Company Quick10K Filing
Quick10K
Kingold Jewelry
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.70 66 $46
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
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 2019-08-26 Enter Agreement, Sale of Shares, Exhibits
8-K 2019-05-09 Other Events, Exhibits
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
CSGP Costar Group 22,440
GRUB Grubhub 5,247
HMSY HMS Holdings 3,220
CTRP Ctrip 2,190
VVI Viad 1,312
TRHC Tabula Rasa Healthcare 1,267
LACQ Leisure Acquisition 242
TPNL 3Pea 118
KBLMU KBL Merger IV 109
NEBU Nebula Acquisition 0
KGJI 2019-06-30
Part I - Financial Information
Item 1. Financial Statements
Note 1 - Organization and Basis of Presentation
Note 2 - Summary of Significant Accounting Policies
Note 3 - Inventories
Note 4 - Property, Plant 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 - Concentrations and Risks
Note 13 - Leases
Note 14 - Subsequent Event
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3. Defaults Upon Senior Securities.
Item 4. Mine Safety Disclosures
Item 5. Other Information.
Item 6. Exhibits
EX-10.4 tv526987_ex10-4.htm
EX-31.1 tv526987_ex31-1.htm
EX-31.2 tv526987_ex31-2.htm
EX-32.1 tv526987_ex32-1.htm
EX-32.2 tv526987_ex32-2.htm
EX-99.1 tv526987_ex99-1.htm

Kingold Jewelry Earnings 2019-06-30

KGJI 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 tv526987_10q.htm FORM 10-Q

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

  

FORM 10-Q

 

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

 

For the quarterly period ended:

June 30, 2019

 

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

 

For the transition period from: _____________ to _____________

  

KINGOLD JEWELRY, INC.

(Exact name of registrant as specified in its charter)

  

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

 

No. 8 Han Huang Road

Jiang’an District

Wuhan, Hubei Province, PRC 430023

(Address of principal executive offices) (Zip Code)

 

(011) 86 27 65694977

(Registrant’s telephone number, including area code)

 

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

 

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

x Yes     ¨ No

 

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

x Yes     ¨ No

 

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

 

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

 

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

 

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

¨ Yes     x  No  

 

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

 

Title of Each Class   Ticker Symbol  

Name of Exchange

on Which Registered 

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

  

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

 

As of August 7, 2019, there were 66,113,502 shares of common stock outstanding, par value $0.001 per share. 

 

 

 

 

 

   

QUARTERLY REPORT ON FORM 10-Q

 

TABLE OF CONTENTS

 

    Page
Number
PART I. FINANCIAL INFORMATION 5
     
Item 1. Financial Statements 5
     
  Condensed Consolidated Balance Sheets as of June 30, 2019 (Unaudited) and December 31, 2018 5
     
  Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Six months Ended June 30, 2019 and 2018 (Unaudited) 6
     
  Condensed Consolidated Statements of Cash Flows for the Six months Ended June 30, 2019 and 2018 (Unaudited) 7
     
  Condensed consolidated Statements of Changes in Stockholders’ Equity for the Six months ended June 30, 2019 and 2018 (Unaudited) 8
     
  Notes to Condensed Consolidated Financial Statements (Unaudited) 9
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 44
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 55
     
Item 4. Controls and Procedures 56
     
PART II. OTHER INFORMATION 59
     
Item 1. Legal Proceedings 59
     
Item 1A. Risk Factors 59
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 77
     
Item 3. Defaults Upon Senior Securities 77
     
Item 4. Mine Safety Disclosures 77
     
Item 5. Other Information 77
     
Item 6. Exhibits 78
     
Signatures   79

 

 Page 2 of 79 

 

    

CAUTIONARY STATEMENT FOR PURPOSES OF THE “SAFE HARBOR” STATEMENT

UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

 

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

 

  · changes in the market price of gold;

 

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

 

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

 

  · non-performance of third-party service providers;

 

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

 

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

 

  · our ability to manage growth;

 

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

 

  · our ability to integrate acquired businesses;

 

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

 

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

 

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

 

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

 

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

 

 Page 3 of 79 

 

    

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

 

  · our ability to protect our intellectual property rights;

 

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

 

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

 

  · our ability to comply with environmental laws and regulations;

 

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

 

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

 

  · other risks.

 

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

 

 Page 4 of 79 

 

   

PART I – FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

KINGOLD JEWELRY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN U.S. DOLLARS)

(UNAUDITED)

 

   June 30,   December 31, 
   2019   2018 
    (Unaudited)      
ASSETS          
           
Cash  $114,723,841   $233,391 
Restricted cash   14,337,042    4,798,185 
Accounts receivable   264,158    451,059 
Inventories   262,763,620    127,034,673 
Investments in gold   2,215,449,367    1,593,557,391 
Value added tax recoverable   258,933,954    259,582,324 
Prepaid expenses and other current assets   82,629    87,590 
Total current assets   2,866,554,611    1,985,744,613 
           
Property and equipment, net   4,924,793    5,395,330 
Restricted cash   1,747,539    7,766,372 
Investments in gold   246,949,601    700,225,896 
Land use right   390,837    395,719 
Other noncurrent assets   492,637    285,768 
Total long-term assets   254,505,407    714,069,085 
TOTAL ASSETS  $3,121,060,018   $2,699,813,698 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
           
CURRENT LIABILITIES          
           
Short term loans  $1,532,528,884   $1,034,947,774 
Related party loan   72,593,313    72,699,779 
Due to related party   4,383,039    3,976,742 
Income tax payable   18,955,285    18,504,197 
Other taxes payable   2,150,167    2,577,102 
Accrued expenses and other payables   14,855,067    15,749,564 
Total current liabilities   1,645,465,755    1,148,455,158 
           
Deferred tax liabilities   71,400,016    24,218,911 
Other long-term liability   160,190    - 
Related party loans   419,694,803    373,327,862 
Long term loans   174,753,888    515,477,020 
TOTAL LIABILITIES   2,311,474,652    2,061,478,951 
           
COMMITMENTS AND CONTINGENCIES          
SHAREHOLDERS’ EQUITY          
Preferred stock, $0.001 par value, 500,000 shares authorized, none issued or outstanding as of June 30, 2019 and December 31, 2018     -    - 
Common stock $0.001 par value, 100,000,000 shares authorized, 66,113,502 shares issued and outstanding as of June 30, 2019 and December 31, 2018   66,113    66,113 
Additional paid-in capital   224,298,271    224,292,907 
Retained earnings          
Unappropriated   372,183,091    353,213,325 
Appropriated   967,543    967,543 
Accumulated other comprehensive income, net of tax   212,070,348    59,794,859 
Total Shareholders’ Equity   809,585,366    638,334,747 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $3,121,060,018   $2,699,813,698 

 

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

 

 Page 5 of 79 

 

   

KINGOLD JEWELRY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE INCOME (LOSS)

(IN US DOLLARS)

(UNAUDITED)

  

 

   For the three months ended June 30,   For the six months ended June 30, 
   2019   2018   2019   2018 
                 
NET SALES  $598,008,324   $678,796,263   $1,051,547,424   $1,218,320,318 
                     
COST OF SALES                    
Cost of sales   (528,233,860)   (614,775,972)   (926,225,754)   (1,089,741,556)
Depreciation   (242,888)   (228,173)   (488,628)   (545,838)
Total cost of sales   (528,476,748)   (615,004,145)   (926,714,382)   (1,090,287,394)
                     
GROSS PROFIT   69,531,576    63,792,118    124,833,042    128,032,924 
                     
OPERATING EXPENSES                    
Selling, general and administrative expenses   6,733,404    2,497,488    9,351,596    4,975,276 
Stock compensation expenses   -    5,364    5,364    10,728 
Depreciation   82,731    151,658    165,672    260,487 
Lease expenses   21,105    67,357    42,443    134,923 
Amortization   2,770    2,963    5,571    5,936 
Total operating expenses   6,840,010    2,724,830    9,570,646    5,387,350 
                     
INCOME FROM OPERATIONS   62,691,566    61,067,288    115,262,396    122,645,574 
                     
OTHER INCOME (EXPENSES)                    
Interest Income   298,499    446,143    637,112    822,144 
Interest expense, including amortization of debt issuance costs of $2,227,896 and $2,305,354 for the three months, and $4,550,860 and $4,560,420 for the six months ended June 30, 2019 and 2018, respectively   (46,041,324)   (43,301,467)   (90,341,429)   (87,418,347)
Total other expenses, net   (45,742,825)   (42,855,324)   (89,704,317)   (86,596,203)
                     
INCOME  FROM OPERATIONS BEFORE TAXES   16,948,741    18,211,964    25,558,079    36,049,371 
                     
INCOME TAX PROVISION (BENEFIT)                    
Current   7,048,016    4,169,121    10,810,187    7,426,595 
Deferred   (2,688,462)   479,046    (4,221,874)   1,824,055 
Total income tax provision   4,359,554    4,648,167    6,588,313    9,250,650 
                     
NET INCOME   12,589,187    13,563,797    18,969,766    26,798,721 
                     
OTHER COMPREHENSIVE INCOME (LOSS)                    
Unrealized gain (loss) related to investments in gold, net of tax  $183,487,051   $(19,350,626)  $154,071,011   $(37,973,323)
Foreign currency translation loss   (18,447,260)   (19,822,304)   (1,795,522)   (6,002,603)
Total Other comprehensive income (loss)  $165,039,791   $(39,172,930)  $152,275,489   $(43,975,926)
                     
COMPREHENSIVE INCOME (LOSS)  $177,628,978   $(25,609,133)  $171,245,255   $(17,177,205)
Earnings per share                    
Basic  $0.19   $0.21   $0.29   $0.41 
Diluted  $0.19   $0.20   $0.29   $0.40 
Weighted average number of shares                    
Basic   66,113,502    66,113,502    66,113,502    66,113,502 
Diluted   66,113,502    66,229,658    66,113,502    66,395,251 

  

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

 

 Page 6 of 79 

 

   

KINGOLD JEWELRY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN US DOLLARS)

(UNAUDITED)

 

   For the six months ended June 30, 
   2019   2018 
         
CASH FLOWS FROM OPERATING ACTIVITIES          
Net income  $18,969,766   $26,798,721 
Adjustments to reconcile net income to cash provided by (used in) operating activities:          
Depreciation and amortization   654,300    806,325 
Amortization of intangible assets   5,571    5,936 
Amortization of debt issuance costs included in interest expense   4,550,860    4,560,420 
Share based compensation for services and warrants expense   5,364    10,728 
Deferred tax provision (benefit)   (4,221,874)   1,824,055 
Changes in operating assets and liabilities          
Accounts receivable   189,855    784,850 
Inventories   (150,267,161)   331,036,274 
Other current assets and prepaid expenses   (203,732)   (157,286)
Value added tax recoverable   1,069,281    76,550,155 
Other payables and accrued expenses   (843,629)   1,168,896 
Income tax payable   445,595    2,939,193 
Other taxes payable   (2,612,043)   (77,119)
Net cash provided by (used in) operating activities   (132,257,847)   446,251,148 
           
CASH FLOWS FROM INVESTING ACTIVITIES          
Purchases of property and equipment   (324,284)   (453,522)
Net cash used in investing activities   (324,284)   (453,522)
           
