Company Quick10K Filing
Quick10K
Kingold Jewelry
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.90 66 $60
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2018-12-15 Shareholder Vote
8-K 2018-11-09
8-K 2018-10-19 Other Events, Exhibits
8-K 2018-07-31 Enter Agreement, Off-BS Arrangement
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TCO Taubman Centers 3,090
SBLK Star Bulk Carriers 756
CDR Cedar Realty Trust 283
BTAI Bioxcel Therapeutics 156
APTO Aptose Biosciences 74
CASM CAS Medical Systems 72
INCT InCapta 0
ALDA Atlantica 0
RKFL B4MC Gold Mines 0
KGJI 2018-12-31
Part I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
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 per Share
Note 11 - Options
Note 12 - Warrants
Note 13 - Concentrations and Risks
Note 14 - Gold Lease Transaction
Note 15 - Commitments and Contingencies
Note 16 - Summarized Quarterly Data (Unaudited)
Note 17 - Comparative Information
Note 18 - Subsequent Events
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
Part IV
Item 15. Exhibits, Financial Statement Schedules
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Kingold Jewelry Earnings 2018-12-31

KGJI 10K Annual Report

Balance SheetIncome StatementCash Flow

10-K 1 tv517166_10k.htm FORM 10-K

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

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

 

For the fiscal year ended: December 31, 2018

 

Or

 

  ¨ 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 or Organization) File Number) Identification No.)

 

No. 8 Han Huang Road

Jiang’an District

Wuhan, Hubei Province, PRC 430023

(Address of Principal Executive Office) (Zip Code)

 

(011) 86 27 65694977

(Registrant’s telephone number, including area code)

 

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

 

Title of each class   Name of each exchange on which registered
Common Stock, $0.001 par value   The NASDAQ Capital Market

 

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

 

Common Stock, $0.001 par value
(Title of Class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

 

¨    Yes  x    No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

 

¨    Yes  x    No

 

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

 

x

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth” company in Rule 12b-2 of the 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 Act). ¨   Yes  x   No

 

The aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant was approximately $61,496,515 as of June 29, 2018, the last business day of the registrant’s most recently completed second fiscal quarter.

 

The number of shares of the registrant’s common stock outstanding as of April 1, 2019 was 66,113,502.

 

 

 

 

 

 

2018 ANNUAL REPORT ON FORM 10-K

 

TABLE OF CONTENTS

 

    Page
     
  PART I  
     
Item 1. Business 5
Item 1A. Risk Factors 17
Item 1B. Unresolved Staff Comments 36
Item 2. Properties 36
Item 3. Legal Proceedings 36
Item 4. Mine Safety Disclosure 36
     
  PART II  
     
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 37
Item 6. Selected Financial Data 39
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 40
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 54
Item 8. Financial Statements and Supplementary Data 56
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures 99
Item 9A. Controls and Procedures 99
Item 9B. Other Information 101
     
  PART III  
     
Item 10. Directors, Executive Officers and Corporate Governance 102
Item 11. Executive Compensation 107
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 116
Item 13. Certain Relationships and Related Transactions, and Director Independence 118
Item 14. Principal Accounting Fees and Services 118
     
  PART IV  
     
Item 15. Exhibits, Financial Statement Schedules 119
SIGNATURES 125

 

[This page intentionally left blank.]

 

2

 

 

CAUTIONARY STATEMENT FOR PURPOSES OF THE “SAFE HARBOR” STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

 

Statements in this 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;

 

  · 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;

 

3

 

 

  · 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. We undertake no obligation to update any such forward-looking statements, except as required by law.

 

4

 

 

PART I

 

ITEM 1. BUSINESS

 

Our Business

 

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 the People’s Republic of China, or the PRC. 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. Typically this mark-up is approximately ranges from 3% – 6% of the price of the base material. In April 2015, we established a new subsidiary Wuhan Kingold Internet Co., Ltd. and started the online sales of our jewelry products to customers. However, the online sales were immaterial for 2015 and 2016. In May 2015, Kingold Internet established a 100% controlled subsidiary Yuhuang Jewelry Design Co., Ltd (“Yuhuang”). Yuhuang engages in the jewelry design business.

 

On December 14, 2016, Wuhan Kingold transferred its 55% ownership interest in Kingold Internet to Wuhan Kingold Industrial Group Co., Ltd., a related party, for a consideration of $79,196 (RMB 550,000). After the transfer, Kingold Internet and Yuhuang were no longer the subsidiaries of Wuhan Kingold.

 

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.

 

Beginning in 2016, we started investing in gold, in addition to purchasing gold for inventory. We borrowed 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. In 2017 and 2018, we continued to expand our investment in gold, which also resulted in growing loan amount to fuel the expansion. We are expected to adjust our gold investment according to the gold market changes. 

 

5

 

 

Industry and Market Overview

 

The Global Market

 

Global consumer demand for gold in 2018 reached 4,345.1 tons, an increase of 4.5% comparing to 4,159.9 tons in 2017. Gold demand in 2018 was in line with the five-year average of 4,347.5 tons. A multi-decade high in central bank buying drove growth. Investment in bars and coins accelerated in the second half of the year of 2018, up 4% to 1,090.2 tons in 2018. Full year jewelry demand was steady at 2,200 tons. Gold used in technology climbed marginally to 334.6 tons in 2018,

 

According to the World Gold Council, China and India continue to consume the most jewelry of any market in the world, and in 2018 together generated 58% of total annual jewelry demand globally. China consumed a total of 672.5 tons of jewelry in 2018, while India consumed 598 tons.

 

The PRC Market

 

China’s market for jewelry and other luxury goods is expanding rapidly over the decade, in large part due to China’s rapid economic growth. According to the State Bureau of Statistics of China, China’s real gross domestic product, or GDP, grew by approximately 6.6% and 6.9% in 2018 and 2017, respectively. Economic growth in China has led to greater levels of personal disposable income and increased spending among China’s expanding consumer base. According to the Economist Intelligence Unit, private consumption has grown at a 9.0% compound annual growth rate over the last decade.

 

According to the World Gold Council, over the last ten years, Chinese gold consumers have displayed a remarkably consistent attitude towards gold. Chinese demand is primarily driven by: (i) the continued urbanization of the Chinese population; (ii) the dominance of 24-karat gold and its role as a savings proxy; and (iii) increasing availability of gold investment products to a populace with a growing awareness of gold’s investment properties, particularly in light of its role as an inflation hedge.

 

In volume terms, Chinese consumer demand for gold investment increased in 2018. Chinese total consumer demand for gold investment (mainly bars and coins) reached 304.2 tons in 2018. China was the world’s largest bar and coin market in 2018, recording it third highest year of bar and coin demand on record. Annual demand in 2018 was consistent compared to 2017 and comfortably above its five-year average of 264.3 tons.

 

We believe that China’s gold jewelry market will continue to grow as China’s economy continues to develop. Since gold has long been a symbol of wealth and prosperity in China, demand for gold jewelry, particularly 24-karat gold jewelry, is firmly embedded in the country’s culture. Gold has long been viewed as both a secure and accessible savings vehicle, and as a symbol of wealth and prosperity in Chinese culture.

 

In addition, gold jewelry plays an important role in marriage ceremonies, child birth, and other major life events in China. Gold ornaments, often in the shapes of dragons, horses and other cultural icons, have long been a customary gift for newly married couples and newborn children in China. As China’s population becomes more urban, more westernized, and more affluent, gold, platinum and other precious metal jewelry are becoming increasingly popular and affordable fashion accessories. The gold jewelry market is currently benefiting from rising consumer spending and rapid urbanization of the Chinese population. We believe that jewelry companies like us, with a developed distribution network, attractive designs, and reliable product quality, are well-positioned to build up our brands and capture an increasing share of China’s growing gold jewelry market.

 

6

 

 

Our Strengths

 

We believe the following strengths contribute to our competitive advantages and differentiate us from our competitors:

  

We have a proven manufacturing capability.

 

We have developed seven proprietary processes that we believe are well integrated and are crucial to gold jewelry manufacturing, namely the processes for 99.9% gold hardening, rubber mold opening efficiency, solder-less welding, pattern carving, chain weaving, dewaxing casting, and our coloring methods.

 

We have a proven design capability.

 

We have a large and experienced in-house design team with a track record of developing products that are fashionable and well received in the jewelry market. We have built up an exclusive partnership with the leading jewelry school in China, the Jewelry Institute of China University of Geosciences (Wuhan), to help us design and launch new products. We are committed to further strengthening our design team and continuing to improve the quality and novelty of our products so as to capture increased market share in the high-end gold jewelry market.

 

We believe that we have superior brand awareness in China.

 

We have established the Kingold brand through our focused sales and marketing efforts, and we believe that it is well known in China. We continue to devote significant efforts towards brand development and marketing in an attempt to enhance the market recognition of our products, such as our Mgold jewelry line of products. Our brand awareness was demonstrated in part by “Kingold” being named a “Famous Brand in Hubei Province,” “Famous Brand in China,” and “Famous Jewelry Brand”. We believe these awards have added credibility to and strengthened customers’ confidence in our products. We have also participated in various exhibitions and trade fairs to promote our products and brands.

 

We have a well-established distribution network throughout China.

 

We have been actively operating in this industry for more than ten years. In the jewelry industry, a well-established and well-maintained distribution network is critical to success. We have established stable and mutually beneficial business relationships with a range of business partners, including large distributors, wholesalers, and retailers. These relationships are essential to our company, and provide us with a key competitive advantage. We have distributors in most provinces, municipalities and autonomous regions in PRC.

 

We believe that we have significant advantages in the areas of capacity, technology and talent when compared to our competitors.

 

We have expanded our capacity significantly in recent years. In 2015, we processed 24-karat gold jewelry and Chinese ornaments with a total weight of approximately 56.5 tons, which was slightly decreased as compared to prior year production of approximately 60.1 tons in 2014. In fiscal 2016, our actual production was 75.3 tons, which was substantially increased as compared to the production in 2015. In fiscal 2017, our actual production was 103.4 tons, In fiscal 2018, our actual production was 114.2 tons, which indicated a continuing strong increase as compared to the production in 2017 and 2016. We attach great importance to the continuous improvement of our technology. Our gold processing systems dramatically reduce waste during the manufacturing process to approximately just one gram per kilogram of gold.

 

We have been awarded 26 patents granted by the State Intellectual Property Office of the PRC, of which 2 expired in 2017, 21 will expire in 2019, and the remaining will expire in 2029. We also owned 17 trademarks at the end of 2017, of which, 1 will expire by 2019, 6 will expire by 2020, 4 will expire by 2021, 1 will expire by 2023 and 3 will expire by 2027, and 2 were registered in Hong Kong. We have made significant investments in training and retaining our own in-house design and manufacturing team. We have an exclusive agreement with the China University of Geosciences School of Jewelry in Wuhan, or the School of Jewelry in Wuhan, which provides us with new, unique and innovative designs through students majoring in jewelry design and jewelry processing technology. These designs are proprietary to us, so our competitors do not have access to these designs. We also provide internships to talented students at the School of Jewelry, which provides us with access to the designs that we believe are best suited for strong consumer sales. 

 

7

 

 

We are a member of the Shanghai Gold Exchange, which has very limited membership and which affords the right to purchase gold directly from the Shanghai Gold Exchange.

 

We have been a member of the Shanghai Gold Exchange, or the Exchange, since 2003. Although the Chinese government eliminated the absolute restriction on trading gold in general, the right to purchase gold directly from the Exchange is limited. The Exchange possesses a membership system and only members can buy gold through its trading system. As of December 31, 2018, there were approximately 253 members of the Exchange throughout China. Non-members who want to purchase gold must deal with members of the Exchange at a higher purchase price compared to the price afforded to members of the Exchange.

 

We have an experienced management team in the Chinese gold industry.

 

We have a strong and stable management team with valuable experience in the PRC jewelry industry. Our Chairman and Chief Executive Officer, Zhihong Jia, has been working in this industry for close to 20 years. Our general manager, Mr. Jun Wang, also has worked in the industry for more than a decade. Other members of our senior management team all have significant experience in key aspects of our operations, including product design, manufacturing, and sales and marketing.

 

Our Strategy

 

Our goal is to be the leading designer and manufacturer of 24-karat gold jewelry products and to become a sizable supplier of investment gold products in China. We intend to achieve our goal by implementing the following strategies:

 

We intend to increase production capacity and marketing abilities through both existing channels and the planned Jewelry Park.

 

We intend to continue to expand the production capacity with our self-generated cash flow as well as bank loans.

 

We also intend to consider sub-contracting opportunities in order to further expand capacity. Given the fragmentation of the PRC gold jewelry and design industry, we believe there may be attractive consolidation opportunities for us to acquire other jewelers, which would allow us to further increase our market share and achieve economies of scale.

 

We also intend to increase our production capacity and marketing abilities through forming relationships with other jewelry manufacturers in China, to whom we plan to lease space in our planned Jewelry Park.

 

We plan to continue to specialize in the manufacture of 24-karat gold jewelry.

 

We intend to leverage our experience in jewelry design to introduce new fashionable products with strong market recognition, such as our Mgold jewelry line of products, to target niche markets such as the fast growing wedding market. We plan to design new product lines of 24-karat gold jewelry to address the specific needs of our target customers. By staying on top of market trends, and expanding our design team and capabilities, we plan to continue to increase our revenues and market share.

 

We intend to further promote and improve the use of our brand recognition.

 

We intend to make continuous efforts in growing the brand recognition of our Kingold brand and increasing our market share. Through marketing and the promotion of our high-end product lines such as Mgold, we believe the credentials and reputation of our brand will be further enhanced.

 

We will increase the automation in our production line.

 

Our production lines use modern technologies and production techniques that we continuously strive to improve. We plan to increase the level of automation in our production lines, which will lower our average costs and expand our production capacity. With our entrance into the investment gold market, we intend to rely more on automated production processes. 

 

8

 

 

We intend to enlarge our PRC customer base.

 

We intend to strive to expand our PRC customer base by strengthening current relationships with distributors, retailers and other wholesalers in our existing markets. We also plan to expand upon our customer base by developing new relationships with strategic distributors and retailers in markets we have not yet penetrated and adding customers in the PRC.

 

Products

 

We currently offer a wide range of 24-karat gold products, including 99.9% and 99% pure gold necklaces, rings, earrings, bracelets, pendants and gold bars.

 

Design and Manufacturing

 

We have adopted a systematic approach to product design and manufacturing that we believe is rigorous. We employ a senior design team with members educated by top art schools or colleges in China, including an exclusive agreement with the School of Jewelry in Wuhan, who have an average of three to five years of experience. Our design team develops and generates new ideas from a variety of sources, including direct customer feedback, trade shows, and industry conferences. We generally test the market potential and customer appeal of our new products and services through a wide outreach program in specific regions prior to a full commercial launch. We have a large-scale production base that includes a 74,933 square foot factory, a dedicated design, sales and marketing team, and 630 company-trained employees. Our production lines include automated jewelry processing equipment and procedures that we can rapidly modify to accommodate new designs and styles.

 

Supply of Raw Materials

 

We purchase gold, our major raw material, directly from the Shanghai Gold Exchange. Our membership grants us the right to purchase gold from the Exchange, a right that is not available to non-members. We also leased gold from certain leading Chinese commercial banks to provide an additional supply of raw materials under certain gold lease arrangements in 2015, 2016 and 2017. We did not enter into any gold lease transactions in fiscal year 2018.

 

Security Measures

 

We believe that we implement the best of breed security measures to protect our assets, including our 24-karat gold, and we believe these measures are well beyond those of our competitors. Our comprehensive security measures at our Wuhan facility include (i) a 24-hour onsite police station with direct deployment of police officers and instant access to the Wuhan city police department and (ii) security guards at each point of entry. Security guards roam our facilities, and monitor security cameras (with video surveillance by both random and fixed cameras) and alarm systems in our warehouse. Our gold is stored in a state of the art vault with encryption and authentication technology, which requires several designated management employees to open the vault, all of whom have different access codes known only to a limited number of officers. Therefore, no one individual can open our vault without the access codes of the others. In addition, every employee or visitor is required to pass through a security check (to include a metal detector) when he or she enters and leaves the jewelry production area. We review our security measures on an annual basis and regularly look to upgrade our systems after such review.

 

Quality Control

 

We consider quality control an important factor for the success of our business. We have a strict quality control system that is implemented by a well-trained team to ensure effective quality control over every step of our business operations, from design and manufacturing to marketing and sales. We have received ISO 9001 accreditation from the International Organization for Standardization attesting to our quality control systems. In 2004, we were named an “Honest and Trustworthy Enterprise” by the Hubei Bureau of Quality and Technical Supervision.

 

9

 

 

Sales and Marketing 

 

Currently we have approximately 360 customers covering 23 provinces in China. We have very stable relationships with our major customers who have generally increased order volume year by year. In 2013, we renovated our showroom and we add an additional showroom at Kingold Industrial Park in 2017.

 

Major Customers

 

During the year ended December 31, 2017, approximately 23.3% of our net sales were generated from our five largest customers. Wuhan Kingold Industrial Group Co. Ltd., a related party, was our largest customer in 2017 (6.3% of our total net sales in 2017).

 

During the year ended December 31, 2018, approximately 23.9% of our net sales were generated from our five largest customers. Zhengzhou Jinmeifu Jewelry Co., Ltd. was our largest customer in 2018 (5.2% of our total net sales in 2018). No customer accounted for more than 10% of annual sales for the years ended December 31, 2018 and 2017.

 

Competition

 

The jewelry industry in China is highly fragmented and very competitive. No single competitor has a significant percentage of the overall market. We believe that the market may become even more competitive as the industry grows and/or consolidates.

 

We produce high-quality jewelry for which the demand has grown year by year as income levels in China have risen and customers continue to appreciate the high quality of our products. We believe the Kingold brand is well-recognized within the industry across China, which has substantially differentiated us from most of our competitors.

 

We compete with local jewelry manufacturers and large foreign multinational companies that offer products similar to ours. Examples of our competitors include, but are not limited to, Zhejiang Sun & Moon Jewelry Group Co., Ltd. (listed on the Shanghai Stock Exchange), Shenzhen Bo Fook Jewelry Co., Ltd., Shenzhen Ganlu Jewelry Co., Ltd., Magfrey Jewelry Co., Ltd., and Guangdong Chaohongji Co., Ltd.

 

Intellectual Property

 

We rely on a combination of patent, trademark and trade secret protection and other unpatented proprietary information to protect our intellectual property rights and to maintain and enhance our competitiveness in the jewelry industry.

 

We currently have 24 patents granted by the State Intellectual Property Office of the PRC, of which 21 will expire in 2019 and the remaining will expire in 2029.

 

We currently have 15 registered trademarks in China, of which 1 will expire in 2019, 6 will expire in 2020, 4 will expire in 2021, 1 will expire in 2023, and the remaining 3 will expire in 2027. In particular, “Kingold” has been named as a “Famous Brand in Hubei Province,” “Famous Brand in China,” and “Famous Jewelry Brand” by the General Administration of Quality Supervision and China Top Brand Strategy Promotion Committee .

 

We have implemented and enhanced intellectual property management procedures in an effort to protect our intellectual property rights. However, there can be no assurance that our intellectual property rights will not be challenged, invalidated, or circumvented, that others will not assert intellectual property rights to technologies that are relevant to us, or that our rights will give us a competitive advantage. In addition, the laws of China may not protect our proprietary rights to the same extent as the laws in other jurisdictions. 

 

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PRC Government Regulations 

 

We are subject to various PRC laws and regulations that are relevant to our business. Our business license permits us to design, manufacture, sell and market jewelry products to department stores throughout China, and allows us to engage in the retail distribution of our products. Any further amendment to the scope of our business will require additional government approvals. We cannot assure you that we will be able to obtain the necessary government approval for any change or expansion of our business.

 

Under applicable PRC laws, the supply of precious metals such as platinum, gold and silver is highly regulated by certain government agencies, such as the People’s Bank of China, or the PBOC. The Shanghai Gold Exchange is the only PBOC authorized supplier of precious metal materials and is our primary source of supply for our raw materials, which substantially consist of precious metals. We are required to obtain and hold several memberships and approval certificates from these government agencies in order to continue to conduct our business. We may be required to renew such memberships and to obtain approval certificates periodically. If we are unable to renew these periodic memberships or approval certificates, it would materially affect our business operations. We are currently in good standing with these agencies.

 

We have also been granted independent import and export rights. These rights permit us to import and export jewelry into and out of China. With the relatively lower cost of production in China, we intend to expand into overseas markets after the launch of our China-based retail plan. We do not currently have plans to import jewelry into China.

 

Environmental Protection

 

Our production facilities in Wuhan are subject to environmental regulation by both the central government of the PRC and by local government agencies. We have obtained all necessary operating permits as required from the Environmental Protection Bureau, and believe that we are in compliance with local regulations governing waste production and disposal, and that our production facilities have met the public safety requirements regarding refuse, emissions, lights, noise and radiation. Since commencement of our operations, we have not been cited for any environmental violations. Because our production process creates almost no waste water or pollution, our costs for environmental compliance have been minimal and immaterial.

 

Tax

 

Wuhan Kingold was incorporated in the PRC and is subject to PRC income tax, which is computed according to the relevant laws and regulations in the PRC. The applicable income tax rate is 25.0%.

 

Pursuant to the Provisional Regulation of China on Value-Added Tax, or VAT, and its implementing rules, all entities and individuals that are engaged in the sale of goods, the provision of repairs and replacement services and the importation of goods in China are generally required to pay VAT at a rate of 16% starting from May 1, 2018 for the gross sales proceeds received, less any deductible VAT already paid or borne by the taxpayer.

 

Recent U.S. federal tax legislation, commonly referred to as the Tax Cuts and Jobs Act (the “U.S. Tax Reform”), was signed into law on December 22, 2017. The U.S. Tax Reform 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 U.S. Tax Reform 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 one-time transition tax of approximately $10.8 million that represented management’s assessment of the amount of U.S. corporate income tax based on the deemed repatriation to the United States of the Company’s previously deferred earnings of 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 adjustments and changes in our assessment. The Company provided an additional $0.9 million for the interest and penalty due on the late payment of the one-time transition tax.

 

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Foreign Currency Exchange

 

Under applicable PRC foreign currency exchange regulations, the Renminbi is convertible for current account items, including the distribution of dividends, interest payments, trade and service-related foreign exchange transactions. Conversion of Renminbi for capital account items, such as direct investment, loan, security investment and repatriation of investment, however, is still subject to the approval of the PRC State Administration of Foreign Exchange, or SAFE. Foreign-invested enterprises may only buy, sell and/or remit foreign currencies at those banks authorized to conduct foreign exchange business after providing valid commercial documents and, in the case of capital account item transactions, obtaining approval from the SAFE. Capital investments by foreign-invested enterprises outside of China are also subject to limitations, which include approvals by the Ministry of Commerce, the SAFE and the State Reform and Development Commission.

 

Dividend Distributions

 

Under applicable PRC regulations, foreign-invested enterprises in China may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, a foreign-invested enterprise in China is required to set aside at least 10.0% of its after-tax profits each year to its general reserves until the cumulative amount of such reserves has reached 50.0% of its registered capital. These reserves are not distributable as cash dividends. The board of directors of a foreign-invested enterprise has the discretion to allocate a portion of its after-tax profits to staff welfare and bonus funds, which may not be distributed to equity owners except in the event of liquidation

 

Employees 

 

As of December 31, 2018, we had approximately 630 full-time employees, all of whom were located in PRC except for our Chief Financial Officer. There are no collective bargaining contracts covering any of our employees. We believe our relationship with our employees is satisfactory. Our full-time employees are entitled to employee benefits including medical care, work related injury insurance, maternity insurance, unemployment insurance and pension benefits through a Chinese government mandated multi-employer defined contribution plan. We are required to accrue those benefits based on certain percentages of the employees’ salaries and make contributions to the plans out of the amounts accrued for medical and pension benefits. The Chinese government is responsible for the medical benefits and the pension liability paid to these employees.

 

The PRC has a labor contract law that enhances rights for the nation’s workers, including open-ended work contracts and severance payments, and requires employers to enter into labor contracts with their workers in writing, restricts the use of temporary laborers and makes it harder to lay off employees. It also requires that employees with a fixed-term contract be entitled to an indefinite-term contract after the fixed-term contract has been renewed twice. Although the labor contract law could increase our labor costs, we do not anticipate there will be any significant effects on our overall profitability in the near future because such amount was historically not material to our operating cost. Management anticipates this may be a step toward improving candidate retention for skilled workers.

