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 June 30, 2017 are not necessarily indicative of the results that may be expected
for the fiscal year ending December 31, 2017. The information included in this Form 10-Q should be read in conjunction with Management’s
Discussion and Analysis, and the financial statements and notes thereto included in the Company’s Form 10-K for the fiscal
year ended December 31, 2016, filed with the SEC on April 17, 2017.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
Wuhan Kingold Jewelry Co., Inc. (“Wuhan
Kingold”) should be considered as a 100% contractually controlled affiliate of Kingold. Kingold is empowered, through its
wholly owned subsidiaries Dragon Lead Group Limited (“Dragon Lead”) and Wuhan Vogue-Show Jewelry Co., Inc. (“Wuhan
Vogue-Show”), with the ability to control and substantially influence Wuhan Kingold’s daily operations and financial
affairs, appoint its senior executives and approve all matters requiring shareholders’ approval. Kingold is also obligated
to absorb a majority of expected losses of Wuhan Kingold, which enables Kingold to receive a majority of expected residual returns
from Wuhan Kingold, and because Kingold has the power to direct the activities of Wuhan Kingold that most significantly impact
Wuhan Kingold’s economic performance, Kingold, through its wholly-owned subsidiaries, accounts for Wuhan Kingold as its Variable
Interest Entity. Accordingly, Kingold consolidates Wuhan Kingold’s operating results, assets and liabilities. The Company
makes an ongoing assessment to determine whether Wuhan Kingold is still a Variable Interest Entity.
In April 2015, Wuhan Kingold Jewelry Co., Inc.
(“Wuhan Kingold”) established a new subsidiary Wuhan Kingold Internet Co., Ltd. (“Kingold Internet”), of
which Wuhan Kingold holds a 55% ownership interest and a third-party minority shareholder holds the remaining 45% ownership interest.
Kingold Internet engaged in promoting the online sales of jewelry products through cooperation with Tmall.com, a large business-to-consumer
online retail platform owned by Alibaba Group. In May 2015, Kingold Internet also established a new subsidiary Yuhuang Jewelry
Design Co., Ltd (“Yuhuang”).
On December 14, 2016, Wuhan Kingold transferred
its 55% ownership interest in Kingold Internet to Wuhan Kingold Industrial Group Co., Ltd., a related party, for a consideration
of $79,196 (RMB 550,000), which was the same amount Wuhan Kingold originally invested. After the transfer, Kingold Internet and
Yuhuang were no longer the subsidiaries of Wuhan Kingold.
The accompanying unaudited condensed consolidated
financial statements include the financial statements of Kingold, Dragon Lead, Wuhan Vogue-Show and Wuhan Kingold. All significant
inter-company balances and transactions have been eliminated in consolidation.
Kingold, Dragon Lead, and Wuhan Vogue-Show,
are hereinafter collectively referred to as the “Company.”
Use of Estimates
The preparation of the unaudited condensed
consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated
financial statements as well as the reported amounts of revenues and expenses during the reporting period. Significant estimates
required to be made by management include, but are not limited to, useful lives of property, plant and equipment, intangible assets,
the recoverability of long-lived assets, inventory valuation, allowance for doubtful accounts, deferred income tax, deferred debt
issuances costs, investment in gold and share based compensation. Actual results could differ from those estimates.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Restricted Cash
As of June 30, 2017 and December 31, 2016,
the Company had restricted cash of $26,291,793 and $60,344,430, respectively. Approximately total of $10.1 million was related
to the various loans with banks and financial institutions – see Note 5 - Loans. Approximately $16.2 million was related
to the gold lease deposits with China Construction Bank (“CCB”) - see Note 18 - 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 June 30, 2017 and December 31, 2016, there was no allowance recorded as the Company considers all of the accounts
receivable fully collectible.
Inventories
Inventories are stated at the lower of cost
or market value, and cost is calculated on the weighted average basis. As of June 30, 2017, an allowance of $17,851,746 was recorded
as the current market price of gold was lower than the carrying value of the Company’s inventories. As of December 31, 2016,
there was no lower of cost or net realizable value adjustment. The cost of inventories comprises all costs of purchases, costs
of fixed and variable production overhead and other costs incurred in bringing the inventories to their present condition.
Property and Equipment
Property and equipment are stated at cost,
less accumulated depreciation. Expenditures for additions, major renewals and betterments are capitalized, and expenditures for
maintenance and repairs are charged to expense as incurred.
Depreciation is provided on a straight-line
basis, less estimated residual value, over an asset’s estimated useful life. The estimated useful lives used in connection
with the preparation of the financial statements are as follows:
|
|
Estimated
Useful Life
|
Buildings
|
|
30 years
|
Plant and machinery
|
|
15 years
|
Motor vehicles
|
|
10 years
|
Office furniture and electronic equipment
|
|
5 – 10 years
|
Land Use Right
Under PRC law, all land in the PRC is owned
by the government and cannot be sold to an individual or company. The government grants individuals and companies the right to
use parcels of land for specified periods of time. These land use rights are sometimes referred to informally as “ownership.”
Land use rights are stated at cost less accumulated amortization. Amortization is provided over the respective useful lives, using
the straight-line method. Estimated useful life is 50 years, and is determined in connection with the term of the land use right.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Long-Lived Assets
Certain assets such as property, plant and
equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be
recoverable. Recoverability of assets that are held and used is measured by a comparison of the carrying amount of an asset to
estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its
estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount exceeds the fair value
of the asset. There were no events or changes in circumstances that triggered a review of impairment of long-lived assets as of
June 30, 2017 and December 31, 2016.
Fair Value of Financial Instruments
The Company follows the provisions of Accounting
Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures.” ASC 820 clarifies the definition
of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used
in measuring fair value as follows:
Level 1-Observable inputs such as unadjusted
quoted prices in active markets for identical assets or liabilities available at the measurement date.
Level 2-Inputs other than quoted prices that
are observable for the asset or liability in active markets, quoted prices for identical or similar assets and liabilities in markets
that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable
market data.
Level 3-Inputs are unobservable inputs which
reflect management’s assumptions based on the best available information.
The carrying value of accounts receivable,
other current assets and prepaid expenses, short term loans, other payables and accrued expenses approximate their fair values
because of the short-term nature of these instruments. The Company determined that the carrying value of the long term loans approximated
their fair value by comparing the stated loan interest rate to the rate charged by similar financial institutions. The Company
uses quoted prices in active markets to measure the fair value of investments in gold.
Investments in Gold
The Company pledged the gold leased from related
party and part of its own gold inventory to meet the requirements of bank loans. The pledged gold will be available for sale upon
the repayment of the bank loans. The Company classified the pledged gold as investments in gold, and carried at fair market value,
with the unrealized gains and losses, included in the determination of comprehensive income (loss) and reported in equity. The
fair market value of the investments in gold is determined by quoted market prices at Shanghai Gold Exchange.
Revenue Recognition
Net sales are primarily composed of sales of
branded products to wholesale and retail customers, as well as fees generated from customized production. In customized production,
a customer supplies the Company with the raw materials and the Company creates products per that customer’s instructions,
whereas in branded production the Company generally purchases gold directly and manufactures and markets the products on its own.
The Company recognizes revenues under ASC 605 as follows:
Sαles of brαnded products
The Company recognizes revenue on sales of
branded products when the goods are delivered and title to the goods passes to the customer provided that: (i) there are no
uncertainties regarding customer acceptance; (ii) persuasive evidence of an arrangement exists; (iii) the sales price
is fixed and determinable; and (iv) collectability is reasonably assured.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Revenue Recognition (Continued)
Customized production fees
The Company recognizes services-based revenue
(the processing fee) from such contracts for customized production when: (i) the contracted services have been performed and (ii)
collectability is reasonably assured.
Income Taxes
Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period including the
enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be
realized.
The provisions of ASC 740-10-25, “Accounting
for Uncertainty in Income Taxes,” prescribe a more-likely-than-not threshold for consolidated financial statement recognition
and measurement of a tax position taken (or expected to be taken) in a tax return. This interpretation also provides guidance on
the recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities,
accounting for interest and penalties associated with tax positions, and related disclosures. The Company does not believe that
there was any uncertain tax position at June 30, 2017 and December 31, 2016.
To the extent applicable, the Company records
interest and penalties as a general and administrative expense. The statute of limitations for the Company’s U.S. federal
income tax returns and certain state income tax returns remains open for tax years 2010 and after. As of June 30, 2017, the tax
years ended December 31, 2010 through December 31, 2016 for the Company’s PRC subsidiaries remain open for statutory examination
by PRC tax authorities.
Foreign Currency Translation
Kingold, as well as its wholly owned subsidiary,
Dragon Lead, maintain accounting records in United States Dollars (“US$”), whereas Wuhan Vogue-Show and Wuhan Kingold
maintain their accounting records in Renminbi (“RMB”), which is the primary currency of the economic environment in
which their operations are conducted. The Company’s principal country of operations is the PRC. The financial position and
results of its operations are determined using RMB, the local currency, as the functional currency. The results of operations and
the statement of cash flows denominated in foreign currency are translated at the average rate of exchange during the reporting
period. Assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the applicable rates
of exchange in effect at that date. The equity denominated in the functional currency is translated at the historical rate of exchange
at the time of capital contribution. Because cash flows are translated based on the average translation rate, amounts related to
assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances
on the balance sheet. Translation adjustments arising from the use of different exchange rates from period to period are included
as a component of equity as “Accumulated Other Comprehensive Income (deficit)”.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Foreign Currency Translation (Continued)
The value of RMB against US$ and other currencies
may fluctuate and is affected by, among other things, changes in the PRC’s political and economic conditions. Any significant
revaluation of RMB may materially affect the Company’s financial condition in terms of US$ reporting. The following table
outlines the currency exchange rates that were used in creating the consolidated financial statements in this report:
|
|
June
30, 2017
|
|
June
30, 2016
|
|
December
31, 2016
|
Balance sheet items, except for share capital, additional paid in capital and retained earnings, as of the period ended
|
|
US$ 1=RMB 6.7774
|
|
US$ 1=RMB 6.6434
|
|
US$ 1=RMB 6.9448
|
Amounts included in the statements of operations and cash flows for the period
|
|
US$ 1=RMB 6.8752
|
|
US$ 1=RMB 6.5388
|
|
US$ 1=RMB 6.6441
|
Comprehensive Income (Loss)
Comprehensive income (loss) consists of two
components, net income (loss) and other comprehensive income (loss). The unrealized gain or loss resulting from the change of the
fair market value from the gold investments and the foreign currency translation gain or loss resulting from translation of the
financial statements expressed in RMB to US$ are reported in other comprehensive income (loss) in the condensed consolidated statements
of operations and comprehensive income (loss).
