Company Quick10K Filing
Kingold Jewelry
Price0.60 EPS-0
Shares11 P/E-1
MCap7 P/FCF-0
Net Debt-16 EBIT134
TEV-10 TEV/EBIT-0
TTM 2019-09-30, in MM, except price, ratios
10-Q 2019-09-30 Filed 2019-11-12
10-Q 2019-06-30 Filed 2019-08-09
10-Q 2019-03-31 Filed 2019-05-15
10-K 2018-12-31 Filed 2019-04-02
10-Q 2018-09-30 Filed 2018-11-14
10-Q 2018-06-30 Filed 2018-08-09
10-Q 2018-03-31 Filed 2018-05-10
10-K 2017-12-31 Filed 2018-03-15
10-Q 2017-09-30 Filed 2017-11-09
10-Q 2017-06-30 Filed 2017-08-09
10-Q 2017-03-31 Filed 2017-05-10
10-K 2016-12-31 Filed 2017-04-17
10-Q 2016-09-30 Filed 2016-11-14
10-Q 2016-06-30 Filed 2016-08-12
10-Q 2016-03-31 Filed 2016-05-16
10-K 2015-12-31 Filed 2016-03-29
10-Q 2015-09-30 Filed 2015-11-16
10-Q 2015-06-30 Filed 2015-08-19
10-Q 2015-03-31 Filed 2015-05-15
10-K 2014-12-31 Filed 2015-03-31
10-Q 2014-09-30 Filed 2014-11-13
10-Q 2014-06-30 Filed 2014-08-13
10-Q 2014-03-31 Filed 2014-05-15
10-K 2013-12-31 Filed 2014-03-31
10-Q 2013-09-30 Filed 2013-11-14
10-Q 2013-06-30 Filed 2013-08-13
10-Q 2013-03-31 Filed 2013-05-15
10-K 2012-12-31 Filed 2013-03-28
10-Q 2012-09-30 Filed 2012-11-13
10-Q 2012-06-30 Filed 2012-08-14
10-Q 2012-03-31 Filed 2012-05-09
10-K 2011-12-31 Filed 2012-03-26
10-Q 2011-09-30 Filed 2011-11-09
10-Q 2011-06-30 Filed 2011-08-09
10-Q 2011-03-31 Filed 2011-05-10
10-K 2010-12-31 Filed 2011-03-31
10-Q 2010-09-30 Filed 2010-11-12
10-Q 2010-06-30 Filed 2010-08-12
10-Q 2010-03-31 Filed 2010-05-14
10-K 2009-12-31 Filed 2010-03-31
8-K 2020-05-29
8-K 2020-05-14
8-K 2020-04-01
8-K 2020-03-30
8-K 2020-01-12
8-K 2019-12-18
8-K 2019-11-05
8-K 2019-11-05
8-K 2019-10-21
8-K 2019-08-26
8-K 2019-05-09
8-K 2018-12-15
8-K 2018-11-09
8-K 2018-10-19
8-K 2018-07-31
8-K 2018-01-02
8-K 2017-12-31

KGJI 10Q Quarterly Report

Part I - Financial Information
Item 1. Financial Statements
Note 1 - Organization and Basis of Presentation
Note 2 - Summary of Significant Accounting Policies
Note 3 - Inventories
Note 4 - Property and Equipment, Net
Note 5 - Loans
Note 6 - Investments in Gold
Note 7 - Related Parties Loans
Note 8 - Other Related Party Transactions
Note 9 - Income Taxes
Note 10 - Earnings (Loss) per Share
Note 11 - Options
Note 12 - Convertible Notes
Note 13 - Concentrations and Risks
Note 14 - Leases
Note 15 - Subsequent Event
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3. Defaults Upon Senior Securities.
Item 4. Mine Safety Disclosures
Item 5. Other Information.
Item 6. Exhibits
EX-10.4 tm1919546d1_ex10-4.htm
EX-10.10 tm1919546d1_ex10-10.htm
EX-10.11 tm1919546d1_ex10-11.htm
EX-10.12 tm1919546d1_ex10-12.htm
EX-31.1 tm1919546d1_ex31-1.htm
EX-31.2 tm1919546d1_ex31-2.htm
EX-32.1 tm1919546d1_ex32-1.htm
EX-32.2 tm1919546d1_ex32-2.htm
EX-99.1 tm1919546d1_ex99-1.htm

Kingold Jewelry Earnings 2019-09-30

Balance SheetIncome StatementCash Flow
3.42.72.01.40.70.02012201420172020
Assets, Equity
0.70.50.40.20.1-0.12012201420172020
Rev, G Profit, Net Income
1.00.4-0.1-0.7-1.2-1.82012201420172020
Ops, Inv, Fin

10-Q 1 tm1919546d1_10q.htm FORM 10-Q

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

  

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended:

September 30, 2019

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from: _____________ to _____________

  

KINGOLD JEWELRY, INC.

(Exact name of registrant as specified in its charter)

  

Delaware 001-15819 13-3883101
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification No.)

 

No. 8 Han Huang Road

Jiang’an District

Wuhan, Hubei Province, PRC 430023

(Address of principal executive offices) (Zip Code)

 

(011) 86 27 65694977

(Registrant’s telephone number, including area code)

 

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 

x Yes     ¨ No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). 

x Yes     ¨ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨ Accelerated filer x
Non-accelerated filer ¨ Smaller reporting company x
    Emerging growth company ¨

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

¨ Yes     x  No  

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class   Ticker Symbol  

Name of Exchange
on Which Registered
 

Common Stock, par value $0.001 per share   KGJI   NASDAQ Capital Market

  

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

As of November 7, 2019, there were 11,020,744 shares of common stock outstanding, par value $0.001 per share. 

 

 

 

 

 

QUARTERLY REPORT ON FORM 10-Q

 

TABLE OF CONTENTS

 

      Page
Number
PART I. FINANCIAL INFORMATION 5
       
Item 1.   Financial Statements 5
       
    Condensed Consolidated Balance Sheets as of September 30, 2019 (Unaudited) and December 31, 2018 5
       
    Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2019 and 2018 (Unaudited) 6
       
    Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018 (Unaudited) 7
       
    Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three Months ended September 30, 2019 and 2018 (Unaudited) 8
       
    Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months ended September 30, 2019 and 2018 (Unaudited) 9
       
    Notes to Condensed Consolidated Financial Statements (Unaudited) 10
       
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations 46
       
Item 3.   Quantitative and Qualitative Disclosures About Market Risk 57
       
Item 4.   Controls and Procedures 58
       
PART II. OTHER INFORMATION 61
       
Item 1.   Legal Proceedings 61
       
Item 1A.   Risk Factors 61
       
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds 79
       
Item 3.   Defaults Upon Senior Securities 79
       
Item 4.   Mine Safety Disclosures 79
       
Item 5.   Other Information 79
       
Item 6.   Exhibits 80
       
Signatures     81

 

 Page 2 of 81 

 

 

CAUTIONARY STATEMENT FOR PURPOSES OF THE “SAFE HARBOR” STATEMENT

UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

 

Statements in this quarterly report that are not historical facts or information are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “estimate,” “project,” “forecast,” “plan,” “believe,” “may,” “expect,” “anticipate,” “intend,” “planned,” “potential,” “can,” “expectation” and similar expressions, or the negative of those expressions, may identify forward-looking statements. Such forward-looking statements are based on management’s reasonable current assumptions and expectations. Such forward-looking statements involve risks, uncertainties and other factors, which may cause our actual results, levels of activity, performance or achievement to be materially different from any future results expressed or implied by such forward-looking statements, and there can be no assurance that actual results will not differ materially from management’s expectations. Such factors include, among others, the following:

 

  · changes in the market price of gold;

 

  · our ability to implement the key initiatives of, and realize the gross and operating margins and projected benefits (in the amounts and time schedules we expect) from, our business strategy;

 

  · non-performance of suppliers on their sale commitments and customers on their purchase commitments;

 

  · non-performance of third-party service providers;

 

  · adverse conditions in the industries in which our customers operate, including a general economic downturn, a recession globally, or sudden disruption in business conditions, and our ability to withstand an economic downturn, recession, cost inflation, competitive or other market pressures, or conditions;

 

  · the effect of political, economic, legal, tax and regulatory risks imposed on us, including foreign exchange or other restrictions, adoption, interpretation and enforcement of foreign laws including any changes thereto, as well as reviews and investigations by government regulators that have occurred or may occur from time to time, including, for example, local regulatory scrutiny in China;

 

  · our ability to manage growth;

 

  · our ability to successfully identify new business opportunities and identify and analyze acquisition candidates, secure financing on favorable terms and negotiate and consummate acquisitions as well as to successfully integrate or manage any acquired business;

 

  · our ability to integrate acquired businesses;

 

  · the effect of economic factors, including inflation and fluctuations in interest rates and currency exchange rates, foreign exchange restrictions and the potential effect of such factors on our business, results of operations and financial condition;

 

  · our ability to retain and attract senior management and other key employees;

 

  · any internal investigations and compliance reviews of Foreign Corrupt Practices Act and related U.S. and foreign law matters in China and additional countries, as well as any disruption or adverse consequences resulting from such investigations, reviews, related actions or litigation;

 

  · changes in the People’s Republic of China or U.S. tax laws;

 

  · increased levels of competition, and competitive uncertainties in our markets, including competition from companies in the gold jewelry industry in the PRC, some of which are larger than we are and have greater resources;

 

 Page 3 of 81 

 

 

  · the impact of the seasonal nature of our business, adverse effect of rising energy, commodity and raw material prices, changes in market trends, purchasing habits of our consumers and changes in consumer preferences;

 

  · our ability to protect our intellectual property rights;

 

  · the risk of an adverse outcome in any material pending and future litigations;

 

  · our ratings, our access to cash and financing and ability to secure financing at attractive rates;

 

  · our ability to comply with environmental laws and regulations;

 

  · our continuing relationship with major banks in China with whom we have certain gold lease agreements and working capital loans;

 

  · the investment in gold may be deficient if the fair market value of the pledged gold in connection with the loans declines, then we may need to increase the pledged gold inventory for the loan collateral or add the restricted cash.

 

  · other risks.

 

Factors that could cause or contribute to such differences include, but are not limited to, those discussed in Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the risks discussed in Part 2, Item 1A “Risk Factors.” We undertake no obligation to revise or update these forward-looking statements. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

 

 Page 4 of 81 

 

 

PART I – FINANCIAL INFORMATION

 

Item 1.  Financial Statements

KINGOLD JEWELRY, INC.

 CONDENSED CONSOLIDATED BALANCE SHEETS

(IN U.S. DOLLARS)

 (UNAUDITED)  

 

   September 30,   December 31, 
   2019   2018 
      

(Audited)

 
ASSETS          
Cash  $651,318   $233,391 
Restricted cash   14,632,279    4,798,185 
Accounts receivable   654,455    451,059 
Inventories   268,214,300    127,034,673 
Investments in gold   2,323,335,559    1,593,557,391 
Value added tax recoverable   242,624,812    259,582,324 
Short-term investments   195,062,420    - 
Prepaid expenses and other current assets   374,843    87,590 
Total current assets   3,045,549,986    1,985,744,613 
           
Property and equipment, net   4,420,547    5,395,330 
Restricted cash   1,681,073    7,766,372 
Investments in gold   267,177,647    700,225,896 
Land use right   373,324    395,719 
Other noncurrent assets   459,524    285,768 
Total long-term assets   274,112,115    714,069,085 
TOTAL ASSETS  $3,319,662,101   $2,699,813,698 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
           
CURRENT LIABILITIES          
           
Short term loans  $1,423,679,826   $1,034,947,774 
Related party loan   69,832,280    72,699,779 
Due to related party   4,410,957    3,976,742 
Income tax payable   18,050,006    18,504,197 
Other taxes payable   2,184,430    2,577,102 
Convertible notes payable, net of discount   599,739    - 
Derivative liabilities   267,000    - 
Accrued expenses and other payables   17,682,301    15,749,564 
Total current liabilities   1,536,706,539    1,148,455,158 
           
Deferred tax liabilities   127,501,207    24,218,911 
Related party loans   534,228,724    373,327,862 
Long term loans   168,107,252    515,477,020 
Other long-term liability   154,098    - 
TOTAL LIABILITIES   2,366,697,820    2,061,478,951 
           
COMMITMENTS AND CONTINGENCIES   -    - 
SHAREHOLDERS’ EQUITY          
Preferred stock, $0.001 par value, 500,000 shares authorized, none issued or outstanding as of September 30, 2019 and December 31, 2018   -    - 
Common stock, $0.001 par value, 100,000,000 shares authorized, 11,018,955 shares issued and outstanding as of September 30, 2019 and December 31, 2018*   11,019    11,019 
Additional paid-in capital   224,420,422    224,348,001 
Retained earnings          
Unappropriated   348,178,634    353,213,325 
Appropriated   967,543    967,543 
Accumulated other comprehensive income, net of tax   379,386,663    59,794,859 
Total Shareholders’ Equity   952,964,281    638,334,747 
           
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $3,319,662,101   $2,699,813,698 

 

* Retrospectively restated for effect of 1-for-6 reverse stock split, see Note 15

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 Page 5 of 81 

 

 

KINGOLD JEWELRY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)

(IN U.S. DOLLARS)

(UNAUDITED)

 

   For the nine months ended
September 30,
   For the three months ended
September 30,
 
   2019   2018   2019   2018 
NET SALES  $1,434,337,556   $1,844,491,390   $382,790,132   $626,171,072 
COST OF SALES                    
Cost of sales   (1,293,608,652)   (1,654,427,318)   (367,382,898)   (564,685,762)
Depreciation   (724,359)   (801,384)   (235,731)   (255,546)
Total cost of sales   (1,294,333,011)   (1,655,228,702)   (367,618,629)   (564,941,308)
                     
GROSS PROFIT   140,004,545    189,262,688    15,171,503    61,229,764 
                     
OPERATING EXPENSES                    
Selling, general and administrative expenses   11,617,494    7,399,734    2,265,898    2,424,458 
Stock compensation expenses   5,364    16,092    -    5,364 
Depreciation   258,110    406,962    92,438    146,475 
Amortization   8,261    8,703    2,690    2,767 
Lease expense   62,943    197,811    20,500    62,888 
Total operating expenses   11,952,172    8,029,302    2,381,526    2,641,952 
                     
INCOME FROM OPERATIONS   128,052,373    181,233,386    12,789,977    58,587,812 
                     
OTHER INCOME (EXPENSES)                    
Other Income   -    64,433    -    64,433 
Interest Income   908,416    1,384,438    271,304    562,294 
Interest expense, including amortization of debt issuance costs of $2,187,956 and $3,482,031 for the three months, and $6,738,816 and $8,042,451 for the nine months ended September 30, 2019 and 2018, respectively   (135,252,496)   (128,898,077)   (44,911,067)   (41,479,730)
Total other expenses, net   (134,344,080)   (127,449,206)   (44,639,763)   (40,853,003)
                     
INCOME (LOSS) FROM OPERATIONS BEFORE TAXES   (6,291,707)   53,784,180    (31,849,786)   17,734,809 
                     
INCOME TAX PROVISION (BENEFIT)                    
Current   17,292,113    9,214,312    6,481,926    1,787,717 
Deferred   (18,549,129)   4,523,643    (14,327,255)   2,699,588 
Total income tax provision (benefit)   (1,257,016)   13,737,955    (7,845,329)   4,487,305 
                     
NET INCOME (LOSS)   (5,034,691)   40,046,225    (24,004,457)   13,247,504 
                     
OTHER COMPREHENSIVE INCOME (LOSS)                    
Unrealized gain (loss) related to investments in gold, net of tax   363,076,281    (56,908,875)   209,005,270    (18,935,552)
Foreign currency translation loss   (43,484,477)   (19,080,264)   (41,688,955)   (13,077,661)
Total other comprehensive income (loss)  $319,591,804   $(75,989,139)  $167,316,315   $(32,013,213)
                     
COMPREHENSIVE INCOME (LOSS)  $314,557,113   $(35,942,914)  $143,311,858   $(18,765,709)
Earnings (loss) per share                    
Basic  $(0.46)  $3.63   $(2.18)  $1.20 
Diluted  $(0.46)  $3.62   $(2.18)  $1.20 
Weighted average number of shares*                    
Basic   11,018,955    11,018,955    11,018,955    11,018,955 
Diluted   11,018,955    11,051,897    11,018,955    11,020,225 

 

* Retrospectively restated for effect of 1-for-6 reverse stock split, see Note 15

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 Page 6 of 81 

 

 

KINGOLD JEWELRY, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(IN U.S. DOLLARS)

(UNAUDITED)

 