 

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Available Information

 

Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are filed with the Securities and Exchange Commission (the “SEC”). The Company is subject to the informational requirements of the Exchange Act and files or furnishes reports, proxy statements and other information with the SEC. Such reports and other information filed by the Company with the SEC are available free of charge on our corporate website (www.kingoldjewelry.com) as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov. The foregoing website addresses are provided as inactive textual references only. We periodically provide other information for investors on our corporate website. This includes press releases and other information about financial performance, information on corporate governance and details related to our annual meeting of stockholders. The information contained on the websites referenced in this Form 10-K is not part of this report and is not incorporated by reference into this filing.

 

Company History

 

Since December 2009, we have been engaged in the design, manufacturing and sale of gold jewelry in the PRC via a VIE relationship with Wuhan Kingold, a PRC company.

 

We were initially incorporated in 1995 in Delaware as Vanguard Enterprises, Inc. In 1999, we changed our corporate name to Activeworlds.com, Inc. (and subsequently to Activeworlds Corp.), and through a wholly-owned subsidiary we provided internet software products and services that enabled the delivery of three-dimensional content over the internet. We operated that business until September 11, 2002, when we sold that business to our former management and we became a shell company with no significant business operations. As a result of the consummation of a reverse acquisition transaction as described below, on December 23, 2009, we ceased to be a shell company and became an indirect holding company for Wuhan Vogue-Show Jewelry Co., Limited, or Vogue-Show, through Dragon Lead Group Limited, or Dragon Lead.

 

Acquisition of Kingold and Name Change

 

In December 2009, we acquired 100% of Dragon Lead from the shareholders of Dragon Lead in a share exchange transaction pursuant to which the shareholders of Dragon Lead exchanged 100% ownership in Dragon Lead for 33,104,234 shares of our common stock. As a result, Dragon Lead became our wholly owned subsidiary. Dragon Lead owns 100% of Vogue-Show and Vogue-Show controls Wuhan Kingold through a series of variable interest entity agreements. We currently operate through Dragon Lead and Vogue-Show.

 

In February 2010, we changed our name to Kingold Jewelry, Inc. to better reflect our business.

 

Organizational History of Dragon Lead and its Subsidiaries

 

Dragon Lead, a British Virgin Islands, or BVI corporation was incorporated in the BVI on July 1, 2008 as an investment holding company. Dragon Lead owns 100% of the ownership interest in Vogue-Show.

 

Vogue-Show was incorporated in the PRC as a wholly foreign owned enterprise, or WFOE, on February 16, 2009. Wuhan Kingold was incorporated in the PRC as a limited liability company on August 2, 2002 by Zhihong Jia, as the major shareholder, and Xue Su Yue who sold her shares in Wuhan Kingold to Zhihong Jia and Chen Wei in 2003. On October 26, 2007, Wuhan Kingold was restructured as a joint stock company limited by shares. Its business activities are principally the design and manufacture of gold ornaments in the PRC. Wuhan Kingold’s business license will expire on July 1, 2052 and is renewable upon expiration. The registered and paid-in capital of Wuhan Kingold is RMB 120 million.

 

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The Vogue-Show/Wuhan Kingold VIE Relationship 

 

On June 30, 2009, Vogue-Show entered into a series of agreements with Wuhan Kingold and shareholders holding 95.83% of the outstanding equity of Wuhan Kingold under which Wuhan Kingold agreed to pay 95.83% of its after-tax profits to Vogue-Show and shareholders owning 95.83% of Wuhan Kingold’s shares have pledged their and delegated their voting power in Wuhan Kingold to Vogue-Show. Such share pledge is registered with the PRC Administration for Industry and Commerce. These agreements were subsequently amended on October 20, 2011; when the minority stockholder holding 4.17% of the equity of Wuhan Kingold became a party to the applicable VIE agreements. Following execution of the 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 Vogue-Show and shareholders owning 100% of Wuhan Kingold’s shares have pledged and delegated their voting power in Wuhan Kingold to Vogue- Show.

 

The VIE agreements, which are described below, currently cover 100% of the equity interest in Wuhan Kingold, and were initially created so that upon the closing of the reverse acquisition, as described below, we would be able to acquire control of Wuhan Kingold, as explained below.

 

These contractual arrangements enable us to:

 

· exercise effective control over our variable interest entity, Wuhan Kingold;

 

· receive substantially all of the economic benefits from variable interest entity, Wuhan Kingold; and

 

· have an exclusive option to purchase 100% of the equity interest in our variable interest entity, Wuhan Kingold, when and to the extent permitted by PRC law.

 

Through such arrangement, Wuhan Kingold has become Vogue-Show’s contractually controlled affiliate. In addition, Wuhan Kingold shareholders agreed to grant Vogue-Show a ten-year option to purchase a 100% equity interest in Wuhan Kingold at a price based on an appraisal provided by an asset evaluation institution that will be jointly appointed by Vogue-Show and the Wuhan Kingold shareholders. Concurrently, Wuhan Kingold agreed to grant Vogue-Show a ten-year option to purchase all of Wuhan Kingold’s assets at a price based on an appraisal provided by an asset evaluation institution that will be jointly appointed by Vogue-Show and Wuhan Kingold.

 

The VIE Agreements

 

Our relationship with Wuhan Kingold and its shareholders is governed by a series of contractual arrangements, which agreements provide as follows:

 

Exclusive Management Consulting and Technical Support Agreement. On June 30, 2009, Vogue-Show initially entered into an Exclusive Management Consulting and Technical Support Agreement with Wuhan Kingold, as subsequently amended, which provided that Vogue-Show will be the exclusive provider of management consulting services to Wuhan Kingold, and obligated Vogue-Show to provide services to fully manage and control all internal operations of Wuhan Kingold, in exchange for receiving 95.83% of Wuhan Kingold’s profits. On October 20, 2011, Wuhan Kingold and Vogue-Show amended this agreement such that Wuhan Kingold is now obligated to pay 100% of its after-tax profits to Vogue-Show. Payments will be made on a monthly basis. The term of this agreement will continue until it is either terminated by mutual agreement of the parties or until such time as Vogue-Show shall acquire 100% of the equity or assets of Wuhan Kingold.

 

Shareholders' Voting Proxy Agreement. On June 30, 2009, shareholders holding 95.83% of the equity interest in Wuhan Kingold entered into a Shareholders’ Voting Proxy Agreement authorizing Vogue-Show to exercise any and all shareholder rights associated with their ownership in Wuhan Kingold, including the right to attend and vote their shares at shareholders’ meetings, the right to call shareholders’ meetings and the right to exercise all other shareholder voting rights as stipulated in the Articles of Association of Wuhan Kingold. Following the October 20, 2011 amendment to this agreement, shareholders holding 100% of the equity interest in Wuhan Kingold have now entered into the Shareholders’ Voting Proxy Agreement. The term of this agreement will continue until it is either terminated by mutual agreement of the parties or until such time as Vogue-Show shall acquire 100% of the equity or assets of Wuhan Kingold.

 

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Purchase Option Agreement. On June 30, 2009, shareholders holding 95.83% of the equity interest in Wuhan Kingold entered into a Purchase Option Agreement with Vogue-Show, which provided that Vogue-Show will be entitled to acquire such Shareholders’ shares in Wuhan Kingold upon certain terms and conditions, if such a purchase is or becomes allowable under PRC laws and regulations. The Purchase Option Agreement also grants to Vogue-Show an option to purchase all of the assets of Wuhan Kingold. Following the October 20, 2011 amendment to this agreement, shareholders holding 100% of the equity interest in Wuhan Kingold have now entered into the Purchase Option Agreement. The exercise price for either the shares or the assets is to be as determined by a qualified third party appraiser. The term of this agreement is ten years from the date thereof. 

 

Reverse Acquisition and Private Placement

 

On September 29, 2009, we entered into an Agreement and Plan of Reverse Acquisition with Vogue-Show, Dragon Lead, and the stockholders of Dragon Lead, or the Dragon Lead Stockholders. Pursuant to the acquisition agreement, we agreed to acquire 100% of the issued and outstanding capital stock of Dragon Lead in exchange for the issuance of 33,104,234 newly issued shares of our common stock. The acquisition agreement closed on or about December 23, 2009. Following the closing, Dragon Lead became our wholly-owned subsidiary.

 

The purpose of the reverse acquisition was to acquire control over Wuhan Kingold. We did not acquire Wuhan Kingold directly through the issuance of stock to Wuhan Kingold’s stockholders because under PRC law it is uncertain whether a share exchange would be legal. We instead chose to acquire control of Wuhan Kingold through the acquisition of Vogue-Show and the VIE arrangements previously described in this Annual Report on Form 10-K. Certain rules and regulations in the PRC restrict the ability of non-PRC companies that are controlled by PRC residents to acquire PRC companies. There is significant uncertainty as to whether these rules and regulations require transactions of the type contemplated by our VIE arrangements, or of the type contemplated by the Call Option described below, to be approved by the PRC Ministry of Commerce, the China Securities and Regulatory Commission, or other agencies.

 

On December 23, 2009, immediately prior to the closing of the reverse acquisition, we completed a private placement with 14 investors. Pursuant to a securities purchase agreement entered into with the investors, we sold an aggregate of 5,120,483 newly issued shares of our common stock at $0.996 per share, for aggregate gross proceeds of approximately $5.1 million. The investors in the private placement also received five-year warrants to purchase up to 1,024,096 shares of common stock at the price of $0.996 per share. After commissions and expenses, we received net proceeds of approximately $4.55 million in the private placement. In addition, five-year warrants to purchase up to 1,536,145 shares of common stock at the price of $0.996 per share were issued to various consultants who assisted in the transaction.

 

All share and per share information for dates prior to August 10, 2010 concerning our common stock in the above discussion reflects a 1-for-2 reverse stock split.

 

As a result of the above transactions, we ceased being a “shell company” as defined in Rule 12b-2 under the Securities Act.

 

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In April 2015, Wuhan Kingold Jewelry Co., Inc. (“Wuhan Kingold”) established a new subsidiary Wuhan Kingold Internet Co., Ltd. (“Kingold Internet”). Total registered capital of Kingold Internet is RMB 1 million (approximately $0.15 million), of which Wuhan Kingold held a 55% ownership interest and a third-party minority shareholder, Mr. Xiaofeng Lv, held the remaining 45% ownership interest. Kingold Internet engages in promoting the online sales of jewelry products through cooperation with Tmall.com, a large business-to-consumer online retail platform owned by Alibaba Group. On December 14, 2016, Wuhan Kingold transferred its 55% ownership interest in Kingold Internet to Wuhan Kingold Industrial Group Co., Ltd., a related party, for a consideration of $79,196 (RMB 550,000). After the transfer, Kingold Internet and Yuhuang were no longer the subsidiaries of Wuhan Kingold.

 

In May 2015, Kingold Internet established a 100% controlled subsidiary Yuhuang Jewelry Design Co., Ltd (“Yuhuang”). Total registered capital of Yuhuang is RMB 1 million (approximately $0.15 million). Since Wuhan Kingold holds a 55% ownership interest of Kingold Internet, Wuhan Kingold also indirectly controls 55% ownership interest in Yuhuang and minority shareholder Mr. Xiaofeng Lv holds the remaining 45% ownership interest in Yuhuang. Yuhuang engages in the jewelry design business.

 

Kingold, Dragon Lead, and Wuhan Vogue-Show, are hereinafter collectively referred to as the “Company.”

 

The following diagram illustrates our corporate structure as of the date of this Annual Report:

 

 

 

Notes:

 

(1) Famous Grow is owned by Fok Wing Lam Winnie (whose Mandarin name is Huo Yong Lin). Pursuant to the Amended and Restated Call Option Agreement as amended, our founder, Chairman and Chief Executive Officer Zhihong Jia, has the right to acquire 100% of the ownership of Famous Grow.

 

(2)

Wuhan Kingold is 92.48% owned by Zhihong Jia, our founder, Chairman and Chief Executive Officer, with the balance of 7.52% owned by a total of 3 other shareholders, who are all PRC citizens. All of Wuhan Kingold’s shareholders have entered into the VIE agreements.  

 

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ITEM 1A. RISK FACTORS

 

Investment in our securities involves a high degree of risk. You should carefully consider the risks described below together with all of the other information included in this report, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, our consolidated financial statements and related notes. The risks and uncertainties described below represent our known material risks to our business. The risks included here are not exhaustive and there may be additional risks that are not presently material or known. New risk factors may emerge from time to time and it is not possible for management to predict all risk factors, nor can it assess the impact of all such risk factors on our business. If any of the following risks actually occurs, our business, financial condition or results of operations could suffer. In that case, you may lose all or part of your investment. 

 

Risks Related to our Business

 

Significant decreases in the price and availability of gold and other precious metal commodities could adversely impact our earnings, cash flows and results of operation.

 

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 needs for gold or other raw materials through commodity purchasing or other common methods such as the use of options or forward contracts. Prior to 2016, we purchased gold in order to produce jewelry and gold products. While jewelry and gold product manufacturing is still our core business, starting in 2016, we began to purchase gold for the purposes of investment and hedging against the risks in gold and other commodity price fluctuations.

 

Our investment objective is to purchase gold in response to the rising price trend of gold for the recent years. By doing so, we have been able to use bank loans or other third party borrowings to finance our gold investment and repay the debts with the gold purchased upon due. The upward increases in the gold price in the last few years have enabled us to use a lesser amount of gold than originally purchased to repay the same debts. However, gold investment has exposed us to a greater degree of risks associated with any future decreases in the price of gold. When gold price decreases, we would have to use or sell a larger amount of gold to repay the outstanding borrowings when they become due. The more investment we make in gold and more loans we borrow to finance such purchases, the greater the risks we would be subject to in any future decreases in the price of gold. Any significant decreases in the price and availability of gold could weaken our cash flow position and adversely affect our costs for conducting our business and results of operation.

 

On the other hand, a sudden significant increase in the price of gold could increase our immediate costs for gold investment as well as 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. Although we generally attempt to pass increased commodity prices to our customers, there may be circumstances in which we are not able to do so. In addition, 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.

 

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If we are unable to accurately manage our inventory, our reputation, earnings and results of operations could suffer.

 

We are faced with the increased challenge of balancing our gold inventory levels to meet gold investment needs with our ability to meet our jewelry manufacturing demands. We purchase gold based on internally generated projections, and the projections are based on many unknown assumptions around the price and price trend of gold, consumer demands, and product pricing, among other things. If these inventory projections are too high, our inventory may be too high, which may result in overstock of the amount of gold we purchase, lower sales prices and gross margins and cause harm to our financial results. Conversely, if these projections are too low, and we underestimate our inventory needs and the consumer demand for our products, we would be exposed to lost business opportunities and experience shortage in our gold inventory to meet our production, financing and investment needs. Either situation could have a material adverse effect on our business, results of operations, financial condition and cash flows.

 

We may be unable to repay our debts as they become due.

 

Over the last two years, we have dramatically increased the amount of debts we borrowed. The borrowings were used to purchase gold, and because the price of gold has increased over the last year, we have profited by such increases. However, in the event the gold market experiences a downturn, we will find that the assets on hand (i.e., gold purchased with loans) are insufficient to repay those loans. Moreover, if the price of gold decreases, banks may be unwilling to refinance our debts as they become due. In addition, a price drop could result in a default under the terms of such loans, regardless of whether we are current in our payment under such loans. If this were to happen, our business could be materially harmed.

 

We will need to implement additional accounting systems, procedures and controls as we grow our business and organization to satisfy the new reporting requirements.

 

As a public reporting company, we are required to comply with the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC, including expanded disclosures and accelerated reporting requirements and more complex accounting rules. Compliance with these new requirements may increase our costs and require additional management time and resources. Most recently, the SEC charged several public companies for failing to maintain internal control over financial reporting over multiple periods and concluded that disclosure of material weaknesses is not enough; companies must actually take actions to remediate such deficiencies. In the prior two fiscal years, our management assessed and found our internal control over financial reporting to be ineffective. To remedy the material weakness of inadequate controls over cash management, our Board adopted resolutions requiring management to seek the Board’s approval prior to entering into any transactions with a value in excess of a certain threshold, and we are in the process of implementing additional policies and procedures to enhance our internal controls. Notwithstanding these additional measures, we still need to implement additional or enhance finance and accounting systems, procedures and controls to satisfy new accounting and reporting requirements. If our internal controls over financial reporting continue to be ineffective, investors could lose confidence in the reliability of our internal controls over financial reporting, which could adversely affect our stock price.

 

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Jewelry purchases are discretionary, may be particularly affected by adverse trends in the general economy, and an economic decline will make it more difficult to generate revenue.

 

The success of our operations depends, to a significant extent, upon a number of factors relating to discretionary consumer spending in China. These factors include economic conditions and perceptions of such conditions by consumers, employment rates, the level of consumers’ disposable income, business conditions, interest rates, consumer debt levels, availability of credit and levels of taxation in regional and local markets in China where we manufacture and sell our products. There can be no assurance that consumer spending on jewelry will not be adversely affected by changes in general economic conditions in China and globally.

 

While the Chinese economy has experienced rapid growth in the past decade, such growth has been uneven among various sectors of the economy and in different geographical areas of the country. Rapid economic growth can lead to growth in the money supply and rising inflation. During the past two decades, the rate of inflation in China has been as high as approximately 20%. If prices for our products rise at a rate that is insufficient to compensate for the rise in the costs of supplies such as raw materials, it may have an adverse effect on our profitability. In the recent years, Chinese economic growth had been slowing down, and for example, GDP growth was only 6.6% in 2018. While the China economic growth showed a considerable improvement in 2017 and 2018, should it experience another slow growth for a sustained period of time, it could substantially affect consumer demand and confidence, which could adversely impact our business, results of operation and financial condition.

 

Competition in the jewelry industry could cause us to lose market share, thereby materially and adversely affecting our business, results of operations and financial condition.

 

The jewelry industry in China is highly fragmented and very competitive. We believe that the market may become even more competitive as the industry grows and/or consolidates. We compete with local jewelry manufacturers and large foreign multinational companies that offer products that are similar to ours. Some of these competitors have larger local or regional customer bases, more locations, more brand equity, and substantially greater financial, marketing and other resources than we have. As a result of this increasing competition, we could lose market share, thereby materially and adversely affecting our business, results of operations and financial condition.

 

We may need to raise additional funds in the future. These funds may not be available on acceptable terms or at all, and, without additional funds, we may not be able to maintain or expand our business. The sale of additional shares or equity or debt securities could result in additional dilution to our shareholders.

 

Our operations require substantial funds to finance our operating expenses, to maintain and expand our manufacturing, marketing and sales capabilities and to cover public company costs. Without these funds, we may not be able to meet our goals. We believe that our current cash and cash equivalents and anticipated cash flow from operations will be sufficient to meet our anticipated cash needs for the foreseeable future. We may, however, require additional cash resources due to changed business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If these resources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain one or more additional credit facilities. If we cannot raise additional funds when needed, or on acceptable terms, we may not be able to effectively execute our growth strategy take advantage of future opportunities, or respond to competitive pressures or unanticipated requirements. In addition, we may be required to scale back or discontinue expansion plans, or obtain funds through strategic alliances that may require us to relinquish certain rights.

 

We may seek additional funding through public or private financing or through collaborative arrangements with strategic partners. However, you should also be aware that in the future:

 

¨ we cannot be certain that additional capital will be available on favorable terms, if at all;
   
¨ any available additional financing may not be adequate to meet our goals; and
   
¨ any equity financing would result in dilution to stockholders.

 

In addition, the incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations.

 

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Our ability to maintain or increase our revenue could be harmed if we are unable to strengthen and maintain our brand image.

 

We believe that the primary factors in facilitating customer buying decisions in China’s jewelry sector include price, confidence in the merchandise sold, and the level and quality of customer service. The ability to differentiate our products from competitors’ by our brand-based marketing strategies is a key factor in attracting consumers, and if our strategies and efforts to promote our brand, such as television and magazine advertising and beauty contest sponsorships fail to garner brand recognition, our ability to generate revenue may suffer. If we are unable to differentiate our products, our ability to sell our products wholesale and our planned sale of products retail will be adversely affected. If we fail to identify or react appropriately or timely to customer buying decisions, we could experience a reduction in consumer recognition of our products, a diminished brand image, higher markdowns, and costs to recast overstocked jewelry. These factors could result in lowering selling prices and sales volumes for our products, which could adversely affect our financial condition and results of operations.

 

There is only one source in China for us to obtain the precious metals used in our jewelry products; accordingly, any interruptions of our arrangement with this source would disrupt our ability to fulfill customer orders and substantially affect our ability to continue our business operations.

 

Under PRC law, the supply of precious metals such as platinum, gold, and silver is highly regulated by PRC government agencies. The Shanghai Gold Exchange (“the Exchange”) is the only supplier in China for gold used for our jewelry products (including the gold we lease from leading PRC banks). We are required to obtain and maintain several membership and approval certificates from government agencies in order to do business involving precious metals. The loss of our relationship or failure to renew our membership with the Exchange, or its inability to furnish precious metals to us (or the banks we lease from) as anticipated in terms of cost, quality, and timeliness, would adversely affect our ability to fulfill customer orders in accordance with our required delivery, quality, and performance requirements. If this situation were to occur, we would not have any alternative suppliers in China to obtain our raw materials from, which would result in a decline in revenue and revenue potential, and ultimately risk the overall continuation of our business operations.

 

If we are not able to adapt to changing jewelry trends in China, our inventory may be overstocked and we may be forced to reduce the price of our overstocked jewelry or incur the cost to recast it into new jewelry.

 

Our jewelry sales depend on consumer fashions, preferences for jewelry and the demand for particular products in China. Jewelry design trends in China can and do change rapidly. The ability to accurately predict future changes in taste, respond to changes in consumer preferences, carry the inventory demanded by customers, deliver the appropriate quality, price products correctly, and implement effective purchasing procedures all have an important influence on determining sales performance and maximizing gross margin. If we fail to anticipate, identify or react appropriately to changes in styles and trends, we could experience excess inventories, higher than normal markdowns or an inability to sell our products. If such a situation were to exist, we would need to incur additional costs to recast our products to fit the demand, and the labor and manufacturing costs previously invested in the recast products would be lost.

 

Our failure to manage growth effectively could have an adverse effect on our employee efficiency, product quality, working capital levels, and results of operations.

 

We intend to develop the retail distribution of our products, which we believe will result in rapid growth, but will also place significant demands on our managerial, operational and financial resources. Any significant growth in the market for our current wholesale business and our planned retail distribution would require us to expand our managerial, operational, financial, and other resources. During any period of growth, we may face problems related to our operational and financial systems and controls, including quality control and delivery and service capabilities. We also will need to continue to expand, train and manage our employee base. If we are unable to successfully build these skills and expand our number of skilled management and staff, we may be unsuccessful in achieving our intended level of growth.

 

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Aside from increased difficulties in the management of human resources, we may also encounter working capital issues, as we will need increased liquidity to finance the purchases of raw materials and supplies, development of new products and the hiring of additional employees. Our failure to manage growth effectively may lead to operational and financial inefficiencies that will have a negative effect on our profitability. We cannot assure you that we will be able to timely and effectively meet that demand and maintain the quality standards required by our existing and potential customers.

 

We maintain a relatively large inventory of our raw materials and jewelry products to support customer delivery requirements, and if this inventory is lost due to theft, our results of operations would be negatively impacted.

 

We purchase large volumes of precious metals and store significant quantities of raw materials and jewelry products at our warehouse and show room in Wuhan, China. Although we have an inventory security system in place, we may be subject to future significant inventory losses due to third-party or employee theft from our warehouses or other forms of theft. The implementation of enhanced security measures beyond those that we already utilize, which include onsite police station with direct deployment of officers and instant access to Wuhan city police department, security cameras, and alarm systems in our warehouse, would increase our operating costs. Also, any such losses of inventory could exceed the limits of, or be subject to an exclusion from, coverage under our insurance policies. Claims filed by us under our insurance policies could lead to increases in the insurance premiums payable by us or the termination of coverage under the relevant policy. In addition, loss of gold inventory may cause violation of our pledge agreements of loans.

 

We have outstanding borrowings, and if our ability to obtain new loans or to renew current loans from financial institutions or other third parties is substantially diminished, our business may be severely disrupted and the results of operations could suffer.

 

In the recent years, we have substantially increased our borrowings as we grew our business and expanded our operations. Almost all of our loans from financial institutions and other unrelated third-parties are secured by restricted cash on deposit at various banks, or gold we own or have leased, as we may agree from time to time with the respective lenders.

