The accompanying notes are an integral part
of these consolidated financial statements
The accompanying notes are an integral part
of these consolidated financial statements
The accompanying notes are an integral part
of these consolidated financial statements
The accompanying notes are an integral part
of these consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
Kingold Jewelry, Inc. (“Kingold”
or “the Company”) was incorporated in the State of Delaware on September 5, 1995.
Dragon Lead Group Limited (“Dragon Lead”)
was incorporated in the British Virgin Islands (“BVI”) on July 1, 2008 as an investment holding company and was 100%
controlled by Kingold. Wuhan Vogue-Show Jewelry Co., Limited (“Wuhan Vogue-Show”), which is principally engaged in
design and manufacture of gold and platinum ornaments in the People’s Republic of China (“PRC”), was incorporated
in the PRC as a wholly-owned foreign enterprise on February 16, 2009, and was 100% owned by Dragon Lead. Wuhan Vogue-Show’s
business permit expires on February 16, 2019, and is renewable upon expiration. Wuhan Kingold Jewelry Co., Limited (“Wuhan
Kingold”) was incorporated in the PRC on August 2, 2002 as a limited liability company. On October 26, 2007, Wuhan Kingold
was restructured as a joint stock company limited by shares and its business activities are the same as those of Wuhan Vogue-Show.
Wuhan Kingold’s business permit expires on July 1, 2052 and is renewable upon expiration.
Wuhan Kingold is effectively controlled by
Wuhan Vogue-Show through a series of agreements and Amendment Agreements (collectively referred to as the Restructuring Agreements).
In accordance with the Agreements and Amendments, shareholders holding 100% of the outstanding equity of Wuhan Kingold were parties
to the agreements such that Wuhan Kingold has agreed to pay 100% of its after-tax profits to Wuhan Vogue-Show and shareholders
owning 100% of Wuhan Kingold’s shares have pledged and delegated their voting power in Wuhan Kingold to Wuhan Vogue-Show.
These contractual arrangements enable Wuhan
Vogue-Show to:
|
•
|
exercise effective control over Wuhan Kingold;
|
|
•
|
receive substantially all of the economic benefits from Wuhan Kingold; and
|
|
•
|
have an exclusive option to purchase 100% of the equity interest in Wuhan Kingold, when and to
the extent permitted by PRC law.
|
Through such arrangements, Wuhan Kingold has
become Wuhan Vogue-Show’s contractually controlled affiliate. Kingold is empowered, through its wholly owned subsidiaries
Dragon Lead and 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 (“VIE”) under ASC 810-10-05-8A. Accordingly, Kingold consolidates Wuhan Kingold’s
operating results, assets and liabilities.
In April 2015, Wuhan Kingold Jewelry Co., Inc.
(“Wuhan Kingold”) established a new subsidiary Wuhan Kingold Internet Co., Ltd. (“Kingold Internet”), of
which Wuhan Kingold holds a 55% ownership interest and a third-party minority shareholder holds the remaining 45% ownership interest.
Kingold Internet engaged 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. In May 2015, Kingold Internet also established a new subsidiary Yuhuang Jewelry
Design Co., Ltd (“Yuhuang”).
On December 14, 2016, Wuhan Kingold transferred
its 55% ownership interest in Kingold Internet to Wuhan Kingold Industrial Group Co., Ltd., a related party, for a consideration
of $79,196 (RMB 550,000), which was the same amount Wuhan Kingold originally invested. After the transfer, Kingold Internet and
Yuhuang were no longer the subsidiaries of Wuhan Kingold.
Kingold, Dragon Lead, and Wuhan Vogue-Show,
are hereinafter collectively referred to as the “Company.”
KINGOLD JEWELRY, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements
include the financial statements of Kingold, Dragon Lead, Wuhan Vogue-Show and Wuhan Kingold. All inter-company balances and transactions
have been eliminated in consolidation.
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, intangible assets, the recoverability
of long-lived assets, inventory valuation, allowance for doubtful accounts, investment in gold and share based compensation. Actual
results could differ from those estimates.
Cash
Cash includes cash on hand and demand deposits
in accounts maintained with commercial banks within the PRC. The Company considers all highly liquid investments with original
maturities of three months or less when purchased to be cash equivalents. The Company maintains most of the bank accounts in the
PRC. Cash balances in bank accounts in PRC are not insured by the Federal Deposit Insurance Corporation or other programs.
Restricted Cash
As of December 31, 2016 and 2015, the Company
had restricted cash of $60,344,430 and $26,649,687, respectively. Approximately total of $9.9 million was related to the various
bank loans with banks and financial institutions – see Note 6 - Bank Loans. Approximately total of $28.8 million was used
to guarantee a thirty party to obtain a bank loan - see Note 10 - Third Party Loan. Approximately total of $21.6 million was related
to the gold lease deposits with Shanghai Pudong Development Bank (“SPD Bank”) and China Construction Bank (“CCB”)
- see Note 21 - Gold Lease Transactions.
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 December 31, 2016 and 2015, there was no allowance recorded as the Company considers all of the accounts receivable
fully collectible.
KINGOLD JEWELRY, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Inventories
Inventories are stated at the lower of cost
or market value, and cost is calculated on the weighted average basis. As of December 31, 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, equipment and leasehold improvements
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.
For property and equipment, depreciation is
provided on a straight-line basis, less estimated residual value, over an asset’s estimated useful life. Leasehold improvements
are amortized over the shorter of the lease term or the estimated useful life of the related assets. 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
|
Motor vehicles
|
10 years
|
Leasehold improvements
|
5 years
|
Construction-in-Progress
Construction in progress represents property
and buildings under construction and consists of construction expenditures, equipment procurement, and other direct costs attributable
to the construction. Construction in progress is not depreciated. Upon completion and when ready for intended use, construction
in progress is reclassified to the appropriate category within property, plant and equipment or will be classified as an asset
held for sale.
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.
KINGOLD JEWELRY, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 December 31, 2016 and 2015.
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 current assets and current
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 investments in
gold.
Investments 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 these pledged gold as investments in gold, and carried at fair market value,
with the unrealized gains and losses, included in accumulated other comprehensive income (loss) and reported in shareholders’
equity. The fair market value of the investments in gold is determined by quoted market prices at Shanghai Gold Exchange.
KINGOLD JEWELRY, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue recognition
Net sales 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: there are no uncertainties
regarding customer acceptance; persuasive evidence of an arrangement exists; the sales price is fixed and determinable; and 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.
Income taxes
Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the consolidated financial statement 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 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 consolidated financial statement 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 December 31, 2016 and 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 December 31, 2016 the
tax years ended December 31, 2010 through December 31, 2016 for the Company’s PRC subsidiaries remain open for statutory
examination by PRC tax authorities.