Earnings (Losses) per Share (“EPS”)
Basic EPS is measured as net income (loss)
divided by the weighted average common shares outstanding for the period. Diluted EPS is similar to basic EPS but presents the
dilutive effect on a per share basis of potential common shares (i.e., options and warrants) as if they had been converted at the
beginning of the periods presented, or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e.,
those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS.
Share or Stock-Based compensation
The Company follows the provisions of ASC 718,
“Compensation — Stock Compensation,” which establishes the accounting for employee stock-based awards. For employee
stock-based awards, share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized
as expense with graded vesting on a straight-line basis over the requisite service period for the entire award. For the non-employee
stock-based awards, the fair value of the awards to non-employees are measured every reporting period based on the value of the
Company’s common stock.
Debts Issuance Costs
The Company follows the provision of Accounting
Standards Update (“ASU”) 2015-03, “Simplifying the Presentation of Debt Issuance Costs,” which requires
that debt issuance cost related to a recognized debt liability are presented in the balance sheet as a direct deduction from the
carrying amount of the debt liability, consistent with debt discounts. Amortization of debt issuance costs is calculated using
the effective interest method and is included as a component of interest expense.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Risks and Uncertainties
The jewelry industry generally is affected
by fluctuations in the price and supply of diamonds, gold, and, to a lesser extent, other precious and semi-precious metals and
stones. The Company potentially has exposure to the fluctuation in gold commodity prices as part of its normal operations. In the
past, the Company has not hedged its requirement for gold or other raw materials through the use of options, forward contracts
or outright commodity purchasing. A significant increase in the price of gold could increase the Company’s production costs
beyond the amount that it is able to pass on to its customers, which would adversely affect the Company’s sales and profitability.
A significant disruption in the Company’s supply of gold, or other commodities, could decrease its production and shipping
levels, materially increase its operating costs, and materially and adversely affect its profit margins. Shortages of gold, or
other commodities, or interruptions in transportation systems, labor strikes, work stoppages, war, acts of terrorism, or other
interruptions to or difficulties in the employment of labor or transportation in the markets in which the Company purchases its
raw materials, may adversely affect its ability to maintain production of its products and sustain profitability. Although the
Company generally attempts to pass on increased commodity prices to its customers, there may be circumstances in which it is not
able to do so. In addition, if the Company were to experience a significant or prolonged shortage of gold, it would be unable to
meet its production schedules and to ship products to its customers in a timely manner, which would adversely affect its sales,
margins and customer relations.
Furthermore, the value of the Company’s
inventories may be affected by commodity prices. The Company records the value of its inventories using the lower of cost or market
value, cost calculated on the weighted average method. As a result, decreases in the market value of precious metals such as gold
would result in a lower stated value of the Company’s inventory, which may require it to take a charge for the decrease in
the value of its inventory.
The Company also allocated a
significant portion of its inventories as investment in gold and pledged as collateral to secure loans from banks and
financial institutions, so there is a risk that the Company will be unable to utilize its inventories, and there could be a
disruption in the Company’s supply of gold which could decrease its production and shipping levels. In addition, the
investment in gold may be deficient if the fair market value of the pledged gold in connection with the loans declines, then
the Company may need to increase the pledged gold inventory for the loan collateral or increase restricted cash.
The Company’s operations are located
in the PRC. Accordingly, the Company’s business, financial condition, and results of operations may be influenced by the
political, economic, and legal environments in the PRC, as well as by the general state of the PRC economy. The Company’s
operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North
America and Western Europe. These include risks associated with, among others, the political, economic and legal environment, and
foreign currency exchange. The Company’s results may be adversely affected by changes in the political, regulatory and social
conditions in the PRC, and by changes in governmental policies or interpretations with respect to laws and regulations, anti-inflationary
measures, currency conversion, remittances abroad, and rates and methods of taxation, among other things. In addition, the Company
only controls Wuhan Kingold through a series of agreements. Although the Company believes the contractual relationships through
which it controls Wuhan Kingold comply with current licensing, registration and regulatory requirements of the PRC, it cannot assure
you that the PRC government would agree, or that new and burdensome regulations will not be adopted in the future. If the PRC government
determines that the Company’s structure or operating arrangements do not comply with applicable law, it could revoke the
Company’s business and operating licenses, require it to discontinue or restrict its operations, restrict its right to collect
revenues, require it to restructure its operations, impose additional conditions or requirements with which the Company may not
be able to comply, impose restrictions on its business operations or on its customers, or take other regulatory or enforcement
actions against the Company that could be harmful to its business. If such agreements were cancelled, modified or otherwise not
complied with, the Company would not be able to retain control of this consolidated entity and the impact could be material to
the Company’s operations. Although the Company has not experienced losses from these situations and believes that it is in
compliance with existing laws and regulations, this may not be indicative of future results.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards
Board (“FASB”) issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU
2014-09”). ASU 2014-09 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer
of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. Generally
Accepted Accounting Principles when it becomes effective and permits the use of either the retrospective or cumulative effect transition
method. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows
arising from customer contracts. In August 2015, the FASB issued ASU No. 2015-14, “Deferral of the Effective Date”
(“ASU 2015-14”), which defers the effective date for ASU 2014-09 by one year. For public entities, the guidance in
ASU 2014-09 will be effective for annual reporting periods beginning after December 15, 2017 (including interim reporting periods
within those periods), which means it will be effective for the Company’s fiscal year beginning October 1, 2018. In
March 2016, the FASB issued ASU No. 2016-08, “Principal versus Agent Considerations (Reporting Revenue versus Net)”
(“ASU 2016-08”), which clarifies the implementation guidance on principal versus agent considerations in the new revenue
recognition standard. In April 2016, the FASB issued ASU No. 2016-10, “Identifying Performance Obligations and Licensing”
(“ASU 2016-10”), which reduces the complexity when applying the guidance for identifying performance obligations and
improves the operability and understandability of the license implementation guidance. In May 2016, the FASB issued ASU No. 2016-12
“Narrow-Scope Improvements and Practical Expedients” (“ASU 2016-12”), which amends the guidance on transition,
collectability, noncash consideration and the presentation of sales and other similar taxes. In December 2016, the FASB further
issued ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers” (“ASU
2016-20”), which makes minor corrections or minor improvements to the Codification that are not expected to have a significant
effect on current accounting practice or create a significant administrative cost to most entities. The amendments are intended
to address implementation and provide additional practical expedients to reduce the cost and complexity of applying the new revenue
standard. These amendments have the same effective date as the new revenue standard. We are planning to adopt Topic 606 in the
first quarter of our fiscal 2019 using the retrospective transition method, and are continuing to evaluate the impact our pending
adoption of Topic 606 will have on our unaudited condensed consolidated financial statements. The Company’s current revenue
recognition policies are generally consistent with the new revenue recognition standards set forth in ASU 2014-09. Potential
adjustments to input measures are not expected to be pervasive to the majority of the Company’s contracts. While
no significant impact is expected upon adoption of the new guidance, the Company will not be able to make that determination
until the time of adoption based upon outstanding contracts at that time.
In January 2017, the FASB issued ASU No. 2017-01,
"Business Combinations (Topic 805): Clarifying the Definition of a Business". The amendments in this ASU clarify the
definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be
accounted for as acquisitions (or disposals) of assets or businesses. Basically these amendments provide a screen to determine
when a set is not a business. If the screen is not met, the amendments in this ASU first, require that to be considered a business;
a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create
output and second, remove the evaluation of whether a market participant could replace missing elements. These amendments take
effect for public businesses for fiscal years beginning after December 15, 2017 and interim periods within those periods, and all
other entities should apply these amendments for fiscal years beginning after December 15, 2018, and interim periods within annual
periods beginning after December 15, 2019. The Company does not expect that the adoption of this guidance will have a material
impact on its condensed consolidated financial statements.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
In February 2017, the FASB issued ASU No. 2017-05
(“ASU 2017-05”) to provide guidance for recognizing gains and losses from the transfer of nonfinancial assets and in-substance
nonfinancial assets in contracts with non-customers, unless other specific guidance applies. The standard requires a company to
derecognize nonfinancial assets once it transfers control of a distinct nonfinancial asset or distinct in substance nonfinancial
asset. Additionally, when a company transfers its controlling interest in a nonfinancial asset, but retains a noncontrolling ownership
interest, the company is required to measure any noncontrolling interest it receives or retains at fair value. The guidance requires
companies to recognize a full gain or loss on the transaction. As a result of the new guidance, the guidance specific to real estate
sales in ASC 360-20 will be eliminated. ASU 2017-05 is effective for annual periods beginning after December 15, 2017, including
interim periods within that reporting period. The effective date of this guidance coincides with revenue recognition guidance.
The Company does not expect that the adoption of this guidance will have a material impact on its condensed consolidated financial
statements.
In May 2017, the Financial Accounting Standards
Board (the “FASB”) issued ASU No. 2017-09 (“ASU 2017-09”) to provide guidance to clarify when to account
for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification
accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability)
changes as a result of the changes in terms or conditions. ASU 2017-09 is effective for all entities for annual periods, and interim
periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted and application is prospective.
