NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
NOTE 1 – BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated
financial statements of Kingold Jewelry, Inc. (“Kingold” or the “Company”) have been prepared in accordance
with generally accepted accounting principles (“U.S. GAAP”) for interim financial information pursuant to the rules
and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the
information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary to make the financial statements not misleading have been included.
Operating results for the interim period ended September 30, 2017 are not necessarily indicative of the results that may be expected
for the fiscal year ending December 31, 2017. The information included in this Form 10-Q should be read in conjunction with Management’s
Discussion and Analysis, and the financial statements and notes thereto included in the Company’s Form 10-K for the fiscal
year ended December 31, 2016, filed with the SEC on April 17, 2017.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
Wuhan Kingold Jewelry Co., Inc. (“Wuhan
Kingold”) should be considered as a 100% contractually controlled affiliate of Kingold. Kingold is empowered, through its
wholly owned subsidiaries Dragon Lead Group Limited (“Dragon Lead”) and Wuhan Vogue-Show Jewelry Co., Inc. (“Wuhan
Vogue-Show”), with the ability to control and substantially influence Wuhan Kingold’s daily operations and financial
affairs, appoint its senior executives and approve all matters requiring shareholders’ approval. Kingold is also obligated
to absorb a majority of expected losses of Wuhan Kingold, which enables Kingold to receive a majority of expected residual returns
from Wuhan Kingold, and because Kingold has the power to direct the activities of Wuhan Kingold that most significantly impact
Wuhan Kingold’s economic performance, Kingold, through its wholly-owned subsidiaries, accounts for Wuhan Kingold as its Variable
Interest Entity. Accordingly, Kingold consolidates Wuhan Kingold’s operating results, assets and liabilities. The Company
makes an ongoing assessment to determine whether Wuhan Kingold is still a Variable Interest Entity.
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.
The accompanying unaudited condensed consolidated
financial statements include the financial statements of Kingold, Dragon Lead, Wuhan Vogue-Show and Wuhan Kingold. All significant
inter-company balances and transactions have been eliminated in consolidation.
Kingold, Dragon Lead, and Wuhan Vogue-Show,
are hereinafter collectively referred to as the “Company.”
Use of Estimates
The preparation of the unaudited condensed
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, deferred income tax, deferred debt
issuances costs, investment in gold and share based compensation. Actual results could differ from those estimates.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Restricted Cash
As of September 30,
2017 and December 31, 2016, the Company had restricted cash of $10,924,281 and $60,344,430, respectively. The total of $10.9 million
restricted cash balance as of September 30, 2017 was related to the various loans with banks and financial institutions –
see Note 5 - Loans.
Accounts Receivable
The Company generally receives cash payment
upon delivery of a product, but may extend unsecured credit to its customers in the ordinary course of business. The Company mitigates
the associated risks by performing credit checks and actively pursuing past due accounts. An allowance for doubtful accounts is
established and recorded based on management’s assessment of the credit history of the customers and current relationships
with them. At September 30, 2017 and December 31, 2016, there was no allowance recorded as the Company considers all of the accounts
receivable fully collectible.
Inventories
Inventories are stated at the
lower of cost or market value, and cost is calculated on the weighted average basis. As of September 30, 2017 and December
31, 2016, there was no lower of cost or net realizable value adjustment, respectively. The cost of inventories comprises all
costs of purchases, costs of fixed and variable production overhead and other costs incurred in bringing the inventories to
their present condition.
Property and Equipment
Property and equipment are stated at cost,
less accumulated depreciation. Expenditures for additions, major renewals and betterments are capitalized, and expenditures for
maintenance and repairs are charged to expense as incurred.
Depreciation is provided on a straight-line
basis, less estimated residual value, over an asset’s estimated useful life. The estimated useful lives used in connection
with the preparation of the financial statements are as follows:
|
|
Estimated
Useful Life
|
Buildings
|
|
30 years
|
Plant and machinery
|
|
15 years
|
Motor vehicles
|
|
10 years
|
Office furniture and electronic equipment
|
|
5 – 10 years
|
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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Long-Lived Assets
Certain assets such as property, plant
and equipment, 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 triggered a review of impairment of long-lived assets as of
September 30, 2017 and December 31, 2016.
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 accounts receivable,
other current assets and prepaid expenses, short term loans, other payables and accrued expenses 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 the pledged gold as investments in gold, and carried at fair
market value, with the unrealized gains and losses, included in the determination of comprehensive income (loss) and reported in
equity. The fair market value of the investments in gold is determined by quoted market prices at Shanghai Gold Exchange.
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: (i) there are
no uncertainties regarding customer acceptance; (ii) persuasive evidence of an arrangement exists; (iii) the sales price
is fixed and determinable; and (iv) collectability is reasonably assured.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
Revenue Recognition (Continued)
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 reasonably assured.
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 September 30, 2017 and December 31, 2016.
To the extent applicable, the Company records
interest and penalties as a general and administrative expense. The statute of limitations for the Company’s U.S. federal
income tax returns and certain state income tax returns remains open for tax years 2010 and after. As of September 30, 2017, 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.
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 equity as “Accumulated Other Comprehensive Income (deficit)”.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Foreign Currency Translation (Continued)
The value of RMB against US$ and other
currencies may fluctuate and is affected by, among other things, changes in the PRC’s political and economic conditions.
Any significant revaluation of RMB may materially affect the Company’s financial condition in terms of US$ reporting. The
following table outlines the currency exchange rates that were used in creating the consolidated financial statements in this report:
|
|
September 30, 2017
|
|
|
September 30, 2016
|
|
|
December 31, 2016
|
|
Balance sheet items, except for share capital, additional paid in capital and retained earnings, as of the period ended
|
|
|
US$ 1=RMB 6.6549
|
|
|
|
US$ 1=RMB 6.6702
|
|
|
|
US$ 1=RMB 6.9448
|
|
Amounts included in the statements of operations and cash flows for the period
|
|
|
US$ 1=RMB 6.8065
|
|
|
|
US$ 1=RMB 6.5802
|
|
|
|
US$ 1=RMB 6.6441
|
|
Comprehensive Income (Loss)
Comprehensive income (loss) consists of
two components, net income (loss) 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 (loss) in the condensed consolidated
statements of operations and comprehensive income (loss).
Earnings (Losses) per Share (“EPS”)
Basic EPS is measured as net income (loss)
divided by the weighted average common shares outstanding for the period. Diluted EPS is similar to basic EPS but presents the
dilutive effect on a per share basis of potential common shares (i.e., options and warrants) as if they had been converted at the
beginning of the periods presented, or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e.,
those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS.
Share or Stock-Based compensation
The Company follows the provisions of ASC
718, “Compensation — Stock Compensation,” which establishes the accounting for employee stock-based awards. For
employee stock-based awards, share-based compensation cost is measured at the grant date based on the fair value of the award and
is recognized as expense with graded vesting on a straight-line basis over the requisite service period for the entire award. For
the non-employee stock-based awards, the fair value of the awards to non-employees are measured every reporting period based on
the value of the Company’s common stock.