KINGOLD JEWELRY, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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. 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. ”
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:
|
|
December 31,
2016
|
|
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 6.9448
|
|
US$1=RMB 6.4917
|
Amounts included in the statements of operations and cash flows for the period
|
|
US$1=RMB 6.6441
|
|
US$1=RMB 6.2288
|
Comprehensive income (loss)
Comprehensive income consists of two components,
net income and other comprehensive income (loss). The unrealized gain or loss resulting from the change of the fair market value
from the gold investments and the foreign currency translation gain or loss resulting from translation of the financial statements
expressed in RMB to US$ are reported in other comprehensive income in the consolidated statements of income and comprehensive income.
Earnings per share (“EPS”)
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.
KINGOLD JEWELRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Debts issuance cost
During the quarter ended June 30, 2015, the
Company adopted Accounting Standards Update (“ASU”) 2015-03, “Simplifying the Presentation of Debt Issuance Costs,”
which requires that debt issuance cost related to a recognized debt liability be presented in the balance sheet as a direct deduction
from the carrying amount of the debt liability, consistent with debt discounts, without changing existing recognition and measurement
guidance for debt issuance costs. Amortization of debt issuance costs is calculated using the effective interest method and is
included as a component of financing costs. The new guidance is required to be applied on a retrospective basis and to be accounted
for as a change in an accounting principle.
Deposit payables - Jewelry Park
Deposit payables consist of 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. During the year ended December 31, 2016, deposit
payables balance was settled when the Jewelry Park was transferred from the Company to Wuhan Lianfuda (See Note 5).
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 Company also allocated significant portion
of its inventories as investment in gold and pledged as collateral to secure loans from banks and financial institutions, there
is a risk that the Company is unable to utilize its inventories, and there could be a disruption in the Company’s supply
of gold which could decrease its production and shipping levels. In addition, 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 or increase restricted cash.
KINGOLD JEWELRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Risks and Uncertainties (continued)
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 this consolidated entity 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.
Recent Accounting Pronouncements
In April 2016, the Financial Accounting Standard
Board (“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 does not expect that the adoption of this guidance
will have a material impact on its consolidated financial statements.
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 does not expect that the adoption of this guidance will have a material
impact on its consolidated financial statements.
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 does not expect that the adoption of this guidance will have a material impact on its consolidated financial
statements.
KINGOLD JEWELRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recent Accounting Pronouncements
(continued)
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 does not expect that the adoption of this guidance will
have a material impact on its consolidated financial statements.
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. Early adoption is permitted, including adoption in an interim period.
The
Company does not expect that the adoption of this guidance will have a material impact on its consolidated financial statements.
In October 2016, the Financial Accounting Standards
Board (the “FASB”) issued Accounting Standards Update (“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. Early adoption
is permitted, including adoption in an interim period. The adoption of this ASU will not have any impact to the Company’s
consolidated financial statements as the Company did not have any interest held through related parties with common control.
In November 2016, the FASB issued Accounting
Standards Update No. 2016-18, “Statement of Cash Flows (Subtopic 230)” (“ASU 2016-18”). The new guidance
requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts
generally described as restricted cash or restricted cash equivalents. The standard will be effective for the first interim period
within annual reporting periods beginning after December 15, 2017 and early adoption is permitted. The amendments should be applied
using retrospective transition method to each period presented. The adoption of this guidance will increase cash and cash equivalents
by the amount of restricted cash on the Company’s consolidated statement of cash flows.
In December 2016, the FASB issued ASU No. 2016-20,
"Technical Corrections and Improvements to Topic 606," which includes thirteen technical corrections or improvements
that affect only narrow aspects of the guidance in ASU No. 2014-09. ASU No. 2014-09 and all of the related ASUs have the same effective
date. On July 9, 2015, the FASB deferred the effective date of ASU No. 2014-09 for annual reporting periods beginning after December
15, 2017, including interim periods within that reporting period. Early adoption is permitted as of the original effective dates,
which are annual reporting periods beginning after December 15, 2016 and interim periods within those annual periods. The new standard
is to be applied retrospectively and permits the use of either the retrospective or cumulative effect transition method. The Company
is currently evaluating the effect that the adoption of this update will have on the consolidated financial statements.
KINGOLD JEWELRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recent Accounting Pronouncements
(continued)
In January 2017, the FASB issued ASU No. 2017-01,
"Business Combinations (Topic 805): Clarifying the Definition of a Business". The amendments in this ASU clarify the
definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be
accounted for as acquisitions (or disposals) of assets or businesses. Basically these amendments provide a screen to determine
when a set is not a business. If the screen is not met, the amendments in this ASU first, require that to be considered a business,
a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create
output and second, remove the evaluation of whether a market participant could replace missing elements. These amendments take
effect for public businesses for fiscal years beginning after December 15, 2017 and interim periods within those periods, and all
other entities should apply these amendments for fiscal years beginning after December 15, 2018, and interim periods within annual
periods beginning after December 15, 2019. The Company does not expect that the adoption of this guidance will have a material
impact on its consolidated financial statements.
Reclassification:
Certain prior year amounts have been reclassified
for consistency with the current year presentation. This reclassification has no effect on the previously reported consolidated
financial statements for the year ended December 31, 2015
KINGOLD JEWELRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – INVENTORIES
Inventories as of December 31, 2016 and December 31, 2015 consisted
of the following:
|
|
As of
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Raw materials (A)
|
|
$
|
7,167,391
|
|
|
$
|
162,766,249
|
|
Work-in-progress (B)
|
|
|
78,813,685
|
|
|
|
108,276,834
|
|
Finished goods (C)
|
|
|
33,454,519
|
|
|
|
27,260,102
|
|
Total inventory
|
|
$
|
119,435,595
|
|
|
$
|
298,303,185
|
|
|
(A)
|
Included 185,000 grams of Au9999 gold as of December 31, 2016 and 5,624,476 grams of Au9999 gold
as of December 31, 2015.
|
|
(B)
|
Included 2,358,178 grams of Au9999 gold as of December 31, 2016 and 3,549,984 grams of Au9999 gold
as of December 31, 2015.
|
|
(C)
|
Included 993,699 grams of Au9999 gold as of December 31, 2016 and 886,849 grams of Au9999 gold
as of December 31, 2015.
|
As of December 31, 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 13).
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 $72.29 million were pledged for the Company’s debts payable.
No lower of cost or market adjustment was recorded
at December 31, 2016 and 2015, respectively.