The Company does not expect that the adoption of this guidance will have a material impact on its condensed consolidated financial
statements.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3 – INVENTORIES
Inventories as of June 30, 2017 and December 31, 2016 consisted
of the following:
|
|
As of
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Raw materials (A)
|
|
$
|
176,919,685
|
|
|
$
|
7,167,391
|
|
Work-in-progress (B)
|
|
|
110,482,409
|
|
|
|
78,813,685
|
|
Finished goods (C)
|
|
|
40,049,216
|
|
|
|
33,454,519
|
|
Inventories allowance
|
|
|
(17,851,746
|
)
|
|
|
-
|
|
Total inventory
|
|
$
|
309,599,564
|
|
|
$
|
119,435,595
|
|
|
(A)
|
Included
4,641,999 grams of Au9999 gold as of June 30, 2017 and 185,000 grams of Au9999 gold as of December 31, 2016.
|
|
(B)
|
Included 3,201,346 grams of Au9999 gold June 30, 2017 and 2,358,178 grams of Au9999 gold as of December 31, 2016.
|
|
(C)
|
Included 1,153,056 grams of Au9999 gold June 30, 2017 and 993,699 grams of Au9999 gold as of December 31, 2016.
|
For the three and six months ended June 30,
2017, the Company recorded $17,851,746 lower of cost or net realizable value adjustment. For the three and six months ended
June 30, 2016, the Company recorded $Nil lower cost or net realizable value adjustment.
NOTE 4 – PROPERTY AND EQUIPMENT, NET
The following is a summary of property and equipment as of June
30, 2017 and December 31, 2016:
|
|
As of
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Buildings
|
|
$
|
2,263,477
|
|
|
$
|
2,208,918
|
|
Plant and machinery
|
|
|
17,841,974
|
|
|
|
17,401,084
|
|
Motor vehicles
|
|
|
166,545
|
|
|
|
97,549
|
|
Leasehold improvements
|
|
|
1,544,158
|
|
|
|
1,185,433
|
|
Office and electric equipment
|
|
|
1,234,603
|
|
|
|
687,901
|
|
Subtotal
|
|
|
23,050,757
|
|
|
|
21,580,885
|
|
Less: accumulated depreciation and amortization
|
|
|
(15,458,418
|
)
|
|
|
(14,356,187
|
)
|
Property and equipment, net
|
|
$
|
7,592,339
|
|
|
$
|
7,224,698
|
|
Depreciation and amortization expenses for the three and six months ended June 30, 2017 was $336,719 and
$737,001, respectively. Depreciation and amortization expenses for the three and six months ended June 30, 2016 was $315,757 and
$629,352, respectively.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 – LOANS
Short-term loans consist of the following:
|
|
As of
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
(a) Loan payable to Minsheng Trust
|
|
$
|
52,970,166
|
|
|
$
|
51,693,353
|
|
(b) Loans payable to National Trust-gross amount
|
|
|
73,774,604
|
|
|
|
143,992,628
|
|
Loans payable to National Trust-deferred financing cost
|
|
|
(196,643
|
)
|
|
|
(4,480,085
|
)
|
(c) Loan payable to Aijian Trust
|
|
|
44,264,762
|
|
|
|
43,197,788
|
|
(d) Loans payable to Evergrowing Bank - Qixia Branch
|
|
|
147,549,207
|
|
|
|
-
|
|
(e) Loans payable to Evergrowing Bank - Yantai Huanshan Road Branch
|
|
|
147,254,109
|
|
|
|
287,986
|
|
Total short term loans
|
|
$
|
465,616,205
|
|
|
$
|
234,691,670
|
|
(a) Loan payable to Minsheng Trust
On October 14, 2016, the Company entered into
a Trust Loan Agreement with the Minsheng Trust to borrow a maximum of 70% of amount of pledged gold as a working capital loan.
The Company is subject to 7.6% fixed annual interest rate. The term of the loan is one year from receiving of the principal amount.
The Company is required to pledge 1,877.49 kilograms of Au9995 gold with carrying value of approximately $64.4 million (RMB 436.5
million) as collateral. The total amount received by the Company was approximately $53 million (RMB 359 million) according to the
calculation stated in the agreement. The Company was also required to pledge approximately $0.5 million (RMB 3.6 million) restricted
cash with Minsheng Trust as collateral.
(b) Loans payable to National Trust
On April 26, 2016, the Company entered into
a trust loan agreement and an amendment to the trust loan agreement with the National Trust Ltd. (“National Trust”)
to borrow a maximum of approximately $73.8 million (RMB 500 million) as working capital loan. During the three months ended June
30, 2017, the Company fully repaid the loan. The pledged gold and restricted deposit were released and refunded upon the repayment.
The Company paid approximately $5 million
(RMB 34.7 million) as loan origination fee for obtaining the loan. The loan origination fee was recorded as deferred
financing cost against the loan balance. For three months and six months ended June 30, 2017, approximately $0.7 million (RMB
4.1 million) and $1.9 million (RMB 12.6 million) deferred financing cost was amortized, respectively. For the year ended
December 31, 2016, approximately $3.2 million (RMB 22.1 million) deferred financing cost was amortized. As of June 30, 2017,
the deferred financing cost was fully amortized.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 – LOANS (Continued)
(b) Loans payable to National Trust (Continued)
On July 11, 2016, the Company entered into
a Trust Loan Agreement with the National Trust Ltd. (“National Trust”) to borrow a maximum of approximately $73.8 million
(RMB 500 million) as a working capital loan. The Company is required to make the first interest payment equal to 4.1% of the principal
received as loan origination fee, then the rest of interest payments are calculated based on a fixed interest rate of 8% and due
on semi-annual basis. The term of the loan could be extended for one additional year. The Company is required to pledge 2,660
kilograms of Au9995 gold with carrying value of approximately $91.3 million (RMB 618.5 million) as collateral. The loan is guaranteed
by the CEO and Chairman of the Company, and Wuhan Vogue-Show. The Company also made a restricted deposit of approximately $0.7
million (RMB 5 million) to secure these loans. The deposit will be refunded when the loan is repaid upon maturity. On July 12,
2017, the Company fully repaid the outstanding balance of $73.8 million.
The Company paid approximately $5.1
million (RMB 34.7 million) as loan origination fee for obtaining the loan. The loan origination fee was recorded as deferred
financing cost against the loan balance. For the three months and six months ended June 30, 2017, approximately $1.2 million
(RMB 8.6 million) and $2.5 million (RMB 17.2 million) deferred financing cost was amortized, respectively. As of June 30,
2017, the unamortized deferred financing cost related to obtaining this loan was approximately $0.2 million (RMB 1.3
million).
(c) Loan payable to Aijian Trust
On April 28, 2016, Wuhan Kingold and Shanghai
Aijian Trust Co., Ltd. (“Aijian Trust”) entered into a gold income right transfer and repurchase agreement. According
to the agreement, Aijian Trust acquired the income rights from Wuhan Kingold for Wuhan Kingold’s Au9999 gold worth at least
RMB 412.5 million based on the closing price of gold on the most recent trading day at the Shanghai Gold Exchange (the “Gold
Income Right”). Aijian Trust’s acquisition price for the Gold Income Right was approximately $44.3 million (RMB 300
million) (the “Acquisition Price”). Wuhan Kingold is required to repurchase the Gold Income Right back from Aijian
Trust with installments and the last installment shall be within the 24 months. The repurchase price is equal to the Acquisition
Price with annual return of 10% for the period from the agreement date and the last repayment date. The repurchase obligation may
be accelerated under certain conditions, including upon breach of representations or warranties, certain cross-defaults, upon the
occurrence of certain material events affecting the financial viability of Wuhan Kingold, and other customary conditions. Wuhan
Kingold pledged the 1,542 kilograms of related Au9999 gold under the Gold Income Right to Aijian Trust with carrying value of approximately
$52.9 million (RMB 358.5 million) as collateral. The agreement is also personally guaranteed by Mr. Zhihong Jia, our CEO and Chairman.
The Company also made a restricted deposit of $0.4 million (RMB 3 million) to secure these loans. The deposit will be refunded
when the loan is repaid upon maturity. Since Wuhan Kingold has a right to repurchase the Gold Income Right in 12 months, the loan
is treated as a short-term loan.
(d) Loans payable to Evergrowing Bank –
Qixia Branch
In January 2016, Wuhan Kingold signed two
Loan Agreements of Circulating Funds with the Qixia Branch of Evergrowing Bank for loans of approximately $118 million (RMB
800 million) in aggregate. The purpose of the loans is for purchasing gold. The terms of loans are two years and bear fixed
interest rates of 7.5% per year. The loans are secured by 5,000 kilograms of Au9999 gold in aggregate with carrying value of
approximately $171.5 million (RMB 1.2 billion) and are guaranteed by the CEO and Chairman of the Company. Both loans are due
in January 2018. The repayment of the loans may be accelerated under certain conditions, including upon a default of
principal or interest payment when due, breach of representations or warranties, certain cross-defaults, upon the occurrence
of certain material events affecting the financial viability of Wuhan Kingold, and other customary conditions.
In February 2017, Wuhan Kingold further entered
into a loan agreement with the Qixia Branch of Evergrowing Bank in the amount of approximately $29.5 million (RMB 200 million).
The loan has one year term from February 24, 2017 to February 19, 2018, and bears fixed annual interest of 4.75%. The Company pledged
1,300 kilograms of Au9999 gold with carrying value of approximately $44.6 million (RMB 302.3 million) as collateral to secure this
loan. The loan is also guaranteed by the CEO and Chairman of the Company and the related party Wuhan Huayuan Technology Development
Co., Ltd.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 – LOANS (Continued)
(e) Loans payable to Evergrowing
Bank - Yantai Huanshan Road Branch
From February 24, 2016 to March 24, 2016, Wuhan
Kingold signed ten Loan Agreements with the Yantai Huangshan Road Branch of Evergrowing Bank for loans of approximately $147.5
million (RMB 1 billion) in aggregate. The purpose of the loans is for purchasing gold. The terms of loans are two years and bear
fixed interest of 7% per year. The loans are secured by 5,550 kilograms of Au9999 gold in aggregate with carrying value of approximately
$190.4 million (RMB 1.3 billion) and are guaranteed by the CEO and Chairman of the Company. Based on the loan repayment plan as
specified in the loan agreements, approximately $147,549 (RMB 1 million) was repaid in August 2016, approximately $147,549 (RMB
1 million) was repaid on February 23, 2017 and another $147,549 (RMB 1 million) should be repaid on August 23, 2017. The remaining
loans are due in February to March 2018. The repayment of the loans may be accelerated under certain conditions, including upon
a default of principal or interest payment when due, breach of representations or warranties, certain cross-defaults, upon the
occurrence of certain material events affecting the financial viability of Wuhan Kingold, and other customary conditions.