 

In addition, many of our loans are borrowed conditioned upon personal guarantees provided by our Chairman and CEO because of his personal credit worthiness and his reputation and expertise in the China gold industry. Thus our ability to obtain loans or credits, to a great extent, depends on the continued services of our founder, Chairman and CEO, Mr. Zhihong Jia. If Mr. Jia is unable or unwilling to continue his service with us or to provide personal guarantees for our loans, we may not be able to obtain new loans or renew existing loans, or our existing loans may be deemed in default or called for immediate repayment acceleration by the lenders.

 

Although we have been able to receive sufficient funding in the past, we cannot assure you that we will be able to renew our loans at maturity or obtain alternative funding on reasonable terms from banks or other parties. If we fail to do so, we would have to repay the existing borrowings with our cash or other assets, including our gold inventory, and our business may be severely disrupted and the results of operations could suffer.

 

Our business could be materially adversely affected if we cannot protect our intellectual property rights.

 

We have developed trademarks, patents, know-how, trade-names and other intellectual property rights that are of significant value to us. In particular, we have applied for patents on a limited number of designs of our jewelry products and trademarks as well. However, the legal regime governing intellectual property in the PRC is still evolving and the level of protection of intellectual property rights in the PRC may differ from those in other jurisdictions. Thus, it may be difficult to enforce our rights relating to these designs as well as our trademarks. Any unauthorized use of, or other infringement upon our designs or trademarks, could result in potential sales being diverted to such unauthorized sellers, and dilute the value of our brand.

 

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While we are not aware of any data breach in the past, any future failure to adequately maintain security and prevent unauthorized access to electronic and other confidential information could result in a data breach which could materially adversely affect our reputation, financial condition and operating results.

 

The protection of our customer, business partner, Company and employee data is critically important to us. Our customers, business partners, and employees expect we will adequately safeguard and protect their sensitive personal and business information. We have become increasingly dependent upon automated information technology processes. Improper activities by third parties, exploitation of encryption technology, data-hacking tools and discoveries and other events or developments may result in a future compromise or breach of our networks, payment terminals or other settlement systems. In particular, the techniques used by criminals to obtain unauthorized access to sensitive data change frequently and often are not recognized until launched against a target; accordingly, we may be unable to anticipate these techniques or implement adequate preventative measures. Any failure to maintain the security of our customers’ sensitive information, or data belonging to ourselves, our business partners or other relationship third parties, could put us at a competitive disadvantage, result in deterioration of our customers’ confidence in us, and subject us to potential litigation, liability, fines and penalties, resulting in a possible material adverse impact on our financial condition and results of operations. There can be no assurance that we will not suffer a criminal cyber-attack in the future, that unauthorized parties will not gain access to personal or business information or sensitive data, or that any such incident will be discovered in a timely manner.

 

We are dependent on certain key personnel, and the loss of these key personnel could have a material adverse effect on our business, financial conditions and results of operations.

 

Our success, to a great extent, has been attributable to the management, sales and marketing, and operational and technical expertise of certain key personnel. Moreover, our daily operation and performance rely heavily upon our senior management. There can be no assurance that we will be able to retain these officers or that such personnel may not receive and/or accept competing offers of employment. The loss of a significant number of these employees could have a material adverse effect upon our business, financial condition, and results of operations. We do not maintain key-man life insurance for any of our senior management.

 

We rely on our distribution network for virtually all of our sales revenues. Failure to maintain good distributor relations, or our inability to successfully execute our planned expansion of our customer base, may affect our revenues and earnings.

 

Our business depends directly on the performance of roughly 300 of our major distributors, which we also refer to as our customers. No customer accounted for more than 10% of annual sales for the years ended December 31, 2018 or 2017. As all purchases of our products by customers are made through purchase orders and we do not have long-term contracts with any of our customers, it is critical that we maintain good relationships with them. However, maintaining good relationships with existing distributors and replacing any distributor is difficult and time consuming. Our failure to maintain good relationships with our distributors could materially disrupt our distribution business and harm our net sales.

 

We may not maintain sufficient insurance coverage for the risks associated with our business operations. As a result, we may incur uninsured losses.

 

Except for property, accident and automobile insurance, we do not have other insurance of such as business liability or disruption insurance coverage for our operations in the PRC. As a result, we may incur uninsured liabilities and losses as a result of the conduct of our business. There can be no guarantee that we will be able to obtain additional insurance coverage in the future, and even if we are able to obtain additional coverage, we may not carry sufficient insurance coverage to satisfy potential claims. Should uninsured losses occur, it could adversely affect our business, results of operations and financial condition.

 

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Global financial crises and economic downturns may have an adverse effect on our businesses, results of operation and financial condition.

 

Global economic conditions can have an effect on our business. If there is an additional global financial crisis or economic downturn, such as that which occurred in 2008, it may adversely affect economies and businesses around the world, including in China, which in turn will have an adverse impact on our business and operations.

 

Potential environmental liability could have a material adverse effect on our operations and financial condition.

 

As a manufacturer, we are subject to various Chinese environmental laws and regulations on air emission, waste water discharge, solid wastes and noise. Although we believe that our operations are in substantial compliance with current environmental laws and regulations, we may not be able to comply with these regulations at all times as the Chinese environmental legal regime is evolving and becoming more stringent. Therefore, if the Chinese government imposes more stringent regulations in the future, we may have to incur additional and potentially substantial costs and expenses in order to comply with new regulations, which may negatively affect our results of operations. Further, no assurance can be given that all potential environmental liabilities have been identified or properly quantified or that any prior owner, operator, or tenant has not created an environmental condition unknown to us. If we fail to comply with any of the present or future environmental regulations in any material aspects, we may suffer from negative publicity and be subject to claims for damages that may require us to pay substantial fines or force us to suspend or cease operations.

 

Compliance with changing regulation of corporate governance and public disclosure will result in additional expenses.

 

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 and related Commission regulations, have created uncertainty for public companies and significantly increased the costs and risks associated with accessing the public markets and public reporting. Our management team will need to invest significant management time and financial resources to more fully comply with both existing and evolving standards for public companies, which will lead to increased general and administrative expenses and a diversion of management time and attention from revenue generating activities to compliance activities.

 

We may have additional tax liabilities.

 

We are subject to income and other taxes in the U.S. and China. Tax laws are complex and subject to constant changes as new laws are passed and new interpretations of the law are issued or applied. In December 2017, the U.S. enacted the 2017 Tax Cuts and Jobs Act (the “Tax Act”) which 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 certain business deductions; migrating 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; and providing for new taxes on certain foreign earnings. Due to the timing of the enactment of the Tax Act and the complexity involved in applying its provisions, we made a reasonable estimate of the effects for the year ended December 31, 2017. We have since then performed additional analysis on the application of the Tax Act and determined that it has impacted the assessment of our U.S. tax liabilities for the prior fiscal year and may impact our future tax liabilities. Significant judgment is required in estimating our provision for income taxes. In our business operations and corporate structure, there are contractual arrangements, transactions or calculations where the ultimate tax determination is uncertain. Although we believe our tax estimates are reasonable, any final determination pursuant to tax audits could be materially different from what is reflected in our consolidated financial statements. Should any tax authority disagree with our estimates and determine any additional tax liabilities, including interest and penalties for us, this could adversely impact our results of operations, financial position and cash flows.

 

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Risks Related to Doing Business in the PRC

 

Substantially all of our assets are located in China and substantially all of our revenues are currently derived from our operations in China, and changes in the political and economic policies of the PRC government could have a significant impact upon what business we may be able to conduct in the PRC and accordingly on the results of our operations and financial condition.

 

Our business operations may be adversely affected by the current and future political environment in the PRC. The Chinese government exerts substantial influence and control over the manner in which we must conduct our business activities. Our ability to operate in China may be adversely affected by changes in Chinese laws and regulations, including those relating to taxation, import and export tariffs, raw materials, environmental regulations, land use rights, property and other matters. Under the current government leadership, the government of the PRC has been pursuing economic reform policies that encourage private economic activity and greater economic decentralization. There is no assurance, however, that the government of the PRC will continue to pursue these policies, or that it will not significantly alter these policies from time to time without notice. In response to the recent global and Chinese economic downturn, the PRC government has adopted policy measures aimed at stimulating the economic growth in China. If the PRC government’s current or future policies fail to help the Chinese economy achieve further growth or if any aspect of the PRC government’s policies limits the growth of our industry or otherwise negatively affects our business, our growth rate or strategy, our results of operations could be adversely affected as a result.

 

Chinese economic growth slowdown may harm our business.

 

Since 2014, Chinese economic growth has been slowing down from double-digit GDP speed. The situation has impacted many industries and economic segments in China, such as restaurants, the hospitality industry, certain manufacturing industries and discretionary or luxury consumer spending. Our business operations in China mainly rely on consumer cash availability and spending, consumer demand for our products and consumer confidence, which are impacted by an economic downturn. If China’s economic growth continues to slow down, our results of operations may be adversely affected due to the slower consumer spending on the jewelry products or gold investment or slow expansion in the consumer discretionary goods industries.

 

Our operations are subject to PRC laws and regulations that are sometimes vague and uncertain. Any changes in such PRC laws and regulations, or the interpretations thereof, may have a material and adverse effect on our business.

 

The PRC’s legal system is a civil law system based on written statutes. Unlike the common law system prevalent in the United States, decided legal cases have little value as precedent in China. There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations including, but not limited to, the laws and regulations governing our business, or the enforcement and performance of our arrangements with customers in the event of the imposition of statutory liens, death, bankruptcy or criminal proceedings. The Chinese government has been developing a comprehensive system of commercial laws, and considerable progress has been made in introducing laws and regulations dealing with economic matters such as foreign investment, corporate organization and governance, commerce, taxation and trade. However, because these laws and regulations are relatively new, and because of the limited volume of published cases and judicial interpretation and their lack of force as precedents, interpretation and enforcement of these laws and regulations involve significant uncertainties. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively.

 

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One of our principal operating subsidiaries, Vogue-Show, is considered a foreign invested enterprise under PRC laws, and as a result is required to comply with PRC laws and regulations, including laws and regulations specifically governing the activities and conduct of foreign invested enterprises. We cannot predict what effect the interpretation of existing or new PRC laws or regulations may have on our businesses. If the relevant authorities find us in violation of PRC laws or regulations, they would have broad discretion in dealing with such a violation, including, without limitation:

 

¨ levying fines;

 

¨ revoking our business license, other licenses or authorities;

 

¨ requiring that we restructure our ownership or operations; and

 

¨ requiring that we discontinue some or all of our business.

 

The scope of our business license in China is limited, and we may not expand or continue our business without government approval and renewal, respectively.

 

Our operating affiliate, Wuhan Kingold, can only conduct business within its business scope, as detailed on its business license. Our license permits us to design, manufacture, sell and market jewelry products to department stores throughout the PRC and to engage in the retail distribution of our products. Any amendment to the scope of our business requires further application and government approval. In order for us to expand our business beyond the scope of our license, we will be required to enter into a negotiation with the authorities for the approval to expand the scope of our business. We cannot assure you that Wuhan Kingold will be able to obtain the necessary government approval for any change or expansion of our business scope.

 

Our PRC stockholders are required to register with the State Administration of Foreign Exchange and their failure to do so could cause us to lose our ability to remit profits out of the PRC as dividends.

 

The SAFE promulgated the Circular on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, in July 2014 that requires PRC residents or entities to register with SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing. In addition, such PRC residents or entities must update their SAFE registrations when the offshore special purpose vehicle undergoes material events relating to any change of basic information (including change of such PRC citizens or residents, name and operation term), increases or decreases in investment amount, transfers or exchanges of shares, or mergers or divisions. 

 

SAFE Circular 37 was issued to replace the Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents Engaging in Financing and Roundtrip Investments via Overseas Special Purpose Vehicles, or SAFE Circular 75.

 

If our shareholders who are PRC residents or entities do not complete their registration with the local SAFE branches, our PRC subsidiary may be prohibited from distributing their profits and proceeds from any reduction in capital, share transfer or liquidation to us, and we may be restricted in our ability to contribute additional capital to our PRC subsidiary. Moreover, failure to comply with the SAFE registration described above could result in liability under PRC laws for evasion of applicable foreign exchange restrictions.

 

These regulations apply to our stockholders who are PRC residents. As of the date of this registration statement, our Chairman and Chief Executive Officer, Zhihong Jia, has obtained his registration under Circular 75, and the other PRC residents are in the process of obtaining registrations under Circular 37. However, there is no assurance that such persons can successfully complete such registrations, and there is no assurance that all of the PRC resident stockholders and beneficiary stockholders have complied with and will comply with the SAFE registration requirements currently or in the future. In the event that these or other of our PRC-resident stockholders do not follow the procedures required by SAFE, we could (i) be exposed to fines and legal sanctions, (ii) lose the ability to contribute additional capital into our PRC subsidiaries or distribute dividends to our company, (iii) face liability for evasion of foreign-exchange regulations, and/or (iv) lose the ability to consolidate the financial statements of our PRC subsidiaries under applicable accounting principles.

 

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PRC regulations relating to acquisitions of PRC companies by foreign entities may create regulatory uncertainties that could restrict or limit our ability to operate. Our failure to obtain the prior approval of the China Securities Regulatory Commission, or CSRC for the listing and trading of our common stock could have a material adverse effect on our business, operating results, reputation and trading price of our common stock.

 

On August 8, 2006, the PRC Ministry of Commerce, or MOFCOM, joined by the State-owned Assets Supervision and Administration Commission of the State Council, the State Administration of Taxation, the State Administration for Industry and Commerce, the China Securities Regulatory Commission, or CSRC, and SAFE, released a substantially amended version of the Provisions for Foreign Investors to Merge with or Acquire Domestic Enterprises, or the Revised M&A Regulations, which took effect September 8, 2006. These rules significantly revised China’s regulatory framework governing onshore-to-offshore restructurings and foreign acquisitions of domestic enterprises. These rules signify greater PRC government attention to cross-border merger, acquisition and other investment activities, by confirming MOFCOM as a key regulator for issues related to mergers and acquisitions in China and requiring MOFCOM approval of a broad range of merger, acquisition and investment transactions. Further, these rules establish reporting requirements for acquisition of control by foreigners of companies in key industries, and reinforce the ability of the Chinese government to monitor and prohibit foreign control transactions in key industries. 

 

In addition, the Revised M&A Regulations include new provisions that purport to require that an offshore special purpose vehicle, or SPV, formed for listing purposes and controlled directly or indirectly by PRC companies or individuals must obtain the approval of the CSRC prior to the listing and trading of such SPV’s securities on any non-PRC stock exchange. On September 21, 2006, the CSRC published on its official website procedures specifying documents and materials required to be submitted to it by SPVs seeking CSRC approval of their overseas listings. However, the application of this PRC regulation remains unclear with no consensus currently existing among the leading PRC law firms regarding the scope and applicability of the CSRC approval requirement.

 

Our wholly-owned BVI subsidiary, Dragon Lead, was formerly owned by eight BVI companies whose shareholders are non-PRC individuals. We understand that some of these non-PRC individuals are nominee shareholders holding shares on behalf of and for the interest of some PRC individuals and PRC companies who are also Wuhan Kingold minority shareholders. These minority Wuhan Kingold shareholders do not have experience in conducting or managing businesses outside the PRC, and therefore believe that to engage nominee shareholders to hold shares on their behalf are in their best commercial interest, and could provide them with guidance when they evaluate whether to purchase, sell or dispose of our shares after the closing.

 

Also, on December 23, 2009, immediately before the reverse acquisition of Vogue Show, Fok Wing Lam Winnie (whose Mandarin name is Huo Yong Lin), the sole shareholder of Famous Grow and the majority shareholder of Dragon Lead prior to the closing of the reverse acquisition, entered into the call option with Zhihong Jia and Bin Zhao (our former general manager and former director) to comply with PRC regulations that restrict PRC residents from owning offshore entities like us in direct exchange for their shares in the PRC operating company and as an inducement to encourage them to provide services to Wuhan Kingold and our company. The call option does not include a vesting schedule and continued employment is not a condition to the call option. Under the call option, as amended and restated, Fok Wing Lam Winnie granted to Zhihong Jia certain call options to acquire up to 100% of the shares of Famous Grow at an exercise price of $1.00, which is par value per share, or $0.001 per Famous Grow share, subject to any exercise notice, or Call Option which was determined in an arm's length negotiation with the parties.

 

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The PRC regulatory authorities may take the view that entry into the VIE Agreements by Vogue-Show and Wuhan Kingold and entry into the call option agreement by Zhihong Jia and Fok Wing Lam Winnie may collectively constitute an onshore to offshore restructuring and a related party acquisition under the M&A Regulations, because upon the consummation of these transactions and after the Call Option is fully exercised, PRC individuals would become majority owners and effective controlling parties of a foreign entity that acquired ownership of Wuhan Kingold. The PRC regulatory authorities may also take the view that the relevant parties should fully disclose to the Wuhan SAFE or MOFCOM the overall restructuring arrangements, the existence of the reverse acquisition and its connection with the VIE Agreement. Our PRC counsel has opined among other things that: (i) each of our VIE agreements with Wuhan Kingold are valid and enforceable under relevant PRC laws, (ii) all government authorizations for the execution, delivery, performance and enforcement of our VIE agreements have been obtained as required by PRC laws, (iii) the ownership structure of Vogue Show and Wuhan Kingold created by our VIE agreements and the call options in favor of Zhihong Jia do not violate any provisions of applicable PRC laws, and (iv) no PRC governmental approvals were required under the Revised M&A Regulations in connection with our acquisition of our current ownership interests in any of our PRC subsidiaries or in connection with the VIE agreements. Our PRC counsel has reviewed and approved of these statements.

 

We, however, cannot assure you that the PRC regulatory authorities, MOFCOM and CSRC will take the same view as our PRC counsel. If the PRC regulatory authorities take the view that the reverse acquisition and VIE arrangement constitute a related party acquisition under the revised M&A Regulations, we cannot assure you we will be able to obtain any approal required from the national offices of MOFCOM or otherwise.

 

If the PRC regulatory authorities take the view that the call options or the VIE arrangement constitutes a related party acquisition without the approval of the national offices of MOFCOM, they could invalidate the call options and VIE arrangement. We may also face regulatory actions or other sanctions from the MOFCOM or other PRC regulatory agencies. These regulatory agencies may impose fines and penalties on our operations in the PRC, limit our operating privileges in the PRC, or take other actions that could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our shares.

 

If we make equity compensation grants to persons who are PRC citizens, they may be required to register with the State Administration of Foreign Exchange of the PRC, or SAFE. We may also face regulatory uncertainties that could restrict our ability to adopt additional equity compensation plans for our directors and employees and other parties under PRC law.

 

On April 6, 2007, SAFE issued the “Operating Procedures for Administration of Domestic Individuals Participating in the Employee Stock Ownership Plan or Stock Option Plan of An Overseas Listed Company,” also known as “Circular 78.” It is not clear whether Circular 78 covers all forms of equity compensation plans or only those that provide for the granting of stock options. For any plans that are so covered and are adopted by a non-PRC listed company, such as our company, after April 6, 2007, Circular 78 requires all participants who are PRC citizens to register with and obtain approvals from SAFE prior to their participation in the plan. In addition, Circular 78 also requires PRC citizens to register with SAFE and make the necessary applications and filings if they participated in an overseas listed company’s covered equity compensation plan prior to April 6, 2007. We believe that the registration and approval requirements contemplated in Circular 78 will be burdensome and time consuming. 

 

Failure to comply with the United States Foreign Corrupt Practices Act could subject us to penalties and other adverse consequences.

 

As we are a Delaware corporation and a U.S. publicly listed company, we are subject to the United States Foreign Corrupt Practices Act, which generally prohibits U.S. companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Some foreign companies, including some that may compete with our company, may not be subject to these prohibitions. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices may occur from time-to-time in the PRC. We can make no assurance, however, that our employees or other agents will not engage in conduct for which we might be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations.

 

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Under the Enterprise Income Tax Law, we may be classified as a “resident enterprise” of China. Such classification will likely result in unfavorable tax consequences to us and our non-PRC stockholders.

 

Under the Enterprise Income Tax Law, or EIT Law, an enterprise established outside the PRC with its “de facto management body” within the PRC is considered a resident enterprise and will be subject to the enterprise income tax at the rate of 25% on its worldwide income. The “de facto management body” is defined as the organizational body that effectively exercises overall management and control over production and business operations, personnel, finance and accounting, and properties of the enterprise. It remains unclear how the PRC tax authorities will interpret such a broad definition. If the PRC tax authorities determine that we should be classified as a resident enterprise, then our worldwide income will be subject to income tax at a uniform rate of 25%, which may have a material adverse effect on our financial condition and results of operations. However, it remains unclear how the PRC tax authorities will interpret the PRC tax resident treatment of an offshore company, like us, having indirect ownership interests in PRC enterprises through intermediary holding vehicles.

 

Moreover, under the EIT Law, foreign shareholders of an entity that is classified as a PRC resident enterprise may be subject to a 10% withholding tax upon dividends payable by such entity, unless the jurisdiction of incorporation of the foreign shareholder of such entity has a tax treaty with the PRC that provides for a reduced rate of withholding tax, and gains realized on the sale or other disposition of shares, if such income is sourced from within the PRC. It remains unclear whether the dividends payable by our PRC subsidiary or the gains our foreign shareholders may realize will be regarded as income from sources within the PRC if we are classified as a PRC resident enterprise. Any such tax will reduce the returns on your investment in our Shares.

 

Because our business is located in the PRC, we have experienced challenges in establishing and implementing adequate management, legal and financial controls, which we are required to do in order to comply with U.S. securities laws.

 

PRC companies have historically not adopted a Western style of management and financial reporting concepts and practices, which includes strong corporate governance, internal controls and, computer, financial and other control systems. Most of our middle and top management staff are not educated and trained in the Western system, and we may have difficulty hiring new employees in the PRC with such training. In addition, we need to rely on a new and developing communication infrastructure to efficiently transfer our information from retail outlets to our headquarters. As a result of these factors, we have had challenges in implementing disclosure controls, collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet Western standards. We have experienced difficulties in implementing and maintaining adequate internal controls as required under Section 404 of the Sarbanes-Oxley Act of 2002. This has resulted in significant deficiencies or material weaknesses in our internal controls, which could impact the reliability of our financial statements and prevent us from complying with Commission rules and regulations and the requirements of the Sarbanes-Oxley Act of 2002. Any such deficiencies, weaknesses or lack of compliance could have a materially adverse effect on our business. 

 

If we continue to fail to maintain effective internal control over financial reporting or effective disclosure controls and procedures, the price of our common stock may be adversely affected.

 

We are required to establish and maintain appropriate internal control over financial reporting and put in place appropriate disclosure controls and procedures to allow our management to make timely decisions regarding required disclosures. Failure to establish those controls, or any failure of those controls once established, could adversely impact our public disclosures regarding our business, financial condition or results of operations. Any failure of our internal control over financial reporting could also prevent us from maintaining accurate accounting records and discovering accounting errors and financial fraud.

 

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Since we became public, our management has continually determined that we had a material weakness in our internal control over financial reporting due to some problems with cash management, as well as continued ineffective disclosure controls and procedures, and other significant deficiencies due to inadequate controls over the appropriate approval procedures for certain material transactions, inadequate controls over certain material cash transactions, and lack of technical competency in review and recording of non-routine or complex transactions. Moreover, our management concluded that our disclosure controls and procedures continued to be ineffective this year because we continued to fail to disclose the entry into certain material agreements within the time periods required by the Commission.

 

Although we are evaluating how to improve the effectiveness of our disclosure controls and procedures and are evaluating additional remedial measures, such efforts may not be successful. In addition, management’s assessment of internal control over financial reporting may identify additional material weaknesses or significant deficiencies that need to be addressed or other potential matters that may raise concerns for investors. Any actual or perceived material weaknesses or significant deficiencies that need to be addressed in our internal control over financial reporting, or the actual or perceived ineffectiveness of our disclosure controls and procedures could have an adverse impact on the price of our common stock.

 

You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions in China based upon U.S. laws, including the federal securities laws, or other foreign laws against us or our management.