Debts Issuance Costs
The Company follows the provision of 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 are presented in the balance sheet as a direct deduction from the
carrying amount of the debt liability, consistent with debt discounts. Amortization of debt issuance costs is calculated using
the effective interest method and is included as a component of interest expense.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
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
inventories may be affected by commodity prices. The Company records the value of its inventories 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 a significant
portion of its inventories as investment in gold and pledged as collateral to secure loans from banks and financial institutions,
so there is a risk that the Company will be 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.
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, this may not be indicative of future results.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards
Board (“FASB”) issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU
2014-09”). ASU 2014-09 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer
of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. Generally
Accepted Accounting Principles when it becomes effective and permits the use of either the retrospective or cumulative effect transition
method. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows
arising from customer contracts. In August 2015, the FASB issued ASU No. 2015-14, “Deferral of the Effective Date”
(“ASU 2015-14”), which defers the effective date for ASU 2014-09 by one year. For public entities, the guidance in
ASU 2014-09 will be effective for annual reporting periods beginning after December 15, 2017 (including interim reporting periods
within those periods), which means it will be effective for the Company’s fiscal year beginning October 1, 2018. In
March 2016, the FASB issued ASU No. 2016-08, “Principal versus Agent Considerations (Reporting Revenue versus Net)”
(“ASU 2016-08”), which clarifies the implementation guidance on principal versus agent considerations in the new revenue
recognition standard. In April 2016, the FASB issued ASU No. 2016-10, “Identifying Performance Obligations and Licensing”
(“ASU 2016-10”), which reduces the complexity when applying the guidance for identifying performance obligations and
improves the operability and understandability of the license implementation guidance. In May 2016, the FASB issued ASU No. 2016-12
“Narrow-Scope Improvements and Practical Expedients” (“ASU 2016-12”), which amends the guidance on transition,
collectability, noncash consideration and the presentation of sales and other similar taxes. In December 2016, the FASB further
issued ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers” (“ASU
2016-20”), which makes minor corrections or minor improvements to the Codification that are not expected to have a significant
effect on current accounting practice or create a significant administrative cost to most entities. The amendments are intended
to address implementation and provide additional practical expedients to reduce the cost and complexity of applying the new revenue
standard. These amendments have the same effective date as the new revenue standard. We are planning to adopt Topic 606 in the
first quarter of our fiscal 2019 using the retrospective transition method, and are continuing to evaluate the impact our pending
adoption of Topic 606 will have on our unaudited condensed consolidated financial statements. The Company’s current revenue
recognition policies are generally consistent with the new revenue recognition standards set forth in ASU 2014-09. Potential
adjustments to input measures are not expected to be pervasive to the majority of the Company’s contracts. While
no significant impact is expected upon adoption of the new guidance, the Company will not be able to make that determination
until the time of adoption based upon outstanding contracts at that time.
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 condensed consolidated financial statements.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Recent Accounting Pronouncements (Continued)
In February 2017, the FASB issued ASU No.
2017-05 (“ASU 2017-05”) to provide guidance for recognizing gains and losses from the transfer of nonfinancial assets
and in-substance nonfinancial assets in contracts with non-customers, unless other specific guidance applies. The standard requires
a company to derecognize nonfinancial assets once it transfers control of a distinct nonfinancial asset or distinct in substance
nonfinancial asset. Additionally, when a company transfers its controlling interest in a nonfinancial asset, but retains a noncontrolling
ownership interest, the company is required to measure any noncontrolling interest it receives or retains at fair value. The guidance
requires companies to recognize a full gain or loss on the transaction. As a result of the new guidance, the guidance specific
to real estate sales in ASC 360-20 will be eliminated. ASU 2017-05 is effective for annual periods beginning after December 15,
2017, including interim periods within that reporting period. The effective date of this guidance coincides with revenue recognition
guidance. The Company does not expect that the adoption of this guidance will have a material impact on its condensed consolidated
financial statements.
In May 2017, the Financial Accounting Standards
Board (the “FASB”) issued ASU No. 2017-09 (“ASU 2017-09”) to provide guidance to clarify when to account
for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification
accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability)
changes as a result of the changes in terms or conditions. ASU 2017-09 is effective for all entities for annual periods, and interim
periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted and application is prospective.
The Company does not expect that the adoption of this guidance will have a material impact on its condensed consolidated financial
statements.
In September 2017, the FASB has issued
ASU No. 2017-13, “Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840),
and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission
of Prior SEC Staff Announcements and Observer Comments.” The amendments in ASU No. 2017-13 amends the early adoption date
option for certain companies related to the adoption of ASU No. 2014-09 and ASU No. 2016-02. Entities may still adopt using the
public company adoption guidance in the related ASUs, as amended. The effective date is the same as the effective date and transition
requirements for the amendments for ASU 2014-09 and ASU 2016-02. The Company does not expect that the adoption of this guidance
will have a material impact on its condensed consolidated financial statements.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3 – INVENTORIES
Inventories as of September 30, 2017 and December 31, 2016 consisted
of the following:
|
|
As of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Raw materials (A)
|
|
$
|
124,204,579
|
|
|
$
|
7,167,391
|
|
Work-in-progress (B)
|
|
|
73,350,803
|
|
|
|
78,813,685
|
|
Finished goods (C)
|
|
|
41,507,677
|
|
|
|
33,454,519
|
|
Inventories allowance
|
|
|
-
|
|
|
|
-
|
|
Total inventory
|
|
$
|
239,063,059
|
|
|
$
|
119,435,595
|
|
|
(A)
|
Included 3,507,981 grams of Au9999 gold as of September
30, 2017 and 185,000 grams of Au9999 gold as of December 31, 2016.
|
|
(B)
|
Included 2,083,997 grams of Au9999 gold September 30, 2017
and 2,358,178 grams of Au9999 gold as of December 31, 2016.
|
|
(C)
|
Included 1,171,382 grams of Au9999 gold September 30, 2017
and 993,699 grams of Au9999 gold as of December 31, 2016.
|
For the three and nine months ended September
30, 2017 and 2016, the Company recorded $Nil lower cost or net realizable value adjustment, respectively.
