
|
|
|
(656,106
|
)
|
Total other expenses, net
|
|
|
(25,261,431
|
)
|
|
|
(271,319
|
)
|
|
|
(43,039,979
|
)
|
|
|
(495,869
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM OPERATIONS BEFORE TAXES
|
|
|
21,182,917
|
|
|
|
11,914,375
|
|
|
|
68,190,328
|
|
|
|
20,625,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAX PROVISION (BENEFIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
25,230,923
|
|
|
|
71,176
|
|
|
|
36,891,707
|
|
|
|
3,357,451
|
|
Deferred
|
|
|
(19,909,244
|
)
|
|
|
3,078,209
|
|
|
|
(19,653,506
|
)
|
|
|
1,348,181
|
|
Total income tax provision
|
|
|
5,321,679
|
|
|
|
3,149,385
|
|
|
|
17,238,201
|
|
|
|
4,705,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
|
15,861,238
|
|
|
|
8,764,990
|
|
|
|
50,952,127
|
|
|
|
15,919,631
|
|
Add: net loss attributable to non-controlling interest
|
|
|
445
|
|
|
|
448
|
|
|
|
1,910
|
|
|
|
636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS
|
|
$
|
15,861,683
|
|
|
$
|
8,765,438
|
|
|
$
|
50,954,037
|
|
|
$
|
15,920,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gain (loss) related to investment in gold
|
|
$
|
(9,822,756
|
)
|
|
$
|
-
|
|
|
$
|
58,520,282
|
|
|
$
|
-
|
|
Total foreign currency translation loss
|
|
|
(1,332,179
|
)
|
|
|
(10,487,596
|
)
|
|
|
(7,993,962
|
)
|
|
|
(8,899,780
|
)
|
Add: Foreign currency translation
(gain) loss attributable to non-controlling interest
|
|
|
(271
|
)
|
|
|
2,821
|
|
|
|
(1,847
|
)
|
|
|
2,739
|
|
Total Other comprehensive income (loss) attributable to KINGOLD JEWELRY, INC.
|
|
$
|
(11,155,206
|
)
|
|
$
|
(10,484,775
|
)
|
|
$
|
50,524,473
|
|
|
$
|
(8,897,041
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stockholders
|
|
$
|
4,706,477
|
|
|
$
|
(1,719,337
|
)
|
|
$
|
101,478,510
|
|
|
$
|
7,023,226
|
|
Non-controlling interest
|
|
|
(174
|
)
|
|
|
-
|
|
|
|
(63
|
)
|
|
|
-
|
|
|
|
$
|
4,706,303
|
|
|
$
|
(1,719,337
|
)
|
|
$
|
101,478,447
|
|
|
$
|
7,023,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.24
|
|
|
$
|
0.13
|
|
|
$
|
0.77
|
|
|
$
|
0.24
|
|
Diluted
|
|
$
|
0.24
|
|
|
$
|
0.13
|
|
|
$
|
0.77
|
|
|
$
|
0.24
|
|
Weighted average number of shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
66,018,867
|
|
|
|
65,963,502
|
|
|
|
65,982,294
|
|
|
|
65,963,502
|
|
Diluted
|
|
|
66,740,085
|
|
|
|
65,963,502
|
|
|
|
66,291,236
|
|
|
|
65,963,502
|
|
The accompanying notes are an integral part of the unaudited
condensed consolidated financial statements
KINGOLD JEWELRY, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH
FLOWS
(IN US DOLLARS)
(UNAUDITED)
|
|
For the nine months ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(Restated)
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
50,952,127
|
|
|
$
|
15,919,631
|
|
Adjustments to reconcile net income to cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
941,164
|
|
|
|
1,000,162
|
|
Amortization of intangible assets
|
|
|
8,617
|
|
|
|
9,203
|
|
Amortization of deferred financing costs
|
|
|
143,227
|
|
|
|
162,322
|
|
Share based compensation
|
|
|
229,162
|
|
|
|
417,471
|
|
Deferred tax provision (benefit)
|
|
|
(19,653,506
|
)
|
|
|
1,348,181
|
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
|
|
(Increase) decrease in:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
788,112
|
|
|
|
307,315
|
|
Inventories
|
|
|
127,479,484
|
|
|
|
(69,261,230
|
)
|
Other current assets and prepaid expenses
|
|
|
(4,081,575
|
)
|
|
|
(134,535
|
)
|
Value added tax recoverable
|
|
|
(117,388,028
|
)
|
|
|
(9,744,403
|
)
|
Increase (decrease) in:
|
|
|
|
|
|
|
|
|
Other payables and accrued expenses
|
|
|
3,673,428
|
|
|
|
2,438,517
|
|
Deposit payable Jewelry Park, net
|
|
|
151,362,720
|
|
|
|
23,374,347
|
|
Income tax payable
|
|
|
23,499,156
|
|
|
|
(886,440
|
)
|
Other taxes payable
|
|
|
990,281
|
|
|
|
1,052,294
|
|
Net cash provided by (used in) operating activities
|
|
|
218,944,369
|
|
|
|
(33,997,165
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(306,652
|
)
|
|
|
(59,406
|
)
|
Purchase of gold investment
|
|
|
(945,283,984
|
)
|
|
|
-
|
|
Cash payment in construction in progress-Jewelry Park
|
|
|
(20,440,112
|
)
|
|
|
(26,111,485
|
)
|
Net cash used in investing activities
|
|
|
(966,030,748
|
)
|
|
|
(26,170,891
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Capital contribution from minority interest for the new subsidiary
|
|
|
-
|
|
|
|
73,045
|
|
Proceeds from bank loans
|
|
|
1,076,863,691
|
|
|
|
55,189,430
|
|
Repayments of bank loans
|
|
|
(54,861,388
|
)
|
|
|
(16,232,185
|
)
|
Restricted cash
|
|
|
(274,106,062
|
)
|
|
|
(14,250,445
|
)
|
Proceeds from related party loans
|
|
|
150,762,768
|
|
|
|
-
|
|
Proceeds from third party loans
|
|
|
37,480,135
|
|
|
|
-
|
|
Proceeds from exercise of warrants
|
|
|
66,439
|
|
|
|
-
|
|
(Repayment) proceeds from debt financing instruments under private placement
|
|
|
(60,788,241
|
)
|
|
|
64,928,741
|
|
Deferred financing costs
|
|
|
-
|
|
|
|
(649,287
|
)
|
Net cash provided by financing activities
|
|
|
875,417,342
|
|
|
|
89,059,299
|
|
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS
|
|
|
(1,781,822
|
)
|
|
|
(608,719
|
)
|
|
|
|
|
|
|
|
|
|
NET INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
126,549,141
|
|
|
|
28,282,524
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
|
|
3,100,569
|
|
|
|
1,331,658
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF PERIOD
|
|
$
|
129,649,710
|
|
|
$
|
29,614,182
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
Cash paid for interest expense
|
|
$
|
45,155,522
|
|
|
$
|
3,751,584
|
|
Cash paid for income tax
|
|
$
|
12,692,294
|
|
|
$
|
4,243,891
|
|
|
|
|
|
|
|
|
|
|
NON-CASH INVESTING AND FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Gold leased from related party in connection with the gold investment
|
|
$
|
438,349,470
|
|
|
$
|
-
|
|
The accompanying notes are an integral part of these unaudited
condensed consolidated Financial Statements
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 — BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated
financial statements of Kingold Jewelry, Inc. (“Kingold” or the “Company”) have been prepared in accordance
with generally accepted accounting principles (“U.S. GAAP”) for interim financial information pursuant to the rules
and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the
information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary to make the financial statements not misleading have been included.
Operating results for the interim period ended September 30, 2016 are not necessarily indicative of the results that may be expected
for the fiscal year ending December 31, 2016. The information included in this Form 10-Q/A should be read in conjunction with Management’s
Discussion and Analysis, and the financial statements and notes thereto included in the Company’s Form 10-K for the fiscal
year ended December 31, 2015, filed with the SEC on March 29, 2016.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
Wuhan Kingold Jewelry Co., Inc. (“Wuhan
Kingold”) should be considered as a 100% contractually controlled affiliate. Kingold is empowered, through its wholly owned
subsidiaries Dragon Lead Group Limited (“Dragon Lead”) and Wuhan Vogue-Show Jewelry Co., Inc. (“Wuhan Vogue-Show”),
with the ability to control and substantially influence Wuhan Kingold’s daily operations and financial affairs, appoint its
senior executives and approve all matters requiring shareholders’ approval. Kingold is also obligated to absorb a majority
of expected losses of Wuhan Kingold, which enables Kingold to receive a majority of expected residual returns from Wuhan Kingold,
and because Kingold has the power to direct the activities of Wuhan Kingold that most significantly impact Wuhan Kingold’s
economic performance, Kingold, through its wholly-owned subsidiaries, accounts for Wuhan Kingold as its Variable Interest Entity
under Accounting Standards Codification (“ASC”) 810-10-05-8A. Accordingly, Kingold consolidates Wuhan Kingold’s
operating results, assets and liabilities. The Company makes an ongoing assessment to determine whether Wuhan Kingold is still
a Variable Interest Entity.
The accompanying unaudited condensed consolidated
financial statements include the financial statements of Kingold, Dragon Lead, Wuhan Vogue-Show, Wuhan Kingold and its 55% controlled
subsidiaries Wuhan Kingold Internet Co., Ltd. (“Kingold Internet”) and Yuhuang Jewelry Design Co., Ltd (“Yuhuang”).
All significant inter-company balances and transactions have been eliminated in consolidation.
Kingold, Dragon Lead, Wuhan Vogue-Show, Wuhan
Kingold, Kingold Internet and Yuhuang are hereinafter collectively referred to as the “Company.”
Restatement of Financial Statements
In connection with its review of the consolidated
financial statements for the fiscal year ended December 31, 2016, management of the Company determined that the previously issued
financial statements contained in the Company’s Quarterly Reports on Form 10-Q for the quarter ended September 30, 2016 should
be amended to correct errors in those financial statements.
Firstly, the Company determined that several
related and third party loans, gold leases and pledges were not properly recorded in the previously issued unaudited condensed
consolidated financial statements as of September 30, 2016. The Company borrowed money to finance its purchases of gold, which gold
was then pledged to secure the loans. In some cases, the unrestricted gold available for production was insufficient to provide
adequate security for such loans, which in turn required the Company to lease gold from a related party to satisfy its loan conditions
and conduct its operations.
Secondly, because bank loans required the Company
to pledge gold in favor of the lenders, such pledged gold should have been reflected as investment in gold (restricted). The Company
determined that certain gold reflected as inventory for production in 2016 should instead be reflected as investment in gold (restricted)
since the Company had excess gold not to be used for production. The result of this reclassification is to record the value of
such gold at the fair market value of the gold, rather than at the lower of cost or market value, as would be the case for inventory
used for production. Because the fair market value of gold has increased during the three and nine months ended September 30, 2016,
such reclassification resulted in an unrealized gain and therefore caused an increase in equity.
