KINGOLD JEWELRY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN US DOLLARS)
(UNAUDITED)
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(Restated)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
13,266,877
|
|
|
$
|
3,100,569
|
|
Restricted cash
|
|
|
42,599,678
|
|
|
|
26,649,687
|
|
Accounts receivable
|
|
|
887,683
|
|
|
|
1,624,323
|
|
Inventories
|
|
|
136,963,786
|
|
|
|
298,303,185
|
|
Investment in gold - current
|
|
|
63,621,396
|
|
|
|
-
|
|
Other current assets and prepaid expenses
|
|
|
3,119,680
|
|
|
|
1,046,032
|
|
Value added tax recoverable
|
|
|
44,907,520
|
|
|
|
15,526,002
|
|
Total current assets
|
|
|
305,366,620
|
|
|
|
346,249,798
|
|
|
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT, NET
|
|
|
7,396,378
|
|
|
|
7,622,509
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS
|
|
|
|
|
|
|
|
|
Deposit on land use right - Jewelry Park
|
|
|
9,357,810
|
|
|
|
9,296,763
|
|
Construction in progress - Jewelry Park
|
|
|
132,262,641
|
|
|
|
105,844,259
|
|
Investment in gold - non-current
|
|
|
459,160,847
|
|
|
|
-
|
|
Other assets
|
|
|
149,690
|
|
|
|
148,713
|
|
Land use right
|
|
|
454,232
|
|
|
|
454,180
|
|
Total long-term assets
|
|
|
608,781,598
|
|
|
|
123,366,424
|
|
TOTAL ASSETS
|
|
$
|
914,148,218
|
|
|
$
|
469,616,222
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Short term loans
|
|
$
|
49,927,512
|
|
|
$
|
55,455,428
|
|
Debts payable, net
|
|
|
-
|
|
|
|
61,471,962
|
|
Construction payables-Jewelry Park
|
|
|
36,437,781
|
|
|
|
23,876,642
|
|
Deposits payable-Jewelry Park
|
|
|
22,327,831
|
|
|
|
22,182,171
|
|
Other payables and accrued expenses
|
|
|
3,995,749
|
|
|
|
6,355,979
|
|
Gold lease payable – related party
|
|
|
138,287,308
|
|
|
|
-
|
|
Due to related party
|
|
|
450,025
|
|
|
|
200,059
|
|
Income tax payable
|
|
|
4,878,962
|
|
|
|
1,119,918
|
|
Other taxes payable
|
|
|
262,059
|
|
|
|
710,104
|
|
Total current liabilities
|
|
|
256,567,227
|
|
|
|
171,372,263
|
|
Deferred income tax liability-non-current
|
|
|
2,045,934
|
|
|
|
1,774,993
|
|
Long term loans
|
|
|
355,074,542
|
|
|
|
30,808,571
|
|
TOTAL LIABILITIES
|
|
|
613,687,703
|
|
|
|
203,955,827
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
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|
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EQUITY
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value, 500,000 shares authorized, none issued or outstanding as of March 31, 2016 and December 31, 2015
|
|
|
-
|
|
|
|
-
|
|
Common stock $0.001 par value, 100,000,000 shares authorized, 65,963,502 shares issued and outstanding as of March 31, 2016 and December 31, 2015
|
|
|
65,963
|
|
|
|
65,963
|
|
Additional paid-in capital
|
|
|
80,066,064
|
|
|
|
79,990,717
|
|
Retained earnings
|
|
|
|
|
|
|
|
|
Unappropriated
|
|
|
199,762,557
|
|
|
|
184,564,147
|
|
Appropriated
|
|
|
967,543
|
|
|
|
967,543
|
|
Accumulated other comprehensive income (deficit)
|
|
|
19,526,765
|
|
|
|
(1,249
|
)
|
Total stockholders' equity
|
|
|
300,388,892
|
|
|
|
265,587,121
|
|
Non-controlling interest
|
|
|
71,623
|
|
|
|
73,274
|
|
Total Equity
|
|
|
300,460,515
|
|
|
|
265,660,395
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
914,148,218
|
|
|
$
|
469,616,222
|
|
The accompanying notes are an integral
part of these unaudited condensed consolidated financial statements
KINGOLD JEWELRY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(IN US DOLLARS)
(UNAUDITED)
|
|
For the three months ended March
31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(Restated)
|
|
|
|
|
NET SALES
|
|
$
|
282,188,057
|
|
|
$
|
206,195,220
|
|
COST OF SALES
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
(253,412,444
|
)
|
|
|
(195,120,956
|
)
|
Depreciation
|
|
|
(290,682
|
)
|
|
|
(309,001
|
)
|
Total cost of sales
|
|
|
(253,703,126
|
)
|
|
|
(195,429,957
|
)
|
GROSS PROFIT
|
|
|
28,484,931
|
|
|
|
10,765,263
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
3,269,365
|
|
|
|
1,678,366
|
|
Stock compensation expenses
|
|
|
11,143
|
|
|
|
212,783
|
|
Depreciation
|
|
|
23,513
|
|
|
|
25,191
|
|
Amortization
|
|
|
2,890
|
|
|
|
3,075
|
|
Total operating expenses
|
|
|
3,306,911
|
|
|
|
1,919,415
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM OPERATIONS
|
|
$
|
25,178,020
|
|
|
$
|
8,845,848
|
|
OTHER INCOME (EXPENSES)
|
|
|
|
|
|
|
|
|
Interest Income
|
|
|
59,224
|
|
|
|
17,270
|
|
Interest expense
|
|
|
(4,973,353
|
)
|
|
|
(297,537
|
)
|
Total other expenses, net
|
|
|
(4,914,129
|
)
|
|
|
(280,267
|
)
|
INCOME FROM OPERATIONS BEFORE TAXES
|
|
|
20,263,891
|
|
|
|
8,565,581
|
|
INCOME TAX PROVISION (BENEFIT)
|
|
|
|
|
|
|
|
|
Current
|
|
|
4,811,004
|
|
|
|
2,728,902
|
|
Deferred
|
|
|
255,674
|
|
|
|
(744,525
|
)
|
Total income tax provision
|
|
|
5,066,678
|
|
|
|
1,984,377
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
|
15,197,213
|
|
|
|
6,581,204
|
|
Less: net loss attribute to the non-controlling interest
|
|
|
(1,197
|
)
|
|
|
-
|
|
NET INCOME ATTRIBUTABLE TO KINGOLD JEWELRY, INC.
|
|
$
|
15,198,410
|
|
|
$
|
6,581,204
|
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
|
|
|
Change in unrealized gain related to investment in gold
|
|
$
|
17,564,866
|
|
|
$
|
-
|
|
Total foreign currency translation gain
|
|
|
1,962,694
|
|
|
|
1,099,665
|
|
Less: foreign currency translation (loss) attributable to non-controlling interest
|
|
|
(454
|
)
|
|
|
-
|
|
Total Other comprehensive income attributable to KINGOLD JEWELRY, INC.
|
|
$
|
19,528,014
|
|
|
$
|
1,099,665
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME ATTRIBUTABLE TO:
|
|
|
|
|
|
|
|
|
KINGOLD JEWELRY, INC.
|
|
$
|
34,726,424
|
|
|
$
|
7,680,869
|
|
Non-controlling interest
|
|
|
(1,651
|
)
|
|
|
-
|
|
|
|
|
34,724,773
|
|
|
$
|
7,680,869
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
0.23
|
|
|
$
|
0.10
|
|
Weighted average number of shares
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
65,963,502
|
|
|
|
65,963,502
|
|
The accompanying notes are an integral
part of these unaudited condensed consolidated financial statements
KINGOLD JEWELRY, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH
FLOWS
(IN US DOLLARS)
(UNAUDITED)
|
|
For the three months ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(Restated)
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
15,197,213
|
|
|
$
|
6,581,204
|
|
Adjusted to reconcile net income to cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
314,195
|
|
|
|
334,192
|
|
Amortization of intangible assets
|
|
|
2,890
|
|
|
|
3,075
|
|
Amortization of deferred financing costs
|
|
|
144,097
|
|
|
|
-
|
|
Share based compensation for services and warrants expense
|
|
|
75,347
|
|
|
|
212,783
|
|
Inventory valuation allowance
|
|
|
-
|
|
|
|
2,978,101
|
|
Deferred tax provision (benefit)
|
|
|
255,674
|
|
|
|
(744,525
|
)
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
|
|
(Increase) decrease in:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
736,891
|
|
|
|
503,537
|
|
Inventories
|
|
|
161,022,459
|
|
|
|
(2,360,577
|
)
|
Other current assets and prepaid expenses
|
|
|
(2,037,978
|
)
|
|
|
(48,362
|
)
|
Deferred offering costs
|
|
|
-
|
|
|
|
(488,249
|
)
|
Value added tax recoverable
|
|
|
(28,871,518
|
)
|
|
|
158,617
|
|
Increase (decrease) in:
|
|
|
|
|
|
|
|
|
Other payables and accrued expenses
|
|
|
(2,362,754
|
)
|
|
|
442,050
|
|
Customer deposits
|
|
|
-
|
|
|
|
687,386
|
|
Income tax payable
|
|
|
3,252,855
|
|
|
|
1,749,934
|
|
Other taxes payable
|
|
|
151
|
|
|
|
(652,139
|
)
|
Net cash provided by operating activities
|
|
|
147,729,522
|
|
|
|
9,357,027
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(42,449
|
)
|
|
|
(26,586
|
)
|
Purchases of gold investment
|
|
|
(361,816,442
|
)
|
|
|
-
|
|
Construction in progress-Jewelry Park
|
|
|
(13,101,275
|
)
|
|
|
(5,561,161
|
)
|
Net cash used in investing activities
|
|
|
(374,960,166
|
)
|
|
|
(5,587,747
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Repayments of bank loans – short term
|
|
|
(6,115,740
|
)
|
|
|
-
|
|
Proceeds from long term loan
|
|
|
319,547,435
|
|
|
|
-
|
|
Restricted cash
|
|
|
(15,555,150
|
)
|
|
|
(10,839
|
)
|
Proceeds from related party loan
|
|
|
250,226
|
|
|
|
-
|
|
Proceeds from (repayment of) debt financing instruments-private placement
|
|
|
(61,157,404
|
)
|
|
|
65,099,928
|
|
Net cash provided by financing activities
|
|
|
236,969,367
|
|
|
|
65,089,089
|
|
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS
|
|
|
427,585
|
|
|
|
269,714
|
|
NET INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
10,166,308
|
|
|
|
69,128,083
|
|
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
|
|
3,100,569
|
|
|
|
1,331,658
|
|
CASH AND CASH EQUIVALENTS, END OF PERIOD
|
|
$
|
13,266,877
|
|
|
$
|
70,459,741
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
Cash paid for interest expense
|
|
$
|
3,951,608
|
|
|
$
|
1,332,444
|
|
Cash paid for income tax
|
|
$
|
1,111,571
|
|
|
$
|
978,968
|
|
NON-CASH INVESTING AND FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Gold leased from related party in connection with the gold investment
|
|
$
|
138,287,308
|
|
|
$
|
-
|
|
The accompanying notes are an integral
part of these unaudited condensed consolidated Financial Statements
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 – BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated
financial statements of Kingold Jewelry, Inc. (“Kingold” or the “Company”) have been prepared in accordance
with generally accepted accounting principles (“U.S. GAAP”) for interim financial information pursuant to the rules
and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the
information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary to make the financial statements not misleading have been included.