NOTE 4 – PROPERTY AND EQUIPMENT, NET
The following is a summary of property and equipment as of September
30, 2017 and December 31, 2016:
|
|
As of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Buildings
|
|
$
|
2,326,914
|
|
|
$
|
2,208,918
|
|
Plant and machinery
|
|
|
18,188,700
|
|
|
|
17,401,084
|
|
Motor vehicles
|
|
|
248,555
|
|
|
|
97,549
|
|
Leasehold improvements
|
|
|
1,679,858
|
|
|
|
1,185,433
|
|
Office and electric equipment
|
|
|
1,439,255
|
|
|
|
687,901
|
|
Subtotal
|
|
|
23,883,282
|
|
|
|
21,580,885
|
|
Less: accumulated depreciation and amortization
|
|
|
(16,181,453
|
)
|
|
|
(14,356,187
|
)
|
Property and equipment, net
|
|
$
|
7,701,829
|
|
|
$
|
7,224,698
|
|
Depreciation and amortization expenses
for the three and nine months ended June 30, 2017 was $436,158 and $1,173,159, respectively. Depreciation and amortization expenses
for the three and nine months ended September 30, 2016 was $311,812 and $941,164, respectively.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 – LOANS
Short-term loans consist of the following:
|
|
As of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
(a)
|
Loan payable to Minsheng Trust
|
|
$
|
53,945,213
|
|
|
$
|
51,693,353
|
|
(b)
|
Loans payable to National Trust-gross amount
|
|
|
-
|
|
|
|
143,992,628
|
|
|
Loans payable to National Trust-deferred financing cost
|
|
|
-
|
|
|
|
(4,480,085
|
)
|
(c)
|
Loan payable to Aijian Trust
|
|
|
45,079,565
|
|
|
|
43,197,788
|
|
(d)
|
Loans payable to Evergrowing Bank - Qixia Branch
|
|
|
150,265,218
|
|
|
|
-
|
|
(e)
|
Loans payable to Evergrowing Bank - Yantai Huanshan Road Branch
|
|
|
149,814,422
|
|
|
|
287,986
|
|
(f)
|
Loans payable to Sichuan Trust-gross amount
|
|
|
75,132,609
|
|
|
|
-
|
|
|
Loans payable to Sichuan Trust-deferred financing cost
|
|
|
(442,099
|
)
|
|
|
-
|
|
(g)
|
Loans payable to China Aviation Capital-gross amount
|
|
|
43,576,913
|
|
|
|
-
|
|
|
Loans payable to China Aviation Capital-deferred financing cost
|
|
|
(612,465
|
)
|
|
|
-
|
|
(h)
|
Loans payable to Huarong Trust-gross amount
|
|
|
142,902,222
|
|
|
|
-
|
|
|
Loan payable to Huarong Trust-deferred financing cost
|
|
|
(1,841,278
|
)
|
|
|
-
|
|
|
Total short term loans
|
|
$
|
657,820,323
|
|
|
$
|
234,691,670
|
|
(a) Loan payable to Minsheng Trust
On October 14, 2016, the Company entered
into a Trust Loan Agreement with the Minsheng Trust to borrow a maximum of 70% of amount of pledged gold as a working capital loan.
The Company is subject to 7.6% fixed annual interest rate. The term of the loan is one year from receiving of the principal amount.
The Company is required to pledge 1,877.49 kilograms of Au9995 gold with carrying value of approximately $65.6 million (RMB 436.5
million) as collateral. The total amount received by the Company was approximately $53.9 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. The loan was subsequently repaid on October 20, 2017. The pledged gold and restricted deposit
were released and refunded upon the repayment.
(b) 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 $75.1 million (RMB 500 million) as working capital loan. During the nine months ended September
30, 2017, the Company fully repaid the loan. The pledged gold and restricted deposit were released and returned upon the repayment.
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 three months and nine months ended September 30, 2017, approximately $Nil and $1.9 million (RMB
12.6 million) deferred financing cost was amortized, respectively. For the year ended December 31, 2016, approximately $3.2 million
(RMB 22.1 million) deferred financing cost was amortized. As of September 30, 2017, the deferred financing cost was fully amortized.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 – LOANS (Continued)
(b) Loans payable to National Trust (Continued)
On July 11, 2016, the Company entered into
a Trust Loan Agreement with the National Trust Ltd. (“National Trust”) to borrow a maximum of approximately $75.1 million
(RMB 500 million) as a working capital loan. During the nine months ended September 30, 2017, the Company fully repaid the loan.
The pledged gold and restricted deposit were released and refunded upon the repayment.
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 three months and nine months ended September 30, 2017, approximately $0.2 million (RMB 1.3
million) and $2.5 million (RMB 17.2 million) deferred financing cost was amortized, respectively. As of September 30, 2017, the
deferred financing cost was fully amortized.
(c) 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 $45.1 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. 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
$53.9 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 $0.45 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.
(d) Loans payable to Evergrowing Bank –
Qixia Branch
In January 2016, Wuhan Kingold signed two
Loan Agreements of Circulating Funds with the Qixia Branch of Evergrowing Bank for loans of approximately $120 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
rates of 7.5% per year. The loans are secured by 5,000 kilograms of Au9999 gold in aggregate with carrying value of approximately
$174.7 million (RMB 1.2 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.
In February 2017, Wuhan Kingold further
entered into a loan agreement with the Qixia Branch of Evergrowing Bank in the amount of approximately $30 million (RMB 200 million).
The loan has one year term from February 24, 2017 to February 19, 2018, and bears fixed annual interest of 4.75%. The Company pledged
1,300 kilograms of Au9999 gold with carrying value of approximately $45.4 million (RMB 302.3 million) as collateral to secure this
loan. The loan is also guaranteed by the CEO and Chairman of the Company and the related party Wuhan Huayuan Technology Development
Co., Ltd.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 – LOANS (Continued)
(e) Loans payable to Evergrowing Bank -
Yantai Huangshan 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 $150
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 kilograms of Au9999 gold in aggregate with carrying value of approximately
$193.9 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 $150,265 (RMB 1 million) was repaid in August 2016, approximately $150,265 (RMB
1 million) was repaid on February 23, 2017 and another $150,265 (RMB 1 million) was repaid on August 23, 2017. 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.
(f) 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 $300.5
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 pledged 7,258 kilograms of Au9999 gold with carrying value
of approximately $253.6 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 $2.3 million (RMB 15 million) to secure these loans.
The deposit will be refunded when the loan is repaid upon maturity. As of September 30, 2017, the Company received an aggregate
of approximately $225.4 million (RMB 1.5 billion) from the loan.
The Company paid approximately $2.7 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 three months and nine months ended September 30, 2017, approximately $0.4 million (RMB 2.3 million)
and $1 million (RMB 6.8 million) deferred financing cost was amortized, respectively. For the year ended December 31, 2016, approximately
$0.3 million (RMB 1.8 million) deferred financing cost was amortized. As of September 30, 2017, the unamortized deferred financing
cost related to obtaining this loan was approximately $1.4 million (RMB 9.6 million). According to the maturity date of the loans,
approximately $75.1 million (RMB 500 million) of the loan with unamortized deferred financing cost of approximately $0.4 million
(RMB 2.9 million) was classified as short-term and the rest were classified as long-term.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 – LOANS (Continued)
(g) 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 $90.2 million (RMB 600 million) as working capital loan. The first installment of the loan is
approximately $43.6 million (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 a one-time consulting fee of 3% based on the principal amount received as loan origination fee. The Company pledged 1,473
kilograms of Au9999 gold with carrying value of approximately $51.5 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 September 30, 2017, the Company received an aggregate of approximately
$43.6 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 three months and nine months ended September 30, 2017, approximately $0.2 million (RMB 1.1 million)
and $0.5 million (RMB 3.3 million) deferred financing cost was amortized, respectively. For the year ended December 31, 2016, approximately
$0.2 million (RMB 1.4 million) deferred financing cost was amortized. As of September 30, 2017, the unamortized deferred financing
cost related to obtaining this loan was approximately $0.6 million (RMB 4.1 million). According to the maturity date of the loan,
the loan balance with unamortized deferred financing cost was classified as short-term.
(h) Loans payable to Huarong Trust
On July 28, 2017, the Company entered into
a loan agreement with Huarong International Trust Co. Ltd. (“Huarong Trust”) to borrow a maximum of approximately $150.3
million (RMB 1,000 million) as working capital loan. The loan has a 12-month term starting from the date of releasing the loan.