 

All of our current operations, including the manufacturing and distribution of jewelry, are conducted in China. Most of our directors and officers are nationals and residents of China. All or substantially all of the assets of these persons are located outside the United States. As a result, it may not be possible to effect service of process within the United States or elsewhere outside China upon these persons. In addition, uncertainty exists as to whether the courts of China would recognize or enforce judgments of U.S. courts obtained against us or such officers and/or directors predicated upon the civil liability provisions of the securities laws of the United States or any state thereof, or be competent to hear original actions brought in China against us or such persons predicated upon the securities laws of the United States or any state thereof.

 

Inflation in China may inhibit our ability to conduct business in China.

 

In recent years, the Chinese economy has experienced periods of rapid expansion and high rates of inflation. Rapid economic growth can lead to growth in the money supply and rising inflation. If prices for our products rise at a rate that is insufficient to compensate for the rise in the costs of supplies, it may have an adverse effect on profitability. These factors have led to the adoption by Chinese government, from time to time, of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation. High inflation may, in the future, cause Chinese government to impose controls on credit and/or prices, or to take other action, which could inhibit economic activity in China, and thereby harm the market for our products.

 

Governmental control of currency conversions could prevent us from paying dividends.

 

Shortages in the availability of foreign currency may restrict the ability of our PRC subsidiaries to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy their foreign currency denominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade-related transactions can be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. However, approval from appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay dividends in foreign currencies to our security-holders.

 

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Currency fluctuations and restrictions on currency exchange may adversely affect our business, including limiting our ability to convert Chinese Renminbi into foreign currencies and, if Chinese Renminbi were to decline in value, reducing our revenue in U.S. dollar terms.

 

Our reporting currency is the U.S. dollar and our operations in China use their local currency, the Renminbi, as their functional currency. Substantially all of our revenue and expenses are in Chinese Renminbi. We are subject to the effects of exchange rate fluctuations with respect to any of these currencies. For example, the value of the Renminbi depends to a large extent on Chinese government policies and China’s domestic and international economic and political developments, as well as supply and demand in the local market. Since July 2005, the RMB is no longer pegged to the U.S. dollar. Although the People’s Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate significantly in value against the U.S. dollar in the medium to long term. Moreover, it is possible that in the future PRC authorities may lift restrictions on fluctuations in the RMB exchange rate and lessen intervention in the foreign exchange market. We can offer no assurance that Chinese Renminbi will be stable against the U.S. dollar or any other foreign currency.

 

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 that 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.

 

Risks Related to the VIE Agreements

 

If the PRC government determines that the contractual arrangements through which we control Wuhan Kingold do not comply with applicable regulations, our business could be adversely affected.

 

Although we believe our contractual relationships through which we control Wuhan Kingold comply with current licensing, registration and regulatory requirements of the PRC, we 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 our structure or operating arrangements do not comply with applicable law, it could revoke our business and operating licenses, require us to discontinue or restrict our operations, restrict our right to collect revenues, require us to restructure our operations, impose additional conditions or requirements with which we may not be able to comply, impose restrictions on our business operations or on our customers, or take other regulatory or enforcement actions against us that could be harmful to our business.

 

The PRC government may determine that the VIE Agreements are not in compliance with applicable PRC laws, rules and regulations.

 

Vogue-Show manages and operates our gold jewelry business through Wuhan Kingold pursuant to the rights it holds under the VIE Agreements. Almost all economic benefits and risks arising from Wuhan Kingold’s operations are transferred to Vogue-Show under these agreements.

 

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There are risks involved with the operation of our business in reliance on the VIE Agreements, including the risk that the VIE Agreements may be determined by PRC regulators or courts to be unenforceable. Our PRC counsel has provided a legal opinion that the VIE Agreements are binding and enforceable under PRC law, but has further advised that if the VIE Agreements were for any reason determined to be in breach of any existing or future PRC laws or regulations, the relevant regulatory authorities would have broad discretion in dealing with such breach, including:

 

¨ imposing economic penalties;

 

¨ discontinuing or restricting the operations of Vogue-Show or Wuhan Kingold;

 

¨ imposing conditions or requirements in respect of the VIE Agreements with which Vogue-Show may not be able to comply;

 

¨ requiring our company to restructure the relevant ownership structure or operations;

 

¨ taking other regulatory or enforcement actions that could adversely affect our company’s business; and

 

¨ revoking the business licenses and/or the licenses or certificates of Vogue-Show, and/or voiding the VIE Agreements.

 

Any of these actions could adversely affect our ability to manage, operate and gain the financial benefits of Wuhan Kingold, which would have a material adverse impact on our business, financial condition and results of operations.

 

Our ability to manage and operate Wuhan Kingold under the VIE Agreements may not be as effective as direct ownership.

 

We conduct our jewelry processing and sales businesses in the PRC and generate virtually all of our revenues through the VIE Agreements. Our plans for future growth are based substantially on growing the operations of Wuhan Kingold. However, the VIE Agreements may not be as effective in providing us with control over Wuhan Kingold as direct ownership. Under the current VIE arrangements, as a legal matter, if Wuhan Kingold fails to perform its obligations under these contractual arrangements, we may have to (i) incur substantial costs and resources to enforce such arrangements, and (ii) reply on legal remedies under PRC law, which we cannot be sure would be effective. Therefore, if we are unable to effectively control Wuhan Kingold, it may have an adverse effect on our ability to achieve our business objectives and grow our revenues.

 

As the VIE agreements are governed by PRC law, we would be required to rely on PRC law to enforce our rights and remedies under them; PRC law may not provide us with the same rights and remedies as are available in contractual disputes governed by the law of other jurisdictions.

 

The VIE Agreements are governed by the PRC law and provide for the resolution of disputes through court proceedings pursuant to PRC law. If Wuhan Kingold or its shareholders fail to perform the obligations under the VIE Agreements, we would be required to resort to legal remedies available under PRC law, including seeking specific performance or injunctive relief, or claiming damages. We cannot be sure that such remedies would provide us with effective means of causing Wuhan Kingold to meet its obligations, or recovering any losses or damages as a result of non-performance. Further, the legal environment in China is not as developed as in other jurisdictions. Uncertainties in the application of various laws, rules, regulations or policies in PRC legal system could limit our liability to enforce the VIE Agreements and protect our interests.

 

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The VIE Agreements may be subject to audit or challenge by PRC tax authorities. A finding that we owe additional taxes could substantially reduce our net earnings and the value of your investment

 

Under PRC laws and regulations, arrangements and transactions among affiliated parties may be subject to audit or challenge by the PRC tax authorities. We could face material and adverse tax and financial consequences if the PRC tax authorities determine that the VIE Agreements do not represent arm’s-length prices. As a result of such a determination, the PRC tax authorities could adjust any of the income in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among other things, result in a reduction of expense deductions for PRC tax purposes recorded by us or Wuhan Kingold or an increase in taxable income, all of which could increase our tax liabilities. In addition, the PRC tax authorities may impose late payment fees and other penalties on us or Wuhan Kingold for under-paid taxes.

 

Our shareholders have potential conflicts of interest with us which may adversely affect our business.

 

Zhihong Jia is our Chief Executive Officer and our Chairman, and is also the largest shareholder of Wuhan Kingold. There could be conflicts that arise from time to time between our interests and the interests of Mr. Jia. There could also be conflicts that arise between us and Wuhan Kingold that would require our shareholders and Wuhan Kingold’s shareholders to vote on corporate actions necessary to resolve the conflict. There can be no assurance in any such circumstances that Mr. Jia will vote his shares in our best interest or otherwise act in the best interests of our company. If Mr. Jia fails to act in our best interests, our operating performance and future growth could be adversely affected. In addition, some or all of our shareholders could violate the non-competition agreements they have signed with our company by diverting business opportunities from our company to others. In such event, our business, financial condition and results of operation could be adversely affected. 

 

We rely on the approval certificates and business license held by Vogue-Show and any deterioration of the relationship between Vogue-Show and Wuhan Kingold could materially and adversely affect our business operations.

 

We operate our jewelry processing and sales businesses in China on the basis of the approval certificates, business license and other requisite licenses held by Vogue-Show. There is no assurance that Vogue-Show will be able to renew its license or certificates when their terms expire with substantially similar terms as the ones they currently hold.

 

Further, our relationship with Wuhan Kingold is governed by the VIE Agreements that are intended to provide us with effective control over the business operations of Wuhan Kingold. However, the VIE Agreements may not be effective in providing control over the application for and maintenance of the licenses required for our business operations. Wuhan Kingold could violate the VIE Agreements, go bankrupt, suffer from difficulties in its business or otherwise become unable to perform its obligations under the VIE Agreements and, as a result, our operations, reputations and business could be severely harmed.

 

If Vogue-Show exercises the purchase options it holds over Wuhan Kingold’s share capital and assets pursuant to the VIE Agreements, the payment of the purchase price could materially and adversely affect our financial position.

 

Under the VIE Agreements, Wuhan Kingold’s shareholders have granted Vogue-Show a ten-year option to purchase 100% of the share capital in Wuhan Kingold at a price determined by appraisal by an asset evaluation institution to be jointly appointed by Vogue-Show and Wuhan Kingold’s shareholders. Concurrently, Wuhan Kingold granted Vogue-Show a ten-year option to purchase Wuhan Kingold’s assets at a price determined by appraisal by such asset evaluation institution. As Wuhan Kingold is already our contractually controlled affiliate, Vogue-Show’s exercising of the above two options would not bring immediate benefits to our company, and payment of the purchase prices could adversely affect our financial position.

 

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Risks Related to Our Common Stock

 

Following the exercise of his Call Option, our Chairman and Chief Executive Officer would exercise significant influence over us.

 

Our Chairman and Chief Executive Officer, Zhihong Jia, will beneficially own or control approximately 25.6% of our outstanding shares if he chooses to fully exercise his Call Option to purchase shares of Famous Grow. Mr. Jia thereafter could possibly have a controlling influence in determining the outcome of any corporate transaction or other matters submitted to our stockholders for approval, including mergers, consolidations and the sale of all or substantially all of our assets, election of directors, and other significant corporate actions. Mr. Jia may also have the power to prevent or cause a change in control. In addition, without the consent of Mr. Jia, we could be prevented from entering into transactions that could be beneficial to us. The interests of Mr. Jia may differ from the interests of our other stockholders.

 

We do not foresee paying cash dividends in the foreseeable future and, as a result, our investors’ sole source of gain, if any, will depend on capital appreciation, if any.

 

We do not plan to declare or pay any cash dividends on our shares of common stock in the foreseeable future and currently intend to retain any future earnings for funding growth. As a result, investors should not rely on an investment in our securities if they require the investment to produce dividend income. Capital appreciation, if any, of our shares may be investors’ sole source of gain for the foreseeable future. Moreover, investors may not be able to resell their shares of our company at or above the price they paid for them.

 

Because we do not intend to pay dividends on our shares, stockholders will benefit from an investment in our shares only if those shares appreciate in value. 

 

We currently intend to retain all future earnings, if any, for use in the operations and expansion of the business. As a result, we do not anticipate paying cash dividends in the foreseeable future. Any future determination as to the declaration and payment of cash dividends will be at the discretion of our board of directors and will depend on factors our board of directors deems relevant, including among others, our results of operations, financial condition and cash requirements, business prospects, and the terms of our credit facilities, if any, and any other financing arrangements. Accordingly, realization of a gain on stockholders’ investments.

 

The market price for our shares may be volatile.

 

The market price for our shares is likely to be highly volatile and subject to wide fluctuations in response to factors including the following:

 

¨ actual or anticipated fluctuations in our quarterly operating results and changes or revisions of our expected results;

 

¨ changes in financial estimates by securities research analysts;

 

¨ conditions in the markets for our products;

 

¨ changes in the economic performance or market valuations of companies specializing in gold jewelry;

 

¨ announcements by us, or our competitors of new products, acquisitions, strategic relationships, joint ventures or capital commitments;

 

¨ addition or departure of senior management and key personnel; and

 

¨ fluctuations of exchange rates between the RMB and the U.S. dollar.

 

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The following table sets forth, for the periods indicated, the range of quarterly high and low closing sales prices for our common stock in U.S. dollars. Prior to our listing on the NASDAQ Capital Market, these quotations reflect inter- dealer prices, without retail mark-up, mark-down or commission, involving our common stock during each calendar quarter, and may not represent actual transactions.

 

   High   Low 
2018          
           
First Quarter  $1.04   $0.75 
Second Quarter  $1.27   $1.00 
Third Quarter  $1.44   $1.21 
Fourth Quarter  $2.02   $1.23 
           
2017          
           
First Quarter  $1.38   $1.09 
Second Quarter  $2.03   $1.06 
Third Quarter  $2.06   $1.53 
Fourth Quarter  $2.31   $1.92 

 

Volatility in the price of our shares may result in shareholder litigation that could in turn result in substantial costs and a diversion of our management’s attention and resources.

 

The financial markets in the United States and other countries have experienced significant price and volume fluctuations, and market prices have been and continue to be extremely volatile. Volatility in the price of our shares may be caused by factors outside of our control and may be unrelated or disproportionate to our results of operations. In the past, following periods of volatility in the market price of a public company’s securities, shareholders have frequently instituted securities class action litigation against that company. Litigation of this kind could result in substantial costs and a diversion of our management’s attention and resources.

 

SEC regulations concerning conflict minerals could negatively impact our business.

 

In response to provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act, in August 2013, the Securities and Exchange Commission adopted annual disclosure and reporting requirements regarding the use of certain minerals, known as “conflict minerals,” mined from the Democratic Republic of Congo and adjoining countries. Conflict minerals include gold.

 

These requirements and the changes we may adopt as a result of compliance with them may prove both costly and time-consuming. The disclosure requirements, which began in 2014, necessitated due diligence efforts to identify the sources of conflict minerals contained in our products. Because we currently acquire our gold directly from the Exchange or leading Chinese banks, or lease it from leading Chinese banks, there is uncertainty as to the amount of diligence we may be able to do on our supply chain.

 

Implementation of these regulations will require us to divert management attention and resources away from our business operations. In addition, as conflict-free minerals may only be available from a limited pool of suppliers, it may or may not include the Exchange, our primary source of gold. In addition, if we are unable to sufficiently verify the origin of all conflict minerals used in our products, we may face reputational challenges with customers, stockholders, or other stakeholders.

 

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Our quarterly results may fluctuate because of many factors and, as a result, investors should not rely on quarterly operating results as indicative of future results.

 

Fluctuations in operating results or the failure of operating results to meet the expectations of public market analysts and investors may negatively impact the value of our securities. Quarterly operating results may fluctuate in the future due to a variety of factors that could affect revenues or expenses in any particular quarter. Fluctuations in quarterly operating results could cause the value of our securities to decline. Investors should not rely on quarter-to-quarter comparisons of results of operations as an indication of future performance. As a result of the factors listed below, it is possible that in future periods the results of operations may be below the expectations of public market analysts and investors. This could cause the market price of our securities to decline. Factors that may affect our quarterly results include:

 

¨ vulnerability of our business to a general economic downturn in China;

 

¨ fluctuation and unpredictability of costs related to the gold, platinum and precious metals and other commodities used to manufacture our products;

 

¨ seasonality of our business;

 

¨ changes in the laws of the PRC that affect our operations;

 

¨ competition from our competitors; and

 

¨ our ability to obtain all necessary government certifications and/or licenses to conduct our business.

 

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ITEM 1B. UNRESOLVED STAFF COMMENTS

 

Not Applicable.

 

ITEM 2. PROPERTIES

 

Our principal executive offices and our factory are located at No. 8 Han Huang Road, Jiang’an District, Wuhan, Hubei Province, China, with a total construction area of approximately 74,933 square feet built on a parcel of state owned land. We own all of our office and factory facilities except for land with regard to which we own land use rights. There is no private ownership of land in the PRC. All land ownership is held by the government of the PRC, its agencies and collectives. Land use rights can be transferred upon approval by the land administrative authorities of the PRC (State Land Administration Bureau) upon payment of the required land transfer fee. Our land use certificate for our current offices and factory expires on January 26, 2055.

  

After the Jewelry Park transfer, our ownership interests in the land use right to the Jewelry Park has been transferred, and we no longer own the office, factory and store spaces located in the Jewelry Park. 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 $87,000 (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.

 

We believe that our current offices and facilities are adequate to meet our needs, and that additional facilities will be available for lease, if necessary, to meet our future needs.

 

ITEM 3. LEGAL PROCEEDINGS

 

From time to time, we may be subject to legal proceedings and claims in the ordinary course of business. We are not currently a party to any litigation the outcome of which, if determined adversely to us, would individually or in the aggregate be reasonably expected to have a material adverse effect on our business, operating results, cash flows or financial condition.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

  

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PART II 

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Information

 

Our common stock is listed on the NASDAQ Capital Market under the symbol “KGJI.” Prior to August 18, 2010, our common stock was listed for quotation on the OTC Bulletin Board or, the OTCBB, under the symbol “KGJI”.

 

The following table sets forth, for the periods indicated, the range of quarterly high and low closing sales prices for our common stock in U.S. dollars. Prior to our listing on the NASDAQ Capital Market, these quotations reflect inter- dealer prices, without retail mark-up, mark-down or commission, involving our common stock during each calendar quarter, and may not represent actual transactions.

 

   High   Low 
2018          
           
First Quarter  $1.04   $0.75 
Second Quarter  $1.27   $1.00 
Third Quarter  $1.44   $1.21 
Fourth Quarter  $2.02   $1.23 
           
2017          
           
First Quarter  $1.38   $1.09 
Second Quarter  $2.03   $1.06 
Third Quarter  $2.06   $1.53 
Fourth Quarter  $2.31   $1.92 

 

On November 9, 2018, the Company received a notification letter from NASDAQ advising the Company that for 30 consecutive business days preceding the date of the Notice, the bid price of the Company’s common stock had closed below the $1.00 per share minimum required for continued listing on The NASDAQ Capital Market, pursuant to the NASDAQ Listing Rule 5550(a)(2) requirement for continued listing on NASDAQ (the “Minimum Bid Price Rule”). The Company was provided 180 calendar days, or until May 8, 2019, to regain compliance with the Minimum Bid Price Rule. While there can be no guarantee that the Company will regain compliance with the NASDAQ continued listing requirement, the Company has been monitoring the bid price for its common stock and will consider available options to resolve the deficiency and regain compliance with the NASDAQ’s Minimum Bid Price Rule.  

  

Holders

 

On March 29, 2019, the closing sale price of our shares of common stock was $0.86 per share and there were 66,113,502 shares of our common stock outstanding. On that date, our shares of common stock were held by approximately 73 shareholders of record. The number of record holders was determined from the records of our transfer agent and does not include beneficial owners of our common stock whose shares are held in the names of various security brokers, dealers, and registered clearing agencies. 

 

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Dividend Policy

 

Although we paid a one-time special dividend of $0.08 per share in 2014, we currently intend to retain all available funds and any future earnings for use in the operation and expansion of our business and do not anticipate paying any cash dividends on our common stock for the foreseeable future. Investors seeking cash dividends in the immediate future should not purchase our common stock. Future cash dividends, if any, will be at the discretion of our board of directors and will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors as our board of directors may deem relevant. We can pay dividends only out of our profits or other distributable reserves and dividends or distribution will only be paid or made if we are able to pay our debts as they fall due in the ordinary course of business. Payment of future dividends, if any, will be at the discretion of the board of directors after taking into account various factors, including current financial condition, operating results, current and anticipated cash needs and regulations governing dividend distributions by wholly foreign owned enterprises in China. 

 

Purchases of Equity Securities

 

During the year ended December 31, 2018, we did not purchase any of our equity securities, nor did any person or entity purchase any of our equity securities on our behalf.

 

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ITEM 6. SELECTED FINANCIAL DATA

 

The following table presents a summary of our selected historical financial data derived from our last 5 years of Financial Statements. Because this information is only a summary and does not provide all of the information contained in our Financial Statements, including the related notes, you should read “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Financial Statements for each year for more detailed information including, 

 

KINGOLD JEWELRY, INC.

Five-Year Summary of Selected Financial Data

(in millions, except for the per share data)

 

   As of and for the years ended December 31, 
   2018   2017   2016   2015   2014 
Consolidated Statement of Operations Data:                         
Net sales  $2,475.6   $2,009.7   $1,420.6   $1,000.1   $1,107.5 
Cost of sales  $(2,211.3)  $(1,809.8)  $(1,274.2)  $(961.8)  $(1,031.3)
Gross profit  $264.3   $199.9   $146.4   $38.3   $76.2 
Operating expenses  $(12.2)  $(13.9)  $(12.4)  $(8.3)  $(10.6)
Other expenses, net  $(170.9)  $(150.6)  $(8.4)  $(2.1)  $(1.5)
Income tax provision  $(31.7)  $(9.2)  $(32.6)  $(6.3)  $(16.8)
Net income  $49.5   $26.2   $92.9   $21.6   $47.3 
Share date                         
Weighted average shares - basic   66,113,502    66,050,498    65,991,487    65,963,502    65,918,768 
Weighted average shares - diluted   66,192,537    66,472,046    66,337,129    65,963,502    66,007,075 
Per share data                         
Earnings per share - basic  $0.75   $0.40   $1.41   $0.33   $0.72 
Earnings per share – dilute  $0.75   $0.39   $1.40   $0.33   $0.72 
Selected Consolidated Balance Sheet Data:                         
Cash  $0.2   $5.0   $21.3   $3.1   $1.3 
Restricted cash – current  $4.8   $5.5   $52.8   $26.6   $14.8 
Restricted cash – non-current  $7.8   $7.4   $7.6   $-   $- 
Inventory  $127.0   $135.0   $119.4   $298.3   $212.4 
Investments in gold - current  $1,593.6   $1,562.9   $281.9   $-   $- 
Investments in gold – non-current  $700.2   $957.1   $1,493.9   $-   $- 
Total assets  $2,699.8   $3,042.3   $2,262.4   $469.6   $311.7 
Short term loans  $1,034.9   $962.1   $234.7   $55.5   $45.1 
Long term loans  $515.5   $789.4   $1,224.8   $30.8   $3.7 
Related parties loans – short term  $72.7   $307.4   $-   $-   $- 
Related parties loans – long term  $373.3   $567.8   $460.8   $-   $- 
Total liabilities  $2,061.5   $2,652.1   $1,979.9   $203.9   $53.5 
Total stockholders’ equity  $638.3   $390.2   $282.5   $265.7   $258.2 

 

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

 

Forward-Looking Information

 

The following discussion αnd αnαlysis of the consolidαted finαnciαl condition αnd results of operαtions should be reαd in conjunction with our consolidαted finαnciαl stαtements αnd relαted notes αppeαring elsewhere. This discussion αnd αnαlysis contαins forwαrd-looking stαtements thαt involve risks, uncertαinties αnd αssumptions. Our αctuαl results could differ mαteriαlly from the results described in or implied by these forwαrd-looking stαtements αs α result of vαrious fαctors. See the “Cαutionαry Stαtement for Purposes of the “Sαfe Hαrbor Stαtement Under the Privαte Securities Litigαtion Reform Act of 1995 immediαtely preceding Pαrt I of this Report.

 

Key Components of Operating Results

 

Sources of Revenue

 

We derive our revenue almost entirely from the sales of 24-karat jewelry and Chinese ornaments and from design and processing fees we receive from other jewelry companies who hire us to design and produce 24-karat jewelry and Chinese ornaments using gold they supply us. We offer a wide range of in-house designed products including but not limited to gold necklaces, rings, earrings, bracelets, and pendants. In our jewelry business, we only sell on a wholesale basis to distributors and retailers. Pricing of our jewelry business products is made at the time of sale based upon the then- current price of gold and sales are made on a cash or credit on delivery basis.

 

We have developed our investments in gold as a business. We sell our investment gold products through banks. Similar to our jewelry business, pricing of our investment gold products is made at the time of sale based upon the then-current price of gold, and sales are made on a cash or credit on delivery basis.

 

Cost of Sales

 

Our cost of sales consists principally of the cost for raw materials, primarily gold. We generally purchase gold directly from the Shanghai Gold Exchange, of which we are a member. We lease gold from leading commercial banks in China to increase our gold supply and fuel our growth. We generally do not enter into long term purchase agreements for gold. During recent years, the price of gold on the international gold market has experienced periods of significant fluctuation. We have been attempting to offset gold price fluctuations by locking in the price at the time an order is placed, as well as passing on the price to purchasers.

