The accompanying notes are an integral
part of these consolidated financial statements
The accompanying notes are an integral
part of these consolidated financial statements
The accompanying notes are an integral
part of these consolidated financial statements
The accompanying notes are an integral
part of these consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
Kingold Jewelry, Inc. (“Kingold”
or “the Company”) was incorporated in the State of Delaware on September 5, 1995.
Dragon Lead Group Limited (“Dragon
Lead”) was incorporated in the British Virgin Islands (“BVI”) on July 1, 2008 as a holding company and was 100%
controlled by Kingold. Wuhan Vogue-Show Jewelry Co., Limited (“Wuhan Vogue-Show”), which is principally engaged in
design and manufacture of gold and platinum ornaments in the People’s Republic of China (“PRC”), was incorporated
in the PRC as a wholly-owned foreign enterprise on February 16, 2009, and was 100% owned by Dragon Lead. Wuhan Vogue-Show’s
business permit expires on February 16, 2019, and is renewable upon expiration. Wuhan Kingold Jewelry Co., Limited (“Wuhan
Kingold”) was incorporated in the PRC on August 2, 2002 as a limited liability company. On October 26, 2007, Wuhan Kingold
was restructured as a joint stock company limited by shares and its business activities are the same as those of Wuhan Vogue-Show.
Wuhan Kingold’s business permit expires on July 1, 2052 and is renewable upon expiration.
Wuhan Kingold is effectively controlled
by Wuhan Vogue-Show through a series of agreements and Amendment Agreements (collectively referred to as the Restructuring Agreements).
In accordance with the Agreements and Amendments, shareholders holding 100% of the outstanding equity of Wuhan Kingold were parties
to the agreements such that Wuhan Kingold has agreed to pay 100% of its after-tax profits to Wuhan Vogue-Show and shareholders
owning 100% of Wuhan Kingold’s shares have pledged and delegated their voting power in Wuhan Kingold to Wuhan Vogue-Show.
These contractual arrangements enable
Wuhan Vogue-Show to:
|
·
|
exercise
effective control over Wuhan Kingold;
|
|
·
|
receive substantially all of the economic benefits from Wuhan Kingold; and
|
|
·
|
have an exclusive option to purchase 100% of the equity interest in Wuhan Kingold, when and
to the extent permitted by PRC law.
|
Through such arrangements, Wuhan Kingold
has become Wuhan Vogue-Show’s contractually controlled affiliate. Kingold is empowered, through its wholly owned subsidiaries
Dragon Lead and Wuhan Vogue-Show, with the ability to control and substantially influence Wuhan Kingold’s daily operations
and financial affairs, appoint its senior executives and approve all matters requiring shareholders’ approval. Kingold is
also obligated to absorb a majority of expected losses of Wuhan Kingold, which enables Kingold to receive a majority of expected
residual returns from Wuhan Kingold, and because Kingold has the power to direct the activities of Wuhan Kingold that most significantly
impact Wuhan Kingold’s economic performance, Kingold, through its wholly-owned subsidiaries, accounts for Wuhan Kingold
as its Variable Interest Entity (“VIE”) under ASC 810-10-05-8A. Accordingly, Kingold consolidates Wuhan Kingold’s
operating results, assets and liabilities.
In April 2015, Wuhan Kingold Jewelry Co.,
Inc. (“Wuhan Kingold”) established a new subsidiary Wuhan Kingold Internet Co., Ltd. (“Kingold Internet”),
of which Wuhan Kingold holds a 55% ownership interest and a third-party minority shareholder holds the remaining 45% ownership
interest. Kingold Internet engaged in promoting the online sales of jewelry products through cooperation with Tmall.com, a large
business-to-consumer online retail platform owned by Alibaba Group. In May 2015, Kingold Internet also established a new subsidiary
Yuhuang Jewelry Design Co., Ltd (“Yuhuang”).
On December 14, 2016, Wuhan Kingold transferred
its 55% ownership interest in Kingold Internet to Wuhan Kingold Industrial Group Co., Ltd., a related party, for a consideration
of $79,196 (RMB 550,000), which was the same amount Wuhan Kingold originally invested. After the transfer, Kingold Internet and
Yuhuang were no longer the subsidiaries of Wuhan Kingold.
Kingold, Dragon Lead, Wuhan Vogue-Show
and Wuhan Kingold, are hereinafter collectively referred to as the “Company.”
KINGOLD JEWELRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial
statements include the financial statements of Kingold, Dragon Lead, Wuhan Vogue-Show and Wuhan Kingold. All inter-company balances
and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial
statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements
as well as the reported amounts of revenues and expenses during the reporting period. Significant estimates required to be made
by management include, but are not limited to, useful lives of property, plant and equipment, one-time transition tax, the recoverability
of long-lived assets, inventory valuation, deferred income tax, allowance for investments in gold and share based compensation.
Actual results could differ from those estimates.
Cash
Cash includes cash on hand and demand
deposits in accounts maintained with commercial banks within the PRC. The Company considers all highly liquid investments with
original maturities of three months or less when purchased to be cash equivalents. The Company maintains most of the bank accounts
in the PRC. Cash balances in bank accounts in PRC are not insured by the Federal Deposit Insurance Corporation or other programs.
Restricted Cash
The Company adopted Accounting Standards
Update (“ASU”) No. 2016-18, “Statement of Cash Flows: Restricted Cash” during the first quarter of 2018.
This ASU applies to all entities that have restricted cash or restricted cash equivalents to be presented in the statement of
cash flows under Topic 230.
As of December 31, 2018 and 2017, the
Company had restricted cash (current and non-current) of $ 12,564,557 and $12,927,272, respectively. All restricted cash
was related to the various loans with banks and financial institutions – see Note 5 - Loans.
Accounts Receivable
The Company generally receives cash payment
upon delivery of a product, but may extend unsecured credit to its customers in the ordinary course of business. The Company mitigates
the associated risks by performing credit checks and actively pursuing past due accounts. An allowance for doubtful accounts is
established and recorded based on management’s assessment of the credit history of the customers and current relationships
with them. At December 31, 2018 and 2017, there was no allowance recorded as the Company considers all of the accounts receivable
fully collectible.
KINGOLD JEWELRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Inventories
Inventories are stated at the lower of
cost and net realizable value, and cost is calculated on the weighted average basis. As of December 31, 2018 and 2017, there was
no lower of cost or market adjustment because the carrying value of the Company’s inventories was lower than the current
and expected market price of gold. The cost of inventories comprises all costs of purchases, costs of fixed and variable production
overhead and other costs incurred in bringing the inventories to their present condition.