   September 30, 2019   September 30, 2018 
CASH FLOWS FROM OPERATING ACTIVITIES          
Net (loss) income  $(5,034,691)   40,046,225 
Adjustments to reconcile net (loss) income to cash (used in) provided by operating activities:          
Depreciation of property and equipment   982,469    1,208,346 
Amortization of intangible assets   8,261    8,703 
Amortization of debt issuance costs included in interest expense   6,738,816    8,042,451 
Interest expense of convertible notes   4,292    - 
Amortization of deferred financing cost associated with convertible notes issuance   39,505    - 
Share based compensation for services and warrants expense   5,364    16,092 
Deferred tax (benefit) provision   (18,549,129)   4,523,643 
Changes in operating assets and liabilities          
Accounts receivable   (228,675)   558,165 
Inventories   (63,300,010)   321,200,297 
Other current assets and prepaid expenses   (493,635)   (752,148)
Value added tax recoverable   7,776,713    84,623,088 
Other payables and accrued expenses   2,749,526    769,590 
Investment income from short-term investment   (72,862)   - 
Income tax payable   (212,447)   748,416 
Other taxes payable   (310,511)   359,224 
Net cash (used in) provided by operating activities   (69,897,014)   461,352,092 
           
CASH FLOWS FROM INVESTING ACTIVITIES          
Purchase of property and equipment   (326,565)   (491,136)
Purchase of short-term investments   (246,592,662)   - 
Redemption of short-term investments   43,790,262    - 
Net cash used in investing activities   (203,128,965)   (491,136)
           
CASH FLOWS FROM FINANCING ACTIVITIES          
Proceeds from other loans - short term   349,034,006    - 
Repayments of other loans - short term   (382,829,071)   (554,840,248)
Proceeds from other loans - long term   131,130,344    435,804,951 
Repayment of related party loans- short-term   (220,916)   (230,227,311)
Proceeds from related party loan- long-term   306,582,758    443,110,831 
Repayment of related party loan- long-term   (125,056,810)   (534,050,005)
Repayment of loan origination fees   (2,163,651)   (6,578,966)
Gross proceeds from issuance of convertible notes   1,000,000    - 
Payments of deferred financing costs associated with convertible notes   (110,000)   - 
Borrowings from related party   508,202    965,643 
Net cash provided by (used in) financing activities   277,874,862    (445,815,105)
           
EFFECT OF EXCHANGE RATES ON CASH AND RESTRICTED CASH   (682,161)   (4,229,857)
NET INCREASE IN CASH AND RESTRICTED CASH   4,166,722    10,815,994 
CASH AND RESTRICTED CASH, BEGINNING OF PERIOD   12,797,948    17,924,397 
CASH AND RESTRICTED CASH, END OF PERIOD  $16,964,670    28,740,391 
           
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION          
Cash paid for interest expense  $126,137,400    120,133,935 
Cash paid for income tax  $17,504,560    8,465,896 
           
NON-CASH INVESTING AND FINANCING ACTIVITIES          
Investments in gold transferred to inventories  $497,824,202    557,866,549 
Inventories transferred to investments in gold  $416,042,035    502,451,549 
Unrealized gain (loss) on investments in gold, net of tax  $363,076,281    (56,908,875)
Right-of-use assets obtained in exchange for operating lease obligations  $184,192    - 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.                

 

 Page 7 of 81 

 

 

KINGOLD JEWELRY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

(IN U.S. DOLLARS)

(UNAUDITED)

   Preferred stock   Common stock   Additional   Unappropriated   Appropriated  

Accumulated

other

     
   Par value   Par value   paid-in   retained   retained   comprehensive     
   Shares   Amount   Shares*   Amount   capital   earnings   earnings   Gain (deficit)   Total 
Balance at June 30, 2018   -   $-    11,018,955   $11,019   $80,443,271   $330,465,332   $967,543   $(38,821,255)  $373,065,910 
                                              
Options granted for services   -    -    -    -    5,364    -    -    -    5,364 
Net income for the period   -    -    -    -    -    13,247,504    -    -    13,247,504 
Unrealized loss related to investments in gold   -    -    -    -    -    -    -    (18,935,552)   (18,935,552)
Foreign currency translation loss   -    -    -    -    -    -    -    (13,077,661)   (13,077,661)
Balance at September 30, 2018   -   $-    11,018,955   $11,019   $80,448,635   $343,712,836   $967,543   $(70,834,468)  $354,305,565 
                                              
Balance at June 30, 2019   -   $-    11,018,955   $11,019   $224,353,365   $372,183,091   $967,543   $212,070,348   $809,585,366 
                                              
Issuance of warrants associated with convertible notes   -    -    -    -    67,057    -    -    -    67,057 
Net loss for the period   -    -    -    -    -    (24,004,457)   -    -    (24,004,457)
Unrealized gain related to investments in gold   -    -    -    -    -    -    -    209,005,270    209,005,270 
Foreign currency translation loss   -    -    -    -    -    -    -    (41,688,955)   (41,688,955)
Balance at September 30, 2019   -   $-    11,018,955   $11,019   $224,420,422   $348,178,634   $967,543   $379,386,663   $952,964,281 

 

* Retrospectively restated for effect of 1-for-6 reverse stock split, see Note 15

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.                      

 

 Page 8 of 81 

 

 

KINGOLD JEWELRY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

(IN U.S. DOLLARS)

(UNAUDITED)

 

   Preferred stock   Common stock   Additional   Unappropriated   Appropriated   Accumulated
other
     
   Par value   Par value   paid-in   retained   retained   comprehensive     
   Shares   Amount   Shares*   Amount   capital   earnings   earnings   Gain (deficit)   Total 
Balance at December 31, 2017   -   $-    11,018,955   $11,019   $80,432,543   $303,666,611   $967,543   $5,154,671   $390,232,387 
                                              
Options granted for services   -    -    -    -    16,092    -    -    -    16,092 
Net income for the period   -    -    -    -    -    40,046,225    -    -    40,046,225 
Unrealized loss related to investments in gold   -    -    -    -    -    -    -    (56,908,875)   (56,908,875)
Foreign currency translation loss   -    -    -    -    -    -    -    (19,080,264)   (19,080,264)
Balance at September 30, 2018   -   $-    11,018,955   $11,019   $80,448,635   $343,712,836   $967,543   $(70,834,468)  $354,305,565 
                   -                          
Balance at December 31, 2018   -   $-    11,018,955   $11,019   $224,348,001   $353,213,325   $967,543   $59,794,859   $638,334,747 
                                              
Options granted for services   -    -    -    -    5,364    -    -    -    5,364 
Issuance of warrants associated with convertible notes                       67,057                   67,057 
Net loss for the period   -    -    -    -    -    (5,034,691)   -    -    (5,034,691)
Unrealized gain related to investments in gold   -    -    -    -    -    -    -    363,076,281    363,076,281 
Foreign currency translation loss   -    -    -    -    -    -    -    (43,484,477)   (43,484,477)
Balance at September 30, 2019   -   $-    11,018,955   $11,019   $224,420,422   $348,178,634   $967,543   $379,386,663   $952,964,281 
                                              

 

* Retrospectively restated for effect of 1-for-6 reverse stock split, see Note 15

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

             

 Page 9 of 81 

 

  

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 1 – ORGANIZATION AND BASIS OF PRESENTATION

 

Kingold Jewelry, Inc. (“Kingold” or “the Company”) was incorporated in the State of Delaware on September 5, 1995.

 

Dragon Lead Group Limited (“Dragon Lead”) was incorporated in the British Virgin Islands (“BVI”) on July 1, 2008 as a holding company and was 100% controlled by Kingold. Wuhan Vogue-Show Jewelry Co., Limited (“Wuhan Vogue-Show”), which is principally engaged in design and manufacture of gold and platinum ornaments in the People’s Republic of China (“PRC”), was incorporated in the PRC as a wholly-owned foreign enterprise on February 16, 2009, and was 100% owned by Dragon Lead. Wuhan Vogue-Show’s business permit expires on February 16, 2019, and is renewed in late February 2019. Wuhan Kingold Jewelry Co., Limited (“Wuhan Kingold”) was incorporated in the PRC on August 2, 2002 as a limited liability company. On October 26, 2007, Wuhan Kingold was restructured as a joint stock company limited by shares and its business activities are the same as those of Wuhan Vogue-Show. Wuhan Kingold’s business permit expires on July 1, 2052 and is renewable upon expiration.

 

Wuhan Kingold is effectively controlled by Wuhan Vogue-Show through a series of agreements and Amendment Agreements (collectively referred to as the Restructuring Agreements). In accordance with the Agreements and Amendments, shareholders holding 100% of the outstanding equity of Wuhan Kingold were parties to the agreements such that Wuhan Kingold has agreed to pay 100% of its after-tax profits to Wuhan Vogue-Show and shareholders owning 100% of Wuhan Kingold’s shares have pledged and delegated their voting power in Wuhan Kingold to Wuhan Vogue-Show.

 

These contractual arrangements enable Wuhan Vogue-Show to:

 

  · exercise effective control over Wuhan Kingold;
  · receive substantially all of the economic benefits from Wuhan Kingold; and
  · have an exclusive option to purchase 100% of the equity interest in Wuhan Kingold, when and to the extent permitted by PRC law.

 

Through such arrangements, Wuhan Kingold has become Wuhan Vogue-Show’s contractually controlled affiliate. Kingold is empowered, through its wholly owned subsidiaries Dragon Lead and Wuhan Vogue-Show, with the ability to control and substantially influence Wuhan Kingold’s daily operations and financial affairs, appoint its senior executives and approve all matters requiring shareholders’ approval. Kingold is also obligated to absorb a majority of expected losses of Wuhan Kingold, which enables Kingold to receive a majority of expected residual returns from Wuhan Kingold, and because Kingold has the power to direct the activities of Wuhan Kingold that most significantly impact Wuhan Kingold’s economic performance, Kingold, through its wholly-owned subsidiaries, accounts for Wuhan Kingold as its Variable Interest Entity (“VIE”) under ASC 810-10-05-8A. Accordingly, Kingold consolidates Wuhan Kingold’s operating results, assets and liabilities.

 

 Page 10 of 81 

 

 

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 1 – ORGANIZATION AND BASIS OF PRESENTATION (continued)

 

The accompanying unaudited condensed consolidated financial statements of Kingold Jewelry, Inc. (“Kingold” or the “Company”) have been prepared in accordance with generally accepted accounting principles (“U.S. GAAP”) for interim financial information pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary to make the financial statements not misleading have been included. Operating results for the interim period ended September 30, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2019. 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, 2018, filed with the SEC on April 2, 2019.

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation 

 

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.

 

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 unaudited condensed 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, and allowance for investments in gold. Actual results could differ from those estimates.

 

Cash

 

Cash includes cash on hand and demand deposits in accounts maintained with commercial banks within the PRC. The Company considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents. The Company maintains most of the bank accounts in the PRC. Cash balances in bank accounts in PRC are not insured by the Federal Deposit Insurance Corporation or other programs.

 

Restricted Cash

 

The Company adopted Accounting Standards Update (“ASU”) No. 2016-18, “Statement of Cash Flows: Restricted Cash” during the first quarter of 2018. This ASU applies to all entities that have restricted cash or restricted cash equivalents to be presented in the statement of cash flows under Topic 230.

 

 Page 11 of 81 

 

 

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

As of September 30, 2019 and December 31, 2018, the Company had restricted cash (current and non-current) of $16,313,352 and $12,564,557, respectively. All restricted cash was related to the various loans with banks and financial institutions – see Note 5 – Loans.

 

Accounts Receivable

 

The Company generally receives cash payment upon delivery of a product, but may extend unsecured credit to its customers in the ordinary course of business. The Company mitigates the associated risks by performing credit checks and actively pursuing past due accounts. An allowance for doubtful accounts is established and recorded based on management’s assessment of the credit history of the customers and current relationships with them. As of September 30, 2019 and December 31, 2018, 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 and net realizable value, and cost is calculated on the weighted average basis. As of September 30, 2019 and December 31, 2018 there was no lower of cost or market adjustment because the carrying value of the Company’s inventories was lower than the current and expected market price of gold. The cost of inventories comprises all costs of purchases, costs of fixed and variable production overhead and other costs incurred in bringing the inventories to their present condition.

 

Short-term Investments

 

The Company’s short-term investments consist of wealth management financial products issued by financial institutions, which are redeemable at any time. The financial institutions invest the funds in certain financial instruments, including money market funds, private fund, bonds or mutual funds, mostly with a floating rate of return on these investments. The carrying values of the Company’s short-term investments approximate fair value because of their short-term nature. The interest earned is recognized in the consolidated statements of income and comprehensive income (loss) over the contractual term of these investments. The Company had short-term investments of $195,062,420 and $nil as of September 30, 2019 and December 31, 2018, respectively. For the three and nine months ended September 30, 2019, $72,862 and nil of investment income has been reported on the Company’s short-term investments.

 

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. Leasehold improvements are depreciated over the shorter of the lease term or the estimated useful life. 

 

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
Leasehold improvements  5 years

 

 Page 12 of 81 

 

 

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

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. Land use rights are stated at cost less accumulated amortization. Amortization is provided over the respective useful lives, using the straight-line method. Estimated useful life is 50 years, and is determined in connection with the term of the land use right. 

 

Long-Lived Assets

 

Certain assets such as property, plant and equipment and construction in progress, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Recoverability of assets that are held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount exceeds the fair value of the asset. There were no events or changes in circumstances that triggered a review of impairment of long-lived assets as of September 30, 2019 and December 31, 2018.   

 

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, prepaid expenses and other current assets, short-term loans, accrued expenses and other payables 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.

 

 Page 13 of 81 

 

   

 KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Investments in Gold

 

The Company pledged its own gold inventory to meet the requirements of bank loans. The pledged gold will be available for sale upon the repayment of the bank loans. The Company classified these pledged gold as investments in gold, and carried at fair market value, with the unrealized gains and losses, included in 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, which is considered as the principal market.

 

Leases

 

The Company adopted ASU 2016-02, “Leases” on January 1, 2019 and used the alternative transition approach which permits the effects of adoption to be applied at the effective date. The new standard provides a number of optional practical expedients in transition. The Company elected the 'package of practical expedients', which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. The Company also elected the short-term lease exemption and combining the lease and non-lease components practical expedients. The most significant impact upon adoption relates to the recognition of new Right-of-use (“ROU”) assets and lease liabilities on the Company’s balance sheet for office space operating leases. Upon adoption, the Company recognized additional operating liabilities of approximately $0.2 million, with corresponding ROU assets of the same amount based on the present value of the remaining rental payments under current leasing standards for existing operating leases. There was no cumulative effect of adopting the standard.  

 

Revenue Recognition

 

The Company adopted Accounting Standards Codification (“ASC”) 606 in the first quarter of 2018 using the modified retrospective approach. ASC 606, Revenue from Contracts with Customers, establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied. 

 

The Company has assessed the impact of the guidance by reviewing its existing customer contracts and current accounting policies and practices to identify differences that will result from applying the new requirements, including the evaluation of its performance obligations, transaction price, customer payments, transfer of control and principal versus agent considerations. Based on the assessment, the Company concluded that there was no change to the timing and pattern of revenue recognition for its current revenue streams in scope of Topic 606 and therefore there was no material changes to the Company’s consolidated financial statements upon adoption of ASC 606. 

 

The Company’s revenues are primarily composed of sales proceeds collected from sales of branded products and customized product fees. Revenue is recognized when performance obligations under the terms of a contract with a customer are satisfied and promised services have transferred to the customers.

 

 Page 14 of 81 

 

  

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Revenue Recognition (continued)

 

Revenue is recognized when obligations under the terms of a contract with the Company’s customers are satisfied. Satisfaction of contract terms occur with the transfer of title of the Company’s branded products and accessories to the customers. Net sale is measured as the amount of consideration the Company expects to receive in exchange for transferring the goods to the wholesaler and retailers. The amount of consideration the Company expects to receive consists of the sales price adjusted for any incentives if applicable. Incidental promotional items that are immaterial in the context of the contract are recognized as expense. Fees charged to customers for shipping and handling are included in net sales in the accompanying consolidated statements of operations and the related costs incurred by the Company are included in cost of goods sold. In applying judgment, the Company considered customer expectations of performance, materiality and the core principles of ASC Topic 606. The Company’s performance obligations are generally transferred to the customer at a point in time. The Company’s contracts with customers generally do not include any variable consideration.

 

Sαles of brαnded products

 

The Company offers a wide range of in-house designed products including but not limited to gold necklaces, rings, earrings, bracelets, and pendants. In our sales of branded products, the Company only sells on a wholesale basis to distributors and retailers. Pricing of the jewelry products is made at the time of sales contracts are made, based on prevailing market price of gold. These sales contracts are primarily based on a customer’s purchase order followed by the Company’s order acknowledgement, and may also include a master supply or distributor agreement. The performance obligations are generally satisfied at a point in time when the Company ships the product from the Company’s facility. The Company usually makes cash sales, and also makes credit sales in rare cases with the payment term due within 30 days.  

 

Customized production fees

 

In the customized product arrangement, the Company receives orders from other jewelry companies who engage to the Company to design and produce 24-karat jewelry and Chinese ornaments using gold they supply to the Company. Although the Company assumes the responsibilities to design and manufacture the related Jewelry products, the Company does not assume inventory risk and does not determine the product design specification. As a result, the Company is considered the agent in this arrangement for revenue recognition purposes. All of the sales contracts in this customized product arrangements contain performance obligations satisfied at a point in time when we complete the design and ship the product from the Company’s facility. 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.