 

Gross Profit, Gross Margin and Inventory Carrying Value

 

Our gross profit margin and profitability as well as the carrying value of our inventory are affected by changes in the price of gold. If there is an increase in the price of gold that increases our production costs beyond the amount we may be able to pass to our customers, it has a negative effect on our gross margin and profitability. Furthermore, the carrying value of our inventory may be affected if the price of gold decreases relative to the price that we paid for that inventory. At December 31, 2018 and 2017, we had approximately 3.7 and 3.7 metric tons of gold in our inventory for production, all of which had been sold in excess of the carrying value by the date of this report.

 

Inflation

 

Although the Chinese government has implemented measures to curb inflation, it is foreseeable that the Chinese economy may remain under inflationary pressure at least for the near term. It is difficult to estimate the impact of continued rise in inflation on us. On the one hand, inflation may lead to, among other things, higher operating expenses for us and erosion of our customers’ purchases, adversely affecting our results. On the other hand, inflation may also make our products more attractive to Chinese consumers who traditionally have perceived gold as a safe haven investment from inflation.

 

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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 consolidated financial statements included elsewhere in this Annual Report on Form 10-K. 

 

Principles of Consolidation

 

Our consolidated financial statements include the financial statements of Kingold, Dragon Lead, Wuhan Vogue-Show and Wuhan Kingold. All inter-company balances and transactions have been eliminated in consolidation.

 

Use of Estimates

 

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements as well as the reported amounts of revenues and expenses during the reporting period. Significant estimates required to be made by management include, but are not limited to, useful lives of property, plant and equipment, one-time transition tax, the recoverability of long-lived assets, inventory valuation, deferred income tax, allowance for investments in gold and share based compensation. Actual results could differ from those estimates.

  

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 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 our 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 investments 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. Since the investments in gold are pledged for the bank loans, any material decrease in market value may negatively impact the loan covenants.

 

Comprehensive Income (Loss)

 

Comprehensive income consists of two components, net income and other comprehensive income (loss). The unrealized gain or loss resulting from the change of the fair market value and the foreign currency translation gain or loss resulting from translation of the financial statements expressed in RMB to US$ are reported in other comprehensive income in the consolidated statements of income and comprehensive income and the consolidated statements of changes in equity and is net of tax.

 

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Fair Value of Financial Instruments

 

We follow 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, 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 all current assets and liabilities approximate their fair values because of the short-term nature of these instruments. We 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. We use quoted prices in active markets to measure the fair value of investments in gold.

 

Accounting for the Impairment of Long-Lived Assets

 

The long-lived assets held and used by us are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable. It is possible that these assets could become impaired as a result of technology or other industry changes. The recoverability value of an asset to be held and used is determined by comparing the carrying amount of such asset against the future net undiscounted cash flows to be generated by the asset. Our principal long-lived assets are our property, plant and equipment assets.

 

We must make various assumptions and estimates regarding estimated future cash flows and other factors in determining the fair values of the respective assets. We use set criteria that are reviewed and approved by various levels of management, and estimate the fair value of our reporting units by using undiscounted cash flow analyses. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for the underlying assets at such time. Any such resulting impairment charges could be material to our results of operations.

 

If the value of such an asset is determined to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or the fair value, less disposition costs. No events or changes in our business or circumstances required us to test for impairment of our long-lived assets during 2018 and 2017, and accordingly, we did not recognize any impairment loss during these periods.

 

Competitive pricing pressure and changes in interest rates could materially and adversely affect our estimates of future net cash flows to be generated by our long-lived assets, and thus could result in future impairment losses. 

 

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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.

 

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. Payment term is typically due within 30 days.  

 

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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.

 

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’s contract liabilities in terms of customer deposit are immaterial.

 

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. 

 

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Results of Operations

 

YEARS ENDED DECEMBER 31, 2018 AND 2017

 

The following table sets forth information from our statements of income and comprehensive income for the years ended December 31, 2018 and 2017 in U.S. dollars.

 

KINGOLD JEWELRY, INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(IN U.S. DOLLARS)

 

 

   For the years ended December 31, 
   2018   2017 
NET SALES  $2,475,666,092   $2,009,732,643 
COST OF SALES          
Cost of sales   (2,210,204,664)   (1,808,612,014)
Depreciation   (1,138,650)   (1,193,453)
Total cost of sales   (2,211,343,314)   (1,809,805,467)
           
GROSS PROFIT   264,322,778    199,927,176 
           
OPERATING EXPENSES          
Selling, general and administrative expenses   11,564,285    13,444,222 
Stock compensation expenses   21,456    33,014 
Depreciation   576,840    444,297 
Amortization, other   11,426    11,188 
Total operating expenses   12,174,007    13,932,721 
           
INCOME FROM OPERATIONS   252,148,771    185,994,455 
           
OTHER INCOME (EXPENSES)          
Other income, net   63,449    66,642 
Interest income   1,763,595    2,251,972 
Interest expense, including $12,247,690 and $10,958,016 of amortization of financing costs for the years ended December 31, 2018 and 2017   (172,692,768)   (152,945,558)
Total other expenses, net   (170,865,724)   (150,626,944)
           
INCOME FROM OPERATIONS BEFORE TAXES   81,283,047    35,367,511 
           
INCOME TAX PROVISION (BENEFIT)          
Current   26,972,159    17,678,757 
Deferred   4,764,174    (8,503,898)
Total income tax provision   31,736,333    9,174,859 
           
NET INCOME   49,546,714    26,192,652 
           
OTHER COMPREHENSIVE INCOME (LOSS)          
Unrealized gain related to investments in gold, net of tax   81,006,008    58,650,446 
Total foreign currency translation gain (loss)   (26,365,820)   22,752,426 
Total Other comprehensive gain   54,640,188    81,402,872 
           
COMPREHENSIVE INCOME  $104,186,902   $107,595,524 
           
Earnings per share          
Basic  $0.75   $0.40 
Diluted  $0.75   $0.39 
           
Weighted average number of shares          
Basic   66,113,502    66,050,498 
Diluted   66,192,537    66,472,046 

 

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Fiscal Year Ended December 31, 2018 Compared to Fiscal Year Ended December 31, 2017  

 

Net Sales

 

Net sales for the year ended December 31, 2018 were $2,475.6 million, an increase of $465.9 million, or 41%, from net sales of $2,009.7 million for the year ended December 31, 2017. For the year ended December 31, 2018, our branded production sales accounted for 97.8% of the total sales and customized production sales accounted for 2.2% of the total sales. When comparing with 2017, our branded production sales increased by $461.3 million or 23.5%, our customized production sales increased by $4.5 million or 9.3%.

 

The overall increase in our revenue in 2018 as compared to 2017 was due to the following combined factors: (1) Total sales volume (in terms of quantity sold) for branded production increased from 51.5 metric tons in 2017 to 62.9 metric tons in 2018, causing 11.4 metric tons or 22.1% increase. However, the average unit selling price for branded production remained stable in 2018, which was RMB 254.8 per gram in 2018, comparing to RMB 257.2 per gram in 2017, resulting a slightly decrease of 0.9%. (2) Total sales volume (in terms of quantity sold) for customized production remained stable in 2018, which was 51.3 metric tons in 2018, comparing to 51.8 metric tons in 2017. However, the average unit selling price for customized production increased from RMB 6.38 per gram in 2017 to RMB 6.89 per gram in 2018, causing 8.1% increase.

 

The increase in branded and customized production sales was attributable to the Company’s strengthened sales efforts and the increase in the market demand during the current year when market price of gold increased, which stimulated and inspired the customers to increase their investments on gold. 

  

   Gold sales for the twelve months ended December 31, 
         
   2018   2017 
           Sales/           Sales/ 
   Metric   Sales   Metric Ton   Metric   Sales   Metric Ton 
   Tons   ($ Million)   ($ Million)   Tons   ($ Million)   ($ Million) 
Total   114.2   $2,475.6   $39.6    103.4   $2,009.7   $39.0 
Branded   62.9   $2,421.9   $38.5    51.5   $1,960.4   $38.1 
Customized   51.3   $53.5   $1.0    51.9   $48.9   $0.9 
Others       $0.2             $0.4      

 

Cost of sales

 

Cost of sales for the year ended December 31, 2018 amounted to $2,211.3 million, an increase of $401.5 million, or 22% from $1,809.8 million for 2017. The increase was primarily due to the higher volume of the gold as a raw material used for our branded production.

 

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Gross profit

 

Gross profit for the year ended December 31, 2018 was $264.3 million, an increase of $64.4 million or 32%, from $199.9 million for 2017. The increase in our gross profit resulted from the following factors: (1) Due to increased sales volume from 103.4 metric tons in 2017 to 114.2 metric tons in 2018, the Company’s gross profit and gross margin for the year ended December 31, 2018 was positively affected. (2) The increased in unit selling price of customized productions impacted the gross margin.

 

The unit selling price of branded production was RMB 254.79 per gram for the year ended December 31, 2018, while the unit selling price of branded production was RMB 257.20 per gram for the year ended December 31, 2017, the unit selling price decreased by 0.9%. On the other hand, the unit cost of branded production was RMB 232.41 per gram for the year ended December 31, 2018, represented a decrease of RMB 4.73 or 2.0% from RMB 237.14 per gram for the year ended December 31, 2017. As a result, the unit margin of branded production was RMB 22.38 per gram for the year ended December 31, 2018 compared to RMB 20.06 per gram for the year ended December 31, 2017. Higher proportional decrease in unit cost than unit price for branded products led the increase in gross profit margin.

 

The unit selling price of customized production was RMB 6.89 per gram for the year ended December 31, 2018, while the unit selling price of customized production was RMB 6.38 per gram for the year ended December 31, 2017, the unit selling price increased by 8.1%. On the other hand, the unit cost of customized production was RMB 0.25 per gram for the year ended December 31, 2018, represented a decrease of RMB 0.02 or 7.6% from RMB 0.27 per gram for the year ended December 31, 2017. The reason that the unit selling price of our customized production is significantly lower than the unit selling price of our branded production is in customized production, a customer supplies the Company with the raw materials and the Company creates products per that customer’s instructions, whereas in branded production the Company generally purchases gold directly and manufactures and markets the products of its own.

 

Our overall gross margin for the year ended December 31, 2018 was 10.7%, a slight increase of 0.7% as compared to gross margin of 9.9% in 2017 due to above reasons.

 

Expenses

 

Total operating expenses for the year ended December 31, 2018 were $12.1 million, a decrease of $1.8 million or 13%, from $13.9 million for 2017. The decrease was mainly due to a $1.9 million decrease in the selling, general and administrative expenses. The decrease in the selling, general and administrative expenses in 2018 was due to gold inventory insurance charges increased by approximately $2.3 million, and recording of underpayment penalty as well as late payment interest related to one-time transition tax of approximately $0.9 million for the year ended December 31, 2018 comparing with the year ended December 31, 2017. The decrease in such expenses was in line with increase in purchases of gold inventory during the year and the decreased inventory level as of December 31, 2018 comparing to December 31, 2017.

 

Income taxes

 

Kingold Jewelry Inc is a Delaware corporation. However, all of our operations are conducted solely by our subsidiaries and VIE in the PRC. No income is earned in the United States. As a result, we did not generate any taxable income sourced from the U.S. for the years ended December 31, 2018 and 2017. 

 

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Recent U.S. federal tax legislation, commonly referred to as the Tax Cuts and Jobs Act (the “U.S. Tax Reform”), was signed into law on December 22, 2017. The U.S. Tax Reform 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 U.S. Tax Reform 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 one-time transition tax of approximately $10.8 million that represented management’s assessment of the amount of U.S. corporate income tax based on the deemed repatriation to the United States of the Company’s 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..

 

Our provision for income tax expense was $31.7 million for the year ended December 31, 2018, increased by $22.6 million, or 246%, from $9.2 million for 2017. The current income tax provision was approximately $26.9 million, increased from approximately $17.7 million in fiscal 2017 due to the increased income before tax resulted from the increased gross profit and decreased operating expenses, as well as the transition tax discussed above. The deferred tax provision was approximately $4.8 million, comparing with approximately $8.5 million deferred tax benefit in fiscal 2017 mainly due to unrealized gain related to the investment in gold. 

 

Net Income

 

For the foregoing reasons, our net income was $49.5 million for the year ended December 31, 2018, increased by $23.3 million or 89% from $26.2 million for fiscal year 2017 as a result of the matters described above.

 

Other Comprehensive Income

 

Other comprehensive gain was approximately $54.6 million for the year ended December 31, 2018, compared to other comprehensive gain of $81.4 million for the year ended December 31, 2017 due to the unrealized gain related to investment in gold and offset by the depreciation of RMB against the U.S. Dollar.

 

Liquidity and Capital Resources 

 

As of December 31, 2018, we had $0.2 million in cash and cash equivalents compared to $5.0 million as of December 31, 2017. As of December 31, 2018, we had $12.6 million in restricted cash compared to $12.9 million at December 31, 2017. This restricted cash (along with our Chairman and Chief Executive Officer’s personal credit) secures our obligations under our bank loans and gold lease agreements. We have financed our operations with cash flow generated from operations and through borrowing of bank loans as well as through private and public borrowings and offerings in the U.S. and Chinese capital markets.

 

Our one-time transition tax of approximately $10.8 million is expected to be due in 2019 with applicable late filing interest or penalty. We believe that the transition tax payment schedule should not have material adverse impact on our operations. We will consider obtaining additional financing from private and public borrowings and offerings in the U.S. and Chinese capital markets if necessary.

 

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As of December 31, 2018, we had total outstanding loans of $1,996.4 million (including $1,034.9 million short-term loans, $446.0 million from a related parties and $515.5 million long-term loans). As of December 31, 2017, we had total outstanding loans of $2,626.7 million (including $962.1 million short-term loans, $875.2 million from a related parties and $789.4 million long-term loans), representing a decrease of $630.3 million, or 24.0%. The amounts outstanding under these loans are presented in our financial statements as “loans”; the amounts outstanding under the third party loans are presented in our financial statements as “Third Party Loans”, and the amounts outstanding under the related party loan are presented in our financial statements as “Related Party Loan”. For additional information regarding our loans, please refer to Notes 5 and 7 in our audited consolidated financial statements included elsewhere in this Form 10-K.

 

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, expanding our sales through our online sales platform and an increase in our revenue in the following years due to the higher interest of inventing in gold to against the currency depreciation.

 

As of December 31, 2018 and 2017, the Company had positive working capital of $837.3 million and $768.3 million, respectively. 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 of this report. 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 financing to meet our capital requirements to fund our operations and growth plans in the ordinary course of business.

 

Cash Flow for the Years Ended December 31, 2018 and 2017 

 

Operating activities:

 

The net cash provided by operating activities for the year ended December 31, 2018 was $365.7 million, compared to $25.7 million of net cash used in operating activities in 2017. The increase of net cash provided by operating activities was mainly due to the increase in net income, the decrease in inventory purchased of $205 million because $769.3 million of gold for investment was released to inventory and processed during the year ended December 31, 2018, collections from value added tax recoverable of $78.0 million, an increase in income tax payable of $17.6 million, offset by our decrease in other payable and accrued expense of $3.7 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.

 

Our one-time transition tax of approximately $10.8 million is expected to be due in 2019 with applicable late filing interest or penalty. We believe that the transition tax payment schedule should not have material adverse impact on our operations. We will consider obtaining additional financing from private and public borrowings and offerings in the U.S. and Chinese capital markets if necessary.

 

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 accounting period due to above reasons.

 

Investing activities:

 

We used $0.1 million of net cash for investing activities for the year ended December 31, 2018, compared to $553.2 million spent in 2017. The significant decrease in the net cash used in the investing activities was mainly because we released gold investment of $769.3 million to inventory for production during the year ended December 31, 2018. However, we purchased gold for investment of $552 million in connection with our significant borrowings during the year ended December 31, 2017.

 

While our net cash used in investing activities did not fluctuate much historically, we expect that cash used in investing activities will continue to fluctuate significantly in the short-term as we continue to obtain financing from the banks which may need to purchase more gold as collateral.

 

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Financing activities:

 

Net cash used in financing activities was $367.6 million for the year ended December 31, 2018, compared with net cash provided by financing activities of $510.5 million for the year ended December 31, 2017. The increase in net cash used in financing activities was mainly due to the fact that the Company repaid significant amount of bank loans and related parties loans, but received less proceeds from various loans during the year, comparing to the year ended December 31, 2017.

 

We expect that cash generated from financing activities may increase significantly as a result of additional financing being obtained to meet the needs of expanded production.

 

Foreign Currency Translations

 

We use the U.S. dollar as the reporting currency for our financial statements. Our operations are conducted through our PRC operating subsidiary, Vogue-Show, and our functional currency is the Renminbi (“RMB”). Foreign currency transactions during the year are translated to the RMB at the approximate rates of exchange on the dates of transactions. Monetary assets and liabilities denominated in foreign currencies on the balance sheet are translated at the approximate rates of exchange at the respective balance sheet date. Non-monetary assets and liabilities are translated at the rates of exchange prevailing at the time that the asset or liability was acquired. Exchange gains or losses are recorded in the statement of operations.

 

Our financial statements are translated into U.S. dollars using the closing rate method. The balance sheet items are translated into U.S. dollars using the exchange rates at the respective balance sheet dates. The capital and various reserves are translated at historical exchange rates prevailing at the time of the transactions while income and expenses items are translated at the average exchange rate for the year. All gains and losses attributable to foreign currency exchange are recorded within equity.

 

The exchange rates used to translate amounts in RMB into U.S. dollars for the purposes of preparing the financial statements were as follows:

 

    December 31,
2018
    December 31,
2017
 
Balance sheet items, except for share capital, additional paid in capital and retained earnings, as of the period ended     US$1=RMB  6.8776       US$1=RMB 6.5064  
Amounts included in the statements of income and cash flows for the period     US$1=RMB 6.6163       US$1=RMB 6.7570  

 

Total translation loss recorded for the year ended December 31, 2018 was $26,365,820. Total translation gain recorded for the year ended December 31, 2017 was $22,752,426.

 

No representation is made that RMB amounts have been, or could be, converted into U.S. dollars at the above rates or at all. Although Chinese government regulations now allow convertibility of RMB for current account transactions, significant restrictions still remain. Hence, such translations should not be construed as representations that RMB can be converted into U.S. dollars at the above conversion rate, or any other rate.

 

The value of the RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in China’s political and economic conditions. Any significant revaluation of RMB may materially affect our financial condition in terms of U.S. dollar reporting.

 

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Off-Balance Sheet Arrangements

 

During the year ended December 31, 2017, we guaranteed payment for a related party of approximately $307.4 million (RMB 2,000 million) for two bank loans. Approximately $234.7 million (RMB 1.5 billion) loans were repaid upon maturity in January 2018 and February 2018, respectively. The remaining loan balance of 72.7 million (RMB 500 million) is still outstanding as of December 31, 2018. We guaranteed the payments for this related party.

 

During the year ended December 31, 2017, we guaranteed payments for a non-related party of approximately $30.7 million (RMB 200 million) in bank loans. On April 12, 2017, the bank loans were repaid upon maturity.

 

As of December 31, 2018 and 2017, we had no leased gold 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 December 31, 2018:

 

    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)   $ 515,477,020     $ -     $ 515,477,020     $ -     $ -  
One-time transition tax     11,660,927       11,660,927       -       -       -  
Short-term bank loans (2)     1,034,947,774       1,034,947,774       -       -       -  
Related party loans (3)     446,027,641       72,699,779       10,468,725       362,859,137       -  
Operating leases (4)      304,703        87,058       174,116         43,529       -  
Total   $ 2,008,418,065     $ 1,119,395,538     $ 526,119,861     $ 362,902,666     $ -  

 

(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, 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 years ended December 31, 2018 and 2017, the Company recorded $202,167 and $211,692 rent expense, respectively. As of December 31, 2018 and 2017, the Company had lease payables to Wuhan Huayuan of $443,992 and $263,740, respectively, which were included in other payables and accrued expenses.

 

51

 

 

Recent Accounting Pronouncements  

 

In February 2016, the FASB issued ASU 2016-02,"Leases" to provide a new comprehensive model for lease accounting. Under this guidance, lessees and lessors should apply a "right-of-use" model in accounting for all leases (including subleases) and eliminate the concept of operating leases and off-balance sheet leases. This guidance is effective for annual periods and interim periods within those annual periods beginning after December 15, 2018. Early adoption is permitted. The Company is evaluating the impact on its consolidated financial statements.

 

In February 2018, the FASB issued ASU 2018-02, which allows a reclassification from accumulated other comprehensive income to retained earnings for adjustments to tax effects that were originally recorded in other comprehensive income due to changes in the U.S. federal corporate income tax rate resulting from the enactment of the U.S. tax reform legislation, commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act. The Company does not expect this guidance will have a material impact on its consolidated financial statements.

 

In March 2018, the FASB issued guidance relative to Income Taxes (Topic 740) that adds various Securities and Exchange Commission (“SEC”) paragraphs pursuant to the issuance of the December 2017 SEC Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), which was effective immediately. The SEC issued SAB 118 to address concerns about reporting entities’ ability to timely comply with the accounting requirements to recognize all of the effects of the Tax Cuts and Jobs Act (the “Tax Act”) in the period of enactment. SAB 118 allows disclosure that timely determination of some or all of the income tax effects from the Tax Cuts and Jobs Act are incomplete by the due date of the financial statements and if possible, to provide a reasonable estimate. For the years ended December 31, 2018, the Company recognized a transition tax of $10.8 million that represented management’s assessment of the amount of U.S. corporate income tax based on the deemed repatriation to the United States of the Company’s 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. Any subsequent adjustment to these amounts will be recorded to current tax expense in subsequent period. 

 

52

 

 

On June 20, 2018, the FASB issued ASU No. 2018-07, Compensation—Stock Compensation (Topic 718) - Improvements to Nonemployee Share-Based Payment Accounting, which aligns the accounting for share-based payment awards issued to employees and nonemployees. Under ASU No. 2018-07, the existing employee guidance will apply to nonemployee share-based transactions (as long as the transaction is not effectively a form of financing), with the exception of specific guidance related to the attribution of compensation cost. The cost of nonemployee awards will continue to be recorded as if the grantor had paid cash for the goods or services. In addition, the contractual term will be able to be used in lieu of an expected term in the option-pricing model for nonemployee awards. The new standard is effective for us on January 1, 2019. Early adoption is permitted, including in interim periods, and should be applied to all new awards granted after the date of adoption. The Company does not expect this guidance will have a material impact on its consolidated financial statements.

 

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 consolidated financial statements.

 

53

 

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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

 

We are exposed to fluctuations in exchange rates between the U.S. and Chinese RMB, which is the functional currency of our Chinese subsidiary and consolidated VIE. Given that all of our revenues are generated in RMB, yet our results are reported in U.S. dollars, devaluation of the RMB could negatively impact our results of operations. The value of 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. 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. Over the past eleven years, RMB has appreciated 5.7% against the U.S. dollar (from USD1 = RMB 7.2946 on January 1, 2008 to USD1 = RMB 6.8776 on December 31, 2018). 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. Our sales, costs and expenses of Chinese subsidiary and consolidated affiliate, when translated into U.S. dollars, can fluctuate due to exchange rate movement. A 10% increase or decrease in the exchange rate of the Chinese RMB would have increased or decreased net income by approximately $5.6 million for fiscal 2018.

 

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.

 

54

 

 

Interest Rate Risk  

 

We have market risk exposure arising from changes in interest rates on our interest bearing bank and third party loans and gold leases. The interest rates on almost all of our interest bearing loans are fixed. Our borrowings from banks and other financial institutions as of December 31, 2018, were approximately $1,550.4 million, and interest expense paid for these loans was $154.1 million for the year ended December 31, 2018.

 

For the year ended December 31, 2018, our weighted average interest rate was 9.0%. We expect the interest expense will be decreased since we may reduce the loans in the next period of 12 months. We currently have no interest rate hedging positions in place to reduce our exposure to interest rates.

 

Based on our overall interest rate exposure to fixed rate debt outstanding as of December 31, 2018, a 1% change in interest rates would result in annual interest expense change of approximately $16.7 million, impact income before income taxes by approximately $16.7 million. A 1% change in interest rates would impact the fair value of our long-term fixed rate debt by approximately $5.2 million.

 

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 December 31, 2018. 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.

 

55

 

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

  Page
   
Reports of Independent Registered Public Accounting Firm 57
Consolidated Balance Sheets at December 31, 2018 and 2017 60
Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2018 and 2017 61
Consolidated Statements of Changes in Stockholder’s Equity for the years ended December 31, 2018 and 2017 62
Consolidated Statements of Cash Flows for the years ended December 31, 2018 and 2017 63
Notes to Consolidated Financial Statements 64

 

56

 

 

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of

Kingold Jewelry, Inc.