Property and Equipment
Property and equipment are stated at cost,
less accumulated depreciation. Expenditures for additions, major renewals and betterments are capitalized, and expenditures for
maintenance and repairs are charged to expense as incurred. Leasehold improvements are depreciated over the shorter of the lease
term or the estimated useful life.
Depreciation is provided on a straight-line
basis, less estimated residual value, over an asset’s estimated useful life. The estimated useful lives used in connection
with the preparation of the financial statements are as follows:
|
|
Estimated
Useful
Life
|
Buildings
|
|
30 years
|
Plant and machinery
|
|
15 years
|
Motor vehicles
|
|
10 years
|
Office furniture and electronic equipment
|
|
5 - 10 years
|
Leasehold improvements
|
|
Shorter of lease term or useful lives
|
Land Use Right
Under PRC law, all land in the PRC is
owned by the government and cannot be sold to an individual or company. The government grants individuals and companies the right
to use parcels of land for specified periods of time. These land use rights are sometimes referred to informally as “ownership.”
Land use rights are stated at cost less accumulated amortization. Amortization is provided over the respective useful lives, using
the straight-line method. Estimated useful life is 50 years, and is determined in connection with the term of the land use right.
KINGOLD JEWELRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Long-lived Assets
Certain assets such as property, plant
and equipment and construction in progress, are reviewed for impairment whenever events or changes in circumstances indicate that
the carrying amount may not be recoverable. Recoverability of assets that are held and used is measured by a comparison of the
carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying
amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying
amount exceeds the fair value of the asset. There were no events or changes in circumstances that triggered a review of impairment
of long-lived assets as of December 31, 2018 and 2017.
Fair Value of Financial Instruments
The Company follows the provisions of
Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures.” ASC 820 clarifies
the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify
the inputs used in measuring fair value as follows:
Level 1-Observable inputs such as unadjusted
quoted prices in active markets for identical assets or liabilities available at the measurement date.
Level 2-Inputs other than quoted prices
that are observable for the asset or liability in active markets, quoted prices for identical or similar assets and liabilities
in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by
observable market data.
Level 3-Inputs are unobservable inputs
which reflect management’s assumptions based on the best available information.
The carrying value of accounts receivable,
other current assets and prepaid expenses, short-term loans, other payables and accrued expenses approximate their fair values
because of the short-term nature of these instruments. The Company determined that the carrying value of the long term loans approximated
their fair value by comparing the stated loan interest rate to the rate charged by similar financial institutions.
Investments in Gold
The Company pledged the gold leased from
related party and part of its own gold inventory to meet the requirements of bank loans. The pledged gold will be available for
sale upon the repayment of the bank loans. The Company classified these pledged gold as investments in gold, and carried at fair
market value, with the unrealized gains and losses, included in the determination of comprehensive income (loss) and reported
in equity. The fair market value of the investments in gold is determined by quoted market prices at Shanghai Gold Exchange.
KINGOLD JEWELRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue Recognition
The Company adopted Accounting Standards
Codification (“ASC”) 606 in the first quarter of 2018 using the modified retrospective approach. ASC 606, Revenue
from Contracts with Customers, establishes principles for reporting information about the nature, amount, timing and uncertainty
of revenue and cash flows arising from the entity’s contracts to provide goods or services to customers. The core principle
requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the
consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations
are satisfied.
The Company has assessed the impact of
the guidance by reviewing its existing customer contracts and current accounting policies and practices to identify differences
that will result from applying the new requirements, including the evaluation of its performance obligations, transaction price,
customer payments, transfer of control and principal versus agent considerations. Based on the assessment, the Company concluded
that there was no change to the timing and pattern of revenue recognition for its current revenue streams in scope of Topic 606
and therefore there was no material changes to the Company’s consolidated financial statements upon adoption of ASC 606.
The Company’s revenues are primarily
composed of sales proceeds collected from sales of branded products and customized product fees. Revenue is recognized when performance
obligations under the terms of a contract with a customer are satisfied and promised services have transferred to the customers.
Revenue is recognized when obligations
under the terms of a contract with the Company’s customers are satisfied. Satisfaction of contract terms occur with the
transfer of title of the Company’s branded products and accessories to the customers. Net sale is measured as the amount
of consideration the Company expects to receive in exchange for transferring the goods to the wholesaler and retailers. The amount
of consideration the Company expects to receive consists of the sales price adjusted for any incentives if applicable. Incidental
promotional items that are immaterial in the context of the contract are recognized as expense. Fees charged to customers for
shipping and handling are included in net sales in the accompanying consolidated statements of operations and the related costs
incurred by the Company are included in cost of goods sold. In applying judgment, the Company considered customer expectations
of performance, materiality and the core principles of ASC Topic 606. The Company’s performance obligations are generally
transferred to the customer at a point in time. The Company’s contracts with customers generally do not include any variable
consideration.
Sαles of brαnded products
The Company offers a wide range of in-house
designed products including but not limited to gold necklaces, rings, earrings, bracelets, and pendants. In our sales of branded
products, the Company only sells on a wholesale basis to distributors and retailers. Pricing of the jewelry products is made at
the time of sales contracts are made, based on prevailing market price of gold. These sales contracts are primarily based on a
customer’s purchase order followed by the Company’s order acknowledgement, and may also include a master supply or
distributor agreement. The performance obligations are generally satisfied at a point in time when the Company ships the product
from the Company’s facility. Payment term is typically due within 30 days.
Customized production fees
In the customized product arrangement,
the Company receives orders from other jewelry companies who engage to the Company to design and produce 24-karat jewelry and
Chinese ornaments using gold they supply to the Company. Although the Company assumes the responsibilities to design and manufacture
the related Jewelry products, the Company does not assume inventory risk and does not determine the product design specification.
As a result, the Company is considered the agent in this arrangement for revenue recognition purposes. All of the sales contracts
in this customized product arrangements contain performance obligations satisfied at a point in time when we complete the design
and ship the product from the Company’s facility. The Company recognizes services-based revenue (the processing fee) from
such contracts for customized production when: (i) the contracted services have been performed and (ii) collectability is reasonably
assured.
KINGOLD JEWELRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue Recognition (continued)
The Company evaluated its revenue recognition
policy for all revenue streams within the scope of the ASU under previous standards and using the
five
-step model
under the new guidance and concluded that there were no differences in the pattern of revenue recognition as a result of the adoption
of ASC 606.
Contract Balances and Remaining Performance
Obligations
Contract balances typically arise when
a difference in timing between the transfer of control to the customer and receipt of consideration occurs. The Company contract
assets, consist primarily of accounts receivable related to sales of products to customers when revenue is recognized prior to
payment and the Company has an unconditional right to payment.