The repayment requirement is listed below:
|
|
As of June 30, 2017
|
|
August 23, 2017
|
|
$
|
147,549
|
|
February 23, 2018 – March 24, 2018
|
|
|
147,106,560
|
|
Total
|
|
|
147,254,109
|
|
Interest expense for all of the loans mentioned
above amounted to $11.8 million and $20 million for the three and six months ended June 30, 2017, respectively. Interest expense
for short-term loan for the three and six months ended June 30, 2016 was $5.1 million and $6.7 million, respectively.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 – LOANS (Continued)
Long-term loans consist of the following:
|
|
As of
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
(f) Loans payable to Evergrowing Bank - Qixia Branch
|
|
$
|
-
|
|
|
$
|
115,194,102
|
|
(g) Loans payable to Evergrowing Bank - Yantai Huanshan Road Branch
|
|
|
-
|
|
|
|
143,560,650
|
|
(h) Loans payable to Anxin Trust
|
|
|
442,647,623
|
|
|
|
431,977,883
|
|
(i) Loans payable to Minsheng Trust - gross amount
|
|
|
-
|
|
|
|
28,798,526
|
|
Loans payable to Minsheng Trust - deferred financing cost
|
|
|
-
|
|
|
|
(563,984
|
)
|
(j) Loans payable to Chang’An Trust
|
|
|
-
|
|
|
|
28,654,533
|
|
(k) Loans payable to Sichuan Trust - gross amount
|
|
|
221,323,811
|
|
|
|
215,988,941
|
|
Loans payable to Sichuan Trust - deferred financing cost
|
|
|
(1,753,551
|
)
|
|
|
(2,359,280
|
)
|
(l) Loans payable to China Aviation Capital - gross amount
|
|
|
42,789,270
|
|
|
|
41,757,862
|
|
Loans payable to China Aviation Capital - deferred financing cost
|
|
|
(763,173
|
)
|
|
|
(1,055,387
|
)
|
(m) Loans payable to China Construction Investment Trust - gross amount
|
|
|
44,264,762
|
|
|
|
43,197,788
|
|
Loans payable to China Construction Investment Trust - deferred financing cost
|
|
|
(267,192
|
)
|
|
|
(371,697
|
)
|
(n) Loans payable to Zheshang Jinhui Trust
|
|
|
81,152,064
|
|
|
|
79,195,945
|
|
(o) Loans payable to Hubei Assets Management
|
|
|
-
|
|
|
|
43,197,788
|
|
(p) Loans payable to Zhongjiang International Trust
|
|
|
59,019,683
|
|
|
|
57,597,051
|
|
Loans payable to Zhongjiang International Trust - deferred financing cost
|
|
|
(206,218
|
)
|
|
|
-
|
|
(q) Loans payable to China Aviation Trust
|
|
|
45,740,254
|
|
|
|
-
|
|
Loans payable to China Aviation Trust - deferred financing cost
|
|
|
(1,078,969
|
)
|
|
|
-
|
|
(r) Loans payable to National Trust
|
|
|
51,642,224
|
|
|
|
-
|
|
Loans payable to National Trust - deferred financing cost
|
|
|
(313,963
|
)
|
|
|
-
|
|
Total long term loans, net of deferred financing costs
|
|
$
|
984,196,625
|
|
|
$
|
1,224,770,721
|
|
(f) Loans payable to Evergrowing Bank –
Qixia Branch (see note (d) above)
(g) Loans payable to Evergrowing Bank - Yantai
Huanshan Road Branch (see note (e) above)
(h) Loans payable to Anxin Trust Co., Ltd
In January 2016, Wuhan Kingold signed a Collective
Trust Loan Agreement with Anxin Trust Co., Ltd. (“Anxin Trust”). The agreement allows the Company to access of approximately
$442.6 million (RMB 3 billion) within 60 months. Each individual loan will bear a fixed annual interest of 14.8% or 11% with a
term of 36 months or more. The purpose of this trust loan is to provide working capital for the Company to purchase gold. The loan
is secured by 15,450,000 grams of Au9999 gold in aggregate with carrying value of approximately $530 million (RMB 3.6 billion).
The loan is also guaranteed by the CEO and Chairman of the Company. As of June 30, 2017, the Company received full amount from
the loan. The Company also made a restricted deposit of approximately $4.4 million (RMB 30 million) to secure these loans. The
deposit will be refunded when the loan is repaid upon maturity.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 – LOANS (Continued)
(i) Loans payable to Minsheng Trust
On June 24, 2016, Wuhan Kingold entered into
a loan agreement with Minsheng Trust, with an aggregate amount of approximately $29.5 million (RMB 200 million), with a maturity
date of June 22, 2018. During the six months ended June 30, 2017, the Company fully repaid the loan. The pledged gold and restricted
deposit were released and refunded upon the repayment.
The Company paid approximately $0.8 million
(RMB 5.3 million) as loan origination fee for obtaining the loan. The loan origination fee was recorded as deferred financing cost
against the loan balance. For three months and six months ended June 30, 2017, approximately $0.5 million (RMB 2.8 million) and
$0.6 million (RMB 3.9 million) deferred financing cost was amortized, respectively. For the year ended December 31, 2016, approximately
$0.2 million (RMB 1.4 million) deferred financing cost was amortized. As of June 30, 2017, the deferred financing cost was fully
amortized.
(j) Loans payable to Chang’An Trust
On March 9, 2016, Wuhan Kingold entered into
a Trust Loan Contract with Chang’An International Trust Co., Ltd. (“Chang’An Trust”). The agreement allows
the Company to access a total of approximately $43.5 million (RMB 300 million) for the purpose of working capital needs. During
the three months ended March 31, 2017, the Company fully repaid the loan. As of June 30, 2017, the restricted deposit was refunded
to the Company.
(k) Loans payable to Sichuan Trust
On September 7, 2016, the Company entered into
two trust loan agreements with the Sichuan Trust Ltd. (“Sichuan Trust”) to borrow a maximum of approximately $295.1
million (RMB 2 billion) as working capital loan. The loan period is 24 months from receiving. For the loan obtained the Company
is required to make interest payments are calculated based on a fixed annual interest rate of 7.25%. The Company is required to
make the first interest payment equal to 1.21% of the principle received as loan origination fee, then the rest of interest payments
are calculated based on a fixed interest rate of 7.25%. The Company pledged 7,258 kilograms of Au9999 gold with carrying value
of approximately $249 million (RMB 1.7 billion) as collateral to secure this loan. The loan is guaranteed by the CEO and Chairman
of the Company. The Company also made a restricted deposit of approximately $2.2 million (RMB 15 million) to secure these loans.
The deposit will be refunded when the loan is repaid upon maturity. As of June 30, 2017, the Company received an aggregate of approximately
$221.3 million (RMB 1.5 billion) from the loan.
The Company paid approximately $2.7 million
(RMB 18.2 million) as loan origination fee for obtaining the loan. The loan origination fee was recorded as deferred financing
cost against the loan balance. For three months and six months ended June 30, 2017, approximately $0.4 million (RMB 2.3 million)
and $0.7 million (RMB 4.5 million) deferred financing cost was amortized, respectively. For the year ended December 31, 2016, approximately
$0.3 million (RMB 1.8 million) deferred financing cost was amortized. As of June 30, 2017, the unamortized deferred financing cost
related to obtaining this loan was approximately $1.7 million (RMB 11.9 million).
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 – LOANS (Continued)
(l) Loans payable to China Aviation Capital
On September 7, 2016, the Company entered into
a trust loan agreement with China Aviation Capital Investment Management (Shenzhen) ("China Aviation Capital") to borrow
a maximum of approximately $88.5 million (RMB 600 million) as working capital loan. The first installment of the loan is approximately
$42.8 million (approximately RMB 290 million) with a period of 24 months from September 7, 2016 to September 7, 2018. For the loan
obtained the Company is required to make interest payments are calculated based on a fixed annual interest rate of 7.5% and a
one time consulting fee of 3% based on the principal amount received as loan origination fee. The Company pledged 1,473 kilograms
of Au9999 gold with carrying value of approximately $50.5 million (RMB 342.5 million) as collateral to secure this loan. The loan
is guaranteed by the CEO and Chairman of the Company. As of June 30, 2017, the Company received an aggregate of approximately $42.8
million (approximately RMB 290 million) from the loan.
The Company paid approximately $1.3
million (RMB 8.7 million) as loan origination fee for obtaining the loan. The loan origination fee was recorded as deferred
financing cost against the loan balance. For the three months and six months ended June 30, 2017, approximately $0.2 million
(RMB 1.1 million) and $0.3 million (RMB 2.1 million) deferred financing cost was amortized, respectively. For the year ended
December 31, 2016, approximately $0.2 million (RMB 1.4 million) deferred financing cost was amortized. As of June 30, 2017,
the unamortized deferred financing cost related to obtaining this loan was approximately $0.8 million (RMB 5.2 million).
(m) Loans payable to China Construction
Investment Trust
On August 29, 2016, the Company entered into
a trust loan agreement with China Construction Investment Trust to borrow a maximum of approximately $44.3 million (RMB 300 million)
as working capital loan for the purpose of purchasing of gold solely with a period of 24 months from August 29, 2016 to August
29, 2018. For the loan obtained the Company is required to make interest payments are calculated based on a fixed annual interest
rate. The interest payment is divided into two parts: (1) 1% of the principal amount received need to be paid before December 25,
2016 as loan origination fee; (2) the rest of interest payments are calculated based on a fixed interest rate of 7.5% and due on
quarterly basis. The Company pledged 1,447 kilograms of Au9999 gold with carrying value of approximately $49.6 million (RMB 336.5
million) as collateral to secure this loan. The loan is guaranteed by the CEO and Chairman of the Company. The Company also made
a restricted deposit of approximately $0.4 million (RMB 3 million) to secure the loan. The deposit will be refunded when the loan
is repaid upon maturity. As of June 30, 2017, the full amount of the loan was received by the Company.