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Kingold Jewelry, Inc. (the “Company”) as of December 31, 2018 and 2017, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2018, and the related notes and schedules (collectively referred to as the financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated April 2, 2019, expressed an adverse opinion.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

 

 

/s/Friedman LLP  
   
We have served as the Company’s auditor since 2009.  
   
New York, New York  
   

April 2, 2019

 

 

 

 

 

57

 

 

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and

Stockholders of Kingold Jewelry, Inc.

 

Adverse Opinion on Internal Control over Financial Reporting

 

We have audited Kingold Jewelry, Inc.’s (the Company’s) internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, because of the effect of the material weaknesses described in the following paragraph on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control— Integrated Framework (2013) issued by COSO.

 

A material weakness is a control deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management’s assessment as of December 31, 2018:

 

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

 

2.Material audit adjustments were proposed by the auditors and recorded by the Company for the fiscal year 2018;

 

3.Lack of resources with technical competency to review and record non-routine or complex transactions;

 

4.Lack of a full-time U.S. GAAP personnel in the accounting department to monitor the recording of the transactions;

 

5.Lack of communication between management, chief executive officer and the board of directors relating to the approval of obtaining loans from banks, other financial institutions, related parties, third parties, and providing guarantees to related parties, third parties and gold lease transactions with related parties;

 

6.Lack of functional internal audit department that monitors the consistencies of the prescribed internal control procedures;

 

7.Lack of proper recording of the leased gold inventory with related party and the related party loan agreements and restricted cash.

 

8.Lack of proper accounting and recording of the investments in gold and the related loans payable to banks, financial institutions and related parties.

 

These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2018 consolidated financial statements, and this report does not affect our report dated April 2, 2019, on those financial statements.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows of the Company, and our report dated April 2, 2019, expressed an unqualified opinion.

 

 

 

 

58

 

 

Basis for Opinion

 

The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

Definition and Limitations of Internal Control over Financial Reporting

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

 

 

/s/Friedman LLP  
   
New York, New York  
   

April 2, 2019

 

 

 

 

 

59

 

 

 

KINGOLD JEWELRY, INC.

CONSOLIDATED BALANCE SHEETS

(IN U.S. DOLLARS)

 

   December 31,   December 31, 
   2018   2017 
         
ASSETS          
           
Cash  $233,391   $4,997,125 
Restricted cash   4,798,185    5,534,551 
Accounts receivable   451,059    768,167 
Inventories   127,034,673    135,042,713 
Investments in gold   1,593,557,391    1,562,943,153 
Other current assets and prepaid expenses   87,590    100,592 
Value added tax recoverable   259,582,324    353,732,758 
Total current assets   1,985,744,613    2,063,119,059 
           
    Property and equipment, net   5,395,330    7,299,643 
Restricted cash   7,766,372    7,392,721 
Investments in gold   700,225,896    957,124,267 
Other assets   285,768    302,072 
Deferred income tax assets   -    6,677,675 
Land use right   395,719    429,915 
Total long-term assets   714,069,085    979,226,293 
TOTAL ASSETS  $2,699,813,698   $3,042,345,352 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
           
CURRENT LIABILITIES          
           
Short term loans  $1,034,947,774   $962,101,746 
Other payables and accrued expenses   15,749,564    18,913,863 
Related party loan   72,699,779    307,389,647 
Due to related party, shareholder   3,976,742    2,630,301 
Income tax payable   18,504,197    1,208,742 
Other taxes payable   2,577,102    2,615,463 
Total current liabilities   1,148,455,158    1,294,859,762 
Deferred income tax liability   24,218,911    - 
Related party loans   373,327,862    567,843,066 
Long term loans   515,477,020    789,410,137 
TOTAL LIABILITIES   2,061,478,951    2,652,112,965 
COMMITMENTS AND CONTINGENCIES          
EQUITY          
Preferred stock, $0.001 par value, 500,000 shares authorized, none issued or outstanding as of December 31, 2018 and 2017   -    - 
Common stock $0.001 par value, 100,000,000 shares authorized, 66,113,502 shares issued and outstanding as of December 31, 2018 and 2017   66,113    66,113 
Additional paid-in capital   224,292,907    80,377,449 
Retained earnings          
Unappropriated   353,213,325    303,666,611 
Appropriated   967,543    967,543 
Accumulated other comprehensive income, net of tax   59,794,859    5,154,671 
Total Equity   638,334,747    390,232,387 
           
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $2,699,813,698   $3,042,345,352 

 

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

 

60

 

 

KINGOLD JEWELRY, INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(IN U.S. DOLLARS)

 

   For the years ended December 31, 
   2018   2017 
NET SALES  $2,475,666,092   $2,009,732,643 
COST OF SALES          
Cost of sales   (2,210,204,664)   (1,808,612,014)
Depreciation   (1,138,650)   (1,193,453)
Total cost of sales   (2,211,343,314)   (1,809,805,467)
           
GROSS PROFIT   264,322,778    199,927,176 
           
OPERATING EXPENSES          
Selling, general and administrative expenses   11,564,285    13,444,222 
Stock compensation expenses   21,456    33,014 
Depreciation   576,840    444,297 
Amortization, other   11,426    11,188 
Total operating expenses   12,174,007    13,932,721 
           
INCOME FROM OPERATIONS   252,148,771    185,994,455 
           
OTHER INCOME (EXPENSES)          
Other income, net   63,449    66,642 
Interest income   1,763,595    2,251,972 
Interest expense, including $12,247,690 and $10,958,016 of amortization of financing costs for the years ended December 31, 2018 and 2017   (172,692,768)   (152,945,558)
Total other expenses, net   (170,865,724)   (150,626,944)
           
INCOME FROM OPERATIONS BEFORE TAXES   81,283,047    35,367,511 
           
INCOME TAX PROVISION (BENEFIT)          
Current   26,972,159    17,678,757 
Deferred   4,764,174    (8,503,898)
Total income tax provision   31,736,333    9,174,859 
           
NET INCOME   49,546,714    26,192,652 
           
OTHER COMPREHENSIVE INCOME (LOSS)          
Unrealized gain related to investments in gold, net of tax   81,006,008    58,650,446 
Total foreign currency translation gain (loss)   (26,365,820)   22,752,426 
Total Other comprehensive gain   54,640,188    81,402,872 
           
COMPREHENSIVE INCOME  $104,186,902   $107,595,524 
           
Earnings per share          
Basic  $0.75   $0.40 
Diluted  $0.75   $0.39 
           
Weighted average number of shares          
Basic   66,113,502    66,050,498 
Diluted   66,192,537    66,472,046 

 

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

 

61

 

 

KINGOLD JEWELRY, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

(IN U.S. DOLLARS)

 

   Preferred stock   Common stock   Additional   Unappropriated   Appropriated  

Accumulated 
other

comprehensive

     
   Par value   Par value   paid-in   retained   retained  

Income

     
   Shares   Amount   Shares   Amount   capital   earnings   earnings   (deficit)   Total 
                                     
Balance at December 31, 2016   -   $-    66,018,867   $66,018   $80,230,968   $277,473,959   $967,543   $(76,248,201)  $282,490,287 
                                              
Options granted for services   -    -    -         33,014    -    -    -    33,014 
Warrants exercised   -    -    94,635    95    113,467    -    -    -    113,562 
Net income for the year   -    -    -    -    -    26,192,652    -    -    26,192,652 
Unrealized gain related to investment in gold   -    -    -    -    -    -    -    58,650,446    58,650,446 
Foreign currency translation gain   -    -    -    -    -    -    -    22,752,426    22,752,426 
                                              
Balance at December 31, 2017  -   $ -    66,113,502   $66,113   $ 80,377,449   $ 303,666,611   $ 967,543   $ 5,154,671   $ 390,232,387 
                                              
Options granted for services   -    -    -         21,456    -    -    -    21,456 
Debt waived by shareholder   -    -    -    -    143,894,002    -    -    -    143,894,002 
Net income for the year   -    -    -    -    -    49,546,714    -    -    49,546,714 
Unrealized gain related to investment in gold   -    -    -    -    -    -    -    81,006,008    81,006,008 
Foreign currency translation gain   -    -    -    -    -    -    -    (26,365,820)   (26,365,820)
Balance at December 31, 2018   -   $-    66,113,502   $66,113   $224,292,907   $353,213,325   $967,543   $59,794,859   $638,334,747 

 

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

 

62

 

 

KINGOLD JEWELRY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN U.S. DOLLARS)

 

   For the years ended December 31, 
   2018   2017 
CASH FLOWS FROM OPERATING ACTIVITIES          
Net income  $49,546,714   $26,192,652 
Adjusted to reconcile net income to cash provided by (used in) operating activities:          
Depreciation   1,715,490    1,637,750 
Amortization of intangible assets   11,426    11,188 
Share based compensation for services   21,456    33,014 
Amortization of debt issuance costs included in interest expense   12,247,690    10,958,016 
Deferred tax (benefit) provision   4,764,174    (7,683,962)
Changes in operating assets and liabilities          
Accounts receivable   286,534    (50,154)
Inventories   205,234,765    (7,279,205)
Other current assets and prepaid expenses   7,900    620,730 
Value added tax recoverable   78,022,977    (60,195,642)
Other payables and accrued expenses   (3,736,015)   4,143,958 
Customer deposits   (144,978)   185,434 
Income tax payable   17,585,797    4,718,786 
Other taxes payable   106,862    957,521 
Net cash provided by (used in) operating activities   365,670,792    (25,749,914)
CASH FLOWS FROM INVESTING ACTIVITIES          
Purchases of property and equipment   (145,507)   (1,241,172)
Investments in gold   -    (551,958,950)
Net cash used in investing activities   (145,507)   (553,200,122)
CASH FLOWS FROM FINANCING ACTIVITIES          
Proceeds from other loans - short term   214,833,064    170,341,868 
Repayments of other loans - short term   (749,080,980)   (304,869,025)
Proceeds from other loans - long term   423,197,255    319,668,492 
Proceeds from related parties loans – short term   -    295,989,344 
Proceeds from related parties loans – long term   545,924,459    821,370,431 
Repayments of related parties loans   

(791,834,472

)   (748,170,175)
Payments of loan origination fees   (11,959,140)   (9,572,415)
Repayment of third parties loans   -    (29,598,934)
(Repayments of) borrowings from related party   1,346,835    (4,738,508)
Proceeds from exercise of warrants   -    113,562 
Net cash (used in) provided by financing activities   (367,572,979)   510,534,640 
EFFECT OF EXCHANGE RATES ON CASH AND RESTRICTED CASH   (3,078,755)   4,662,170 
NET INCREASE (DECREASE) IN CASH AND RESTRICTED CASH   (5,126,449)   (63,753,226)
CASH AND RESTRICTED CASH, BEGINNING OF YEAR   17,924,397    81,677,623 
CASH AND RESTRICTED, END OF YEAR  $12,797,948   $17,924,397 
           
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION          
Cash paid for interest expense  $163,182,925   $128,823,958 
Cash paid for income tax  $10,262,316   $13,091,812 
           
NON-CASH INVESTING AND FINANCING ACTIVITIES          
Investments in gold obtained in a lease from a related party  $-   $133,721,408 
Investments in gold transferred to inventories  $769,308,629   $417,937,474 
Unrealized gain on investments in gold  $81,006,008   $58,650,446 

Forgiveness of debt by shareholder allocated to capital contribution

  $143,894,002   $- 

 

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

 

63

 

 

KINGOLD JEWELRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION

 

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

 

Dragon Lead Group Limited (“Dragon Lead”) was incorporated in the British Virgin Islands (“BVI”) on July 1, 2008 as 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 renewable upon expiration. Wuhan Kingold Jewelry Co., Limited (“Wuhan Kingold”) was incorporated in the PRC on August 2, 2002 as a limited liability company. On October 26, 2007, Wuhan Kingold was restructured as a joint stock company limited by shares and its business activities are the same as those of Wuhan Vogue-Show. Wuhan Kingold’s business permit expires on July 1, 2052 and is renewable upon expiration.

 

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

 

These contractual arrangements enable Wuhan Vogue-Show to:

 

·exercise effective control over Wuhan Kingold;

  · receive substantially all of the economic benefits from Wuhan Kingold; and

  · have an exclusive option to purchase 100% of the equity interest in Wuhan Kingold, when and to the extent permitted by PRC law.

 

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

 

In April 2015, Wuhan Kingold Jewelry Co., Inc. (“Wuhan Kingold”) established a new subsidiary Wuhan Kingold Internet Co., Ltd. (“Kingold Internet”), of which Wuhan Kingold holds a 55% ownership interest and a third-party minority shareholder holds the remaining 45% ownership interest. Kingold Internet engaged in promoting the online sales of jewelry products through cooperation with Tmall.com, a large business-to-consumer online retail platform owned by Alibaba Group. In May 2015, Kingold Internet also established a new subsidiary Yuhuang Jewelry Design Co., Ltd (“Yuhuang”).

 

On December 14, 2016, Wuhan Kingold transferred its 55% ownership interest in Kingold Internet to Wuhan Kingold Industrial Group Co., Ltd., a related party, for a consideration of $79,196 (RMB 550,000), which was the same amount Wuhan Kingold originally invested. After the transfer, Kingold Internet and Yuhuang were no longer the subsidiaries of Wuhan Kingold.

 

Kingold, Dragon Lead, Wuhan Vogue-Show and Wuhan Kingold, are hereinafter collectively referred to as the “Company.” 

 

64

 

 

KINGOLD JEWELRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

 

The accompanying consolidated financial statements include the financial statements of Kingold, Dragon Lead, Wuhan Vogue-Show and Wuhan Kingold. All inter-company balances and transactions have been eliminated in consolidation.

 

Use of Estimates

 

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements as well as the reported amounts of revenues and expenses during the reporting period. Significant estimates required to be made by management include, but are not limited to, useful lives of property, plant and equipment, one-time transition tax, the recoverability of long-lived assets, inventory valuation, deferred income tax, allowance for investments in gold and share based compensation. Actual results could differ from those estimates.

 

Cash

  

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

 

Restricted Cash

 

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.

 

As of December 31, 2018 and 2017, the Company had restricted cash (current and non-current) of $ 12,564,557 and $12,927,272, 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. At December 31, 2018 and 2017, there was no allowance recorded as the Company considers all of the accounts receivable fully collectible. 

 

65

 

 

KINGOLD JEWELRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Inventories

 

Inventories are stated at the lower of cost and net realizable value, and cost is calculated on the weighted average basis. As of December 31, 2018 and 2017, there was no lower of cost or market adjustment because the carrying value of the Company’s inventories was lower than the current and expected market price of gold. The cost of inventories comprises all costs of purchases, costs of fixed and variable production overhead and other costs incurred in bringing the inventories to their present condition.

 

Property and Equipment

 

Property and equipment are stated at cost, less accumulated depreciation. Expenditures for additions, major renewals and betterments are capitalized, and expenditures for maintenance and repairs are charged to expense as incurred. 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  Shorter of lease term or useful lives

 

Land Use Right

 

Under PRC law, all land in the PRC is owned by the government and cannot be sold to an individual or company. The government grants individuals and companies the right to use parcels of land for specified periods of time. These land use rights are sometimes referred to informally as “ownership.” Land use rights are stated at cost less accumulated amortization. Amortization is provided over the respective useful lives, using the straight-line method. Estimated useful life is 50 years, and is determined in connection with the term of the land use right.

 

66

 

 

KINGOLD JEWELRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Long-lived Assets

 

Certain assets such as property, plant and equipment and construction in progress, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Recoverability of assets that are held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount exceeds the fair value of the asset. There were no events or changes in circumstances that triggered a review of impairment of long-lived assets as of December 31, 2018 and 2017.

 

Fair Value of Financial Instruments

 

The Company follows the provisions of Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures.” ASC 820 clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:

 

Level 1-Observable inputs such as unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.

 

Level 2-Inputs other than quoted prices that are observable for the asset or liability in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data. 

 

Level 3-Inputs are unobservable inputs which reflect management’s assumptions based on the best available information.

 

The carrying value of accounts receivable, other current assets and prepaid expenses, short-term loans, other payables and accrued expenses approximate their fair values because of the short-term nature of these instruments. The Company determined that the carrying value of the long term loans approximated their fair value by comparing the stated loan interest rate to the rate charged by similar financial institutions.

 

Investments in Gold

 

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

 

67

 

 

KINGOLD JEWELRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

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.

 

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. Payment term is typically 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.

 

68

 

 

KINGOLD JEWELRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Revenue Recognition (continued)

 

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.

 

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 years ended December 31, 2018 and 2017: 

 

   For the year ended December 31, 
   2018   2017 
Branded production sales  $2,421,896,796   $1,960,424,366 
Customized production sales   53,479,608    48,938,691 
Trade in product sales   158,078    154,643 
Other   131,610    214,943 
   $2,475,666,092   $2,009,732,643 

 

Income Taxes  

 

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

 

The provisions of ASC 740-10-25, “Accounting for Uncertainty in Income Taxes,” prescribe a more-likely-than-not threshold for consolidated financial statement recognition and measurement of a tax position taken (or expected to be taken) in a tax return. This interpretation also provides guidance on the recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, and related disclosures. The Company does not believe that there was any uncertain tax position at December 31, 2018 and 2017.

 

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 2013 and after. As of December 31, 2018, 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.

 

69

 

 

 KINGOLD JEWELRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Foreign Currency Translation

 

Kingold, as well as its wholly owned subsidiary, Dragon Lead, maintain accounting records in United States Dollars (“US$”), whereas Wuhan Vogue-Show and Wuhan Kingold maintain their accounting records in Renminbi (“RMB”), which is the primary currency of the economic environment in which their operations are conducted. The Company’s principal country of operations is the PRC. The financial position and results of its operations are determined using RMB, the local currency, as the functional currency. The results of operations and the statement of cash flows denominated in foreign currency are translated at the average rate of exchange during the reporting period. Assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the applicable rates of exchange in effect at that date. The equity denominated in the functional currency is translated at the historical rate of exchange at the time of capital contribution. Because cash flows are translated based on the average translation rate, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet. Translation adjustments arising from the use of different exchange rates from period to period are included as a component of stockholders’ equity as “Accumulated Other Comprehensive Income (Deficit)”. 

 

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

 

    December 31,
2018
    December 31,
2017
 
Balance sheet items, except for share capital, additional paid in capital and retained earnings, as of the period ended   US$1=RMB  6.8776    US$1=RMB 6.5064 
Amounts included in the statements of income and cash flows for the period   US$1=RMB 6.6163    US$1=RMB 6.7570 

 

Comprehensive Income

 

Comprehensive income consists of two components, net income and other comprehensive income . The unrealized gain or loss resulting from the change of the fair market value from the gold investments and the foreign currency translation gain or loss resulting from translation of the financial statements expressed in RMB to US$ are reported in other comprehensive income in the consolidated statements of income   and comprehensive income. 

 

Earnings per Share (“EPS”)

 

Basic EPS is measured as net income divided by the weighted average common shares outstanding for the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (i.e., options and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS.

 

Share or Stock-Based Compensation

 

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.  

 

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KINGOLD JEWELRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Debts issuance Cost

 

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

 

Risks and Uncertainties

 

The jewelry industry generally is affected by fluctuations in the price and supply of diamonds, gold, and, to a lesser extent, other precious and semi-precious metals and stones. The Company potentially has exposure to the fluctuation in gold commodity prices as part of its normal operations. In the past, the Company has not hedged its requirement for gold or other raw materials through the use of options, forward contracts or outright commodity purchasing. A significant increase in the price of gold could increase the Company’s production costs beyond the amount that it is able to pass on to its customers, which would adversely affect the Company’s sales and profitability. A significant disruption in the Company’s supply of gold, or other commodities, could decrease its production and shipping levels, materially increase its operating costs, and materially and adversely affect its profit margins. Shortages of gold, or other commodities, or interruptions in transportation systems, labor strikes, work stoppages, war, acts of terrorism, or other interruptions to or difficulties in the employment of labor or transportation in the markets in which the Company purchases its raw materials, may adversely affect its ability to maintain production of its products and sustain profitability. Although the Company generally attempts to pass on increased commodity prices to its customers, there may be circumstances in which it is not able to do so. In addition, if the Company were to experience a significant or prolonged shortage of gold, it would be unable to meet its production schedules and to ship products to its customers in a timely manner, which would adversely affect its sales, margins and customer relations.

 

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

 

The Company also allocated significant portion of its inventories as investment in gold and pledged as collateral to secure loans from banks and financial institutions, 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. 

 

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KINGOLD JEWELRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Risks and Uncertainties (continued)

 

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

 

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KINGOLD JEWELRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Recent Accounting Pronouncements 

 

In February 2016, the FASB issued ASU 2016-02,"Leases" to provide a new comprehensive model for lease accounting. Under this guidance, lessees and lessors should apply a "right-of-use" model in accounting for all leases (including subleases) and eliminate the concept of operating leases and off-balance sheet leases. This guidance is effective for annual periods and interim periods within those annual periods beginning after December 15, 2018. Early adoption is permitted. The Company is evaluating the impact on its consolidated financial statements.

 

In February 2018, the FASB issued ASU 2018-02, which allows a reclassification from accumulated other comprehensive income to retained earnings for adjustments to tax effects that were originally recorded in other comprehensive income due to changes in the U.S. federal corporate income tax rate resulting from the enactment of the U.S. tax reform legislation, commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act. The Company does not expect this guidance will have a material impact on its consolidated financial statements.

 

In March 2018, the FASB issued guidance relative to Income Taxes (Topic 740) that adds various Securities and Exchange Commission (“SEC”) paragraphs pursuant to the issuance of the December 2017 SEC Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), which was effective immediately. The SEC issued SAB 118 to address concerns about reporting entities’ ability to timely comply with the accounting requirements to recognize all of the effects of the Tax Cuts and Jobs Act (the “Tax Act”) in the period of enactment. SAB 118 allows disclosure that timely determination of some or all of the income tax effects from the Tax Cuts and Jobs Act are incomplete by the due date of the financial statements and if possible, to provide a reasonable estimate. For the years ended December 31, 2018, the Company recognized a transition tax of $10.8 million that represented management’s assessment of the amount of U.S. corporate income tax based on the deemed repatriation to the United States of the Company’s 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. Any subsequent adjustment to these amounts will be recorded to current tax expense in subsequent period when the analysis is complete. 

 

On June 20, 2018, the FASB issued ASU No. 2018-07, Compensation—Stock Compensation (Topic 718) - Improvements to Nonemployee Share-Based Payment Accounting, which aligns the accounting for share-based payment awards issued to employees and nonemployees. Under ASU No. 2018-07, the existing employee guidance will apply to nonemployee share-based transactions (as long as the transaction is not effectively a form of financing), with the exception of specific guidance related to the attribution of compensation cost. The cost of nonemployee awards will continue to be recorded as if the grantor had paid cash for the goods or services. In addition, the contractual term will be able to be used in lieu of an expected term in the option-pricing model for nonemployee awards. The new standard is effective for us on January 1, 2019. Early adoption is permitted, including in interim periods, and should be applied to all new awards granted after the date of adoption. The Company does not expect this guidance will have a material impact on its consolidated financial statements.

 

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 consolidated financial statements.

 

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

 

73

 

  

KINGOLD JEWELRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 3 – INVENTORIES  

 

Inventories as of December 31, 2018 and 2017 consisted of the following:

 

   As of 
   December 31,   December 31, 
   2018   2017 
Work-in-progress (A)  $87,160,453   $90,406,021 
Finished goods (B)   39,874,220    44,636,692 
Total inventory  $127,034,673   $135,042,713 

 

  (A) Included 2,570,232 grams of Au9999 gold as of December 31, 2018 and 2,508,182 grams of Au9999 gold as of December 31, 2017.

 

  (B) Included 1,168,892 grams of Au9999 gold as of December 31, 2018 and 1,231,586 grams of Au9999 gold as of December 31, 2017.

 

No lower of cost or net realizable value adjustment was recorded at December 31, 2018 and 2017.

 

NOTE 4 - PROPERTY AND EQUIPMENT, NET

 

The following is a summary of property and equipment as of December 31, 2018 and 2017:

 

   As of 
   December 31,   December 31, 
   2018   2017 
Buildings  $2,285,204   $2,415,577 
Plant and machinery   17,703,975    18,615,951 
Motor vehicles   240,507    254,228 
Office and electric equipment   1,454,794    1,415,194 
Leasehold improvements   1,466,654    1,623,027 
Subtotal   23,151,134    24,323,977 
Less: accumulated depreciation   (17,755,804)   (17,024,334)
Property and equipment, net  $5,395,330   $7,299,643 

 

Depreciation expense for the years ended December 31, 2018 and 2017 was $1,715,490 and $1,637,750, respectively.