The Company did not disclose information
about remaining performance obligations pertaining to the customer contracts that either (i) contracts with an original expected
term of one year or less, or (ii) contracts for which revenue is recognized in proportion to the amount the Company has the right
to invoice for products sold or services rendered.
Revenue by category
Revenue by major product line was as follows for the years
ended December 31, 2018 and 2017:
|
|
For the year ended December
31,
|
|
|
|
2018
|
|
|
2017
|
|
Branded production sales
|
|
$
|
2,421,896,796
|
|
|
$
|
1,960,424,366
|
|
Customized production sales
|
|
|
53,479,608
|
|
|
|
48,938,691
|
|
Trade in product sales
|
|
|
158,078
|
|
|
|
154,643
|
|
Other
|
|
|
131,610
|
|
|
|
214,943
|
|
|
|
$
|
2,475,666,092
|
|
|
$
|
2,009,732,643
|
|
Income Taxes
Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts
of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period including
the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected
to be realized.
The provisions of ASC 740-10-25, “Accounting
for Uncertainty in Income Taxes,” prescribe a more-likely-than-not threshold for consolidated financial statement recognition
and measurement of a tax position taken (or expected to be taken) in a tax return. This interpretation also provides guidance
on the recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities,
accounting for interest and penalties associated with tax positions, and related disclosures. The Company does not believe that
there was any uncertain tax position at December 31, 2018 and 2017.
To the extent applicable, the Company
records interest and penalties as a general and administrative expense. The statute of limitations for the Company’s U.S.
federal income tax returns and certain state income tax returns remains open for tax years 2013 and after. As of December 31,
2018, the tax years ended December 31, 2013 through December 31, 2018 for the Company’s PRC subsidiaries remain open for
statutory examination by PRC tax authorities.
KINGOLD JEWELRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Foreign Currency Translation
Kingold, as well as its wholly owned subsidiary,
Dragon Lead, maintain accounting records in United States Dollars (“US$”), whereas Wuhan Vogue-Show and Wuhan Kingold
maintain their accounting records in Renminbi (“RMB”), which is the primary currency of the economic environment in
which their operations are conducted. The Company’s principal country of operations is the PRC. The financial position and
results of its operations are determined using RMB, the local currency, as the functional currency. The results of operations
and the statement of cash flows denominated in foreign currency are translated at the average rate of exchange during the reporting
period. Assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the applicable rates
of exchange in effect at that date. The equity denominated in the functional currency is translated at the historical rate of
exchange at the time of capital contribution. Because cash flows are translated based on the average translation rate, amounts
related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding
balances on the balance sheet. Translation adjustments arising from the use of different exchange rates from period to period
are included as a component of stockholders’ equity as “Accumulated Other Comprehensive Income (Deficit)”.
The value of RMB against US$ and other
currencies may fluctuate and is affected by, among other things, changes in the PRC’s political and economic conditions.
Any significant revaluation of RMB may materially affect the Company’s financial condition in terms of US$ reporting. The
following table outlines the currency exchange rates that were used in creating the consolidated financial statements in this
report:
|
|
|
December 31,
2018
|
|
|
|
December 31,
2017
|
|
Balance sheet items, except for share capital, additional paid in capital and retained
earnings, as of the period ended
|
|
|
US$1=RMB 6.8776
|
|
|
|
US$1=RMB 6.5064
|
|
Amounts included in the statements of income and cash flows for the period
|
|
|
US$1=RMB 6.6163
|
|
|
|
US$1=RMB 6.7570
|
|
Comprehensive Income
Comprehensive income consists of two components,
net income and other comprehensive income . The unrealized gain or loss resulting from the change of the fair market value from
the gold investments and the foreign currency translation gain or loss resulting from translation of the financial statements
expressed in RMB to US$ are reported in other comprehensive income in the consolidated statements of income
and
comprehensive income.
Earnings per Share (“EPS”)
Basic EPS is measured as net income divided
by the weighted average common shares outstanding for the period. Diluted EPS is similar to basic EPS but presents the dilutive
effect on a per share basis of potential common shares (i.e., options and warrants) as if they had been converted at the beginning
of the periods presented, or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e., those that
increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS.
Share or Stock-Based Compensation
For employee stock-based awards, share-based
compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense with graded
vesting on a straight-line basis over the requisite service period for the entire award. For the non-employee stock-based awards,
the fair value of the awards to non-employees are measured every reporting period based on the value of the Company’s common
stock.
KINGOLD JEWELRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Debts issuance Cost
Debt issuance cost related to a recognized
debt liability are presented in the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent
with debt discounts. Amortization of debt issuance costs is calculated using the effective interest method and is included as
a component of interest expense.
Risks and Uncertainties
The jewelry industry generally is affected
by fluctuations in the price and supply of diamonds, gold, and, to a lesser extent, other precious and semi-precious metals and
stones. The Company potentially has exposure to the fluctuation in gold commodity prices as part of its normal operations. In
the past, the Company has not hedged its requirement for gold or other raw materials through the use of options, forward contracts
or outright commodity purchasing. A significant increase in the price of gold could increase the Company’s production costs
beyond the amount that it is able to pass on to its customers, which would adversely affect the Company’s sales and profitability.
A significant disruption in the Company’s supply of gold, or other commodities, could decrease its production and shipping
levels, materially increase its operating costs, and materially and adversely affect its profit margins. Shortages of gold, or
other commodities, or interruptions in transportation systems, labor strikes, work stoppages, war, acts of terrorism, or other
interruptions to or difficulties in the employment of labor or transportation in the markets in which the Company purchases its
raw materials, may adversely affect its ability to maintain production of its products and sustain profitability. Although the
Company generally attempts to pass on increased commodity prices to its customers, there may be circumstances in which it is not
able to do so. In addition, if the Company were to experience a significant or prolonged shortage of gold, it would be unable
to meet its production schedules and to ship products to its customers in a timely manner, which would adversely affect its sales,
margins and customer relations.
Furthermore, the value of the Company’s
inventory may be affected by commodity prices. The Company records the value of its inventory using the lower of cost or market
value, cost calculated on the weighted average method. As a result, decreases in the market value of precious metals such as gold
would result in a lower stated value of the Company’s inventory, which may require it to take a charge for the decrease
in the value of its inventory.