 

The Company evaluated its revenue recognition policy for all revenue streams within the scope of the ASU under previous standards and using the five-step model under the new guidance and concluded that there were no differences in the pattern of revenue recognition as a result of the adoption of ASC 606. 

 

 Page 15 of 81 

 

  

 KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Revenue Recognition (continued)

 

Contract Balances and Remaining Performance Obligations

 

Contract balances typically arise when a difference in timing between the transfer of control to the customer and receipt of consideration occurs. The Company contract assets, consist primarily of accounts receivable related to sales of products to customers when revenue is recognized prior to payment and the Company has an unconditional right to payment.

 

The Company did not disclose information about remaining performance obligations pertaining to the customer contracts that either (i) contracts with an original expected term of one year or less, or (ii) contracts for which revenue is recognized in proportion to the amount the Company has the right to invoice for products sold or services rendered. 

 

Revenue by category

 

Revenue by major product line was as follows for the three and nine months ended September 30, 2019 and 2018:  

 

   For the three months ended September 30,   For the nine months ended September 30, 
   2019   2018   2019   2018 
Branded production sales  $378,320,309   $612,836,724   $1,404,815,559   $1,808,294,992 
Customized production sales   4,376,793    13,279,852    29,282,905    35,961,620 
Trade in product sales   42,336    54,496    92,658    103,514 
Other   50,694    -    146,434    131,264 
   $382,790,132   $626,171,072   $1,434,337,556   $1,844,491,390 

  

Income Taxes

 

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period including the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

 

The provisions of ASC 740-10-25, “Accounting for Uncertainty in Income Taxes,” prescribe a more-likely-than-not threshold for consolidated financial statement recognition and measurement of a tax position taken (or expected to be taken) in a tax return. This interpretation also provides guidance on the recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, and related disclosures. The Company does not believe that there was any uncertain tax position at September 30, 2019 and December 31, 2018.

 

 Page 16 of 81 

 

   

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

  

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 2016 and after. As of September 30, 2019, the tax years ended December 31, 2013 through December 31, 2018 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 stockholders’ equity as “Accumulated other comprehensive income”.

 

The value of RMB against US$ and other currencies may fluctuate and is affected by, among other things, changes in the PRC’s political and economic conditions. Any significant revaluation of RMB may materially affect the Company’s financial condition in terms of US$ reporting. The following table outlines the currency exchange rates that were used in creating the consolidated financial statements in this report: 

 

    September 30, 2019    September 30, 2018    December 31, 2018 
Balance sheet items, except for equity, as of the period ended  US$ 1=RMB 7.1383   US$1=RMB 6.8683   US$1=RMB 6.8776 
Amounts included in the statements of operations and cash flows for the periods presented  US$1=RMB 6.8634   US$1=RMB 6.5153   US$1=RMB  6.6163 

 

 

 Page 17 of 81 

 

 

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

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 unaudited condensed consolidated statements of income and comprehensive income (loss).

 

Earnings (Loss) 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

 

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. 

 

Debt Issuance Origination Costs

 

Debt issuance cost related to a recognized debt liability is presented in the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts. Amortization of debt origination costs is calculated using the effective interest method and is included as a component of interest expense.

 

 Page 18 of 81 

 

 

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 inventory may be affected by commodity prices. The Company records the value of its inventory using the lower of cost and net realizable value, cost calculated on the weighted average method. As a result, decreases in the market value of precious metals such as gold would result in a lower stated value of the Company’s inventory, which may require it to take a charge for the decrease in the value of its inventory.

 

The Company also allocated significant portion of its inventories as investment in gold and pledged as collateral to secure loans from banks and financial institutions, so there is a risk that the Company is unable to utilize its inventories, and there could be a disruption in the Company’s supply of gold which could decrease its production and shipping levels. In addition, the investment in gold may be deficient if the fair market value of the pledged gold in connection with the loans declines, then the Company may need to increase the pledged gold inventory for the loan collateral or increase restricted cash. 

 

 Page 19 of 81 

 

 

 KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Risks and Uncertainties (continued)

 

The Company’s operations are located in the PRC. Accordingly, the Company’s business, financial condition, and results of operations may be influenced by the political, economic, and legal environments in the PRC, as well as by the general state of the PRC economy. The Company’s operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment, and foreign currency exchange. The Company’s results may be adversely affected by changes in the political, regulatory and social conditions in the PRC, and by changes in governmental policies or interpretations with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation, among other things. In addition, the Company only controls Wuhan Kingold through a series of agreements. Although the Company believes the contractual relationships through which it controls Wuhan Kingold comply with current licensing, registration and regulatory requirements of the PRC, it cannot assure you that the PRC government would agree, or that new and burdensome regulations will not be adopted in the future. If the PRC government determines that the Company’s structure or operating arrangements do not comply with applicable law, it could revoke the Company’s business and operating licenses, require it to discontinue or restrict its operations, restrict its right to collect revenues, require it to restructure its operations, impose additional conditions or requirements with which the Company may not be able to comply, impose restrictions on its business operations or on its customers, or take other regulatory or enforcement actions against the Company that could be harmful to its business. If such agreements were cancelled, modified or otherwise not complied with, the Company would not be able to retain control of this consolidated entity and the impact could be material to the Company’s operations. Although the Company has not experienced losses from these situations and believes that it is in compliance with existing laws and regulations, this may not be indicative of future results.

 

Recent Accounting Pronouncements

 

In August 2018, the FASB Accounting Standards Board issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). ASU 2018-13 modifies the disclosure requirements on fair value measurements. ASU 2018-13 is effective for public entities for fiscal years beginning after December 15, 2019, with early adoption permitted for any removed or modified disclosures. The removed and modified disclosures will be adopted on a retrospective basis and the new disclosures will be adopted on a prospective basis. The Company does not expect this guidance will have a material impact on its unaudited condensed consolidated financial statements.

 

 In June 2016, the FASB issued Accounting Standards Update ("ASU") 2016-13, Financial Instruments-Credit Losses (Topic 326), which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. ASU 2016-13 was subsequently amended by Accounting Standards Update 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Accounting Standards Update 2019-04 Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, and Accounting Standards Update 2019-05, Targeted Transition Relief. For public entities, ASU 2016-13 and its amendments is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. For all other entities, this guidance and its amendments will be effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early application will be permitted for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. We are currently evaluating the impact of our pending adoption of ASU 2016-13 on our unaudited condensed consolidated financial statements.

 

Except for the above-mentioned pronouncements, there are no new recent issued accounting standards that will have material impact on the unaudited condensed consolidated financial position, statements of operations and cash flows. 

 

 Page 20 of 81 

 

 

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 3 – INVENTORIES

 

Inventories as of September 30, 2019 and December 31, 2018 consisted of the following:

 

   As of 
   September 30, 2019   December 31, 2018 
   (unaudited)     
Raw materials (A)  $152,476,550   $- 
Work-in-progress (B)   71,111,074    87,160,453 
Finished goods (C)   44,626,676    39,874,220 
Total inventories  $268,214,300   $127,034,673 

 

(A) Included 4,433,222 grams of Au9999 gold as of September 30, 2019 and Nil Au9999 gold as of December 31, 2018.

 

(B) Included 2,087,344 grams of Au9999 gold as of September 30, 2019 and 2,570,232 grams of Au9999 gold as of December 31, 2018.

 

(C) Included 1,304,899 grams of Au9999 gold as of September 30, 2019 and 1,168,892 grams of Au9999 gold as of December 31, 2018.

 

No lower of cost or net realizable value adjustment was recorded at September 30, 2019 and December 31, 2018, respectively.

 

 Page 21 of 81 

 

 

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 4 – PROPERTY AND EQUIPMENT, NET

 

The following is a summary of property and equipment as of September 30, 2019 and December 31, 2018:

 

   As of 
   September 30, 2019   December 31, 2018 
   (unaudited)     
Buildings  $2,201,744   $2,285,203 
Plant and machinery   17,062,772    17,703,977 
Motor vehicles   231,723    240,507 
Office and electric equipment   1,561,626    1,454,793 
Leasehold improvements   1,414,654    1,466,654 
Subtotal   22,472,519    23,151,134 
Less: accumulated depreciation   (18,051,972)   (17,755,804)
Property and equipment, net  $4,420,547   $5,395,330 

 

Depreciation and amortization expenses for the three and nine months ended September 30, 2019 was $328,169 and $982,469, respectively. Depreciation and amortization expenses for the three and nine months ended September 30, 2018 was $402,021 and $1,208,346, respectively.

 

 Page 22 of 81 

 

 

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 5 – LOANS

 

Short term loans consist of the following: 

 

   As of 
   September 30, 2019   December 31, 2018 
   (Unaudited)     
(a) Loans payable to Evergrowing Bank - Yantai Huanshan Road Branch  $27,946,563   $72,699,779 
(b) Loans payable to Sichuan Trust - gross amount   210,134,066    145,399,558 
  Loans payable to Sichuan Trust - deferred financing cost   (747,160)   - 
(c) Loans payable to Zheshang Jinhui Trust - gross amount   -    62,725,369 
  Loans payable to Zheshang Jinhui Trust - deferred financing cost   -    (18,547)
(d) Loan payable to China Aviation Trust - gross amount   40,625,919    45,073,863 
  Loan payable to China Aviation Trust - deferred financing cost   (338,549)   (44,456)
(e) Loans payable to National Trust - gross amount   -    50,889,845 
  Loans payable to National Trust - deferred financing cost   -    (30,023)
(f) Loans payable to Anxin Trust   210,134,066    354,774,921 
(g) Loans payable to China Construction Bank   -    42,165,871 
(h) Loans payable to Minsheng Trust   574,366,446    145,399,560 
  Loans payable to Minsheng Trust- deferred financing cost   (964,256)   - 
(i) Loans payable to Dongguan Trust   140,089,377    - 
(i) Loans payable to Dongguan Trust-deferred financing cost   (487,978)   - 
(j) Loans payable to Chang’An Trust - gross amount   112,331,440    116,589,437 
  Loans payable to Chang’An Trust– deferred financing cost   (75,110)   (677,403)
(k) Loans payable to Sichuan Trust   43,427,707    - 
(l) Loans payable to Northern International Trust   42,021,210    - 
(m) Loans payable to Zhangjiakou Bank   25,216,085    - 
  Total short term loans  $1,423,679,826   $1,034,947,774 

 

 Page 23 of 81 

 

 

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 5 – LOANS (continued)

 

(a) 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 $140.1 million (RMB 1 billion) in aggregate. The purpose of the loans was for purchasing gold. The original terms of loans are two years and bear fixed interest of 4.75% per year. Based on the loan repayment plan as specified in the loan agreements, $140,089 (RMB 1 million) was repaid in August 2016, $140,089 (RMB 1 million) was repaid on February 23, 2017 and another $140,089 (RMB 1 million) was repaid in August 23, 2017. The Company repaid approximately $69.6 million (RMB 497 million) to Evergrowing bank Yantai Huangshan Road Branch upon maturity.

 

For the remaining balance of approximately $70.0 million (RMB 500 million), the Company entered into a loan extension agreement with the bank to extend the loan borrowing period for additional seven months until October 2018, with the new interest rate of 6.5% per year. The loans are secured by 2,735 kilograms of Au9999 gold in aggregate with carrying value of approximately $89.1 million (RMB 635.9 million) and are guaranteed by the CEO and Chairman of the Company. Upon the maturity of these loans, the Company entered into a series of supplemental agreements with Yantai Huanshan Road Branch of Evergrowing Bank to extend the term of the loan for additional 12 months, with new maturity dates between October 9, 2019 and October 21, 2019. From April to September 2019, the Company repaid total of $42.1 million (RMB 300.5 million) to Evergrowing bank Yantai Huangshan Road Branch. As of September 30, 2019, the outstanding loans payable to Evergrowing bank Yantai Huangshan Road Branch amounted to approximately $27.9 million (RMB 199.5 million).

 

The loan was subsequently matured in October 2019, and the Company signed supplemental agreement with the bank to extend the loan repayment date to March 23, 2020.

 

(b) 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 $280.2 million (RMB 2 billion) as working capital loan. The required annual interest rate is 8.46%. The Company paid the first interest payment equal to 1.21% of the principle received as loan origination fee on annual basis, 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 $236.4 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 $2.1 million (RMB 15 million) to secure these loans. The deposit will be refunded when the loan is repaid upon maturity. As of September 30, 2019, the Company received an aggregate of approximately $210.1 million (RMB 1.5 billion) from the loan.

 

These loans originally have maturity dates between September 20, 2018 and November 30, 2018. During the year ended December 31, 2018, these loans were extended to have maturity dates between November 20, 2019 and January 30, 2020. Therefore, approximately $72.7 million (RMB 500 million) was recorded as long term as of December 31, 2018. During the nine months ended September 30, 2019, such amount has been reclassified as short-term loan based on its current maturity. As of September 30, 2019, 7,258 kilograms of Au999 gold with carrying value of approximately $236.4 million (approximately RMB 1.7 billion) was pledged as collateral to secure the loans.

 

The Company paid approximately $5.1 million (RMB 36.3 million) as loan origination fee in 2017 and 2016 for obtaining the loan. The loan origination fee was recorded as deferred financing cost against the loan balance. For the years ended December 31, 2018 and 2017, approximately $2.2 million (RMB 14.6 million) and approximately $3.1 million (RMB 20 million) deferred financing costs were amortized, respectively. Amortization of deferred financing costs amounted to $0.4 million (RMB 3.2 million) and approximately $1.3 (RMB 9.5 million) million for the three and nine months ended September 30, 2019, respectively. Amortization of deferred financing costs amounted to $0.6 million (RMB 4.4 million) and approximately $2.1 million (RMB 13.4 million) for the three and nine months ended September 30, 2018, respectively.

 

 Page 24 of 81 

 

 

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 5 – LOANS (continued)

 

(c) Loans payable to Zheshang Jinhui Trust

 

In November 2017, Wuhan Kingold entered into a Trust Loan Contract with Zheshang Jinhui Trust. The agreement allows the Company to access a total of approximately $140.1 million (RMB 1 billion) for the purpose of working capital needs. The loan bears a fixed annual interest of 7.7% with a term of 24 months and is secured by 3,264 kilograms of Au9999 gold in aggregate with carrying value of approximately $106.3 million (RMB 758.5 million). The Company also made a restricted deposit of approximately $0.9 million (RMB 6.3 million) to secure these loans. The loan is also guaranteed by the CEO and Chairman of the Company. The loan has been fully repaid before June 2019 and the pledged gold and restricted cash was released and returned upon the repayment. 

 

The Company paid approximately $1.3 million (RMB 9.5 million) as loan origination fee for obtaining the Zhejiang Jinhui Trust loans in November 2017. The loan origination fee was recorded as deferred financing cost against the loan balance. For the years ended December 31, 2018 and 2017, approximately $1.4 million (RMB 9.0 million) and $0.1 million (RMB 0.3 million) deferred financing costs were amortized related to the loans. For the three and nine months ended September 30, 2019, $Nil and $0.02 million (RMB 127,561) deferred financing cost was amortized, respectively. For the three and nine months ended September 30, 2018, approximately $0.3 million (RMB 1.9 million) and $0.9 million (RMB 5.6 million) deferred financing cost was amortized, respectively.

 

(d) 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 $43.4 million (RMB 310 million) for working capital with a period of 24 months from the date of releasing the loan. The Company is required to make interest payments that are calculated based on a fixed annual interest rate of 8%. The Company pledged 1,647 kilograms of Au9999 gold with carrying value of approximately $53.0 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 also made a restricted deposit of approximately $0.4 million (RMB 3.1 million) to secure these loans. The deposit will be refunded when the loan is repaid upon maturity. In January 2019, the Company made fully repayment to China Aviation Trust, The pledged gold and restricted deposit were released and returned upon the repayment. 

 

The Company paid approximately $1.3 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 the years ended December 31, 2018 and 2017, approximately $0.7 million (RMB 4.7 million) and $0.7 million (RMB 4.3 million) deferred financing costs were amortized, respectively. For the three and nine months ended September 30, 2019, $Nil and $42,833 (RMB 305,753) deferred financing cost was amortized, respectively. For the three and nine months ended September 30, 2018, approximately $0.2 million (RMB 1.2 million) and $0.5 million (RMB 3.5 million) deferred financing cost was amortized, respectively. 

 

 Page 25 of 81 

 

 

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 5 – LOANS (continued)

 

In addition, on September 7, 2016, the Company entered into another trust loan agreement with China Aviation Capital Investment Management (Shenzhen) (“China Aviation Capital”) to borrow a maximum of approximately $84.1 million (RMB 600 million) as working capital loan. The first installment of the loan was approximately $40.6 million (RMB 290 million) to mature on September 6, 2018. The Company is required to make interest payments calculated based on a fixed annual interest rate of 7.5% and a one-time consulting fee of 3% based on the principal amount received as loan origination fee. The Company pledged 1,473 kilograms of Au9999 gold with carrying value of approximately $48 million (RMB 342.5 million) as collateral to secure this loan. The loan is guaranteed by the CEO and Chairman of the Company. The loan was extended upon maturity for another 18 months with a new maturity date of March 5, 2020. As of September 30, 2019, based on its current maturity, the $40.6 million loan from China Aviation Capital has been reclassified as short-term loan. The Company is required to pay interest based on a fixed annual interest rate of 10% and a one-time consulting fee of 3% based on the principal amount extended as loan origination fee.