 

74

 

 

KINGOLD JEWELRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 5 – LOANS

 

Short term loans consist of the following: 

 

   As of 
   December 31, 2018     December 31, 2017 
         
(a) Loan payable to Aijian Trust  $-   $46,108,447 
(b) Loans payable to Evergrowing Bank - Qixia Branch   -    153,694,824 
(c) Loans payable to Evergrowing Bank - Yantai Huanshan Road Branch   72,699,779    153,233,739 
(d) Loans payable to Sichuan Trust - gross amount   145,399,558    230,542,236 
Loans payable to Sichuan Trust - deferred financing cost   -    (2,239,292)
(e) Loans payable to China Aviation Capital - gross amount   -    44,571,499 
  Loans payable to China Aviation Capital - deferred financing cost   -    (457,926)
(f) Loans payable to Huarong Trust - gross amount   -    146,163,777 
  Loans payable to Huarong Trust - deferred financing cost   -    (1,324,677)
(g) Loans payable to China Construction Investment Trust - gross amount   -    46,108,447 
  Loans payable to China Construction Investment Trust - deferred financing cost   -    (167,796)
(h) Loans payable to Zheshang Jinhui Trust - gross amount   62,725,369    84,532,153 
  Loans payable to Zheshang Jinhui Trust - deferred financing cost   (18,547)   - 
(i) Loans payable to Zhongjiang International Trust - gross amount   -    61,477,929 
  Loans payable to Zhongjiang International Trust - deferred financing cost   -    (141,614)
(j) Loan payable to China Aviation Trust - gross amount   45,073,863    - 
  Loan payable to China Aviation Trust - deferred financing cost   (44,456)   - 
(k) Loans payable to National Trust - gross amount   50,889,845    - 
  Loans payable to National Trust - deferred financing cost   (30,023)   - 
(l) Loans payable to Anxin Trust   354,774,921    - 
(m) Loans payable to China Construction Bank   42,165,871    - 
(n) Loans payable to Minsheng Trust (new)   145,399,560    - 
(o) Loans payable to Chang’An Trust (new) - gross amount   116,589,437    - 
  Loans payable to Chang’An Trust (new) – deferred financing cost   (677,403)   - 
  Total short term loans  $1,034,947,774   $962,101,746 

 

(a) Loan payable to Aijian Trust

 

The Company fully repaid loan to Aijian Trust upon maturity on May 4, 2018. The pledged gold and restricted deposit were released and returned upon the repayment. 

 

(b) Loans payable to Evergrowing Bank – Qixia Branch

 

The Company fully repaid loan to Evergrowing Bank – Qixia Branch upon maturity and the pledged gold was subsequent returned to the Company.

 

75

 

 

KINGOLD JEWELRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 5 – LOANS (continued)

 

(c) 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 $145.4 million (RMB 1 billion) in aggregate. The purpose of the loans was for purchasing gold. The 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, $145,400 (RMB 1 million) was repaid in August 2016, $145,400 (RMB 1 million) was repaid on February 23, 2017 and another $145,400 (RMB 1 million) was repaid in August 23, 2017. The Company repaid approximately $72.3 million (RMB 497 million) to Evergrowing bank Yantai Huangshan Road Branch upon maturity.

 

For the remaining balance of approximately $72.7 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 $92.5 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.

 

(d) 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 $290.8 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 $245.4 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 $2.2 million (RMB 15 million) to secure these loans. The deposit will be refunded when the loan is repaid upon maturity. As of December 31, 2018, the Company received an aggregate of approximately $218.1 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.

 

The Company paid approximately $5.3 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. As of December 31, 2018, the deferred financing costs related to obtaining these loans were fully amortized.

 

76

 

 

KINGOLD JEWELRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 5 – LOANS (continued)

 

(e) Loans payable to China Aviation Capital

 

On September 7, 2016, the Company entered into a trust loan agreement with China Aviation Capital Investment Management (Shenzhen) (“China Aviation Capital”) to borrow a maximum of approximately $87.2 million (RMB 600 million) as working capital loan. The first installment of the loan was approximately $42.2 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 $49.8 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. Therefore, the $42.2 million loan from China Aviation Capital was recorded as long term at December 31, 2018. 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.

 

The Company paid totally approximately $1.3 million (RMB 8.7 million) during the year as loan origination fee for extending 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.

 

(f) Loans payable to Huarong Trust

 

The Company fully repaid loan to Huarong International Trust Co. Ltd. (“Huarong Trust”) upon maturity on August 15, 2018. The pledged gold and restricted deposit were released and returned upon the repayment. 

 

The Company paid approximately $2.1 million (RMB 14.3 million) in fiscal year 2017 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 $1.3 million (RMB 8.6 million) and $0.9 million (RMB 5.7 million) deferred financing costs were amortized, respectively.

 

(g) Loans payable to China Construction Investment Trust

 

On August 29, 2016, the Company entered into a trust loan agreement with China Construction Investment Trust to borrow a maximum of approximately $43.6 million (RMB 300 million) as working capital loan for the purpose of purchasing of gold solely with a period of 24 months from October 9, 2016 to October 9, 2018. For the loan obtained the Company is required to make interest payments are calculated based on a fixed annual interest rate. The interest payment is divided into two parts: (1) 1% of the principal amount received need to be paid before December 25, 2016 as loan origination fee; (2) the rest of interest payments are calculated based on a fixed interest rate of 7.5% and due on quarterly basis. The Company pledged 1,447 kilograms of Au9999 gold with carrying value of approximately $48.9 million (RMB 336.4 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 million) to secure the loan. During the year ended December 31, 2018, the Company full repaid all the outstanding balance. The pledged gold and restricted deposit were released and returned upon the repayment. 

 

The Company paid approximately $0.4 million (RMB 3 million) in fiscal year 2016 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 $0.2 million (RMB 1.1 million) and $0.2 million (RMB 1.5 million) deferred financing costs were amortized, respectively. 

 

77

 

 

KINGOLD JEWELRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 5 – LOANS (continued)

 

(h) Loans payable to Zheshang Jinhui Trust

 

On November 7, 2016, the Company entered into a trust loan agreement with Zheshang Jinhui Trust to borrow a maximum of approximately $80.0 million (RMB 550 million) for purchasing gold with a period of 24 months from principal receiving date November 15, 2016 to November 15, 2018. The Company is required to make interest payments calculated based on a fixed annual interest rate of 7.8%. The Company pledged 2,708 kilograms of Au9999 gold with carrying value of approximately $91.5 million (RMB 629.6 million) as collateral to secure this loan. The loan is guaranteed by the CEO and Chairman of the Company. The Company also made a restricted deposit of approximately $0.8 million (RMB 5.5 million) to secure these loans. The deposit will be refunded when the loan is repaid upon maturity. During the year ended December 31, 2018, the Company full repaid the loan upon maturity. The pledged gold and restricted deposit were released and returned upon the repayment. 

 

In November 2017, Wuhan Kingold entered into a new Trust Loan Contract with Zheshang Jinhui Trust. The agreement allows the Company to access a total of approximately $145.4 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 $110.3 million (RMB 758.5 million). The loan is also guaranteed by the CEO and Chairman of the Company. After entering into the contract, the Company received an aggregate of approximately $91.8 million (RMB 631.4 million) from the loan. During the year ended December 31, 2018, the Company repaid approximately $29.1 million (RMB 200 million) to the loan. The Company also made a restricted deposit of approximately $0.92 million (RMB 6.3 million) to secure these loans. The deposit will be refunded when the loan is repaid upon maturity. In January 2019, the Company made repayment of approximately $38.0 million (RMB 261.4 million) to Zheshang Jinhui Trust.

 

The Company paid approximately $1.4 million (RMB 9.5 million) as loan origination fee for obtaining the new loan of 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 new loans.

 

(i) Loans payable to Zhongjiang International Trust

 

On December 23, 2016, the Company entered into a trust loan agreement with Zhongjiang International Trust to borrow a maximum of approximately $58.2 million (RMB 400 million) for purchasing gold with a period of 24 months from December 23, 2016 to December 22, 2018. The Company is required to make interest payments calculated based on a fixed annual interest rate of 8.75%. The Company pledged 2,104 kilograms of Au9999 gold with carrying value of approximately $71.1 million (RMB 489.2 million) as collateral to secure this loan. The loan is guaranteed by the CEO and Chairman of the Company. During the year ended December 31, 2018, the Company full repaid the loan upon maturity. The pledged gold was released upon the repayment. 

 

The Company paid approximately $0.3 million (RMB 1.9 million) as loan origination fee for obtaining the loan. The loan origination fee was recorded as deferred financing cost against the loan balance. For the years ended December 31, 2018 and 2017, approximately $0.1 million (RMB 0.9 million) and $0.2 million (RMB 1.0 million) deferred financing costs were amortized, respectively.

 

78

 

 

KINGOLD JEWELRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 5 – LOANS (continued)

 

(j) Loans payable to China Aviation Trust

 

On January 25, 2017, Wuhan Kingold entered into a trust loan agreement with China Aviation Trust Ltd. to borrow a maximum of approximately $45.1 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 $55.0 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 $0.5 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 $1.4 million (RMB 9.3 million) as loan origination fee for obtaining the loan. The loan origination fee was recorded as deferred financing cost against the loan balance. For 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.

 

(k) 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 $50.9 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 $59.3 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 years ended December 31, 2018 and 2017, approximately $0.2 million (RMB 1.3 million) and $0.2 million (RMB 1.1 million) deferred financing costs were amortized, respectively.

 

(l) 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 $436.2 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 $522.3 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 $81.4 million (RMB 0.56 billion), which resulted in an outstanding balance of approximately $354.8 million (RMB 2.44 billion) as of December 31, 2018 reported as short term loans. The Company also made a restricted deposit of approximately $3.5 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 subsequently made repayments total of approximately $24 million (RMB 165 million) and extended the loans of approximately $18.5 million (RMB 127 million) which originally due on March 29, 2019 to May 17, 2019.

 

79

 

 

KINGOLD JEWELRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 5 – LOANS (continued)

 

(m) Loan payable to China Construction Bank

 

In September 2018, Wuhan Kingold signed a Loan Agreement with Wuhan Jiang’An Branch of China Construction for a loan of approximately $17.2 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 for a loan of approximately $25.0 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 above mentioned two 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, contingent asset-liability ratio should be less than 60%.

 

(n) Loan payable to Minsheng Trust (new)

 

On October 10, 2018, the Company entered into a Trust Loan Contract in the amount of no more than approximately $145.4 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 $181.9 million (RMB 1.3 billion). The loan is also guaranteed by the CEO and Chairman of the Company. As of December 31, 2018, the Company received the full amount from the loan.

  

(o) Loans payable to Chang’An Trust

 

In September 2017, Wuhan Kingold entered into a new Trust Loan Contract with Chang’An Trust. The agreement allows the Company to access a total of approximately $145.4 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 $163.4 million (RMB 1.1 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. The Company also made a restricted deposit of approximately $1.5 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 $2.9 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 December 31, 2018, the balance of loans from Chang’An Trust was approximately $116.6 (RMB 801.9 million).

 

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 years ended December 31, 2018 and 2017, approximately $0.8 million (RMB 5.5 million) and $0.1 million (RMB 0.8 million) deferred financing costs were amortized, respectively.  

 

Interest expenses for all of the short term loans classified as of the balance sheet dates for the years ended December 31, 2018 and 2017 were approximately $116.1 million and $68.8 million, respectively. The weighted average interest rates for the years ended December 31, 2018 and 2017 were 9.0% and 7.0%, respectively.

 

80

 

 

KINGOLD JEWELRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 5 – LOANS (continued)

 

Long term loans consist of the following:

 

   As of 
   December 31, 2018   December 31, 2017 
         
(p) Loans payable to Minsheng Trust - gross amount  $218,099,337   $- 
  Loans payable to Minsheng Trust - deferred financing cost   (3,907,406)   - 
(q) Loans payable to Anxin Trust   -    461,084,471 
(r) Loans payable to Chang’An Trust - gross amount   -    153,694,824 
  Loans payable to Chang’An Trust - deferred financing cost   -    (1,563,230)
(s) Loans payable to China Aviation Trust - gross amount   -    47,645,395 
  Loans payable to China Aviation Trust - deferred financing cost   -    (761,674)
(t) Loans payable to China Aviation Capital   42,165,872    - 
  Loans payable to China Aviation Capital - deferred financing cost   (990,898)   - 
(u) Loans payable to National Trust - gross amount   -    53,793,188 
  Loans payable to National Trust - deferred financing cost   -    (228,068)
(v) Loans payable to Zheshang Jinhui Trust - gross amount   -    76,847,412 
  Loans payable to Zheshang Jinhui Trust - deferred financing cost   -    (1,102,181)
(w) Loans payable to Sichuan Trust - gross amount   72,699,779    - 
  Loans payable to Sichuan Trust - deferred financing cost   -    - 
(x) Loan payable to Dongguan Trust   145,399,557    - 
  Loan payable to Dongguan Trust - deferred financing cost   (1,609,089)   - 
(y) Loan payable to Kunlun Trust   43,619,868    - 
  Total long term loans, net of deferred financing costs  $515,477,020   $789,410,137 

 

(p) 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 $218.1 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 Trust Loan bears interest at a fixed annual rate of 9.2%. The loan is secured by 7,887 kilograms of Au9999 gold in aggregate with carrying value of approximately $270.2 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 $2.2 million (RMB 15 million) to secure these loans. The deposit will be refunded when the loan is repaid upon maturity. As of December 31, 2018, the Company received full amount from the loan.

 

The Company paid approximately $7.8 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.

  

(q) Loans payable to Anxin Trust (see Note 5 (l) above)

 

(r) Loans payable to Chang’An Trust (see Note 5 (o) above)

 

(s) Loans payable to China Aviation Trust (see Note 5 (j) above)

 

(t) Loans payable to China Aviation Capital (see Note 5 (e) above)

 

81

 

 

KINGOLD JEWELRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 5 – LOANS (continued)

 

(u) Loans payable to National Trust (see Note 5 (k) above)

 

(v) Loans payable to Zheshang Jinhui Trust (see Note 5 (h) above)

 

(w) Loans payable to Sichuan Trust (see Note 5 (d) above)

 

(x) 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 obtain no more than approximately $145.4 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 $165.8 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 $1.5 million (RMB 10 million) to secure the loan. The deposit will be refunded when the loan is repaid upon maturity.

 

The Company paid approximately $2.2 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.

 

(y) Loans payable to Kunlun Trust

  

In December 2018, Wuhan Kingold entered into a Trust Loan Contract in the amount of approximately $145.4 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 $54.6 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 $0.4 million (RMB 3 million) to secure the loan. The deposit will be refunded when the loan is repaid upon maturity.

 

Total Interest for the long term loans classified as balance sheet dates in the amount of $38.0 million and $59.7 million for the years ended December 31, 2018 and 2017, respectively. The weighted average interest rates for the years ended December 31, 2018 and 2017 were 9.2% and 11.6%, respectively.

 

82

 

 

KINGOLD JEWELRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

 

NOTE 6 – INVESTMENTS IN GOLD

 

As of December 31, 2018 and 2017, the Company allocated total of 61,122,210 and 59,523,000 grams of Au9999 gold in its inventories with carrying value of approximately $2,078.5 million and $2,131.6 million as investments in gold for obtaining various loans from banks and financial institutions. (See Note 5)

 

As of December 31, 2018 and 2017, the Company pledged a total of 2,655 and 10,225 kilograms of gold, respectively, as guarantee for Wuhan Kangbo Biotech Limited (“Kangbo”), a related party which is controlled by the CEO and Chairman of the Company, for obtaining total amount of RMB 500 million and RMB 2 billion loan from Evergrowing Bank Huanshan Road Branch, respectively. (See Note 7)

 

As of December 31, 2018, the Company pledged 523 kilograms of gold as collateral for obtaining total amount of RMB 100 million loan from Wuhan Huayuan Technology Development Limited (“Huayuan”), a related party which is controlled by the CEO and Chairman of the Company. (See Note 7)

 

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 December 31, 2017, the total of 26,689 kilograms of Au9999 gold with fair market value of approximately $957.1 million was pledged for long-term bank loans, and therefore classified as non-current investments in gold. The remaining investments in gold of 43,582 kilograms of Au9999 gold with fair market value of approximately $1,562.9 million was classified as current assets as of December 31, 2017. 

 

For the year ended December 31, 2018, the fair market value of investments in gold increased by approximately $106.9 million, which resulted in net unrealized gain of approximately $81.0 million, net of tax for the year ended December 31, 2018. The Company recorded the change in unrealized gain as other comprehensive income, net of tax.

 

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 $145.4 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 $182.7 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 $145.4 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 $163.6 million (RMB 1.1 billion) as collateral.

 

83

 

 

KINGOLD JEWELRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 7 – RELATED PARTIES LOANS (continued) 

 

The Company repaid $226.7 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 $72.7 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, the 2,655 kilograms of Au9999 gold with carrying value of approximately $91.3 million (RMB 627.3 million) will still be pledged in Yantai Huanshan Road Branch of Evergrowing Bank for Kangbo to obtain the loan.

 

Total interest expenses for above related party loans were approximately $5.4 million and $12.9 million, respectively for the years ended December 31, 2018 and 2017.

 

(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.

 

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 subsequently transferred this credit right to paid-in capital through a share restructuring on November 31, 2018. (See Note 8)

 

As of December 31, 2018, the aggregate borrowing amount from Wuhan Kingold Industrial Group was $362.9 million (RMB 2.5 billion). The Company classified these loans as non-current liabilities. As of December 31, 2017, the aggregate borrowing amount from Wuhan Kingold Industrial Group was approximately $553.3 million (RMB 3.6 billion).

 

84

 

 

KINGOLD JEWELRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 7 – RELATED PARTIES LOANS (continued)

 

(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 $19.1 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 year ended December 31, 2017, the Company repaid approximately $3.4 million (RMB 22.6 million), results in the outstanding balance of $10.5 million (RMB 72 million) as of December 31, 2017.

 

Interest expense of $1,017,045 and $574,228 was recorded for this loan for the years ended December 31, 2018 and 2017, respectively.

 

NOTE 8 – OTHER RELATED PARTY TRANSACTIONS

 

For the years ended December 31, 2018 and 2017, 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 December 31, 2018 and 2017, the amount due to this related party were $3,941,846 and $2,630,301, respectively.

 

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 subsequently transferred this credit right to paid-in capital through a share restructuring on November 31, 2018. (See Note 7(b)). As a result, the Company recorded this transaction by increasing the additional paid-in capital as of December 31, 2018.  

 

In connection with the Company’s borrowings of approximately $42.2 (RMB 290 million) loans from China Construction Bank (Note 5), related party Wuhan Huayuan pledged fixed assets buildings as collaterals to secure these loans.

 

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 years ended December 31, 2018 and 2017, the Company recorded $202,167 and $211,692 rent expense, respectively. As of December 31, 2018 and 2017, the Company had lease payables to Wuhan Huayuan of $443,992 and $263,740, respectively, which were included in other payables and accrued expenses.

 

85

 

 

KINGOLD JEWELRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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 December 31, 2018. 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 BVI, and under current laws of the BVI, income earned is not subject to income tax.

 

Wuhan Vogue-Show and Wuhan Kingold are incorporated in the PRC and are subject to PRC income tax, which is computed according to the relevant laws and regulations in the PRC. The applicable tax rate is 25% for the years ended December 31, 2018 and 2017. The Company recorded deferred income tax liabilities of $24,218,911 and deferred income tax assets of $6,677,675 as of December 31, 2018 and 2017, respectively.

 

Recent U.S. federal tax legislation, commonly referred to as the Tax Cuts and Jobs Act (the “U.S. Tax Reform”), was signed into law on December 22, 2017. The U.S. Tax Reform 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 U.S. Tax Reform 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 years 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 years ended December 31, 2018 and 2017:

 

    For the years ended December 31,  
    2018     2017  
United States   $ (1,645,957 )   $ (1,331,862 )
Foreign     82,929,004       36,699,373  
    $ 81,283,047     $ 35,367,511  

  

86

 

 

KINGOLD JEWELRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 9 - INCOME TAXES (continued)

 

Significant components of the income tax provision were as follows for the years ended December 31, 2018 and 2017: 

 

   For the years ended December 31, 
   2018   2017 
Current tax provision          
Federal  $10,784,973   $- 
State   -    - 
Foreign   16,187,186    17,678,757 
   $26,972,159   $17,678,757 
           
Deferred tax provision (benefit)          
Federal   -    - 
State   -    - 
Foreign   4,764,174    (8,503,898)
    4,764,174    (8,503,898)
Income tax provision  $31,736,333   $9,174,859 

 

The components of deferred tax assets and deferred tax liability as of December 31, 2018 and 2017 consist of the following: 

 

   As of December 31, 
   2018   2017 
Deferred tax assets:          
Accrued interest  $557,941   $1,824,171 
Inventory Valuation   (680,780)   4,545,708 
Accrued expenses   (966,667)   330,663 
Deferred financing costs on loans   3,646,606    741,008 
Other temporary difference   (47,321)   56,062 
   $2,509,779   $7,497,612 
           
Deferred financing costs on the loans   -    - 
Deferred tax liability from capitalized interest   -    - 
Unrealized gain due to change in fair value of investments in gold   (26,728,690)   (819,937)
Deferred tax assets (liability) - Net  $(24,218,911)  $6,677,675 

 

The following table reconciles the U.S. statutory rates to the Company’s effective rate for the years ended December 31, 2018 and 2017: 

 

    For the years ended December 31,  
    2018     2017  
US statutory rate     21.0 %     34.0 %
Foreign income and loss not recognized in the U.S.     (21.0 )%     (34.0 )%
One-time transition tax     13.3 %        
China income tax     25 %     25.0 %
Miscellanies and non-deductible expense     0.7 %     0.9 %
Effective tax rate     39.0 %     25.9 %

 

87

 

 

KINGOLD JEWELRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 10 - EARNINGS PER SHARE

 

For the year ended December 31, 2018, the effect of potential shares of common stock was dilutive since the exercise prices for the warrant and options were lower than the average market price for the year ended December 31, 2018. As a result, total of 79,035 unexercised warrants and options are dilutive, and were included in the computation of diluted EPS.

 

For the year ended December 31, 2017, the effect of potential shares of common stock was dilutive since the exercise prices for the warrant and options were lower than the average market price for the year ended December 31, 2017. As a result, total of 421,548 unexercised warrants and options are dilutive, and were included in the computation of diluted EPS.

 

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

 

    For the years ended December 31,  
    2018     2017  
Net income attributable to common stockholders   $ 49,546,714     $ 26,192,652  
Weighted average number of common shares outstanding - Basic Effect of dilutive securities     66,113,502       66,050,498  
Unexercised warrants and options     79,035       421,548  
Weighted average number of common shares outstanding – diluted     66,192,537       66,472,046  
                 
Earnings per share - Basic   $ 0.75     $ 0.40  
Earnings per share – Diluted   $ 0.75     $ 0.39  

 

88

 

 

KINGOLD JEWELRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 11 - OPTIONS

 

The Company recorded $21,456 and $33,014 stock-based compensation expense for the years ended December 31, 2018 and 2017, respectively.