The Company also allocated significant
portion of its inventories as investment in gold and pledged as collateral to secure loans from banks and financial institutions,
so there is a risk that the Company is unable to utilize its inventories, and there could be a disruption in the Company’s
supply of gold which could decrease its production and shipping levels. In addition, the investment in gold may be deficient if
the fair market value of the pledged gold in connection with the loans declines, then the Company may need to increase the pledged
gold inventory for the loan collateral or increase restricted cash.
KINGOLD JEWELRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Risks and Uncertainties (continued)
The Company’s operations are located
in the PRC. Accordingly, the Company’s business, financial condition, and results of operations may be influenced by the
political, economic, and legal environments in the PRC, as well as by the general state of the PRC economy. The Company’s
operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North
America and Western Europe. These include risks associated with, among others, the political, economic and legal environment,
and foreign currency exchange. The Company’s results may be adversely affected by changes in the political, regulatory and
social conditions in the PRC, and by changes in governmental policies or interpretations with respect to laws and regulations,
anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation, among other things. In
addition, the Company only controls Wuhan Kingold through a series of agreements. Although the Company believes the contractual
relationships through which it controls Wuhan Kingold comply with current licensing, registration and regulatory requirements
of the PRC, it cannot assure you that the PRC government would agree, or that new and burdensome regulations will not be adopted
in the future. If the PRC government determines that the Company’s structure or operating arrangements do not comply with
applicable law, it could revoke the Company’s business and operating licenses, require it to discontinue or restrict its
operations, restrict its right to collect revenues, require it to restructure its operations, impose additional conditions or
requirements with which the Company may not be able to comply, impose restrictions on its business operations or on its customers,
or take other regulatory or enforcement actions against the Company that could be harmful to its business. If such agreements
were cancelled, modified or otherwise not complied with, the Company would not be able to retain control of this consolidated
entity and the impact could be material to the Company’s operations. Although the Company has not experienced losses from
these situations and believes that it is in compliance with existing laws and regulations, this may not be indicative of future
results.
KINGOLD JEWELRY,
INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU
2016-02,"Leases" to provide a new comprehensive model for lease accounting. Under this guidance, lessees and lessors
should apply a "right-of-use" model in accounting for all leases (including subleases) and eliminate the concept of
operating leases and off-balance sheet leases. This guidance is effective for annual periods and interim periods within those
annual periods beginning after December 15, 2018. Early adoption is permitted. The Company is evaluating the impact on its consolidated
financial statements.
In February 2018, the FASB issued ASU
2018-02, which allows a reclassification from accumulated other comprehensive income to retained earnings for adjustments to tax
effects that were originally recorded in other comprehensive income due to changes in the U.S. federal corporate income tax rate
resulting from the enactment of the U.S. tax reform legislation, commonly referred to as the Tax Cuts and Jobs Act (the “Tax
Act. The Company does not expect this guidance will have a material impact on its consolidated financial statements.
In March 2018, the FASB issued guidance
relative to Income Taxes (Topic 740) that adds various Securities and Exchange Commission (“SEC”) paragraphs pursuant
to the issuance of the December 2017 SEC Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts
and Jobs Act (“SAB 118”), which was effective immediately. The SEC issued SAB 118 to address concerns about reporting
entities’ ability to timely comply with the accounting requirements to recognize all of the effects of the Tax Cuts and
Jobs Act (the “Tax Act”) in the period of enactment. SAB 118 allows disclosure that timely determination of some or
all of the income tax effects from the Tax Cuts and Jobs Act are incomplete by the due date of the financial statements and if
possible, to provide a reasonable estimate. For the years ended December 31, 2018, the Company recognized a transition tax of
$10.8 million that represented management’s assessment of the amount of U.S. corporate income tax based on the deemed repatriation
to the United States of the Company’s previously deferred earnings of certain non-U.S. subsidiaries and VIE of the Company
mandated by the U.S. Tax Reform. U.S. Treasury regulations, administrative interpretations or court decisions interpreting the
Tax Act may require further adjustments and changes in our estimates. Any subsequent adjustment to these amounts will be recorded
to current tax expense in subsequent period when the analysis is complete.
On June 20, 2018, the FASB issued ASU
No. 2018-07,
Compensation—Stock Compensation (Topic 718) - Improvements to Nonemployee Share-Based Payment Accounting,
which
aligns the accounting for share-based payment awards issued to employees and nonemployees. Under ASU No. 2018-07, the existing
employee guidance will apply to nonemployee share-based transactions (as long as the transaction is not effectively a form of
financing), with the exception of specific guidance related to the attribution of compensation cost. The cost of nonemployee awards
will continue to be recorded as if the grantor had paid cash for the goods or services. In addition, the contractual term will
be able to be used in lieu of an expected term in the option-pricing model for nonemployee awards. The new standard is effective
for us on January 1, 2019. Early adoption is permitted, including in interim periods, and should be applied to all new awards
granted after the date of adoption. The Company does not expect this guidance will have a material impact on its consolidated
financial statements.
In August 2018, the FASB Accounting Standards
Board issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework Changes to the Disclosure Requirements
for Fair Value Measurement” (“ASU 2018-13”). ASU 2018-13 modifies the disclosure requirements on fair value
measurements. ASU 2018-13 is effective for public entities for fiscal years beginning after December 15, 2019, with early adoption
permitted for any removed or modified disclosures. The removed and modified disclosures will be adopted on a retrospective basis
and the new disclosures will be adopted on a prospective basis. The Company does not expect this guidance will have a material
impact on its consolidated financial statements.
Except for the above-mentioned pronouncements,
there are no new recent issued accounting standards that will have material impact on the consolidated financial position, statements
of operations and cash flows.
KINGOLD JEWELRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – INVENTORIES
Inventories as of December 31, 2018 and 2017 consisted of the
following:
|
|
As of
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Work-in-progress (A)
|
|
$
|
87,160,453
|
|
|
$
|
90,406,021
|
|
Finished goods (B)
|
|
|
39,874,220
|
|
|
|
44,636,692
|
|
Total inventory
|
|
$
|
127,034,673
|
|
|
$
|
135,042,713
|
|
|
(A)
|
Included 2,570,232 grams of Au9999 gold as of December 31, 2018 and 2,508,182 grams of Au9999
gold as of December 31, 2017.
|
|
(B)
|
Included 1,168,892 grams of Au9999 gold as of December 31, 2018 and 1,231,586 grams of Au9999
gold as of December 31, 2017.
|
No lower of cost or net realizable value
adjustment was recorded at December 31, 2018 and 2017.