NOTE 4 - PROPERTY AND EQUIPMENT, NET
The following is a summary of property and equipment as of December
31, 2016 and December 31, 2015:
|
|
As of
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Buildings
|
|
$
|
2,208,918
|
|
|
$
|
2,363,093
|
|
Plant and machinery
|
|
|
17,401,084
|
|
|
|
18,496,731
|
|
Motor vehicles
|
|
|
97,549
|
|
|
|
53,935
|
|
Office and electric equipment
|
|
|
687,901
|
|
|
|
630,312
|
|
Leasehold improvements
|
|
|
1,185,433
|
|
|
|
-
|
|
Subtotal
|
|
|
21,580,885
|
|
|
|
21,544,071
|
|
Less: accumulated depreciation
|
|
|
(14,356,187
|
)
|
|
|
(13,921,562
|
)
|
Property and equipment, net
|
|
$
|
7,224,698
|
|
|
$
|
7,622,509
|
|
Depreciation expense for the years ended December
31, 2016 and 2015 was $1,403,688 and $1,388,389, respectively.
KINGOLD JEWELRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – 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 $144 million as of December 31, 2016) 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 $164.2 million) (“Selling Price”).
This amount includes (1) RMB 640 million (approximately US $92.2 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 $72 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 $54.2 million) stipulated in the Acquisition Agreement.
Before the Transfer Transaction, the carrying
value of Jewelry Park was approximately $162.6 million (RMB 1.08 billion), included the following components (1) Land use right
of approximately $9.1 million (RMB 60.4 million), which represents the total cost of the Land Use Right and (2) the construction
progress of approximately $153.4 million (RMB 1.02 billion), consisting of the Company’s cash payment of approximately $87.3
million (RMB 580 million) towards the construction of Jewelry Park project, capitalized interest of approximately $12 million (RMB
80 million), and the construction payable of approximately $54.2 million (RMB 360 million) has been accrued based on the billing
request by the construction company Wuhan Wansheng.
As of December 31, 2016, the project has passed
all inspections and completed acceptance procedures. The Company transferred its 60% ownership in Wuhan Huayuan to Wuhan Lianfuda
to complete the transaction. In connection with the Jewelry Park Transfer Transaction, Wuhan Lianfuda undertook Wuhan Kingold’s
remaining payment obligation of $54.2 million (RMB 360 million).The following table presents the components of the property held
for sale- Jewelry Park at of the transaction date and December 31, 2015:
|
|
As of
|
|
|
|
Transaction
|
|
|
December 31,
|
|
|
|
Date
|
|
|
2015
|
|
Deposit on land use right
|
|
$
|
9,083,517
|
|
|
$
|
9,296,763
|
|
Construction in progress
|
|
|
153,468,199
|
|
|
|
105,844,259
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
162,551,716
|
|
|
$
|
115,141,022
|
|
|
|
|
|
|
|
|
|
|
Construction payables
|
|
$
|
54,183,411
|
|
|
$
|
23,876,642
|
|
Deposit payable
|
|
|
171,580,801
|
|
|
|
22,182,171
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
225,764,212
|
|
|
$
|
46,058,813
|
|
As of the transaction date, the carrying value
of Jewelry Park was approximately $162.6 million (RMB 1,080 million), with total construction payables and deposit payable of approximately
$225.8 million (RMB 1,500 million).
For the year ended December 31, 2016, the Company recognized gain
of $63,212,496 due to this Transfer Transaction.
KINGOLD JEWELRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 – LOANS
Short term loans consist of the following:
|
|
As of
|
|
|
|
December 31,
|
|
|
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
|
|
|
51,693,353
|
|
|
|
46,212,857
|
|
(d) Current portion of long-term loan payable to Evergrowing Bank
|
|
|
287,986
|
|
|
|
-
|
|
(e) Loans payable to National Trust - gross amount
|
|
|
143,992,628
|
|
|
|
-
|
|
Loans payable to National Trust – deferred financing cost
|
|
|
(4,480,085
|
)
|
|
|
-
|
|
(f) Loan payable to Aijian Trust
|
|
|
43,197,788
|
|
|
|
-
|
|
Total short term loans, net of deferred financing costs
|
|
$
|
234,691,670
|
|
|
$
|
55,455,428
|
|
(a) Loans payable to CITIC Bank Wuhan Branch
Loans payable to CITIC Bank Wuhan Branch with
an aggregate amount of approximately $6.2 million (RMB 40 million) consisted of two working capital loan contracts originated on
May 29, 2015 and June 1, 2015, with maturity dates of March 29, 2016 and March 1, 2016, respectively. The annual interest rate
for both loans was 6.7%. The prior year loan balance was repaid upon maturity. All the loans from CITIC Bank Wuhan Branch were
secured by restricted cash of approximately $1.3 million (RMB 9 million). The loan is also secured by 800,000 grams of Au9999 gold
with carrying value of approximately $26.8 million (RMB 186 million). In addition, the Company's subsidiary Wuhan Kingold and Mr.
Zhihong Jia, Chairman and Chief Executive Officer of the Company, separately signed a maximum guarantee agreement with the bank,
to provide a maximum amount of approximately $22.3 million (RMB 155 million) guarantee for a line of credit of approximately $22.3
million (RMB 155 million) from CITIC Bank during May 25, 2015 through May 25, 2016. The $6.2 million loan has been fully repaid
upon maturity.
(b) Loan payable to Bank of Hubei, Wuhan Jiang’an
Branch
Loan payable to Bank of Hubei, Wuhan Jiang’an
Branch with an aggregate amount of approximately $3.1 million (RMB 20 million) originated on November 12, 2015, with a maturity
date of November 12, 2016. The annual interest rate was 6.7%. The $3.1 million loan has been fully repaid upon maturity.
(c) Loan payable to Minsheng Trust
Loan payable to Minsheng Trust with an aggregate
amount of approximately $46.2 million (RMB 300 million) originated on September 17, 2015, with a maturity date of September 25,
2016. The annual interest rate was 12.5%. The loan is to be used for the Company’s working capital. The loan was fully repaid
by December 31, 2016. The previous pledged restricted cash of approximately $0.4 million (RMB 3 million) was returned by December
31, 2016.
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 1877.49 kilograms of Au9995 gold with carrying value of approximately $62.9 million (RMB 436.5
million) as collateral. The total amount received by the Company was approximately $51.7 million (RMB 359 million) according to
the calculation stated in the agreement. The Company was also required to pledge approximately $0.5 million (RMB 3.6 million) restricted
cash with Minsheng Trust as collateral.
KINGOLD JEWELRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 – LOANS (continued)
(d) The current portion of loans payable to
Yantai Huanshan Road Branch of Evergrowing Bank (see note (h) below).
(e) Loans payable to National Trust
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 $72 million (RMB 500 million) as working capital loan. The loan is comprised of two installments,
with the first installment of approximately $14.4 million (RMB 100 million) and the second installment of approximately $57.6 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 as loan origination fee, 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 kilograms of Au9995 gold with carrying value of approximately $87 million (RMB 604.5 million) as collateral to secure
this loan. The loan is jointly guaranteed by 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. The Company paid approximately $5 million (RMB 34.7
million) as loan origination fee for obtaining the loan. The loan origination fee was recorded as deferred financing cost against
the loan balance. For the year ended December 31, 2016, approximately $3.2 million (RMB 22.1 million) deferred financing cost was
amortized. As of December 31, 2016, the deferred financing cost related to obtaining this loan was approximately $1.8 million (RMB
12.6 million).