 

For the September 7, 2016 loans from China Aviation Trust, the Company paid totally approximately $1.2 million (RMB 8.7 million) during 2018 as loan origination fee for obtaining the loan. The loan origination fee was recorded as deferred financing cost against the loan balance. For the years ended December 31, 2018 and 2017, approximately $0.7 million (RMB 4.9 million) and $0.7 million (RMB 4.4 million) deferred financing costs were amortized, respectively. For the three and nine months ended September 30, 2019, approximately $0.2 million (RMB 1.5 million) and $0.6 million (RMB 4.4 million) deferred financing cost was amortized, respectively. For the three and nine months ended September 30, 2018, approximately $0.1 million (RMB 0.8 million) and $0.4 million (RMB 3 million) deferred financing cost was amortized, respectively.

 

As of September 30, 2019, the Company had the availability to borrow additional approximately $43.4 million (RMB 310 million) from China Aviation Capital under the above-mentioned loan agreements.

 

(e) 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 $49.0 million (RMB 350 million) for working capital with a period of 24 months from the date of releasing the loan. The Company is required to make interest payments that are calculated based on a fixed annual interest rate of 8.617%. The Company pledged 1,745 kilograms of Au9999 gold with carrying value of approximately $57.1 million (RMB 408.1 million) as collateral to secure this loan. The loan is guaranteed by the CEO and Chairman of the Company. The loan was fully repaid on March 1, 2019, and the pledged gold was released and returned upon the repayment. 

  

The Company paid approximately $0.4 million (RMB 2.6 million) as loan origination fee for obtaining the loan. The loan origination fee was recorded as deferred financing cost against the loan balance. The loan origination fee was recorded as deferred financing cost against the loan balance. For the three and nine months ended September 30, 2019, $Nil and $28,926 (RMB 206,486) deferred financing cost was amortized, respectively. For the three and nine months ended September 30, 2018, approximately $0.05 million (RMB 0.3 million) and $0.1 million (RMB 0.9 million) deferred financing cost was amortized, respectively.

  

 Page 26 of 81 

 

 

 KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 5 – LOANS (continued)

 

(f) 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 allowed the Company to access of approximately $420.3 million (RMB 3 billion) within 60 months. Each individual loan will bear a fixed annual interest of 14.8% or 11% with various maturity dates from February 19, 2019 to October 12, 2019. The purpose of this trust loan was to provide working capital for the Company to purchase gold. The loan is secured by 15,450 kilograms of Au9999 gold in aggregate with carrying value of approximately $504.3 million (RMB 3.6 billion). The loan is also guaranteed by the CEO and Chairman of the Company. As of December 31, 2018, the Company received full amount from the loan.

 

During the year ended December 31, 2018, the Company repaid approximately $78.5 million (RMB 0.56 billion), which resulted in an outstanding balance of approximately $341.8 million (RMB 2.44 billion) as of December 31, 2018 reported as short term loans. The Company also made a restricted deposit of approximately $3.4 million (RMB 24 million) to secure the rest of these loans. The deposit will be refunded when the loan is repaid upon maturity.

 

In February and March 2019, the Company made repayments total of approximately $26.9 million (RMB 192 million) and extended the loans of approximately $17.8 million (RMB 127 million) which originally due on March 29, 2019 to April 10, 2019.  In April and June 2019, the Company made repayments total of approximately $99.2 million (RMB 708 million) to Anxin Trust Co., Ltd., and 5,580 kilograms of Au999 pledged gold with carrying value of approximately $55.4 million (RMB 395.3 million) has been released and returned upon the repayment. In August 2019, the Company made additional repayment of approximately $5.6 million (RMB 40 million) to Anxin Trust. 2,470 kilograms of pledged gold has been released and returned to inventory pool.

 

As of September 30, 2019, total outstanding loan payable to Anxin Trust amounted to approximately $210.1 million (RMB 1.5 billion), among which (1) $140.1 million (RMB 1 billion) matured in September 2019 but not repaid because the Company negotiated with Anxin Trust and extended the insurance coverage date to October 18, 2019, and subsequently further extended the insurance coverage date to December 18, 2019 and accordingly postponed the maturity date of $140.1 million loan to December 18, 2019. (2) The remaining $70.0 million (RMB 500 million) subsequently matured on October 11, 2019 and October 12, 2019, and the Company repaid RMB 100 million (approximately $14.0 million) to Anxin Trust upon loan maturity and then entered into a supplemental agreement with Anxin Trust to extend the loan term of RMB 400 million (approximately $56.0 million) for additional one year, with new maturity date in October 2020. As of September 30, 2019, 7,400 kilograms of Au999 gold with carrying value of approximately $241.0 million (approximately RMB 1.72 billion) was pledged as collateral to secure the loans.

 

(g) Loan payable to China Construction Bank

 

In September 2018, Wuhan Kingold signed a Loan Agreement with Wuhan Jiang’An Branch of China Construction Bank for a loan of approximately $16.5 million (RMB 118 million). The purpose of this loan is to provide working capital for the Company to purchase gold. The term of the loan is one year with maturity date of September 19, 2019 and bears fixed interest of 4.35% per year. As of December 31, 2018, the Company received full amount from the loan.

 

In September 2018, Wuhan Kingold signed a second Loan Agreement with Wuhan Jiang’An Branch of China Construction Bank for a loan of approximately $24.1 million (RMB 172 million). The purpose of this loan is to provide working capital for the Company to purchase gold. The term of the loan is one year with maturity date of September 25, 2019 and bears fixed interest of 4.35% per year. As of December 31, 2018, the Company received full amount from the loan.

 

The loans were guaranteed by the CEO and Chairman of the Company. In addition, related party Wuhan Huayuan pledged fixed asset buildings as collateral to further secure these loans. The loan agreements also required that Company to maintain an asset-liability ratio less than 90% and current ratio over 1. The Company is not allowed to increase contingent liabilities without notice to the bank, the balance of contingent liabilities should be no larger than RMB 3.05 billion, and contingent asset-liability ratio should be less than 60%.

 

The above-mentioned loans payable to China Construction Bank have been fully repaid upon maturity in September 2019.

 

 Page 27 of 81 

 

 

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 5 – LOANS (continued)

 

(h) Loan payable to Minsheng Trust

 

On December 26, 2017, the Company entered into a Trust Loan Contract in the amount of no more than approximately $210.1 million (RMB 1.5 billion) with China Minsheng Trust Co., Ltd. (“Minsheng Trust”). The purpose of the trust loan is to supplement liquidity needs. The Trust Loan will be issued in installments. Each installment of the Trust Loan has a 24-month term, and the period from issuance date of the first installment to the expiration date of the last installment shall not exceed 30 months. The loans have different maturity date from January 3, 2020 to June 24, 2020. The Trust Loan bears interest at a fixed annual rate of 9.2%. The Company received total of $210.1 million (RMB 1.5 billion) loans from Minsheng Trust under this agreement. The loan is secured by 7,887 kilograms of Au9999 gold in aggregate with carrying value of approximately $260.3 million (RMB 1.9 billion). The loan is also guaranteed by the CEO and Chairman of the Company. The Company made a restricted deposit of approximately $2.1 million (RMB 15 million) to secure these loans. The deposit will be refunded when the loan is repaid upon maturity. This loan was originally recorded as long-term loans payable as of December 31, 2018. Based on its current maturity, it has been reclassified as short-term loans payable as of September 30, 2019. The Company paid approximately $7.5 million (RMB 53.5 million) as loan origination fee for obtaining this loan. The loan origination fee was recorded as deferred financing cost against the loan balance. For the year ended December 31, 2018 approximately $4.0 million (RMB 26.6 million) deferred financing cost was amortized. For the three and nine months ended September 30, 2019, $0.94 million (RMB 6.7 million) and $2.8 million (RMB 19.99 million) deferred financing cost was amortized, respectively. For the three and nine months ended September 30, 2018, approximately $1.5 million (RMB 9.6 million) deferred financing cost was amortized.

 

On October 10, 2018, the Company entered into another Trust Loan Contract in the amount of no more than approximately $140.1 million (RMB 1.0 billion) with China Minsheng Trust Co., Ltd. (“Minsheng Trust”). The purpose of the trust loan is to supplement liquidity needs. The Trust Loan will be issued in installments. Each installment of the Trust Loan has a 12-month term, and the period from issuance date of the first installment to the expiration date of the last installment shall not exceed 18 months. The Trust Loan bears interest at a fixed annual rate of 10.5%. The loan is secured by 5,356 kilograms of Au9999 gold in aggregate with carrying value of approximately $175.3 million (RMB 1.3 billion). The loan is also guaranteed by the CEO and Chairman of the Company.

 

In addition, on December 21, 2018, the Company entered into another Trust Loan Contract in the amount of no more than approximately $140.1 million (RMB 1.0 billion) with China Minsheng Trust Co., Ltd. (“Minsheng Trust”). The purpose of the trust loan is to supplement liquidity needs. The Trust Loan will be issued in installments. Each installment of the Trust Loan has a 12-month term, and the period from issuance date of the first installment to the expiration date of the last installment shall not exceed 18 months. The Trust Loan bears interest at a fixed annual rate of 11%. The loan is secured by 5,225.7 kilograms of Au9999 gold in aggregate. For the total raw material gold pledged, 2,971.21 kilograms were from the Company with carrying value of approximately $101.7 million (RMB 726.1 million) and the remaining 2,254.49 kilograms were from one related party Wuhan Kingold Group controlled by the CEO and Chairman with carrying value of approximately $87.9 million (RMB 627.1 million). The loan is also guaranteed by the CEO and Chairman of the Company. The loan installments were released to the Company from January 15 to January 21, 2019.

 

On May 24, 2019, the Company entered into another Trust Loan Contract with Minsheng Trust to borrow approximately $84.1 million (RMB 600 million) as working capital. Each installment of the Trust Loan has a 12-month term, and the period from issuance date of the first installment to the expiration date of the last installment shall not exceed 18 months. The Trust Loan bears interest at a fixed annual rate of 11%. The loan is secured by 2,990 kilograms of Au9999 gold in aggregate with carrying value of approximately $111.1 million (RMB 793.3 million). The loan is also guaranteed by the CEO and Chairman of the Company.

 

As of September 30, 2019 the aggregate outstanding loans payable to Mingsheng Trust amounted to approximately $574.4 million, among which approximately $78.8 million (RMB 526.6 million) has been subsequently repaid upon maturity in October 2019.

 

 Page 28 of 81 

 

 

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 5 – LOANS (continued)

 

(i) Loans payable to Dongguan Trust

  

In July 2018, Wuhan Kingold entered into a gold income rights transfer and repurchase agreement (the “Agreement”) with Dongguan Trust. The Agreement allows the Company to borrow up to approximately $140.1 million (RMB 1 billion) to exchange the income earning rights of the Company. The Company committed to buy back the rights and repay the proceeds received, and shall pay a fixed interest of 11% over a term of 18 months. The Company determined that this Agreement is essentially a loan agreement due to the nature of this transaction. This loan is secured by 4,974 kilograms of Au9999 gold in aggregate with carrying value of approximately $159.7 million (RMB 1,140 million). The loan is also guaranteed by the CEO and Chairman of the Company. The Company also made a restricted deposit of approximately $1.4 million (RMB 10 million) to secure the loan. The deposit will be refunded when the loan is repaid upon maturity. This loan was originally recorded as long-term loans payable as of December 31, 2018 and has been reclassified as short-term loans payable as of September 30, 2019, based on its current maturity.

 

The Company paid approximately $2.1 million (RMB 15 million) as loan origination fee for obtaining this loan. The loan origination fee was recorded as deferred financing cost against the loan balance. For year ended December 31, 2018, approximately $0.6 million (RMB 3.9 million) deferred financing cost was amortized. For the three and nine months ended September 30, 2019, approximately $0.4 million (RMB 2.6 million) and $1.1 million (RMB 7.6 million) deferred financing cost was amortized, respectively.

 

(j) Loans payable to Chang’An Trust

 

In September 2017, Wuhan Kingold entered into a Trust Loan Contract with Chang’An Trust. The agreement allows the Company to access a total of approximately $140.1 million (RMB 1 billion) for the purpose of working capital needs. The loan bears a fixed annual interest of 10% with a term of 24 months and is secured by 4,784 kilograms of Au9999 gold in aggregate with carrying value of approximately $157.5 million (RMB 1.1 billion). The loan is also guaranteed by the CEO and Chairman of the Company. The Company also made a restricted deposit of approximately $1.4 million (RMB 10 million) to secure these loans. The deposit will be refunded when the loan is repaid upon maturity. On September 30, 2018, the Company made repayment of approximately $2.8 million (RMB 20 million). On October 31, 2018, the Company made additional repayment of approximately $25.9 million (RMB 178.2 million) to Chang'An Trust. As of September 30, 2019, the balance of loans from Chang’An Trust was approximately $112.3 (RMB 801.9 million), among which approximately $77.6 million (RMB 554.2 million) subsequently matured in October and early November 2019, and the Company entered into supplemental agreement with Chang’An Trust to extend the loan repayment date of these loans to December 27, 2019.

 

The Company paid approximately $1.5 million (RMB 11 million) as loan origination fee for obtaining the loans. The loan origination fee was recorded as deferred financing cost against the loan balance.  For the three and nine months ended September 30, 2019, approximately $0.2 million (RMB 1.4 million) and $0.6 million (RMB 4.1 million) deferred financing cost was amortized, respectively. For the three and nine months ended September 30, 2018, approximately $0.2 million (RMB 1.4 million) and $0.6 million (RMB 4.1 million) deferred financing cost was amortized, respectively.

 

 Page 29 of 81 

 

 

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 5 – LOANS (continued)

 

(k) Loans payable to Sichuan Trust

 

In January 2019, the Company entered into a Trust Loan Contract in the amount of approximately $43.4 million (RMB 310 million) with Sichuan Trust. The purpose of the trust loan is to purchase raw material gold. The loan period is 12 months from receiving of principal amount. The Trust Loan bears interest at a fixed annual rate of 10.7615%. The loan is secured by 1,647 kilograms of Au9999 gold in aggregate with carrying value of approximately $56.0 million (RMB 399.6 million). The loan is also guaranteed by the CEO and Chairman of the Company. 

 

(l) Loans payable to Northern International Trust

 

On January 18, 2019, the Company entered into a Trust Loan Contract in the amount of approximately $42.0 million (RMB 300 million) with Northern International Trust Co., Ltd. (“Northern International Trust”). The purpose of the trust loan is to purchase raw material gold. The Trust Loan will be issued in installments. Each installment of the Trust Loan has a 12-month term, and the period from issuance date of the first installment to the expiration date of the last installment shall not exceed 24 months. The Trust Loan bears interest at a fixed annual rate of 10%. The loan is secured by 1,524 kilograms of Au9999 gold in aggregate with carrying value of approximately $53.0 million (RMB 378.2 million). The Company also made a restricted deposit of approximately $0.42 million (RMB 3 million) to secure these loans. The deposit will be refunded when the loan is repaid upon maturity. The loan is also guaranteed by the Wuhan Kingold Group, the entity controlled by CEO and Chairman of the Company.

 

(m) Loans payable to Zhangjiakou Bank

 

On September 15, 2019, the Company signed a Loan Agreement with Baoding Branch of Zhangjiakou Bank for a loan of approximately $25.2 million (RMB 180 million). The purpose of this loan is to provide working capital for the Company to purchase gold. The term of the loan is one year with maturity date of September 15, 2020 and bears fixed interest of 7.5% per year. The loan is secured by 747 kilograms of Au9999 gold in aggregate with carrying value of approximately $32.0 million (RMB 228.7 million).

 

Interest expense for all of the short term loans for the three and nine months ended September 30, 2019 was $36.5 million and $113.2 million, respectively. Interest expense for all of the short-term loans amounted to $21.3 million and $62.8 million for the three and nine months ended September 30, 2018, respectively. The weighted average interest rate for the nine months ended September 30, 2019 and 2018 was 9.7% and 8.9%, respectively.

 

 Page 30 of 81 

 

 

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 5 – LOANS (continued)

 

Long term loans consist of the following:

 

   As of 
   September 30, 2019   December 31, 2018 
   (unaudited)     
(n) Loans payable to Minsheng Trust - gross amount  $-   $218,099,337 
  Loans payable to Minsheng Trust - deferred financing cost   -    (3,907,406)
(o) Loans payable to China Aviation Capital   -    42,165,872 
  Loans payable to China Aviation Capital - deferred financing cost   -    (990,898)
(p) Loans payable to Sichuan Trust - gross amount   -    72,699,779 
  Loans payable to Sichuan Trust - deferred financing cost   -    - 
(q) Loan payable to Dongguan Trust   -    145,399,557 
  Loan payable to Dongguan Trust - deferred financing cost   -    (1,609,089)
(r) Loan payable to Kunlun Trust   42,026,813    43,619,868 
(s ) Loan payable to Northern International Trust   42,026,813    - 
(t) Loan payable to Tianjin Trust   84,053,626    - 
  Total long term loans, net of deferred financing costs  $168,107,252   $515,477,020 

 

(n) Loan payable to Minsheng Trust- (see Note 5 (h) above). Approximately $210.1 million loans payable to Minsheng Trust has been reclassified as short-term loans payable as of September 30, 2019.