The Company paid approximately $0.4
million (RMB 3 million) as loan origination fee for obtaining the loan. The loan origination fee was recorded as deferred
financing cost against the loan balance. For the three months and six months ended June 30, 2017, approximately $0.07 million
(RMB 0.4 million) and $0.1 million (RMB 0.8 million) deferred financing cost was amortized, respectively. For the year ended
December 31, 2016, approximately $0.1 million (RMB 0.4 million) deferred financing cost was amortized. As of June 30, 2017,
the unamortized deferred financing cost related to obtaining this loan was approximately $0.27 million (RMB 1.8 million).
(n) Loans payable to Zheshang Jinhui Trust
On November 7, 2016, the Company entered into
a trust loan agreement with Zheshang Jinhui Trust to borrow a maximum of approximately $81.2 million (RMB 550 million) for purchasing
gold with a period of 24 months from principle receiving date November 15, 2016 to November 15, 2018. For the loan obtained the
Company is required to make interest payments are calculated based on a fixed annual interest rate of 7.8% based on the principal
amount received. The Company pledged 2,708 kilograms of Au9999 gold with carrying value of approximately $92.9 million (RMB 629.6
million) as collateral to secure this loan. The loan is guaranteed by the CEO and Chairman of the Company. The Company also made
a restricted deposit of approximately $0.8 million (RMB 5.5 million) to secure these loans. The deposit will be refunded when the
loan is repaid upon maturity.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 – LOANS (Continued)
(o) Loans payable to Hubei Assets Management
On September 30, 2016, the Company entered
into an Entrust Loan Agreement with the Hubei Asset Management Co., Ltd. to borrow from Industrial and Commercial Bank of China
Wuhan Jiang'an Branch of a maximum of approximately $43.5 million (RMB 300 million) as a working capital loan in the later period.
During the six months ended June 30, 2017, the Company fully repaid the loan. The pledged gold was released to the Company upon
the repayment.
(p) Loans payable to Zhongjiang International
Trust
On December 23, 2016, the Company entered into
a trust loan agreement with Zhongjiang International Trust to borrow a maximum of approximately $59 million (RMB 400 million) for
purchasing gold with a period of 24 months from December 23, 2016 to December 22, 2018. For the loan obtained the Company is required
to make interest payments are calculated based on a fixed annual interest rate of 8.75% on the principal amount received. The Company
pledged 2,104 kilograms of Au9999 gold with carrying value of approximately $72.2 million (RMB 489.2 million) as collateral to
secure this loan. The loan is guaranteed by the CEO and Chairman of the Company.
The Company paid approximately $0.28
million (RMB 1.9 million) as loan origination fee for obtaining the loan. The loan origination fee was recorded as deferred
financing cost against the loan balance. For the three months and six months ended June 30, 2017, approximately $0.03 million
(RMB 0.2 million) and $0.07 million (RMB 0.5 million) deferred financing cost was amortized, respectively. As of June 30,
2017, the unamortized deferred financing cost related to obtaining this loan was approximately $0.21 million (RMB 1.4
million).
(q) Loans payable to China Aviation Trust
On January 25, 2017, Wuhan Kingold entered
into a trust loan agreement with China Aviation Trust Ltd. to borrow a maximum of approximately $45.7 million (RMB 310 million)
for working capital with a period of 24 months from the date of releasing the loan. For the loan obtained, the Company is required
to make interest payments that are calculated based on a fixed annual interest rate of 8% based on the principal amount received.
The Company pledged 1,647 kilograms of Au9999 gold with carrying value of approximately $55.8 million (RMB 378.4 million) as collateral
to secure this loan. The loan is guaranteed by the CEO and Chairman of the Company.
The Company paid approximately $1.4 million
(RMB 9.3 million) as loan origination fee for obtaining the loan. The loan origination fee was recorded as deferred financing cost
against the loan balance. For three months and six months ended June 30, 2017, approximately $0.2 million (RMB 1.2 million) and
$0.3 million (RMB 2.0 million) deferred financing cost was amortized, respectively. As of June 30, 2017, the unamortized deferred
financing cost related to obtaining this loan was approximately $1.1 million (RMB 7.3 million).
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 – LOANS (Continued)
(r) Loans payable to National Trust
On February 28, 2017, Wuhan Kingold entered
into a trust loan agreement with National Trust Ltd. (“National Trust”) to borrow a maximum of approximately $51.6
million (RMB 350 million) for working capital with a period of 24 months from the date of releasing the loan. For the loan obtained,
the Company is required to make interest payments that are calculated based on a fixed annual interest rate of 8.617% based on
the principal amount received. The Company pledged 1,745 kilograms of Au9999 gold with carrying value of approximately $60.2 million
(RMB 408 million) as collateral to secure this loan. The loan is guaranteed by the CEO and Chairman of the Company.
The Company paid approximately $0.38
million (RMB 2.5 million) as loan origination fee for obtaining the loan. The loan origination fee was recorded as deferred
financing cost against the loan balance. For the three months and six months ended June 30, 2017, approximately $0.05 million
(RMB 0.3 million) and $0.06 million (RMB 0.4 million) deferred financing cost was amortized, respectively. As of June 30,
2017, the unamortized deferred financing cost related to obtaining this loan was approximately $0.3 million (RMB 2.1
million).
Total interest expense for the above long-term
loans was approximately $24.8 million and $48.8 million for the three and six months ended June 30, 2017, respectively. Interest
expense for the long-term loans amounted to $8.5 million and $11.9 million for the three and six months ended June 30, 2016, respectively.
NOTE 6 – INVESTMENTS IN GOLD
As of June 30, 2017, the Company allocated
a total of 51,761,490 grams of Au9999 gold in its inventories with carrying value of approximately $1,775.5 million (RMB 12,033 million)
as investments in gold for obtaining various loans from banks and financial institutions. (See Note 5)
During the six months ended June 30, 2017,
the Company leased a total of 10,225,000 grams of gold and pledged as guarantee for Wuhan Kangbo Biotech Limited (“Kangbo”),
a related party which is controlled by the CEO and Chairman of the Company, for obtaining total amount of RMB 2 billion loan from
Evergrowing Bank Huanshan Road Branch. (See Note 10)
During the six months ended June 30, 2017,
the Company leased a total of 523,000 grams of gold and pledged as collateral for obtaining total amount of RMB 100 million loan
from Wuhan Huayuan Technology Development Limited (“Huayuan”), a related party which is controlled by the CEO and Chairman
of the Company. (See Note 10)
During the three months ended March 31, 2017,
the Company also leased a total of 4,000,000 grams of Au9999 gold in aggregate with carrying value of approximately $131.1 million
(RMB 903.6 million) from Wuhan Shuntianyi Investment Management Ltd. (“Shuntianyi”), a related party (See Note 7).
The leased gold was fully returned by the Company to Shuntianyi as of March 31, 2017.
As of June 30, 2017, total investments in gold
pledged had a fair market value of $2,139.4 million, which resulted in unrealized loss of $54 million for three months ended June
30, 2017, and unrealized gain of $48.9 million for six months ended June 30, 2017. The Company recorded this unrealized gain (loss)
as other comprehensive income, net of tax.
As of June 30, 2017, a total of 34,355,000
grams of Au9999 gold with fair market value of approximately $1,175.8 million was pledged for long-term bank loans, and therefore
classified as non-current investments in gold. The remaining investments in gold of 28,154,490 grams of Au9999 gold with fair market
value of approximately $963.6 million was classified as current assets as of June 30, 2017.
As of December 31, 2016, a total of 45,998,000
grams of Au9999 gold with fair market value of approximately $1,494 million was pledged for long term bank loans, and therefore
classified as non-current investments in gold. The remaining investments in gold of 8,679,490 grams of Au9999 gold with fair market
value of approximately $281.8 million was classified as current assets as of December 31, 2016.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7 – GOLD LEASE PAYABLE –
RELATED PARTY
On January 3, 2017, the Company entered into
a gold lease agreement with Shuntianyi, a related party which was controlled
by the CEO and the Chairman of the Company, to lease a total of 4,000,000 grams of Au9999 gold in aggregate with carrying value
of approximately $131.1 million. This lease was from January 3, 2017 to February 28, 2017. The Company recorded this transaction
as gold lease payable – related party. The leased gold was fully returned by the Company to Shuntianyi as of March 31, 2017.
NOTE 8 – GOLD LEASE PAYABLE –
BANK
The Company allocated a
significant amount of gold in its inventories as investments in gold and pledged as collateral to secure loans from banks and
financial institutions. In order to meet the Company’s production needs, the Company also utilized 185,000 grams of
leased Au9999 gold in aggregate with carrying value of approximately $7.2 million (RMB 49.8 million) from Shanghai
Pudong Development Bank (“SPD Bank”), and recorded this transaction as gold lease payable – bank. The
leased gold from SPD Bank was returned when the lease expired in June 2017. (See Note 18).
NOTE 9 - THIRD PARTIES LOAN
On April 12, 2016, the Company entered into
a loan agreement with Yantai Runtie Trade Ltd. for a total loan of approximately $29 million (RMB 200 million). In April 2017,
the Company fully repaid the loan and the deposit was refunded upon the repayment.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 10 – RELATED PARTIES LOANS
|
(a)
|
Loans
payable to Wuhan Kangbo Biotech Limited
|
On January 13, 2017, Wuhan Kingold entered
into a loan agreement with Wuhan Kangbo Biotech Limited (“Kangbo”), a related party which is controlled by the CEO
and Chairman of the Company, for a loan of approximately $147.5 million (RMB 1,000 million). The loan has one-year term from January
12, 2017 to January 10, 2018, and bears fixed interest of 4.75%. In order for Kangbo to obtain the loan from the bank, Wuhan Kingold
signed the guarantee agreement with Evergrowing Bank- Yantai Huangshan Road Branch on January 11, 2017. As a guarantor of the bank
loan, Wuhan Kingold pledged 5,470 kilograms of gold in aggregate with carrying value of approximately $185.4 million (RMB 1.3 billion)
as collateral.