The effects of the Company’s previously
issued unaudited condensed consolidated financial statements as of September 30, 2016 are summarized as follows:
Selected Unaudited Consolidated Balance Sheets Information as of
September 30, 2016
|
|
Previously
|
|
|
|
|
|
|
|
|
|
Reported
|
|
|
Adjustment
|
|
|
Restated
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
$
|
111,471,928
|
|
|
$
|
184,03,924
|
|
|
$
|
295,575,852
|
|
Other current assets and prepaid expenses
|
|
$
|
4,766,011
|
|
|
$
|
282,352
|
|
|
$
|
5,048,363
|
|
Inventories
|
|
$
|
1,097,089,498
|
|
|
$
|
(932,529,410
|
)
|
|
$
|
164,560,088
|
|
Investment in gold - current
|
|
$
|
-
|
|
|
$
|
248,359,383
|
|
|
$
|
248,359,383
|
|
Investment in gold - non-current
|
|
$
|
-
|
|
|
$
|
1,181,039,779
|
|
|
$
|
1,181,039,779
|
|
Restricted cash – non-current
|
|
$
|
-
|
|
|
$
|
3,296,753
|
|
|
$
|
3,296,753
|
|
Gold lease payable – related party
|
|
$
|
-
|
|
|
$
|
438,349,470
|
|
|
$
|
438,349,470
|
|
Related party loans
|
|
$
|
-
|
|
|
$
|
149,920,542
|
|
|
$
|
149,920,542
|
|
Third party loans
|
|
$
|
-
|
|
|
$
|
37,480,135
|
|
|
$
|
37,480,135
|
|
Retained earnings – Unappropriated
|
|
$
|
235,235,832
|
|
|
$
|
286,214
|
|
|
$
|
235,522,046
|
|
Accumulated other comprehensive income (deficit)
|
|
$
|
(7,993,196
|
)
|
|
$
|
58,516,420
|
|
|
$
|
50,523,224
|
|
Selected Unaudited Consolidated Statements
of Operations and Comprehensive Income information for the three months ended September 30, 2016
|
|
Three months ended September 30, 2016
|
|
|
|
Previously
|
|
|
|
|
|
|
|
|
|
Reported
|
|
|
Adjustment
|
|
|
Restated
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
1,216,697
|
|
|
$
|
149.287
|
|
|
$
|
1,365,984
|
|
Change in unrealized loss related to investment in gold
|
|
$
|
-
|
|
|
$
|
(9,822,756
|
)
|
|
$
|
(9,822,756
|
)
|
Foreign currency translation loss
|
|
$
|
(1,330,413
|
)
|
|
$
|
(1,766
|
)
|
|
$
|
(1,332,179
|
)
|
Selected Unaudited Consolidated Statements
of Operations and Comprehensive Income information for the nine months ended September 30, 2016
|
|
Nine months ended September 30, 2016
|
|
|
|
Previously
|
|
|
|
|
|
|
|
|
|
Reported
|
|
|
Adjustment
|
|
|
Restated
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
1,900,120
|
|
|
$
|
282,352
|
|
|
$
|
2,182,472
|
|
Change in unrealized gain related to investment in gold
|
|
$
|
-
|
|
|
$
|
58,520,282
|
|
|
$
|
58,520,282
|
|
Foreign currency translation loss
|
|
$
|
(7,990,100
|
)
|
|
$
|
(3,862
|
)
|
|
$
|
(7,993,962
|
)
|
Selected Unaudited Consolidated Statements
of Cash Flows for the nine months ended September 30, 2016
|
|
Nine months ended September 30, 2016
|
|
|
|
Previously
|
|
|
|
|
|
|
|
|
|
Reported
|
|
|
Adjustment
|
|
|
Restated
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
50,669,775
|
|
|
$
|
282,352
|
|
|
$
|
50,952,127
|
|
Inventories
|
|
$
|
(817,804,500
|
)
|
|
$
|
945,283,984
|
|
|
$
|
127,479,484
|
|
Other current assets and prepaid expenses
|
|
$
|
(3,799,223
|
)
|
|
$
|
(282,352
|
)
|
|
$
|
(4,081,575
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of gold investment
|
|
$
|
-
|
|
|
$
|
(945,283,984
|
)
|
|
$
|
(945,283,984
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
$
|
(86,705,385
|
)
|
|
$
|
(187,400,677
|
)
|
|
$
|
(274,106,062
|
)
|
Proceeds from related party loans
|
|
$
|
842,226
|
|
|
$
|
149,920,542
|
|
|
$
|
150,762,768
|
|
Proceeds from third party loans
|
|
$
|
-
|
|
|
$
|
37,480,135
|
|
|
$
|
37,480,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-CASH INVESTING AND FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Gold leased from related party in connection with the gold investment
|
|
$
|
-
|
|
|
$
|
438,349,470
|
|
|
$
|
438,349,470
|
|
Use of Estimates
The preparation of the consolidated financial
statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of
assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements
as well as the reported amounts of revenues and expenses during the reporting period. Significant estimates required to be made
by management include, but are not limited to, useful lives of property, plant and equipment, the recoverability of long-lived
assets, allowance for doubtful accounts, deferred tax assets and liabilities, investment in gold and share based compensation.
Actual results could differ from those estimates.
Restricted Cash
As of September 30, 2016 and December 31, 2015,
the Company had restricted cash of $298,872,605 and $26,649,687, respectively. Approximately $5.3 million was related to the bank
loan with various financial institutions. Approximately $106.2 million was related to the gold lease deposits with Shanghai Pudong
Development Bank (“SPD Bank”), China Construction Bank (“CCB”) Commerce Bank of China (“ICBC”) and
CITIC Bank – see Note 20 – Gold Lease Transactions. Approximately $37.5 million was related to the third party
loans – see Note 11 – Third Party Loans. Approximately $150 million was related to the related party loans –
see Note 12 – Related Party Loans.
Accounts Receivable
The Company generally receives cash payment
upon delivery of a product, but may extend unsecured credit to its customers in the ordinary course of business. The Company mitigates
the associated risks by performing credit checks and actively pursuing past due accounts. An allowance for doubtful accounts is
established and recorded based on management’s assessment of the credit history of the customers and current relationships
with them. At September 30, 2016 and December 31, 2015, there was no allowance recorded as the Company considers all of the accounts
receivable fully collectible.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Inventories
Inventories are stated at the lower of cost
or market value, and cost is calculated on the weighted average basis. As of September 30, 2016 and December 31, 2015, there was
no lower of cost or market adjustment because the carrying value of the Company’s inventories was lower than the current
and expected market price of gold. The cost of inventories comprises all costs of purchases, costs of fixed and variable production
overhead and other costs incurred in bringing the inventories to their present condition.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation.
Expenditures for additions, major renewals and betterments are capitalized, and expenditures for maintenance and repairs are charged
to expense as incurred.
Depreciation is provided on a straight-line basis, less estimated
residual value, over an asset’s estimated useful life. The estimated useful lives used in connection with the preparation
of the financial statements are as follows:
|
Estimated
Useful Life
|
Buildings
|
30 years
|
Plant and machinery
|
15 years
|
Motor vehicles
|
10 years
|
Office furniture and electronic equipment
|
5 – 10 years
|
Building improvements
|
Over lease term
|
Land Use Right
Under PRC law, all land in the PRC is owned
by the government and cannot be sold to an individual or company. The government grants individuals and companies the right to
use parcels of land for specified periods of time. These land use rights are sometimes referred to informally as “ownership.”
Land use rights are stated at cost less accumulated amortization. Amortization is provided over the respective useful lives, using
the straight-line method. Estimated useful life is 50 years, and is determined in connection with the term of the land use right.
Long-Lived Assets
Certain assets such as property, plant and
equipment and construction in progress, are reviewed for impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. Recoverability of assets that are held and used is measured by a comparison of the carrying
amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of
an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount
exceeds the fair value of the asset. There were no events or changes in circumstances that necessitated a review of impairment
of long-lived assets as of September 30, 2016 and December 31, 2015.
Property Held for Sale
Property held for sale relates to the Company’s
commitment to sell the real estate property of Kingold Jewelry Cultural Industry Park (the “Jewelry Park”), to third
party. On June 27, 2016, the Company entered into a transfer contract with third party, Wuhan Lianfuda Investment Management Co.,
Ltd. (“Wuhan Lianfuda”), to sell all of its interest in the Jewelry Park to Wuhan Lianfuda (the “Transfer Transaction;”
see Note 5). The Transfer Transaction has not been consummated as of September 30, 2016 therefore Jewelry Park real estate property
was treated as property held for sale because all of the following criteria were met:
|
·
|
management
commits to a plan to sell a property;
|
|
·
|
it
is unlikely that the disposal plan will be significantly modified or discontinued;
|
|
·
|
the
property is available for immediate sale in its present condition;
|
|
·
|
actions
required to complete the sale of the property have been initiated;
|
|
·
|
sale
of the property is probable and the expected completion of the sale will occur within one year; and
|
|
·
|
the
property is actively being marketed for sale at a price that is reasonable given its current market value.
|
Upon designation the Jewelry Park as property
held for sale, the Company records the carrying value of the Jewelry Park at the lower of its carrying value or its estimated fair
value, less estimated costs to sell.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Fair Value of Financial Instruments
The Company follows the provisions of Accounting
Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures.” ASC 820 clarifies the definition
of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used
in measuring fair value as follows:
Level 1-Observable inputs such as unadjusted
quoted prices in active markets for identical assets or liabilities available at the measurement date.
Level 2-Inputs other than quoted prices that
are observable for the asset or liability in active markets, quoted prices for identical or similar assets and liabilities in markets
that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable
market data.
Level 3-Inputs are unobservable inputs which
reflect management’s assumptions based on the best available information.
The carrying value of all current assets and
liabilities approximate their fair values because of the short-term nature of these instruments. The Company determined that the
carrying value of the long term loans approximated their fair value by comparing the stated loan interest rate to the rate charged
by similar financial institutions. The Company uses quoted prices in active markets to measure the fair value of investment
in gold.
Investment in Gold
The Company pledged the gold leased from related
party and part of its own gold inventory to meet the requirements of bank loans. The pledged gold will be available for sale upon
the repayment of the bank loans. The Company classified the pledged gold as investment in gold, and carried at fair market value,
with the unrealized gains and losses, included in the determination of comprehensive income and reported in shareholders’
equity. The fair market value of the investment in gold is determined by quoted market prices at Shanghai Gold Exchange.
Revenue Recognition
Net sales (gross sales less valued added tax)
are primarily composed of sales of branded products to wholesale and retail customers, as well as fees generated from customized
production. In customized production, a customer supplies the Company with the raw materials and the Company creates products per
that customer’s instructions, whereas in branded production the Company generally purchases gold directly and manufactures
and markets the products on its own. The Company recognizes revenues under ASC 605 as follows:
Sαles of brαnded products
The Company recognizes revenue on sales of
branded products when the goods are delivered and title to the goods passes to the customer provided that: (i) there are no uncertainties
regarding customer acceptance; (ii) persuasive evidence of an arrangement exists; (iii) the sales price is fixed and determinable;
and (iv) collectability is deemed probable.
Customized production fees
The Company recognizes services-based revenue
(the processing fee) from such contracts for customized production when: (i) the contracted services have been performed and (ii)
collectability is deemed probable.
Internet sales
The Company also engages in promoting the online
sales of jewelry products through cooperation with Tmall.com, a large business-to-consumer online retail platform owned by Alibaba
Group. Consistent with the criteria of ASC 605, Revenue Recognition, the Company recognizes revenues of internet sales when the
following four revenue recognition criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred,
(iii) the selling price is fixed or determinable, and (iv) collectability is reasonably assured.
In accordance with ASC 605, Revenue Recognition,
the Company evaluates whether it is appropriate to record the gross amount of product sales and related costs or the net amount
earned as commissions. When the Company is primarily obligated in a transaction, is subject to inventory risk, has latitude in
establishing prices and selecting suppliers, or has several but not all of these indicators, revenues should be recorded on a gross
basis. When the Company is not the primary obligor, doesn’t bear the inventory risk and doesn’t have the ability to
establish the price, revenues are recorded on a net basis.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Income Taxes
Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in net income in the period including the enactment date. Valuation allowances
are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
The provisions of ASC 740-10-25, “Accounting
for Uncertainty in Income Taxes,” prescribe a more-likely-than-not threshold for recognition and measurement of a tax position
taken (or expected to be taken) in a tax return. This interpretation also provides guidance on the recognition of income tax assets
and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties
associated with tax positions, and related disclosures. The Company does not believe that there was any uncertain tax position
at September 30, 2016 and December 31, 2015.