NOTE 4 - PROPERTY AND EQUIPMENT, NET
The following is a summary of property and equipment as of
December 31, 2018 and 2017:
|
|
As of
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Buildings
|
|
$
|
2,285,204
|
|
|
$
|
2,415,577
|
|
Plant and machinery
|
|
|
17,703,975
|
|
|
|
18,615,951
|
|
Motor vehicles
|
|
|
240,507
|
|
|
|
254,228
|
|
Office and electric equipment
|
|
|
1,454,794
|
|
|
|
1,415,194
|
|
Leasehold improvements
|
|
|
1,466,654
|
|
|
|
1,623,027
|
|
Subtotal
|
|
|
23,151,134
|
|
|
|
24,323,977
|
|
Less: accumulated depreciation
|
|
|
(17,755,804
|
)
|
|
|
(17,024,334
|
)
|
Property and equipment, net
|
|
$
|
5,395,330
|
|
|
$
|
7,299,643
|
|
Depreciation expense for the years ended
December 31, 2018 and 2017 was $1,715,490 and $1,637,750, respectively.
KINGOLD JEWELRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – LOANS
Short term loans consist of the following:
|
|
As of
|
|
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
(a)
|
Loan payable to Aijian Trust
|
|
$
|
-
|
|
|
$
|
46,108,447
|
|
(b)
|
Loans payable to Evergrowing Bank - Qixia Branch
|
|
|
-
|
|
|
|
153,694,824
|
|
(c)
|
Loans payable to Evergrowing Bank - Yantai Huanshan Road Branch
|
|
|
72,699,779
|
|
|
|
153,233,739
|
|
(d)
|
Loans payable to Sichuan Trust - gross amount
|
|
|
145,399,558
|
|
|
|
230,542,236
|
|
|
Loans payable to Sichuan Trust - deferred financing cost
|
|
|
-
|
|
|
|
(2,239,292
|
)
|
(e)
|
Loans payable to China Aviation Capital - gross amount
|
|
|
-
|
|
|
|
44,571,499
|
|
|
Loans payable to China Aviation Capital - deferred financing cost
|
|
|
-
|
|
|
|
(457,926
|
)
|
(f)
|
Loans payable to Huarong Trust - gross amount
|
|
|
-
|
|
|
|
146,163,777
|
|
|
Loans payable to Huarong Trust - deferred financing cost
|
|
|
-
|
|
|
|
(1,324,677
|
)
|
(g)
|
Loans payable to China Construction Investment Trust - gross amount
|
|
|
-
|
|
|
|
46,108,447
|
|
|
Loans payable to China Construction Investment Trust - deferred financing cost
|
|
|
-
|
|
|
|
(167,796
|
)
|
(h)
|
Loans payable to Zheshang Jinhui Trust - gross amount
|
|
|
62,725,369
|
|
|
|
84,532,153
|
|
|
Loans payable to Zheshang Jinhui Trust - deferred financing cost
|
|
|
(18,547
|
)
|
|
|
-
|
|
(i)
|
Loans payable to Zhongjiang International Trust - gross amount
|
|
|
-
|
|
|
|
61,477,929
|
|
|
Loans payable to Zhongjiang International Trust - deferred financing cost
|
|
|
-
|
|
|
|
(141,614
|
)
|
(j)
|
Loan payable to China Aviation Trust - gross amount
|
|
|
45,073,863
|
|
|
|
-
|
|
|
Loan payable to China Aviation Trust - deferred financing cost
|
|
|
(44,456
|
)
|
|
|
-
|
|
(k)
|
Loans payable to National Trust - gross amount
|
|
|
50,889,845
|
|
|
|
-
|
|
|
Loans payable to National Trust - deferred financing cost
|
|
|
(30,023
|
)
|
|
|
-
|
|
(l)
|
Loans payable to Anxin Trust
|
|
|
354,774,921
|
|
|
|
-
|
|
(m)
|
Loans payable to China Construction Bank
|
|
|
42,165,871
|
|
|
|
-
|
|
(n)
|
Loans payable to Minsheng Trust (new)
|
|
|
145,399,560
|
|
|
|
-
|
|
(o)
|
Loans payable to Chang’An Trust (new) - gross amount
|
|
|
116,589,437
|
|
|
|
-
|
|
|
Loans payable to Chang’An Trust (new) – deferred financing cost
|
|
|
(677,403
|
)
|
|
|
-
|
|
|
Total short term loans
|
|
$
|
1,034,947,774
|
|
|
$
|
962,101,746
|
|
(a) Loan payable to Aijian Trust
The Company fully repaid loan to Aijian
Trust upon maturity on May 4, 2018. The pledged gold and restricted deposit were released and returned upon the repayment.
(b) Loans payable to Evergrowing Bank
– Qixia Branch
The Company fully repaid loan to Evergrowing
Bank – Qixia Branch upon maturity and the pledged gold was subsequent returned to the Company.
KINGOLD JEWELRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – LOANS (continued)
(c) Loans payable to Evergrowing Bank
– Yantai Huanshan Road Branch
From February 24, 2016 to March 24, 2016,
Wuhan Kingold signed ten Loan Agreements with the Yantai Huangshan Road Branch of Evergrowing Bank for loans of approximately
$145.4 million (RMB 1 billion) in aggregate. The purpose of the loans was for purchasing gold. The terms of loans are two years
and bear fixed interest of 4.75% per year. Based on the loan repayment plan as specified in the loan agreements, $145,400 (RMB
1 million) was repaid in August 2016, $145,400 (RMB 1 million) was repaid on February 23, 2017 and another $145,400 (RMB 1 million)
was repaid in August 23, 2017. The Company repaid approximately $72.3 million (RMB 497 million) to Evergrowing bank Yantai Huangshan
Road Branch upon maturity.
For the remaining balance of approximately
$72.7 million (RMB 500 million), the Company entered into a loan extension agreement with the bank to extend the loan borrowing
period for additional seven months until October 2018, with the new interest rate of 6.5% per year. The loans are secured by 2,735 kilograms
of Au9999 gold in aggregate with carrying value of approximately $92.5 million (RMB 635.9 million) and are guaranteed by the CEO
and Chairman of the Company. Upon the maturity of these loans, the Company entered into a series of supplemental agreements
with Yantai Huanshan Road Branch of Evergrowing Bank to extend the term of the loan for additional 12 months.
(d) Loans payable to Sichuan Trust
On September 7, 2016, the Company entered
into two trust loan agreements with the Sichuan Trust Ltd. (“Sichuan Trust”) to borrow a maximum of approximately
$290.8 million (RMB 2 billion) as working capital loan. The required annual interest rate is 8.46%. The Company paid the first
interest payment equal to 1.21% of the principle received as loan origination fee on annual basis, then the rest of interest payments
are calculated based on a fixed interest rate of 7.25%. The Company pledged 7,258 kilograms of Au9999 gold with carrying value
of approximately $245.4 million (RMB 1.7 billion) as collateral to secure this loan. The loan is guaranteed by the CEO and Chairman
of the Company. The Company also made a restricted deposit of approximately $2.2 million (RMB 15 million) to secure these loans.