CASH FLOWS FROM FINANCING ACTIVITIES          
Proceeds from other loans – short term   326,509,078    - 
Repayments of other loans – short term   (305,237,937)   (301,624,503)
Proceeds from other loans – long term   132,633,813    240,479,892 
Repayments of related party loans – short term   (223,449)   (235,549,065)
Proceeds from related party loans – long term   137,886,112    334,479,672 
Repayments of related party loans – long term   (91,558,511)   (484,255,723)
Payments of loan origination fees   (2,188,458)   (309,511)
(Repayment of) borrowings from related party   465,421    800,793 
Net cash provided by (used in) financing activities   198,286,069    (445,978,445)
           
EFFECT OF EXCHANGE RATES ON CASH AND RESTRICTED CASH   52,306,536    (2,937,126)
NET INCREASE (DECREASE) IN CASH AND RESTRICTED CASH   118,010,474    (3,117,945)
CASH AND RESTRICTED CASH, BEGINNING OF PERIOD   12,797,948    17,924,397 
CASH AND RESTRICTED CASH, END OF PERIOD  $130,808,422   $14,806,452 
           
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION          
Cash paid for interest expense  $86,976,537   $81,761,918 
Cash paid for income tax  $10,364,592   $4,487,402 
           
NON-CASH INVESTING AND FINANCING ACTIVITIES          
Investments in gold transferred to inventories  $425,343,494   $389,112,590 
Inventories transferred to investments in gold   387,102,692    291,819,372 
Unrealized gain (loss) on investments in gold, net of tax  $154,071,011   $(37,973,323)
Right-of-use assets obtained in exchange for operating lease obligations  $206,419   $- 

 

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

 

 Page 7 of 79 

 

   

 KINGOLD JEWELRY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2019 AND 2018

(IN U.S. DOLLARS)

(UNAUDITED)

 

   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, 2017   -   $-    66,113,502   $66,113   $80,377,449   $303,666,611   $967,543   $5,154,671   $390,232,387 
                                              
Options granted for services   -    -    -         10,728    -    -    -    10,728 
Net income for the period   -    -    -    -    -    26,798,721    -    -    26,798,721 
Unrealized loss related to investment in gold   -    -    -    -    -    -    -    (37,973,323)   (37,973,323)
Foreign currency translation gain   -    -    -    -    -    -    -    (6,002,603)   (6,002,603)
                                              
Balance at June 30, 2018   -   $-    66,113,502   $66,113   $80,388,177   $330,465,332   $967,543   $(38,821,255)  $373,065,910 
                                              
Balance at December 31, 2018   -   $-    66,113,502   $66,113   $224,292,907   $353,213,325   $967,543   $59,794,859   $638,334,747 
                                              
Options granted for services   -    -    -         5,364    -    -    -    5,364 
Net income for the period   -    -    -    -    -    18,969,766    -    -    18,969,766 
Unrealized gain related to investment in gold   -    -    -    -    -    -    -    154,071,011    154,071,011 
Foreign currency translation loss   -    -    -    -    -    -    -    (1,795,522)   (1,795,522)
Balance at June 30, 2019   -   $-    66,113,502   $66,113   $224,298,271   $372,183,091   $967,543   $212,070,348   $809,585,366 

 

The accompanying notes are an integral part of these unaudited condensed consolidated Financial Statements

 

 Page 8 of 79 

 

   

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 1 – ORGANIZATION AND BASIS OF PRESENTATION

 

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

 

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

 

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

 

These contractual arrangements enable Wuhan Vogue-Show to:

 

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

 

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

 

 Page 9 of 79 

 

   

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 1 – ORGANIZATION AND BASIS OF PRESENTATION (continued)

 

The accompanying unaudited condensed consolidated financial statements of Kingold Jewelry, Inc. (“Kingold” or the “Company”) have been prepared in accordance with generally accepted accounting principles (“U.S. GAAP”) for interim financial information pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary to make the financial statements not misleading have been included. Operating results for the interim period ended June 30, 2019  are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2019. The information included in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis, and the financial statements and notes thereto included in the Company’s Form 10-K for the fiscal year ended December 31, 2018, filed with the SEC on April 2, 2019.

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation 

 

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

 

Use of Estimates

 

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

 

Cash

 

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

 

Restricted Cash

 

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

 

 Page 10 of 79 

 

   

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

As of June 30, 2019 and December 31, 2018, the Company had restricted cash (current and non-current) of $16,084,581 and $12,564,557, respectively. All restricted cash was related to the various loans with banks and financial institutions – see Note 5 – Loans.

 

Accounts Receivable

 

The Company generally receives cash payment upon delivery of a product, but may extend unsecured credit to its customers in the ordinary course of business. The Company mitigates the associated risks by performing credit checks and actively pursuing past due accounts. An allowance for doubtful accounts is established and recorded based on management’s assessment of the credit history of the customers and current relationships with them. As of June 30, 2019 and December 31, 2018, there was no allowance recorded as the Company considers all of the accounts receivable fully collectible. 

 

Inventories

 

Inventories are stated at the lower of cost and net realizable value, and cost is calculated on the weighted average basis. As of June 30, 2019 and December 31, 2018 there was no lower of cost or market adjustment because the carrying value of the Company’s inventories was lower than the current and expected market price of gold. The cost of inventories comprises all costs of purchases, costs of fixed and variable production overhead and other costs incurred in bringing the inventories to their present condition.

 

Property, Plant and Equipment

 

Property and equipment are stated at cost, less accumulated depreciation. Expenditures for additions, major renewals and betterments are capitalized, and expenditures for maintenance and repairs are charged to expense as incurred. Leasehold improvements are depreciated over the shorter of the lease term or the estimated useful life. 

 

Depreciation is provided on a straight-line basis, less estimated residual value, over an asset’s estimated useful life. The estimated useful lives used in connection with the preparation of the financial statements are as follows:

 

    Estimated
Useful Life
Buildings   30 years
Plant and machinery   15 years
Motor vehicles   10 years
Office furniture and electronic equipment   5 - 10 years
Leasehold improvements   5 years

 

 Page 11 of 79 

 

   

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Land Use Right

 

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

 

Long-Lived Assets

 

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

 

Fair Value of Financial Instruments

 

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

 

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

 

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

 

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

 

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

 

 Page 12 of 79 

 

    

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Investments in Gold

 

The Company pledged its own gold inventory to meet the requirements of bank loans. The pledged gold will be available for sale upon the repayment of the bank loans. The Company classified these pledged gold as investments in gold, and carried at fair market value, with the unrealized gains and losses, included in the determination of comprehensive income (loss) and reported in equity. The fair market value of the investments in gold is determined by quoted market prices at Shanghai Gold Exchange, which is considered as the principal market.

 

Leases

 

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

 

Revenue Recognition

 

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

 

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

 

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

 

 Page 13 of 79 

 

   

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Revenue Recognition (continued)

 

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

 

Sαles of brαnded products

 

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

 

Customized production fees

 

In the customized product arrangement, the Company receives orders from other jewelry companies who engage to the Company to design and produce 24-karat jewelry and Chinese ornaments using gold they supply to the Company. Although the Company assumes the responsibilities to design and manufacture the related Jewelry products, the Company does not assume inventory risk and does not determine the product design specification. As a result, the Company is considered the agent in this arrangement for revenue recognition purposes. All of the sales contracts in this customized product arrangements contain performance obligations satisfied at a point in time when we complete the design and ship the product from the Company’s facility. The Company recognizes services-based revenue (the processing fee) from such contracts for customized production when: (i) the contracted services have been performed and (ii) collectability is reasonably assured.

 

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

 

 Page 14 of 79 

 

   

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Revenue Recognition (continued)

 

Contract Balances and Remaining Performance Obligations

 

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

 

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

 

Revenue by category

 

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

 

   For the three months ended June 30,   For the six months ended June 30, 
   2019   2018   2019   2018 
Branded production sales  $584,108,061   $667,137,665   $1,026,495,250   $1,195,458,268 
Customized production sales   13,778,350    11,593,838    24,906,111    22,681,768 
Trade in product sales   26,280    26,479    50,322    46,036 
Other   95,633    38,281    95,741    134,246 
   $598,008,324   $678,796,263   $1,051,547,424   $1,218,320,318 

  

Income Taxes

 

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

 

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

 

 Page 15 of 79 

 

   

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

  

To the extent applicable, the Company records interest and penalties as a general and administrative expense. The statute of limitations for the Company’s U.S. federal income tax returns and certain state income tax returns remains open for tax years 2016 and after. As of June 30, 2019, the tax years ended December 31, 2014 through December 31, 2018 for the Company’s PRC subsidiaries remain open for statutory examination by PRC tax authorities.

 

Foreign Currency Translation

 

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

 

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

 

    June 30, 2019     June 30, 2018     December 31, 2018  
Balance sheet items, except for equity, as of the period ended   US$ 1=RMB 6.8668     US$ 1=RMB 6.6198     US$ 1=RMB 6.8776  
Amounts included in the statements of operations and cash flows for the periods presented   US$ 1=RMB 6.7856     US$ 1=RMB 6.3681     US$ 1=RMB  6.6163  

  

 Page 16 of 79 

 

   

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Comprehensive income (loss)

 

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

 

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. 

 

Debt Issuance Origination Costs

 

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

  

 Page 17 of 79 

 

   

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Risks and Uncertainties

 

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

 

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

 

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

 

 Page 18 of 79 

 

   

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Risks and Uncertainties (continued)

 

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

 

Recent Accounting Pronouncements

 

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

 

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

 

 Page 19 of 79 

 

   

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 3 – INVENTORIES

 

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

 

   As of 
   June 30, 2019   December 31, 2018 
   (unaudited)     
Raw materials (A)  $148,873,722   $- 
Work-in-progress (B)   73,045,237    87,160,453 
Finished goods (C)   40,844,661    39,874,220 
Total inventories  $262,763,620   $127,034,673 

 

(A)

Included 4,280,771 grams of Au9999 gold as of June 30, 2019 and Nil Au9999 gold as of December 31, 2018.

 

(B) Included 2,108,382 grams of Au9999 gold as of June 30, 2019 and 2,570,232 grams of Au9999 gold as of December 31, 2018.

 

(C) Included 1,172,133 grams of Au9999 gold as of June 30, 2019 and 1,168,892 grams of Au9999 gold as of December 31, 2018.

 

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

 

 Page 20 of 79 

 

  

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 4 – PROPERTY, PLANT AND EQUIPMENT, NET

 

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

 

    As of  
    June 30, 2019     December 31, 2018  
    (unaudited)        
Buildings   $ 2,288,797     $ 2,285,204  
Plant and machinery     17,731,821       17,703,975  
Motor vehicles     240,885       240,507  
Office and electric equipment     1,622,997       1,454,794  
Leasehold improvements     1,470,586       1,466,654  
Subtotal     23,355,086       23,151,134  
Less: accumulated depreciation     (18,430,293 )     (17,755,804 )
Property and equipment, net   $ 4,924,793     $ 5,395,330  

 

Depreciation for the three and six months ended June 30, 2019 was $325,619 and $654,300, respectively. Depreciation expenses for the three and six months ended June 30, 2018 was $379,831 and $806,325, respectively.  