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 $72 million
(RMB 500 million) as a working capital loan. The Company is required to make a loan origination fee equivalent to 4.1% of the loan
principal amount which was approximately $5 million (RMB 34.7 million). The Company is subject to 8% interest which will be paid
on a semiannual basis. The term of the loan could be extended for one additional year. The Company is required to pledge 2,660
kilograms of Au9995 gold with carrying value of approximately $89.1 million (RMB 618.5 million) as collateral. The loan is guaranteed
by 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. The Company
paid approximately $5 million (RMB 34.7 million) as loan origination fee for obtaining the loan. The loan origination fee was recorded
as deferred financing cost against the loan balance. For the year ended December 31, 2016, approximately $2.3 million (RMB 16.1
million) deferred financing cost was amortized. As of December 31, 2016, the deferred financing cost related to obtaining this
loan was approximately $2.7 million (RMB 18.6 million).
(f) Loan payable to Aijian Trust
On April 28, 2016, Wuhan Kingold and Shanghai
Aijian Trust Co., Ltd. (“Aijian Trust”) entered into a gold income right transfer and repurchase agreement. According
to the agreement, Aijian 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”). Aijian Trust’s acquisition price for the Gold Income Right was approximately $43.2 million (RMB 300
million) (the “Acquisition Price”). Wuhan Kingold is required to repurchase the Gold Income Right back from Aijian
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 Aijian
Trust with carrying value of approximately $51.6 million (RMB 358.5 million) as collateral. The agreement is also personally guaranteed
by Mr. Zhihong Jia, our CEO and Chairman. The Company also made a restricted deposit of $0.4 million (RMB 3 million) to secure
these loans. The deposit will be refunded when the loan is repaid upon maturity. Since Wuhan Kingold has a right to repurchase
the Gold Income Right in 12 months, the loan is treated as a short term loan.
KINGOLD JEWELRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 – LOANS (continued)
Interest expense for all of the loans mentioned
above for the years ended December 31, 2016 and 2015 was $14.8 million and $2.2 million, respectively. The weighted average interest
rate for the year ended December 31, 2016 and 2015 was 9.4% and 11.5%, respectively.
Long term loans consist of the following:
|
|
As of
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
(g) Loans payable to Evergrowing Bank - Qixia Branch
|
|
$
|
115,194,102
|
|
|
$
|
30,808,571
|
|
(h) Loans payable to Evergrowing Bank - Yantai Huanshan Road Branch
|
|
|
143,560,650
|
|
|
|
-
|
|
(i) Loans payable to Anxin Trust
|
|
|
431,977,883
|
|
|
|
-
|
|
(j) Loans payable to Minsheng Trust - gross amount
|
|
|
28,798,526
|
|
|
|
-
|
|
Loans payable to Minsheng Trust - deferred financing cost
|
|
|
(563,984
|
)
|
|
|
-
|
|
(k) Loans payable to Chang’An Trust
|
|
|
28,654,533
|
|
|
|
-
|
|
(l) Loans payable to Sichuan Trust - gross amount
|
|
|
215,988,941
|
|
|
|
-
|
|
Loans payable to Sichuan Trust - deferred financing cost
|
|
|
(2,359,280
|
)
|
|
|
-
|
|
(m) Loans payable to China Aviation Capital - gross amount
|
|
|
41,757,862
|
|
|
|
-
|
|
Loans payable to China Aviation Capital - deferred financing cost
|
|
|
(1,055,387
|
)
|
|
|
-
|
|
(n) Loans payable to China Construction Investment Trust - gross amount
|
|
|
43,197,788
|
|
|
|
-
|
|
Loans payable to China Construction Investment Trust - deferred financing cost
|
|
|
(371,697
|
)
|
|
|
-
|
|
(o) Loans payable to Zheshang Jinhui Trust
|
|
|
79,195,945
|
|
|
|
-
|
|
(p) Loans payable to Hubei Assets Management
|
|
|
43,197,788
|
|
|
|
-
|
|
(q) Loans payable to Zhongjiang International Trust
|
|
|
57,597,051
|
|
|
|
-
|
|
Total long term loans, net of deferred financing costs
|
|
$
|
1,224,770,721
|
|
|
$
|
30,808,571
|
|
(g) Loans payable to Evergrowing Bank –
Qixia Branch
On December 18, 2015, Wuhan Kingold signed
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 $49.4 million (RMB 343.1 million). In addition, the Company’s CEO and Chairman signed a guarantee agreement
with the bank, to provide a guarantee for the loan. The loan was fully repaid by December 31, 2016.
In January 2016, Wuhan Kingold further signed
two Loan Agreements of Circulating Funds with the Qixia Branch of Evergrowing Bank for loans of approximately $115.2 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 6,300,000 grams of Au9999 gold in aggregate with carrying value of approximately $210.9
million (RMB 1.5 billion) and are guaranteed by 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 CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 – LOANS (continued)
(h) Loans payable to Evergrowing Bank - Yantai
Huanshan Road Branch
From February 24, 2016 to March 24, 2016, Wuhan
Kingold signed ten Loan Agreements with the Yantai Huangshan Road Branch of Evergrowing Bank for loans of approximately $144 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
$185.8 million (RMB 1.3 billion) and are guaranteed by the CEO and Chairman of the Company. Based on the loan repayment plan as
specified in the loan agreements, approximately $143,993 (RMB 1 million) was repaid in August 2016. Approximately $143,993 (RMB
1 million) should be repaid on February 23, 2017 and another $143,993 (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. Subsequently in February 2017, $143,993 (RMB
1 million) was repaid upon maturity. The repayment requirement is listed below:
|
|
As of December 31, 2016
|
|
February 23, 2017
|
|
$
|
143,993
|
|
August 23, 2017
|
|
|
143,993
|
|
February 23, 2018 – March 24, 2018
|
|
|
143,560,650
|
|
Total
|
|
|
143,848,636
|
|
|
|
|
|
|
Short term portion (refer to short term loan – d)
|
|
|
287,986
|
|
Long term portion
|
|
$
|
143,560,650
|
|
(i) Loans payable to Anxin Trust Co., Ltd
In January 2016, Wuhan Kingold signed a Collective
Trust Loan Agreement with Anxin Trust Co., Ltd. (“Anxin Trust”). The agreement allows the Company to access of approximately
$431.9 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 more. The purpose of this trust loan is to provide working capital for the Company to purchase gold. The loan is secured
by 15,450,000 grams of Au9999 gold in aggregate with carrying value of approximately $517.3 million (RMB 3.6 billion). The loan
is also guaranteed by the CEO and Chairman of the Company. As of December 31, 2016, the Company received full amount from the loan.