 

(o) Loans payable to China Aviation Trust – (see Note 5 (d) above). Approximately $40.6 million loans payable has been reclassified as short-term loans payable as of September 30, 2019.

 

(p) Loans payable to Sichuan Trust (see Note 5 (b) above). Approximately $210.1 million loans payable has been reclassified as short-term loans payable as of September 30, 2019. 

  

(q) Loans payable to Dongguan Trust- (see Note 5 (i) above). Approximately $140.1 million loans payable has been reclassified as short-term loans payable as of September 30, 2019.

 

 Page 31 of 81 

 

 

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 5 – LOANS (continued)

 

(r) Loans payable to Kunlun Trust

  

In December 2018, Wuhan Kingold entered into a Trust Loan Contract in the amount of approximately $42.0 million (RMB 300 million) with China Kunlun Trust Co., Ltd. (“Kunlun Trust”). The Trust Loan has a 24-month term and bears interest at a fixed annual rate of 10%. This loan is secured by 1,578 kilograms of Au9999 gold in aggregate with carrying value of approximately $52.6 million (RMB 375.2 million). The loan is also guaranteed by the CEO and Chairman of the Company. The Company made a restricted deposit of approximately $0.42 million (RMB 3 million) to secure the loan. The deposit will be refunded when the loan is repaid upon maturity.

 

(s) Loans payable to North International Trust

  

In January 2019, Wuhan Kingold entered into a Trust Loan Contract in the amount of approximately $42.0 million (RMB 300 million) with Northern International Trust Co., Ltd. (“Northern International Trust”). The Trust Loan has a 24-month term with maturity date on January 28, 2021, and bears interest at a fixed annual rate of 10%. This loan is secured by 1,517 kilograms of Au9999 gold in aggregate with carrying value of approximately $51.6 million (RMB 368.1 million). The Company made a restricted deposit of approximately $0.42 million (RMB 3 million) to secure these loans. The deposit will be refunded when the loan is repaid upon maturity. The loan is also guaranteed by the related party Wuhan Kingold Industrial Group Co., Ltd, an entity controlled by the CEO and Chairman of the Company.

 

(t) Loans payable to Tianjin Trust

 

In March 2019, the Company entered into a gold income rights transfer and repurchase agreement (the “Agreement”) with Tianjin Trust. The Agreement allows the Company to obtain up to approximately $140.1 million (RMB 1 billion) loans to exchange the income earning rights derived from its gold. The Company committed to buy back the rights and repay the proceeds received, and shall pay a fixed interest of 12% over the term (from March 29, 2019 to December 29, 2020). The Company determined that this Agreement is essentially a loan agreement due to the nature of this transaction. The Company has pledged 2,822 kilograms of Au9999 gold in aggregate with carrying value of approximately $95.9 million (RMB 684.7 million) to secure the loan. The Company also made a restricted deposit of approximately $0.84 million (RMB 6 million) to secure the loan. The deposit will be refunded when the loan is repaid upon maturity. The loan is also guaranteed by the CEO and Chairman of the Company, and related party Wuhan Kingold Industrial Group. The Company received RMB 414.6 million in the first quarter of 2019 and further received additional RMB 185.4 million in April 2019. As of September 30, 2019, the Company received approximately $84.1 million (RMB 600 million) loans from Tianjin Trust.

 

Interest expense for all of the long term loans for the three and nine months ended September 30, 2019 was approximately $4.9 million and $11.3 million, respectively. Total interest expense for the above long-term loans was approximately $15.3 million and $53.0 million for the three and nine months ended September 30, 2018, respectively. The weighted average interest rate for the nine months ended September 30, 2019 and 2018 was 11% and 8.9%, respectively.

 

 Page 32 of 81 

 

 

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 6 – INVESTMENTS IN GOLD

 

As of September 30, 2019 and December 31, 2018, the Company allocated a total of 57,663,210 grams and 61,122,210 grams of Au9999 gold in its inventories with carrying value of approximately $1,924.0 million and $2,078.5 million, respectively, as investments in gold for obtaining various loans from banks, and financial institutions (See Note 5).

 

As of September 30, 2019 and December 31, 2018, the Company pledged a total of 2,655 kilograms of gold, 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 approximately $69.8 million (RMB 498.5 million) and $70.0 million (RMB 500 million) loan from Evergrowing Bank Huanshan Road Branch, respectively (See Note 7).

 

As of September 30, 2019, the Company pledged a total of 339 kilograms of gold as collateral for obtaining total amount of $7.5 million (RMB 53.8 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 7).   

 

As of September 30, 2019, a total of 6,256 kilograms of Au9999 gold with fair market value of approximately $267.2 million was pledged for long term loans, and therefore classified as non-current investments in gold. The remaining investments in gold of 54,401.21 kilograms of Au9999 gold with fair market value of approximately $2,323.3 million was classified as current assets as of September 30, 2019.

 

As of December 31, 2018, the total of 19,629 kilograms of Au9999 gold with fair market value of approximately $700.2 million was pledged for long-term bank loans, and therefore classified as non-current investments in gold. The remaining investments in gold of 44,671.21 kilograms of Au9999 gold with fair market value of approximately $1,593.6 million was classified as current assets as of December 31, 2018.

 

As of September 30, 2019, the fair market value of a total of 60,657.2 kilograms of Au9999 gold investments increased by approximately $484.1 million, which resulted in unrealized gain of approximately $363.1 million, net of tax for the nine months ended September 30, 2019. The Company recorded the change in unrealized gain related to investments in gold as other comprehensive income (loss), net of tax.

 

 Page 33 of 81 

 

  

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 7 – 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 $140.1 million (RMB 1 billion). The loan had one-year term from January 12, 2017 to January 10, 2018 and bore 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 $176.1 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 $140.1 million (RMB 1 billion). The loan had one-year term from February 20, 2017 to February 20, 2018 bore 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 $157.7 million (RMB 1.1 billion) as collateral.

 

The Company repaid $210.1 million (RMB 1.5 billion) loans to Kangbo upon maturity in January 2018 and February 2018. 7,870 kilograms of pledged gold in Evergrowing Bank - Yantai Huanshan Road Branch were released to the Company accordingly with 2,355 kilograms are still pledged as guarantee. For the remaining $70.0 million (RMB 500 million) loan that matured on March 2, 2018, the Company entered into a loan extension agreement with Kangbo to extend the loan borrowing period for additional seven months until October 2, 2018 with additional 300 kilograms of gold pledged as collateral. Upon the maturity of the loan, the Company entered into a supplemental agreement with the related party Kangbo to extend the term of the loan for 12 months with new maturity date on October 2, 2019, the 2,655 kilograms of Au9999 gold with carrying value of approximately $87.9 million (RMB 627.3 million) will still be pledged in Yantai Huanshan Road Branch of Evergrowing Bank for Kangbo to obtain the loan.  The Company repaid approximately $0.21 million (RMB 1,516,238) loan to Kangbo in the second quarter of 2019. As of September 30, 2019, total outstanding loans payable to Kangbo amounted to approximately $69.8 million (RMB 498.5 million).

 

Total interest expenses for above related party loans were approximately $1,179,018 and $3,599,314, respectively for the three and nine months ended September 30, 2019, respectively. Total interest expenses for above related party loans were approximately $1,207,654 and $4,178,626, respectively for the three and nine months ended September 30, 2018, respectively.

 

The $69.8 million loans payable to Kangbo matured on October 2, 2019 and the Company entered into a supplemental agreement with Kangbo to extend the loan repayment date to February and March 2020.

 

(b) Loans payable to Wuhan Kingold Industrial Group

 

Between November 23, 2016 and November 29, 2016, the Company entered into multiple loan agreements of RMB 3.2 billion in aggregate with Wuhan Kingold Industrial Group, a related party which is controlled by the CEO and Chairman of the Company, as working capital loans in order to subsequently purchase raw material of gold.

 

 Page 34 of 81 

 

  

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 7 – RELATED PARTIES LOANS (continued)

 

(b) Loans payable to Wuhan Kingold Industrial Group (continued)

 

On February 22, 2017, the Company signed a non-interest bearing credit line agreement with Wuhan Kingold Industrial Group for additional loan of RMB 800 million with a 5 year maturity to February 21, 2022.

 

In April 2017, the Company signed three additional non-interest bearing credit line agreements with Wuhan Kingold Industrial Group for additional loans totaling RMB 1.35 billion with 5 year maturity to April 2022.

 

In January 2018, the Company signed an agreement and borrowed additional $305.3 million (RMB 2.1 billion) non-interest bearing loan from Wuhan Kingold Industrial Group as working capital with 5 year maturity to January 2023.

  

During the year ended December 31, 2018, the Company repaid loans totaling $561.7 million (RMB 3.7 billion) and obtained loans totaling $545.9 million (RMB 3.6 billion).

 

On November 30, 2018, Wuhan Kingold Industrial Group signed an agreement with the CEO and Chairman of the Company to transfer the credit right for its loan to the Company of approximately $143.9 million (RMB 1 billion). As the result, the CEO and Chairman of the Company resume the credit right. The CEO and Chairman transferred this credit right to paid-in capital through a share restructuring on November 30, 2018.

 

As of December 31, 2018, the aggregate borrowing amount from Wuhan Kingold Industrial Group was $362.9 million (RMB 2.5 billion).

 

During the nine months ended September 30, 2019, the Company repaid approximately $117.7 million (RMB 840.2 million) to Wuhan Kingold Industrial Group. During the nine months ended September 30, 2019, the Company also borrowed additional approximately $294.8 million (RMB 2.1 billion) from Wuhan Kingold Industrial Group. As of September 30, 2019, the aggregate borrowing amount from Wuhan Kingold Industrial Group was approximately $526.7 million (RMB 3.8 billion). The Company classified these loans as non-current 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 $14.5 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 $18.1 million (RMB 124.4 million) as collateral to secure this loan.

 

During the year ended December 31, 2018, the Company repaid $3.4 million (RMB 22.6 million), results in the outstanding balance of $10.5 million (RMB 72.0 million) as of December 31, 2018. During the nine months ended September 30, 2019, additional $2.54 million (RMB 18.1 million) was repaid to Wuhan Huayuan, resulting the outstanding balance of $7.5 million (RMB 53.9 million) payable to Wuhan Huayuan as of September 30, 2019. In connection with the loan repayment, in May 2019, 184 kilograms of pledged gold were released and returned.  As of September 30, 2019, the Au9999 gold pledged with Wuhan Huayuan as collateral were 339 kilograms with carrying value of approximately $11.3 million (RMB 80.6 million).

 

Interest expense of $166,029 and $562,799 was recorded for this loan for the three and nine months ended September 30, 2019, respectively. Interest expense of $237,276 and $799,905 was recorded for this loan for the three and nine months ended September 30, 2018, respectively.

 

 Page 35 of 81 

 

 

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 8 – OTHER RELATED PARTY TRANSACTIONS

 

During the Company’s normal course of business, the Company received working capital proceeds from the CEO and Chairman of the Company, to pay certain expense to various service providers on behalf of the Company. Such amount is unsecured and payable on demand with no interest. As of September 30, 2019 and December 31, 2018, the amount due to this related party were $4,410,957 and $3,976,742, respectively.  

 

On June 27, 2016, Wuhan Kingold signed certain 5 years lease agreements with Wuhan Huayuan, a related party which is controlled by the CEO and Chairman of the Company, to rent office and store space at the Jewelry Park, commencing in July 2016 and October 2016, respectively, with aggregate annual rent of approximately $0.3 million (RMB 2.3 million). On July 1, 2017, Wuhan Kingold signed another 5 years lease agreement with Wuhan Huayuan to rent additional office space at the Jewelry Park commencing in July 2017 with aggregate annual rent of approximately $87,058 (RMB 576,000). The lease agreement with Wuhan Huayuan has been amended on November 16, 2017, pursuant to which two office spaces and a dormitory were no longer leased. The lease agreement was further amended on September 1, 2018, pursuant to which the store space was no longer leased.

 

For the three and nine months ended September 30, 2019, the Company recorded $20,500 and $62,943 rent expense, respectively. For the three and nine months ended September 30, 2018, the Company recorded $62,888 and $197,811 rent expense, respectively. As of September 30, 2019 and December 31, 2018, the Company had lease payables to Wuhan Huayuan of $488,296 and $443,992, respectively, which were included in other payables and accrued expenses. 

 

NOTE 9 – INCOME TAXES 

 

The Company is subject to income taxes on an entity basis on income arising in or derived from the tax jurisdiction in which each entity is domiciled.

 

Kingold is incorporated in the United States and has incurred net operating loss for income tax purposes through September 30, 2019. The Company has utilized approximately $6.2 million of net operating loss carry forward to offset the one-time transition tax for the year ended December 31, 2017 and the tax benefit derived from the utilization of this net operating loss was approximately $2.2 million.

 

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 three and nine months ended September 30, 2019 and for the year ended December 31, 2018.

 

 Page 36 of 81 

 

 

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 9 – INCOME TAXES (continued)

 

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law making significant changes to the Internal Revenue Code. The Act significantly modified the U.S. Internal Revenue Code by, among other things, reducing the statutory U.S. federal corporate income tax rate from 35% to 21% for taxable years beginning after December 31, 2017; limiting and/or eliminating many business deductions; migrating the U.S. to a territorial tax system with a one-time transition tax on a mandatory deemed repatriation of previously deferred foreign earnings of certain foreign subsidiaries; subject to certain limitations, generally eliminating U.S. corporate income tax on dividends from foreign subsidiaries; and providing for new taxes on certain foreign earnings. Taxpayers may elect to pay the one-time transition tax over eight years or in a single lump sum. The Act also includes provisions for a new tax on GILTI effective for tax years of foreign corporations beginning after December 31, 2017. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of controlled foreign corporations (“CFCs”), subject to the possible use of foreign tax credits and a deduction equal to 50 percent to offset the income tax liability, subject to some limitations.

 

For the year ended December 31, 2018, the Company recognized a transition tax of approximately $10.8 million that represented management’s estimate of the amount of U.S. corporate income tax based on the deemed repatriation to the United States of the Company’s share of previously deferred earnings of certain non-U.S. subsidiaries and VIE of the Company mandated by the U.S. Tax Reform. U.S. Treasury regulations, administrative interpretations or court decisions interpreting the Tax Act may require further adjustments and changes in our estimates. The Company provided an additional $0.9 million for the interest and penalty due on the late payment of the one-time transition tax. 