On February 20, 2017, Wuhan Kingold entered
into a second loan agreement with Kangbo for a loan of approximately $147.5 million (RMB 1,000 million). The loan has one-year
term from February 20, 2017 to February 20, 2018, and bears fixed interest of 4.75%. In order for Kangbo to obtain the loan from
the bank, Wuhan Kingold signed the guarantee agreement with Evergrowing Bank - Yantai Huangshan Road Branch on February 16, 2017.
As a guarantor of the bank loan, Wuhan Kingold pledged 4,755 kilograms of gold in aggregate with carrying value of approximately
$166 million (RMB 1.1 billion) as collateral.
Total interest expense for above related party
loans was approximately $3.5 million and $5.6 million for the three and six months ended June 30, 2017, respectively. As of June
30, 2017, the aggregated borrowing amount from Kangbo was $295.1million (RMB 2,000 million). The Company classified these loans
as current liabilities .
|
(b)
|
Loans
payable to Wuhan Kingold Industrial Group
|
Between November 23, 2016 and November 29,
2016, the Company entered into multiple loan agreements with Wuhan Kingold Industrial Group, a related party that is controlled
by the CEO and Chairman of the Company, as working capital loans in order to subsequently purchase raw material of gold. The aggregate borrowing amount as of December 31, 2016 was approximately $472.2 million (RMB 3,200 million) with a term of 5 years and free of
interest.
On February 22, 2017, the Company signed
a non-interest bearing credit line agreement with Wuhan Kingold Industrial Group for additional loan of $118 million (RMB 800 million)
with a 5 year maturity from February 22, 2017 to February 21, 2022.
In April 2017, the Company signed three additional non-interest bearing credit line agreements
with Wuhan Kingold Industrial Group for additional loans totalling $199.19 million (RMB 1.35 billion) with 5 year maturity
from April 2017 to April 2022.
During the three months ended March 31, 2017,
the Company repaid loans totaling $380.7 million (RMB 2,580 million) and obtained loans totaling $486.9 million (RMB 3,300
million). During the three months ended June 30, 2017, the Company repaid loans totaling $41.3 million (RMB 280 million) and
obtained loans totaling $199.2 million (RMB 1,350 million).
As of June 30, 2017, the aggregate borrowing amount from Wuhan Kingold Industrial Group was $736.3 million
(RMB 4,990 million). The Company classified these loans as long term liabilities.
|
(c)
|
Loans
payable to Wuhan Huayuan Technology Development Limited
|
On June 8, 2017, Wuhan Kingold signed a loan
agreement with Wuhan Huayuan Technology Development Limited (“Wuhan Huayuan”), a related party which is controlled
by the CEO and Chairman of the Company, for a loan of $14.7 million (RMB 100 million). The purpose for the loans is for working
capital and purchasing gold. The loan has four years term from June 8, 2017 to June 8, 2021, and bears fixed interest of 7%. The
Company also pledged 523 kilograms of Au9999 gold with carrying value of approximately $18.4 million (RMB 124.4 million) as collateral
to secure this loan. Interest expense of $48,079 was recorded for this loan for the three months ended June 30, 2017.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 11 – OTHER RELATED PARTY TRANSACTIONS
For the six months ended June 30, 2017 and
for the year ended December 31, 2016, the Company received working capital proceeds of $2,017,082 from the CEO and Chairman of
the Company, and $1,282,442 from Wuhan Kingold Industrial Group, to pay certain expenses to various service providers on behalf
of the Company. Such proceeds are unsecured and payable on demand with no interest. As of June 30, 2017 and December 31, 2016,
the amount due to these related parties was $3,299,524 and $7,223,321, respectively.
On June 27, 2016, Wuhan Kingold signed certain
5 years lease agreements with Wuhan Huayuan, a related party which is controlled by the CEO and Chairman of the Company, to rent
office and store space at the Jewelry Park, commencing in July 2016 and October 2016, respectively, with aggregate annual rent
of approximately $0.4 million (RMB 2.3 million). On July 1, 2017, Wuhan Kingold signed another 5 years lease agreement with Wuhan
Huayuan to rent additional office space at the Jewelry Park commencing in July 2017 with aggregate annual rent of approximately
$83,779 (RMB 576,000). For the three and six months ended June 30, 2017, the Company recorded $85,012 and $169,684 rent expense,
respectively.
NOTE 12 – INCOME TAXES
The Company is subject to income taxes on income
arising in or derived from the tax jurisdiction in which each entity is domiciled.
Kingold is incorporated in the United States
and has incurred net operating loss for income tax purposes through June 30, 2017 resulting in loss carry forwards of approximately
$17,480,000 for U.S. income tax purposes available for offsetting against future taxable U.S. income, expiring in 2036. Management
believes that the realization of the benefits from these losses is uncertain due to its history of continuing losses in the United
States. Accordingly, a full deferred tax asset valuation allowance has been provided and no deferred tax asset benefit has been
recorded. The valuation allowance as of June 30, 2017 and December 31, 2016 was approximately $5,943,000 and $5,699,000, respectively.
Dragon Lead is incorporated in the British
Virgin Islands (the “BVI”), and under current laws of the BVI, income earned is not subject to income tax.
Wuhan Vogue-Show and Wuhan Kingold are incorporated
in the PRC and are subject to PRC income tax, which is computed according to the relevant laws and regulations in the PRC. The
applicable tax rate is 25% for the periods ended June 30, 2017 and 2016. The Company recorded $8,258,042 deferred income tax assets
and $1,249,622 deferred income tax liability as of June 30, 2017 and December 31, 2016, respectively.
The Company intends to reinvest its foreign
profits indefinitely in order to avoid a tax liability upon repatriation to the United States. Income (loss) from continuing operations
before income taxes was allocated between the U.S. and foreign components for the three and six months ended June 30, 2017 and
2016:
|
|
For the three months ended June 30,
|
|
|
For the six months ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
(Restated)
|
|
United States
|
|
$
|
(399,406
|
)
|
|
$
|
(235,312
|
)
|
|
$
|
(716,646
|
)
|
|
$
|
(530,264
|
)
|
Foreign
|
|
|
6,536,211
|
|
|
|
26,978,832
|
|
|
|
(16,740,317
|
)
|
|
|
47,537,675
|
|
|
|
$
|
6,136,805
|
|
|
$
|
26,743,520
|
|
|
$
|
(17,456,963
|
)
|
|
$
|
47,007,411
|
|
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 12 – INCOME TAXES (Continued)
Significant components of the income tax provision
(benefit) were as follows for the three and six months ended June 30, 2017 and 2016:
|
|
For the three months ended June 30,
|
|
|
For the six months ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
(Restated)
|
|
Current tax provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Foreign
|
|
|
5,218,082
|
|
|
|
6,849,780
|
|
|
|
5,218,082
|
|
|
|
11,660,784
|
|
|
|
$
|
5,218,082
|
|
|
$
|
6,849,780
|
|
|
$
|
5,218,082
|
|
|
$
|
11,660,784
|
|
Deferred tax provision (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Foreign
|
|
|
(7,114,895
|
)
|
|
|
64
|
|
|
|
(9,402,844
|
)
|
|
|
255,738
|
|
|
|
|
(7,114,895
|
)
|
|
|
64
|
|
|
|
(9,402,844
|
)
|
|
|
255,738
|
|
Income tax provision (benefit)
|
|
$
|
(1,896,813
|
)
|
|
$
|
6,849,844
|
|
|
$
|
(4,184,762
|
)
|
|
$
|
11,916,522
|
|
The components of deferred tax assets and deferred
tax liabilities as of June 30, 2017 and December 31, 2016 consist of the following:
|
|
As of June 30,
2017
|
|
|
As of December 31,
2016
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Accrued interest
|
|
$
|
4,113,821
|
|
|
$
|
-
|
|
Inventory valuation
|
|
|
4,462,937
|
|
|
|
-
|
|
Accrued expense
|
|
|
704,538
|
|
|
|
-
|
|
Other temporary differences
|
|
|
121,673
|
|
|
|
721,570
|
|
Net operating losses from parent company
|
|
|
5,942,528
|
|
|
|
5,698,869
|
|
Valuation allowance
|
|
|
(5,942,528
|
)
|
|
|
(5,698,869
|
)
|
|
|
|
9,402,969
|
|
|
|
721,570
|
|
|
|
|
|
|
|
|
|
|
Deferred financing costs on the loans
|
|
$
|
(1,144,927
|
)
|
|
$
|
(1,971,192
|
)
|
Deferred tax assets (liability) - Net
|
|
$
|
8,258,042
|
|
|
$
|
(1,249,622
|
)
|
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 13 – EARNINGS (LOSSES) PER SHARE
For the three months ended June 30, 2017, the
effect of potential shares of common stock was dilutive since the exercise prices for the warrant and options were lower than the
average market price for the three months ended June 30, 2017. As a result, total of 396,734 unexercised warrants and options are
dilutive, and were included in the computation of diluted EPS.
For the six months ended June 30, 2017, 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 Company had a net loss for the six months ended June 30, 2017.
For the three and six months ended June 30,
2016, the effect of potential shares of common stock was dilutive since the exercise prices for the warrant and options were lower
than the average market price for the three and six months ended June 30, 2016. As a result, total of 309,136 and 6,358 unexercised
warrants and options are dilutive, respectively, and were included in the computation of diluted EPS, respectively.
NOTE 14 – OPTIONS
On March 24, 2011, the Board of Directors voted
to adopt the 2011 Stock Incentive Plan (the “Plan”), which was later ratified by the Company’s stockholders on
October 31, 2011, at the 2011 annual meeting.