To the extent applicable, the Company records
interest and penalties as a general and administrative expense. The statute of limitations for the Company’s U.S. federal
income tax returns and certain state income tax returns remains open for tax years 2010 and after. As of September 30, 2016, the
tax years ended December 31, 2010 through December 31, 2015 for the Company’s PRC subsidiaries remain open for statutory
examination by PRC tax authorities.
Foreign Currency Translation
Kingold, as well as its wholly owned subsidiary,
Dragon Lead, maintain accounting records in United States Dollars (“US$”), whereas Wuhan Vogue-Show and Wuhan Kingold
maintain their accounting records in Renminbi (“RMB”), which is the primary currency of the economic environment in
which their operations are conducted. The Company’s principal country of operations is the PRC. The financial position and
results of its operations are determined using RMB, the local currency, as the functional currency. The results of operations and
the statement of cash flows denominated in foreign currency are translated at the average rate of exchange during the reporting
period. Assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the applicable rates
of exchange in effect at that date. The equity denominated in the functional currency is translated at the historical rate of exchange
at the time of capital contribution and stock issuance. Because cash flows are translated based on the average translation rate,
amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the
corresponding balances on the balance sheet. Translation adjustments arising from the use of different exchange rates from period
to period are included as a component of stockholders’ equity as “Accumulated Other Comprehensive Income (deficit)”.
The value of RMB against US$ and other currencies
may fluctuate and is affected by, among other things, changes in the PRC’s political and economic conditions. Any significant
revaluation of RMB may materially affect the Company’s financial condition in terms of US$ reporting. The following table
outlines the currency exchange rates that were used in creating the consolidated financial statements in this report:
|
|
September 30, 2016
|
|
September 30, 2015
|
|
December 31,2015
|
Balance sheet items, except for share capital, additional paid in capital and retained earnings, as of the period ended
|
|
US$1=RMB 6.6702
|
|
US$1=RMB 6.3538
|
|
US$1=RMB6.4917
|
Amounts included in the statements of operations and cash flows for the period
|
|
US$1=RMB 6.5802
|
|
US$1=RMB 6.1606
|
|
US$1=RMB 6.2288
|
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Comprehensive Income
Comprehensive income consists of two components,
net income and other comprehensive income (loss). The unrealized gain or loss resulting from the change of the fair market value
and the foreign currency translation gain or loss resulting from translation of the financial statements expressed in RMB to US$
are reported in other comprehensive income in the consolidated statements of income and comprehensive income and the consolidated
statements of changes in equity.
Earnings per Share
Basic EPS is measured as net income divided
by the weighted average common shares outstanding for the period. Diluted EPS is similar to basic EPS but presents the dilutive
effect on a per share basis of potential common shares (i.e., options and warrants) as if they had been converted at the beginning
of the periods presented, or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e., those that
increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS.
Share or Stock-Based compensation
The Company follows the provisions of ASC 718,
“Compensation — Stock Compensation,” which establishes the accounting for employee stock-based awards. For employee
stock-based awards, share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized
as expense with graded vesting on a straight-line basis over the requisite service period for the entire award. For the non-employee
stock-based awards, the fair value of the awards to non-employees are measured every reporting period based on the value of the
Company’s common stock.
Debts Payable
Debt issuance costs related to a recognized
debt liability are presented in the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent
with debt discounts.
Deposit payables - Jewelry Park
Deposit payables consist of the following two
components: (1) amounts received from customers relating to the pre-sale of the residential or commercial units in the Jewelry
Park. The Company receives these funds and recognizes them as a liability until the revenue can be recognized; (2) amounts received
from third party in connection with the Jewelry Park Transfer Transaction, to be offset against the Jewelry Park construction in
process (“CIP”) in the near future when the Transfer transaction is consummated.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Risks and Uncertainties
The jewelry industry generally is affected
by fluctuations in the price and supply of diamonds, gold, and, to a lesser extent, other precious and semi-precious metals and
stones. The Company potentially has exposure to the fluctuation in gold commodity prices as part of its normal operations. In the
past, the Company has not hedged its requirement for gold or other raw materials through the use of options, forward contracts
or outright commodity purchasing. A significant increase in the price of gold could increase the Company’s production costs
beyond the amount that it is able to pass on to its customers, which would adversely affect the Company’s sales and profitability.
A significant disruption in the Company’s supply of gold, or other commodities, could decrease its production and shipping
levels, materially increase its operating costs, and materially and adversely affect its profit margins. Shortages of gold, or
other commodities, or interruptions in transportation systems, labor strikes, work stoppages, war, acts of terrorism, or other
interruptions to or difficulties in the employment of labor or transportation in the markets in which the Company purchases its
raw materials, may adversely affect its ability to maintain production of its products and sustain profitability. Although the
Company generally attempts to pass on increased commodity prices to its customers, there may be circumstances in which it is not
able to do so. In addition, if the Company were to experience a significant or prolonged shortage of gold, it would be unable to
meet its production schedules and to ship products to its customers in a timely manner, which would adversely affect its sales,
margins and customer relations.
Furthermore, the value of the Company’s
inventory may be affected by commodity prices. The Company records the value of its inventory using the lower of cost or market
value, cost calculated on the weighted average method. As a result, decreases in the market value of precious metals such as gold
would result in a lower stated value of the Company’s inventory, which may require it to take a charge for the decrease
in the value of its inventory.
The investment in gold may be deficient if
the fair market value of the pledged gold in connection with the loans declines, then the Company may need to increase the pledged
gold inventory for the loan collateral.
The Company’s operations are located in the PRC. Accordingly, the Company’s
business, financial condition, and results of operations may be influenced by the political, economic, and legal environments
in the PRC, as well as by the general state of the PRC economy. The Company’s operations in the PRC are subject to special
considerations and significant risks not typically associated with companies in North America and Western Europe. These include
risks associated with, among others, the political, economic and legal environment, and foreign currency exchange. The Company’s
results may be adversely affected by changes in the political, regulatory and social conditions in the PRC, and by changes in
governmental policies or interpretations with respect to laws and regulations, anti-inflationary measures, currency conversion,
remittances abroad, and rates and methods of taxation, among other things. In addition, the Company only controls Wuhan Kingold
through a series of agreements. Although the Company believes the contractual relationships through which it controls Wuhan Kingold
comply with current licensing, registration and regulatory requirements of the PRC, it cannot assure you that the PRC government
would agree, or that new and burdensome regulations will not be adopted in the future. If the PRC government determines that the
Company’s structure or operating arrangements do not comply with applicable law, it could revoke the Company’s business
and operating licenses, require it to discontinue or restrict its operations, restrict its right to collect revenues, require
it to restructure its operations, impose additional conditions or requirements with which the Company may not be able to comply,
impose restrictions on its business operations or on its customers, or take other regulatory or enforcement actions against the
Company that could be harmful to its business. If such agreements were cancelled, modified or otherwise not complied with, the
Company would not be able to retain control of Wuhan Kingold and the impact could be material to the Company’s operations.
Although the Company has not experienced losses from these situations and believes that it is in compliance with existing laws
and regulations, including the organization and structure disclosed in Note 1, this may not be indicative of future results.
Reclassification
“Comprehensive income” in 2015
statements of income and comprehensive income has been changed to conform to the current period presentation. This reclassification
has no effect on the accompanying unaudited condensed financial statements.
KINGOLD JEWELRY,
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Recent Accounting Pronouncements
In January 2016, the FASB has issued Accounting
Standards Update (ASU) No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial
Assets and Financial Liabilities. The new guidance is intended to improve the recognition and measurement of financial instruments.
The new guidance makes targeted improvements to existing U.S. GAAP by: (1) requiring equity investments (except those accounted
for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value
with changes in fair value recognized in net income. Requiring public business entities to use the exit price notion when measuring
the fair value of financial instruments for disclosure purposes; (2) Requiring separate presentation of financial assets and financial
liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables) on the balance sheet
or the accompanying notes to the financial statements; (3) Eliminating the requirement for public business 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; and. (4) Requiring a reporting organization to present separately in other comprehensive
income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit
risk (also referred to as “own credit”) when the organization has elected to measure the liability at fair value in
accordance with the fair value option for financial instruments. The new guidance is effective for public companies for fiscal
years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is evaluating the effect,
if any that this update will have on the Company's unaudited condensed consolidated financial position, results of operations and
cash flows.
In February 2016, the FASB issued ASU 2016-02, Leases
(Topic 842), which supersedes the existing guidance for lease accounting, Leases (Topic 840). ASU 2016-02 requires lessees
to recognize leases on their balance sheets, and leaves lessor accounting largely unchanged. The amendments in this ASU are effective
for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early application is permitted
for all entities. ASU 2016-02 requires a modified retrospective approach for all leases existing at, or entered into after, the
date of initial application, with an option to elect to use certain transition relief. The Company is currently evaluating the
impact of this new standard on its unaudited condensed consolidated financial statements.
In March 2016, the FASB issued Accounting Standards
Update No. 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments. The amendments apply
to all entities that are issuers of or investors in debt instruments (or hybrid financial instruments that are determined to have
a debt host) with embedded call (put) options. The amendments clarify what steps are required when assessing whether the economic
characteristics and risks of call (put) options are clearly and closely related to the economic characteristics and risks of their
debt hosts, which is one of the criteria for bifurcating an embedded derivative. Consequently, when a call (put) option is contingently
exercisable, an entity does not have to assess whether the event that triggers the ability to exercise a call (put) option is related
to interest rates or credit risks. Public business entities must apply the new requirements for fiscal years beginning after December
15, 2016 and interim periods within those fiscal years. All other entities must apply the new requirements for fiscal years beginning
after December 15, 2017 and interim periods within fiscal years beginning after December 15, 2018. All entities have the option
of adopting the new requirements early, including adoption in an interim period. If an entity early adopts the new requirements
in an interim period, it must reflect any adjustments as of the beginning of the fiscal year that includes that interim period.
The Company does not expect any material impact of this new standard on its unaudited condensed consolidated financial statements.
In April 2016, the FASB released 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 is currently evaluating the impact of this new standard on its unaudited condensed consolidated
financial statements.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Recent Accounting Pronouncements – continued
In May 2016, the FASB issued ASU No. 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, which is rescinding certain SEC
Staff Observer comments that are codified in Topic 605, Revenue Recognition, and Topic 932, Extractive Activities—Oil and
Gas, effective upon adoption of Topic 606. The Company is assessing the impact of the adoption of the ASU on its unaudited condensed
consolidated financial statements, disclosure requirements and methods of adoption.
In May 2016, FASB issued ASU No. 2016-12—Revenue
from Contracts with Customers (Topic 606); Narrow-Scope Improvements and Practical Expedients, which is intended to not change
the core principle of the guidance in Topic 606, but rather affect only the narrow aspects of Topic 606 by reducing the potential
for diversity in practice at initial application and by reducing the cost and complexity of applying Topic 606 both at transition
and on an ongoing basis. The Company is assessing the impact of the adoption of the ASU on its unaudited condensed consolidated
financial statements, disclosure requirements and methods of adoption.
In August 2016, the FASB issued ASU No. 2016
15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, to provide guidance
on
the presentation and classification of certain cash receipts and cash payments on the statement of cash flows. The guidance specifically
addresses cash flow issues with the objective of reducing the diversity in practice. The guidance will be effective for the Company
in fiscal year 2018, but early adoption is permitted. The Company is currently evaluating the impact of this new standard on its
unaudited condensed consolidated financial statements and related disclosures.