Operating results for the interim period ended March 31, 2016 are not necessarily indicative of the results that may be expected
for the fiscal year ending December 31, 2016. The information included in this Form 10-Q/A should be read in conjunction with Management’s
Discussion and Analysis, and the financial statements and notes thereto included in the Company’s Form 10-K for the fiscal
year ended December 31, 2015, filed with the SEC on March 29, 2016.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
Wuhan Kingold Jewelry Co., Inc. (“Wuhan
Kingold”) should be considered as a 100% contractually controlled affiliate 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 under Accounting Standards Codification (“ASC”) 810-10-05-8A. Accordingly, Kingold consolidates Wuhan
Kingold’s operating results, assets and liabilities. The Company makes an ongoing assessment to determine whether Wuhan Kingold
is still a Variable Interest Entity.
The accompanying unaudited condensed consolidated
financial statements include the financial statements of Kingold, Dragon Lead, Wuhan Vogue-Show, Wuhan Kingold and its 55% controlled
subsidiaries Wuhan Kingold Internet Co., Ltd. (“Kingold Internet”) and Yuhuang Jewelry Design Co., Ltd (“Yuhuang”).
All significant inter-company balances and transactions have been eliminated in consolidation.
Kingold, Dragon Lead, Wuhan Vogue-Show, Wuhan Kingold, Kingold Internet
and Yuhuang are hereinafter collectively referred to as the “Company.”
Restatement of Financial Statements
In connection with its review of the consolidated
financial statements for the fiscal year ended December 31, 2016, management of the Company determined that the previously issued
financial statements contained in the Company’s Quarterly Reports on Form 10-Q for the quarter ended March 31, 2016 should
be amended to correct errors in those financial statements.
Firstly, the Company determined that gold leases
and pledges were not properly recorded in the previously issued unaudited condensed consolidated financial statements as of March
31, 2016. The Company borrowed money to finance its purchases of gold, which gold was then pledged to secure the loans. In some
cases, the unrestricted gold available for production was insufficient to provide adequate security for such loans, which in turn
required the Company to lease gold from a related party to satisfy its loan conditions and conduct its operations.
Secondly, because bank loans required the Company
to pledge gold in favor of the lenders, such pledged gold should have been reflected as investment in gold (restricted). The Company
determined that certain gold reflected as inventory for production in 2016 should instead be reflected as investment in gold (restricted)
since the Company had excess gold not to be used for production. The result of this reclassification is to record the value of
such gold at the fair market value of the gold, rather than at the lower of cost or market value, as would be the case for inventory
used for production. Because the fair market value of gold has increased during the three months ended March 31, 2016, such reclassification
resulted in an unrealized gain and therefore caused an increase in equity.
The effects of the Company’s previously
issued unaudited condensed consolidated financial statements as of March 31, 2016 are summarized as follows:
Selected Unaudited Consolidated Balance Sheets
Information as of March 31, 2016
|
|
Previously
|
|
|
|
|
|
|
|
|
|
Reported
|
|
|
Adjustment
|
|
|
Restated
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
503,893,855
|
|
|
$
|
(366,930,069
|
)
|
|
$
|
136,963,786
|
|
Investment in gold - current
|
|
$
|
-
|
|
|
$
|
63,621,396
|
|
|
$
|
63,621,396
|
|
Investment in gold - non-current
|
|
$
|
-
|
|
|
$
|
459,160,847
|
|
|
$
|
459,160,847
|
|
Gold lease payable – related party
|
|
$
|
-
|
|
|
$
|
138,287,308
|
|
|
$
|
138,287,308
|
|
Accumulated other comprehensive income
|
|
$
|
1,961,899
|
|
|
$
|
17,564,866
|
|
|
$
|
19,526,765
|
|
Selected Unaudited Consolidated Statements
of Operations and Comprehensive Income information for the three months ended March 31, 2016
|
|
Three months ended March 31, 2016
|
|
|
|
Previously
|
|
|
|
|
|
|
|
|
|
Reported
|
|
|
Adjustment
|
|
|
Restated
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gain related to investment in gold
|
|
$
|
-
|
|
|
$
|
17,564,866
|
|
|
$
|
17,564,866
|
|
Selected Unaudited Consolidated Statements
of Cash Flows for the three months ended March 31, 2016
|
|
Three months ended March 31, 2016
|
|
|
|
Previously
|
|
|
|
|
|
|
|
|
|
Reported
|
|
|
Adjustment
|
|
|
Restated
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
(200,793,983
|
)
|
|
$
|
361,816,442
|
|
|
$
|
161,022,459
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of gold investment
|
|
$
|
-
|
|
|
$
|
(361,816,442
|
)
|
|
$
|
(361,816,442
|
)
|
NON-CASH INVESTING AND FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Gold leased from related party in connection with the gold investment
|
|
$
|
-
|
|
|
$
|
138,287,308
|
|
|
$
|
138,287,308
|
|
Use of Estimates
The preparation of the consolidated financial
statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of
assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements
as well as the reported amounts of revenues and expenses during the reporting period. Significant estimates required to be made
by management include, but are not limited to, useful lives of property, plant and equipment, intangible assets, the recoverability
of long-lived assets, inventory valuation, allowance for doubtful accounts, deferred income tax, investment in gold and share based
compensation. Actual results could differ from those estimates.
Restricted Cash
As of March 31, 2016 and December 31, 2015,
the Company had restricted cash of $42,599,678 and $26,649,687, respectively. Approximately $0.5 million was related to the bank
loan with China Minsheng Trust Co., Ltd. (“Minsheng Trust”). Approximately $42.1million was related to the gold lease
deposits with Shanghai Pudong Development Bank (“SPD Bank”), China Construction Bank (“CCB”), Commerce
Bank of China (“ICBC”) and CITIC Bank – see Note 8 – Gold Lease Transactions.
Accounts Receivable
The Company generally receives cash payment
upon delivery of a product, but may extend unsecured credit to its customers in the ordinary course of business. The Company mitigates
the associated risks by performing credit checks and actively pursuing past due accounts. An allowance for doubtful accounts is
established and recorded based on management’s assessment of the credit history of the customers and current relationships
with them. At March 31, 2016 and December 31, 2015, there was no allowance recorded as the Company considers all of the accounts
receivable fully collectible.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Inventories
Inventories are stated at the lower of cost
or market value, and cost is calculated on the weighted average basis. As of March 31, 2016 and December 31, 2015, there was no
lower of cost or market adjustment because the carrying value of the Company’s inventories was lower than the current and
expected market price of gold. The cost of inventories comprises all costs of purchases, costs of fixed and variable production
overhead and other costs incurred in bringing the inventories to their present condition.
Property and Equipment
Property 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
|
Construction-in-Progress
Construction in progress represents property
and buildings under construction and consists of construction expenditures, equipment procurement, and other direct costs attributable
to the construction. Construction in progress is not depreciated. Upon completion and when ready for intended use, construction
in progress is reclassified to the appropriate category within property, plant and equipment or will be classified as an asset
held for sale.
Land Use Right
Under PRC law, all land in the PRC is owned
by the government and cannot be sold to an individual or company. The government grants individuals and companies the right to
use parcels of land for specified periods of time. These land use rights are sometimes referred to informally as “ownership.”
Land use rights are stated at cost less accumulated amortization. Amortization is provided over the respective useful lives, using
the straight-line method. Estimated useful life is 50 years, and is determined in connection with the term of the land use right.
Long-Lived Assets
Certain assets such as property, plant and
equipment and construction in progress, are reviewed for impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. Recoverability of assets that are held and used is measured by a comparison of the carrying
amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of
an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount
exceeds the fair value of the asset. There were no events or changes in circumstances that necessitated a review of impairment
of long-lived assets as of March 31, 2016 and December 31, 2015.