 

Income (loss) from continuing operations before income taxes was allocated between the U.S. and foreign components for the three and nine months ended September 30, 2019 and 2018: 

 

   For the three months ended September 30,   For the nine months ended September 30, 
   2019   2018   2019   2018 
United States  $(683,414)  $(214,312)  $(1,262,239)  $(1,167,190)
Foreign   (31,166,372)   17,949,121    (5,029,468)   54,951,370 
   $(31,849,786)  $17,734,809   $(6,291,707)  $53,784,180 

 

 Page 37 of 81 

 

 

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 9 – INCOME TAXES (continued)

 

Significant components of the income tax provision (benefit) were as follows for the three and nine months ended September 30, 2019 and 2018: 

 

   For the three months ended September 30,   For the nine months ended September 30, 
   2019   2018   2019   2018 
Current tax provision                    
Federal  $-   $-   $-   $- 
State   -    -    -    - 
Foreign   6,481,926    1,787,717    17,292,113    9,214,312 
   $6,481,926   $1,787,717   $17,292,113   $9,214,312 
Deferred tax provision (benefit)                    
Federal  $-   $-   $-   $- 
State   -    -    -    - 
Foreign   (14,327,255)   2,699,588    (18,549,129)   4,523,643 
    (14,327,255)   2,699,588    (18,549,129)   4,523,643 
Income tax provision (benefit)  $(7,845,329)  $4,487,305   $(1,257,016)  $13,737,955 

 

 Page 38 of 81 

 

 

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 9 – INCOME TAXES (continued)

 

The components of deferred tax assets and deferred tax liabilities as of September 30, 2019 and December 31, 2018 consist of the following:

 

   As of September 30,
2019
   As of December 31, 2018 
Deferred tax assets:          
Accrued interest  $1,098,229   $557,941 
Deferred financing costs on the loans   5,133,252    3,646,606 
Net operating losses of the U.S entity (“NOLs”)   4,410,301    4,145,231 
Less: valuation allowance   (4,410,301)   (4,145,231)
Deferred tax assets, net   6,231,481    4,204,547 
           
Deferred tax liabilities:          
Gain due to change in fair value of investments in gold  $(132,040,939)  $(27,409,470)
Accrued expenses   (1,646,158)   (966,667)
Other temporary differences   (45,591)   (47,321)
           
Deferred tax liabilities - net  $(127,501,207)  $(24,218,911)

 

 Page 39 of 81 

 

 

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 9 – INCOME TAXES (continued)

 

The following table reconciles the U.S. statutory rates to the Company’s effective rate for the three and nine months ended September 30, 2019 and 2018: 

 

   For the three months ended September 30,   For the nine months ended September 30, 
   2019   2018   2019   2018 
US statutory rate   21.0%   21.0%   21.0%   21.0%
Foreign income and loss not recognized in the U.S.   (21.0)%   (21.0)%   (21.0)%   (21.0)%
China income tax   25.0%   25.0%   25.0%   25.0%
Miscellanies and non-deductible expense   (0.4)%   0.3%   (5.0)%   0.5%
 Effective tax rate   24.6%   25.3%   20.0%   25.5%

 

NOTE 10 – EARNINGS (LOSS) PER SHARE

 

The following table presents a reconciliation of basic and diluted net income (loss) per share:

 

   For the three months ended September 30,   For the nine months ended September 30, 
   2019   2018   2019   2018 
Net income (loss) attributable to common stockholders  $(24,004,457)  $13,247,504   $(5,034,691)  $40,046,225 
Weighted average number of common shares outstanding - Basic   11,018,955    11,018,955    11,018,955    11,018,955 
Unexercised warrants and options   -    1,270    -    32,942 
Weighted average number of common shares outstanding – diluted   11,018,955    11,020,225    11,018,955    11,051,897 
                     
                     
Earnings (loss) per share - Basic  $(2.18)  $1.20   $(0.46)  $3.63 
Earnings (loss) per share – Diluted  $(2.18)  $1.20   $(0.46)  $3.62 

 

 Page 40 of 81 

 

 

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 11 – OPTIONS

 

The Company recorded $Nil and $5,364 stock-based compensation expense for the three and nine months ended September 30, 2019, respectively. The Company recorded $5,364 and $16,092 stock-based compensation expense for the three and nine months ended September 30, 2018, 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, 2018   3,220,000   $1.90    2.76 
Exercisable, December 31, 2018   3,214,636   $1.90    2.75 
                
Granted   -    -    - 
Forfeited   -    -    - 
Exercised   -    -    - 
Outstanding, September 30, 2019   3,220,000   $1.90    2.01 
                
Exercisable, September 30, 2019   3,220,000   $1.90    2.01 

   

NOTE 12 – CONVERTIBLE NOTES

 

On August 26, 2019, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with two private investors (the “Investors”) pursuant to which the Company agreed to sell to the Investors, and the Investors agreed to purchase from the Company, in an unregistered private transaction, convertible notes (the “Notes”) with an aggregate principal amount of $1,030,000. The Notes feature an initial issuance discount of 3%, bear interest at 5% annual rate and mature in one year. The conversion price for the Notes is initially set at $3.00 per share for the first 180 days following issuance. Thereafter, the Notes may be converted by the Investors for a price equal to 70% of the lowest closing price of the Company’s common stock, $0.001 par value per share (the “Common Stock”) during the ten trading days immediately prior to the delivery of an exercise notice.

 

The Company also agreed to sell to the Investors warrants to purchase up to an aggregate of 400,000 shares of Common Stock at an exercise price of $0.75 per share (the “Warrants”). The Warrants are exercisable from issuance and expire two years from the date of issuance. The exercise price and the number of shares of Common Stock issuable upon exercise of the Warrants are subject to adjustment in the event of stock splits or dividends, or other similar transactions, but not as a result of future securities offerings at lower prices.

 

The Company also agreed to pay the Placement Agent a cash commission fee equal to 8% of the aggregate gross proceeds. Net proceeds to the Company from the sale of the Shares and the Warrants, after deducting offering expenses and placement agent fees, are $890,000. The transaction closed on August 27, 2019.

 

In connection of the Company’s subsequent reverse stock split as disclosed in Note 15, the conversion price of the Notes and number of shares of common stock under the warrants has been retrospectively adjusted by dividing the number of shares of common stock into which the warrants and convertible securities are exercisable or convertible by 6 and multiplying the exercise or conversion price thereof by 6.

 

The proceeds of debt instruments with detachable warrants shall be allocated between the convertible notes and warrants based on their relative fair values at time of issuance. The conversion feature is treated as a derivative instrument and derivative accounting is applied. Derivative liability is recognized initially at fair, which shall be reassessed at each reporting date. Issuance costs should be allocated proportionally to the debt host, conversion feature and warrants.

 

As of September 30, 2019, net convertible notes payable amounted to $599,739 (carrying value of $1,034,291, net of unamortized debt discounts of $434,552), and the conversion feature of $267,000 was recorded as derivative liability as reflected in the accompanying unaudited condensed consolidated balance sheets. The warrants of $67,057 is recorded into additional paid-in capital.

 

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KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 12 – CONVERTIBLE NOTES PAYABLE AND WARRANTS (continued)

 

For the nine months ended September 30, 2019, $39,505 of debt discount amortization expense has been recorded and charged to the interest expense which is included in the unaudited condensed consolidated statements of operation and comprehensive income (loss).

 

NOTE 13 – 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 $16,609,371 and $12,749,593 as of September 30, 2019 and December 31, 2018, respectively. The cash balance held in the BVI bank accounts was $Nil as of September 30, 2019 and December 31, 2018. As of September 30, 2019 and December 31, 2018, the Company held $332,259 and $22,953 of cash balances within the United States.

 

As of September 30, 2019 and December 31, 2018, 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 reporting period was gold, which accounted for almost 100% of its total purchases for the three months ended September 30, 2019 and 2018. The gold purchased by the Company was solely from the Shanghai Gold Exchange, the largest gold trading platform in the PRC.

 

No customer accounted for more than 10% of annual sales for the three and nine months ended September 30, 2019 and 2018.  

 

 Page 42 of 81 

 

 

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 14 – LEASES

 

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, with aggregate annual rent of approximately $0.3 million (RMB 2.3 million). On July 1, 2017, Wuhan Kingold signed another 5 years lease agreement with Wuhan Huayuan to rent additional office space at the Jewelry Park commencing in July 2017 with aggregate annual rent of approximately $85,352 (RMB 576,000). The lease agreement with Wuhan Huayuan has been amended on November 16, 2017, pursuant to which two office spaces and a dormitory were no longer leased. The lease agreement was further amended on September 1, 2018, pursuant to which the store space was no longer leased.

 

Effective January 1, 2019, the Company adopted the new lease accounting standard using the optional transition method which allowed us to continue to apply the guidance under the lease standard in effect at the time in the comparative periods presented. In addition, the Company elected the package of practical expedients, which allowed us to not reassess whether any existing contracts contain a lease, to not reassess historical lease classification as operating or finance leases, and to not reassess initial direct costs. The Company has not elected the practical expedient to use hindsight to determine the lease term for its leases at transition. The Company has also elected the practical expedient allowing us to not separate the lease and non-lease components for all classes of underlying assets. Adoption of this standard resulted in the recording of operating lease ROU assets and corresponding operating lease liabilities of $241,762 and $241,762, respectively, as of January 1, 2019 with no impact on accumulated deficit. Financial position for reporting periods beginning on or after January 1, 2019, are presented under the new guidance, while prior period amounts are not adjusted and continue to be reported in accordance with previous guidance.

 

All of the Company’s leases are classified as operating leases and primarily includes office space. Operating lease ROU assets are presented within other assets-net on the Condensed Consolidated Balance Sheet. The current portion of operating lease liabilities are presented within accrued expenses and other payables, and the non-current portion of operating lease liabilities are presented within other long-term liabilities on the Condensed Consolidated Balance Sheet.

 

 Page 43 of 81 

 

 

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 14 – LEASES

 

Supplemental balance sheet information related to operating leases was as follows:

 

   Balance Sheet
Classification
  As of
September 30, 2019
 
Assets:        
Right-of-use assets  Other assets - net  $184,192 
         
Liabilities:        
Current  Accrued expenses and other payables  $90,613 
Noncurrent  Other long-term liabilities   154,098 
         
Total operating lease liabilities     $244,711 

 

As of September 30, 2019, the weighted-average remaining lease term was 2.75 years. The Company’s lease agreements do not provide a readily determinable implicit rate nor is it available to the Company from its lessors. Instead, the Company estimates its incremental borrowing rate based on its average long-term loans borrowing rate in order to discount lease payments to present value. The weighted-average discount rate of the Company’s operating leases was 10.2%, as of September 30, 2019.

 

As of September 30, 2019, maturities of operating lease liabilities were as follows:  

 

Maturity of Operating Lease Liabilities    
2019  $89,923 
2020  83,923 
2021   83,923 
2022   41,962 
Total future minimum lease payments   293,731 
Less imputed interest   (49,020)
Total  $244,711 

 

 Page 44 of 81 

 

 

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 15 – SUBSEQUENT EVENT

 

In order to enable the Company to meet the NASDAQ continued listing standards relating to the minimum bid price and to reduce the risk of the Company being automatically delisted from the NASDAQ Capital Market due to the closing bid price of its common stock falling below $1.00 per share for 30 consecutive business days, on September 26, 2019 and October 7, 2019, respectively, the Company’s Board of Directors and a majority of the shareholders approved a 1-for-6 reverse stock split of the Company’s issued and outstanding shares of common stock (the “Reverse Stock Split”), which became effective on October 21, 2019 (the “Effective Date”). Immediately prior to the Effective Date, there were 66,113,502 shares of common stock outstanding. As a result of the Reverse Stock Split, there are 11,018,955 shares of common stock outstanding. The Reverse Stock Split will not have any effect on the stated par value of the common stock. All options, warrants and convertible securities of the Company outstanding immediately prior to the Reverse Stock Split will be appropriately adjusted by dividing the number of shares of common stock into which the options, warrants and convertible securities are exercisable or convertible by 6 and multiplying the exercise or conversion price thereof by 6, as a result of the Reverse Stock Split. As a result of this Reverse Stock Split, the Company’s shares and per share data as reflected in the stockholder’s equity section has been retroactively restated as if the transaction occurred at the beginning of the periods presented.

 

In October 2019, the Company signed a supplemental agreement with Evergrowing bank Yantai Huangshan Road Branch to extend the loan repayment date for an outstanding loan of $27.9 million to March 23, 2020 (see Note 5).

 

In October 2019, for $140.1 million loan payable to Anxin Trust with maturity date on October 18, 2019, the Company negotiated with Anxin Trust and extended the insurance coverage date to December 18, 2019 and accordingly postponed the maturity date of $140.1 million loan to December 18, 2019. In addition, for additional $70.0 million (RMB 500 million) loans payable to Anxin Trust that subsequently matured on October 11, 2019 and October 12, 2019, the Company repaid RMB 100 million (approximately $14.0 million) to Anxin Trust upon loan maturity and then entered into a supplemental agreement with Anxin Trust to extend the loan term of RMB 400 million (approximately $56.0 million) for additional one year, with new maturity date in October 2020 (see Note 5).

 

In October and early November 2019, approximately $77.6 million (RMB 554.2 million) loans payable to Chang’An Trust has matured and the Company entered into supplemental agreement with Chang’An Trust to extend the loan repayment date of these loans to December 27, 2019 (see Note 5).

 

On October 2, 2019, approximately $69.8 million loans payable to Kangbo matured and the Company entered into a supplemental agreement with Kangbo to extend the loan repayment date to February and March 2020 (see Note 7).

 

In September 2019, the Company entered into a gold pledge contract with Mingsheng Trust to provide guarantee for related party, Hubei Sanhuan Industrial Co., Ltd. (“Sanhuan”), an entity controlled by Wuhan Kingold Industrial Group, in order for Sanhuan to obtain a maximum loan of approximately $140.1 million (RMB 1 billion) from Minsheng Trust for 18 months. Based on the contract, the Company pledged 5,361 kilograms of Au9999 gold in aggregate with carrying value of approximately $200.1 million (RMB 1.4 billion) in October 2019 to guarantee this related party loan.

 

The Company evaluated the subsequent event through the date of the report available to issue, and concluded that there are no additional reportable subsequent events except those disclosed.

 

 Page 45 of 81 

 

 

   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion of our financial condition and results of operations should be read together with the financial statements and related notes included in this report and in our Annual Report on Form 10-K for the year ended December 31, 2018. This discussion contains forward-looking statements that involve risks and uncertainties. See also the “Cautionary Statement for Purposes of the “Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995” appearing elsewhere in this report. Our actual results may differ materially from those anticipated in those forward-looking statements as a result of certain factors, including, but not limited to, those contained in the “Risk Factors” section of this report and in our Annual Report on Form 10-K for the year ended December 31, 2018.

 

Our Business

 

Through a variable interest entity (“VIE”) relationship with Wuhan Kingold Jewelry Company Limited (“Wuhan Kingold”), a corporation incorporated in the People’s Republic of China (“PRC”), we believe that we are one of the leading professional designers and manufacturers of high quality 24-karat gold jewelry and Chinese ornaments. We develop, promote and sell a broad range of products to the rapidly expanding jewelry market across China. We offer a wide range of in-house designed products including, but not limited to, gold necklaces, rings, earrings, bracelets, and pendants. We have built a partnership with the Jewelry Institute of China University of Geosciences to help us design new products.

 

We have historically sold our products directly to distributors, retailers and other wholesalers, who then sell our products to consumers through retail counters located in both department stores and other traditional stand-alone jewelry stores. We sell our products to our customers at a price that reflects the market price of the base material, plus a mark-up reflecting our design fees and processing fees. This mark-up typically ranges from 3% – 6% of the price of the base material.

 

We aim to become an increasingly important participant in the PRC’s gold jewelry design and manufacturing sector. In addition to expanding our design and manufacturing capabilities, our goal is to provide a large variety of gold products in unique styles and superior quality under our brand, Kingold.

 

We borrow money to finance the purchase of gold, which gold was then pledged to secure the loans. In some cases, the unrestricted gold available for production was insufficient to provide adequate security for such loans, which in turn required us to lease gold from a related party to satisfy the loan conditions and conduct the operations. 

 

 Page 46 of 81 

 

 

Results of Operations

 

The following table sets forth our condensed consolidated statements of operations and comprehensive income (loss) (unaudited) for the three months ended September 30, 2019 and 2018 in U.S. dollars: 

 

   For the three months ended
September 30,
   Changes 
   2019   2018   Amount   % 
NET SALES  $382,790,132   $626,171,072   $(243,380,940)   (38.9)%
COST OF SALES                    
Cost of sales   (367,382,898)   (564,685,762)   197,302,864    (34.9)%
Depreciation   (235,731)   (255,546)   19,815    (7.8)%
Total cost of sales   (367,618,629)   (564,941,308)   197,322,679    (34.9)%
                     
GROSS PROFIT   15,171,503    61,229,764    (46,058,261)   (75.2)%
                     
OPERATING EXPENSES                    
Selling, general and administrative expenses   2,265,898    2,424,458    (158,560)   (6.5)%
Stock compensation expenses   -    5,364    (5,364)   (100.0)%
Depreciation   92,438    146,475    (54,037)   (36.9)%
Lease expense   20,500    62,888    (42,388)   (67.4)%
Amortization, other   2,690    2,767    (77)   (2.8)%
Total operating expenses   2,381,526    2,641,952    (260,426)   (9.9)%
                     
INCOME FROM OPERATIONS   12,789,977    58,587,812    (45,797,835)   (78.2)%
                     
OTHER INCOME (EXPENSES)                    
Other income   -    64,433    (64,433)   (100.0)%
Interest Income   271,304    562,294    (290,990)   (51.8)%
Interest expense, including amortization of debt issuance costs of $2,187,956 and $3,482,031   (44,911,067)   (41,479,730)   (3,431,337)   8.3%
Total other expenses, net   (44,639,763)   (40,853,003)   (3,786,760)   9.3%
                     
INCOME (LOSS) FROM OPERATIONS BEFORE TAXES   (31,849,786)   17,734,809    (49,584,595)   (279.6)%
                     
INCOME TAX PROVISION (BENEFIT)                    
Current   6,481,926    1,787,717    4,694,209    262.6%
Deferred   (14,327,255)   2,699,588    (17,026,843)   (630.7)%
Total income tax provision (benefit)   (7,845,329)   4,487,305    (12,332,634)   (274.8)%
                     
NET INCOME (LOSS)   (24,004,457)   13,247,504    (37,251,961)   (281.2)%
                     
OTHER COMPREHENSIVE INCOME (LOSS)                    
Unrealized gain (loss) related to investment in gold, net of tax   209,005,270    (18,935,552)   227,940,822    (1203.8)%
Total Foreign currency translation loss   (41,688,955)   (13,077,661)   (28,611,294)   218.8)%
Total Other comprehensive income (loss)   167,316,315    (32,013,213)   199,329,528   (622.6)%
                     
Comprehensive income (loss)  $143,311,858   $(18,765,709)  $162,077,567    (863.7)%

 

 Page 47 of 81 

 

 

 

Three Months Ended September 30, 2019 Compared to Three Months Ended September 30, 2018

 

Net Sales

 

Net sales for the three months ended September 30, 2019 amounted to approximately $382.8 million, a decrease of approximately $243.4 million, or 38.9%, from net sales of $626.2 million for the three months ended September 30, 2018. The overall decrease in our revenue in the three months ended September 30, 2019 as compared to the three months ended September 30, 2018 was mainly the result of the following reasons: (1) Total sales volume (in terms of quantity sold) decreased from 29.6 metric tons in three months ended September 30, 2018 to 13.7 metric tons in three months ended September 30, 2019, causing 15.9 metric tons or 53.6% decrease. The decrease in our sales volume was affected by our customers’ perception of the investment in gold. Usually when the market price of gold rises, our customers reduce the gold purchase and invest until the price drop in the near future. As a result, approximately $289.7 million decrease in our revenue was attributable to the decrease in our sales volume. (2) The average unit selling price for our brand production sales increased from RMB 250.77 per gram in three months ended September 30, 2018 to RMB 286.75 per gram in three months ended September 30, 2019, causing 14.3% increase. In addition, the average unit selling price for our customized production sales increased from RMB 6.92 per gram in three months ended September 30, 2018 to RMB 7.27 per gram in three months ended September 30, 2019, causing 5.1% increase. As a result of the price change effect, the increase in average unit selling price led to approximately $92.5 million increase in our revenue, to compensate the revenue decrease derived from sales volume decrease, to a certain extent. (3) Foreign currency adjustment effect was an approximately $46.2 million foreign currency translation loss converting RMB into USD when the average exchange rate of USD: RMB increased from 1 USD=6.5153 RMB in three months ended September 30, 2018 to 1 USD=6.8634 RMB in three months ended September 30, 2019. 