 

 Page 21 of 79 

 

   

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 5 – LOANS

 

Short term loans consist of the following: 

 

    As of  
    June 30, 2019       December 31, 2018  
    (Unaudited)        
(a) Loans payable to Evergrowing Bank - Yantai Huanshan Road Branch     62,005,222       72,699,779  
(b) Loans payable to Sichuan Trust - gross amount     218,442,360       145,399,558  
  Loans payable to Sichuan Trust - deferred financing cost     (1,243,737)       -  
(c) Loans payable to Zheshang Jinhui Trust - gross amount     -       62,725,369  
  Loans payable to Zheshang Jinhui Trust - deferred financing cost     -       (18,547 )
(d) Loan payable to China Aviation Trust - gross amount     42,232,190       45,073,863  
  Loan payable to China Aviation Trust - deferred financing cost     (567,788)       (44,456 )
(e) Loans payable to National Trust - gross amount     -       50,889,845  
  Loans payable to National Trust - deferred financing cost     -       (30,023 )
(f) Loans payable to Anxin Trust     224,267,490       354,774,921  
(g) Loans payable to China Construction Bank     42,232,189       42,165,871  
(h) Loans payable to Minsheng Trust     597,075,786       145,399,560  
  Loans payable to Minsheng Trust- deferred financing cost     (1,983,435)       -  
(i) Loans payable to Dongguan Trust     145,628,240       -  
  Loans payable to Dongguan Trust-deferred financing cost     (879,433)       -  
(j) Loans payable to Chang’An Trust - gross amount     116,772,808       116,589,437  
  Loans payable to Chang’An Trust– deferred financing cost     (280,409 )     (677,403 )
(k) Loans payable to Sichuan Trust     45,144,754       -  
(l) Loans payable to Northern International Trust     43,682,647        
  Total short term loans   $ 1,532,528,884     $ 1,034,947,774  

 

 Page 22 of 79 

 

   

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 5 – LOANS (continued)

 

(a) Loans payable to Evergrowing Bank – Yantai Huanshan Road Branch

 

From February 24, 2016 to March 24, 2016, Wuhan Kingold signed ten Loan Agreements with the Yantai Huangshan Road Branch of Evergrowing Bank for loans of approximately $145.4 million (RMB 1 billion) in aggregate. The purpose of the loans was for purchasing gold. The original terms of loans are two years and bear fixed interest of 4.75% per year. Based on the loan repayment plan as specified in the loan agreements, $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 $72.8 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 $92.6 million (RMB 635.9 million) and are guaranteed by the CEO and Chairman of the Company. Upon the maturity of these loans, the Company entered into a series of supplemental agreements with Yantai Huanshan Road Branch of Evergrowing Bank to extend the term of the loan for additional 12 months, with new maturity dates between October 9, 2019 and October 21, 2019. In April and June 2019, the Company repaid total of $10.8 million (RMB 74.2 million) to Evergrowing bank Yantai Huangshan Road Branch. As of June 30, 2019, the outstanding loans payable to Evergrowing bank Yantai Huangshan Road Branch amounted to approximately $62 million (RMB 425.8 million).

 

(b) Loans payable to Sichuan Trust

 

On September 7, 2016, the Company entered into two trust loan agreements with the Sichuan Trust Ltd. (“Sichuan Trust”) to borrow a maximum of approximately $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 June 30, 2019, the Company received an aggregate of approximately $218.4 million (RMB 1.5 billion) from the loan.

 

These loans originally have maturity dates between September 20, 2018 and November 30, 2018. During the year ended December 31, 2018, these loans were extended to have maturity dates between November 20, 2019 and January 30, 2020. Therefore, approximately $72.7 million (RMB 500 million) was recorded as long term as of December 31, 2018. During the six months ended June 30, 2019, such amount has been reclassified as short-term loan based on its current maturity. As of June 30, 2019, 7,258 kilograms of Au999 gold with carrying value of approximately $245.8 million (approximately RMB 1.7 billion) was pledged as collateral to secure the loans.

 

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. Amortization of deferred financing costs amounted to $0.5 million (RMB 3.2 million) and approximately $0.9 (RMB 6.3 million) million for the three and six months ended June 30, 2019, respectively. Amortization of deferred financing costs amounted to $0.7 million (RMB 4.5 million) and approximately $1.4 million (RMB 9 million) for the three and six months ended June 30, 2018, respectively.

 

 Page 23 of 79 

 

   

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 5 – LOANS (continued)

 

(c) Loans payable to Zheshang Jinhui Trust

 

In November 2017, Wuhan Kingold entered into a Trust Loan Contract with Zheshang Jinhui Trust. The agreement allows the Company to access a total of approximately $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 $0.94 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 255.8 million) to Zheshang Jinhui Trust. In March 2019, the Company made additional approximately $3.7 million (RMB 25 million) repayment to the loan. As of March 31, 2019, the outstanding loans payable to Zhejiang Jinhui Trust amounted to approximately $22.4 million (RMB 150.6 million), which was secured by 1,524 kilograms of Au999 gold with carrying value of approximately $52.6 million (RMB 352.8 million). From April to June 2019, the Company fully repaid the loan to Zheshang Jinhui Trust, and the pledged gold and restricted cash was released and returned upon the repayment. 

 

The Company paid approximately $1.4 million (RMB 9.5 million) as loan origination fee for obtaining the Zhejiang Jinhui Trust loans in November 2017. The loan origination fee was recorded as deferred financing cost against the loan balance. For the years ended December 31, 2018 and 2017, approximately $1.4 million (RMB 9.0 million) and $0.1 million (RMB 0.3 million) deferred financing costs were amortized related to the loans. For the three and six months ended June 30, 2019, $0.01 million (RMB 18,576) and $0.01 million (RMB 18,576) deferred financing cost was amortized, respectively. For the three and six months ended June 30, 2018, approximately $0.3 million (RMB 1.9 million  ) and $$0.6 million (RMB 3.7 million) deferred financing cost was amortized, respectively.

 

(d) Loans payable to China Aviation Trust

 

On January 25, 2017, Wuhan Kingold entered into a trust loan agreement with China Aviation Trust Ltd. to borrow a maximum of approximately $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. For the three and six months ended June 30, 2019, $Nil and $44,526 (RMB 305,753) deferred financing cost was amortized, respectively. For the three and six months ended June 30, 2018, approximately $0.2 million (RMB 1.2 million) and $0.4 million (RMB 2.3 million) deferred financing cost was amortized, respectively.

 

 Page 24 of 79 

 

   

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 5 – LOANS (continued)

 

In addition, on September 7, 2016, the Company entered into another trust loan agreement with China Aviation Capital Investment Management (Shenzhen) (“China Aviation Capital”) to borrow a maximum of approximately $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 $50 million (RMB 342.5 million) as collateral to secure this loan. The loan is guaranteed by the CEO and Chairman of the Company. The loan was extended upon maturity for another 18 months with a new maturity date of March 5, 2020. As of June 30, 2019, based on its current maturity, the $42.2 million loan from China Aviation Capital has been reclassified as short-term loan. The Company is required to pay interest based on a fixed annual interest rate of 10% and a one-time consulting fee of 3% based on the principal amount extended as loan origination fee.

 

For the September 7, 2016 loans from China Aviation Trust, the Company paid totally approximately $1.3 million (RMB 8.7 million) during 2018 as loan origination fee for obtaining the loan. The loan origination fee was recorded as deferred financing cost against the loan balance. For the years ended December 31, 2018 and 2017, approximately $0.7 million (RMB 4.9 million) and $0.7 million (RMB 4.4 million) deferred financing costs were amortized, respectively. For the three and six months ended June 30, 2019, approximately $0.2 million (RMB 1.46 million) and $0.4 million (RMB 2.9 million) deferred financing cost was amortized, respectively. There was no amortization of deferred financing costs on this loan for the three and six months ended June 30, 2018.

 

As of June 30, 2019, the Company had the availability to borrow additional approximately $45.1 million (RMB 310 million) from China Aviation Capital under the above mentioned loan agreements.

 

(e) Loans payable to National Trust

 

On February 28, 2017, Wuhan Kingold entered into a trust loan agreement with National Trust Ltd. (“National Trust”) to borrow a maximum of approximately $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 three and six months ended June 30, 2019, $Nil and $30,023 (RMB 206,486) deferred financing cost was amortized, respectively. For the three and six months ended June 30, 2018, approximately $0.05 million (RMB 0.3 million) and $0.1 million (RMB 0.6 million) deferred financing cost was amortized, respectively.

 

 Page 25 of 79 

 

   

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 5 – LOANS (continued)

 

(f) Loans payable to Anxin Trust Co., Ltd

 

In January 2016, Wuhan Kingold signed a Collective Trust Loan Agreement with Anxin Trust Co., Ltd. (“Anxin Trust”). The agreement allowed the Company to access of approximately $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 $535.2 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 $3.6 million (RMB 24 million) to secure the rest of these loans. The deposit will be refunded when the loan is repaid upon maturity. In February and March 2019, the Company made repayments total of approximately $28.6 million (RMB 192 million) and extended the loans of approximately $18.5 million (RMB 127 million) which originally due on March 29, 2019 to April 10, 2019.  In April and June 2019, the Company made repayments total of approximately $103.1 million (RMB 708 million) to Anxin Trust Co., Ltd., and 5,580 kilograms of Au999 pledged gold with carrying value of approximately $57.6 million (RMB 395.3 million) has been released and returned upon the repayment. As of June 30, 2019, 9,870 kilograms of Au999 gold with carrying value of approximately $465.6 million (approximately RMB 3.2 billion) was pledged as collateral to secure the loans.

 

Among the outstanding loans payable to Anxin Trust of $224.3 million as of June 30, 2019, approximately $145.6 million (RMB 1 billion) matured in July 2019 (including RMB 500 million with maturity on July 1, 2019 and another RMB 500 million with maturity between July 14, 2019 to July 18, 2019). The Company negotiated with Anxin Trust and extended the insurance coverage date to September 18, 2019. Through such insurance extension, the Company extended the loan repayment date to September 18, 2019. In August 2019, the Company made additional repayment of approximately $5.8 million (RMB 40 million) to Anxin Trust. 2470 kilograms of pledged gold has been released and returned to inventory pool.

 

(g) 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.

 

As of June 30, 2019, outstanding loans payable to China Construction Bank amounted to approximately $42.2 million (RMB 290 million). The loans were guaranteed by the CEO and Chairman of the Company. In addition, related party Wuhan Huayuan pledged fixed asset buildings as collateral to further secure these loans. The loan agreements also required that Company to maintain an asset-liability ratio less than 90% and current ratio over 1. The Company is not allowed to increase contingent liabilities without notice to the bank, the balance of contingent liabilities should be no larger than RMB 3.05 billion, and contingent asset-liability ratio should be less than 60%.

 

On July 5, 2019, the Company made a repayment of approximately $4.4 million (RMB 30 million) to China Construction Bank.