Fair Value of Financial Instruments
The Company follows the provisions of Accounting
Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures.” ASC 820 clarifies the definition
of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used
in measuring fair value as follows:
Level 1-Observable inputs such as unadjusted
quoted prices in active markets for identical assets or liabilities available at the measurement date.
Level 2-Inputs other than quoted prices that
are observable for the asset or liability in active markets, quoted prices for identical or similar assets and liabilities in markets
that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable
market data.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Fair Value of Financial Instruments - continued
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 investment in gold.
Investment in Gold
The Company pledged the gold leased from related
party and part of its own gold inventory to meet the requirements of bank loans. The pledged gold will be available for sale upon
the repayment of the bank loans. The Company classified the pledged gold as investment in gold, and carried at fair market value,
with the unrealized gains and losses, included in the determination of comprehensive income and reported in shareholders’
equity. The fair market value of the investment in gold is determined by quoted market prices at Shanghai Gold Exchange.
Revenue Recognition
Net sales 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.
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.
Internet sales
The Company also engages in promoting the online
sales of jewelry products through cooperation with Tmall.com, a large business-to-consumer online retail platform owned by Alibaba
Group. Consistent with the criteria of ASC 605, Revenue Recognition, the Company recognizes revenues of internet sales
when the following four revenue recognition criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery
has occurred, (iii) the selling price is fixed or determinable, and (iv) collectability is reasonably assured.
In accordance with ASC 605, Revenue Recognition,
the Company evaluates whether it is appropriate to record the gross amount of product sales and related costs or the net amount
earned as commissions. When the Company is primarily obligated in a transaction, is subject to inventory risk, has latitude in
establishing prices and selecting suppliers, or has several but not all of these indicators, revenues should be recorded on a gross
basis. When the Company is not the primary obligor, doesn’t bear the inventory risk and doesn’t have the ability to
establish the price, revenues are recorded on a net basis.
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 March 31, 2016 and December 31, 2015.
To the extent applicable, the Company records
interest and penalties as a general and administrative expense. The statute of limitations for the Company’s U.S. federal
income tax returns and certain state income tax returns remains open for tax years 2010 and after. As of March 31, 2016, the tax
years ended December 31, 2010 through December 31, 2015 for the Company’s PRC subsidiaries remain open for statutory examination
by PRC tax authorities.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Foreign Currency Translation
Kingold, as well as its wholly owned subsidiary,
Dragon Lead, maintain accounting records in United States Dollars (“US$”), whereas Wuhan Vogue-Show and Wuhan Kingold
maintain their accounting records in Renminbi (“RMB”), which is the primary currency of the economic environment in
which their operations are conducted. The Company’s principal country of operations is the PRC. The financial position and
results of its operations are determined using RMB, the local currency, as the functional currency. The results of operations and
the statement of cash flows denominated in foreign currency are translated at the average rate of exchange during the reporting
period. Assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the applicable rates
of exchange in effect at that date. The equity denominated in the functional currency is translated at the historical rate of exchange
at the time of capital contribution. Because cash flows are translated based on the average translation rate, amounts related to
assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances
on the balance sheet. Translation adjustments arising from the use of different exchange rates from period to period are included
as a component of stockholders’ equity as “Accumulated Other Comprehensive Income(deficit)”.
The value of RMB against US$ and other currencies
may fluctuate and is affected by, among other things, changes in the PRC’s political and economic conditions. Any significant
revaluation of RMB may materially affect the Company’s financial condition in terms of US$ reporting. The following table
outlines the currency exchange rates that were used in creating the consolidated financial statements in this report:
|
|
March 31, 2016
|
|
March 31, 2015
|
|
December 31,2015
|
Balance sheet items, except for share capital, additional paid in capital and retained earnings, as of the period ended
|
|
US$ 1=RMB 6.4494
|
|
US$ 1=RMB 6.1206
|
|
US$ 1=RMB 6.4917
|
Amounts included in the statements of operations and cash flows for the period
|
|
US$ 1=RMB 6.5405
|
|
US$ 1=RMB 6.1444
|
|
US$ 1=RMB 6.2288
|
Comprehensive Income
Comprehensive income consists of two components,
net income and other comprehensive income (loss). The unrealized gain or loss resulting from the change of the fair market value
and the foreign currency translation gain or loss resulting from translation of the financial statements expressed in RMB to US$
are reported in other comprehensive income in the consolidated statements of income and comprehensive income and the consolidated
statements of changes in equity.
Earnings per Share (“EPS”)
Basic EPS is measured as net income divided
by the weighted average common shares outstanding for the period. Diluted EPS is similar to basic EPS but presents the dilutive
effect on a per share basis of potential common shares (i.e., options and warrants) as if they had been converted at the beginning
of the periods presented, or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e., those that
increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS.
Share or Stock-Based compensation
The Company follows the provisions of ASC 718,
“Compensation — Stock Compensation,” which establishes the accounting for employee stock-based awards. For employee
stock-based awards, share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized
as expense with graded vesting on a straight-line basis over the requisite service period for the entire award. For the non-employee
stock-based awards, the fair value of the awards to non-employees are measured every reporting period based on the value of the
Company’s common stock.
Debts Payable
During the quarter ended June 30, 2015, the
Company adopted Accounting Standards Update (“ASU”) 2015-03, “Simplifying the Presentation of Debt Issuance Costs,”
which requires that debt issuance cost related to a recognized debt liability be presented in the balance sheet as a direct deduction
from the carrying amount of the debt liability, consistent with debt discounts, without changing existing recognition and measurement
guidance for debt issuance costs. The new guidance is required to be applied on a retrospective basis and to be accounted for as
a change in an accounting principle.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Deposit payables - Jewelry Park
Deposit payables consist of amounts received
from customers relating to the pre-sale of the residential or commercial units in the Jewelry Park. The Company receives these
funds and recognizes them as a liability until the revenue can be recognized.
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. A significant
increase in the price of gold could increase the Company’s production costs beyond the amount that it is able to pass on
to its customers, which would adversely affect the Company’s sales and profitability. A significant disruption in the Company’s
supply of gold, or other commodities, could decrease its production and shipping levels, materially increase its operating costs,
and materially and adversely affect its profit margins. Shortages of gold, or other commodities, or interruptions in transportation
systems, labor strikes, work stoppages, war, acts of terrorism, or other interruptions to or difficulties in the employment of
labor or transportation in the markets in which the Company purchases its raw materials, may adversely affect its ability to maintain
production of its products and sustain profitability. Although the Company generally attempts to pass on increased commodity prices
to its customers, there may be circumstances in which it is not able to do so. In addition, if the Company were to experience a
significant or prolonged shortage of gold, it would be unable to meet its production schedules and to ship products to its customers
in a timely manner, which would adversely affect its sales, margins and customer relations.
Furthermore, the value of the Company’s
inventory may be affected by commodity prices. The Company records the value of its inventory using the lower of cost or market
value, cost calculated on the weighted average method. As a result, decreases in the market value of precious metals such as gold
would result in a lower stated value of the Company’s inventory, which may require it to take a charge for the decrease
in the value of its inventory.
The investment in gold may be deficient if the fair market value of the pledged gold in connection
with the loans declines, then the Company may need to increase the pledged gold inventory for the loan collateral.
The Company’s operations are located
in the PRC. Accordingly, the Company’s business, financial condition, and results of operations may be influenced by the
political, economic, and legal environments in the PRC, as well as by the general state of the PRC economy. The Company’s
operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North
America and Western Europe. These include risks associated with, among others, the political, economic and legal environment, and
foreign currency exchange. The Company’s results may be adversely affected by changes in the political, regulatory and social
conditions in the PRC, and by changes in governmental policies or interpretations with respect to laws and regulations, anti-inflationary
measures, currency conversion, remittances abroad, and rates and methods of taxation, among other things. In addition, the Company
only controls Wuhan Kingold through a series of agreements. Although the Company believes the contractual relationships through
which it controls Wuhan Kingold comply with current licensing, registration and regulatory requirements of the PRC, it cannot assure
you that the PRC government would agree, or that new and burdensome regulations will not be adopted in the future. If the PRC government
determines that the Company’s structure or operating arrangements do not comply with applicable law, it could revoke the
Company’s business and operating licenses, require it to discontinue or restrict its operations, restrict its right to collect
revenues, require it to restructure its operations, impose additional conditions or requirements with which the Company may not
be able to comply, impose restrictions on its business operations or on its customers, or take other regulatory or enforcement
actions against the Company that could be harmful to its business. If such agreements were cancelled, modified or otherwise not
complied with, the Company would not be able to retain control of 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)
Recent Accounting Pronouncements – continued
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842), which supersedes the existing guidance for lease accounting, Leases (Topic 840). ASU 2016-02 requires lessees
to recognize leases on their balance sheets, and leaves lessor accounting largely unchanged. The amendments in this ASU are effective
for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early application is permitted
for all entities. ASU 2016-02 requires a modified retrospective approach for all leases existing at, or entered into after, the
date of initial application, with an option to elect to use certain transition relief. The Company is currently evaluating the
impact of this new standard on its consolidated financial statements.