In October
2016, the FASB issued ASU No. 2016-17, Consolidation (Topic 810): Interest Held through Related Parties That Are under Common Control,
to provide guidance on the evaluation of whether a reporting entity is the primary beneficiary of a VIE by amending how a reporting
entity, that is a single decision maker of a VIE, treats indirect interests in that entity held through related parties that are
under common control. 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 are effective for fiscal years beginning
after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. Early adoption is permitted,
including adoption in an interim period. The Company is currently evaluating the impact of this new standard on its unaudited condensed
consolidated financial statements and related disclosures.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3 - INVENTORIES, NET
Inventories as of September 30, 2016 and December 31, 2015 consisted
of the following:
|
|
As of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Raw materials (A)
|
|
$
|
86,993,397
|
|
|
$
|
162,766,248
|
|
Work-in-progress (B)
|
|
|
62,506,029
|
|
|
|
108,276,834
|
|
Finished goods (C)
|
|
|
15,060,662
|
|
|
|
27,260,103
|
|
Inventory valuation allowance
|
|
|
-
|
|
|
|
-
|
|
Total inventory
|
|
$
|
164,560,088
|
|
|
$
|
298,303,185
|
|
|
(A)
|
Included 2,485,927 grams of Au9999 gold as of September 30, 2016 and 5,624,476 grams of Au9999 gold as of December 31, 2015.
|
|
(B)
|
Included 1,817,026 grams of Au9999 gold September 30, 2016 and 3,549,984 grams of Au9999 gold as of December 31, 2015.
|
|
(C)
|
Included 436,684 grams of Au9999 gold September 30, 2016 and 886,849 grams of Au9999 gold as of December 31, 2015.
|
As of September 30, 2016, no inventory was
pledged on the debts payable because it has been fully repaid upon maturity and accordingly previously pledged inventory has been
released (see Note 7).
As of December 31, 2015, 3,977,490 grams of
Au9999 gold with carrying value of approximately $115.1 million were pledged for certain bank loans and another 2,456,000 grams
of Au9999 gold with carrying value of approximately $71 million were pledged for the Company’s debts payable.
For the three and nine months ended September
30, 2016, the Company recorded $Nil lower cost or market adjustment. For the three and nine months ended September 30, 2015, the
Company recorded $Nil lower of cost or market adjustment.
NOTE 4 - PROPERTY AND EQUIPMENT, NET
The following is a summary of property and equipment as of September
30, 2016 and December 31, 2015:
|
|
As of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Buildings
|
|
$
|
2,364,582
|
|
|
$
|
2,363,093
|
|
Plant and machinery
|
|
|
18,105,818
|
|
|
|
18,496,731
|
|
Motor vehicles
|
|
|
101,565
|
|
|
|
53,935
|
|
Office and electric equipment
|
|
|
698,021
|
|
|
|
630,312
|
|
Building improvements
|
|
|
892,257
|
|
|
|
-
|
|
Subtotal
|
|
|
22,162,243
|
|
|
|
21,544,071
|
|
Less: accumulated depreciation
|
|
|
(14,477,435
|
)
|
|
|
(13,921,562
|
)
|
Property and equipment, net
|
|
$
|
7,684,808
|
|
|
$
|
7,622,509
|
|
Depreciation expense for the three and nine
months ended September 30, 2016 was $311,812 and $941,164, respectively. Depreciation expense for the three and nine months ended
September 30, 2015 was $329,624 and $1,000,162, respectively.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 – PROPERTY HELD FOR SALE, JEWELRY PARK
On October 23, 2013, the Company, through its
wholly-owned subsidiary, Wuhan Kingold, entered into an acquisition agreement (the “Acquisition Agreement”) with third-parties
Wuhan Wansheng House Purchasing Limited (“Wuhan Wansheng”) and Wuhan Huayuan Science and Technology Development Limited
Company (“Wuhan Huayuan”). The Acquisition Agreement provides for the build out of the planned “Shanghai Creative
Industry Park,” which is proposed to be renamed to “Kingold Jewelry Cultural Industry Park” (the “Jewelry
Park”). Pursuant to the Acquisition Agreement, Wuhan Kingold acquired the land use rights for a parcel of land (the “Land”)
in Wuhan for a total of 66,667 square meters (approximately 717,598 square feet, or 16.5 acres) (the “Land Use Right”),
which had been approved for real estate development use. Wuhan Kingold committed to provide a total sum of RMB 1.0 billion (approximately
$149.9 million) for the acquisition of this Land Use Right and to finance the entire development and construction of a total of
192,149 square meters (approximately 2,068,000 square feet) of commercial properties, which were proposed to include a commercial
wholesale center for various jewelry manufacturers, two commercial office buildings, a commercial residence of condominiums as
well as a hotel.
On June 27, 2016, Wuhan Kingold entered into
a transfer contract with Wuhan Lianfuda Investment Management Co., Ltd. (“Wuhan Lianfuda”), an unrelated party, to
sell all of its interest in the Jewelry Park to Wuhan Lianfuda (“Transfer Transaction”). Pursuant to the transfer contract,
Wuhan Lianfuda is obligated to pay Wuhan Kingold RMB 1.14 billion (approximately US $170.9 million) (“Selling Price”).
This amount includes (1) RMB 640 million (approximately US $96 million) for the share acquisition fees and the construction fees
that Wuhan Kingold has paid to Wuhan Wansheng; and (2) transfer fees of RMB 500 million (approximately US $75 million). In addition,
Wuhan Kingold transfers and Wuhan Lianfuda receives all the rights and obligations in the Transfer Transaction Agreement, including
60% stock rights of Wuhan Huayuan. Wuhan Lianfuda will undertake Wuhan Kingold’s remaining payment obligation of RMB 360
million (approximately US $54 million) stipulated in the Acquisition Agreement.
As of September 30, 2016, the carrying value
of Jewelry Park was approximately $161.9 million (RMB 1.08 billion), included the following components (1) Land use right of approximately
$9 million (RMB 60.4 million), which represents the total cost of the Land Use Right and (2) the construction progress of approximately
$152.9 million (RMB 1.02 billion), consisting of the Company’s cash payment of approximately $86.9 million (RMB 579.6 million)
towards the construction of Jewelry Park project, capitalized interest of approximately $12 million (RMB 80 million) and construction
payable of approximately $54.0 million (RMB 360.0 million) which has been accrued based on the billing request by the construction
company Wuhan Wansheng as of September 30, 2016. As of September 30, 2016 and December 31, 2015, the construction payable of approximately
$54.0 million and $23.9 million has been accrued based on the billing request of the construction company, respectively. The Company
determines the selling price to Wuhan Lianfuda represents the fair value of the property and no material estimated costs to sell,
therefore the Company did not recognize any impairment loss for the three and nine months ended September 30, 2016.
As of September 30, 2016, the project has passed
all inspections and completed acceptance procedures. The Company is waiting for the certificate of occupancy to be issued by local
government, and is in the process of transferring the ownership title to Wuhan Lianfuda.
Based on the total budget of $149.9 million
(RMB 1.0 billion) on the Jewelry Park, Wuhan Kingold was still obligated to pay the remaining $54.0 million (RMB 360 million) to
Wuhan Wansheng as of September 30, 2016 after deducting all the progress payments made by Wuhan Kingold. In connection with the
Jewelry Park Transfer Transaction, Wuhan Lianfuda will undertake Wuhan Kingold’s remaining payment obligation of $54.0 million
(RMB 360 million), when the Transfer Transaction is consummated in the near future.
The following table presents the components
of the property held for sale- Jewelry Park at September 30, 2016 and December 31, 2015:
|
|
As of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Deposit on land use right
|
|
$
|
9,047,947
|
|
|
$
|
9,296,763
|
|
Construction in progress
|
|
|
152,867,231
|
|
|
|
105,844,259
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
161,915,178
|
|
|
$
|
115,141,022
|
|
|
|
|
|
|
|
|
|
|
Construction payables
|
|
$
|
53,971,233
|
|
|
$
|
23,876,642
|
|
Deposit payable
|
|
|
170,908,906
|
|
|
|
22,182,171
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
224,880,139
|
|
|
$
|
46,058,813
|
|
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6 - LOANS
Short term loans consist of the following:
|
|
As of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
(a) Loans payable to CITIC Bank Wuhan Branch
|
|
$
|
-
|
|
|
$
|
6,161,714
|
|
(b) Loan payable to Bank of Hubei Wuhan Jiang’an Branch
|
|
|
-
|
|
|
|
3,080,857
|
|
(c) Loan payable to Minsheng Trust
|
|
|
-
|
|
|
|
46,212,857
|
|
(d) Current portion of long-term loan payable to Evergrowing Bank
|
|
|
299,840
|
|
|
|
-
|
|
(e) Loans payable to National Trust
|
|
|
149,920,093
|
|
|
|
-
|
|
(f) Loan payable to AJ Trust
|
|
|
44,976,028
|
|
|
|
-
|
|
Total short term loans
|
|
$
|
195,195,961
|
|
|
$
|
55,455,428
|
|
Short term loans
a) Loans payable to CITIC Bank Wuhan Branch
have been fully repaid on March 1, 2016.
b) Loan payable to Bank of Hubei, Wuhan Jiang’an
Branch has been fully repaid by September 30, 2016.
c) Loan payable to Minsheng Trust has been
fully repaid by September 30, 2016.
d) The current portion of loans payable to
Yantai Huangshan Road Branch of Evergrowing Bank (see note (i) below).
e) On April 26, 2016, the Company entered into
a trust loan agreement and an amendment to the trust loan agreement with the National Trust Ltd. (“National Trust”)
to borrow a maximum of approximately $75 million (RMB 500 million) as working capital loan. The loan is comprised of two installments,
with the first installment of approximately $15 million (RMB 100 million) and the second installment of approximately $60 million
(RMB 400 million). Each installment has a one-year term starting from the installment release date. For each installment, the Company
is required to make the first interest payment equal to 4.1% of the principal received, then the rest of interest payments are
calculated based on a fixed interest rate of 8% and due on semi-annual basis. The Company is required to pledge 2,600 kilogram
of Au9995 gold with carrying value of approximately $91 million as collateral to secure this loan. The loan is jointly guaranteed
by Mr. Zhihong Jia, the CEO and Chairman of the Company, and Wuhan Vogue-Show. The Company received full proceeds in May 2016.
The Company also made a restricted deposit of approximately $0.7 million (RMB 5 million) to secure these loans. The deposit will
be refunded when the loan is repaid upon maturity.
On July 11, 2016, the Company entered into
a Trust Loan Agreement with the National Trust Ltd. (“National Trust”) to borrow a maximum of approximately $75 million
(RMB 500 million) as a working capital loan. The Company is required to make first interest payment equal to 4.1% of the loan principal
amount within 3 days after the loan proceeds are received. Subsequently, the Company is subject to 8% interest which will be paid
on a semiannual basis. The term of the loan is one year from the payment release date and could be extended for one additional
year. The Company is required to pledge 2,660 kilogram of Au9995 gold with carrying value of approximately $93.1 million as collateral.
The loan is guaranteed by Mr. Zhihong Jia, the CEO and Chairman of the Company, and Wuhan Vogue-Show. The Company also made a restricted
deposit of approximately $0.7 million (RMB 5 million) to secure these loans. The deposit will be refunded when the loan is repaid
upon maturity.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6 – LOANS - continued
f) On April 28, 2016, Wuhan Kingold and Shanghai
AJ Trust Co., Ltd. (“AJ Trust”) entered into a gold income right transfer and repurchase agreement. According to the
agreement, AJ Trust acquired the income rights from Wuhan Kingold for Wuhan Kingold’s Au9999 gold worth at least RMB 412.5
million based on the closing price of gold on the most recent trading day at the Shanghai Gold Exchange (the “Gold Income
Right”). AJ Trust’s acquisition price for the Gold Income Right was approximately $45 million (RMB 300 million) (the
“Acquisition Price”). Wuhan Kingold is required to repurchase the Gold Income Right back from AJ Trust with installments
and the last installment shall be within the 24 months after establishment of the trust plan. The repurchase price is equal to
the Acquisition Price with annual return of 10% for the period from the agreement date and the last repayment date. The repurchase
obligation may be accelerated under certain conditions, including upon breach of representations or warranties, certain cross-defaults,
upon the occurrence of certain material events affecting the financial viability of Wuhan Kingold, and other customary conditions.