The Company also made a restricted deposit of approximately $3.6 million (RMB 25 million) to secure these loans. The deposit will
be refunded when the loan is repaid upon maturity.
(j) Loans payable to Minsheng Trust
On June 24, 2016, Wuhan Kingold entered into
a loan agreement with Minsheng Trust, with an aggregate amount of approximately $28.8 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 $36.5 million (RMB 253.4 million) as of December 31, 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. The Company paid approximately $0.8 million (RMB 5.3 million) as loan origination fee for obtaining the loan. The
loan origination fee was recorded as deferred financing cost against the loan balance. For the year ended December 31, 2016, approximately
$0.2 million (RMB 1.4 million) deferred financing cost was amortized. As of December 31, 2016, the deferred financing cost related
to obtaining this loan was approximately $0.6 million (RMB 3.9 million).
KINGOLD JEWELRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 – LOANS (continued)
(k) Loans payable to Chang’An Trust
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 $43.2 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, approximately $37.5 million (RMB 260.6 million) is pledged by Wuhan Kingold. The
loan is guaranteed by the CEO and Chairman of the Company and shall be repaid upon maturity. As of December 31, 2016, the Company
received an aggregate of approximately $28.7 million (RMB 199 million) from the loan. The Company also made a restricted deposit
of $0.3 million (RMB 2 million) to secure these loans. The deposit will be refunded when the loan is repaid upon maturity.
(l) Loans payable to Sichuan Trust
On September 7, 2016, the Company entered into
two trust loan agreements with the Sichuan Trust Ltd. (“Sichuan Trust”) to borrow a maximum of approximately $288 million
(RMB 2 billion) as working capital loan. The loan period is 24 months from receiving. For the loan obtained the Company is required
to make interest payments are calculated based on a fixed annual interest rate of 7.25%. The Company is required to make the first
interest payment equal to 1.21% of the principle received as loan origination fee, then the rest of interest payments are calculated
based on a fixed interest rate of 7.25%. The Company is required to pledge 7,258 kilograms of Au9999 gold with carrying value of
approximately $243 million (RMB 1.7 billion) as collateral to secure this loan. The loan is guaranteed by the CEO and Chairman
of the Company. The Company also made a restricted deposit of approximately $2.2 million (RMB 15 million) to secure these loans.
The deposit will be refunded when the loan is repaid upon maturity. As of December 31, 2016, the Company received an aggregate
of approximately $216 million (RMB 1.5 billion) from the loan. The Company paid approximately $2.6 million (RMB 18.2 million) as
loan origination fee for obtaining the loan. The loan origination fee was recorded as deferred financing cost against the loan
balance. For the year ended December 31, 2016, approximately $0.3 million (RMB 1.8 million) deferred financing cost was amortized.
As of December 31, 2016, the deferred financing cost related to obtaining this loan was approximately $2.4 million (RMB 16.4 million).
(m) Loans payable to China Aviation Capital
On September 7, 2016, the Company entered into
a trust loan agreement with China Aviation Capital Investment Management (Shenzhen) ("China Aviation Capital") to borrow
a maximum of approximately $86.4 million (RMB 600 million) as working capital loan. The first instalment of the loan is approximately
$41.8 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 are calculated based on a fixed annual interest rate of 7.5% and an
one time consulting fee of 3% based on the principle amount received as loan origination fee. The Company is required to pledge
1,473 kilograms of Au9999 gold with carrying value of approximately $49.3 million (RMB 342.5 million) as collateral to secure this
loan. The loan is guaranteed by the CEO and Chairman of the Company. As of December 31, 2016, the Company received an aggregate
of approximately $41.8 million (approximately RMB 290 million) from the loan. The Company paid approximately $1.3 million (RMB
8.7 million) as loan origination fee for obtaining the loan. The loan origination fee was recorded as deferred financing cost against
the loan balance. For the year ended December 31, 2016, approximately $0.2 million (RMB 1.4 million) deferred financing cost was
amortized. As of December 31, 2016, the deferred financing cost related to obtaining this loan was approximately $1.1 million (RMB
7.3 million).
KINGOLD JEWELRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 – LOANS (continued)
(n) Loans payable to China Construction
Investment Trust
On August 29, 2016, the Company entered into
a trust loan agreement with China Construction Investment Trust to borrow a maximum of approximately $43.2 million (RMB 300 million)
as working capital loan for the purposed 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 are calculated based on a fixed annual interest
rate. The interest payment is divided into two parts: (1) 1% of the principle amount received need to be paid before December 25,
2016 as loan origination fee; (2) the rest of 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 $48.4 million
(RMB 336.4 million) as collateral to secure this loan. The loan is guaranteed by the CEO and Chairman of the Company. As of December
31, 2016, full amount of the loan was received by the Company. The Company paid approximately $0.4 million (RMB 3 million) as loan
origination fee for obtaining the loan. The loan origination fee was recorded as deferred financing cost against the loan balance.
For the year ended December 31, 2016, approximately $0.1 million (RMB 0.4 million) deferred financing cost was amortized. As of
December 31, 2016, the deferred financing cost related to obtaining this loan was approximately $0.4 million (RMB 2.6 million).
(o) Loans payable to Zheshang Jinhui Trust
On November 7, 2016, the Company entered into
a trust loan agreement with Zheshang Jinhui Trust to borrow a maximum of approximately $79.2 million (RMB 550 million) for purchasing
gold with a period of 24 months from principle receiving date November 15, 2016 to November 15, 2018. For the loan obtained the
Company is required to make interest payments are calculated based on a fixed annual interest rate of 7.8% based on the principal
amount received. The Company is required to pledge 2,708 kilograms of Au9999 gold with carrying value of approximately $90.7 million
(RMB 629.6 million) as collateral to secure this loan. The loan is guaranteed by the CEO and Chairman of the Company. The Company
also made a restricted deposit of approximately $0.8 million (RMB 5.5 million) to secure these loans. The deposit will be refunded
when the loan is repaid upon maturity.
(p) Loans payable to Hubei Assets Management
On September 30, 2016, the Company entered
into an Entrust Loan Agreement with the Hubei Asset Management Co., Ltd. to borrow from Industrial and Commercial Bank of China
Wuhan Jiang'an Branch of a maximum of approximately $43.2 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 $50.1 million (RMB
348.1 million) as collateral. The loan is guaranteed by the CEO and Chairman of the Company. The full amount of this entrust loan
was received by the Company on October 28, 2016.
(q) Loans payable to Zhongjiang International
Trust
On December 23, 2016, the Company entered into
a trust loan agreement with Zhongjiang International Trust to borrow a maximum of approximately $57.6 million (RMB 400 million)
for purchasing gold with a period of 24 months from December 23, 2016 to December 22, 2018. For the loan obtained the Company is
required to make interest payments are calculated based on a fixed annual interest rate of 8.75% on the principle amount received.