 

 Page 26 of 79 

 

   

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 5 – LOANS (continued)

 

(h) Loan payable to Minsheng Trust

 

On December 26, 2017, the Company entered into a Trust Loan Contract in the amount of no more than approximately $218.4 million (RMB 1.5 billion) with China Minsheng Trust Co., Ltd. (“Minsheng Trust”). The purpose of the trust loan is to supplement liquidity needs. The Trust Loan will be issued in installments. Each installment of the Trust Loan has a 24-month term, and the period from issuance date of the first installment to the expiration date of the last installment shall not exceed 30 months. The loans have different maturity date from January 3, 2020 to June 24, 2020. The Trust Loan bears interest at a fixed annual rate of 9.2%. The Company received total of $218.4 million (RMB 1.5 billion) loans from Minsheng Trust under this agreement. The loan is secured by 7,887 kilograms of Au9999 gold in aggregate with carrying value of approximately $270.6 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. This loan was originally recorded as long-term loans payable as of December 31, 2018. Based on its current maturity, it has been reclassified as short-term loans payable as of June 30, 2019. 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. For the three and six months ended June 30, 2019, $0.95 million (RMB 6.7 million) and $1.9 million (RMB 13.3 million) deferred financing cost was amortized, respectively. No deferred financing cost was amortized for the three and six months ended June 30, 2018, respectively.

 

On October 10, 2018, the Company entered into another Trust Loan Contract in the amount of no more than approximately $145.6 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 $182.2 million (RMB 1.3 billion). The loan is also guaranteed by the CEO and Chairman of the Company.

 

In addition, on December 21, 2018, the Company entered into another Trust Loan Contract in the amount of no more than approximately $145.6 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 $105.7 million (RMB 726.1 million) and the remaining 2,254.49 kilograms were from one related party Wuhan Kingold Group controlled by the CEO and Chairman with carrying value of approximately $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.

 

On May 24, 2019, the Company entered into another Trust Loan Contract with Minsheng Trust to borrow approximately $87.4 million (RMB 600 million) as working capital. Each installment of the Trust Loan has a 12-month term, and the period from issuance date of the first installment to the expiration date of the last installment shall not exceed 18 months. The Trust Loan bears interest at a fixed annual rate of 11%. The loan is secured by 2,990 kilograms of Au9999 gold in aggregate with carrying value of approximately $115.5 million (RMB 793.3 million). The loan is also guaranteed by the CEO and Chairman of the Company.

 

As of June 30, 2019 the aggregate outstanding loans payable to Mingsheng Trust amounted to approximately $597.1 million.

 

 Page 27 of 79 

 

   

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 5 – LOANS (continued)

 

(i) Loans payable to Dongguan Trust

  

In July 2018, Wuhan Kingold entered into a gold income rights transfer and repurchase agreement (the “Agreement”) with Dongguan Trust. The Agreement allows the Company to borrow up to approximately $145.6 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 $166.1 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. This loan was originally recorded as long-term loans payable as of December 31, 2018 and has been reclassified as short-term loans payable as of June 30, 2019, based on its current 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. For the three and six months ended June 30, 2019, approximately $0.37 million (RMB 2.5 million) and $0.74 million (RMB 5 million) deferred financing cost was amortized, respectively.

 

(j) Loans payable to Chang’An Trust

 

In September 2017, Wuhan Kingold entered into a Trust Loan Contract with Chang’An Trust. The agreement allows the Company to access a total of approximately $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 $163.7 million (RMB 1.1 billion). The loan is also guaranteed by the CEO and Chairman of the Company. The Company also made a restricted deposit of approximately $1.5 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 June 30, 2019, the balance of loans from Chang’An Trust was approximately $116.8 (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 three and six months ended June 30, 2019 , approximately $0.2 million (RMB 1.4 million) and $0.4 million (RMB 2.7 million) deferred financing cost was amortized, respectively. For the three and six months ended June 30, 2018, approximately $0.2 million (RMB 1.4 million) and $0.4 million (RMB 2.7 million) deferred financing cost was amortized, respectively.

 

 Page 28 of 79 

 

   

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 5 – LOANS (continued)

 

(k) Loans payable to Sichuan Trust

 

In January 2019, the Company entered into a Trust Loan Contract in the amount of approximately $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 $58.2 million (RMB 399.6 million). The loan is also guaranteed by the CEO and Chairman of the Company. 

 

(l) Loans payable to Northern International Trust

 

On January 18, 2019, the Company entered into a Trust Loan Contract in the amount of approximately $43.7 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 $55.1 million (RMB 378.2 million). The Company also made a restricted deposit of approximately $0.44 million (RMB 3 million) to secure these loans. The deposit will be refunded when the loan is repaid upon maturity. The loan is also guaranteed by the Wuhan Kingold Group, the entity controlled by CEO and Chairman of the Company.

 

Interest expense for all of the short term loans for the three and six months ended June 30, 2019 was $38.3 million and $76.7 million, respectively. Interest expense for all of the short-term loans amounted to $23 million and $41.5 million for the three and six months ended June 30, 2018, respectively. The weighted average interest rate for the six months ended June 30, 2019 and 2018 was 9.7% and 8.0%, respectively.

 

 Page 29 of 79 

 

   

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 5 – LOANS (continued)

 

Long term loans consist of the following:

 

    As of  
    June 30, 2019     December 31, 2018  
    (unaudited)        
(m) Loans payable to Minsheng Trust - gross amount   $ -     $ 218,099,337  
  Loans payable to Minsheng Trust - deferred financing cost     -       (3,907,406)  
(n) Loans payable to China Aviation Capital     -       42,165,872  
  Loans payable to China Aviation Capital - deferred financing cost     -       (990,898)  
(o) Loans payable to Sichuan Trust - gross amount     -       72,699,779  
(p) Loan payable to Dongguan Trust     -       145,399,557  
  Loan payable to Dongguan Trust - deferred financing cost     -       (1,609,089)  
(q) Loan payable to Kunlun Trust     43,688,472       43,619,868  
(r ) Loan payable to Northern International Trust     43,688,472       -  
(s) Loan payable to Tianjin Trust     87,376,944       -  
  Total long term loans, net of deferred financing costs   $ 174,753,888     $ 515,477,020  

 

(m) Loan payable to Minsheng Trust- (see Note 5 (h) above). Approximately $218.4 million (RMB 1.5 billion) loans payable to Minsheng Trust has been reclassified as short-term loans payable as of June 30, 2019.

 

(n) Loans payable to China Aviation Trust – (see Note 5 (d) above). Approximately $42.2 million loans payable has been reclassified as short-term loans payable as of June 30, 2019.

 

(o) Loans payable to Sichuan Trust (see Note 5 (b) above). Approximately $218.4 million loans payable has been reclassified as short-term loans payable as of June 30, 2019. 

  

(p) Loans payable to Dongguan Trust- (see Note 5 (i) above). Approximately $145.6 million loans payable has been reclassified as short-term loans payable as of June 30, 2019.

 

 Page 30 of 79 

 

   

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 5 – LOANS (continued)

 

(q) Loans payable to Kunlun Trust

  

In December 2018, Wuhan Kingold entered into a Trust Loan Contract in the amount of approximately $43.7 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 $0.44 million (RMB 3 million) to secure the loan. The deposit will be refunded when the loan is repaid upon maturity.

 

(r) Loans payable to North International Trust

  

In January 2019, Wuhan Kingold entered into a Trust Loan Contract in the amount of approximately $43.7 million (RMB 300 million) with Northern International Trust Co., Ltd. (“Northern International Trust”). The Trust Loan has a 24-month term with maturity date on January 28, 2021, and bears interest at a fixed annual rate of 10%. This loan is secured by 1,517 kilograms of Au9999 gold in aggregate with carrying value of approximately $54.8 million (RMB 376.5 million). The Company made a restricted deposit of approximately $0.44 million (RMB 3 million) to secure these loans. The deposit will be refunded when the loan is repaid upon maturity. The loan is also guaranteed by the related party Wuhan Kingold Industrial Group Co., Ltd, an entity controlled by the CEO and Chairman of the Company.

 

(s) Loans payable to Tianjin Trust

 

In March 2019, the Company entered into a gold income rights transfer and repurchase agreement (the “Agreement”) with Tianjin Trust. The Agreement allows the Company to obtain up to approximately $148.9 million (RMB 1 billion) loans to exchange the income earning rights derived from its gold. The Company committed to buy back the rights and repay the proceeds received, and shall pay a fixed interest of 12% over the term (from March 29, 2019 to December 29, 2020). The Company determined that this Agreement is essentially a loan agreement due to the nature of this transaction. The Company has pledged 2,822 kilograms of Au9999 gold in aggregate with carrying value of approximately $99.7 million (RMB 684.7 million) to secure the loan. The Company also made a restricted deposit of approximately $0.9 million (RMB 6 million) to secure the loan. The deposit will be refunded when the loan is repaid upon maturity. The loan is also guaranteed by the CEO and Chairman of the Company, and related party Wuhan Kingold Industrial Group . The Company received RMB 414.6 million in the first quarter of 2019 and further received additional RMB 185.4 million in April 2019. As of June 30, 2019, the Company received approximately $87.4 million (RMB 600 million) loans from Tianjin Trust.

 

Interest expense for all of the long term loans for the three and six months ended June 30, 2019 was approximately $4.1 million and $6.4 million, respectively. Total interest expense on the long-term loans was approximately $16.4 million and $37.8 million for the three and six months ended June 30, 2018, respectively. The weighted average interest rate for the six months ended June 30, 2019 and 2018 was 10.9% and 9.8%, respectively.

 

 Page 31 of 79 

 

   

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 6 – INVESTMENTS IN GOLD

 

As of June 30, 2019 and December 31, 2018, the Company allocated a total of 59,386,210 grams and 61,122,210 grams of Au9999 gold in its inventories with carrying value of approximately $2,050.4 million and $2,078.5 million, respectively, as investments in gold for obtaining various loans from banks, and financial institutions (See Note 5).

 

As of June 30, 2019 and December 31, 2018, the Company pledged a total of 2,655 kilograms of gold, as guarantee for Wuhan Kangbo Biotech Limited (“Kangbo”), a related party which is controlled by the CEO and Chairman of the Company, for obtaining total amount of RMB 500 million loan from Evergrowing Bank Huanshan Road Branch, respectively (See Note 7).

 

As of June 30, 2019, the Company pledged a total of 339 kilograms of gold as collateral for obtaining total amount of $8.7 million (RMB 60 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 June 30, 2019, a total of 6,256 kilograms of Au9999 gold with fair market value of approximately $246.9 million was pledged for long term loans, and therefore classified as non-current investments in gold. The remaining investments in gold of 56,124.2 kilograms of Au9999 gold with fair market value of approximately $2,215.4 million was classified as current assets as of June 30, 2019.

 

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

 

As of June 30, 2019, the fair market value of a total of 62,380.2 kilograms of Au9999 gold investments increased by approximately $205.4 million, which resulted in unrealized gain of approximately $154.1 million, net of tax for the six months ended June 30, 2019. The Company recorded the change in unrealized gain related to investments in gold as other comprehensive income (loss), net of tax.

 

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KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 7 – RELATED PARTIES LOANS 

 

(a) Loans payable to Wuhan Kangbo Biotech Limited

 

On January 13, 2017, Wuhan Kingold entered into a loan agreement with Wuhan Kangbo Biotech Limited (“Kangbo”), a related party which is controlled by the CEO and Chairman of the Company, for a loan of approximately $148.9 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 $193.7 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 $148.9 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 $163.9 million (RMB 1.1 billion) as collateral.