The Company is required to pay a special interest as loan origination fee equivalent to 1.5% of the principal amount received and
bears normal interest at a fixed rate of 7% per annum. The loan is also guaranteed by the CEO and Chairman of the Company. The
Company pledged 4,975 kilograms of Au9999 gold with carrying value of approximately $176.7 million (RMB 1,176 million) as collateral
to secure this loan. The loan is guaranteed by the CEO and Chairman of the Company. The Company was also required to pledge approximately
$1.4 million (RMB 9.5 million) restricted cash with Huarong Trust as collateral. As of September 30, 2017, the Company received
an aggregate of approximately $142.9 million (RMB 951 million) from the loan.
The Company paid approximately $2.1 million
(RMB 14.3 million) as loan origination fee for obtaining the loan. The loan origination fee was recorded as deferred financing
cost against the loan balance. For three months and nine months ended September 30, 2017, approximately $0.3 million (RMB 2 million)
deferred financing cost was amortized. As of September 30, 2017, the unamortized deferred financing cost related to obtaining this
loan was approximately $1.8 million (RMB 12.3 million).
Interest expense for the short-term loans
amounted to $9.7 million and $29.7 million for the three and nine months ended September 30, 2017, respectively. Interest expense
for short-term loans for the three and six months ended September 30, 2016 was $5.0 million and $11.7 million, respectively.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 – LOANS (Continued)
Long-term loans consist of the following:
|
|
As of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
(i)
|
Loans payable to Evergrowing Bank - Qixia Branch
|
|
$
|
-
|
|
|
$
|
115,194,102
|
|
(j)
|
Loans payable to Evergrowing Bank - Yantai Huanshan Road Branch
|
|
|
-
|
|
|
|
143,560,650
|
|
(k)
|
Loans payable to Anxin Trust
|
|
|
450,795,654
|
|
|
|
431,977,883
|
|
(l)
|
Loans payable to Minsheng Trust - gross amount
|
|
|
-
|
|
|
|
28,798,526
|
|
|
Loans payable to Minsheng Trust - deferred financing cost
|
|
|
-
|
|
|
|
(563,984
|
)
|
(m)
|
Loans payable to Chang’An Trust
|
|
|
-
|
|
|
|
28,654,533
|
|
(n)
|
Loans payable to Sichuan Trust - gross amount
|
|
|
150,265,218
|
|
|
|
215,988,941
|
|
|
Loans payable to Sichuan Trust - deferred financing cost
|
|
|
(1,000,015
|
)
|
|
|
(2,359,280
|
)
|
(o)
|
Loans payable to China Aviation Capital - gross amount
|
|
|
-
|
|
|
|
41,757,862
|
|
|
Loans payable to China Aviation Capital - deferred financing cost
|
|
|
-
|
|
|
|
(1,055,387
|
)
|
(p)
|
Loans payable to China Construction Investment Trust - gross amount
|
|
|
45,079,565
|
|
|
|
43,197,788
|
|
|
Loans payable to China Construction Investment Trust - deferred financing cost
|
|
|
(230,956
|
)
|
|
|
(371,697
|
)
|
(q)
|
Loans payable to Zheshang Jinhui Trust
|
|
|
82,645,870
|
|
|
|
79,195,945
|
|
(r)
|
Loans payable to Hubei Assets Management
|
|
|
-
|
|
|
|
43,197,788
|
|
(s)
|
Loans payable to Zhongjiang International Trust
|
|
|
60,106,087
|
|
|
|
57,597,051
|
|
|
Loans payable to Zhongjiang International Trust - deferred financing cost
|
|
|
(174,234
|
)
|
|
|
-
|
|
(t)
|
Loans payable to China Aviation Trust
|
|
|
46,582,218
|
|
|
|
-
|
|
|
Loans payable to China Aviation Trust - deferred financing cost
|
|
|
(922,711
|
)
|
|
|
-
|
|
(u)
|
Loans payable to National Trust
|
|
|
52,592,826
|
|
|
|
-
|
|
|
Loans payable to National Trust - deferred financing cost
|
|
|
(271,361
|
)
|
|
|
-
|
|
|
Total long term loans, net of deferred financing costs
|
|
$
|
885,468,163
|
|
|
$
|
1,224,770,721
|
|
(i) Loans payable to Evergrowing Bank –
Qixia Branch (see note (d) above)
(j) Loans payable to Evergrowing Bank -
Yantai Huanshan Road Branch (see note (e) above)
(k) 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 $450.8 million (RMB 3 billion) within 60 months. Each individual loan will bear a fixed annual interest of 14.8%
or 11% 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 $539.8 million (RMB
3.6 billion). The loan is also guaranteed by the CEO and Chairman of the Company. As of September 30, 2017, the Company received
full amount from the loan. The Company also made a restricted deposit of approximately $4.5 million (RMB 30 million) to secure
these loans. The deposit will be refunded when the loan is repaid upon maturity.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 – LOANS (Continued)
(l) 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 $30.1 million (RMB 200 million), with a maturity
date of June 22, 2018. During the nine months ended September 30, 2017, the Company fully repaid the loan. The pledged gold and
restricted deposit were released and refunded upon the repayment.
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 nine months ended September 30, 2017, approximately $0.6 million (RMB 3.9 million) deferred financing
cost was amortized, respectively. For the year ended December 31, 2016, approximately $0.2 million (RMB 1.4 million) deferred financing
cost was amortized. As of September 30, 2017, the deferred financing cost was fully amortized.
(m) 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 $45.1 million (RMB 300 million) for the purpose of working capital needs.
During the three months ended March 31, 2017, the Company fully repaid the loan. As of September 30, 2017, the restricted deposit
was refunded to the Company.
(n) Loans payable to Sichuan Trust
- (see note (f) above)
(o) Loans payable to China Aviation
Capital - (see note (g) above)
(p) 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 $45.1 million (RMB 300
million) as working capital loan for the purpose of purchasing of gold solely with a period of 24 months from October 9, 2016 to
October 9, 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 principal 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 pledged 1,447 kilograms of Au9999 gold with carrying value of approximately $50.6 million (RMB
336.5 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 $0.5 million (RMB 3 million) to secure the loan. The deposit will be refunded when the
loan is repaid upon maturity. As of September 30, 2017, the full amount of the loan was received by the Company.
The Company paid approximately $0.5 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 three months and nine months ended September 30, 2017, approximately $0.04 million (RMB 0.3 million)
and $0.2 million (RMB 1.0 million) deferred financing cost was amortized, respectively. For the year ended December 31, 2016, approximately
$0.1 million (RMB 0.4 million) deferred financing cost was amortized. As of September 30, 2017, the unamortized deferred financing
cost related to obtaining this loan was approximately $0.2 million (RMB 1.6 million).
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 – LOANS (Continued)
(q) 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 $82.6 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 pledged 2,708 kilograms of Au9999 gold with carrying value of approximately $94.6 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.
(r) 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 $45.1 million (RMB 300 million) as a working capital loan in the later period.
During the nine months ended September 30, 2017, the Company fully repaid the loan. The pledged gold was released to the Company
upon the repayment.
(s) 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 $60.1 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 principal amount received.
The Company pledged 2,104 kilograms of Au9999 gold with carrying value of approximately $73.5 million (RMB 489.2 million) as collateral
to secure this loan. The loan is guaranteed by the CEO and Chairman of the Company.