The Company is required to pledge 2,104 kilograms of Au9999 gold with carrying value of approximately $70.4 million (RMB 489 million)
as collateral to secure this loan. The loan is guaranteed by the CEO and Chairman of the Company.
Total Interest for the above loans in the amount
of $52.3 million and $3.8 million for the years ended December 31, 2016 and 2015, respectively. The weighted average interest rate
for the years ended December 31, 2016 and 2015 was 11.2% and 11.5%, respectively.
KINGOLD JEWELRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 – INVESTMENTS IN GOLD
During the year ended December 31, 2016, the
Company leased a total of 16,000,000 grams of Au9999 gold in aggregate with carrying value of approximately $538.6 million (RMB
3,740 million) from Wuhan Shuntianyi Investment Management Ltd. (“Shuntianyi”), a related party (See Note 8). The leased
gold was fully returned by the Company to Shuntianyi as of December 31, 2016.
As of December 31, 2016, the Company allocated
total of 54,677,490 grams of Au9999 gold in its inventories with carrying value of approximately $1,830.6 million as investments
in gold for obtaining various loans from banks and financial institutions. (See Note 6)
As of December 31, 2016, total investments
in gold pledged had a fair market value of $1,775.8 million, which resulted in unrealized loss of $54.8 million. The Company recorded
this unrealized loss as other comprehensive loss.
As of December 31, 2016, a total of 45,998,000
grams of Au9999 gold with fair market value of approximately $1,494 million was pledged for long term bank loans, and therefore
classified as non-current investment in gold. The remaining investments in gold of total 8,679,490 grams of Au9999 gold with fair
market value of approximately $281.8 million was classified as current assets on the Company’s consolidated balance sheet
as of December 31, 2016.
NOTE 8 – GOLD LEASE PAYABLE –
RELATED PARTY
During the year ended December 31, 2016, the
Company entered into multiple gold lease agreements with Wuhan Shuntianyi Investment Management Ltd. (“Shuntianyi”),
a related party which is controlled by the CEO and the Chairman of the Company, to lease a total of 16,000,000 grams of Au9999
gold in aggregate with carrying value of approximately $538.6 million (RMB 3,740 million). The Company recorded these transactions
as gold lease payable – related party. The leased gold was fully returned by the Company to Shuntianyi as of December 31,
2016.
NOTE 9 – GOLD LEASE PAYABLE –
BANK
During the year ended December 31, 2016, the
Company allocated significant amount of gold in its inventories as investments in gold and pledged as collateral to secure loans
from banks and financial institutions. In order to meet the Company’s production needs, the Company also utilized the leased
gold of 185,000 grams of Au9999 gold in aggregate with carrying value of approximately $7.2 million (RMB 49.8 million) from Shanghai
Pudong Development Bank (“SPD Bank”), and recorded this transaction as gold lease payable – bank. The leased
gold shall be returned to the SPD Bank upon lease maturity in June 2017. (See Note 21)
Note 10 - THIRD PARTIES LOANS
On April 12, 2016, the Company entered into
a loan agreement with Yantai Runtie Trade Ltd. for a total loan of approximately $28.8 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 a deposit of totaling $28.8 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
a loan agreement with Yantai Runtie Trade Ltd. for a total loan of approximately $2.9 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 a restricted deposit of totaling $2.9 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 $4.3 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 a restricted deposit of totaling $4.3 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.
KINGOLD JEWELRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 – RELATED PARTIES LOANS
Between April 12, 2016 and May 22, 2016, the
Company entered into multiple loan agreements with Wuhan Kangbo Biotech Limited (“Kangbo”), a related party which is
controlled by the CEO and Chairman of the Company, for a total loan of approximately $144 million (RMB 1,000 million). The loans
have one year terms and are interest free. In order for Kangbo to obtain the loans from the bank, Wuhan Kingold signed a guarantee
agreement with Evergrowing Bank- Yantai Huangshan Road Branch to pledge a restricted deposit of totaling $144 million (RMB 1,000
million) to guarantee the loans. The loans were fully repaid by the Company on December 12, 2016 and the deposit was released from
the bank.
Between November 23, 2016 and November 29,
2016, the Company entered into multiple loan agreements with Wuhan Kingold Industrial Group, a related party which is controlled
by the CEO and Chairman of the Company, as working capital loans in order to subsequently purchase raw material of gold. The aggregated
borrowing amount as of December 31, 2016 is approximately $460.8 million (RMB 3,200 million) with a term of 5 years and free of
interest. The Company classified these loans as non-current liabilities.
NOTE 12 – OTHER RELATED PARTY TRANSACTIONS
For the year ended December 31, 2016 and 2015,
the Company received working capital proceeds from 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 no interest.
On December 14, 2016, Wuhan Kingold transferred
its 55% ownership interest in Kingold Internet to Wuhan Kingold Industrial Group Co., Ltd., a related party which is controlled
by the CEO and Chairman of the Company, for a consideration of $79,196 (RMB 550,000). After the transfer, Kingold Internet and
Yuhuang were no longer the subsidiaries of Wuhan Kingold.
NOTE 13 - 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 $141,850
was fully amortized in the year ended December 31, 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 year ended December 31, 2016, approximately $1 million interest expenses were capitalized into construction in
progress of Jewelry Park project,
Pursuant to the Private Placement Agreement
dated on August 12, 2014, the RMB 750 million debt financing instruments can be issued within two years. The Company originally
planned to request the second phase of issuance of approximately $54 million (RMB 350 million) before the first phase debt expiration
date in March 2016 and the proceeds will be used to pay back the first phase debt. However, the Company subsequently obtained alternative
financing through several bank borrowings, management does not expect the second phase of debt issuance will be materialized in
the near future.
NOTE 14 - 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. During the year ended December 31, 2016, the Company transferred $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.
In connection with the Transfer Transaction, the Company also received the advance payments from Wuhan Lianfuda approximately $171.6
million (RMB 1,140 million) during the year ended December 31, 2016, which was subsequently settled during Transfer Transaction
(see Note 5).
KINGOLD JEWELRY, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 15 - 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 for 2016 and 2015. The Company has loss carry forwards of approximately
$16,760,000 for U.S. income tax purposes 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 December 31, 2016 and 2015 was approximately $5,699,000 and $5,335,000, respectively. The
net increase in the valuation allowance for the years ended December 31, 2016 and 2015 was approximately $364,000 and $623,000,
respectively.
Dragon Lead is incorporated in the BVI, and
under current laws of the BVI, income earned is not subject to income tax.
Wuhan Vogue-Show and Wuhan Kingold 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 years ended December 31, 2016 and 2015. The Company recorded $Nil deferred income tax assets
as of December 31, 2016 and 2015.
The Company intends to reinvest its foreign
profits indefinitely in order to avoid a tax liability upon repatriation to the United States. Since the U.S. holding company does
not have any earnings and profits, distributions made in 2014 were deemed as a return of capital for U.S. income tax purpose.