In March 2016, the FASB issued Accounting Standards
Update No. 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments. The amendments apply
to all entities that are issuers of or investors in debt instruments (or hybrid financial instruments that are determined to have
a debt host) with embedded call (put) options. The amendments clarify what steps are required when assessing whether the economic
characteristics and risks of call (put) options are clearly and closely related to the economic characteristics and risks of their
debt hosts, which is one of the criteria for bifurcating an embedded derivative. Consequently, when a call (put) option is contingently
exercisable, an entity does not have to assess whether the event that triggers the ability to exercise a call (put) option is related
to interest rates or credit risks. Public business entities must apply the new requirements for fiscal years beginning after December
15, 2016 and interim periods within those fiscal years. All entities have the option of adopting the new requirements early, including
adoption in an interim period. If an entity early adopts the new requirements in an interim period, it must reflect any adjustments
as of the beginning of the fiscal year that includes that interim period. The Company does not expect any material impact of this
new standard on its consolidated financial statements.
In April 2016, the FASB released ASU 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
. The ASU includes
multiple provisions intended to simplify various aspects of the accounting for share-based payments. While aimed at reducing the
cost and complexity of the accounting for share-based payments, the amendments are expected to significantly impact net income,
EPS, and the statement of cash flows. Implementation and administration may present challenges for companies with significant share-based
payment activities. The ASU is effective for public companies in annual periods beginning after December 15, 2016, and interim
periods within those years. The Company is currently evaluating the impact of this new standard on its consolidated financial statements.
In April 2016, FASB issued Accounting Standards
Update No. 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing
.
The amendments clarify the following two aspects of Topic 606:
(a)
identifying performance obligations; and
(b)
the
licensing implementation guidance. The amendments do not change the core principle of the guidance in Topic 606. The effective
date and transition requirements for the amendments are the same as the effective date and transition requirements in Topic 606.
Public entities should apply the amendments for annual reporting periods beginning after December 15, 2017, including interim reporting
periods therein (i.e., January 1, 2018, for a calendar year entity). Early application for public entities is permitted only as
of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.
The Company is currently evaluating the impact of this new standard on its consolidated financial statements.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 3 – INVENTORIES, NET
Inventories as of March 31, 2016 and December 31, 2015 consisted
of the following:
|
|
As of
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Raw materials (A)
|
|
$
|
28,882,519
|
|
|
$
|
162,766,248
|
|
Work-in-progress (B)
|
|
|
94,953,436
|
|
|
|
108,276,834
|
|
Finished goods (C)
|
|
|
13,127,831
|
|
|
|
27,260,103
|
|
Inventory valuation allowance
|
|
|
-
|
|
|
|
-
|
|
Total inventory
|
|
$
|
136,963,786
|
|
|
$
|
298,303,185
|
|
|
(A)
|
Included 899,503 grams of Au9999 gold as of March 31, 2016 and 5,624,476 grams of Au9999 gold as of December 31, 2015.
|
|
(B)
|
Included 3,017,085 grams of Au9999 gold March 31, 2016 and 3,549,984 grams of Au9999 gold as of December 31, 2015.
|
|
(C)
|
Included 415,738 grams of Au9999 gold March 31, 2016 and 886,849 grams of Au9999 gold as of December 31, 2015.
|
As of March 31, 2016, no inventory was pledged
on debt payable because the debts payable have been fully repaid upon maturity and accordingly previously pledged inventory has
been released (see Note 7).
As of December 31, 2015, 3,977,490 grams of
Au9999 gold with carrying value of approximately $115.1 million were pledged for certain bank loans and another 2,456,000 grams
of Au9999 gold with carrying value of approximately $71 million were pledged for the Company’s debts payable.
For the three months ended March 31, 2016 and
2015 the Company recorded a Nil and $2,989,681 of lower cost or market adjustment, respectively.
NOTE 4 – PROPERTY AND EQUIPMENT, NET
The following is a summary of property and equipment as of March
31, 2016 and December 31, 2015:
|
|
As of
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Buildings
|
|
$
|
2,378,611
|
|
|
$
|
2,363,093
|
|
Plant and machinery
|
|
|
18,660,286
|
|
|
|
18,496,731
|
|
Motor vehicles
|
|
|
54,289
|
|
|
|
53,935
|
|
Office and electric equipment
|
|
|
634,804
|
|
|
|
630,312
|
|
Subtotal
|
|
|
21,727,990
|
|
|
|
21,544,071
|
|
Less: accumulated depreciation
|
|
|
(14,331,612
|
)
|
|
|
(13,921,562
|
)
|
Property and equipment, net
|
|
$
|
7,396,378
|
|
|
$
|
7,622,509
|
|
Depreciation expense for the three months ended
March 31, 2016 and 2015 was $314,195 and $334,192, respectively.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 5 – DEPOSIT ON LAND USE RIGHT AND CONSTRUCTION IN
PROGRESS
On October 23, 2013, the Company, through its
wholly-owned subsidiary, Wuhan Kingold, entered into an agreement (the “Agreement”) with third-parties Wuhan Wansheng
House Purchasing Limited (“Wuhan Wansheng”) and Wuhan Huayuan Science and Technology Development Limited Company (“Wuhan
Huayuan”). The Agreement provides for the build out of the planned “Shanghai Creative Industry Park,” which is
proposed to be renamed to “Kingold Jewelry Cultural Industry Park” (the “Jewelry Park”). Pursuant to the
Agreement, Wuhan Kingold will acquire the land use rights for a parcel of land (the “Land”) in Wuhan for a total of
66,667 square meters (approximately 717,598 square feet, or 16.5 acres) (the “Land Use Right”), which has been approved
for real estate development use. Wuhan Kingold has committed to provide a total sum of RMB 1.0 billion (approximately $155 million)
for the acquisition of this Land Use Right and to finance the entire development and construction of a total of 192,149 square
meters (approximately 2,068,000 square feet) of commercial properties, which are proposed to include a commercial wholesale center
for various jewelry manufacturers, two commercial office buildings, a commercial residence of condominiums as well as a hotel.
As of March 31, 2016, the carrying value of
Jewelry Park was approximately $141.6 million (RMB 913.4 million), included the following components (1) Land use right of approximately
$9.4 million (RMB 60.4 million), which represents the total cost of the Land Use Right and (2) the construction progress of approximately
$132.3 million, consisting of the Company’s cash payment of approximately $83.4 million (RMB 538.0 million) towards the construction
of Jewelry Park project, capitalized interest of approximately $8.1 million (RMB 52.0 million) on the long-term bank loan, capitalized
interest of approximately $4.3 million (RMB 28.0 million) on the Debts and construction payable of approximately $36.4 million
(RMB 235.0 million) which has been accrued based on the billing request by the construction company as of March 31, 2016 (see Note
9).
Wuhan Kingold is also required to make the
construction payments to finance the entire construction project, as estimated based on certain construction project milestones
listed below. Due to a delay by the construction company Wuhan Wansheng in charge of the project’s construction, the Company
has delayed its payments to the construction company by ten to eleven months. However, this delay is not expected to impact the
total expected cost of RMB 1.0 billion (approximately $155 million) and any over budget cost will be the construction company’s
obligation.
In October 2015, Wuhan Kingold signed a supplemental
agreement with the construction company Wuhan Wansheng to amend the original acquisition agreement dated October 23, 2013. Pursuant
to this supplemental agreement, Wuhan Wansheng agreed to complete the construction and deliver the completed real estate property
to the Company before January 15, 2016. As of December 31, 2015, based on the actual construction in progress, both parties agreed
to extend the completion time for the construction was extended to April 2016. However, due to the cold weather condition in January
and February 2016 and the construction worker leave during the Chinese Spring Festival holiday season, the final construction work
of the Jewelry Park resumed in the middle of February 2016 and the landscaping, building decoration and road construction did not
fully complete as of March 31, 2016. Due to the construction work delay, the inspection application with local government was also
delayed until mid-April 2016 when the construction work fully completed. Therefore, in April 2016, both parties signed an additional
supplemental agreement to extend the final property delivery time to May 30, 2016 when the certificate of occupancy is expected
to be obtained from local government. As of the date of this Report, the Company is unable to predict the actual timing of the
delivery because the government inspection process is not under the Company’s control and may be longer than expected.
Based on the RMB 1.0 billion (approximately
$155 million) total budget on the Jewelry Park, as of December 31, 2015, the Company already paid RMB 520 million and was still
obligated to pay the remaining RMB 480 million to Wuhan Wansheng. From late January to early March 2016, the Company paid additional
RMB 79 million (approximately $12.2 million) to Wuhan Wansheng to settle the outstanding construction payable. As of March 31,
2016, the Company was still committed to pay the remaining amount of approximately $62 million (approximately RMB 401 million)
to Wuhan Wansheng. On April 28, 2016, the Company paid RMB 50 million (approximately $7.7 million) to Wuhan Wansheng and will make
the remaining payment of RMB 351 million (approximately $54.3 million) to Wuhan Wansheng upon delivery of the completed real estate
property to the Company with certificate of occupancy by May 30, 2016.