 

For the three months ended September 30, 2019, our branded production sales accounted for 98.8% of the total sales and customized production sales accounted for 1.1% of the total sales. When compared with the three months ended September 30, 2018, our branded production sales decreased by $234.5 million, or 38.3%, and our customized production sales decreased by approximately $8.9 million, or 67.0%. 

 

During three months ended September 30, 2019, we processed a total of 13.7 metric tons of gold, of which branded production accounted for 9.3 metric tons (68.0%) and customized production accounted for 4.4 metric tons (32.0%). During three months ended September 30, 2018, we processed a total of 29.6 metric tons of gold, of which branded production accounted for 16.6 metric tons (56.1%) and customized production accounted for 13 metric tons (43.9%). 

 

 Page 48 of 81 

 

  

Cost of Sales

 

Cost of sales for the three months ended September 30, 2019 amounted to $367.6 million, a decrease of $197.3 million, or 34.9%, from $564.9 million for the same period in 2018. The decrease was primarily due to the lower volume of the gold as a raw material used for our branded production. Total sales quantity decreased 53.6% to approximately 13.7 metric tons in three months ended September 30, 2019 from 29.6 metric tons in three months ended September 30, 2018.

 

Gross Profit

 

Gross profit for the three months ended September 30, 2019 was approximately $15.2 million, a decrease of approximately $46.0 million, or 75.2%, from $61.2 million for the same period in 2018. The decrease in our gross profit resulted from the following factors: (1) Due to decreased sales volume affected by decreased market demand, the Company’s gross profit for the three months ended September 30, 2019 was negatively affected. (2) Our gross profit was affected by the unit cost of raw materials used in our production. The unit cost of our branded production sales was RMB 277.76 per gram for the three months ended September 30, 2019 while the unit cost of our branded production sales was RMB 230.86 per gram for three months ended September 30, 2018, representing a 20.3% increase. In addition, the unit cost of our customized production sales was RMB 0.51 per gram for the three months ended September 30, 2019 while the unit cost of our customized production sales was RMB 0.23 per gram for three months ended September 30, 2018, representing a 123.7% increase. The increase in our unit cost of raw materials used in our production reduced our gross profit for the three months ended September 30, 2019 as compared to the same period of 2018. The decrease in quantity sold and increase in our unit cost were the major reasons which led the decrease in our gross profit. (3) On the other hand, our gross profit was also affected by increased average selling price. Meanwhile, the average selling price of our customized production sales was RMB 7.27 per gram for the three months ended September 30, 2019, increased by RMB 0.35, or 5.1%, from RMB 6.92 per gram for the three months ended September 30, 2018. As a result, our gross profit decrease due to decreased sales volume and increased unit cost was compensated by increased average selling price to a certain extent. For the three months ended September 30, 2019 and 2018, our gross margin was 4.0% and 9.8%, respectively. The overall decrease in our gross profit and gross margin reflected the above combined factors.

 

Expenses

 

Total operating expenses for the three months ended September 30, 2019 were approximately $2.38 million, a decrease of $260,426 or 9.9%, as compared with $2.64 million for the same period in 2018. The decrease was mainly due to the decrease in selling expenses such as sales commission paid to sales personnel when our sales volume and revenue decreased during the three months ended September 30, 2019 as compared to the same period of 2018, and decreased operating lease expense because we amended our original lease agreement with Wuhan Huayuan in September 2018, pursuant to which the store space was no longer leased and accordingly our operating lease expense was reduced.

 

Interest expense for the three months ended September 30, 2019 was $44.9 million compared with $41.5 million for the same period in 2018. The increase of interest expense was mainly due to higher balances for interest bearing loans resulted from additional loans obtained and recorded during the three months ended September 30, 2019 compared with the same period of 2018.

 

The income tax benefit was approximately $7.8 million for the three months ended September 30, 2019, compared to income tax expense of approximately $4.5 million for the same period in 2018. The decrease of income tax expense was mainly because we had a decrease in taxable income from operations before tax for the three months ended September 30, 2019, comparing to the same period last year.

 

 Page 49 of 81 

 

 

Net Income (loss)

 

For the foregoing reasons, we reported a net loss of approximately $24.0 million for the three months ended September 30, 2019, as compared to a net income of approximately $13.2 million for the three months ended September 30, 2018. The decrease in our net income was a result of decreased revenue, increased interest expense and decreased taxable income as discussed above.

 

Other Comprehensive Income (Loss)

 

Other comprehensive income was approximately $167.3 million for the three months ended September 30, 2019, compared to other comprehensive loss of $32.0 million for the three months ended September 30, 2018. The other comprehensive income for the three months ended September 30, 2019 was mainly due to the change in market value of gold investment resulting in an unrealized gain of $209.0 million, net of tax, and foreign currency translation loss of approximately $41.7 million resulted from the depreciation of the Chinese RMB against the U.S. Dollar for the three months ended September 30, 2019.

  

Nine Months Ended September 30, 2019 compared to the Nine Months Ended September 30, 2018

 

The following table sets forth our condensed consolidated statements of operations and comprehensive income (loss) (unaudited) for the nine months ended September 30, 2019 and 2018 in U.S. dollars: 

 

   For the nine months ended
September 30,
   Changes 
   2019   2018   Amount   % 
NET SALES  $1,434,337,556   $1,844,491,390   $(410,153,834)   (22.2)%
COST OF SALES                    
Cost of sales   (1,293,608,652)   (1,654,427,318)   360,818,666    (21.8)%
Depreciation   (724,359)   (801,384)   77,025    (9.6)%
Total cost of sales   (1,294,333,011)   (1,655,228,702)   360,895,691    (21.8)%
                     
GROSS PROFIT   140,004,545    189,262,688    (49,258,143)   (26.0)%
                     
OPERATING EXPENSES                    
Selling, general and administrative expenses   11,617,494    7,399,734    4,217,760    57.0%
Stock compensation expenses   5,364    16,092    (10,728)   (66.7)%
Depreciation   258,110    406,962    (148,852)   (36.6)%
Lease expense   62,943    197,811    (134,868)   (68.2)%
Amortization, other   8,261    8,703    (442)   (5.1)%
Total operating expenses   11,952,172    8,029,302    3,922,870    48.9%
                     
INCOME FROM OPERATIONS   128,052,373    181,233,386    (53,181,013)   (29.3)%
                     
OTHER INCOME (EXPENSES)                    
Other income   -    64,433    (64,433)   (100.0)%
Interest Income   908,416    1,384,438    (476,022)   (34.4)%
Interest expense, including amortization of debt issuance costs of $6,738,816 and $8,042,451   (135,252,496)   (128,898,077)   (6,354,419)   4.9%
Total other expenses, net   (134,344,080)   (127,449,206)   (6,894,874)   5.4%
                     
INCOME (LOSS) FROM OPERATIONS BEFORE TAXES   (6,291,707)   53,784,180    (60,075,887)   (111.7)%
                     
INCOME TAX PROVISION (BENEFIT)                    
Current   17,292,113    9,214,312    8,077,801    87.7%
Deferred   (18,549,129)   4,523,643    (23,072,772)   (510.0)%
Total income tax provision (benefit)   (1,257,016)   13,737,955    (14,994,971)   (109.1)%
                     
NET INCOME (LOSS)   (5,034,691)   40,046,225    (45,080,916)   (112.6)%
                     
OTHER COMPREHENSIVE INCOME (LOSS)                    
Unrealized gain (loss) related to investment in gold, net of tax   363,076,281    (56,908,875)   419,985,156    (738.0)%
Total Foreign currency translation loss   (43,484,477)   (19,080,264)   (24,404,213)   127.9%
Total Other comprehensive income (loss)   319,591,804    (75,989,139)   395,580,943    (520.6)%
                     
Comprehensive income (loss)  $314,557,113   $(35,942,914)  $350,500,027    (975.2)%

 

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Net Sales

 

Net sales for the nine months ended September 30, 2019 amounted to approximately $1.43 billion, a decrease of approximately $410.1 million, or 22.2%, from net sales of $1.84 billion for the nine months ended September 30, 2018. The overall decrease in our revenue in the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018 was mainly the result of the following reasons: (1) Total sales volume (in terms of quantity sold) decreased from 80.5 metric tons in nine months ended September 30, 2018 to 63.7 metric tons in nine months ended September 30, 2019, causing 16.8 metric tons or 21.0% decrease. The decrease in our sales volume was affected by our customers’ perception of the investment in gold. Usually when the market price of gold rises, our customers reduce the gold purchase and investment until the price drop in the near future. As a result, approximately $440.1 million decrease in our revenue was attributable to the decrease in our sales volume. (2) The average unit selling price for our brand production sales increased from RMB 253.45 per gram in nine months ended September 30, 2018 to RMB 272.93 per gram in nine months ended September 30, 2019, causing 7.7% increase. In addition, the average unit selling price for our customized production sales increased from RMB 6.88 per gram in nine months ended September 30, 2018 to RMB 7.09 per gram in nine months ended September 30, 2019, causing 3.1% increase. As a result of the price change effect, the increase in average unit selling price led to approximately $140.0 million increase in our revenue, to compensate the revenue decrease derived from sales volume decrease, to a certain extent. (3) Foreign currency adjustment effect was an approximately $110.2 million foreign currency translation loss converting RMB into USD when the average exchange rate of USD: RMB increased from 1 USD=6.5153 RMB in nine months ended September 30, 2018 to 1 USD=6.8634 RMB in nine months ended September 30, 2019. 

 

For the nine months ended September 30, 2019, our branded production sales accounted for 97.9% of the total sales and customized production sales accounted for 2.0% of the total sales. When compared with the nine months ended September 30, 2018, our branded production sales decreased by approximately $403.5 million, or 22.3%, and our customized production sales also decreased by approximately $6.7 million, or 18.6%. 

 

During nine months ended September 30, 2019, we processed a total of 63.6 metric tons of gold, of which branded production accounted for 35.3 metric tons (55.5%) and customized production accounted for 28.3 metric tons (45.5%). During nine months ended September 30, 2018, we processed a total of 80.5 metric tons of gold, of which branded production accounted for 46.5 metric tons (57.7%) and customized production accounted for 34.0 metric tons (42.3%). 

 

Cost of Sales

 

Cost of sales for the nine months ended September 30, 2019 amounted to approximately $1.29 billion, a decrease of approximately $360.9 million, or 21.8%, from approximately $1.65 billion for the same period in 2018. The decrease was primarily due to the lower volume of the gold as a raw material used for our branded production. Total sales quantity decreased 21.0% to approximately 63.7 metric tons in nine months ended September 30, 2019 from 80.5 metric tons in nine months ended September 30, 2018.

 

Gross Profit

 

Gross profit for the nine months ended September 30, 2019 was approximately $140.0 million, a decrease of approximately $49.3 million, or 26.0%, from approximately $189.3 million for the same period in 2018. The decrease in our gross profit resulted from the following factors: (1) Due to decreased sales volume affected by decreased market demand, the Company’s gross profit for the nine months ended September 30, 2019 was negatively affected. (2) Our gross profit was affected by the unit cost of raw materials used in our production. The unit cost of our branded production sales was RMB 251.17 per gram for the nine months ended September 30, 2019 while the unit cost of our branded production sales was RMB 231.78 per gram for nine months ended September 30, 2018. In addition, the unit cost of our customized production sales was RMB 0.33 per gram for the nine months ended September 30, 2019 while the unit cost of our customized production sales was RMB 0.26 per gram for nine months ended September 30, 2018. The increase in our unit cost of raw materials used in our production reduced our gross profit for the nine months ended September 30, 2019 as compared to the same period of 2018. The decrease in quantity sold and increase in our unit cost were the major reasons which led to the decrease in our gross profit. (3) On the other hand, our gross profit was also affected by increased average selling price. The average selling price of our branded production was RMB 272.93 per gram for the nine months ended September 30, 2019, increased by RMB 19.48 or 7.7%, from RMB 253.45 per gram for the same period in 2018. Meanwhile, the average selling price of our customized production sales was RMB 7.09 per gram for the nine months ended September 30, 2019, increased by RMB 0.21, or 3.1%, from RMB 6.88 per gram for the nine months ended September 30, 2018. As a result, our gross profit decrease due to decreased sales volume and increased unit cost was compensated by increased average selling price to a certain extent. For the nine months ended September 30, 2019 and 2018, our gross margin was 9.8% and 10.3%, respectively. The overall decrease in our gross profit and gross margin reflected the above combined factors.

 

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Expenses

 

Total operating expenses for the nine months ended September 30, 2019 were approximately $11.95 million, an increase of $3.92 million or 48.9%, as compared with $8.03 million for the same period in 2018. The increase was mainly due to the increase in selling, general and administrative expenses because of increased insurance and custody fees in connection with the increased level of investment in gold quantity.

 

Interest expense for the nine months ended September 30, 2019 was approximately $135.3 million compared with approximately $128.9 million for the same period in 2018. The increase of interest expense was mainly due to higher balances for interest bearing loans resulted from additional loans obtained and recorded during the nine months ended September 30, 2019 compared with the same period of 2018.

 

The income tax benefit was approximately $1.3 million for the nine months ended September 30, 2019, compared to income tax expense of approximately $13.7 million for the same period in 2018. The decrease of income tax expense was mainly because we had a decrease in taxable income from operations before tax for the nine months ended September 30, 2019, comparing to the same period last year.

 

Net Income (loss)

 

For the foregoing reasons, we reported a net loss of approximately $5.0 million for the nine months ended September 30, 2019, decreased by approximately $45.0 million, or 112.6%, from a net income of $40.0 million for nine months end September 30, 2018.

 

Other Comprehensive Income (Loss)

 

Other comprehensive income was approximately $319.6 million for the nine months ended September 30, 2019, compared to other comprehensive loss of approximately $76.0 million for the nine months ended September 30, 2018. The other comprehensive income for the nine months ended September 30, 2019 was mainly due to the change in market value of gold investment resulting in an unrealized gain of approximately $363.1 million, net of tax, and foreign currency translation loss of approximately $43.5 million resulted from the depreciation of the Chinese RMB against the U.S. Dollar for the nine months ended September 30, 2019.

 

Cash Flows

 

Operating activities

 

We had approximately $69.9 million of net cash used in operating activities for the nine months ended September 30, 2019, compared with approximately $461.4 million of net cash provided by operating activities for the same period in 2018. The decrease of our operating cash flows was mainly due to the increase in gold purchases of approximately $141.2 million in order to meet the production demand when we anticipate more sales orders will be fulfilled in the fourth quarter of fiscal year 2019 during the holiday season. At the same time, we also decreased gold pledged with various financial institutions by approximately $164.7 million when we repaid certain loans to these financial institution upon maturity. In addition, our value added tax receivable decreased by approximately $7.8 million and our accrued expenses and other payables increased by approximately $2.8 million. 

 

We had $461.4 million of net cash provided by operating activities for the nine months ended September 30, 2018. The net cash provided by operating activities was mainly due to net income of approximately $40.0 million for the nine months ended September 30, 2018, the decrease in inventory purchased of $321 million because $557.9 million of gold for investment was released to inventory and processed during the nine months ended September 30, 2018, collections from value added tax receivables of $84.6 million, an increase in income tax payable of $0.7 million and an increase in other payables and accrued liabilities of $1.0 million. 

 

Our net cash from operating activities can fluctuate significantly due to changes in our inventories. Other factors that may vary significantly include our accounts payable, purchases of gold and income taxes. Looking forward, we expect the net cash that we generate from operating activities to continue to fluctuate as our inventories, receivables, accounts payables and the other factors described above change with increased production and the purchase of larger or smaller quantities of raw materials. These fluctuations could cause net cash from operating activities to decrease, even if our net income grows as we continue to expand. Although we expect that net cash from operating activities will increase over the long term, we cannot predict how these fluctuations will affect our cash flow in any particular quarter.