The Plan permits the granting of stock options
(including incentive stock options as well as nonstatutory stock options), stock appreciation rights, restricted and unrestricted
stock awards, restricted stock units, performance awards, other stock-based awards or any combination of the foregoing. Under the
terms of the Plan, up to 5,000,000 shares of the Company’s common stock may be granted. Prior to January 1, 2012, the Company
granted 1,620,000 options under the plan, which are exercisable until 2020. These options have fully vested by December 31, 2015.
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 fair value of the options was calculated using the Black-Scholes
options pricing model using the following assumptions: volatility of 124.81%, risk free interest rate of 1.98 %, and expected term
of 10 years. The fair value of the options was $1,516,435. These options have fully vested by December 31, 2015.
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 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.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 14 – OPTIONS (Continued)
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 $11,558 were recorded as part of operating expense-stock compensation
for the three and six months ended June 30, 2017, respectively. The Company recorded $5,779 and $11,558 as part of operating expense-stock
compensation for the three and six months ended June 30, 2016, respectively.
On February 25, 2015, the Company granted 90,000
options with an exercise price of $1.11 to its non-employee directors, which options expire ten years from the grant date under
the Plan. These options became exercisable in accordance with the following schedule: (a) 25% of the options became exercisable
on the first anniversary of the grant date, and (b) 6.25% of the options became exercisable on the date three and six months after
the initial vesting date and on such date every third month thereafter, through the fourth anniversary of the grant date. The fair
value of the options was calculated using the Black-Scholes options pricing model under the following assumptions: volatility of
115.20%, risk free interest rate of 1.96%, and expected term of 6.25 years. The aggregate fair value of the options was $85,822.
In accordance with the vesting periods, $5,364 and $10,728 were recorded as part of operating expense-stock compensation for the
three and six months ended June 30, 2017, respectively. The Company recorded $5,363 and $10,727 as part of operating expense-stock
compensation for the three and six months ended June 30, 2016, respectively.
The Company recorded $11,143 and $22,286 stock-based
compensation expense for the three and six months ended June 30, 2017, respectively. The Company recorded $11,142 and $22,285 stock-based
compensation expense for the three and six months ended June 30, 2016, respectively.
The following table summarized the Company’s
stock option activity:
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Number of
Options
|
|
|
Weighted Average
Exercise Price
|
|
|
Remaining Life
in Years
|
|
Outstanding, December 31, 2016
|
|
|
3,220,000
|
|
|
$
|
1.90
|
|
|
|
4.76
|
|
Exercisable, December 31, 2016
|
|
|
3,152,500
|
|
|
$
|
1.92
|
|
|
|
4.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding, June 30, 2017
|
|
|
3,220,000
|
|
|
$
|
1.90
|
|
|
|
4.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, June 30, 2017
|
|
|
3,175,000
|
|
|
$
|
1.91
|
|
|
|
4.21
|
|
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
June 30, 2017 and December 31, 2016
|
|
Number of
|
|
|
Weighted Average
|
|
|
Weighted average
|
|
|
|
warrants
|
|
|
Exercise Price
|
|
|
Remaining Life in Years
|
|
Outstanding, December 31, 2016
|
|
|
244,635
|
|
|
$
|
1.38
|
|
|
|
0.52
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
(94,635
|
)
|
|
|
1.20
|
|
|
|
-
|
|
Outstanding, June 30, 2017
|
|
|
150,000
|
|
|
$
|
1.50
|
|
|
|
0.05
|
|
On August 12, 2015, the Company signed a consulting
agreement to engage Bespoke Independent Partners (“BIP”), a wholly owned subsidiary of FPIA Partners LLC to operate
as a strategic advisor to Kingold in matters relating to investor relations, capital markets and shareholder value creation strategy.
As the part of the agreement with BIP, an aggregate of 900,000 shares of warrants with exercise price ranging from $1.20 to $1.80
will be directly issued at no cost to BIP if certain stock performance targets are met within a three-year period. As of June 30,
2017, no warrants were issued to BIP because the performance target has not been met.
On March 29, 2016, pursuant to
the consulting agreement, the Company’s obligation to issue BIP warrants to purchase 150,000 shares of the
Company’s common stock for $1.20 per share (the “First Tranche Warrants”) was triggered as a result of
certain milestone accomplishments. The warrants were exercised on June 28, 2017, and the Company is in the process of issuing
the shares. Accordingly, the Company recorded $64,204 consulting expense and included in the general administrative expense. The
fair value of the warrants was calculated using the Black-Scholes options pricing model using the following assumptions:
volatility of 81%, risk free interest rate of 0.84%, and expected term of 1.25 years. The fair value of the warrants was
$64,204.
On April 18, 2016, pursuant to the
consulting agreement, the Company’s obligation to issue BIP warrants to purchase 150,000 shares of the Company’s
common stock for $1.50 per share (the “Second Tranche Warrants”) was triggered as a result of certain milestone
accomplishments. The warrants were scheduled to expire on July 17, 2017. Accordingly, the Company recorded $65,091 consulting
expense and included in the general administrative expense. The fair value of the warrants was calculated using the
Black-Scholes options pricing model using the following assumptions: volatility of 79.7%, risk free interest rate of 0.63%,
and expected term of 1.25 years. The fair value of the warrants was $65,091.
On May 10, 2016, the Company terminated the
consulting agreement. On June 27, 2016, the Company and BIP signed a settlement agreement (the “Settlement Agreement”).
In connection with the Settlement Agreement, the Company and BIP agreed that (1) the First Tranche Warrants and the Second Tranche
Warrants would remain vested and outstanding, (2) the third, fourth and fifth tranches of success fee warrants would be cancelled;
and (3) crediting of $66,439 in outstanding but unpaid fees against the exercise price of the First Tranche Warrants would be the
only payment made or required under the Service Agreement. As a result, BIP will receive (a) 55,365 shares, (b) warrants to purchase
94,635 shares for $1.2 per share, expiring June 28, 2017, and (c) warrants to purchase 150,000 shares for $1.50 per share, which
may be exercised from July 18, 2016 until July 17, 2017. As a result of the Settlement Agreement, the Company does not have any
liability for future warrants issuance to BIP. During the six months ended June 30, 2017, 94,635 warrants were exercised. As of June 30, 2017, there were 150,000 warrants outstanding. On July 17, 2017, the Company received notice
from BIP not to exercise the remaining 150,000 warrants.
For the three months ended June 30, 2017 and
2016, the Company included $Nil and $65,091 warrants cost in the general administrative expenses, respectively. For the six months
ended June 30, 2017 and 2016, the Company included $Nil and $129,295 warrants cost in the general administrative expenses, respectively.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 16 – NON-CONTROLLING INTEREST
On December 14, 2016, Wuhan Kingold transferred
its 55% ownership interest in Kingold Internet to Wuhan Kingold Industrial Group Co., Ltd., a related party, for a consideration
of $79,196 (RMB 550,000). After the transfer, Kingold Internet and Yuhuang were no longer the subsidiaries of Wuhan Kingold. There
was no non-controlling interest as of June 30, 2017.
A reconciliation of non-controlling interest
as of December 31, 2016 are as follows:
|
|
As of December 31, 2016
|
|
Beginning Balance
|
|
$
|
73,274
|
|
Capital Contribution
|
|
|
-
|
|
Proportionate shares of net loss
|
|
|
(6,214
|
)
|
Foreign currency translation gain (loss)
|
|
|
(4,222
|
)
|
Deconsolidation of subsidiaries
|
|
|
(62,557
|
)
|
Ending Balance
|
|
$
|
-
|
|
NOTE 17 – CONCENTRATIONS AND RISKS
The Company maintains certain bank accounts
in the PRC and BVI, which are not insured by Federal Deposit Insurance Corporation (“FDIC”) insurance or other insurance.
The cash and restricted cash balance held in the PRC bank accounts was $35,154,036 and $81,354,642 as of June 30, 2017 and December
31, 2016, respectively. The cash balance held in the BVI bank accounts was $Nil and $7,083 as of June 30, 2017 and December 31,
2016, respectively. As of June 30, 2017, the Company held $297,737 of cash balances within the United States, which was $47,737
in excess of FDIC insurance limits of $250,000. As of December 31, 2016, the Company held $281,018 of cash balances within the
United States, which was $31,018 in excess of FDIC insurance limits of $250,000.
For the periods ended June 30, 2017 and 2016,
almost 100% of the Company's assets were located in the PRC and 100% of the Company's revenues were derived from its subsidiaries
located in the PRC.
The Company’s principal raw material
used during the three and six months ended June 30, 2017 and 2016 was gold, which accounted for almost 100% of its total purchases
for the three and six months ended June 30, 2017 and 2016. The gold purchased by the Company was solely from the Shanghai Gold
Exchange, the largest gold trading platform in the PRC.
No customer accounted for more than 10% of annual sales for the
three and six months ended June 30, 2017 or 2016.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 18 – GOLD LEASE TRANSACTIONS
The Company leased gold as a way to finance
its growth and will return the same amount of gold to China Construction Bank (“CCB”), Shanghai Pudong Development
Bank (“SPD Bank”) and CITIC Bank at the end of the respective lease agreements. Under these gold lease arrangements,
each of CCB, SPD Bank and CITIC Bank retains beneficial ownership of the gold leased to the Company and treats it as if the gold
is placed on consignment to the Company. All three banks have their own representatives on the Company’s premises to monitor
on a daily basis the use and security of the gold leased to the Company. Accordingly, the Company records these gold lease transactions
as operating leases because the Company does not have ownership nor has it assumed the risk of loss for the leased gold.
|
a)
|
Gold
lease transactions with CCB
|
During the year ended December 31, 2016, the
Company entered into gold lease agreements with CCB and leased an aggregate of 975 kilograms of gold, which amounted to approximately
$33.8 million (RMB 235 million). The leases have initial terms of one year and provide an interest rate of 5.7% per annum. The
leased gold shall be returned to the Bank upon lease maturity.
During the year ended December 31, 2016, the
Company returned 2,490 kilograms of gold, which amounted to approximately $86.4 million (RMB 600.3 million) back to CCB upon lease
maturity.