 

 The Company repaid $223.5 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 $74.5 million (RMB 500 million) loan that matured on March 2, 2018, the Company entered into a loan extension agreement with Kangbo to extend the loan borrowing period for additional seven months until October 2, 2018 with additional 300 kilograms of gold pledged as collateral. Upon the maturity of the loan, the Company entered into a supplemental agreement with the related party Kangbo to extend the term of the loan for 12 months with new maturity date on October 2, 2019, the 2,655 kilograms of Au9999 gold with carrying value of approximately $91.4 million (RMB 627.3 million) will still be pledged in Yantai Huanshan Road Branch of Evergrowing Bank for Kangbo to obtain the loan.  The Company repaid approximately $0.22 million (RMB 1,516,238) loan to Kangbo in the second quarter of 2019. As of June 30, 2019, total outstanding loans payable to Kangbo amounted to approximately $72.6 million (RMB 498.5 million).

 

Total interest expenses for above related party loans were approximately $1,202,948 and $2,420,296, respectively for the three and six months ended June 30, 2019, respectively. Total interest expenses for above related party loans were approximately $1,287,450 and $2,970,972, respectively for the three and six months ended June 30, 2018, respectively.

 

(b) Loans payable to Wuhan Kingold Industrial Group

 

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

 

 Page 33 of 79 

 

   

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 7 – RELATED PARTIES LOANS (continued)

 

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

 

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

 

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

 

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

  

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

 

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

 

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

 

During the six months ended June 30, 2019, the Company repaid approximately $88.7 million (RMB 609.3 million) to Wuhan Kingold Industrial Group. During the six months ended June 30, 2019, the Company also borrowed additional approximately $136.3 million (RMB 935.6 million) fromWuhan Kingold Industrial Group. As of June 30, 2019, the aggregate borrowing amount from Wuhan Kingold Industrial Group was approximately $410.9 million (RMB 2.82 billion).The Company classified these loans as non-current liabilities.

 

(c) Loans payable to Wuhan Huayuan Technology Development Limited

 

On June 8, 2017, Wuhan Kingold signed a loan agreement with Wuhan Huayuan Technology Development Limited (“Wuhan Huayuan”), a related party which is controlled by the CEO and Chairman of the Company, for a loan of $14.5 million (RMB 100 million). The purpose for the loans is for working capital and purchasing gold. The loan has four years term from June 8, 2017 to June 8, 2021, and bears fixed interest of 7%. The Company also pledged 523 kilograms of Au9999 gold with carrying value of approximately $18.1 million (RMB 124.4 million) as collateral to secure this loan.

 

During the year ended December 31, 2018, the Company repaid $3.4 million (RMB 22.6 million), results in the outstanding balance of $10.5 million (RMB 72.0 million) as of December 31, 2018. During the six months ended June 30, 2019, additional $1.74 million (RMB 12 million) was repaid to Wuhan Huayuan, resulting the outstanding balance of $8.7 million (RMB 60 million) payable to Wuhan Huayuan as of June 30, 2019. In connection with the loan repayment, in May 2019, 184 kilograms of pledged gold were released and returned.  As of June 30, 2019, the Au9999 gold pledged with Wuhan Huayuan as collateral were 339 kilograms with carrying value of approximately $11.7 million (RMB 80.6 million).

 

Interest expense of $188,724 and $396,769 was recorded for this loan for the three and six months ended June 30, 2019, respectively. Interest expense of $271,060 and $562,629 was recorded for this loan for the three and six months ended June 30, 2018, respectively.

 

 Page 34 of 79 

 

   

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 8 – OTHER RELATED PARTY TRANSACTIONS

 

During the Company’s normal course of business, the Company received working capital proceeds from the CEO and Chairman of the Company, to pay certain expense to various service providers on behalf of the Company. Such amount is unsecured and payable on demand with no interest. As of June 30, 2019 and December 31, 2018, the amount due to this related party were $4,383,039 and $3,976,742, respectively.  

 

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 three and six months ended June 30, 2019, the Company recorded $21,105 and $42,443 rent expense, respectively. For the three and six months ended June 30, 2018, the Company recorded $67,357  and $134,923  rent expense, respectively. As of June 30, 2019 and December 31, 2018, the Company had lease payables to Wuhan Huayuan of $486,631 and $443,992, respectively, which were included in other payables and accrued expenses. 

  

NOTE 9 – INCOME TAXES 

 

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

 

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

 

Dragon Lead is incorporated in the British Virgin Islands (the “BVI”), and under current laws of the BVI, income earned is not subject to income tax.

 

Wuhan Vogue-Show and Wuhan Kingold are incorporated in the PRC and are subject to PRC income tax, which is computed according to the relevant laws and regulations in the PRC. The applicable tax rate is 25% for the three months ended June 30, 2019 and for the year ended December 31, 2018.

 

 Page 35 of 79 

 

  

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 9 – INCOME TAXES (continued)

 

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

 

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

 

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

 

   For the three months ended June 30,   For the six months ended June 30, 
   2019   2018   2019   2018 
United States  $(273,162)  $(379,110)  $(578,825)  $(952,878)
Foreign   17,221,903    18,591,074    26,136,904    37,002,249 
   $16,948,741   $18,211,964   $25,558,079   $36,049,371 

  

 Page 36 of 79 

 

   

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 9 – INCOME TAXES (continued)

 

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

 

   For the three months ended June 30,   For the six months ended June 30, 
   2019   2018   2019   2018 
Current tax provision                    
Federal  $-   $-   $-   $- 
State   -    -    -    - 
Foreign   7,048,016    4,169,121    10,810,187    7,426,595 
   $7,048,016   $4,169,121   $10,810,187   $7,426,595 
Deferred tax provision (benefit)                    
Federal  $-   $-   $-   $- 
State   -    -    -    - 
Foreign   (2,688,462)   479,046    (4,221,874)   1,824,055 
    (2,688,462)   479,046    (4,221,874)   1,824,055 
Income tax provision (benefit)  $4,359,554   $4,648,167   $6,588,313   $9,250,650 

 

 Page 37 of 79 

 

   

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 9 – INCOME TAXES (continued)

 

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

 

   As of June 30,
2019
   As of December 31,
2018
 
Deferred tax assets:          
Accrued interest  $265,833   $557,941 
Deferred financing costs on the loans   4,223,077    3,646,606 
Net operating losses of the U.S entity (“NOLs”)   4,266,784    4,145,231 
Less: valuation allowance   (4,266,784)   (4,145,231)
Deferred tax assets, net   4,488,910    4,204,547 
           
Deferred tax liabilities:          
Gain due to change in fair value of investments in gold  $(74,094,897)  $(27,409,470)
Accrued expenses   (1,746,635)   (966,667)
Other temporary differences   (47,394)   (47,321)
           
Deferred tax assets (liabilities) - net  $(71,400,016)  $(24,218,911)

 

 Page 38 of 79 

 

   

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 9 – INCOME TAXES (continued)

 

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

 

   For the three months ended June 30,   For the six months ended June 30, 
   2019    2018   2019   2018 
US statutory rate   21.0   21.0%   21.0%   21.0%
Foreign income and loss not recognized in the U.S.   (21.0)%   (21.0)%   (21.0)%   (21.0)%
China income tax   25.0%   25.0%   25.0%   25.0%
Miscellanies and non-deductible expense   0.7%   0.5%   0.8%   0.7%
 Effective tax rate   25.7%   25.5%   25.8%   25.7%

   

NOTE 10 – EARNINGS PER SHARE

 

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

 

   For the three months ended June 30,   For the six months ended June 30, 
   2019   2018   2019   2018 
Net income attributable to common stockholders  $12,589,187   $13,563,797   $18,969,766   $26,798,721 
Weighted average number of common shares outstanding - Basic   66,113,502    66,113,502    66,113,502    66,113,502 
Unexercised warrants and options   -    116,156    -    281,749 
 Weighted average number of common shares outstanding – diluted   66,113,502    66,229,658    66,113,502    66,395,251 
                     
Earnings per share - Basic  $0.19   $0.21   $0.29   $0.41 
Earnings per share – Diluted  $0.19   $0.20   $0.29   $0.40 

  

 Page 39 of 79 

 

   

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 11 – OPTIONS

 

The Company recorded $Nil and $5,364 stock-based compensation expense for the three and six months ended June 30, 2019, respectively. The Company recorded $5,364 and $10,728 stock-based compensation expense for the three and six months ended June 30, 2018, respectively.  

 

The following table summarized the Company’s stock option activity:

 

           Weighted Average 
   Number of
Options
   Weighted Average
Exercise Price
   Remaining Life 
in Years
 
Outstanding, December 31, 2018   3,220,000   $1.90    2.76 
Exercisable, December 31, 2018   3,214,636   $1.90    2.75 
                
Granted   -    -    - 
Forfeited   -    -    - 
Exercised   -    -    - 
Outstanding, June 30, 2019   3,220,000   $1.90    2.26 
                
Exercisable, June 30, 2019   3,220,000   $1.90    2.26 

   

NOTE 12 – CONCENTRATIONS AND RISKS

 

The Company maintains certain bank accounts in the PRC and BVI, which are not insured by Federal Deposit Insurance Corporation (“FDIC”) insurance or other insurance. The cash and restricted cash balance held in the PRC bank accounts was $130,781,467 and $12,749,593 as of June 30, 2019 and December 31, 2018, respectively. The cash balance held in the BVI bank accounts was $Nil as of June 30, 2019 and December 31, 2018. As of June 30, 2019 and December 31, 2018, the Company held $4,376 and $22,953 of cash balances within the United States.

 

As of June 30, 2019 and December 31, 2018, almost 100% of the Company’s assets were located in the PRC and 100% of the Company’s revenues were derived from its subsidiaries located in the PRC.

 

The Company’s principal raw material used during the reporting period was gold, which accounted for almost 100% of its total purchases for the three months ended June 30, 2019 and 2018. The gold purchased by the Company was solely from the Shanghai Gold Exchange, the largest gold trading platform in the PRC.

 

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

 

 Page 40 of 79 

 

   

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 13 – LEASES

 

On June 27, 2016, Wuhan Kingold signed certain 5 years lease agreements with Wuhan Huayuan, a related party which is controlled by the CEO and Chairman of the Company, to rent office and store space at the Jewelry Park, commencing in July 2016 and October 2016, with aggregate annual rent of approximately $0.3 million (RMB 2.3 million). On July 1, 2017, Wuhan Kingold signed another 5 years lease agreement with Wuhan Huayuan to rent additional office space at the Jewelry Park commencing in July 2017 with aggregate annual rent of approximately $84,886 (RMB 576,000). The lease agreement with Wuhan Huayuan has been amended on November 16, 2017, pursuant to which two office spaces and a dormitory were no longer leased. The lease agreement was further amended on September 1, 2018, pursuant to which the store space was no longer leased.