 

As of December 31, 2018, the Company had 3,214,636 outstanding vested stock options with a weighted average remaining term over 2.75 years and 5,364 unvested stock options with a weighted average remaining term over 6 years. Unamortized stock-based compensation expense was $3,576 and $25,032 as of December 31, 2018 and 2017, respectively. The following table summarized the Company’s stock option activity:

 

           Weighted Average 
   Number of
Options
   Weighted Average
Exercise Price
   Remaining Life 
in Years
 
Outstanding, December 31, 2016   3,220,000   $1.90    4.76 
Exercisable, December 31, 2016   3,152,500   $1.92    4.70 
                
Granted   -   $-    - 
Forfeited   -    -    - 
Exercised   -    -    - 
                
Outstanding, December 31, 2017   3,220,000   $1.90    3.76 
Exercisable, December 31, 2017   3,191,875   $1.91    3.73 
                
Granted   -   $-    - 
Forfeited   -    -    - 
Exercised   -    -    - 
                
Outstanding, December 31, 2018   3,220,000   $1.90    2.76 
Exercisable, December 31, 2018   3,214,636   $1.90    2.75 

 

89

 

 

KINGOLD JEWELRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 12 - WARRANTS

 

Following is a summary of the status of warrant activities as of December 31, 2018 and 2017:

 

   Number of   Weighted Average   Weighted average 
   warrants   Exercise Price   Remaining Life in Years 
Outstanding, December 31, 2016   244,635   $1.38    0.52 
Granted   -    -    - 
Forfeited   (150,000)   -    - 
Exercised   (94,635)   -    - 
Outstanding, December 31, 2017   -   $-    - 
Granted   -    -    - 
Forfeited   -    -    - 
Exercised   -    -    - 
Outstanding, December 31, 2018   -   $-    - 

 

On August 12, 2015, the Company signed a consulting agreement to engage Bespoke Independent Partners (“BIP”), a wholly owned subsidiary of FPIA Partners LLC to operate as a strategic advisor to Kingold in matters relating to investor relations, capital markets and shareholder value creation strategy. As the part of the agreement with BIP, an aggregate of 900,000 shares of warrants with exercise price ranging from $1.20 to $1.80 will be directly issued at no cost to BIP if certain stock performance targets are met within a three-year period. As of September 30, 2018, no warrants were issued to BIP because the performance target has not been met.

 

On March 29, 2016, pursuant to the consulting agreement, the Company’s obligation to issue BIP warrants to purchase 150,000 shares of the Company’s common stock for $1.20 per share (the “First Tranche Warrants”) was triggered as a result of certain milestone accomplishments. The warrants were exercised on June 28, 2017, and the Company is in the process of issuing the shares. Accordingly, the Company recorded $64,204 consulting expense and included in the general administrative expense. The fair value of the warrants was calculated using the Black-Scholes options pricing model using the following assumptions: volatility of 81%, risk free interest rate of 0.84%, and expected term of 1.25 years. The fair value of the warrants was $64,204.

 

On April 18, 2016, pursuant to the consulting agreement, the Company’s obligation to issue BIP warrants to purchase 150,000 shares of the Company’s common stock for $1.50 per share (the “Second Tranche Warrants”) was triggered as a result of certain milestone accomplishments. The warrants were scheduled to expire on July 17, 2017. Accordingly, the Company recorded $65,091 consulting expense and included in the general administrative expense. The fair value of the warrants was calculated using the Black-Scholes options pricing model using the following assumptions: volatility of 79.7%, risk free interest rate of 0.63%, and expected term of 1.25 years. The fair value of the warrants was $65,091.

 

On May 10, 2016, the Company terminated the consulting agreement. On June 27, 2016, the Company and BIP signed a settlement agreement (the “Settlement Agreement”). In connection with the Settlement Agreement, the Company and BIP agreed that (1) the First Tranche Warrants and the Second Tranche Warrants would remain vested and outstanding, (2) the third, fourth and fifth tranches of success fee warrants would be cancelled; and (3) crediting of $66,439 in outstanding but unpaid fees against the exercise price of the First Tranche Warrants would be the only payment made or required under the Service Agreement. As a result, BIP received (a) 55,365 shares, (b) warrants to purchase 94,635 shares for $1.2 per share, which expired June 28, 2017, and (c) warrants to purchase 150,000 shares for $1.50 per share, which may be exercised until July 17, 2017. As a result of the Settlement Agreement, the Company does not have any liability for future warrants issuance to BIP. During the year ended December 31, 2017, 94,635 warrants were exercised and these shares were issued in August 2017. On July 17, 2017, the Company received notice from BIP not to exercise the remaining 150,000 warrants.

 

For the years ended December 31, 2018 and 2017, there were no warrants costs recorded in the general administrative expenses of the Company, respectively.

 

90

 

 

KINGOLD JEWELRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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 were $12,749,593 and $17,632,270 as of December 31, 2018 and 2017, respectively. The cash balance held in the BVI bank accounts were $Nil as of December 31, 2018 and 2017, respectively. As of December 31, 2018 and 2017, the Company held $22,953 and $266,012 of cash balances within the United States,

 

For the years ended December 31, 2018 and 2017, 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 years was gold, which accounted for almost 100% of its total purchases for the years ended December 31, 2018 and 2017. The gold purchased by the Company was solely from the Shanghai Gold Exchange, the largest gold trading platform in the PRC.

 

During the years ended December 31, 2018 and 2017, approximately 23.9% and 23.3% of the Company’s net sales were generated from the Company’s five largest customers, respectively. No customer accounted for more than 10% of annual sales for the years ended December 31, 2018 and 2017.

 

NOTE 14 - GOLD LEASE TRANSACTION  

 

a) Gold lease transactions with related party

 

On January 3, 2017, Wuhan Kingold entered into a gold lease agreement with Shuntianyi to lease a total of 4,000 kilograms of Au9999 gold in aggregate with carrying value of approximately $131.1 million for a period from January 3, 2017 to February 28, 2017. The leased gold was fully returned by the Company to Shuntianyi on February 28, 2017.

 

As of December 31, 2018 and 2017, the Company had no leased gold outstanding from any related party, respectively.

 

b) Gold lease transaction with financial institutes

 

The Company leased gold as a way to finance its growth and will return the same amount of gold to China Construction Bank (“CCB”), Shanghai Pudong Development Bank (“SPD Bank”) and CITIC Bank at the end of the respective lease agreements. Under these gold lease arrangements, each of CCB, SPD Bank and CITIC Bank retains beneficial ownership of the gold leased to the Company and treats it as if the gold is placed on consignment to the Company. All three banks have their own representatives on the Company’s premises to monitor on a daily basis the use and security of the gold leased to the Company. Accordingly, the Company records these gold lease transactions as operating leases because the Company does not have ownership nor has it assumed the risk of loss for the leased gold.  

 

As of December 31, 2018 and 2017, no leased gold was outstanding and no restricted cash was pledged as collateral to safeguard any gold leases from financial institutions.

 

Interest expense for all gold lease arrangements for the year ended December 31, 2018 was $Nil. Interest expense for all gold lease arrangements for the year ended December 31, 2017 was approximately $0.1 million, which was included in the cost of sales.

 

91

 

 

KINGOLD JEWELRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 15 - COMMITMENTS AND CONTINGENCIES

 

Gold Income Rights Repurchase Commitment

 

In connection with the Company’s borrowings of approximately $145.4 million (RMB 1 billion) from Dongguan Trust (Note 5), the Company and Dongguan Trust entered into a gold income rights transfer and repurchase agreement. The Agreement allows the Company to obtain no more than approximately $145.4 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 $166.0 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 $1.5 million (RMB 10 million) to secure the loan. The deposit will be refunded when the loan is repaid upon maturity.

 

Operating 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, 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 years ended December 31, 2018 and 2017, the Company recorded $202,167 and $211,692 rent expense, respectively. As of December 31, 2018 and 2017, the Company had lease payables to Wuhan Huayuan of $443,992 and $263,740, respectively, which were included in other payables and accrued expenses.

 

For the Twelve Months Ending December 31,      
2019  $87,058 
2020   87,058 
2021   87,058 
2022   43,529 
   $304,703 

 

92

 

 

KINGOLD JEWELRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 16 – SUMMARIZED QUARTERLY DATA (UNAUDITED)

 

Our following table summarizes the quarterly results of operations for the years ended December 31, 2018 and 2017:  

 

   Fiscal Quarterly 
   Quarter 1   Quarter 2   Quarter 3   Quarter 4 
   (in millions, expect per share data) 
2018                    
Net sales  $539.5   $678.8   $626.2   $631.2 
Income from operations   61.6    61.1    58.6    70.8 
Net income   13.2    13.6    13.2    9.5 
Earnings per share                    
Earnings per share - basic  $0.20   $0.21   $0.20   $0.14 
Earnings per share – dilute  $0.20   $0.20   $0.20   $0.15 
                     
2017                    
Net sales  $292.3   $475.9   $584.5   $675.0 
Income from operations   13.2    44.6    74.7    53.5 
Net income (loss)   (21.3)   8.0    29.0    10.5 
Earnings per share                    
Earnings per share - basic  $(0.32)  $0.12   $0.44   $0.16 
Earnings per share – dilute  $(0.32)  $0.12   $0.44   $0.15 

 

NOTE 17 – COMPARATIVE INFORMATION

 

The Company adopted ASU No. 2016-18, “Statement of Cash Flows: Restricted Cash” on January 1, 2018. As a result, the Company retroactively applied the new standard on the condensed consolidated statement of cash flows for the year ended December 31, 2018 to conform to the current period presentation.

 

The following table provides a reconciliation of cash and restricted cash reported within the condensed consolidated statement of balance sheets that sum to the total of the same such amounts shown in the unaudited condensed consolidated statement of cash flows for the years ended December 31, 2018 and 2017:

 

   December 31, 2018   December 31, 2017 
Cash  $233,391   $4,997,125 
Restricted cash - current   4,798,185    5,534,551 
Restricted cash - non current   7,766,372    7,392,721 
Total cash and restricted cash  $12,797,948   $17,924,397 

 

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KINGOLD JEWELRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 18 – SUBSEQUENT EVENTS  

   

December 21, 2018, the Company entered into a Trust Loan Contract in the amount of no more than approximately $145.4 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 $120.2 million (RMB 826.4 million) and the rest 2,254.49 kilograms were from one related party Wuhan Kingold Group controlled by the CEO and Chairman with carrying value of approximately $91.2 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.

 

January 18, 2019, the Company entered into a Trust Loan Contract in the amount of approximately $43.6 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 $62.7 million (RMB 431.4 million). The loan is also guaranteed by the Wuhan Kingold Group, the entity controlled by CEO and Chairman of the Company.

 

In January 2019, the Company entered into a Trust Loan Contract in the amount of approximately $45.1 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 $68.0 million (RMB 468.0 million). The loan is also guaranteed by the CEO and Chairman of the Company.

 

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 $145.4 million (RMB 1 billion) 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. The Company determined that this Agreement is essentially a loan agreement due to the nature of this transaction. As of the report date, the Company has pleaded 2,822 kilograms of Au9999 gold in aggregate with carrying value of approximately $116.3 million (RMB 800 million) to secure the loan. The loan is also guaranteed by the CEO and Chairman of the Company. As of the report date, the loan has not been released from Tianjin Trust.

 

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KINGOLD JEWELRY, INC.

SCHEDULE 1 - PARENT COMPANY BALANCE SHEETS (IN U.S. DOLLARS)

(Unaudited)

 

   December 31,   December 31, 
   2018   2017 
ASSETS          
CURRENT ASSETS          
           
Cash  $22,953   $266,011 
Other current assets and prepaid expenses   500    500 
Total current assets   23,453    266,511 
OTHER ASSETS          
Investment in subsidiary   650,129,007    390,065,876 
Total other assets   650,129,007    390,065,876 
TOTAL ASSETS  $650,152,460   $390,332,387 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
           
CURRENT LIABILITIES          
           
Other payables and accrued expenses  $156,786   $100,000 
Income tax payable   11,660,927    - 
Total current liabilities   11,817,713    100,000 
TOTAL LIABILITIES   11,817,713    100,000 
           
COMMITMENTS AND CONTINGENCIES          
           
EQUITY          
Preferred stock, $0.001 par value, 500,000 shares authorized, none issued or outstanding as of December 31, 2018 and 2017   -    - 
Common stock $0.001 par value, 100,000,000 shares authorized, 66,113,502 shares issued and outstanding as of December 31, 2018 and 2017   66,113    66,113 
Additional paid-in capital   224,292,907    80,377,449 
Retained earnings          
Unappropriated   353,213,325    303,666,611 
Appropriated   967,543    967,543 
Accumulated other comprehensive income   59,794,859    5,154,671 
Total Equity   638,334,747    390,232,387 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $650,152,460   $390,332,387 

 

The accompanying notes are an integral part of Schedule 1.

 

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KINGOLD JEWELRY, INC.

SCHEDULE 1 - PARENT COMPANY STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(IN U.S. DOLLARS)

(Unaudited)

 

   For the years ended December 31, 
   2018   2017 
OPERATING EXPENSES          
Selling, general and administrative expenses  $(2,500,455)  $(1,297,888)
Stock compensation expenses   (21,456)   (33,014)
Total operating expenses   (2,521,911)   (1,330,902)

EQUITY INCOME OF SUBSIDIARY

   52,068,625    27,523,554 
NET INCOME   49,546,714    26,192,652 
           
OTHER COMPREHENSIVE INCOME (LOSS)          
Unrealized gain related to investments in gold   81,006,008    58,650,446 
Total foreign currency translation gain (loss)   (26,365,802)   22,752,426 
Total Other comprehensive gain   54,640,188    81,402,872 
           
COMPREHENSIVE INCOME  $104,186,902   $107,595,524 

 

The accompanying notes are an integral part of Schedule 1.

 

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KINGOLD JEWELRY, INC.

SCHEDULE 1 - PARENT COMPANY STATEMENTS OF CASH FLOWS (IN U.S. DOLLARS)

(Unaudited)

 

   For the years ended December 31, 
   2018   2017 
CASH FLOWS FROM OPERATING ACTIVITIES          
Net income  $49,546,714   $26,192,652 
Adjusted to reconcile net income to cash used in operating activities:          
Income from subsidiary   (61,528,941)   (26,123,585)
Share based compensation for services   21,456    33,014 
Warrants and shares issued for consulting services   -    - 
Changes in operating assets and liabilities:          
Other payables and accrued expenses   56,786    (117,087)
Income tax payable   11,660,927      
Net cash used in operating activities   (243,058)   (15,006)
           
NET DECREASE IN CASH   (243,058)   (15,006)
CASH, BEGINNING OF YEAR   266,011    281,017 
CASH, END OF YEAR  $22,953   $266,011 
NON-CASH INVESTING AND FINANCING ACTIVITIES          
           
Forgiveness of debt by shareholder allocated to capital contribution  $143,894,002   $- 

  

The accompanying notes are an integral part of Schedule 1.

 

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KINGOLD JEWELRY, INC.
NOTES TO SCHEDULE 1

 

1. Basis of presentation

 

Certain information and footnote disclosures normally included in financial statements prepared in conformity with generally accepted accounting principles have been condensed or omitted. The Company’s investment in subsidiaries is stated at cost plus equity in undistributed earnings of subsidiaries.

 

2. Restricted net assets

 

Schedule I of Article 5-04 of Regulation S-X requires the condensed financial information of registrant shall be filed when the restricted net assets of consolidated subsidiaries exceed 25 percent of consolidated net assets as of the end of the most recently completed fiscal year. For purposes of the above test, restricted net assets of consolidated subsidiaries shall mean that amount of the registrant’s proportionate share of net assets of consolidated subsidiaries (after intercompany eliminations) which as of the end of the most recent fiscal year may not be transferred to the parent company by subsidiaries in the form of loans, advances or cash dividends without the consent of a third party (i.e., lender, regulatory agency, foreign government, etc.).

 

The parent company financial statements have been prepared in accordance with Rule 12-04, Schedule I of Regulation S- X as the restricted net assets of the subsidiaries of Kingold Jewelry, Inc. exceed 25% of the consolidated net assets of Kingold Jewelry, Inc. The ability of our Chinese operating affiliates to pay dividends may be restricted due to the foreign exchange control policies and availability of cash balances of the Chinese operating subsidiaries. Because a significant portion of our operations and revenues are conducted and generated in China, a significant portion of our revenues being earned and currency received are denominated in Renminbi (RMB). RMB is subject to the exchange control regulation in China, and, as a result, we may be unable to distribute any dividends outside of China due to PRC exchange control regulations that restrict our ability to convert RMB into US Dollars.

 

3. Commitments

 

The Company did not have any significant commitments or long-term obligations as at December 31, 2018 and 2017.

 

4. Options

 

The Company recorded $21,456 and $33,014 stock-based compensation expense for the years ended December 31, 2018 and 2017, respectively.

 

As of December 31, 2018, the Company had 3,214,636 outstanding vested stock options with a weighted average remaining term over 2.75 years and 5,364 unvested stock options with a weighted average remaining term over 6 years. Unamortized stock-based compensation expense was $3,576 and $25,032 as of December 31, 2018 and 2017, respectively.

 

5. Warrants

 

For the years ended December 31, 2018 and 2017, there were no warrants costs recorded in the general administrative expenses of the Company, respectively.

 

6. Additional paid-in capital

 

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 subsequently transferred this credit right to paid-in capital through a share restructuring on November 31, 2018. As a result, the Company recorded this transaction by increasing the additional paid-in capital as of December 31, 2018.  

 

98

 

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

ITEM 9A. CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

In evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Due to the timing of the disclosures regarding the entry into certain material agreements, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this report to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 (1) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (2) is accumulated and communicated to management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

In order to remedy our ineffective disclosure controls and procedures, we intend to implement further new processes and procedures to clarify internal reporting channels to ensure that the information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 (1) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (2) is accumulated and communicated to management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. We plan to devote significant remediation efforts toward enhancing disclosure controls and procedures and implement remediation steps by forming a compliance committee within the organization. The committee will be headed by a Chief Risk Officer, a newly created position, and will be responsible for considering the materiality of information and determining disclosure obligations on a timely basis, in addition to other aspects of the Company’s legal and regulatory compliance.

 

Management’s Report on Internal Control Over Financial Reporting

 

Management, under the supervision of our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting (as defined in Rules 13a-15(f) and 15d(f) under the Exchange Act) is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States, or GAAP. Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets, (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, (3) provide reasonable assurance that receipts and expenditures are being made only in accordance with appropriate authorization of management and the board of directors, and (4) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the financial statements. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

99

 

 

Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2018. Management based the assessment on criteria for effective internal control over financial reporting described in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Management’s assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of its internal control over financial reporting. Management reviewed the results of its assessment with the Audit Committee.

 

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will be prevented or detected on a timely basis.

 

Based on the assessment, management determined that, as of December 31, 2018, we did not maintain effective internal control over financial reporting due to the existence of the following significant deficiencies and material weaknesses:

 

  · 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 and toll tax, which led to material audit adjustments been proposed by the auditors and recorded by the Company for fiscal year 2018;

 

  · Certain prior years identified material weaknesses and significant control deficiencies have been carried over from prior years and have not been remediated in 2018;

 

  · Lack of full-time qualified U.S. GAAP personnel in the accounting department to monitor the recording of the transactions;

 

  · Lack of communications between management, chief executive officers and the Board of Directors relating to the approval of recapitalization through debt conversion into equity, obtaining loans from banks, other financial institutions, related parties and providing guarantees to related parties and third parties;

 

  · Lack of a functional internal audit department that monitors the consistencies of the preventive internal control procedures;

 

  · Lack of resources and someone with competency to review non-routine or complex accounting transactions, including the assessment of the impact of the toll tax accrual on the Company's financial statements;

 

  · Lack of management review of internal control over financial reporting and proper review of the financial information on a timely basis, which could increase the risks of financial statement misstatement.

  

100

 

 

In order to remedy the material weakness of inadequate controls over cash management, our Board adopted resolutions requiring management to seek Board approval prior to entering into any transactions including gold leases and loans with a value in excess of $250,000. Notwithstanding this requirement, our Board determined in the course of preparing this annual report that management did not consistently seek Board approval prior to causing Wuhan Kingold to enter into a number of transactions covered by these resolutions. In addition to failing to approve such transactions as anticipated, this absence of prior approval resulted in our failure to disclose such transactions at the time they occurred. Further, we intend to explore implementing additional policies and procedures, which may include:

 

·Reporting other material and non-routine transactions to the Board and obtain proper approval,

 

·Recruiting qualified professionals with appropriate levels of knowledge and experience to assist in resolving accounting issues in non-routine or complex transactions.

 

·Improving the communication between management, board of directors and chief financial officer.

 

·Improving the internal audit function, internal control policies and monitoring controls.

  

·Holding monthly board meeting with management - management reports to the board of directors of significant events such as loans renewals, related parties' transactions, new loans obtained from related and third parties, gold inventories and gold investment (pledged gold) movements and guarantees to related parties and third parties loans.

 

·Developing and conducting internal control training to senior executives, management personnel, finance and accounting departments and the information process office, so that management and key personnel understand the requirements and elements of internal control over financial reporting mandated by the U.S. securities laws.

 

·Holding financial controller accountable for any omitted or misleading transactions not reported to the board of directors and the independent auditors.

 

Changes in Internal Control over Financial Reporting

 

Except for the actions taken to remedy the material weaknesses described above, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. Further, because of changes in conditions, effectiveness of internal controls over financial reporting may vary over time. Our system contains self-monitoring mechanisms, and actions are taken to correct deficiencies as they are identified. These mechanisms may not always be effective at alerting our Board of important transactions, as we experienced in 2018, some of the procedures we intended to implement from 2016 were not carried out during 2018.

 

ITEM 9B. OTHER INFORMATION

 

None.

 

101

 

 

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Directors and Executive Officers

 

The following table sets forth as of the date of this filing the names, positions and ages of our current executive officers and directors. Our directors serve until the next annual meeting of shareholders or until their successors are elected and qualified. Our officers are elected by the board of directors, or the Board, and their terms of office are, except to the extent governed by an employment contract, at the discretion of the Board.

 

Name   Age   Position
Zhihong Jia   57   Chief Executive Officer and Chairman of the Board
Bin Liu   48   Chief Financial Officer and Secretary
Jun Wang   45   General Manager and Director
Guang Chen   40   Independent Director
Alice Io Wai Wu   47   Independent Director
Zhiyong Xia   50   Independent Director

 

ZHIHONG JIA

 

Mr. Jia has served as our chief executive officer and chairman of our Board since the consummation of our December 2009 reverse acquisition transaction. Mr. Jia also co-founded Wuhan Kingold, our contractually controlled affiliate and has served as its chief executive officer and chairman since its establishment in 2002. Mr. Jia has also served vice president of the Gems and Jewelry Trade Association of China since November 2005. Mr. Jia served in the rear supply service department of the People’s Liberation Army in Guangzhou and Wuhan, and was responsible for managing gold mines owned by the government. Mr. Jia graduated from Wuhan University in 2004 with a graduate EMBA certificate. Mr. Jia was elected to the Board due to his extensive operational and industry experience, as well as his committed service to the company as our chairman and chief executive officer, along with his knowledge of and deep genuine interest in our company and the industry.

 

BIN LIU

 

Mr. Liu has served as our chief financial officer since April 2010. Mr. Liu has more than 20 years of experience in the financial markets and in bridging business between the US and China. From July 2004 through March 2010, Mr. Liu served as a vice president of Citigroup’s Financial Institution Cards business where he had full financial responsibility of a $2 billion business. He has also played critical roles in the development of Citigroup’s franchise development in the US. From 1993 through 2002, Mr. Liu worked for the China’s Ministry of Commerce (MOFCOM), promoting bilateral business and investment between the US and China. Mr. Liu graduated from Shanghai Institute of Foreign Trade with a bachelor’s degree in International Business in 1993 and graduated from the Kellogg School at Northwestern University with a Master of Business Administration in 2004.

 

JUN WANG

 

Mr. Wang has served as one of our directors since June 16, 2014 and as our general manager since May 1, 2014. Mr. Wang has worked at Wuhan Kingold since 2003 as a gold investment analyst, and has successively served as the manager of the purchase department, the manager of the investment department, the assistant general manager and as the vice general manager of Wuhan Kingold. From 2000 to 2002, Mr. Wang worked at Hubei Mailyard Group Company and led its network information management and website development. From 1997 to 2000, Mr. Wang worked at MODISH C’BONS Cosmetics Company and led its network information management and logistics management. Mr. Wang graduated with a Bachelor’s Degree from the Computer Engineering Department of Central China Normal University in 1997 where he majored in software development and application. Mr. Wang was elected to the Board due to his 14 years of working experience both within the gold jewelry industry and at Wuhan Kingold, his experience and involvement with the company, as well as his deep understanding of the gold jewelry industry and abundant experience in the management of industrial production technology and business management.

 

102

 

 

GUANG CHEN

 

Mr. Chen has served as one of our directors since June 16, 2014. Mr. Chen has severed as chairman of the Nominating Committee and a member of the Audit Committee and the Compensation Committee. Mr. Chen has extensive banking experience as well as experience with public companies and in capital markets within China. Mr. Chen has worked as a Vice President at the Investment Bank Department of HuaTai United Securities Co., Ltd. He worked at China Merchants Securities Co., Ltd. Investment Bank since 2007 to 2015. From 2007 to 2009, Mr. Chen worked in the Supervision Department of the China Securities Regulatory Commission. From 2006