The deposit will be refunded when the loan is repaid upon maturity. As of December 31, 2018, the Company received an aggregate
of approximately $218.1 million (RMB 1.5 billion) from the loan.
These loans originally have maturity dates
between September 20, 2018 and November 30, 2018. During the year ended December 31, 2018, these loans were extended to have maturity
dates between November 20, 2019 and January 30, 2020. Therefore, approximately $72.7 million (RMB 500 million) was recorded as
long term.
The Company paid approximately $5.3 million
(RMB 36.3 million) as loan origination fee in 2017 and 2016 for obtaining the loan. The loan origination fee was recorded as deferred
financing cost against the loan balance. For the years ended December 31, 2018 and 2017, approximately $2.2 million (RMB 14.6
million) and approximately $3.1 million (RMB 20 million) deferred financing costs were amortized, respectively. As of December
31, 2018, the deferred financing costs related to obtaining these loans were fully amortized.
KINGOLD JEWELRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – LOANS (continued)
(e) Loans payable to China Aviation Capital
On September 7, 2016, the Company entered
into a trust loan agreement with China Aviation Capital Investment Management (Shenzhen) (“China Aviation Capital”)
to borrow a maximum of approximately $87.2 million (RMB 600 million) as working capital loan. The first installment of the loan
was approximately $42.2 million (RMB 290 million) to mature on September 6, 2018. The Company is required to make interest payments
calculated based on a fixed annual interest rate of 7.5% and a one-time consulting fee of 3% based on the principal amount received
as loan origination fee. The Company pledged 1,473 kilograms of Au9999 gold with carrying value of approximately $49.8 million
(RMB 342.5 million) as collateral to secure this loan. The loan is guaranteed by the CEO and Chairman of the Company. The loan
was extended upon maturity for another 18 months with a new maturity date of March 5, 2020. Therefore, the $42.2 million loan
from China Aviation Capital was recorded as long term at December 31, 2018. The Company is required to pay interest based on a
fixed annual interest rate of 10% and a one-time consulting fee of 3% based on the principal amount extended as loan origination
fee.
The Company paid totally approximately
$1.3 million (RMB 8.7 million) during the year as loan origination fee for extending the loan. The loan origination fee was recorded
as deferred financing cost against the loan balance. For the years ended December 31, 2018 and 2017, approximately $0.7 million
(RMB 4.9 million) and $0.7 million (RMB 4.4 million) deferred financing costs were amortized, respectively.
(f) Loans payable to Huarong Trust
The Company fully repaid loan to Huarong
International Trust Co. Ltd. (“Huarong Trust”) upon maturity on August 15, 2018. The pledged gold and restricted deposit
were released and returned upon the repayment.
The Company paid approximately $2.1 million
(RMB 14.3 million) in fiscal year 2017 as loan origination fee for obtaining the loan. The loan origination fee was recorded as
deferred financing cost against the loan balance. For the years ended December 31, 2018 and 2017, approximately $1.3 million (RMB
8.6 million) and $0.9 million (RMB 5.7 million) deferred financing costs were amortized, respectively.
(g) Loans payable to China Construction
Investment Trust
On August 29, 2016, the Company entered
into a trust loan agreement with China Construction Investment Trust to borrow a maximum of approximately $43.6 million (RMB 300
million) as working capital loan for the purpose of purchasing of gold solely with a period of 24 months from October 9, 2016
to October 9, 2018. For the loan obtained the Company is required to make interest payments are calculated based on a fixed annual
interest rate. The interest payment is divided into two parts: (1) 1% of the principal amount received need to be paid before
December 25, 2016 as loan origination fee; (2) the rest of interest payments are calculated based on a fixed interest rate of
7.5% and due on quarterly basis. The Company pledged 1,447 kilograms of Au9999 gold with carrying value of approximately $48.9
million (RMB 336.4 million) as collateral to secure this loan. The loan is guaranteed by the CEO and Chairman of the Company.
The Company also made a restricted deposit of approximately $0.4 million (RMB 3 million) to secure the loan. During the year ended
December 31, 2018, the Company full repaid all the outstanding balance. The pledged gold and restricted deposit were released
and returned upon the repayment.
The Company paid approximately $0.4 million
(RMB 3 million) in fiscal year 2016 as loan origination fee for obtaining the loan. The loan origination fee was recorded as deferred
financing cost against the loan balance. For the years ended December 31, 2018 and 2017, approximately $0.2 million (RMB 1.1 million)
and $0.2 million (RMB 1.5 million) deferred financing costs were amortized, respectively.
KINGOLD JEWELRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – LOANS (continued)
(h) Loans payable to Zheshang Jinhui
Trust
On November 7, 2016, the Company entered
into a trust loan agreement with Zheshang Jinhui Trust to borrow a maximum of approximately $80.0 million (RMB 550 million) for
purchasing gold with a period of 24 months from principal receiving date November 15, 2016 to November 15, 2018. The Company is
required to make interest payments calculated based on a fixed annual interest rate of 7.8%. The Company pledged 2,708 kilograms
of Au9999 gold with carrying value of approximately $91.5 million (RMB 629.6 million) as collateral to secure this loan. The loan
is guaranteed by the CEO and Chairman of the Company. The Company also made a restricted deposit of approximately $0.8 million
(RMB 5.5 million) to secure these loans. The deposit will be refunded when the loan is repaid upon maturity. During the year ended
December 31, 2018, the Company full repaid the loan upon maturity. The pledged gold and restricted deposit were released and returned
upon the repayment.
In November 2017, Wuhan Kingold entered
into a new Trust Loan Contract with Zheshang Jinhui Trust. The agreement allows the Company to access a total of approximately
$145.4 million (RMB 1 billion) for the purpose of working capital needs. The loan bears a fixed annual interest of 7.7% with a
term of 24 months and is secured by 3,264 kilograms of Au9999 gold in aggregate with carrying value of approximately $110.3 million
(RMB 758.5 million). The loan is also guaranteed by the CEO and Chairman of the Company. After entering into the contract, the
Company received an aggregate of approximately $91.8 million (RMB 631.4 million) from the loan. During the year ended December
31, 2018, the Company repaid approximately $29.1 million (RMB 200 million) to the loan. The Company also made a restricted deposit
of approximately $0.92 million (RMB 6.3 million) to secure these loans. The deposit will be refunded when the loan is repaid upon
maturity. In January 2019, the Company made repayment of approximately $38.0 million (RMB 261.4 million) to Zheshang Jinhui Trust.