 

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

 

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

 

 Page 41 of 79 

 

   

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 13 – LEASES (continued)

 

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

 

   Balance Sheet
Classification
  As of
June 30, 2019
 
Assets:        
Right-of-use assets  Other noncurrent assets - net  $206,419 
         
Liabilities:        
Current  Accrued expenses and other payables  $88,170 
Noncurrent  Other long-term liabilities   160,190 
         
Total operating lease liabilities     $248,360 

 

As of June 30, 2019, the weighted-average remaining lease term was 3 years. The Company’s lease agreements do not provide a readily determinable implicit rate nor is it available to the Company from its lessors. Instead, the Company estimates its incremental borrowing rate based on its average long-term loans borrowing rate in order to discount lease payments to present value. The weighted-average discount rate of the Company’s operating leases was 10.2%, as of June 30, 2019.

 

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

 

Maturity of Operating Lease Liabilities

     
2020    $ 84,886  
2021     84,886  
2022     84,886  
         
Total future minimum lease payments     254,657  
Less imputed interest     (6,297
Total   $ 248,360  

 

 Page 42 of 79 

 

 

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

  

NOTE 14 – SUBSEQUENT EVENT 

 

On July 5, 2019, the Company made a repayment of approximately $4.4 million ( RMB 30 million) to China Construction Bank (see Note 5).

 

In July 2019, the Company had approximately $145.6 million (RMB 1 billion) loans payable to Anxin Trust has matured. The Company negotiated with Anxin Trust and extended the insurance coverage date to September 18, 2019. Through such insurance extension, the Company extended the loan repayment date of $145.6 million to September 18, 2019. In August 2019, the Company made additional repayment of approximately $5.8 million (RMB 40 million) to Anxin Trust. 2470 kilograms of pledged gold has been released and returned to inventory pool. (see Note 5).

 

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

 

 Page 43 of 79 

 

    

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

 

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

 

Our Business

 

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

 

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

 

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

 

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

  

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Results of Operations

 

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

 

   For the three months ended
June 30,
   Changes 
   2019   2018   Amount   % 
                 
NET SALES  $598,008,324   $678,796,263   $(80,787,939)   (11.9)%
COST OF SALES                    
Cost of sales   (528,233,860)   (614,775,972)   86,542,112    (14.1)%
Depreciation   (242,888)   (228,173)   (14,715)   6.4%
Total cost of sales   (528,476,748)   (615,004,145)   86,527,397    (14.1)%
                     
GROSS PROFIT   69,531,576    63,792,118    5,739,458    9.0%
                     
OPERATING EXPENSES                    
Selling, general and administrative expenses   6,733,404    2,497,488    4,235,916    169.6%
Stock compensation expenses   -    5,364    (5,364)   (100.0)%
Depreciation   82,731    151,658    (68,927)   (45.4%)
Lease expense   21,105    67,357    (46,252)   (68.7)%
Amortization, other   2,770    2,963    (193)   (6.5)%
Total operating expenses   6,840,010    2,724,830    4,115,180    151.0%
                     
INCOME FROM OPERATIONS   62,691,566    61,067,288    1,624,278    2.7%
                     
OTHER INCOME (EXPENSES)                    
Interest Income   298,499    446,143    (147,644)   (33.1)%
Interest expense, including amortization of debt issuance costs of $2,227,896 and $2,305,354   (46,041,324)   (43,301,467)   (2,739,857)   6.3%
Total other expenses, net   (45,742,825)   (42,855,324)   (2,887,501)   6.7%
                     
INCOME FROM OPERATIONS BEFORE TAXES   16,948,741    18,211,964    (1,263,223)   (6.9)%
                     
INCOME TAX PROVISION (BENEFIT)                    
Current   7,048,016    4,169,121    2,878,895    69.1%
Deferred   (2,688,462)   479,046    (3,167,508)   (661.2)%
Total income tax provision   4,359,554    4,648,167    (288,613)   (6.2)%
                     
NET INCOME   12,589,187    13,563,797    (974,610)   (7.2)%
                     
OTHER COMPREHENSIVE INCOME (LOSS)                    
Unrealized gain (loss) related to investment in gold, net of tax   183,487,051    (19,350,626)   202,837,677    (1048.2)%
Total foreign currency translation loss   (18,447,260)   (19,822,304)   1,375,044    (6.9)%
Total other comprehensive gain (loss)   165,039,791    (39,172,930)   204,212,721    (521.3)%
                     
Comprehensive income (loss)  $177,628,978   $(25,609,133)  $203,238,111    (793.6)%

 

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

 

Net Sales

 

Net sales for the three months ended June 30, 2019 amounted to approximately $598.0 million, a decrease of approximately $80.8 million, or 11.9%, from net sales of $678.8 million for the three months ended June 30, 2018. The overall decrease in our revenue in the three months ended June 30, 2019 as compared to the three months ended June 30, 2018 was mainly the result of the following reasons: (1) Sales volume of the Company’s branded production decreased by 2.1 metric tons, or 12.2%, from 16.9 metric tons in the three months ended June 30, 2018 to 14.8 metric tons in three months ended June 30, 2019, which caused approximately $76.3 million decrease in revenue from branded production sales. On the other hand, sales volume of customized production sales increased by 2.3 metric tons, from 10.8 metric tons in three months ended June 30, 2018 to 13.1 metric tons in three months ended June 30, 2019, which led to approximately $2.2 million increase to offset the decrease in revenue from the branded production sales. (2) The average unit selling price for our brand production sales increased from RMB 252.34 per gram in three months ended June 30, 2018 to RMB 268.96 per gram in three months ended June 30, 2019, causing 6.6% increase. In addition, the average unit selling price for our customized production sales increased from RMB 6.88 per gram in three months ended June 30, 2018 to RMB 7.15 per gram in three months ended June 30, 2019, causing 3.9% increase. As a result of the price change effect, the increase in average unit selling price led to approximately $41.5 million increase in our revenue, to compensate the revenue decrease derived from sales volume decrease, to certain extent. (3) Foreign currency adjustment effect was approximately a $48.4 million foreign currency translation loss converting RMB into USD when the average exchange rate of USD: RMB increased from 1 USD=6.3760 RMB in three months ended June 30, 2018 to 1 USD=6.8137 RMB in three months ended June 30, 2019. 

 

For the three months ended June 30, 2019, our branded production sales accounted for 97.7% of the total sales and customized production sales accounted for 2.3% of the total sales. When compared with the three months ended June 30, 2018, our branded production sales decreased by approximately $83 million, or 12.4%, and our customized production sales increased by approximately $2.2 million, or 18.8%. 

 

During three months ended June 30, 2019, we processed a total of 27.9 metric tons of gold, of which branded production accounted for 14.8 metric tons (53.0%) and customized production accounted for 13.1metric tons (47.0%). During three months ended June 30, 2018, we processed a total of 27.6 metric tons of gold, of which branded production accounted for 16.8 metric tons (61.1%) and customized production accounted for 10.8 metric tons (38.9%). 

 

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Cost of Sales

 

Cost of sales for the three months ended June 30, 2019 amounted to approximately $528.5 million, a decrease of $86.5 million, or 14.1%, from approximately $615 million for the same period in 2018. The decrease was primarily due to the lower volume of the gold as a raw material used for our branded production. Total sales quantity for branded production decreased 12.2% to approximately 14.8 metric tons in three months ended June 30, 2019 from 16.9 metric tons in three months ended June 30, 2018.

 

Gross Profit

 

Gross profit for the three months ended June 30, 2019 was $69.5 million, an increase of approximately $5.7 million, or 9.0%, from approximately $63.8 million for the same period in 2018. The increase in our gross profit was primarily due to the increase in our average selling price for our brand production sales by 6.6% and the increase in our average unit selling price for our customized production sales by 3.9%, when comparing three months ended June 30, 2019 to the same period of 2018, as discussed above.

 

Expenses

 

Total operating expenses for the three months ended June 30, 2019 were approximately $6.8 million, an increase of approximately $4.1 million or 151.0%, as compared with $2.7 million for the same period in 2018. The increase was mainly due to the increase in selling, general and administrative expenses because of increased insurance and custody fees in connection with the increased level of investment in gold quantity.

 

Interest expense for the three months ended June 30, 2019 was $46 million compared with $43.3 million for the same period in 2018. The increase of interest expense was mainly due to higher balances for interest bearing loans resulted from additional loans obtained and recorded during the three months ended June 30, 2019 compared with the same period of 2018 and more debt origination costs amortized during the current period.

 

The income tax expense was approximately $4.4 million for the three months ended June 30, 2019, compared to income tax expense of approximately $4.6 million for the same period in 2018. The decrease of income tax expense was mainly because we had a decrease in taxable income from operations before tax for the three months ended June 30, 2019, comparing to the same period last year.

 

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Net Income

 

For the foregoing reasons, our net income was approximately $12.6 million for the three months ended June 30, 2019, decreased by approximately $0.97 million, or 7.2%, from a net income of $13.6 million for three months end June 30, 2018.

 

Other Comprehensive Income (Loss)

 

Other comprehensive income was approximately $165.0 million for the three months ended June 30, 2019, compared to other comprehensive loss of $39.2 million for the three months ended June 30, 2018. The Other comprehensive income for the three months ended June 30, 2019 was mainly due to the change in market value of gold investment resulting in an unrealized gain of $183.5 million, net of tax, and foreign currency translation loss of approximately $18.4 million resulted from the depreciation of the Chinese RMB against the U.S. Dollar for the three months ended June 30, 2019.

  

Six Months Ended June 30, 2019 compared to the Six Months Ended June 30, 2018

 

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

 

   For the six months ended
June 30,
   Changes 
   2019   2018   Amount   % 
                 
NET SALES  $1,051,547,424   $1,218,320,318   $(166,772,894)   (13.7)%
COST OF SALES                    
Cost of sales   (926,225,754)   (1,089,741,556)   163,515,802    (15.0)%
Depreciation   (488,628)   (545,838)   57,210    (10.5)%
Total cost of sales   (926,714,382)   (1,090,287,394)   163,573,012    (15.0)%
                     
GROSS PROFIT   124,833,042    128,032,924    (3,199,882)   (2.5)%
                     
OPERATING EXPENSES                    
Selling, general and administrative expenses   9,351,596    4,975,276    4,376,320    88.0%
Stock compensation expenses   5,364    10,728    (5,364)   (50.0)%
Depreciation   165,672    260,487    (94,815)   (36.4)%
Lease expense   42,443    134,923    (92,480)   (68.5)%
Amortization, other   5,571    5,936    (365)   (6.1)%
Total operating expenses   9,570,646    5,387,350    4,183,296    77.7%
                     
INCOME FROM OPERATIONS   115,262,396    122,645,574    (7,383,178)   (6.0)%
                     
OTHER INCOME (EXPENSES)                    
Interest Income   637,112    822,144    (185,032)   (22.5)%
Interest expense, including amortization of debt issuance costs of $4,550,860 and $4,560,420   (90,341,429)   (87,418,347)   (2,923,082)   3.3%
Total other expenses, net   (89,704,317)   (86,596,203)   (3,108,114)   3.6%
                     
INCOME FROM OPERATIONS BEFORE TAXES   25,558,079    36,049,371    (10,491,292)   (29.1)%
                     
INCOME TAX PROVISION (BENEFIT)                    
Current   10,810,187    7,426,595    3,383,592    45.6%
Deferred   (4,221,874)   1,824,055    (6,045,929)   (331.5)%
Total income tax provision   6,588,313    9,250,650    (2,662,337)   (28.8)%
                     