Wuhan Kingold pledged the 1,542 kilograms of related Au9999 gold under the Gold Income Right to AJ Trust. The agreement is also
personally guaranteed by Mr. Zhihong Jia, the CEO and Chairman. As of September 30, 2016, the carrying value of the pledged gold
was approximately $54 million. The Company also made a restricted deposit of $0.4 million (RMB 3 million) to secure this loan.
The deposit will be refunded when the loan is repaid upon maturity. Management believes the substance of this agreement is a debt
arrangement with AJ Trust, therefore AJ Trust’s acquisition price was recorded as loan payable. Since Wuhan Kingold has a
right to repurchase the Gold Income Right in 12 months, the loan is treated as a short term loan.
Interest expense for all of the short term
loans mentioned above amounted approximately to $5.0 million and $11.7 million for the three and nine months ended September 30,
2016, respectively. Interest expense for all of the short term loans mentioned above amounted approximately to $299,713 and $681,866
for the three and nine months ended September 30, 2015, respectively.
Long term loans consist of the following:
|
|
As of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
(h) Loans payable to Qixia Branch of Evergrowing Bank
|
|
$
|
149,920,093
|
|
|
$
|
30,808,571
|
|
(i) Loans payable to Yantai Huangshan Road Branch of Evergrowing Bank
|
|
|
149,470,332
|
|
|
|
-
|
|
(j) Loans payable to Anxin Trust
|
|
|
374,800,231
|
|
|
|
-
|
|
(k) Loans payable to Minsheng Trust
|
|
|
29,984,019
|
|
|
|
-
|
|
(l) Loans payable to Chang’An Trust
|
|
|
29,834,098
|
|
|
|
-
|
|
(m) Loans payable to Sichuan Trust
|
|
|
74,960,046
|
|
|
|
-
|
|
(n) Loans payable to China Aviation Capital
|
|
|
43,476,827
|
|
|
|
-
|
|
(o) Loans payable to China Construction Investment Trust
|
|
|
44,526,268
|
|
|
|
-
|
|
Total long term loans
|
|
$
|
896,971,914
|
|
|
$
|
30,808,571
|
|
(h) Loans payable to Evergrowing Bank – Qixia Branch
On December 18, 2015, Wuhan Kingold entered
a loan agreement with the Qixia Branch of Evergrowing Bank in the amount of approximately $30 million (RMB 200 million). This loan
was used to partially fund the construction of the Jewelry Park and as working capital. The loan period was from December 18, 2015
to December 15, 2017 with the annual interest of 7.5%. The loan is secured by 1,300,000 grams of Au9999 gold with carrying value
of approximately $45.5 million. In addition, the Company’s CEO and Chairman, Mr. Zhihong Jia signed a guarantee agreement
with the bank, to provide a guarantee for the loan.
In January 2016, Wuhan Kingold further
entered into two Loan Agreements of Circulating Funds with the Qixia Branch of Evergrowing Bank for loans of approximately
$119.9 million (RMB 800 million) in aggregate. The purpose of the loans is for purchasing gold. The terms of loans are two
years and bear fixed interest of 7.5% per year. The loans are secured by 5,000,000 grams of Au9999 gold in aggregate with
carrying value of approximately $175.1 million and are guaranteed by Mr. Zhihong Jia, the CEO and Chairman of the Company.
Both loans are due in January 2018. The repayment of the loans may be accelerated under certain conditions, including upon a
default of principal or interest payment when due, breach of representations or warranties, certain cross-defaults, upon the
occurrence of certain material events affecting the financial viability of Wuhan Kingold, and other customary conditions.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6 – LOANS - continued
(i) Loans payable to Evergrowing Bank- Yantai
Huangshan Road Branch
From February 24, 2016 to March 24, 2016, Wuhan
Kingold entered into ten Loan Agreements with the Yantai Huangshan Road Branch of Evergrowing Bank for loans of approximately $149.9
million (RMB 1 billion) in aggregate. The purpose of the loans is for purchasing gold. The terms of loans are two years and bear
fixed interest of 7% per year. The loans are secured by 5,550,000 grams of Au9999 gold in aggregate with carrying value of approximately
$194 million and are guaranteed by Mr. Zhihong Jia, the CEO and Chairman of the Company. Based on the loan repayment plan as specified
in the loan agreements, approximately $149,920 (RMB 1 million) was repaid in August 2016. Approximately $149,920 (RMB 1 million)
should be repaid on February 23, 2017 and another $149,920 (RMB 1 million) should be repaid in August 23, 2017. Accordingly, these
amounts have been reclassified as the current portion of the long-term loans. The remaining loans are due in February to March
2018. The repayment of the loans may be accelerated under certain conditions, including upon a default of principal or interest
payment when due, breach of representations or warranties, certain cross-defaults, upon the occurrence of certain material events
affecting the financial viability of Wuhan Kingold, and other customary conditions. The repayment requirement is listed below:
|
|
As of September 30, 2016
|
|
February 23, 2017
|
|
$
|
149,920
|
|
August 23, 2017
|
|
|
149,920
|
|
February 23, 2018 – March 24, 2018
|
|
|
149,470,332
|
|
Total
|
|
|
149,770,172
|
|
|
|
|
|
|
Short term portion (refer to short term loan – d)
|
|
|
299,840
|
|
Long term portion
|
|
$
|
149,470,332
|
|
(j) Loans payable to Anxin Trust Co., Ltd
In January 2016, Wuhan Kingold entered into
a Collective Trust Loan Agreement with Anxin Trust Co., Ltd. (“Anxin Trust”). The agreement allows the Company to access
of approximately $449.8 million (RMB 3 billion) within 60 months. Each individual loan will bear a fixed annual interest of 14.8%
with a term of 36 months or less. The loan is subject to certain covenants required by the agreement. The purpose of this trust
loan is to provide working capital for the Company to purchase gold. The loan is secured by 13,020,000 grams of Au9999 gold in
aggregate with carrying value of approximately $455.9 million. The loan is also guaranteed by Mr. Zhihong Jia, the CEO and Chairman
of the Company. As of September 30, 2016, the Company received an aggregate of approximately $374.8 million (RMB 2.5 billion) from
the loan. The Company also made a restricted deposit of approximately $1.5 million (RMB 10 million) to secure these loans. The
deposit will be refunded when the loan is repaid upon maturity. On October 11, 2016, the Company subsequently obtained additional
loan of approximately $75 million (RMB 500 million) from Anxin Trust under the same loan agreement.
(k) On June 24, 2016, Wuhan Kingold entered
into a loan agreement with Minsheng Trust, with an aggregate amount of approximately $30 million (RMB 200 million), with a maturity
date of June 22, 2018. The annual interest rate was 10.85%. The loan is to be used for the working capital. Wuhan Kingold pledged
1,090,000 grams of gold with carrying value of approximately $38.2 million as of September 30, 2016 to secure this loan. The Company
was also required to pledge approximately $0.3 million (RMB 2 million) restricted cash with Minsheng Trust as collateral. In addition,
the Company’s CEO, Mr. Zhihong Jia and his wife, Ms. Lili Huang, jointly signed a guarantee agreement with the Minsheng Trust,
to provide a guarantee for the loan.
(l) On March 9, 2016, Wuhan Kingold entered
into a Trust Loan Contract with Chang’An International Trust Co., Ltd. (“Chang’An Trust”). The agreement
allows the Company to access a total of approximately $45 million (RMB 300 million) for the purpose of working capital needs. The
loan has a 24-month term starting from the date of releasing the loan, and bears interest at a fixed rate of 13% per annum. The
loan is secured by 1,121 kilograms of Au9995 gold, which approximately $39.3 million is pledged by Wuhan Kingold. The loan is guaranteed
by Mr. Zhihong Jia, the CEO and Chairman of the Company and shall be repaid upon maturity. As of September 30, 2016, the Company
received an aggregate of approximately $29.8 million (RMB 199 million) from the loan. The Company also made a restricted deposit
of approximately $0.3 million (RMB 1.99 million) to secure these loans. The deposit will be refunded when the loan is repaid upon
maturity.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6 – LOANS - continued
(m) On September 7, 2016, the Company entered
into a trust loan agreement with the Sichuan Trust Ltd. (“Sichuan Trust”) to borrow a maximum of approximately $149.9
million (RMB 1 billion) as working capital loan. The loan period is 24 months from September 7, 2016 to September 7, 2018. For
the loan obtained the Company is required to make interest payments are calculated based on a fixed annual interest rate of 8.46%
(the Company is required to make the first interest payment equal to 1.21% of the principal received, then the rest of interest
payments are calculated based on a fixed interest rate of 7.25%). The Company is required to pledge 2,345 kilograms of Au9999 gold
with carrying value of approximately $82.1 million as collateral to secure this loan. The loan is guaranteed by Mr. Zhihong Jia,
the CEO and Chairman of the Company. The Company also made a restricted deposit of approximately $0.7 million (RMB 5 million) to
secure these loans. The deposit will be refunded when the loan is repaid upon maturity. As of September 30, 2016, the Company received
an aggregate of approximately $75 million (RMB 500 million) from the loan. On October 13, 2016, the Company subsequently obtained
additional loan of approximately $75 million (RMB 500 million) from Sichuan Trust under the same loan agreement.
(n) On September 7, 2016, the Company entered
into a loan agreement with China Aviation Capital Investment Management (Shenzhen) ("China Aviation Capital") to borrow
a maximum of approximately $90 million (RMB 600 million) as working capital loan. The first installment of the loan is approximately
$43.5 million (approximately RMB 290 million) with a period of 24 months from September 7, 2016 to September 7, 2018. For the loan
obtained, the Company is required to make interest payments calculated based on a fixed annual interest rate of 7.5% and a one-time
consulting fee of 3% based on the principal amount received. The Company is required to pledge 1,473 kilograms of Au9999 gold with
carrying value of approximately $51.6 million as collateral to secure this loan. The loan is guaranteed by Mr. Zhihong Jia, the
CEO and Chairman of the Company. As of September 30, 2016, the Company received an aggregate of approximately $43.5 million (approximately
RMB 290 million) from the loan.
(o) On August 29, 2016, the Company entered
into a trust loan agreement with China Construction Investment Trust to borrow a maximum of approximately $45 million (RMB 300
million) as working capital loan for the purpose of purchasing of gold solely with a period of 24 months from August 29, 2016 to
August 29, 2018. For the loan obtained, the Company is required to make interest payments calculated based on a fixed annual interest
rate. The interest payment is divided into two parts: (1) 1% of the principal amount received is required to be paid before December
25, 2016; (2) the remaining interest payments are calculated based on a fixed interest rate of 7.5% and due on quarterly basis.
The Company is required to pledge 1,447 kilograms of Au9999 gold with carrying value of approximately $50.7 million as collateral
to secure this loan. The loan is guaranteed by Mr. Zhihong Jia, the CEO and Chairman of the Company. As of September 30, 2016,
approximately $44.5 million (RMB 297 million) of the loan was received by the Company. On October 9, 2016, the Company subsequently
received the rest of $0.4 million (RMB 3 million) of the loan.