The Company paid approximately $1.4 million
(RMB 9.5 million) as loan origination fee for obtaining the new loan of November 2017. The loan origination fee was recorded as
deferred financing cost against the loan balance. For the years ended December 31, 2018 and 2017, approximately $1.4 million (RMB
9.0
million) and $0.1 million (RMB 0.3 million) deferred financing costs were amortized
related to the new loans.
(i) Loans payable to Zhongjiang International
Trust
On December 23, 2016, the Company entered
into a trust loan agreement with Zhongjiang International Trust to borrow a maximum of approximately $58.2 million (RMB 400 million)
for purchasing gold with a period of 24 months from December 23, 2016 to December 22, 2018. The Company is required to make interest
payments calculated based on a fixed annual interest rate of 8.75%. The Company pledged 2,104 kilograms of Au9999 gold with carrying
value of approximately $71.1 million (RMB 489.2 million) as collateral to secure this loan. The loan is guaranteed by the CEO
and Chairman of the Company. During the year ended December 31, 2018, the Company full repaid the loan upon maturity. The pledged
gold was released upon the repayment.
The Company paid approximately $0.3 million
(RMB 1.9 million) as loan origination fee for obtaining the loan. The loan origination fee was recorded as deferred financing
cost against the loan balance. For the years ended December 31, 2018 and 2017, approximately $0.1
million
(RMB 0.9 million) and $0.2
million (RMB 1.0 million) deferred financing costs were amortized,
respectively.
KINGOLD JEWELRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – LOANS (continued)
(j) Loans payable to China Aviation Trust
On January 25, 2017, Wuhan Kingold entered
into a trust loan agreement with China Aviation Trust Ltd. to borrow a maximum of approximately $45.1 million (RMB 310 million)
for working capital with a period of 24 months from the date of releasing the loan. The Company is required to make interest payments
that are calculated based on a fixed annual interest rate of 8%. The Company pledged 1,647 kilograms of Au9999 gold with carrying
value of approximately $55.0 million (RMB 378.4 million) as collateral to secure this loan. The loan is guaranteed by the CEO
and Chairman of the Company. The Company also made a restricted deposit of approximately $0.5 million (RMB 3.1 million) to secure
these loans. The deposit will be refunded when the loan is repaid upon maturity. In January 2019, the Company made fully repayment
to China Aviation Trust, The pledged gold and restricted deposit were released and returned upon the repayment.
The Company paid approximately $1.4 million
(RMB 9.3 million) as loan origination fee for obtaining the loan. The loan origination fee was recorded as deferred financing
cost against the loan balance. For the years ended December 31, 2018 and 2017, approximately $0.7 million (RMB 4.7 million) and
$0.7 million (RMB 4.3 million) deferred financing costs were amortized, respectively.
(k) Loans payable to National Trust
On February 28, 2017, Wuhan Kingold entered
into a trust loan agreement with National Trust Ltd. (“National Trust”) to borrow a maximum of approximately $50.9
million (RMB 350 million) for working capital with a period of 24 months from the date of releasing the loan. The Company is required
to make interest payments that are calculated based on a fixed annual interest rate of 8.617%. The Company pledged 1,745 kilograms
of Au9999 gold with carrying value of approximately $59.3 million (RMB 408.1 million) as collateral to secure this loan. The loan
is guaranteed by the CEO and Chairman of the Company. The loan was fully repaid on March 1, 2019, and the pledged gold was released
and returned upon the repayment.
The Company paid approximately $0.4 million
(RMB 2.6 million) as loan origination fee for obtaining the loan. The loan origination fee was recorded as deferred financing
cost against the loan balance. The loan origination fee was recorded as deferred financing cost against the loan balance. For
the years ended December 31, 2018 and 2017, approximately $0.2 million (RMB 1.3 million) and $0.2 million (RMB 1.1 million) deferred
financing costs were amortized, respectively.
(l) Loans payable to Anxin Trust Co.,
Ltd
In January 2016, Wuhan Kingold signed
a Collective Trust Loan Agreement with Anxin Trust Co., Ltd. (“Anxin Trust”). The agreement allowed the Company to
access of approximately $436.2 million (RMB 3 billion) within 60 months. Each individual loan will bear a fixed annual interest
of 14.8% or 11% with various maturity dates from February 19, 2019 to October 12, 2019. The purpose of this trust loan was to
provide working capital for the Company to purchase gold. The loan is secured by 15,450 kilograms of Au9999 gold in aggregate
with carrying value of approximately $522.3
million (RMB 3.6 billion). The loan is also
guaranteed by the CEO and Chairman of the Company. As of December 31, 2018, the Company received full amount from the loan.
During the year ended December 31, 2018,
the Company repaid approximately $81.4 million (RMB 0.56 billion), which resulted in an outstanding balance of approximately $354.8
million (RMB 2.44 billion) as of December 31, 2018 reported as short term loans. The Company also made a restricted deposit of
approximately $3.5 million (RMB 24 million) to secure the rest of these loans. The deposit will be refunded when the loan is repaid
upon maturity. In February and March 2019, the Company subsequently made repayments total of approximately $24 million (RMB 165
million) and extended the loans of approximately $18.5 million (RMB 127 million) which originally due on March 29, 2019 to May
17, 2019.
KINGOLD JEWELRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – LOANS (continued)
(m) Loan payable to China Construction
Bank
In September 2018, Wuhan Kingold signed
a Loan Agreement with Wuhan Jiang’An Branch of China Construction for a loan of approximately $17.2 million (RMB 118 million).
The purpose of this loan is to provide working capital for the Company to purchase gold. The term of the loan is one year with
maturity date of September 19, 2019 and bears fixed interest of 4.35% per year. As of December 31, 2018, the Company received
full amount from the loan.
In September 2018, Wuhan Kingold signed
a second Loan Agreement with Wuhan Jiang’An Branch of China Construction for a loan of approximately $25.0 million (RMB
172 million). The purpose of this loan is to provide working capital for the Company to purchase gold. The term of the loan is
one year with maturity date of September 25, 2019 and bears fixed interest of 4.35% per year. As of December 31, 2018, the Company
received full amount from the loan.
The above mentioned two loans were guaranteed
by the CEO and Chairman of the Company. In addition, related party Wuhan Huayuan pledged fixed asset buildings as collateral to
further secure these loans. The loan agreements also required that Company to maintain an asset-liability ratio less than 90%
and current ratio over 1. The Company is not allowed to increase contingent liabilities without notice to the bank, the balance
of contingent liabilities should be no larger than RMB 3.05 billion, contingent asset-liability ratio should be less than 60%.