NET INCOME   18,969,766    26,798,721    (7,828,955)   (29.2)%
                     
OTHER COMPREHENSIVE INCOME (LOSS)                    
Unrealized gain (loss) related to investment in gold, net of tax   154,071,011    (37,973,323)   192,044,334    (505.7)%
Total foreign currency translation gain   (1,795,522)   (6,002,603)   4,207,081    (70.1)%
Total other comprehensive gain (loss)   152,275,489    (43,975,926)   196,251,415    (446.3)%
                     
Comprehensive income (loss)  $171,245,255   $(17,177,205)  $188,422,460    (1,096.9)%

 

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Net Sales

 

Net sales for the six months ended June 30, 2019 amounted to approximately $1.05 billion, a decrease of approximately $166.8 million, or 13.7%, from net sales of approximately $1.22 billion for the six months ended June 30, 2018. The overall decrease in our revenue in the six months ended June 30, 2019 as compared to the six months ended June 30, 2018 was mainly the result of the following reasons: (1) Total sales volume (in terms of quantity sold) decreased from 50.9 metric tons in six months ended June 30, 2018 to 49.9 metric tons in six months ended June 30, 2019, causing approximately 0.99 metric tons or 2.0% decrease. As a result, approximately $142.4 million decrease in our revenue was attributable to the decrease in our sales volume.  (2) The average unit selling price for our brand production sales increased from RMB 254.95 per gram in six months ended June 30, 2018 to RMB 267.97 per gram in six months ended June 30, 2019, causing 5.1% increase. In addition, the average unit selling price for our customized production sales increased from RMB 6.86 per gram in six months ended June 30, 2018 to RMB 7.06 per gram in six months ended June 30, 2019, causing 3.0% increase. As a result of the price change effect, the increase in average unit selling price led to approximately $57.9 million increase in our revenue, to compensate the revenue decrease derived from sales volume decrease, to certain extent. (3) Foreign currency adjustment effect was approximately a $82.3 million foreign currency translation loss converting RMB into USD when the average exchange rate of USD: RMB increased from 1 USD=6.3681 RMB in six months ended June 30, 2018 to 1 USD=6.7856 RMB in six months ended June 30, 2019. 

 

For the six months ended June 30, 2019, our branded production sales accounted for 97.6% of the total sales and customized production sales accounted for 2.4% of the total sales. When compared with the six months ended June 30, 2018, our branded production sales decreased by $168.9 million, or 14.1%, and our customized production sales increased by approximately $2.2 million, or 9.8%. 

 

During six months ended June 30, 2019, we processed a total of 49.9 metric tons of gold, of which branded production accounted for 26 metric tons (52.1%) and customized production accounted for 23.9 metric tons (47.9%). During six months ended June 30, 2018, we processed a total of 50.9 metric tons of gold, of which branded production accounted for 29.9 metric tons (58.6%) and customized production accounted for 21 metric tons (41.4%). 

 

Cost of Sales

 

Cost of sales for the six months ended June 30, 2019 amounted to approximately $926.7 million, a decrease of $163.6 million, or 15.0%, from $1.09 billion for the same period in 2018. The decrease was primarily due to the lower volume of the gold as a raw material used for our branded production. Total sales quantity decreased 2.0% to approximately 49.9 metric tons in six months ended June 30, 2019 from 50.9 metric tons in six months ended June 30, 2018.

 

Gross Profit

 

Gross profit for the six months ended June 30, 2019 was $124.8 million, a decrease of $3.2 million, or 2.5%, from $128 million for the same period in 2018. The decrease in our gross profit resulted from the following factors: (1) Due to decreased sales volume affected by decreased market demand, the Company’s gross profit for the six months ended June 30, 2019 was negatively affected. (2) Our gross profit was affected by the unit cost of raw materials used in our production. The unit cost of our branded production sales was RMB 241.63 per gram for the six months ended June 30, 2019 while the unit cost of our branded production sales was RMB 232.3 per gram for six months ended June 30, 2018. In addition, the unit cost of our customized production sales was RMB 0.30 per gram for the six months ended June 30, 2019 while the unit cost of our customized production sales was RMB 0.29 per gram for six months ended June 30, 2018. The increase in our unit cost of raw materials used in our production reduced our gross profit for the six months ended June 30, 2019 as compared to the same period of 2018. The decrease in quantity sold and increase in our unit cost were the major reasons which led the decrease in our gross profit. (3) Although our gross profit decreased due to decreased sales volume and increased unit cost, our gross margin increased from 10.5% for the six months ended June 30, 2018 to 11.9% for the six months ended June 30, 2019. The primary reason for the increase in gross margin was due to the increased average selling price of our branded production and customized production sales. The average selling price of our branded production was RMB 267.97 per gram for the six months ended June 30, 2019, increased by RMB 13.02 or 5.1%, from RMB 254.95 per gram for the same period in 2018. Meanwhile, the average selling price of our customized production sales was RMB 7.06 per gram for the six months ended June 30, 2019, increased by RMB 0.20, or 3.0%, from RMB 6.86 per gram for the six months ended June 30, 2018.

 

Expenses

 

Total operating expenses for the six months ended June 30, 2019 were approximately $9.6 million, an increase of approximately $4.2 million or 77.7%, as compared with approximately $5.4 million for the same period in 2018. The increase was mainly due to the increase in selling, general and administrative expenses because of increased insurance and custody fees in connection with the increased level of investment in gold quantity.

 

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Interest expense for the six months ended June 30, 2019 was approximately $90.3 million compared with $87.4 million for the same period in 2018. The increase of interest expense was mainly due to higher balances for interest bearing loans resulted from additional loans obtained and recorded during the six months ended June 30, 2019 compared with the same period of 2018 and more debt origination costs amortized during the current period.

 

The income tax expense was approximately $6.6 million for the six months ended June 30, 2019, compared to income tax expense of approximately $9.3 million for the same period in 2018. The decrease of income tax expense was mainly because we had a decrease in taxable income from operations before tax for the six months ended June 30, 2019, comparing to the same period last year.

 

Net Income

 

For the foregoing reasons, our net income was approximately $19 million for the six months ended June 30, 2019, decreased by approximately $7.8 million, or 29.2%, from a net income of $26.8 million for six months end June 30, 2018.

 

Other Comprehensive Income (Loss)

 

Other comprehensive income was approximately $152.3 million for the six months ended June 30, 2019, compared to other comprehensive loss of approximately $44 million for the six months ended June 30, 2018. The Other comprehensive income for the six months ended June 30, 2019 was mainly due to the change in market value of gold investment resulting in an unrealized gain of $154.1 million, net of tax, and foreign currency translation loss of approximately $1.8 million resulted from the depreciation of the Chinese RMB against the U.S. Dollar for the six months ended June 30, 2019.

 

Cash Flows

 

Operating activities

 

We had approximately $132.3 million of net cash used in operating activities for the six months ended June 30, 2019, compared with approximately $446.3 million of net cash provided by operating activities for the same period in 2018. The decrease of our operating cash flows was mainly due to the increase in gold purchases of approximately $129.4 million (RMB 887 million) in order to meet the production demand when we anticipate more sales orders will be fulfilled in the second half of fiscal year 2019. At the same time, we also increased purchase of gold of approximately $175.9 million (RMB 1,182.9 million) in order to pledge such gold as collateral with various financial institutions to obtain additional loans. In connection with the purchase of gold for investment, we also reported an unrealized gain of approximately $154.6 million for the six months ended June 30, 2019. The overall increase in inventory of approximately $150.4 million as included in our statements of cash flows reflected the above factors. The decrease in our cash flows from operating activities was also affected by an increase in value added tax receivable of approximately $1.1 million and a decrease in other tax payable by approximately $2.6 million. 

 

We had $446.3 million of net cash provided by operating activities for the six months ended June 30, 2018, mainly due to the decrease in inventory purchases of $311 million   because $349.4 million of gold for investment was released to inventory during the six months ended June 30, 2018, a decrease in value added tax receivable of $76.6 million, an increase in income taxable of $2.9 million and an increase in other payables and accrued liabilities of $1.3 million.

  

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

  

Investing activities

 

Net cash used in investing activities was $0.3 million for the six months ended June 30, 2019, compared with net cash used in investing activities of $0.5 million for the six months ended June 30, 2018.  Our net cash used in investing activities primarily include purchase of fixed assets for the periods indicated.

 

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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 financings from the banks which may require us to purchase more gold as collateral. 

 

Financing activities  

 

Net cash provided by financing activities was approximately $198.3 million for the six months ended June 30, 2019. During the six months ended June 30, 2019, we increased our borrowings from various financial institutions and received approximately $326.5 million proceeds from short-term loans and $132.6 million proceeds from long-term loans. At the same time, we repaid $305.2 million short-term loans upon maturity. We also borrowed additional $137.9 million loans from related party and repaid $91.6 million related party loans during this period.

 

Net cash used in financing activities was approximately $446 million for the six months ended June 30, 2018. During the six months ended June 30, 2018, we borrowed additional $240.5 million loans from banks and other financial institutions, and $334.5 million loans from related parties, and repaid $301.6 million loans from banks and other financial institutions, and $719.8 million loans from related parties. During the six months ended June 30, 2017, we borrowed additional $125.1 million loans from banks and other financial institutions, and $981.8 million loans from related parties, and repaid $174.7 million loans from banks and other financial institutions, $416 million from related parties, and $29.1 million loans from third party loans.  

 

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 $72.6 million (RMB 498.5 million) is still outstanding as of June 30, 2019. We guaranteed the payments for this related party.

 

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

 

 Obligations and Commitments

 

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

 

   Payment Due by Period 
Contractual
Obligations
  Total   Less Than 1
year
   1-3 years   3-5 years   More than 5
years
 
                     
Long-term bank loans (1)  $174,753,888   $-   $174,753,888   $    -   $     - 
Short-term bank loans (2)   1,537,483,686    1,537,483,686    -    -    - 
Related party loans (3)   492,288,116    72,593,313    419,694,803    -    - 
Operating leases liability (4)   248,360    88,170    160,190    -    - 
Total  $2,204,774,050   $1,610,165,169   $594,608,881   $-   $- 

 

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

 

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

 

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

 

(4) On June 27, 2016, Wuhan Kingold signed certain 5 years lease agreements with Wuhan Huayuan, a related party which is controlled by the CEO and Chairman of the Company, to rent office and store space at the Jewelry Park, commencing in July 2016 and October 2016, with aggregate annual rent of approximately $0.3 million (RMB 2.3 million). On July 1, 2017, Wuhan Kingold signed another 5 years lease agreement with Wuhan Huayuan to rent additional office space at the Jewelry Park commencing in July 2017 with aggregate annual rent of approximately $84,886 (RMB 576,000). The lease agreement with Wuhan Huayuan has been amended on November 16, 2017, pursuant to which two office spaces and a dormitory were no longer leased. The lease agreement was further amended on September 1, 2018, pursuant to which the store space was no longer leased.