  

Investing activities

 

Net cash used in investing activities was approximately $203.1 million for the nine months ended September 30, 2019, compared with net cash used in investing activities of $491,136 for the nine months ended September 30, 2018.  Our net cash used in investing activities primarily include purchase of short-term investments of approximately $246.6 million when we use cash to purchase wealth management financial products from financial institution in order to earn interest income. On September 2, 2019, we redeemed approximately $43.7 million with a total of $72,862 of investment income. In addition, we also purchased fixed assets of $326,565 during the nine months ended September 30, 2019. The overall change in our cash flows from investing activities for the nine months ended September 30, 2019 reflected the above combined factors.

 

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For the nine months ended September 30, 2018, our cash used in investing activities primarily included purchase of fixed assets of $491,136.

  

We expect that cash used in investing activities will continue to fluctuate significantly in the short-term as we continue to obtain financings from the banks which may require us to purchase more gold as collateral. 

 

Financing activities  

 

Net cash provided by financing activities was approximately $277.9 million for the nine months ended September 30, 2019. During the nine months ended September 30, 2019, we increased our borrowings from various financial institutions and received approximately $349.0 million proceeds from short-term loans and approximately $131.1 million proceeds from long-term loans. At the same time, we repaid $382.8 million short-term loans upon maturity. We also borrowed additional approximately $306.6 million loans from related party and repaid approximately $125.1 million related party loans during this period. In addition, we had gross proceeds from issuance of convertible notes of $1 million, because in August 2019, we entered into a Securities Purchase Agreement with two private investors and sold to the investors in an unregistered private transaction, convertible notes.

 

Net cash used in financing activities was $445.8 million for the nine months ended September 30, 2018. The net cash used in the financing activities was mainly due to repayment of an aggregate amount of loans than that of new borrowings during the nine months ended September 30, 2018.  During the nine months ended September 30, 2018, we borrowed additional $435.8 million loans from banks and other financial institutions, and $443.1 million loans from related parties, and repaid $554.8 million loans from banks and other financial institutions, and $764.3 million loans from related parties. 

 

Off-Balance Sheet Arrangements 

 

During the year ended December 31, 2017, we guaranteed payment for a related party of approximately $280.2 million (RMB 2,000 million) for two bank loans. Approximately $210.1 million (RMB 1.5 billion) loans were repaid upon maturity in January 2018 and February 2018, respectively. The remaining loan balance of 69.8 million (RMB 498.5 million) is still outstanding as of September 30, 2019. We guaranteed the payments for this related party.

 

In September 2019, the Company entered into a gold pledge contract with Mingsheng Trust to provide guarantee for related party, Hubei Sanhuan Industrial Co., Ltd. (“Sanhuan”), an entity controlled by Wuhan Kingold Industrial Group, in order for Sanhuan to obtain a maximum loan of approximately $140.1 million (RMB 1 billion) from Minsheng Trust for 18 months. Based on the contract, the Company pledged 5,361 kilograms of Au9999 gold in aggregate with carrying value of approximately $200.1 million (RMB 1.4 billion) in October 2019 to guarantee this related party loan

 

As of September 30, 2019, we had no gold lease outstanding. The Company may sign new gold lease agreements with the banks when necessary.

 

Obligations and Commitments

 

The following table sets forth our contractual obligations as of September 30, 2019:

 

   Payment Due by Period 
Contractual
Obligations
  Total   Less Than 1
year
   1-3 years   3-5 years   More than 5
years
 
Long-term bank loans (1)  $168,107,252   $-   $168,107,252   $-   $- 
Short-term bank loans (2)   1,423,679,826    1,423,679,826    -    -    - 
Related party loans (3)   604,061,004    69,832,280    534,228,724    -    - 
Operating leases liability (4)   244,711    90,613    154,098    -    - 
Total  $2,196,092,793   $1,493,602,719   $702,490,074   $-   $- 

 

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(1) Represents the outstanding principal balance of long-term loans from bank and financial institutions.

 

(2) Represents the outstanding principal balance of short-term loans from bank and financial institutions.

 

(3) Represents the outstanding principal balance of loans from related parties.

 

(4) 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, with aggregate annual rent of approximately $0.3 million (RMB 2.3 million). On July 1, 2017, Wuhan Kingold signed another 5 years lease agreement with Wuhan Huayuan to rent additional office space at the Jewelry Park commencing in July 2017 with aggregate annual rent of approximately $85,352 (RMB 576,000). The lease agreement with Wuhan Huayuan has been amended on November 16, 2017, pursuant to which two office spaces and a dormitory were no longer leased. The lease agreement was further amended on September 1, 2018, pursuant to which the store space was no longer leased.

 

On January 1, 2019, the Company adopted the new lease accounting standard using the optional transition method which allowed us to continue to apply the guidance under the lease standard in effect at the time in the comparative periods presented. Adoption of this standard resulted in the recording of operating lease ROU assets and corresponding operating lease liabilities. As of September 30, 2019, total operating lease liabilities amounted to $244,711.

 

Liquidity and Capital Resources 

 

As of September 30, 2019, we had approximately $0.7 million in cash and approximately $16.3 million restricted cash. We also had short-term investments of approximately $195.1 million because we used the excessive cash on hand to purchase interest-bearing wealth management financial products from a Trust company and such short-term investments are redeemable at any time. These short-term investments are highly liquid and can be used as working capital when needed. We have financed our operations with cash flow generated from operations and primarily through borrowings from various financial institutions as well as from related parties.

 

As of September 30, 2019, we had total outstanding loans of approximately $2,195.9 million (including $1,423.7 million short-term loans, $168.1 million long-term loans, and $604.1 million related party loans). For additional information regarding our loans, please see Notes 5 and 7 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report.

 

We have maintained a close relationship with the banks from where we leased gold in the past. Therefore, we expect that we are able to obtain additional gold leases from the banks, if necessary. We are expecting to generate additional cash flows in the coming period of time from developing new customers and an increase in our revenue in the following years due to the higher interest in investing in gold against the currency depreciation.   

 

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As of September 30, 2019, the Company had working capital of approximately $1,508.8 million. We believe that our current cash and cash flow from operations will be sufficient to meet our anticipated cash needs, including our cash needs for working capital for the next 12 months from the date we issue this Form 10Q. We may, however, require additional cash resources due to changing business conditions or other future developments, including any investments or acquisitions we may decide to pursue. Our ability to maintain sufficient liquidity depends partially on our ability to achieve anticipated levels of revenue, while continuing to control costs. We continue to seek favorable additional financings to meet our capital requirements to fund our operations and growth plans in the ordinary course of business.

  

Critical Accounting Policies and Estimates

 

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures in the financial statements. Critical accounting policies are those accounting policies that may be material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and that have a material impact on financial condition or operating performance. While we base our estimates and judgments on our experience and on various other factors that we believe to be reasonable under the circumstances, actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies used in the preparation of our financial statements require significant judgments and estimates. For additional information relating to these and other accounting policies, see Note 2 to our unaudited condensed consolidated financial statements included elsewhere in this report.

 

Short-term Investments

The Company’s short-term investments consist of wealth management financial products issued by financial institutions, which are redeemable at any time. The financial institutions invest the funds in certain financial instruments, including money market funds, private fund, bonds or mutual funds, mostly with a floating rate of return on these investments. The carrying values of the Company’s short-term investments approximate fair value because of their short-term nature. The interest earned is recognized in the consolidated statements of income and comprehensive income (loss) over the contractual term of these investments. The Company had short-term investments of $195,062,420 and $nil as of September 30, 2019 and December 31, 2018, respectively.

 

Inventories

 

Inventory is stated at the lower of cost and net realizable value. Cost is determined using the weighted average method. We continually evaluate the composition of our inventory, turnover of our products, the price of gold, and the ability of our customers to pay for their products. We write down slow-moving and obsolete inventory based on an assessment of these factors, but principally customer demand. Such assessments require the exercise of significant judgment by management. Additionally, the value of our inventory may be affected by commodity prices. Decreases in the market value of gold would result in a lower stated value of our inventory, which may require us to take a charge for the decrease in the value. In addition, if the price of gold changes substantially in a very short period, it might trigger customer defaults, which could result in inventory obsolescence. If any of these factors were to become less favorable than those projected, inventory write-downs could be required, which would have a negative effect on our earnings and working capital. 

  

Investments in Gold

 

We 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. We classified these pledged gold as investment in gold, and carried at fair market value, with the unrealized gains and losses, included in the determination of comprehensive income and reported in shareholders’ equity. The fair market value of the investments in gold is determined by quoted market prices at Shanghai Gold Exchange. Any fluctuation in gold price may significantly impact the investments in gold and other comprehensive income (loss). 

 

Revenue Recognition

 

The Company adopted Accounting Standards Codification (“ASC”) 606 in the first quarter of 2018 using the modified retrospective approach. ASC 606, Revenue from Contracts with Customers, establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.

 

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The Company has assessed the impact of the guidance by reviewing its existing customer contracts and current accounting policies and practices to identify differences that will result from applying the new requirements, including the evaluation of its performance obligations, transaction price, customer payments, transfer of control and principal versus agent considerations. Based on the assessment, the Company concluded that there was no change to the timing and pattern of revenue recognition for its current revenue streams in scope of Topic 606 and therefore there was no material changes to the Company’s consolidated financial statements upon adoption of ASC 606.

 

The Company’s revenues are primarily composed of sales proceeds collected from sales of branded products and customized product fees. Revenue is recognized when performance obligations under the terms of a contract with a customer are satisfied and promised services have transferred to the customers.

 

Revenue is recognized when obligations under the terms of a contract with the Company’s customers are satisfied. Satisfaction of contract terms occur with the transfer of title of the Company’s branded products and accessories to the customers. Net sale is measured as the amount of consideration the Company expects to receive in exchange for transferring the goods to the wholesaler and retailers. The amount of consideration the Company expects to receive consists of the sales price adjusted for any incentives if applicable. Incidental promotional items that are immaterial in the context of the contract are recognized as expense. Fees charged to customers for shipping and handling are included in net sales in the accompanying consolidated statements of operations and the related costs incurred by the Company are included in cost of goods sold. In applying judgment, the Company considered customer expectations of performance, materiality and the core principles of ASC Topic 606. The Company’s performance obligations are generally transferred to the customer at a point in time. The Company’s contracts with customers generally do not include any variable consideration. 

 

Sαles of brαnded products 

 

The Company offers a wide range of in-house designed products including but not limited to gold necklaces, rings, earrings, bracelets, and pendants. In our sales of branded products, the Company only sells on a wholesale basis to distributors and retailers. Pricing of the jewelry products is made at the time of sales contracts are made, based on prevailing market price of gold. These sales contracts are primarily based on a customer’s purchase order followed by the Company’s order acknowledgement, and may also include a master supply or distributor agreement. The performance obligations are generally satisfied at a point in time when the Company ships the product from the Company’s facility. The Company usually makes cash sales, and also makes credit sales in rare cases with the payment term due within 30 days.   

 

Customized production fees 

 

In the customized product arrangement, the Company receives orders from other jewelry companies who engage to the Company to design and produce 24-karat jewelry and Chinese ornaments using gold they supply to the Company. Although the Company assumes the responsibilities to design and manufacture the related Jewelry products, the Company does not assume inventory risk and does not determine the product design specification. As a result, the Company is considered the agent in this arrangement for revenue recognition purposes. All of the sales contracts in this customized product arrangements contain performance obligations satisfied at a point in time when we complete the design and ship the product from the Company’s facility. 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. 

 

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Item 3. Quantitative and Qualitative Disclosure about Market Risk

 

We are exposed to market risk from fluctuations in foreign currency exchange rates, precious metal prices and interest rates, which could affect its consolidated financial position, earnings and cash flows. We manage our exposure to market risk through its regular operating and financing activities.

 

Foreign Currency Exchange Rate Risk

 

Given that all of our revenues are generated in RMB, while our results are reported in U.S. dollars, devaluation of the RMB could negatively impact our results of operations. The value of the RMB is subject to changes in the PRC’s governmental policies and to international economic and political developments. In January 1994, the PRC government implemented a unitary managed floating rate system. Under this system, the People’s Bank of China, or PBOC, began publishing a daily base exchange rate with reference primarily to the supply and demand of RMB against the U.S. dollar and other foreign currencies in the market during the previous day. Authorized banks and financial institutions are allowed to quote buy and sell rates for RMB within a specified band around the central bank’s daily exchange rate. On July 21, 2005, the PBOC announced an adjustment of the exchange rate of the U.S. dollar to RMB from 1:8.27 to 1:8.11 and modified the system by which the exchange rates are determined. Over the past eleven years, RMB has depreciated 6.4% against the U.S. dollar (from USD1 = RMB 7.2946 on January 1, 2008 to USD1 = RMB 7.1383 on September 30, 2019). While the international reaction to the RMB revaluation has generally been positive, there remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in further fluctuations of the exchange rate of RMB against the U.S. dollar, including possible devaluations. As all of our net revenues are recorded in RMB, any future devaluation of RMB against the U.S. dollar could negatively impact our results of operations.

 

Along these lines, the income statements of our operations are translated into U.S. dollars at the average exchange rates in each applicable period. To the extent the U.S. dollar strengthens against foreign currencies, the translation of these foreign currencies denominated transactions results in reduced revenue, operating expenses and net income for our international operations. Similarly, to the extent the U.S. dollar weakens against foreign currencies, the translation of these foreign currency denominated transactions results in increased revenue, operating expenses and net income for our international operations. We are also exposed to foreign exchange rate fluctuations as we convert the financial statements of our foreign subsidiaries into U.S. dollars in consolidation. If there is a change in foreign currency exchange rates, the conversion of the foreign subsidiaries’ financial statements into U.S. dollars will lead to a translation gain or loss which is recorded as a component of other comprehensive income. In addition, we have certain assets and liabilities that are denominated in currencies other than the relevant entity’s functional currency. Changes in the functional currency value of these assets and liabilities create fluctuations that will lead to a transaction gain or loss. We have not entered into agreements or purchased instruments to hedge our exchange rate risks, although we may do so in the future. The availability and effectiveness of any hedging transaction may be limited and we may not be able to successfully hedge our exchange rate risks. 

 

Interest Rate Risk

 

Our borrowings from banks and other financial institutions as of September 30, 2019, were approximately $1,591.8 million, and interest expense paid for these loans was approximately $44.9 million and $135.2 million for the three and nine months ended September 30, 2019, respectively.

 

For the three months ended September 30, 2019, our weighted average interest rate on our short-term loans and long-term loans was approximately 9.7% and 9.8%, respectively. We do not expect the interest expense will be changed dramatically and we currently have no interest rate hedging positions in place to reduce our exposure to interest rates. 

 

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Commodity Price Risk

 

Most of our sales are of products that include gold, precious metals and other commodities, and fluctuations in the availability and pricing of commodities would adversely impact our ability to obtain and make products at favorable prices. 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. In the past, we have not hedged our requirement for gold or other raw materials through the use of options, forward contracts or outright commodity purchasing, although we may do so in the future. A significant increase in the price of gold could increase our production costs beyond the amount that we are able to pass on to our customers, which would adversely affect our sales and profitability. A significant disruption in our supply of gold or other commodities could decrease our production and shipping levels, materially increase our operating costs, and materially and adversely affect our 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 we purchase our raw materials, may adversely affect our ability to maintain production of our products and sustain profitability. If we were to experience a significant or prolonged shortage of gold, we would be unable to meet our production schedules and to ship products to our customers in a timely manner, which would adversely affect our sales, margins and customer relations.

 

A dramatic increase in the price of gold could increase our production costs beyond the amount that we may be able to pass on to our customers, which could adversely affect our gross profit margin and profitability. Furthermore, the carrying value of our inventory may be affected. Slight decreases in the market price of gold following the end of a reporting period could impact the carrying amount of the inventory at the balance sheet date and/or the following reporting period’s gross profit margin and profitability.

 

Inflation Risk

 

We do not believe inflation has had a material impact on our net sales, income from continuing operations, plans for expansion or other capital expenditures for any year during the three-year period ended September 30, 2019. However, we cannot be sure inflation will not have an adverse impact on our operating results, financial condition, plans for operations or other capital expenditures in future periods.

  

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures designed to provide reasonable assurance that material information required to be disclosed by us in the reports filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that the information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on our review, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were not effective at the reasonable assurance level as of the end of the period covered by this report due to the continued existence of material weaknesses in our internal control over financial reporting.

 

In connection with the preparation of this report, management determined that, as of September 30, 2019, we did not maintain effective internal control over financial reporting due to the existence of the following material weaknesses as identified during 2018 annual audit:

 

  Lack of segregation of duties for accounting personnel who prepared and reviewed the journal entries;

 

  Lack of proper accounting and recording of the investments in gold, loans payable to banks, financial institutions and related parties, deferred financing costs and interest expense and deferred tax assets or liabilities;