KINGOLD JEWELRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - INCOME TAXES (continued)
Income (loss) from continuing operations before
income taxes was allocated between the U.S. and foreign components for the year ended December 31, 2016 and 2015:
|
|
For the years ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
(1,010,848
|
)
|
|
$
|
(1,833,064
|
)
|
Foreign
|
|
|
126,541,875
|
|
|
|
29,733,565
|
|
|
|
$
|
125,531,027
|
|
|
$
|
27,900,501
|
|
Significant components of the income tax provision were as follows
for the years ended December 31, 2016 and 2015:
|
|
For the years ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Current tax provision
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
Foreign
|
|
|
33,055,811
|
|
|
|
4,488,815
|
|
|
|
|
33,055,811
|
|
|
|
4,488,815
|
|
|
|
|
|
|
|
|
|
|
Deferred tax provision (benefit)
|
|
|
|
|
|
|
|
|
Federal
|
|
|
-
|
|
|
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
Foreign
|
|
|
(428,101
|
)
|
|
|
1,849,910
|
|
|
|
|
(428,101
|
)
|
|
|
1,849,910
|
|
Income tax provision
|
|
$
|
32,627,710
|
|
|
$
|
6,338,725
|
|
The components of deferred tax assets and deferred tax liability
as of December 31, 2016 and 2015 consist of the following:
|
|
As of December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Deferred tax assets from net operating losses from parent company
|
|
$
|
5,698,869
|
|
|
$
|
5,335,180
|
|
Valuation allowance
|
|
|
(5,698,869
|
)
|
|
|
(5,335,180
|
)
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liability:
|
|
|
|
|
|
|
|
|
Deferred tax liability from capitalized interest
|
|
$
|
-
|
|
|
$
|
1,774,993
|
|
Deferred financing costs on the loans
|
|
|
1,971,192
|
|
|
$
|
-
|
|
Other temporary differences
|
|
|
(721,570
|
)
|
|
|
-
|
|
Deferred income tax liability
|
|
$
|
1,249,622
|
|
|
$
|
1,774,993
|
|
The following table reconciles the U.S. statutory rates to the Company’s
effective rate for the years ended December 31, 2016 and 2015:
|
|
For the years ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
US statutory rate
|
|
|
34
|
%
|
|
|
34
|
%
|
Foreign income and loss not recognized in U.S.A.
|
|
|
(34
|
)%
|
|
|
(34
|
)%
|
China income tax
|
|
|
25
|
%
|
|
|
25
|
%
|
Miscellanies and non-deductible expense
|
|
|
1
|
%
|
|
|
(2.3
|
)%
|
Effective tax rate
|
|
|
26
|
%
|
|
|
22.7
|
%
|
KINGOLD JEWELRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - EARNINGS PER SHARE
For the year ended December 31, 2016, the effect
of potential shares of common stock was dilutive since the exercise prices for the warrant and options were lower than the average
market price for the year ended December 31, 2016. As a result, total of 345,642 unexercised warrants and options are dilutive,
and were included in the computation of diluted EPS.
For the year ended December 31, 2015, 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
year ended December 31, 2015. As a result, warrants to purchase 294,000 shares of common stock at weighted average exercise price
of $3.61 per shares and options to purchase 3,220,000 shares of common stock at weighted average exercise price of $1.90 per share
were not included in the computation of diluted EPS.
The following table presents a reconciliation
of basic and diluted net income per share:
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. These options have fully vested by December 31, 2015. In accordance with the vesting
periods, $Nil and $110,439 were recorded as part of operating expense-stock compensation for the years ended December 31, 2016
and 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 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. These options have fully vested by December 31, 2015. In accordance
with the vesting periods, $Nil and $379,109 were recorded as part of operating expense-stock compensation for the 1,300,000 options
above for the years ended December 31, 2016 and 2015, respectively.
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 10 years. The fair value of the options
was $92,458. In accordance with the vesting periods, $23,114 and $23,114 were recorded as part of operating expense-stock compensation
for the 90,000 options above for the years ended December 31, 2016 and 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 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 10 years. The aggregate fair value of the options was $85,822.
In accordance with the vesting periods, $21,458 and $17,880 were recorded as part of operating expense-stock compensation for the
90,000 options above for the years ended December 31, 2016 and 2015, respectively.
The Company recorded $44,572 and $530,542 stock-based
compensation expense for the years ended December 31, 2016 and 2015, respectively. As of December 31, 2016 the Company had 3,152,500
outstanding vested stock options with a weighted average remaining term over 4.70 years and 67,500 unvested stock options with
a weighted average remaining term over 7.63 years. Unrecorded stock-based compensation expense was $58,039 as of December 31, 2016.
The following table summarized the Company’s stock option activity:
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. As of December
31, 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 December 31, 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.
For the year ended December 31, 2016, the Company
included $129,295 warrants cost in the general administrative expenses.
For the year ended December 31, 2015, Non-controlling
interest represents the minority stockholders’ 45% proportionate share of the results of the newly established subsidiary
Kingold Internet and Yuhuang.
On December 14, 2016, Wuhan Kingold transferred
its 55% ownership interest in Kingold Internet to Wuhan Kingold Industrial Group Co., Ltd., a related party, for a consideration
of $79,196 (RMB 550,000). After the transfer, Kingold Internet and Yuhuang were no longer the subsidiaries of Wuhan Kingold.
A reconciliation of non-controlling interest
as of December 31, 2016 and 2015 are as follows:
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 $81,354,642 and $29,544,475 as of December 31, 2016 and
2015, respectively. The cash balance held in the BVI bank accounts was $7,083 and $13,277 as of December 31, 2016 and December
31, 2015, respectively. As of December 31, 2016, the Company held $281,018 cash balances within the United States which is $31,018
in excess of FDIC insurance limits of $250,000. As of December 31, 2015, the Company held $144,465 of cash balances within the
United States.
For the years ended December 31, 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 years ended December 31, 2016 and
2015. The Company purchased gold directly, and solely, from the Shanghai Gold Exchange, the largest gold trading platform in the
PRC.
During the year ended December 31, 2016
and 2015, approximately 21.5% and 18.8% of the Company’s net sales were generated from the Company’s five largest customers,
respectively. No customer accounted for more than 10% of annual sales for the years ended December 31, 2016 or 2015.
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”) and CITIC Bank at the end of the respective lease agreements. Under these gold lease arrangements,
each of CCB, SPD Bank and CITIC Bank 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.
During 2015, the Company renewed gold lease
agreements with CCB and leased an aggregate of 1,515 kilograms of gold, which amounted to approximately $56.2 million (RMB 365
million). The leases have initial terms of one year and provide an interest rate of 6% per annum. The leased gold was returned
to the Bank upon lease maturity in 2016.