As of December 31, 2016, the Company pledged
restricted cash of approximately $14.4 million (RMB 100 million) as collateral to safeguard the gold lease from CCB, which was
returned to the Company in early 2017 as the leased gold was returned at the end of December 2016.
As of June 30, 2017, the Company recorded $16.2
million (RMB 110 million) as restricted cash deposit in CCB for the purpose of gold lease in future period. During the six months
ended June 30, 2017, no gold lease transactions were made and no leased gold was outstanding from CCB as of June 30, 2017.
|
b)
|
Gold
lease transactions with SPD Bank
|
On April 10, 2015, Wuhan Kingold entered into
a gold lease agreement with SPD Bank to lease 197 kilograms of gold (valued at approximately RMB 46.98 million or approximately
$7.2 million). The lease has an initial term of one year and provides an interest rate of 3.2% per annum.
In the third quarter of 2015, Wuhan Kingold
entered into several gold lease agreements with SPD Bank to lease an aggregate of 720 kilograms of gold, valued approximately $25.9
million (RMB 168.2 million). The leases have initial terms of one year and provide an interest rate of 2.8% to 6% per annum.
During the year ended December 31, 2016, the
Company entered into gold lease agreements with Shanghai Pudong Development Bank and leased an aggregate of 345 kilograms of gold,
which amounted to approximately $13.4 million (RMB 93.3 million). The leases have initial terms of six months to one year and provide
an interest rate from 3.0% to 3.3% per annum. During the year ended December 31, 2016, the Company returned 1,077 kilograms of
gold, which amounted to approximately $37.2 million (RMB 258.6 million) back to SPD Bank upon lease maturity. The remaining leased
gold of 185 kilograms of leased gold which amounted to approximately $7.2 million (RMB 49.8 million) was returned to the SPD Bank
upon lease maturity in June 2017.
In June 2017, the pledged restricted cash of
approximately $8.1 million (RMB 55.6 million) as collateral to safeguard the gold lease from SPD Bank was also fully refunded to
the Company upon lease maturity.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 18 – GOLD LEASE TRANSACTIONS (Continued)
|
c)
|
Gold
lease transaction with CITIC Bank
|
During 2015, Wuhan Kingold entered into a gold
lease agreement with CITIC Bank to lease an additional 850 kilograms of gold (valued at approximately $31 million or RMB 201 million).
The lease has an initial term of one to six months and provides an interest rate of 6% per annum. The Company is required to deposit
cash into an account at CITIC Bank equal to approximately $1.2 million (RMB 8.0 million). During 2015, the Company returned 1,150
kilograms of leased gold upon maturity, which amounted to approximately $44.3 million (RMB 287.4 million). The remaining amount
was returned to the Bank upon lease maturity in 2016.
As of June 30, 2017 and December 31, 2016,
no leased gold was outstanding and no restricted cash was pledged as collateral to safeguard the gold lease from CITIC.
|
d)
|
Gold
lease transaction with Industrial and Commercial Bank of China (“ICBC’)
|
During the year ended December 31, 2016, the
Company entered into additional gold lease agreements with ICBC and leased an aggregate amount of 527 kilograms of gold, which
amounted to approximately $20.1 million (RMB 139.7 million). The leases have initial terms of half year and provide an interest
rate of 2.75% per annum. As of December 31, 2016, 527 kilograms of leased gold were all returned to ICBC.
As of June 30, 2017 and December 31, 2016,
no leased gold was outstanding and no restricted cash was pledged as collateral to safeguard the gold lease from ICBC.
|
e)
|
Gold
lease transactions with related party
|
During the year ended December 31, 2016, the
Company entered into multiple gold lease agreements with Wuhan Shuntianyi Investment Management Ltd. (“Shuntianyi”),
a related party which is controlled by the CEO and the Chairman of the Company, to lease a total of 16,000,000 grams of Au9999
gold in aggregate with carrying value of approximately $538.6 million. The leased gold was fully returned by the Company to Shuntianyi
as of December 31, 2016.
On January 3, 2017, Wuhan Kingold entered into
a gold lease agreement with Shuntianyi to lease a total of 4,000 kilograms of Au9999 gold in aggregate with carrying value of approximately
$131.1 million for a period from January 3, 2017 to February 28, 2017. The leased gold was fully returned by the Company to Shuntianyi
on February 28, 2017.
As of June 30, 2017, the Company had no leased
gold outstanding. As of December 31, 2016, 185 kilograms of leased gold was outstanding, at the approximated amounts of $7.2 million.
Interest expense for all gold lease arrangements
for the three months ended June 30, 2017 and 2016 was approximately $0.05 million and $1.2 million, respectively, which was included
in the cost of sales. Interest expense for all gold lease arrangements for the six months ended June 30, 2017 and 2016 was approximately
$0.1 million and $2.4 million, respectively, which was included in the cost of sales.
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 19 – COMMITMENTS AND CONTINGENCIES
Commitments
Guarantee for Third Party
On April 12, 2016, Wuhan Kingold signed the
collateral agreements with Evergrowing Bank - Yantai Huangshan Road Branch to pledge restricted deposits of totaling $29 million
(RMB 200 million). The pledged deposits is to guarantee a bank acceptance note agreement signed between Yantai Runtie Trade Ltd.
and Evergrowing Bank - Yantai Huangshan Road Branch, which allows Yantai Runtie Trade Ltd. to access a loan of approximately $29
million (RMB 200 million) with a term of one year from April 12, 2016 to April 12, 2017, and bearing a fixed annual interest rate
of 2.01%.
On April 12, 2017, Wuhan Kingold repaid the
loan of approximately $29 million (RMB 200 million) to Yantai Runtie Trade Ltd. upon maturity. The restricted deposit of totaling
$29 million (RMB 200 million) in connection with this loan was also released to the Company upon the repayment.
Guarantee for Related Party
On January 13, 2017, Wuhan Kingold
entered into a loan agreement with Wuhan Kangbo Biotech Limited (“Kangbo”), a related party which is controlled
by the CEO and Chairman of the Company, for a loan of approximately $147.5 million (RMB 1,000 million). The loan has a
one-year term from January 12, 2017 to January 10, 2018, and is interest free. In order for Kangbo to obtain the loan from
the bank, Wuhan Kingold signed the guarantee agreement with Evergrowing Bank- Yantai Huangshan Road Branch on January 11,
2017. As a guarantor of the bank loan, Wuhan Kingold pledged 5,470 kilograms of gold in aggregate with carrying value of
approximately $185.4 million (RMB 1.3 billion) as collateral.
On February 20, 2017, Wuhan Kingold entered
into a second loan agreement with Kangbo for a loan of approximately $147.5 million (RMB 1,000 million). The loan has one-year
term from February 20, 2017 to February 20, 2018, and is interest free. In order for Kangbo to obtain the loan from the bank, Wuhan
Kingold signed the guarantee agreement with Evergrowing Bank - Yantai Huangshan Road Branch on February 16, 2017. As a guarantor
of the bank loan, Wuhan Kingold pledged 4,755 kilograms of gold in aggregate with carrying value of approximately $166 million
(RMB 1.1 billion) as collateral.
Operating Lease
On June 27, 2016, Wuhan Kingold
signed several 5 year lease agreements with Wuhan Huayuan, a related party that is controlled by the CEO and Chairman of
the Company, to rent office and store space at the Jewelry Park, commencing in July 2016 and October 2016, respectively,
with aggregate annual rent of approximately $0.4 million (RMB 2.3 million). On July 1, 2017, Wuhan Kingold signed another 5
year lease agreement with Wuhan Huayuan to rent additional office space at the Jewelry Park commencing in July 2017 with
aggregate annual rent of approximately $83,779 (RMB 576,000). For the three and six months ended June 30, 2017, the Company
recorded $85,012 and $169,684 rent expense, respectively. For the three and six months ended June 30, 2016, the Company did
not incur rent expenses. As of June 30, 2017, the Company was obligated under non-cancellable operating leases for minimum
rentals as follows:
For the Twelve Months Ending June 30,
|
|
|
|
2018
|
|
$
|
423,145
|
|
2019
|
|
|
423,145
|
|
2020
|
|
|
423,145
|
|
2021
|
|
|
423,145
|
|
2022 and thereafter
|
|
|
125,320
|
|
|
|
$
|
1,817,900
|
|
KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 20 – COMPARATIVE INFORMATION
The financial statements and notes for the
period ended June 30, 2016 were restated, and the Quarterly Report on Form 10-Q was amended and filed with the SEC on April 10,
2017. In addition, certain amounts on the unaudited condensed consolidated statements of operations and comprehensive income and
unaudited condensed consolidated statement of cash flows for the period ended June 30, 2016 were reclassified for consistency with
the current period presentation.
NOTE 21 – SUBSEQUENT EVENTS
On July 17, 2017, the Second
Tranche Warrants (see Note 15) expired pursuant to their terms. Accordingly, as of the date of this report no warrants are
issued and outstanding.
On July 28, 2017, Wuhan Kingold pledged
2,100 kilograms of gold in aggregate with carrying value of approximately $84.3 million (RMB 572 million) as collateral to
secure a loan from Huarong International Trust Co. Ltd. (“Huarong Trust”). Pursuant to the loan agreement signed
with Huarong Trust on July 27, 2017, the Company has access to a loan with an aggregate amount of approximately $147.5
million (RMB 1,000 million) for the purpose of working capital needs. The loan has a 12-month term starting from the date of
releasing the loan. The Company is required to pay a special interest as loan origination fee equivalent to 1.5% of the
principal amount received and bears normal interest at a fixed rate of 7% per annum. The loan is also guaranteed by the CEO
and Chairman of the Company. On August 2, 2017, a loan of $59 million (RMB 400 million) was released to the Company.
On July 31, 2017, Wuhan Kingold repaid loan
of $73.8 million (RMB 500 million) to Wuhan Kingold Industrial Group. After the repayment, the aggregate borrowing amount from
Wuhan Kingold Industrial Group was $662.5 million (RMB 4,490 million).