Upon the completion of the whole project in
accordance with the specific requirements agreed upon by the signing parties, Wuhan Kingold will have 100% ownership of the properties
situated on the land and intends to either sell or lease various properties. The following table identifies the original payment
milestones as well as the new payment milestones, which have been revised to reflect the delays with construction progress associated
with those milestones. The Company will continue to evaluate the milestone payment commitments in relation to actual progress and
completion and will revise as deemed necessary.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 5 – DEPOSIT ON LAND USE RIGHT
AND CONSTRUCTION IN PROGRESS - continued
|
|
Original Payment
Commitment
(RMB in millions)
|
|
|
Revised Payment
Commitment
(RMB in millions)
|
|
|
Revised Payment
Commitment
(USD in millions)
**
|
|
October 2013*
|
|
|
200
|
|
|
|
200
|
|
|
|
31
|
|
January 2014
|
|
|
50
|
|
|
|
50
|
|
|
|
8
|
|
June 2014
|
|
|
100
|
|
|
|
-
|
|
|
|
-
|
|
September 2014
|
|
|
150
|
|
|
|
20
|
|
|
|
3
|
|
November 2014
|
|
|
-
|
|
|
|
87
|
|
|
|
14
|
|
December 2014
|
|
|
-
|
|
|
|
35
|
|
|
|
5
|
|
January 2015***
|
|
|
250
|
|
|
|
-
|
|
|
|
-
|
|
February 2015***
|
|
|
-
|
|
|
|
28
|
|
|
|
4
|
|
April 2015
|
|
|
-
|
|
|
|
100
|
|
|
|
16
|
|
May 2015
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
June 2015***
|
|
|
250
|
|
|
|
-
|
|
|
|
-
|
|
January to March 2016
|
|
|
|
|
|
|
79
|
|
|
|
12
|
|
May or June 2016***
|
|
|
-
|
|
|
|
401
|
|
|
|
62
|
|
Total
|
|
|
1,000
|
|
|
|
1,000
|
|
|
|
155
|
|
* Includes initial deposit made to seller **
In US$ based on current exchange rates
***
Updated to reflect delay to payment schedule
The Land Use Right will not be transferred
to Wuhan Kingold until the project is completed and certificate of occupancy is issued. Upon the completion of the Project, the
excess of RMB 1.0 billion commitment over the actual amount spent on the construction of the project shall be deemed as the actual
cost of the Land Use Right. As of March 31, 2016 and December 31, 2015, the deposit on land use right was $9,357,810 and $9,296,763,
respectively.
As of March 31, 2016 and December 31, 2015,
the construction payable of approximately $36.4 million and $23.9 million has been accrued based on the billing request by the
construction company, respectively.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 6 – LOANS
Short term loans consist of the following:
|
|
As of
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
(a) Loans payable to CITIC Bank Wuhan Branch
|
|
$
|
-
|
|
|
$
|
6,161,714
|
|
(b) Loan payable to Bank of Hubei Wuhan Jiang’an Branch
|
|
|
3,101,088
|
|
|
|
3,080,857
|
|
(c) Loan payable to Minsheng Trust
|
|
|
46,516,316
|
|
|
|
46,212,857
|
|
(d) Current portion of long-term loan payable to Evergrowing Bank
|
|
|
310,108
|
|
|
|
-
|
|
Total short term loans
|
|
$
|
49,927,512
|
|
|
$
|
55,455,428
|
|
a) Loans payable to CITIC Bank Wuhan Branch
with an aggregate amount of approximately $6.2 million (RMB 40 million) matured and was fully repaid on March 1, 2016.
b) Loan payable to Bank of Hubei, Wuhan Jiang’an
Branch with an aggregate amount of approximately $3.1 million (RMB 20 million) originated on November 12, 2015, with a maturity
date of November 12, 2016. The annual interest rate was 6.7%. This loan is secured by the Company’s building and land use
rights with carrying value of approximately $5.9 million. In addition, the Company's subsidiary Wuhan Kingold and Mr. Zhihong Jia,
Chairman and Chief Executive Officer of the Company, separately signed a maximum guarantee agreement with the bank, to provide
a maximum amount of approximately $3.7 million (RMB 24 million) guarantee for a line of credit of approximately $3.1 million (RMB
20 million) from Bank of Hubei during September 24, 2015 through September 24, 2018.
c) Loan payable to Minsheng Trust, with an
aggregate amount of approximately $46.5 million (RMB 300 million) originated on September 17, 2015, with a maturity date of September
25, 2016. The annual interest rate was 12.5%. The loan is to be used for the Company’s working capital. Wuhan Kingold pledged
1,877,490 grams of gold with carrying value of approximately $61.5 million as of March 31, 2016 to secure this loan. The Company
was also required to pledge approximately $0.5 million (RMB 3 million) restricted cash with Minsheng Trust as collateral. In addition,
the Company’s CEO, Mr. Zhihong Jia and his wife, Ms. Lili Huang, jointly signed a guarantee agreement with the Minsheng Trust,
to provide a guarantee for the loan.
d) The current portion of loans payable to
Yantai Huanshan Road Branch of Evergrowing Bank (see note (f) below).
Interest expense for all of the loans mentioned
above amounted to $1,558,301 and $246,904 for the three months ended March 31, 2016 and 2015, respectively.
Long term loans consist of the following:
|
|
As of
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
(e) Loans payable to Qixia Branch of Evergrowing Bank
|
|
$
|
155,054,385
|
|
|
$
|
30,808,571
|
|
(f) Loans payable to Yantai Huanshan Road Branch of Evergrowing Bank
|
|
|
154,744,277
|
|
|
|
-
|
|
(g) Loans payable to Anxin Trust
|
|
|
45,275,880
|
|
|
|
-
|
|
Total long term loans
|
|
$
|
355,074,542
|
|
|
$
|
30,808,571
|
|
(e) Loans payable to Evergrowing Bank – Qixia Branch
On December 18, 2015, Wuhan Kingold signed
a loan agreement with the Qixia Branch of Evergrowing Bank in the amount of approximately $31.0 million (RMB 200 million) for the
purpose of acquiring the Jewelry Park project (see Note 5). The loan period is from December 18, 2015 to December 15, 2017 with
the annual interest of 7.5%. The loan is secured by 1,300,000 grams of Au9999 gold with carrying value of approximately $42.6 million.
In addition, the Company’s CEO, Mr. Zhihong Jia signed a guarantee agreement with the bank, to provide a guarantee for the
loan.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 6 – LOANS - continued
(e) Loans payable to Evergrowing Bank – Qixia Branch - continued
In January 2016, Wuhan Kingold
entered into two Loan Agreements of Circulating Funds with the Qixia Branch of Evergrowing Bank for loans of approximately
$124.0 million (RMB 800 million) in aggregate. The purpose of the loans is purchasing gold. The terms of loans are two years
and bear fixed interest of 7.5% per year. The loans are subject to certain covenants required by the agreements. The loans
are secured by 5,000,000 grams of Au9999 gold in aggregate with carrying value of approximately $163.7 million and are
jointly guaranteed by Mr. Zhihong Jia, the CEO and Chairman of the Company. Both loans are due in January 2018. The repayment
of the loans may be accelerated under certain conditions, including upon a default of principal or interest payment when due,
breach of representations or warranties, certain cross-defaults, upon the occurrence of certain material events affecting the
financial viability of Wuhan Kingold, and other customary conditions
(f) Loans payable to Evergrowing Bank- Yantai
Huanshan Road Branch
From February 24, 2016 to March 24, 2016, Wuhan
Kingold entered into ten Loan Agreements with the Yantai Huanshan Road Branch of Evergrowing Bank for a total of approximately
$155.1 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 subject to certain covenants required by the agreements. The loans are secured
by 5,550,000 grams of Au9999 gold in aggregate with carrying value of approximately $181.8 million and are jointly guaranteed by
Mr. Zhihong Jia, the CEO and Chairman of the Company. Based on the loan repayment plan as specified in the loan agreements, RMB
1 million (equivalent to $155,054) should be repaid on August 23, 2016 and additional RMB 1 million (equivalent to $155,054) should
be repaid on February 23, 2017 and accordingly these amounts have been reclassified as the current portion of the long-term loans
(see note (d) above). The remaining loans are due in February to March 2018. The repayment of the loans may be accelerated under
certain conditions, including upon a default of principal or interest payment when due, breach of representations or warranties,
certain cross-defaults, upon the occurrence of certain material events affecting the financial viability of Wuhan Kingold, and
other customary conditions. The repayment requirement is listed below:
|
|
As of
|
|
|
|
March 31, 2016
|
|
|
December 31,2015
|
|
August 23, 2016
|
|
$
|
155,054
|
|
|
$
|
-
|
|
February 23, 2017
|
|
|
155,054
|
|
|
|
-
|
|
Current portion
|
|
$
|
310,108
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
August 23, 2017
|
|
$
|
155,054
|
|
|
|
-
|
|
February 23, 2018 – March 24, 2018
|
|
|
154,589,223
|
|
|
|
-
|
|
Long-term portion
|
|
$
|
154,744,277
|
|
|
$
|
-
|
|
(g) Loans payable to Anxin Trust Co., Ltd
In January 2016, Wuhan Kingold entered into a Collective
Trust Loan Agreement with Anxin Trust Co., Ltd. (“Anxin Trust”). The agreement allows the Company to access of approximately
$465 million (RMB 3 billion) within 60 months. Each individual loan will bear a fixed annual interest of 14.8% with a term of 36
months or less. The loan is subject to certain covenants required by the agreement. The purpose of this trust loan is to provide
working capital for the Company to purchase gold. The loan is secured by 1,700,000 grams of Au9999 gold in aggregate with carrying
value of approximately $55.7 million. The loan is also jointly guaranteed
by Mr. Zhihong Jia, the CEO and Chairman of the Company. As of the date of this report, the Company received an aggregate of approximately
$45.3 million (RMB 292 million) from the loan.
For the three months ended March 31, 2016 and
2015, total interest for long term loans capitalized on the Jewelry Park project (see Note 5) was $Nil and $1,085,540, respectively.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 7 – DEBTS PAYABLE
On February 9, 2015, Wuhan Kingold received
a Notice of Acceptance of Registration (the “Acceptance”) from the PRC’s National Association of Financial Market
Institutional Investors (the “NAFMII”), registering the issuance of up to RMB 750 million (approximately US$116 million)
of debt financing instruments by Wuhan Kingold pursuant to a Non-Public Oriented Debt Financing Instruments Private Placement Agreement,
by and among Wuhan Kingold, SPD Bank and the other institutional investors named therein (together with SPD Bank, the “Investors”),
dated July 21, 2014 (the “Private Placement Agreement”). Such Private Placement Agreement became valid upon the Acceptance.