The Company paid approximately $0.28 million
(RMB 1.9 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 three months and nine months ended September 30, 2017, approximately $0.04 million (RMB 0.2 million)
and $0.1 million (RMB 0.7 million) deferred financing cost was amortized, respectively. As of September 30, 2017, the unamortized
deferred financing cost related to obtaining this loan was approximately $0.17 million (RMB 1.2 million).
(t) Loans payable to China Aviation
Trust
On January 25, 2017, Wuhan Kingold entered
into a trust loan agreement with China Aviation Trust Ltd. to borrow a maximum of approximately $46.6 million (RMB 310 million)
for working capital with a period of 24 months from the date of releasing the loan. For the loan obtained, the Company is required
to make interest payments that are calculated based on a fixed annual interest rate of 8% based on the principal amount received.
The Company pledged 1,647 kilograms of Au9999 gold with carrying value of approximately $56.9 million (RMB 378.4 million) as collateral
to secure this loan. The loan is guaranteed by the CEO and Chairman of the Company.
The Company paid approximately $1.4 million
(RMB 9.3 million) as loan origination fee for obtaining the loan. The loan origination fee was recorded as deferred financing cost
against the loan balance. For three months and nine months ended September 30, 2017, approximately $0.2 million (RMB 1.2 million)
and $0.5 million (RMB 3.2 million) deferred financing cost was amortized, respectively. As of September 30, 2017, the unamortized
deferred financing cost related to obtaining this loan was approximately $0.9 million (RMB 6.1 million).
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 – LOANS (Continued)
(u) Loans payable to National Trust
On February 28, 2017, Wuhan Kingold entered
into a trust loan agreement with National Trust Ltd. (“National Trust”) to borrow a maximum of approximately $52.6
million (RMB 350 million) for working capital with a period of 24 months from the date of releasing the loan. For the loan obtained,
the Company is required to make interest payments that are calculated based on a fixed annual interest rate of 8.617% based on
the principal amount received. The Company pledged 1,745 kilograms of Au9999 gold with carrying value of approximately $61.3 million
(RMB 408 million) as collateral to secure this loan. The loan is guaranteed by the CEO and Chairman of the Company.
The Company paid approximately $0.38 million
(RMB 2.6 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 three months and nine months ended September 30, 2017, approximately $0.05 million (RMB 0.3 million)
and $0.1 million (RMB 0.7 million) deferred financing cost was amortized, respectively. As of September 30, 2017, the unamortized
deferred financing cost related to obtaining this loan was approximately $0.27 million (RMB 1.8 million).
Total interest expense for the above long-term
loans was approximately $17.4 million and $66.2 million for the three and nine months ended September 30, 2017, respectively. Interest
expense for the long-term loans amounted to $21.5 million and $33.5 million for the three and nine months ended September 30, 2016,
respectively.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6 – INVESTMENTS IN GOLD
As of September 30, 2017, the Company allocated
a total of 54,076,490 grams of Au9999 gold in its inventories with carrying value of approximately $1,892 million (RMB 12,591 million)
as investments in gold for obtaining various loans from banks and financial institutions. (See Note 5)
During the nine months ended September
30, 2017, the Company leased a total of 10,225,000 grams of gold and pledged as guarantee for Wuhan Kangbo Biotech Limited (“Kangbo”),
a related party which is controlled by the CEO and Chairman of the Company, for obtaining total amount of RMB 2 billion loan from
Evergrowing Bank Huanshan Road Branch. (See Note 10)
During the nine months ended September
30, 2017, the Company leased a total of 523,000 grams of gold and pledged as collateral for obtaining total amount of RMB 100 million
loan from Wuhan Huayuan Technology Development Limited (“Huayuan”), a related party which is controlled by the CEO
and Chairman of the Company. (See Note 10)
During the three months ended March 31,
2017, the Company also leased a total of 4,000,000 grams of Au9999 gold in aggregate with carrying value of approximately $131.1
million (RMB 903.6 million) from Wuhan Shuntianyi Investment Management Ltd. (“Shuntianyi”), a related party (See Note
7). The leased gold was fully returned by the Company to Shuntianyi as of March 31, 2017.
As of September 30, 2017, total investments
in gold pledged had a fair market value of $2,295.6 million, which resulted in unrealized gain of $27.1 million for three months
ended September 30, 2017, and unrealized gain of $75.9 million for nine months ended September 30, 2017. The Company recorded this
unrealized gain (loss) as other comprehensive income, net of tax.
As of September 30, 2017, a total of 30,537,000
grams of Au9999 gold with fair market value of approximately $1,081.4 million was pledged for long-term bank loans, and therefore
classified as non-current investments in gold. The remaining investments in gold of 34,287,490 grams of Au9999 gold with fair market
value of approximately $1,214.2 million was classified as current assets as of September 30, 2017.
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 investments in gold. The remaining investments in gold of 8,679,490 grams of Au9999 gold with fair market
value of approximately $281.8 million was classified as current assets as of December 31, 2016.
NOTE 7 – GOLD LEASE PAYABLE –
RELATED PARTY
On January 3, 2017, the Company entered
into a gold lease agreement with Shuntianyi, a related party which was controlled by the CEO and the Chairman of the Company, to
lease a total of 4,000,000 grams of Au9999 gold in aggregate with carrying value of approximately $131.1 million. This lease was
from January 3, 2017 to February 28, 2017. The Company recorded this transaction as gold lease payable – related party. The
leased gold was fully returned by the Company to Shuntianyi as of March 31, 2017.
NOTE 8 – GOLD LEASE PAYABLE –
BANK
The Company allocated a 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 185,000 grams of leased 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 from SPD Bank was returned when the lease expired
in June 2017. (See Note 18).
NOTE 9 – THIRD PARTIES LOAN
On April 12, 2016, the Company entered
into a loan agreement with Yantai Runtie Trade Ltd. for a total loan of approximately $30.1 million (RMB 200 million). In April 2017,
the Company fully repaid the loan and the deposit was refunded upon the repayment.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 10 – RELATED PARTIES LOANS
(a) Loans payable to Wuhan Kangbo Biotech Limited
On January 13, 2017, Wuhan Kingold entered
into a loan agreement with Wuhan Kangbo Biotech Limited (“Kangbo”), a related party which is controlled by the CEO
and Chairman of the Company, for a loan of approximately $150.3 million (RMB 1,000 million). The loan has one-year term from January
12, 2017 to January 10, 2018, and bears fixed interest of 4.75%. In order for Kangbo to obtain the loan from the bank, Wuhan Kingold
signed the guarantee agreement with Evergrowing Bank- Yantai Huangshan Road Branch on January 11, 2017. As a guarantor of the bank
loan, Wuhan Kingold pledged 5,470 kilograms of gold in aggregate with carrying value of approximately $188.8 million (RMB 1.3 billion)
as collateral.
On February 20, 2017, Wuhan Kingold entered
into a second loan agreement with Kangbo for a loan of approximately $150.3 million (RMB 1,000 million). The loan has one-year
term from February 20, 2017 to February 20, 2018, and bears fixed interest of 4.75%. In order for Kangbo to obtain the loan from
the bank, Wuhan Kingold signed the guarantee agreement with Evergrowing Bank - Yantai Huangshan Road Branch on February 16, 2017.