Interest expense for all of the long term loans
mentioned above amounted approximately to $21.5 million and $33.5 million for the three and nine months ended September 30, 2016,
respectively. There were no interest expense for the three and nine months ended September 30, 2015.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7 - DEBTS PAYABLE
Amounts owed by the Company to Shanghai
Pudong Development Bank (“SPD Bank”) under a Credit Agent Agreement were full repaid upon maturity on March 24, 2016
and approximately $5.3 million (RMB 35 million) security deposit was returned to the Company. The remaining deferred financing
cost of $144,134 was fully amortized in the nine months ended September 30, 2016. Interest expense incurred on the debt financing
instruments amounted to approximately $3.3 million for the year ended December 31, 2015 and was capitalized into construction in
progress of Jewelry Park project. For the nine months period ended September 30, 2016, approximately $1 million interest expenses
were capitalized into construction in progress of Jewelry Park project,
Pursuant to a Private Placement Agreement
dated on August 12, 2014, the RMB 750 million debt financing instruments can be issued within two years. Since the Company obtained
alternative financing through several bank borrowings, management does not expect this approved debt issuance will be materialized
in the near future.
NOTE 8 - DEPOSIT PAYABLES - JEWELRY
PARK
As of December 31, 2015, the Company received
the advance payment from potential customers approximately $22 million (RMB 144 million) to acquire certain real estate property
in the Jewelry Park. As of September 30, 2016, in connection with the Transfer Transaction, the Company received the advance payments
from Wuhan Lianfuda approximately $170.9 million (RMB 1,140 million) (see Note 5) and included in Deposit payable, while the Company
refunded $22 million of customer deposits to Wuhan Lianfuda because Wuhan Kingold transferred all its interest in Jewelry Park
to Wuhan Lianfuda in accordance with the Transfer Transaction.
NOTE 9 – INVESTMENT IN GOLD
As of September 30, 2016, the Company leased
total of 12,500,000 grams of Au9999 gold in aggregate with carrying value of approximately $438.3 million from Wuhan Shuntianyi
Investment Management Ltd. (“Shuntianyi”), a related party (See Note 10). Together with part of its inventory, the
Company pledged a total of 39,148,000 grams of Au9999 gold with carrying value of approximately $1,370.9 million for obtaining
various bank loans. (See Note 6)
As of September 30, 2016, total investment
in gold pledged had a fair market value of $1,429.4 million, which resulted in unrealized gain of $58.5 million. For the three
and nine months ended September 30, 2016, the Company recorded $9.8 million of unrealized loss and $58.5 million of unrealized
gain as other comprehensive income (loss), respectively.
As of September 30, 2016, a total of 32,346,000
grams of Au9999 gold with fair value of approximately $1,181 million was pledged for long term bank loans, and therefore classified
as non-current investment in gold. The remaining investment in gold of total 6,802,000 grams of Au9999 gold with fair value of
approximately $248.4 million was classified as current asset on the Company’s condensed consolidated balance sheet as of
September 30, 2016.
NOTE 10 – GOLD LEASE PAYABLE –
RELATED PARTY
During nine months ended September 30,
2016, the Company entered into multiple gold lease agreements with Wuhan Shuntianyi Investment Management Ltd. (“Shuntianyi”),
a related party which was controlled by the CEO and the Chairman of the Company, to lease a total of 12,500,000 grams of Au9999
gold in aggregate with carrying value of approximately $438.3 million. These leases were from March 2, 2016 to November 30, 2016.
The Company recorded these transactions as gold lease payable and presented as a current liability on the Company’s condensed
consolidated balance sheet as of September 30, 2016.
NOTE 11 – THIRD PARTY LOANS
On April 12, 2016, the Company entered
into a loan agreement with Yantai Runtie Trade Ltd. for a total loan of approximately $30 million (RMB 200 million). The loan is
interest free and has one year term from April 12, 2016 to April 12, 2017. In order for Yantai Runtie Trade Ltd, to obtain the
loan from the bank, Wuhan Kingold signed a guarantee agreement with the ultimate lender, Evergrowing Bank - Yantai Huanshan Road
Branch, on April 12, 2016 to pledge restricted deposit of totaling $30 million (RMB 200 million) to guarantee the loan. The deposit
will be refunded when the loan is repaid upon maturity by Yantai Runtie Trade Ltd.
On April 13, 2016, the Company entered
into the second loan agreement with Yantai Runtie Trade Ltd. for a total loan of approximately $3 million (RMB 20 million). In
order for Yantai Runtie Trade Ltd, to obtain the loan from the bank, Wuhan Kingold signed a guarantee agreement with the ultimate
lender, Evergrowing Bank - Yantai Huanshan Road Branch, on April 13, 2016 to pledge restricted deposit of totaling $3 million (RMB
20 million) to guarantee the loan. The loan was repaid by the Company on October 13, 2016 and the deposit was released from the
bank.
On April 13, 2016, the Company entered
into a loan agreement with Yantai Yongyu Trade Ltd. for a total loan of approximately $4.5 million (RMB 30 million). In order for
Yantai Yongyu Trade Ltd, to obtain the loan from the bank, Wuhan Kingold signed a guarantee agreement with the ultimate lender,
Evergrowing Bank - Yantai Huanshan Road Branch, on April 13, 2016 to pledge restricted deposit of totaling $4.5 million (RMB 30
million) to guarantee the loan. The loan was repaid by the Company on December 14, 2016 and the deposit was released from the bank.
NOTE 12 – RELATED PARTY LOANS
Between April 12 and May 22, 2016, the
Company entered into multiple loan agreements with Wuhan Kangbo Biotech Limited (“Kangbo”), a related party which was
controlled by the CEO and the Chairman of the Company, for a total loan of approximately $149.9 million (RMB 1,000 million). The
loans have one year term and interest free. In order for Kangbo to get the loan from the bank, Wuhan Kingold signed a guarantee
agreement with Evergrowing Bank- Yantai Huangshan Road Branch to pledge restricted deposit of totaling $149.9 million (RMB 1,000
million) to guarantee the loans. The loans were repaid by the Company on December 12, 2016 and the deposit was released from the
bank.
NOTE 13 – OTHER RELATED PARTY
TRANSACTIONS
For the nine months ended September 30,
2016, the Company borrowed total of $1,041,634 from Mr. Zhihong Jia, the CEO and Chairman of the Company, to pay certain expense
to various service providers on behalf of the Company. Such amount is unsecured and repayable on demand with free of interest.
As of September 30, 2016 and December 31, 2015, the balance of due to related party amounted to $1,041,634 and $200,059, respectively.
For the nine months end September 30, 2016
and 2015, Mr. Zhihong Jia, the CEO and Chairman of the Company, together with his wife provided their personal guarantees to various
financial institutions to support the Company (see Notes 6 and 7).
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 14 - INCOME TAXES
The Company is subject to income taxes
on an entity basis on income arising in or derived from the tax jurisdiction in which each entity is domiciled.
Kingold is incorporated in the United States
and has incurred net operating loss for income tax purposes through 2015 resulting in loss carry forwards of approximately $16.5
million available for offsetting against future taxable U.S. income, expiring in 2036. Management believes that the realization
of the benefits from these losses is uncertain due to its history of continuing losses in the United States. Accordingly, a full
deferred tax asset valuation allowance has been provided and no deferred tax asset benefit has been recorded. The valuation allowance
as of September 30, 2016 and December 31, 2015 was approximately $5.6 million and $5.4 million, respectively.
Dragon Lead is incorporated in the British
Virgin Islands (the “BVI”), and under current laws of the BVI, income earned is not subject to income tax.
Wuhan Vogue-Show, Wuhan Kingold, Kingold
Internet, and Yuhuang are incorporated in the PRC and are subject to PRC income tax, which is computed according to the relevant
laws and regulations in the PRC. The applicable tax rate is 25% for the periods ended September 30, 2016 and 2015. The Company
recorded $17,660,837 deferred income tax assets and $1,774,993 deferred tax liability as of September 30, 2016 and December 31,
2015, respectively.
The Company intends to reinvest its foreign
profits indefinitely in order to avoid a tax liability upon repatriation to the United States.
Income (loss) from continuing operations
before income taxes was allocated between the U.S. and foreign components for the three and nine months ended September 30, 2016
and 2015:
|
|
For the three months ended September 30,
|
|
|
For the nine months ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
(170,311
|
)
|
|
$
|
(194,487
|
)
|
|
$
|
(700,575
|
)
|
|
$
|
(985,192
|
)
|
Foreign
|
|
|
21,353,228
|
|
|
|
12,108,862
|
|
|
|
68,890,903
|
|
|
|
21,610,455
|
|
|
|
$
|
21,182,917
|
|
|
$
|
11,914,375
|
|
|
$
|
68,190,328
|
|
|
$
|
20,625,263
|
|
Significant components of the income tax provision were as follows
for the three and nine months ended September 30, 2016 and 2015:
|
|
For the three months ended September 30,
|
|
|
For the nine months ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Current tax provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Foreign
|
|
|
25,230,923
|
|
|
|
71,176
|
|
|
|
36,891,707
|
|
|
|
3,357,451
|
|
|
|
$
|
25,230,923
|
|
|
$
|
71,176
|
|
|
$
|
36,891,707
|
|
|
$
|
3,357,451
|
|
Deferred tax provision (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Foreign
|
|
|
(19,909,244
|
)
|
|
|
3,078,209
|
|
|
|
(19,653,506
|
)
|
|
|
1,348,181
|
|
|
|
|
(19,909,244
|
)
|
|
|
3,078,209
|
|
|
|
(19,653,506
|
)
|
|
|
1,348,181
|
|
Income tax provision
|
|
$
|
5,321,679
|
|
|
$
|
3,149,385
|
|
|
$
|
17,238,201
|
|
|
$
|
4,705,632
|
|
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 14 - INCOME TAXES - continued
The components of deferred tax assets and deferred tax liability
as of September 30, 2016 and December 31, 2015 consist of the following:
|
|
As of September 30,
2016
|
|
|
As of December 31,
2015
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Deferred tax assets from net operating losses from parent company
|
|
$
|
5,593,375
|
|
|
$
|
5,335,180
|
|
Accrued interest expenses
|
|
|
165,243
|
|
|
|
-
|
|
Accrued other expenses
|
|
|
733,770
|
|
|
|
-
|
|
Gain from the sale of Jewelry Park
|
|
|
18,740,011
|
|
|
|
|
|
Valuation allowance
|
|
|
(5,593,375
|
)
|
|
|
(5,335,180
|
)
|
|
|
|
19,639,024
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liability:
|
|
|
|
|
|
|
|
|
Deferred tax liability from capitalized interest
|
|
|
1,978,187
|
|
|
|
1,774,993
|
|
|
|
|
1,978,187
|
|
|
|
1,774,993
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets (liability) - Net
|
|
$
|
17,660,837
|
|
|
$
|
(1,774,993
|
)
|
NOTE 15 - EARNINGS PER SHARE
For three and nine months ended September
30, 2016 and 2015, the basic average shares outstanding and diluted average shares outstanding were the same because the effect
of potential shares of common stock was anti-dilutive since the exercise prices for the warrant and options were greater than the
average market price for the related periods. As a result, for the three and nine months ended September 30, 2016, total of 721,218
and 308,942 unexercised warrants and options are dilutive, respectively, and were included in the computation of diluted EPS. For
the three and nine months ended September 30, 2015, no unexercised warrants and options were dilutive.