In connection with the Private Placement Agreement, Wuhan Kingold and SPD Bank entered into an Underwriting Agreement dated August
12, 2014, appointing SPD Bank as the lead underwriter and bookkeeping manager for the issuance of the debt securities. The debt
financing program is intended to operate similar to a commercial paper program. Under the program, Wuhan Kingold may issue the
debt securities at any time within two years from the date of the Acceptance, with the initial issuance completed within six months
from the date of the Acceptance. Wuhan Kingold is required to report any issuance to the NAFMII. The Private Placement Agreement
provides that the Investors are entitled to, but are not required to, participate in any issuance, and prohibits using the proceeds
from any issuance of debt securities for real estate and equity acquisition transactions.
On March 26, 2015, Wuhan Kingold completed
the issuance of the first phase of debt financing instruments with the total amount of approximately $62 million (RMB 400 million)
under the Private Placement Agreement. The debt has a one-year term with the annual interest rate of 7%. The debt was secured by
certain gold or gold products held by Wuhan Kingold and approximately $5 million (RMB 35 million) security deposit. Management
determined the debt was for the purpose of financing the Jewelry Park project (see Note 5). In connection with the foregoing, Wuhan
Kingold and SPD Bank have entered into a Credit Agent Agreement (the “Credit Agent Agreement”), pursuant to which SPD
Bank serves as the agent of the holders of the debt securities. Zhihong Jia, Chairman and Chief Executive Officer of the Company,
has executed a guaranty, to guarantee Wuhan Kingold’s obligations under the Credit Agent Agreement. The interest expense
incurred on the debt financing instruments amounted to approximately $3.3 million for the year ended December 31, 2015 and was
capitalized into construction in progress of Jewelry Park project. The RMB 400 million debts payable have been fully repaid to
SPD Bank upon maturity on March 24, 2016.
A one-time financing cost of approximately
$0.6 million (RMB 4 million) related to the issuance has been offset against the debts payable carrying amount and is being amortized
on a quarterly basis. For the year ended December 31, 2015, amortization of the deferred financing costs was $490,870. The remaining
deferred financing cost of $145,180 was fully amortized in the three months ended March 31, 2016.
|
|
As of
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Gross Debts Payable for Phase One
|
|
$
|
-
|
|
|
$
|
61,617,142
|
|
Deferred financing cost
|
|
|
-
|
|
|
|
(145,180
|
)
|
|
|
|
|
|
|
|
|
|
Debts Payable, net
|
|
$
|
-
|
|
|
$
|
61,471,962
|
|
Pursuant to the Private Placement Agreement
dated on August 12, 2014, the RMB 750 million debt financing instruments can be issued within two years. The Company originally
planned to request the second phase of issuance of approximately $54 million (RMB 350 million) before the first phase debt expiration
date in March 2016 and the proceeds were planned to pay back the first phase debt. However, because the Company obtained alternative
financing through several bank borrowings, management does not expect the second phase of debt issuance will be requested in the
near future.
NOTE 8 – DEPOSITS PAYABLE - JEWELRY
PARK
In August 2015, the Company started the pre-sale
of certain real estate property in the Kingold Jewelry Park (see Note 5). 41,754.23 square meters (approximately 433,000 square
feet) of office space have been pre-sold to various buyers at approximately $930 (RMB 6,000) per construction square meter and
the Company received deposits of approximately $22 million (RMB 144 million) from buyers as of March 31, 2016 and December 31,
2015. The Company expects to deliver these properties to the customers when the Jewelry Park passes the inspection conducted by
the local government authority and the certificate of occupancy is obtained in late May 2016.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 9 – INVESTMENT IN GOLD
As
of March 31, 2016, the Company leased a total of 4,000,000 grams of Au9999 gold in aggregate with carrying value of approximately
$138.3 million from Wuhan Shuntianyi Investment Management Ltd. (“Shuntianyi”), a related party (See Note 10). Together
with part of its inventory, the Company pledged a total of 15,427,490 grams of Au9999 gold with carrying value of approximately
$505.2 million for obtaining various bank loans (See Note 6)
.
As of March 31, 2016, total investment in gold
pledged had a fair market value of $522.8 million, which resulted in unrealized gain of $17.6 million. The Company recorded this
unrealized gain as other comprehensive income.
As of March 31, 2016, a total of 13,550,000
grams of Au9999 gold with fair value of approximately $459.2 million was pledged for long term bank loans, and therefore classified
as non-current investment in gold. The remaining investment in gold of total 1,877,490 grams of Au9999 gold with fair value of
approximately $63.6 million was classified as current asset on the Company’s condensed consolidated balance sheet as of March
31, 2016.
NOTE 10 – GOLD LEASE PAYABLE –
RELATED PARTY
During three months ended March 31, 2016, the
Company entered into multiple gold lease agreements with Wuhan Shuntianyi Investment Management Ltd. (“Shuntianyi”),
a related party which was controlled by the CEO and the Chairman of the Company, to lease a total of 4,000,000 grams of Au9999
gold in aggregate with carrying value of approximately $138.3 million. These leases were from March 2, 2016 to November 30, 2016.
The Company recorded these transactions as gold lease payable and presented as a current liability on the Company’s condensed
consolidated balance sheet as of March 31, 2016.
NOTE 11 – OTHER RELATED PARTY TRANSACTIONS
For the three months ended March 31, 2016,
the Company borrowed a total of $450,025 from Mr. Zhihong Jia, the CEO and Chairman of the Company, to pay certain expense to various
service providers on behalf of the Company. Such amount is unsecured and repayable on demand with free of interest. As of March
31, 2016 and December 31, 2015, the due to related party amounted to $450,025 and $200,059, respectively.
For the three months end March 31, 2016 and
2015, Mr. Zhihong Jia, the CEO and Chairman of the Company, together with his wife provided their personal guarantees to various
financial institutions to supports the Company (see Notes 6 and 7).
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 for 2015 and 2014. The Company has loss carry forwards of approximately
$16 million for U.S. income tax purposes available for offsetting against future taxable U.S. income, expiring in 2035. 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 March 31, 2016 and December 31, 2015 was approximately $5.5 million and $5.4 million, respectively.
The net increase in the valuation allowance for the three months ended March 31, 2016 and 2015 was $100,284 and $278,125, respectively.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Dragon Lead is incorporated in the British
Virgin Islands (the “BVI”), and under current laws of the BVI, income earned is not subject to income tax.
Wuhan Vogue-Show, Wuhan Kingold, Kingold Internet
and Yuhuang are incorporated in the PRC and are subject to PRC income tax, which is computed according to the relevant laws and
regulations in the PRC. The applicable tax rate is 25% for the periods ended March 31, 2016 and 2015. The Company recorded $Nil
deferred income tax assets as of March 31, 2016 and December 31, 2015.
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 months ended March 31, 2016 and 2015:
|
|
For the three months ended
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
(294,952
|
)
|
|
$
|
(819,803
|
)
|
Foreign
|
|
|
20,558,843
|
|
|
|
9,385,384
|
|
|
|
$
|
20,263,891
|
|
|
$
|
8,565,581
|
|
Significant components of the income tax provision were as follows
for the three months ended March 31, 2016 and 2015:
|
|
For the three months ended
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Current tax provision
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
Foreign
|
|
|
4,811,004
|
|
|
|
2,728,902
|
|
|
|
|
4,811,004
|
|
|
|
2,728,902
|
|
|
|
|
|
|
|
|
|
|
Deferred tax provision (recovery)
|
|
|
|
|
|
|
|
|
Federal
|
|
|
-
|
|
|
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
Foreign
|
|
|
255,674
|
|
|
|
(744,525
|
)
|
|
|
|
255,674
|
|
|
|
(744,525
|
)
|
Income tax provision
|
|
$
|
5,066,678
|
|
|
$
|
1,984,377
|
|
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 12 – INCOME TAXES - continued
The components of deferred tax assets and deferred tax liability
as of March 31, 2016 and December 31, 2015 consist of the following:
|
|
As of March 31,
2016
|
|
|
As of December 31,
2015
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Deferred tax assets from net operating losses from parent company
|
|
$
|
5,455,464
|
|
|
$
|
5,335,180
|
|
Valuation allowance
|
|
|
(5,455,464
|
)
|
|
|
(5,335,180
|
)
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liability:
|
|
|
|
|
|
|
|
|
Deferred tax liability from capitalized interest
|
|
$
|
2,045,934
|
|
|
$
|
1,774,993
|
|
Income tax provision
|
|
$
|
2,045,934
|
|
|
$
|
1,774,993
|
|
NOTE 13 – EARNINGS PER SHARE
For the three months ended March 31, 2016 and
2015, the basic average shares outstanding and diluted average shares outstanding were the same because the effect of potential
shares of common stock was anti-dilutive since the exercise prices for the warrant and options were greater than the average market
price for the related periods. As a result, for the three months ended March 31, 2016 and 2015, warrants to purchase 150,000 shares
and 294,000 shares of common stock at weighted average exercise price of $1.20 and $3.25 per shares, respectively, and options
to purchase 3,220,000 shares of common stock at weighted average exercise price of $1.90 per share, were not included in the computation
of diluted EPS.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 14 – OPTIONS
The 2011 Stock Incentive Plan (the “Plan”)
permits the granting of stock options (including incentive stock options as well as nonstatutory stock options), stock appreciation
rights, restricted and unrestricted stock awards, restricted stock units, performance awards, other stock-based awards or any combination
of the foregoing. Under the terms of the Plan, up to 5,000,000 shares of the Company’s common stock may be granted. Prior
to January 1, 2012, the Company granted 1,620,000 options under the plan. In accordance with the vesting periods, $Nil and $110,439
were recorded as part of operating expense-stock compensation for the three months ended March 31, 2016 and 2015, respectively.