As a guarantor of the bank loan, Wuhan Kingold pledged 4,755 kilograms of gold in aggregate with carrying value of approximately
$169.1 million (RMB 1.1 billion) as collateral.
As of September 30, 2017, the aggregated
borrowing amount from Kangbo was $300.5 million (RMB 2,000 million). The Company classified these loans as current liabilities.
Total interest expense
for above related party loans was approximately $3.6 million and $9.2 million for the three and nine months ended September 30,
2017, respectively.
(b) Loans payable to Wuhan Kingold Industrial
Group
Between November 23, 2016 and November
29, 2016, the Company entered into multiple loan agreements with Wuhan Kingold Industrial Group, a related party that is controlled
by the CEO and Chairman of the Company, as working capital loans in order to subsequently purchase raw material of gold. The aggregate
borrowing amount as of December 31, 2016 was approximately $460.8 million (RMB 3,200 million) with a term of 5 years and free of
interest.
On February 22, 2017, the Company signed
a non-interest bearing credit line agreement with Wuhan Kingold Industrial Group for additional loan of $120.2 million (RMB 800
million) with a 5 year maturity from February 22, 2017 to February 21, 2022.
In April 2017, the Company signed three
additional non-interest bearing credit line agreements with Wuhan Kingold Industrial Group for additional loans totaling $202.9
million (RMB 1.35 billion) with 5 year maturity from April 2017 to April 2022.
During the three months ended March 31,
2017, the Company repaid loans totaling $387.7 million (RMB 2,580 million) and obtained loans totaling $495.9 million (RMB 3,300
million). During the three months ended June 30, 2017, the Company repaid loans totaling $42.1 million (RMB 280 million) and obtained
loans totaling $202.9 million (RMB 1,350 million). During the three months ended September 30, 2017, the Company repaid loans totaling
$193.8 million (RMB 1,290 million) and obtained loans totaling $75.1 million (RMB 500 million).
As of September 30, 2017, the aggregate
borrowing amount from Wuhan Kingold Industrial Group was $631.1 million (RMB 4,200 million). The Company classified these loans
as long term liabilities.
(c) Loans payable to Wuhan Huayuan Technology
Development Limited
On June 8, 2017, Wuhan Kingold signed a
loan agreement with Wuhan Huayuan Technology Development Limited (“Wuhan Huayuan”), a related party which is controlled
by the CEO and Chairman of the Company, for a loan of $15 million (RMB 100 million). The purpose for the loans is for working capital
and purchasing gold. The loan has four years term from June 8, 2017 to June 8, 2021, and bears fixed interest of 7%. The Company
also pledged 523 kilograms of Au9999 gold with carrying value of approximately $18.7 million (RMB 124.4 million) as collateral
to secure this loan. Interest expense of $263,306 and $311,385 were recorded for this loan for the three and nine months ended
September 30, 2017, respectively.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 11 – OTHER RELATED PARTY
TRANSACTIONS
For the nine months ended September 30,
2017 and for the year ended December 31, 2016, the Company received working capital from the CEO and Chairman of the Company, to
pay certain expenses to various service providers on behalf of the Company. Such proceeds are unsecured and payable on demand with
no interest. As of September 30, 2017 and December 31, 2016, the amount due to this related party was $2,114,933 and $7,223,321,
respectively.
On June 27, 2016, Wuhan Kingold signed
certain 5 years lease agreements with Wuhan Huayuan, a related party which is controlled by the CEO and Chairman of the Company,
to rent office and store space at the Jewelry Park, commencing in July 2016 and October 2016, respectively, with aggregate annual
rent of approximately $0.3 million (RMB 2.3 million). On July 1, 2017, Wuhan Kingold signed another 5 years lease agreement with
Wuhan Huayuan to rent additional office space at the Jewelry Park commencing in July 2017 with aggregate annual rent of approximately
$84,625 (RMB 576,000). For the three and nine months ended September 30, 2017, the Company recorded $108,567 and $278,251 rent
expense, respectively.
NOTE 12 – INCOME TAXES
The Company is subject to income taxes
on income arising in or derived from the tax jurisdiction in which each entity is domiciled.
Kingold is incorporated in the United States
and has incurred net operating loss for income tax purposes through September 30, 2017 resulting in loss carry forwards of approximately
$17,715,000 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 September 30, 2017 and December 31, 2016 was approximately $6,023,000 and $5,699,000, respectively.
Dragon Lead is incorporated in the British
Virgin Islands (the “BVI”), and under current laws of the BVI, income earned is not subject to income tax.
Wuhan Vogue-Show 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 periods ended September 30, 2017 and 2016. The Company recorded $6,305,739 deferred
income tax assets and $1,249,622 deferred income tax liability as of September 30, 2017 and December 31, 2016, respectively.
The Company intends to reinvest its foreign
profits indefinitely in order to avoid a tax liability upon repatriation to the United States. Income (loss) from continuing operations
before income taxes was allocated between the U.S. and foreign components for the three and nine months ended September 30, 2017
and 2016:
|
|
For the three months
ended September 30,
|
|
|
For the nine months ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
(Restated)
|
|
United States
|
|
$
|
(236,952
|
)
|
|
$
|
(170,311
|
)
|
|
$
|
(953,598
|
)
|
|
$
|
(700,575
|
)
|
Foreign
|
|
|
38,965,061
|
|
|
|
21,353,228
|
|
|
|
22,224,744
|
|
|
|
68,890,903
|
|
|
|
$
|
38,728,109
|
|
|
$
|
21,182,917
|
|
|
$
|
21,271,146
|
|
|
$
|
68,190,328
|
|
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 12 – INCOME TAXES (Continued)
Significant components of the income tax
provision (benefit) were as follows for the nine and three months ended September 30, 2017 and 2016:
|
|
For the three months ended September 30,
|
|
|
For the nine months ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
(Restated)
|
|
Current tax provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Foreign
|
|
|
7,778,520
|
|
|
|
25,230,923
|
|
|
|
12,996,602
|
|
|
|
36,891,707
|
|
|
|
$
|
7,778,520
|
|
|
$
|
25,230,923
|
|
|
$
|
12,996,602
|
|
|
$
|
36,891,707
|
|
Deferred tax provision (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Foreign
|
|
|
1,962,539
|
|
|
|
(19,909,244
|
)
|
|
|
(7,440,305
|
)
|
|
|
(19,653,506
|
)
|
|
|
|
1,962,539
|
|
|
|
(19,909,244
|
)
|
|
|
(7,440,305
|
)
|
|
|
(19,653,506
|
)
|
Income tax provision
|
|
$
|
9,741,059
|
|
|
$
|
5,321,679
|
|
|
$
|
5,556,297
|
|
|
$
|
17,238,201
|
|
The components of deferred tax assets and
deferred tax liabilities as of September 30, 2017 and December 31, 2016 consist of the following:
|
|
As of September 30,
2017
|
|
|
As of December 31,
2016
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Accrued interest
|
|
$
|
3,098,593
|
|
|
$
|
-
|
|
Inventory valuation
|
|
|
2,715,104
|
|
|
|
-
|
|
Accrued expense
|
|
|
465,982
|
|
|
|
-
|
|
Other temporary differences
|
|
|
101,019
|
|
|
|
721,570
|
|
Net operating losses from parent company
|
|
|
6,023,092
|
|
|
|
5,698,869
|
|
Valuation allowance
|
|
|
(6,023,092
|
)
|
|
|
(5,698,869
|
)
|
|
|
|
6,380,698
|
|
|
|
721,570
|
|
|
|
|
|
|
|
|
|
|
Deferred financing costs on the loans
|
|
|
(74,959
|
)
|
|
|
(1,971,192
|
)
|
Deferred tax assets (liability) - Net
|
|
$
|
6,305,739
|
|
|
$
|
(1,249,622
|
)
|
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 13 – EARNINGS PER SHARE
For the three and nine months ended September
30, 2017, 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 three months ended September 30, 2017. As a result, for the three and nine months ended
September 30, 2017, total of 434,991 and 307,803 unexercised options are dilutive, respectively, and were included in the computation
of diluted EPS.