During the year ended December 31, 2016,
the Company entered into gold lease agreements with China Construction Bank and leased an aggregated of 975 kilograms of gold,
which amounted to approximately $33.8 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.
During the year ended December 31, 2016,
the Company returned 2,490 kilograms of gold, which amounted to approximately $86.4 million (RMB 600.3 million) back to China Construction
Bank upon lease maturity.
As of December 31, 2016 and 2015, Nil and
1,515 kilograms of leased gold were outstanding and not yet returned to the Bank, respectively.
As of December 31, 2016, the Company pledged
restricted cash of approximately $14.4 million (RMB 100 million) as collateral to safeguard the gold lease from China Construction
Bank, which was returned to the Company in early 2017 as the leased gold was returned at the end of December 2016.
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 46.98 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.
During the year ended December 31, 2016,
the Company entered into gold lease agreements with Shanghai Pudong Development Bank and leased an aggregated of 345 kilograms
of gold, which amounted to approximately $13.4 million (RMB 93.3 million). The leases have initial terms of six months to one year
and provide an interest rate from 3.0% to 3.3% per annum. During the year ended December 31, 2016, the Company returned 1,077 kilograms
of gold, which amounted to approximately $37.2 million (RMB 258.6 million) back to Shanghai Pudong Development Bank upon lease
maturity. The remaining leased gold shall be returned to the Bank upon lease maturity in June 2017.
As of December 31, 2016 and 2015, about
185 kilograms and 917 kilograms of leased gold were outstanding and not yet returned to Shanghai Pudong Development Bank, respectively,
which amounted to approximately $7.2 million (RMB 49.8 million), and $33.1 million (RMB 215.2 million), respectively.
As of December 31, 2016, the Company pledged
restricted cash of approximately $7.2 million (RMB 50 million) as collateral to safeguard the gold lease from Shanghai Pudong Development
Bank.
During 2015, Wuhan Kingold entered into
a gold lease agreement with CITIC Bank to lease an additional 850 kilograms of gold (valued at approximately $31 million or RMB
201 million). The lease has an initial term of one to six months and provides an interest rate of 6% per annum. The Company is
required to deposit cash into an account at CITIC Bank equal to approximately $1.2 million (RMB 8.0 million). During 2015, the
Company returned 1,150 kilograms of leased gold upon maturity, which amounted to approximately $44.3 million (RMB 287.4 million).
The remaining amount was returned to the Bank upon lease maturity in 2016. The Company is required to deposit cash into an account
at the Bank equal to approximately $3 million (RMB 19.5 million).
As of December 31, 2016 and 2015, Nil and
350 kilograms of leased gold were outstanding and not yet returned to CITIC Bank, which amounted to approximately $Nil and $12.4
million, respectively.
During the year ended December 31, 2016,
the Company entered into additional gold lease agreements with Industrial & Commercial Bank of China and leased an aggregated
amount of 527 kilograms of gold, which amounted to approximately $20.1 million (RMB 139.7 million). The leases have initial terms
of half year and provide an interest rate of 2.75% per annum. As of December 31, 2016, 527 kilograms of leased gold were all returned
to Industrial & Commercial Bank of China.
As of December 31, 2016, no restricted
cash was pledged by the Company as collateral to safeguard the gold lease from Industrial & Commercial Bank of China.
During the year ended December 31, 2016,
the Company entered into multiple gold lease agreements with Wuhan Shuntianyi Investment Management Ltd. (“Shuntianyi”),
a related party which is controlled by the CEO and the Chairman of the Company, to lease a total of 16,000,000 grams of Au9999
gold in aggregate with carrying value of approximately $538.6 million. The leased gold was fully returned by the Company to Shuntianyi
as of December 31, 2016.
As of December 31, 2016 and 2015, 185 kilograms
and 2,782 kilograms of leased gold were outstanding, at the approximated amounts of $7.2 million and $101.8 million, respectively.
Interest expense for the leased gold for the year ended December 31, 2016 and 2015 were approximately $3.9 million and $7.0 million,
respectively, which was included in the cost of sales.
On April 12, 2016, the Company signed the
collateral agreements with Evergrowing Bank - Yantai Huangshan Road Branch to pledge restricted deposits of totaling $28.8 million
(RMB 200 million). The pledged deposits is to guarantee a bank acceptance note agreement signed between Yantai Runtie Trade Ltd.
and Evergrowing Bank - Yantai Huangshan Road Branch, which allows Yantai Runtie Trade Ltd. to access a loan of approximately $28.8
million (RMB 200 million) with a term of one year from April 12, 2016 to April 12, 2017, and bearing a fixed annual interest rate
of 2.01%. The deposits will be refunded to the Company when the loan is repaid upon maturity.
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 of approximately $0.4 million (RMB 2.3 million). For the year ended December 31, 2016, the Company
recorded $132,600 rent expense. As of December 31, 2016, the Company was obligated under non-cancellable operating leases for minimum
rentals as follows:
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 will 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 will bear interest at a rate of
6.0% per year payable annually. The Note will mature on the third anniversary of the issuance date of the Note, unless earlier
converted. The Note constitutes a general, senior, secured obligation of the Company. The Company granted 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, will 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.
Certain information and footnote disclosures
normally included in financial statements prepared in conformity with generally accepted accounting principles have been condensed
or omitted. The Company’s investment in subsidiaries is stated at cost plus equity in undistributed earnings of subsidiaries.
Schedule I of Article 5-04 of Regulation
S-X requires the condensed financial information of registrant shall be filed when the restricted net assets of consolidated subsidiaries
exceed 25 percent of consolidated net assets as of the end of the most recently completed fiscal year. For purposes of the above
test, restricted net assets of consolidated subsidiaries shall mean that amount of the registrant’s proportionate share of
net assets of consolidated subsidiaries (after intercompany eliminations) which as of the end of the most recent fiscal year may
not be transferred to the parent company by subsidiaries in the form of loans, advances or cash dividends without the consent of
a third party (i.e., lender, regulatory agency, foreign government, etc.).
The parent company financial statements
have been prepared in accordance with Rule 12-04, Schedule I of Regulation S- X as the restricted net assets of the subsidiaries
of Kingold Jewelry, Inc. exceed 25% of the consolidated net assets of Kingold Jewelry, Inc. The ability of our Chinese operating
affiliates to pay dividends may be restricted due to the foreign exchange control policies and availability of cash balances of
the Chinese operating subsidiaries. Because a significant portion of our operations and revenues are conducted and generated in
China, a significant portion of our revenues being earned and currency received are denominated in Renminbi (RMB). RMB is subject
to the exchange control regulation in China, and, as a result, we may be unable to distribute any dividends outside of China due
to PRC exchange control regulations that restrict our ability to convert RMB into US Dollars.
The Company did not have any significant
commitments or long-term obligations as at December 31, 2016 and 2015.