On January 9, 2012, the Company granted 1,300,000
options with an exercise price of $1.22 to certain members of management and directors. These options can be exercised within ten
years from the grant date once they become exercisable. The options become exercisable in accordance with the schedule below: (a)
25% of the options become exercisable on the first anniversary of the grant date (such date is the initial vesting date), and (b)
6.25% of the options become exercisable on the date three months after the initial vesting date and on such date every third month
thereafter, through the fourth anniversary of the grant date. The fair value of the options was calculated using the Black-Scholes
options pricing model using the following assumptions: volatility of 124.81%, risk free interest rate of 1.98 %, and expected term
of 10 years. The fair value of the options was $1,516,435. In accordance with the vesting periods, $Nil and $94,777 were recorded
as part of operating expense-stock compensation for the three months ended March 31, 2016 and 2015, respectively.
On April 1, 2012, the Company granted 120,000
options with an exercise price of $1.49 to its Chief Financial Officer (“CFO”) per his employment agreement. These
options can be exercised within ten years from the grant date once they become exercisable. The options become exercisable every
three months starting from grant date for the one year service period from April 1, 2012. The fair value of the options was calculated
using the Black-Scholes options pricing model using the following assumptions: volatility of 124.50%, risk free interest rate of
2.23%, and expected term of 10 years. The fair value of the options was $170,967. These options have fully vested by December 31,
2013.
On July 16, 2013, the Company granted 90,000
options with an exercise price of $1.18 to its non-employee directors, which options expire ten years from the grant date under
the Plan. These options became exercisable in accordance with the following schedule: (a) 25% of the options became exercisable
on the first anniversary of the grant date (the “Initial Vesting Date”), and (b) 6.25% of the options became exercisable
on the date three months after the Initial Vesting Date and on such date every third month thereafter, through the fourth anniversary
of the grant date. The fair value of the options was calculated using the Black-Scholes options pricing model using the following
assumptions: volatility of 118.01%, risk free interest rate of 2.55%, and expected term of 6.25 years. The fair value of the options
was $92,458. In accordance with the vesting periods, $5,779 and $5,779 were recorded as part of operating expense-stock compensation
for the 90,000 options above for the three months ended March 31, 2016 and 2015, respectively.
On February 25, 2015, the Company granted 90,000
options with an exercise price of $1.11 to its non-employee directors, which options expire ten years from the grant date under
the Plan. These options became exercisable in accordance with the following schedule: (a) 25% of the options became exercisable
on the first anniversary of the grant date, and (b) 6.25% of the options became exercisable on the date three months after the
initial vesting date and on such date every third month thereafter, through the fourth anniversary of the grant date. The fair
value of the options was calculated using the Black-Scholes options pricing model under the following assumptions: volatility of
115.20%, risk free interest rate of 1.96%, and expected term of 6.25 years. The aggregate fair value of the options was $85,822.
In accordance with the vesting periods, $5,364 and $1,788 were recorded as part of operating expense-stock compensation for the
90,000 options above for the three months ended March 31, 2016 and 2015, respectively.
The Company recorded $11,143 and $212,783 stock-based
compensation expense for the three months ended March 31, 2016 and 2015, respectively. The following table summarized the Company’s
stock option activity:
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Number of
Options
|
|
|
Weighted Average
Exercise Price
|
|
|
Remaining Life
in Years
|
|
|
Aggregate
Intrinsic Value
|
|
Outstanding, December 31, 2015
|
|
|
3,220,000
|
|
|
$
|
1.90
|
|
|
|
5.76
|
|
|
$
|
-
|
|
Exercisable, December 31, 2015
|
|
|
3,009,375
|
|
|
$
|
1.95
|
|
|
|
5.63
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding, March 31, 2016
|
|
|
3,220,000
|
|
|
$
|
1.90
|
|
|
|
5.51
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, March 31, 2016
|
|
|
3,118,750
|
|
|
$
|
1.93
|
|
|
|
5.42
|
|
|
$
|
-
|
|
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
March 31, 2016 and December 31, 2015
|
|
Number of
|
|
|
Weighted Average
|
|
|
Weighted average
|
|
|
|
warrants
|
|
|
Exercise Price
|
|
|
Remaining Life in Years
|
|
Outstanding, December 31, 2015
|
|
|
294,000
|
|
|
$
|
3.61
|
|
|
|
0.63
|
|
Granted
|
|
|
150,000
|
|
|
|
1.20
|
|
|
|
|
|
Forfeited
|
|
|
(294,000
|
)
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding, March 31, 2016
|
|
|
150,000
|
|
|
$
|
1.20
|
|
|
|
1.25
|
|
On August 12, 2015, the
Company signed a consulting agreement to engage Bespoke Independent Partners (“BIP”), a fully owned subsidiary of FPIA
Partners LLC to operate as a strategic advisor to Kingold. As the part of the agreement with BIP, warrants to purchase an aggregate
of up to 900,000 shares with exercise price ranging from $1.20 to $1.80 may be due to BIP if certain stock performance targets
are met within a three-year period starting from August 12, 2015. Such warrants become exercisable for cash three months after
they are due and may be exercised for twelve months after they become exercisable. As of March 31, 2016, BIP claimed 150,000 shares
of warrants to BIP for certain milestone accomplished with an exercise price of $1.20 per share. The warrants may be exercised
for cash from June 29, 2016 until June 28, 2017. Accordingly, the Company recorded $64,204 consulting expenses and included in
the general administrative expenses. 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. As of December 31, 2015, BIP did not claim any warrants because no performance target was met.
A total of 294,000 warrants consisting of 150,000 warrants issued to Wallington Investment Holdings Ltd with exercise price of
$3.25 per share on January 13, 2011 and 144,000 warrants issued to Rodman & Renshaw, LLC with exercise price of $3.99 per share
on January 13, 2011 expired on January 13, 2016.
NOTE 16 – NON-CONTROLLING INTEREST
Non-controlling interest represents the minority
stockholders’ 45% proportionate share of the results of the newly established subsidiary Kingold Internet and Yuhuang. A
reconciliation of non-controlling interest as of March 31, 2016 and December 31, 2015 are as follows:
|
|
As of March 31, 2016
|
|
|
As of December 31, 2015
|
|
Beginning Balance
|
|
$
|
73,274
|
|
|
$
|
-
|
|
Capital Contribution
|
|
|
-
|
|
|
|
69,319
|
|
Proportionate shares of Net loss
|
|
|
(1,197
|
)
|
|
|
(296
|
|
Foreign currency translation gain
|
|
|
(454
|
)
|
|
|
4,251
|
|
Ending Balance
|
|
$
|
71,623
|
|
|
$
|
73,274
|
|
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 $55,653,562 and $29,544,475 as of March 31, 2016 and December
31, 2015, respectively. The cash balance held in the BVI bank accounts was $25,399 and $13,277 as of March 31, 2016 and December
31, 2015, respectively. As of March 31, 2016 and December 31, 2015, the Company held $146,428 and $144,465 of cash balances within
the United States, no balance was in excess of FDIC insurance limits of $250,000 as of March 31, 2016 and December 31, 2015, respectively.
For the periods ended March 31, 2016 and 2015,
almost 100% of the Company's assets were located in the PRC and 100% of the Company's revenues were derived from its subsidiaries
located in the PRC.
The Company’s principal raw material
used during the year was gold, which accounted for almost 100% of its total purchases for the periods ended March 31, 2016 and
2015. The Company purchased gold directly, and solely, from the Shanghai Gold Exchange, the largest gold trading platform in the
PRC.
No customer accounted for more than 10% of annual sales for the
periods ended March 31, 2016 or 2015.
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 CCB, SPD Bank, CITIC Bank and ICBC 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.
|
1)
|
Gold
lease transactions with CCB
|
During 2015, the Company renewed gold lease
agreements with CCB and leased an aggregate of 1,515 kilograms of gold, which amounted to approximately $56.3 million (RMB 365
million). The leases have initial terms of one year and provide an interest rate of 6% per annum. The leased gold shall be returned
to CCB upon lease maturity in December 2016.
During the three months ended March 31, 2016,
the Company entered into gold lease agreements with CCB and leased an aggregate of 815 kilograms of gold, which amounted to approximately
$29.4 million (RMB 189.4 million). The leases have initial terms of one year and provide an interest rate of 5.7% per annum. The
leased gold shall be returned to the Bank upon lease maturity in 2017.
During the three months ended March 31, 2016,
the Company returned 880 kilograms of gold, which amounted to approximately $33.8 million (RMB 218.1 million) back to CCB upon
lease maturity.
As of March 31, 2016, 1,450 kilograms of leased
gold were outstanding and not yet returned to the Bank which amounted to approximately $52.2 million (RMB 336.6 million) and due
in various months throughout 2016 and 2017.
|
2)
|
Gold
lease transactions with SPD Bank
|
On April 10, 2015, Wuhan Kingold entered into
a gold lease agreement with SPD Bank to lease additional 197 kilograms of gold (valued at approximately RMB 46.98 million or approximately
$7.2 million). The lease has initial term of one year and provides an interest rate of 3.2% per annum.