The following table presents a reconciliation
of basic and diluted net income per share:
|
|
For the three months ended September 30,
|
|
|
For the nine months ended September 30,
|
|
|
|
2016
(Restated)
|
|
|
2015
|
|
|
2016
(Restated)
|
|
|
2015
|
|
Net income attributable to common stockholders
|
|
$
|
15,861,683
|
|
|
$
|
8,764,990
|
|
|
$
|
50,954,037
|
|
|
$
|
15,919,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding - Basic
|
|
|
66,018,867
|
|
|
|
65,963,502
|
|
|
|
65,982,294
|
|
|
|
65,963,502
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unexercised warrants and options
|
|
|
721,218
|
|
|
|
-
|
|
|
|
308,942
|
|
|
|
-
|
|
Weighted average number of common shares outstanding - Diluted
|
|
|
66,740,085
|
|
|
|
65,963,502
|
|
|
|
66,291,236
|
|
|
|
65,963,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share-Basic
|
|
$
|
0.24
|
|
|
$
|
0.13
|
|
|
$
|
0.77
|
|
|
$
|
0.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share-Diluted
|
|
$
|
0.24
|
|
|
$
|
0.13
|
|
|
$
|
0.77
|
|
|
$
|
0.24
|
|
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 16 - OPTIONS
On March 24, 2011, the Board of Directors
voted to adopt the 2011 Stock Incentive Plan (the “Plan”), which was later ratified by the Company’s stockholders
on October 31, 2011, at the 2011 annual meeting.
The Plan permits the granting of stock
options (including incentive stock options as well as nonstatutory stock options), stock appreciation rights, restricted and unrestricted
stock awards, restricted stock units, performance awards, other stock-based awards or any combination of the foregoing. Under the
terms of the Plan, up to 5,000,000 shares of the Company’s common stock may be granted. Prior to January 1, 2012, the Company
granted 1,620,000 options under the plan. In accordance with the vesting periods, $Nil was recorded as part of operating expense-stock
compensation for the three and nine months ended September 30, 2016, respectively. The Company recorded $Nil and $110,439 as part
of operating expense-stock compensation for the three and nine months ended September 30, 2015, respectively
On January 9, 2012, the Company granted
1,300,000 options with an exercise price of $1.22 to certain members of management and directors. These options can be exercised
within ten years from the grant date once they become exercisable. The options become exercisable in accordance with the schedule
below: (a) 25% of the options become exercisable on the first anniversary of the grant date (such date is the initial vesting date),
and (b) 6.25% of the options become exercisable on the date three and six months after the initial vesting date and on such date
every third month thereafter, through the fourth anniversary of the grant date. The fair value of the options was calculated using
the Black-Scholes options pricing model using the following assumptions: volatility of 124.81%, risk free interest rate of 1.98
%, and expected term of 10 years. The fair value of the options was $1,516,435. In accordance with the vesting periods, $Nil was
recorded as part of operating expense-stock compensation for the 1,300,000 options above for the three and nine months ended September
30, 2016, respectively. The Company recorded $91,200 and $277,178 as part of operating expense-stock compensation for the three
and nine months ended September 30, 2015, respectively
On April 1, 2012, the Company granted 120,000
options with an exercise price of $1.49 to its Chief Financial Officer (“CFO”) per his employment agreement. These
options can be exercised within ten years from the grant date once they become exercisable. The options become exercisable every
three months starting from grant date for the one year service period from April 1, 2012. The fair value of the options was calculated
using the Black-Scholes options pricing model using the following assumptions: volatility of 124.50%, risk free interest rate of
2.23%, and expected term of 10 years. The fair value of the options was $170,967. These options have fully vested by December 31,
2013.
On July 16, 2013, the Company granted 90,000
options with an exercise price of $1.18 to its non-employee directors, which options expire ten years from the grant date under
the Plan. These options became exercisable in accordance with the following schedule: (a) 25% of the options became exercisable
on the first anniversary of the grant date (the “Initial Vesting Date”), and (b) 6.25% of the options became exercisable
on the date three months after the Initial Vesting Date and on such date every third month thereafter, through the fourth anniversary
of the grant date. The fair value of the options was calculated using the Black-Scholes options pricing model using the following
assumptions: volatility of 118.01%, risk free interest rate of 2.55%, and expected term of 6.25 years. The fair value of the options
was $92,458. In accordance with the vesting periods, $5,779 and $17,337 were recorded as part of operating expense-stock compensation
for the three and nine months ended September 30, 2016, respectively. The Company recorded $5,779 and $17,337 as part of operating
expense-stock compensation for the three and nine months ended September 30, 2015, respectively.
On February 25, 2015, the Company granted
90,000 options with an exercise price of $1.11 to its non-employee directors, which options expire ten years from the grant date
under the Plan. These options became exercisable in accordance with the following schedule: (a) 25% of the options became exercisable
on the first anniversary of the grant date, and (b) 6.25% of the options became exercisable on the date three and six months after
the initial vesting date and on such date every third month thereafter, through the fourth anniversary of the grant date. The fair
value of the options was calculated using the Black-Scholes options pricing model under the following assumptions: volatility of
115.20%, risk free interest rate of 1.96%, and expected term of 6.25 years. The aggregate fair value of the options was $85,822.
In accordance with the vesting periods, $5,364 and $16,091 were recorded as part of operating expense-stock compensation for the
90,000 options above for the three and nine months ended September 30, 2016, respectively. The Company recorded $5,364 and $12,516
as part of operating expense-stock compensation for the three and nine months ended September 30, 2015, respectively.
The Company recorded $11,143 and $33,428
stock-based compensation expense for the three and nine months ended September 30, 2016, respectively. The Company recorded $102,343
and $417,470 stock-based compensation expense for the three and nine months ended September 30, 2015, respectively.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 16 – OPTIONS - continued
The following table summarized the Company’s
stock option activity:
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Number of
Options
|
|
|
Weighted Average
Exercise Price
|
|
|
Remaining Life
in Years
|
|
|
Aggregate
Intrinsic Value
|
|
Outstanding, December 31, 2015
|
|
|
3,220,000
|
|
|
$
|
1.90
|
|
|
|
5.76
|
|
|
$
|
-
|
|
Exercisable, December 31, 2015
|
|
|
3,009,375
|
|
|
$
|
1.95
|
|
|
|
5.63
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding, September 30, 2016
|
|
|
3,220,000
|
|
|
$
|
1.90
|
|
|
|
4.99
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, September 30, 2016
|
|
|
3,141,250
|
|
|
$
|
1.98
|
|
|
|
5.03
|
|
|
$
|
-
|
|
NOTE 17 - WARRANTS
Following is a summary of the status of warrant activities as
of September 30, 2016 and December 31, 2015
|
|
Number of
|
|
|
Weighted Average
|
|
|
Weighted average
|
|
|
|
warrants
|
|
|
Exercise Price
|
|
|
Remaining Life in Years
|
|
Outstanding, December 31, 2015
|
|
|
294,000
|
|
|
$
|
3.61
|
|
|
|
0.04
|
|
Granted
|
|
|
300,000
|
|
|
$
|
1.35
|
|
|
|
1.25
|
|
Forfeited
|
|
|
(294,000
|
)
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
(55,365
|
)
|
|
|
-
|
|
|
|
-
|
|
Outstanding, September 30, 2016
|
|
|
244,635
|
|
|
$
|
1.38
|
|
|
|
0.78
|
|
On August 12, 2015,
the Company signed a consulting agreement to engage Bespoke Independent Partners (“BIP”), a wholly owned subsidiary
of FPIA Partners LLC to operate as a strategic advisor to Kingold in matters relating to investor relations, capital markets and
shareholder value creation strategy. As the part of the agreement with BIP, an aggregate of 900,000 shares of warrants with exercise
price ranging from $1.20 to $1.80 will be directly issued at no cost to BIP if certain stock performance targets are met within
a three-year period. Through September 30, 2016, no warrants were issued to BIP because the performance target has not been met.
On March 29, 2016,
pursuant to the consulting agreement, the Company’s obligation to issue BIP warrants to purchase 150,000 shares of the Company’s
common stock for $1.20 per share (the “First Tranche Warrants”) was triggered as a result of certain milestone accomplishments.
The warrants will expire on June 29, 2017. Accordingly, the Company recorded $64,204 consulting expense and included in the general
administrative expense. The fair value of the warrants was calculated using the Black-Scholes options pricing model using the following
assumptions: volatility of 81%, risk free interest rate of 0.84%, and expected term of 1.25 years. The fair value of the warrants
was $64,204.
On April 18, 2016,
pursuant to the consulting agreement, the Company’s obligation to issue BIP warrants to purchase 150,000 shares of the Company’s
common stock for $1.50 per share (the “Second Tranche Warrants”) was triggered as a result of certain milestone accomplishments.
The warrants will expire on July 17, 2017. Accordingly, the Company recorded $65,091 consulting expense and included in the general
administrative expense. The fair value of the warrants was calculated using the Black-Scholes options pricing model using the following
assumptions: volatility of 79.7%, risk free interest rate of 0.63%, and expected term of 1.25 years. The fair value of the warrants
was $65,091.
On May 10, 2016, the Company terminated
the consulting agreement. On June 27, 2016, the Company and BIP signed a settlement agreement (the “Settlement Agreement”).
In connection with the Settlement Agreement, the Company and BIP agreed that (1) the First Tranche Warrants and the Second Tranche
Warrants would remain vested and outstanding, (2) the third, fourth and fifth tranches of success fee warrants would be cancelled;
and (3) crediting of $66,439 in outstanding but unpaid fees against the exercise price of the First Tranche Warrants would be the
only payment made or required under the Service Agreement. As a result, BIP will receive (a) 55,365 shares, (b) warrants to purchase
94,635 shares for $1.2 per share, expiring June 28, 2017, and (c) warrants to purchase 150,000 shares for $1.50 per share, which
may be exercised from July 18, 2016 until July 17, 2017. As a result of the Settlement Agreement, the Company does not have any
liability for future warrants issuance to BIP. As of September 30, 2016, the remaining 244,635 outstanding warrants may be exercised
in the future by BIP upon delivery of cash and an exercise notice to the Company.
A total of 294,000
warrants consisting of 150,000 warrants issued to Wallington Investment Holdings Ltd with exercise price of $3.25 per share on
January 13, 2011 and 144,000 warrants issued to Rodman & Renshaw, LLC with exercise price of $3.99 per share on January 13,
2011 were expired on January 13, 2016.
During the three
and nine months ended September 30, 2016, the Company included $65,091 and $129,295 warrants cost in the general administrative
expenses, respectively.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 18- NONCONTROLLING INTEREST
Non-controlling interest represents the
minority stockholders’ 45% proportionate share of the results of the newly established subsidiary Kingold Internet and Yuhuang. A
reconciliation of non-controlling interest as of September 30, 2016 and December 31, 2015 are as follows:
|
|
As of September 30, 2016
|
|
|
As of December 31, 2015
|
|
Beginning Balance
|
|
$
|
-
|
|
|
$
|
-
|
|
Capital Contribution
|
|
|
73,274
|
|
|
|
69,319
|
|
Proportionate shares of Net loss
|
|
|
(1,910
|
)
|
|
|
(296
|
)
|
Foreign currency translation gain
|
|
|
1,847
|
|
|
|
4,251
|
|
Ending Balance
|
|
$
|
73,211
|
|
|
$
|
73,274
|
|
NOTE 19 - CONCENTRATIONS AND RISKS
The Company maintains certain bank accounts
in the PRC and BVI, which are not insured by Federal Deposit Insurance Corporation (“FDIC”) insurance or other insurance.
The cash and restricted cash balance held in the PRC bank accounts was $428,331,255 and $29,544,475 as of September 30, 2016 and
December 31, 2015, respectively. The cash balance held in the BVI bank accounts was $35,163 and $13,277 as of September 30, 2016
and December 31, 2015, respectively. As of September 30, 2016 and December 31, 2015, the Company held $155,897 and $144,465 of
cash balances within the United States, no balance was in excess of FDIC insurance limits of $250,000 as of September 30, 2016
and December 31, 2015, respectively.
For the periods ended September 30, 2016
and 2015, almost 100% of the Company's assets were located in the PRC and 100% of the Company's revenues were derived from its
subsidiaries located in the PRC.
The Company’s principal raw material
used during the year was gold, which accounted for almost 100% of its total purchases for the periods ended September 30, 2016
and 2015. The Company purchased gold directly, and solely, from the Shanghai Gold Exchange, the largest gold trading platform in
the PRC.