For three and nine months ended September
30, 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 three and nine months ended September 30, 2016. As a result, for the three and nine
months ended September 30, 2016, total of 721,218 and 308,942 unexercised warrants and options are dilutive, respectively, and
were included in the computation of diluted EPS.
NOTE 14 – OPTIONS
On July 16, 2013, the Company granted 90,000
options with an exercise price of $1.18 to its non-employee directors, which options expire ten years from the grant date under
the Plan. These options became exercisable in accordance with the following schedule: (a) 25% of the options became exercisable
on the first anniversary of the grant date (the “Initial Vesting Date”), and (b) 6.25% of the options became exercisable
on the date three months after the Initial Vesting Date and on such date every third month thereafter, through the fourth anniversary
of the grant date. The fair value of the options was calculated using the Black-Scholes options pricing model using the following
assumptions: volatility of 118.01%, risk free interest rate of 2.55%, and expected term of 6.25 years. The fair value of the options
was $92,458. In accordance with the vesting periods, $Nil and $11,558 were recorded as part of operating expense-stock compensation
for the three and nine months ended September 30, 2017, respectively. The Company recorded $5,779 and $17,337 as part of operating
expense-stock compensation for the three and nine months ended September 30, 2016, respectively.
On February 25, 2015, the Company granted
90,000 options with an exercise price of $1.11 to its non-employee directors, which options expire ten years from the grant date
under the Plan. These options became exercisable in accordance with the following schedule: (a) 25% of the options became exercisable
on the first anniversary of the grant date, and (b) 6.25% of the options became exercisable on the date three and six months after
the initial vesting date and on such date every third month thereafter, through the fourth anniversary of the grant date. The fair
value of the options was calculated using the Black-Scholes options pricing model under the following assumptions: volatility of
115.20%, risk free interest rate of 1.96%, and expected term of 6.25 years. The aggregate fair value of the options was $85,822.
In accordance with the vesting periods, $5,364 and $16,092 were recorded as part of operating expense-stock compensation for the
three and nine months ended September 30, 2017, respectively. The Company recorded $5,364 and $16,091 as part of operating expense-stock
compensation for the three and nine months ended September 30, 2016, respectively.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 14 – OPTIONS (Continued)
The Company recorded $5,364 and $27,650
stock-based compensation expense for the three and nine months ended September 30, 2017, respectively. The Company recorded $11,143
and $33,428 stock-based compensation expense for the three and nine months ended September 30, 2016, respectively.
The following table summarized the Company’s
stock option activity:
|
|
Number of
Options
|
|
|
Weighted Average
Exercise Price
|
|
|
Weighted Average
Remaining Life
in Years
|
|
Outstanding, December 31, 2016
|
|
|
3,220,000
|
|
|
$
|
1.90
|
|
|
|
4.76
|
|
Exercisable, December 31, 2016
|
|
|
3,152,500
|
|
|
$
|
1.92
|
|
|
|
4.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding, September 30, 2017
|
|
|
3,220,000
|
|
|
$
|
1.90
|
|
|
|
4.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, September 30, 2017
|
|
|
3,186,250
|
|
|
$
|
1.91
|
|
|
|
3.97
|
|
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 15 – WARRANTS
Following is a summary of the status of warrant activities as
of September 30, 2017 and December 31, 2016
|
|
Number of
warrants
|
|
|
Weighted Average
Exercise Price
|
|
|
Weighted Average
Remaining Life in Years
|
|
Outstanding, December 31, 2016
|
|
|
244,635
|
|
|
$
|
1.38
|
|
|
|
0.52
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(150,000
|
)
|
|
|
1.35
|
|
|
|
-
|
|
Exercised
|
|
|
(94,635
|
)
|
|
|
1.20
|
|
|
|
-
|
|
Outstanding, September 30, 2017
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
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 September 30, 2017, 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 were exercised on June 28, 2017, and the Company is in the process of issuing the shares. 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 were scheduled to 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. During the six months ended June 30, 2017, 94,635 warrants were exercised
and these shares were issued in August 2017. On July 17, 2017, the Company received notice from BIP not to exercise the remaining
150,000 warrants. As of September 30, 2017, there were no warrants outstanding.
For the three months ended September 30,
2017 and 2016, the Company included $Nil and $65,091 warrants cost in the general administrative expenses, respectively. For the
nine months ended September 30, 2017 and 2016, the Company included $Nil and $129,295 warrants cost in the general administrative
expenses, respectively.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 16 – NON-CONTROLLING 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, for a consideration
of $79,196 (RMB 550,000). After the transfer, Kingold Internet and Yuhuang were no longer the subsidiaries of Wuhan Kingold. There
was no non-controlling interest as of September 30, 2017.
A reconciliation of non-controlling interest
as of December 31, 2016 is as follows:
|
|
As of December 31, 2016
|
|
Beginning Balance
|
|
$
|
73,274
|
|
Capital Contribution
|
|
|
-
|
|
Proportionate shares of net loss
|
|
|
(6,214
|
)
|
Foreign currency translation gain (loss)
|
|
|
(4,222
|
)
|
Deconsolidation of subsidiaries
|
|
|
(62,557
|
)
|
Ending Balance
|
|
$
|
-
|
|
NOTE 17 – CONCENTRATIONS AND RISKS
The Company maintains certain bank accounts
in the PRC and BVI, which are not insured by Federal Deposit Insurance Corporation (“FDIC”) insurance or other insurance.
The cash and restricted cash balance held in the PRC bank accounts was $11,635,252 and $81,354,642 as of September 30, 2017 and
December 31, 2016, respectively. The cash balance held in the BVI bank accounts was $Nil and $7,083 as of September 30, 2017 and
December 31, 2016, respectively. As of September 30, 2017, the Company held $195,637 of cash balances within the United States.
As of December 31, 2016, the Company held $281,018 of cash balances within the United States, which was $31,018 in excess of FDIC
insurance limits of $250,000.
For the periods ended September 30, 2017
and 2016, 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 three and nine months ended September 30, 2017 and 2016 was gold, which accounted for almost 100% of its total
purchases for the three and nine months ended September 30, 2017 and 2016. The gold purchased by the Company was solely from the
Shanghai Gold Exchange, the largest gold trading platform in the PRC.