In the third quarter of 2015, Wuhan Kingold
entered into several gold lease agreements with SPD Bank to lease an aggregate of 720 kilograms of gold, valued approximately $25.9
million (RMB 168.2 million). The leases have initial terms of one year and provide an interest rate of 2.8% to 6% per annum. The
Company is required to deposit cash into an account at SPD Bank equal to approximately $16 million (RMB 103 million).
As of December 31, 2015, 917 kilograms of leased
gold were outstanding and not yet returned to SPD Bank, which amounted to approximately $33.1 million (RMB 215.2 million). Such
gold leases will be due in various months in 2016.
As of March 31, 2016, 917 kilograms of leased
gold were outstanding and not yet returned to SPD Bank, which amounted to approximately $33.4 million (RMB 215.2 million). Such
gold leases will be due in various months in 2016.
|
3)
|
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 a restricted 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 shall be returned to the Bank upon lease maturity in 2016. The Company is required to deposit cash into a restricted account
at the Bank equal to approximately $3 million (RMB 19.5 million).
As of December 31, 2015, 350 kilograms of leased
gold were outstanding and not yet returned to CITIC Bank, which amounted to approximately $12.4 million. During the three months
ended March 31, 2016, the Company returned 150 kilograms of gold, which amounted to approximately $5.5 million (RMB 35.5 million)
back to CITIC upon lease maturity.
As of March 31, 2016, 200 kilograms of leased
gold were outstanding and not yet returned to CITIC Bank, which amounted to approximately $7.0 million (RMB 44.8 million). Such
leased gold is due in various months in 2016.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 18 – GOLD LEASE TRANSACTIONS - continued
|
4)
|
Gold
lease transaction with ICBC
|
During the three months ended March 31, 2016,
the Company entered into a gold lease agreement with ICBC and leased 527 kilograms of gold, which amounted to approximately $21.7
million (RMB 139.7 million). The lease has an initial term of half year and provides an interest rate of 2.75% per annum. The leased
gold shall be returned to the Bank upon lease maturity in September 2016. As of March 31, 2016, 527 kilograms of leased gold were
outstanding and not yet returned to ICBC.
|
5)
|
Gold
lease transactions with related party
|
During three months ended March 31, 2016, the
Company entered into multiple gold lease agreements with Wuhan Shuntianyi Investment Management Ltd. (“Shuntianyi”),
a related party which was controlled by the CEO and the Chairman of the Company, to lease a total of 4,000,000 grams of Au9999
gold in aggregate with carrying value of approximately $138.3 million. These leases were from March 2, 2016 to November 30, 2016.
As of March 31, 2016 and December 31, 2015,
7,094 kilograms and 2,782 kilograms of leased gold were outstanding, at the approximated carrying amounts of $252.5 million and
$101.8 million, respectively.
Interest expense for all gold lease arrangements
for the three month period ended March 31, 2016 and 2015 were approximately $1.23 million and $1.84 million, respectively, which
was included in the cost of sales.
NOTE 19 – COMMITMENTS AND CONTINGENCIES
Commitments
Future payment commitments under the purchase
agreement of “Kingold Jewelry Cultural Industry Park” amounted to approximately $62 million (RMB 401 million). See
Note 5 “Deposit on Land Use Right and Construction In Progress”.
On August 12, 2015, the Company signed a consulting
agreement to engage BIP to operate as a strategic advisor to Kingold. BIP claimed an initial three month retainer fee of $12,000
as well as a due diligence fee of $15,000 upon execution of the contract. Thereafter BIP claimed service fees of $4,000 per month.
Pursuant to the agreement with BIP, an aggregate of 900,000 shares of warrants with exercise price ranging from $1.20 to $1.80
may be granted to BIP if certain stock performance targets are met within a three-year period. As of March 31, 2016, 150,000 warrants
were claimed by BIP for certain milestone accomplished with an exercise price of $1.20 per share. Subsequent to March 31, 2016,
BIP claimed that the Company was obligated to issue additional warrants based on meeting certain stock performance targets (See
Note 19).
NOTE 20 – CONVERTIBLE NOTE PURCHASE AGREEMENT
On April 2, 2015, the Company entered into
a Convertible Note Purchase Agreement (the “Purchase Agreement”) with Fidelidade – Companhia de Seguros, S.A.,
a company duly incorporated and existing under the laws of Portugal and a majority-owned subsidiary of Fosun International Limited
(the “Holder”). Pursuant to the Purchase Agreement, the Company agreed to issue and sell to the Holder $15 million
aggregate principal amount 6.0% Senior Secured Convertible Note due 2018 (the “Note”), subject to customary closing
conditions. The Company will sell the Note in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities
Act of 1933, as amended (the “Securities Act”). The Note and the underlying shares of the Company’s common stock
issuable upon conversion of the Note have not been registered under the Securities Act and may not be offered or sold in the United
States absent registration or an applicable exemption from registration requirements.
The Note will bear interest at a rate of 6.0%
per year payable annually. The Note will mature on the third anniversary of the issuance date of the Note, unless earlier converted.
The Note constitutes a general, senior, secured obligation of the Company. The Company is required to grant the Holder a security
interest in certain collateral as identified in the Purchase Agreement, to secure the payment, discharge and performance of all
the Company’s obligations under the Note. Mr. Zhihong Jia, Chairman and Chief Executive Officer of the Company, will execute
a guarantee in favor of the Holder, pursuant to which Mr. Jia will be jointly liable for the Company’s obligations under
the Note.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 20 – CONVERTIBLE NOTE PURCHASE
AGREEMENT - continued
Subject to and upon compliance with the provisions
of the Purchase Agreement, the Holder has the right, at its option, to convert the principal amount of the Note or any portion
of such principal amount which is $1,000 or an integral multiple of $1,000 in excess thereof, into shares of common stock at the
applicable conversion rate. The conversion rate is initially 869.57 shares of common stock per $1,000 principal amount of Note
(equivalent to an initial conversion price of approximately $1.15 per share), subject to adjustment in certain events described
in the Purchase Agreement. Upon conversion, the Company will deliver shares of common stock as set forth in the Purchase Agreement.
No fractional shares will be issued upon any conversion.
In connection with the entry into the Purchase
Agreement, the Company will enter into a registration rights agreement (the “Registration Rights Agreement”) with the
Holder as a condition to closing the sale of the Note, which sets forth the rights of the Holder to have the shares of common stock
issuable upon conversion of the Note registered with the SEC for public resale under the Securities Act. Pursuant to the Registration
Rights Agreement, the Company is required to file a registration statement with the SEC (the “Initial Registration Statement”)
within 60 days following the date of the issuance of the Note, registering the shares of common stock issuable upon conversion
of the Note. The Company is required to use its reasonable best efforts to have the Initial Registration Statement declared effective
as promptly as possible following the filing thereof and, in any event, by no later than 90 days after the date of the issuance
of the Note. In addition, the agreement gives the Holder the ability to exercise certain piggyback registration rights in connection
with registered offerings by the Company.
The Purchase Agreement was set to terminate
automatically on May 31, 2015 in the absence of a closing or extension at the discretion of the Holder. Closing did not occur prior
to such time because the Company had not secured a $15 million letter of credit required under the agreement. The Holder has not
provided written notice to the Company of its intention either to terminate or to extend the Purchase Agreement, and the Company
continues to pursue the $15 million letter of credit. While there can be no guarantee that the Company will locate a letter of
credit on terms acceptable to the Holder, the Company remains willing to proceed under the Purchase Agreement.
NOTE 21 – SUBSEQUENT EVENTS
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 $46.5 million (RMB 300 million) for the purpose of working capital needs. The loan
has a 24-month term starting from the date of releasing the loan, and bears interest at a fixed rate of 13% per annum. The loan
is secured by 1,121 kilograms of Au9995 gold, which approximately $44.3 million (RMB 285.9 million) is pledged by Wuhan Kingold.
The loan is jointly guaranteed by Mr. Zhihong Jia, the CEO and Chairman of the Company and shall be repaid upon maturity. As of
March 31, 2016, the loan was not released by Chang’An Trust. On April 27, 2016 and April 29, 2016, approximately $26.8 million
(RMB 173 million) and $4 million (RMB 26 million), respectively, were released by Chang’ An Trust to the Company, with maturity
dates on April 27, 2018 and April 29, 2018, respectively. The Company also made a restricted deposit of $308,556 (RMB 1.99 million)
to secure these loans. The deposit will be refunded when the loan is repaid upon maturity.
On April 19, 2016, BIP notified the Company
that under the terms of consulting agreement with BIP (see Note 13), the second milestone was accomplished on April 18, 2016. BIP
claimed 150,000 warrants at an exercise price of $1.50 per share. The warrants may be exercised for cash from July 17, 2016 until
July 17, 2017.
On May 10, 2016, the Company notified BIP that
the consulting agreement was terminated.
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 $77.5 million (RMB 500 million) as working capital loan. The loan is comprised of two installments,
with the first installment of approximately $15.5 million (RMB 100 million) and the second installment of approximately $62 million
(RMB 400 million). Each installment has a one-year term starting from the installment release date. For each installment, the Company
is required to make the first interest payment equal to 4.1% of the principle received, then the rest of interest payments are
calculated based on a fixed interest rate of 8% and due on semi-annual basis. The Company is required to pledge 2,600 kilogram
of Au9995 gold with carrying value of approximately $83.4 million (RMB 538 million) as collateral to secure this loan. The loan
is jointly guaranteed by Mr. Zhihong Jia, the CEO and Chairman of the Company, and Wuhan Vogue-Show. As of the date of this Report,
RMB 500 million (approximately $77.5 million) has been fully released by National Trust.