No customer accounted for more than 10% of annual sales for
the periods ended September 30, 2016 or 2015.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 20 - GOLD LEASE TRANSACTIONS
The Company leased gold as a way to finance
its growth and will return the same amount of gold to China Construction Bank (“CCB”), Shanghai Pudong Development
Bank (“SPD Bank”), CITIC Bank and Industrial & Commercial Bank of China (“ICBC”) at the end of the
respective lease agreements. Under these gold lease arrangements, each of CCB, SPD Bank, CITIC Bank and ICBC retains beneficial
ownership of the gold leased to the Company and treats it as if the gold is placed on consignment to the Company. All three banks
have their own representatives on the Company’s premises to monitor on a daily basis the use and security of the gold leased
to the Company. Accordingly, the Company records these gold lease transactions as operating leases because the Company does not
have ownership nor has it assumed the risk of loss for the leased gold.
|
1)
|
Gold
lease transactions with China Construction Bank’s Wuhan Jiang’an Branch (“CCB”)
|
During 2015, the Company renewed gold lease
agreements with CCB and leased an aggregate of 2,330 kilograms of gold, which amounted to approximately $54.8 million (RMB 365
million). The leases have initial terms of one year and provide an interest rate of 6% per annum. The leased gold shall be returned
to the Bank upon lease maturity in 2016.
During nine months ended September 30,
2016, the Company entered into gold lease agreements with CCB and leased an aggregated of 975 kilograms of gold, which amounted
to approximately $35.2 million (RMB 235 million). The leases have initial terms of one year and provide an interest rate of 5.7%
per annum. The leased gold shall be returned to the Bank upon lease maturity in 2017. During the nine months ended September 30,
2016, the Company returned 1,415 kilograms of gold, which amounted to approximately $51.4 million (RMB 342.8 million) back to CCB
upon lease maturity.
As of September 30, 2016 and December 31,
2015, 1,075 kilograms and 1,515 kilograms of leased gold were outstanding and not yet returned to the Bank, respectively, which
amounted to approximately $38.6 million (RMB 257.5 million) and $56.3 million (RMB 365.3 million), respectively due in various
months through out of 2016 and 2017. As of September 30, 2016 and December 31, 2015, the Company pledged restricted cash of approximately
$37.5 million and Nil as collateral to safeguard the gold lease from CCB, respectively.
|
2)
|
Gold
lease transactions with SPD Bank
|
On April 10, 2015, Wuhan Kingold entered
into a gold lease agreement with SPD Bank to lease additional 197 kilograms of gold (valued at approximately RMB 47 million or
approximately $7.2 million). The lease has initial term of one year and provides an interest rate of 3.2% per annum.
In the third quarter of 2015, Wuhan Kingold
entered into several gold lease agreements with SPD Bank to lease an aggregate of 720 kilograms of gold, valued approximately $25.9
million (RMB 168.2 million). The leases have initial terms of one year and provide an interest rate of 2.8% to 6% per annum. The
Company is required to deposit cash into an account at SPD Bank equal to approximately $15.9 million (RMB 103 million).
During nine months ended September 30,
2016, the Company entered into gold lease agreements with SPD bank and leased an aggregated of 345 kilograms of gold, which amounted
to approximately $14 million (RMB 93.3 million). The leases have initial terms of six months to one year and provide an interest
rate of 6.0% per annum. During nine month ended September 30, 2016, the Company returned 917 kilograms of gold, which amounted
to approximately $32.3 million (RMB 215.2 million) back to SPD bank upon lease maturity. The remaining leased gold shall be returned
to the Bank upon lease maturity in December 2016 and June 2017.
As of September 30, 2016 and December 31,
2015, about 345 kilograms and 917 kilograms of leased gold were outstanding and not yet returned to SPD Bank, respectively, which
amounted to approximately $14 million (RMB 93.3 million) and $33.2 million (RMB 215.2 million), respectively. Such gold leases
will be due in various months in 2016 and 2017. As of September 30, 2016 and December 31, 2015, the Company pledged restricted
cash of approximately $68.7 million and $16.3 million as collateral to safeguard the gold lease from SPD Bank, respectively.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 20 - GOLD LEASE TRANSACTIONS – continued
|
3)
|
Gold lease transaction with Industrial and Commercial Bank of China (“ICBC’)
|
During the nine months ended September
30, 2016, the Company entered into additional gold lease agreements with ICBC and leased an aggregated amount of 527 kilograms
of gold, which amounted to approximately $20.9 million (RMB 139.7 million). The leases have initial terms of half year and provide
an interest rate of 2.75% per annum. The leased gold shall be returned to the Bank upon lease maturity in September 2016. As of
September 30, 2016, 527 kilograms of leased gold were all returned to ICBC. As of September 30, 2016 and December 31, 2015, no
restricted cash was pledged by the Company as collateral to safeguard the gold lease from ICBC, respectively.
|
4)
|
Gold lease transactions with related party
|
During nine months ended September 30,
2016, the Company signed multiple gold lease agreements with Wuhan Shuntianyi Investment Management Ltd. (“Shuntianyi”),
a related party which was controlled by the CEO and the Chairman of the Company, to lease a total of 12,500,000 grams of Au9999
gold in aggregate with carrying value of approximately $438.3 million. These leases were from March 2, 2016 to November 30, 2016.
As of September 30, 2016 and December 31,
2015, a total amount of 13,920 kilograms and 2,782 kilograms of leased gold were outstanding, at the approximated carrying amounts
of $490.9 million and $101.8 million, respectively. Interest expense for the leased gold for the nine month period ended September
30, 2016 and 2015 were approximately $3.3 million and $5.6 million, respectively, which was included in the cost of sales. Interest
expense for the leased gold for the three month period ended September 30, 2016 and 2015 were approximately $0.9 million and $1.9
million, respectively, which was included in the cost of sales.
NOTE 21 – COMMITMENTS AND CONTINGENCIES
Operating Lease
On June 27, 2016, Wuhan Kingold signed
certain 5 years lease agreements to rent office and store space at the Jewelry Park commencing in July 2016 and October 2016, respectively,
with aggregated annual rent with aggregated annual rent of approximately $0.09 million and $0.17 million, respectively. For the
three and nine months ended September 30, 2016, the Company recorded $21,884 rent expense. As of September 30, 2016, the Company
was obligated under non-cancellable operating leases for minimum rentals as follows:
For the Twelve Months Ending September 30,
|
|
|
|
2017
|
|
$
|
261,146
|
|
2018
|
|
|
261,146
|
|
2019
|
|
|
261,146
|
|
2020
|
|
|
261,146
|
|
2021 and thereafter
|
|
|
239,263
|
|
|
|
|
|
|
|
|
$
|
1,283,847
|
|
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 22 – CONVERTIBLE NOTE PURCHASE AGREEMENT
On April 2, 2015, the Company entered into
a Convertible Note Purchase Agreement (the “Purchase Agreement”) with Fidelidade – Companhia de Seguros, S.A.,
a company duly incorporated and existing under the laws of Portugal and a majority-owned subsidiary of Fosun International Limited
(the “Holder”). Pursuant to the Purchase Agreement, the Company agreed to issue and sell to the Holder $15 million
aggregate principal amount 6.0% Senior Secured Convertible Note due 2018 (the “Note”), subject to customary closing
conditions. The Company was to sell the Note in reliance on the exemption from registration provided by Section 4(a)(2) of the
Securities Act of 1933, as amended (the “Securities Act”). The Note and the underlying shares of the Company’s
common stock issuable upon conversion of the Note have not been registered under the Securities Act and may not be offered or sold
in the United States absent registration or an applicable exemption from registration requirements.
The Note was to bear interest at a rate
of 6.0% per year payable annually and mature on the third anniversary of the issuance date of the Note, unless earlier converted.
The Note constituted a general, senior, secured obligation of the Company. The Company was required to grant the Holder a security
interest in certain collateral as identified in the Purchase Agreement, to secure the payment, discharge and performance of all
the Company’s obligations under the Note. Mr. Zhihong Jia, Chairman and Chief Executive Officer of the Company, was to execute
a guarantee in favor of the Holder, pursuant to which Mr. Jia will be jointly liable for the Company’s obligations under
the Note.
Subject to and upon compliance with the
provisions of the Purchase Agreement, the Holder has the right, at its option, to convert the principal amount of the Note or any
portion of such principal amount which is $1,000 or an integral multiple of $1,000 in excess thereof, into shares of common stock
at the applicable conversion rate. The conversion rate is initially 869.57 shares of common stock per $1,000 principal amount of
Note (equivalent to an initial conversion price of approximately $1.15 per share), subject to adjustment in certain events described
in the Purchase Agreement. Upon conversion, the Company will deliver shares of common stock as set forth in the Purchase Agreement.
No fractional shares will be issued upon any conversion.
In connection with the entry into the Purchase
Agreement, the Company will enter into a registration rights agreement (the “Registration Rights Agreement”) with the
Holder as a condition to closing the sale of the Note, which sets forth the rights of the Holder to have the shares of common stock
issuable upon conversion of the Note registered with the SEC for public resale under the Securities Act. Pursuant to the Registration
Rights Agreement, the Company is required to file a registration statement with the SEC (the “Initial Registration Statement”)
within 60 days following the date of the issuance of the Note, registering the shares of common stock issuable upon conversion
of the Note. The Company is required to use its reasonable best efforts to have the Initial Registration Statement declared effective
as promptly as possible following the filing thereof and, in any event, by no later than 90 days after the date of the issuance
of the Note. In addition, the agreement gives the Holder the ability to exercise certain piggyback registration rights in connection
with registered offerings by the Company.
The Purchase Agreement was set to terminate
automatically on May 31, 2015 in the absence of a closing or extension at the discretion of the Holder. Closing did not occur prior
to such time because the Company had not secured a $15 million letter of credit required under the agreement. The Holder has not
provided written notice to the Company of its intention either to terminate or to extend the Purchase Agreement, and the Company
continues to pursue the $15 million letter of credit. While there can be no guarantee that the Company will locate a letter of
credit on terms acceptable to the Holder, the Company remains willing to proceed under the Purchase Agreement.
NOTE 23 – SUBSEQUENT EVENTS
On September 30, 2016, the Company entered
into an Entrust Loan Agreement with the Hubei Asset Management Co., Ltd. to borrow from ICBC Wuhan Jiang'an Branch of a maximum
of approximately $45 million (RMB 300 million) as a working capital loan in the later period. The Company is subject to 9.5% fixed
annual interest rate. The term of the loan is two years from the date of receiving the principal amount. The Company is required
to pledge 1,497 kilograms of Au9999 gold with carrying value of approximately $61.6 million (RMB 410.9 million) as collateral.
The loan is jointly guaranteed by Mr. Zhihong Jia, the CEO and Chairman of the Company. The full amount of this entrust loan was
subsequently received by the Company on October 28, 2016.
On October 13, 2016, the SEC declared effective
a registration statement filed by the Company on Form S-3 that registered the sale, from time to time, of up to $80 million of
the securities.
On October 14, 2016, the Company entered
into a Trust Loan Agreement with the Minsheng Trust to borrow a maximum of 70% of amount of pledged gold as a working capital loan.
The Company is subject to 7.6% fixed annual interest rate. The term of the loan is one year from receiving of the principal amount.
The Company is required to pledge 1,877.49 kilograms of Au9995 gold with carrying value of approximately $76.9 million (RMB 512.9
million) as collateral. The total amount received by the Company was approximately $53.8 million (RMB 359 million) as 70% of carrying
value of the gold pledged.
The Company is expected to receive the
certificate of occupancy for Jewelry Park project and the ownership title will be transferred to Wuhan Lianfuda to complete the
Transfer Transaction before the end of the fiscal year 2016.