No customer accounted for more than 10%
of annual sales for the three and nine months ended September 30, 2017 or 2016.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 18 – GOLD LEASE TRANSACTIONS
The Company leased gold as a way to finance
its growth and will return the same amount of gold to China Construction Bank (“CCB”), Shanghai Pudong Development
Bank (“SPD Bank”) 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.
|
a)
|
Gold lease transactions with CCB
|
During the year ended December 31, 2016,
the Company entered into gold lease agreements with CCB and leased an aggregate 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 CCB upon
lease maturity.
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 CCB, which was
returned to the Company in early 2017 as the leased gold was returned at the end of December 2016.
As of September 30, 2017, the Company recorded
$Nil as restricted cash deposit in CCB for the purpose of gold lease in future period. During the nine months ended September 30,
2017, no gold lease transactions were made and no leased gold was outstanding from CCB as of September 30, 2017.
|
b)
|
Gold lease transactions with SPD Bank
|
During the year ended December 31, 2016,
the Company entered into gold lease agreements with Shanghai Pudong Development Bank and leased an aggregate 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 SPD Bank upon lease maturity. The remaining
leased gold of 185 kilograms of leased gold which amounted to approximately $7.2 million (RMB 49.8 million) was returned to the
SPD Bank upon lease maturity in September 2017.
In June 2017, the pledged restricted cash
of approximately $8.1 million (RMB 55.6 million) as collateral to safeguard the gold lease from SPD Bank was also fully refunded
to the Company upon lease maturity.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 18 – GOLD LEASE TRANSACTIONS (Continued)
|
c)
|
Gold lease transaction with CITIC 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.
As of September 30, 2017 and December 31,
2016, no leased gold was outstanding and no restricted cash was pledged as collateral to safeguard the gold lease from CITIC.
|
d)
|
Gold lease transaction with Industrial and Commercial Bank
of China (“ICBC’)
|
During the year ended December 31, 2016,
the Company entered into additional gold lease agreements with ICBC and leased an aggregate 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 ICBC.
As of September 30, 2017 and December 31,
2016, no leased gold was outstanding and no restricted cash was pledged as collateral to safeguard the gold lease from ICBC.
|
e)
|
Gold lease transactions with 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. The leased gold was fully returned by the Company to Shuntianyi
as of December 31, 2016.
On January 3, 2017, Wuhan Kingold entered
into a gold lease agreement with Shuntianyi to lease a total of 4,000 kilograms of Au9999 gold in aggregate with carrying value
of approximately $131.1 million for a period from January 3, 2017 to February 28, 2017. The leased gold was fully returned by the
Company to Shuntianyi on February 28, 2017.
As of September 30, 2017, the Company had
no leased gold outstanding. As of December 31, 2016, 185 kilograms of leased gold was outstanding, at the approximated amounts
of $7.2 million.
Interest expense for all gold lease arrangements
for the three months ended September 30, 2017 and 2016 was approximately $1,159 and $0.9 million, respectively, which was included
in the cost of sales. Interest expense for all gold lease arrangements for the nine months ended September 30, 2017 and 2016 was
approximately $115,972 and $3.3 million, respectively, which was included in the cost of sales.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 19 – COMMITMENTS AND CONTINGENCIES
Commitments
Guarantee for Third
Party
On April 12, 2016, Wuhan Kingold signed
the collateral agreements with Evergrowing Bank - Yantai Huangshan Road Branch to pledge restricted deposits of totaling $30.1 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 $30.1
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%.
On April 12, 2017, Wuhan Kingold repaid
the loan of approximately $30.1 million (RMB 200 million) to Yantai Runtie Trade Ltd. upon maturity. The restricted deposit of
totaling $30.1 million (RMB 200 million) in connection with this loan was also released to the Company upon the repayment.
Guarantee for Related Party
On January 13, 2017, Wuhan Kingold entered
into a loan agreement with Wuhan Kangbo Biotech Limited (“Kangbo”), a related party which is controlled by the CEO
and Chairman of the Company, for a loan of approximately $150.3 million (RMB 1,000 million). The loan has a one-year term from
January 12, 2017 to January 10, 2018, and is interest free. In order for Kangbo to obtain the loan from the bank, Wuhan Kingold
signed the guarantee agreement with Evergrowing Bank- Yantai Huangshan Road Branch on January 11, 2017. As a guarantor of the bank
loan, Wuhan Kingold pledged 5,470 kilograms of gold in aggregate with carrying value of approximately $188.8 million (RMB 1.3 billion)
as collateral.
On February 20, 2017, Wuhan Kingold entered
into a second loan agreement with Kangbo for a loan of approximately $150.3 million (RMB 1,000 million). The loan has one-year
term from February 20, 2017 to February 20, 2018, and is interest free. In order for Kangbo to obtain the loan from the bank, Wuhan
Kingold signed the guarantee agreement with Evergrowing Bank - Yantai Huangshan Road Branch on February 16, 2017. As a guarantor
of the bank loan, Wuhan Kingold pledged 4,755 kilograms of gold in aggregate with carrying value of approximately $169 million
(RMB 1.1 billion) as collateral.
Operating Lease
On June 27, 2016, Wuhan Kingold signed
several 5 year lease agreements with Wuhan Huayuan, a related party that is controlled by the CEO and Chairman of the Company,
to rent office and store space at the Jewelry Park, commencing in July 2016 and October 2016, respectively, with aggregate annual
rent of approximately $0.3 million (RMB 2.3 million). On July 1, 2017, Wuhan Kingold signed another 5 year lease agreement with
Wuhan Huayuan to rent additional office space at the Jewelry Park commencing in July 2017 with aggregate annual rent of approximately
$84,625 (RMB 576,000). For the three and nine months ended September 30, 2017, the Company recorded $108,567 and $278,251 rent
expense, respectively. For the three and nine months ended September 30, 2016, the Company did not incur rent expenses. As of September
30, 2017, the Company was obligated under non-cancellable operating leases for minimum rentals as follows:
For the Twelve Months Ending September 30,
|
|
|
|
2018
|
|
$
|
427,418
|
|
2019
|
|
|
427,418
|
|
2020
|
|
|
427,418
|
|
2021
|
|
|
383,680
|
|
2022 and thereafter
|
|
|
84,625
|
|
|
|
$
|
1,750,559
|
|
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 20 – COMPARATIVE INFORMATION
The financial statements and notes for
the period ended September 30, 2016 were restated, and the Quarterly Report on Form 10-Q was amended and filed with the SEC on
April 10, 2017. In addition, certain amounts on the unaudited condensed consolidated statements of operations and comprehensive
income and unaudited condensed consolidated statement of cash flows for the period ended September 30, 2016 were reclassified for
consistency with the current period presentation.
NOTE 21 – SUBSEQUENT EVENTS
In September 2017, 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 $150.3 million (RMB 1 billion) for the
purpose of working capital needs. The loan bears a fixed annual interest of 10% with a term of 24 months and is secured by
4,784,000 grams of Au9999 gold in aggregate with carrying value of approximately $200.4 million (RMB 1.3 billion). The loan
is also guaranteed by the CEO and Chairman of the Company. On October 18, 2017, the Company received approximately $73.5
million (RMB 488.9 million) from Chang’An Trust. On November 8, 2017, the Company received additional approximately
$39.6 million (RMB 263.45 million) from Chang’An Trust.