 

On January 1, 2019, the Company adopted the new lease accounting standard using the optional transition method which allowed us to continue to apply the guidance under the lease standard in effect at the time in the comparative periods presented. Adoption of this standard resulted in the recording of operating lease ROU assets and corresponding operating lease liabilities. As of June 30, 2019, total operating lease liabilities amounted to $248,360.

 

Liquidity and Capital Resources 

 

As of June 30, 2019, we had approximately $114.7 million in cash and approximately $16 million restricted cash. We have financed our operations with cash flow generated from operations and primarily through borrowings from various financial institutions as well as from related parties.

 

As of June 30, 2019, we had total outstanding loans of approximately $2,199.6 million (including $1,532.5 million short-term loans, $174.8 million long-term loans, and $492.3 million related party loans). For additional information regarding our loans, please see Notes 5 and 7 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report.

 

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

 

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As of June 30, 2019, the Company had working capital of approximately $1,221.1 million. We believe that our current cash and cash flow from operations will be sufficient to meet our anticipated cash needs, including our cash needs for working capital for the next 12 months from the date we issue this Form 10Q. We may, however, require additional cash resources due to changing business conditions or other future developments, including any investments or acquisitions we may decide to pursue. Our ability to maintain sufficient liquidity depends partially on our ability to achieve anticipated levels of revenue, while continuing to control costs. We continue to seek favorable additional financings to meet our capital requirements to fund our operations and growth plans in the ordinary course of business.

  

Critical Accounting Policies and Estimates

 

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

 

Inventories

 

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

  

Investments in Gold

 

We pledged the gold leased from related party and part of its own gold inventory to meet the requirements of bank loans. The pledged gold will be available for sale upon the repayment of the bank loans. We classified these pledged gold as investment in gold, and carried at fair market value, with the unrealized gains and losses, included in the determination of comprehensive income and reported in shareholders’ equity. The fair market value of the investments in gold is determined by quoted market prices at Shanghai Gold Exchange. Any fluctuation in gold price may significantly impact the investments in gold and other comprehensive income (loss). 

 

Revenue Recognition

 

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

 

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

 

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

 

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

 

Sαles of brαnded products 

 

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

 

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Item 3. Quantitative and Qualitative Disclosure about Market Risk

 

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

 

Foreign Currency Exchange Rate Risk

 

Given that all of our revenues are generated in RMB, while our results are reported in U.S. dollars, devaluation of the RMB could negatively impact our results of operations. The value of the RMB is subject to changes in the PRC’s governmental policies and to international economic and political developments. In January 1994, the PRC government implemented a unitary managed floating rate system. Under this system, the People’s Bank of China, or PBOC, began publishing a daily base exchange rate with reference primarily to the supply and demand of RMB against the U.S. dollar and other foreign currencies in the market during the previous day. Authorized banks and financial institutions are allowed to quote buy and sell rates for RMB within a specified band around the central bank’s daily exchange rate. On July 21, 2005, the PBOC announced an adjustment of the exchange rate of the U.S. dollar to RMB from 1:8.27 to 1:8.11 and modified the system by which the exchange rates are determined. Over the past eleven years, RMB has appreciated 9.3% against the U.S. dollar (from USD1 = RMB 7.2946 on January 1, 2008 to USD1 = RMB 6.8668 on June 30, 2019). While the international reaction to the RMB revaluation has generally been positive, there remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in further fluctuations of the exchange rate of RMB against the U.S. dollar, including possible devaluations. As all of our net revenues are recorded in RMB, any future devaluation of RMB against the U.S. dollar could negatively impact our results of operations.

 

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

 

Interest Rate Risk

 

Our borrowings from banks and other financial institutions as of June 30, 2019, were approximately $1,707.3 million, and interest expense paid for these loans was approximately $82.8 million for the six months ended June 30, 2019.

 

For the six months ended June 30, 2019, our weighted average interest rate was approximately 9.7%. We do not expect the interest expense will be changed dramatically and we currently have no interest rate hedging positions in place to reduce our exposure to interest rates. 

 

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Commodity Price Risk

 

Most of our sales are of products that include gold, precious metals and other commodities, and fluctuations in the availability and pricing of commodities would adversely impact our ability to obtain and make products at favorable prices. The jewelry industry generally is affected by fluctuations in the price and supply of diamonds, gold, and, to a lesser extent, other precious and semi-precious metals and stones. In the past, we have not hedged our requirement for gold or other raw materials through the use of options, forward contracts or outright commodity purchasing, although we may do so in the future. A significant increase in the price of gold could increase our production costs beyond the amount that we are able to pass on to our customers, which would adversely affect our sales and profitability. A significant disruption in our supply of gold or other commodities could decrease our production and shipping levels, materially increase our operating costs, and materially and adversely affect our profit margins. Shortages of gold, or other commodities, or interruptions in transportation systems, labor strikes, work stoppages, war, acts of terrorism, or other interruptions to or difficulties in the employment of labor or transportation in the markets in which we purchase our raw materials, may adversely affect our ability to maintain production of our products and sustain profitability. If we were to experience a significant or prolonged shortage of gold, we would be unable to meet our production schedules and to ship products to our customers in a timely manner, which would adversely affect our sales, margins and customer relations.

 

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

 

Inflation Risk

 

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

  

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

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

 

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

 

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

 

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

 

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  · Certain previously identified material weaknesses and significant control deficiencies have been carried over from prior periods;

 

  · 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.

 

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In order to remediate 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 quarterly report that management did not consistently seek Board approval prior to causing Wuhan Kingold to enter into 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 by management;

 

  · 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.

 

  · To hold 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

 

The following changes in our internal controls over financial reporting occurred during the six months ended June 30, 2019, which are reasonably likely to materially affect our internal control over financial reporting: 

 

  · We have begun to implement segregation of duties for accounting personnel who prepare and review journal entries.

 

  · We have begun to implement and maintain proper recording of the leased gold inventory with related parties and the related party loan agreements and restricted cash.  

 

We believe these efforts are likely to improve our internal controls. We recognize that we must continue to implement policies and procedures to further enhance our internal controls. Except for the actions taken to remedy the material weaknesses described above, there have been no other changes in our internal control over financial reporting that have materially affected, or are reasonably to have materially affect, our internal control over financial reporting during our six months ended June 30, 2019. 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. 

  

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PART II – OTHER INFORMATION

 

Item 1. 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. Our business may also be adversely affected by risks and uncertainties not presently known to us or that we currently believe to be immaterial. If any of the events contemplated by the following discussion of risks should occur, our business, prospects, financial condition and results of operations may suffer.

 

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 before making an investment decision. The risks and uncertainties described below represent our known material risks to 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. You should not invest in our securities unless you can afford to lose your entire 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 may 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. 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 may still need to implement additional or enhance finance and accounting systems, procedures and controls to satisfy new accounting and reporting requirements. If our internal control over financial reporting continues to be determined to be ineffective, investors could lose confidence in the reliability of our internal controls, which could adversely affect our stock price.

 

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.

 

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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 6.7% in 2016. While the China economic growth showed a considerable improvement in 2017, 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.

 

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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.

 

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.

 

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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.

 

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.

 

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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.

 

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 our total sales for the three and six months ended June 30, 2019 and 2018. 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 requires time and efforts by our management, and replacing any existing distributor would be difficult and time consuming. Our failure to maintain good relationships with our distributors could materially disrupt our product distributions and harm our net sales.

 

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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.

 

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 prior fiscal periods 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. 

  

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:

 

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¨ 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 approval 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, and 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 may have difficulty establishing 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 may 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 may experience difficulty in establishing management, legal and financial controls, collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet Western standards. Therefore, we may, in turn, experience difficulties in implementing and maintaining adequate internal controls as required under Section 404 of the Sarbanes-Oxley Act of 2002. This may result 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 be unable 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 period 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 25.5% 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;

 

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¨ 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.

 

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 
2019        
First Quarter  $0.90   $0.74 
Second Quarter  $0.92   $0.59 
           
2018          
First Quarter  $2.02   $1.23 
Second Quarter  $1.44   $1.21 
Third Quarter  $1.27   $1.00 
Fourth Quarter  $1.04   $0.75 

 

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.

 

We have received a notice of delisting from the Nasdaq Capital Market for failure to comply with Nasdaq’s minimum bid price requirement, and our shares may be delisted if we are unable to regain compliance with Nasdaq rules within the applicable grace periods.

 

On November 9, 2018, we received a notification letter (the “Notice”) from the NASDAQ Capital Market advising us 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 Marketplace Rule 5550(a)(2) (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. The Company was unable to regain compliance with the Minimum Bid Price Rule by May 8, 2019. On May 9, 2019, the NASDAQ granted us an additional 180 calendar days, or until November 4, 2019, to regain compliance with the $1.00 per share minimum required for continued listing on The NASDAQ pursuant to the Minimum Bid Price Rule. The NASDAQ determination to grant the second compliance period was based on the Company’s meeting the continued listing requirement for market value of publicly held shares and all other applicable requirements for initial listing on The NASDAQ Capital Market, with the exception of the bid price requirement, and the Company’s written notice of its intention to cure the deficiency during the second compliance period by effecting a reverse stock split, if necessary.

 

There can be no guarantee that we will be able to regain compliance with the continued listing requirement of Nasdaq Marketplace Rule 5550(a)(2). If we do not regain compliance by November 4, 2019, Nasdaq will provide written notification to us that our common stock may be delisted.

 

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.

 

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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.

 

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.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information.

 

None. 

 

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Item 6. Exhibits

 

No.   Description
10.1   Trust Loan Contract (English translation), dated January 17, 2019, between Wuhan Kingold Jewelry Company Limited and North International Trust Co., Ltd. (incorporated by reference to Exhibit 10.56 to Annual Report on Form 10-K filed with the Commission on April 2, 2019).
10.2   Trust Loan Contract (English translation), dated January 24, 2019, between Wuhan Kingold Jewelry Company Limited and Sichuan Trust Co., Ltd. (incorporated by reference to Exhibit 10.57 to Annual Report on Form 10-K filed with the Commission on April 2, 2019).
10.3   Asset Income Rights Transfer and Repurchase Agreement  (English translation), dated March 12, 2019, between Wuhan Kingold Jewelry Company Limited and Tianjin Trust Co., Ltd.(incorporated by reference to Exhibit 10.58 to Annual Report on Form 10-K filed with the Commission on April 2, 2019).
10.4   Trust Loan Contract (English translation), dated May 24, 2019, between Wuhan Kingold Jewelry Company Limited and Minsheng Trust Co., Ltd.*
31.1   Certification of Principal Executive Officer pursuant to Rules 13a-14 and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2   Certification of Principal Financial Officer pursuant to Rules 13a-14 and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1   Certification of Principal Executive Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
32.2   Certification of Principal Financial Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
99.1   Press release dated August 9, 2019, titled “Kingold Jewelry Reports Financial Results For the Second Quarter and Six Months Ended June 30, 2019.”*

   

  * Filed herewith

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: August 9, 2019

 

  KINGOLD JEWELRY, INC.
     
  By: /s/ Zhihong Jia
    Zhihong Jia
    Chairman, Chief Executive Officer and Principal Executive Officer
     
  By: /s/ Bin Liu
    Bin Liu
    Chief Financial Officer and Principal Accounting Officer

  

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