(n) Loan payable to Minsheng Trust (new)
On October 10, 2018, the Company entered
into a Trust Loan Contract in the amount of no more than approximately $145.4 million (RMB 1.0 billion) with China Minsheng Trust
Co., Ltd. (“Minsheng Trust”). The purpose of the trust loan is to supplement liquidity needs. The Trust Loan will
be issued in installments. Each installment of the Trust Loan has a 12-month term, and the period from issuance date of the first
installment to the expiration date of the last installment shall not exceed 18 months. The Trust Loan bears interest at a fixed
annual rate of 10.5%. The loan is secured by 5,356 kilograms of Au9999 gold in aggregate with carrying value of approximately
$181.9 million (RMB 1.3 billion). The loan is also guaranteed by the CEO and Chairman of the Company. As of December 31, 2018,
the Company received the full amount from the loan.
(o) Loans payable to Chang’An
Trust
In September 2017, Wuhan Kingold entered
into a new Trust Loan Contract with Chang’An Trust. The agreement allows the Company to access a total of approximately
$145.4 million (RMB 1 billion) for the purpose of working capital needs. The loan bears a fixed annual interest of 10% with a
term of 24 months and is secured by 4,784 kilograms of Au9999 gold in aggregate with carrying value of approximately $163.4 million
(RMB 1.1 billion). The loan is also guaranteed by the CEO and Chairman of the Company. As of December 31, 2018, the Company received
full amount from the loan. The Company also made a restricted deposit of approximately $1.5 million (RMB 10 million) to secure
these loans. The deposit will be refunded when the loan is repaid upon maturity. On September 30, 2018, the Company made repayment
of approximately $2.9 million (RMB 20 million). On October 31, 2018, the Company made additional repayment of approximately $25.9
million (RMB 178.2 million) to Chang'An Trust. As of December 31, 2018, the balance of loans from Chang’An Trust was approximately
$116.6 (RMB 801.9 million).
The Company paid approximately $1.5 million
(RMB 11 million) as loan origination fee for obtaining the loans. The loan origination fee was recorded as deferred financing
cost against the loan balance. For the years ended December 31, 2018 and 2017, approximately $0.8 million (RMB 5.5 million) and
$0.1 million (RMB 0.8 million) deferred financing costs were amortized, respectively.
Interest expenses for all of the short
term loans classified as of the balance sheet dates for the years ended December 31, 2018 and 2017 were approximately $116.1 million
and $68.8 million, respectively. The weighted average interest rates for the years ended December 31, 2018 and 2017 were 9.0%
and 7.0%, respectively.
KINGOLD JEWELRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – LOANS (continued)
Long term loans consist of the following:
|
|
As of
|
|
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
(p)
|
Loans payable to Minsheng Trust - gross amount
|
|
$
|
218,099,337
|
|
|
$
|
-
|
|
|
Loans payable to Minsheng Trust - deferred financing cost
|
|
|
(3,907,406
|
)
|
|
|
-
|
|
(q)
|
Loans payable to Anxin Trust
|
|
|
-
|
|
|
|
461,084,471
|
|
(r)
|
Loans payable to Chang’An Trust - gross amount
|
|
|
-
|
|
|
|
153,694,824
|
|
|
Loans payable to Chang’An Trust - deferred financing cost
|
|
|
-
|
|
|
|
(1,563,230
|
)
|
(s)
|
Loans payable to China Aviation Trust - gross amount
|
|
|
-
|
|
|
|
47,645,395
|
|
|
Loans payable to China Aviation Trust - deferred financing cost
|
|
|
-
|
|
|
|
(761,674
|
)
|
(t)
|
Loans payable to China Aviation Capital
|
|
|
42,165,872
|
|
|
|
-
|
|
|
Loans payable to China Aviation Capital - deferred financing cost
|
|
|
(990,898
|
)
|
|
|
-
|
|
(u)
|
Loans payable to National Trust - gross amount
|
|
|
-
|
|
|
|
53,793,188
|
|
|
Loans payable to National Trust - deferred financing cost
|
|
|
-
|
|
|
|
(228,068
|
)
|
(v)
|
Loans payable to Zheshang Jinhui Trust - gross amount
|
|
|
-
|
|
|
|
76,847,412
|
|
|
Loans payable to Zheshang Jinhui Trust - deferred financing cost
|
|
|
-
|
|
|
|
(1,102,181
|
)
|
(w)
|
Loans payable to Sichuan Trust - gross amount
|
|
|
72,699,779
|
|
|
|
-
|
|
|
Loans payable to Sichuan Trust - deferred financing cost
|
|
|
-
|
|
|
|
-
|
|
(x)
|
Loan payable to Dongguan Trust
|
|
|
145,399,557
|
|
|
|
-
|
|
|
Loan payable to Dongguan Trust - deferred financing cost
|
|
|
(1,609,089
|
)
|
|
|
-
|
|
(y)
|
Loan payable to Kunlun Trust
|
|
|
43,619,868
|
|
|
|
-
|
|
|
Total long term loans, net of deferred financing costs
|
|
$
|
515,477,020
|
|
|
$
|
789,410,137
|
|
(p) Loan payable to Minsheng Trust
On December 26, 2017, the Company entered
into a Trust Loan Contract in the amount of no more than approximately $218.1 million (RMB 1.5 billion) with China Minsheng Trust
Co., Ltd. (“Minsheng Trust”). The purpose of the trust loan is to supplement liquidity needs. The Trust Loan will
be issued in installments. Each installment of the Trust Loan has a 24-month term, and the period from issuance date of the first
installment to the expiration date of the last installment shall not exceed 30 months. The Trust Loan bears interest at a fixed
annual rate of 9.2%. The loan is secured by 7,887 kilograms of Au9999 gold in aggregate with carrying value of approximately $270.2
million (RMB 1.9 billion). The loan is also guaranteed by the CEO and Chairman of the Company. The Company made a restricted deposit
of approximately $2.2 million (RMB 15 million) to secure these loans. The deposit will be refunded when the loan is repaid upon
maturity. As of December 31, 2018, the Company received full amount from the loan.
The Company paid approximately $7.8 million
(RMB 53.5 million) as loan origination fee for obtaining this loan. The loan origination fee was recorded as deferred financing
cost against the loan balance. For the year ended December 31, 2018 approximately $4.0 million (RMB 26.6 million) deferred financing
cost was amortized.
(q) Loans payable to Anxin Trust
(see Note 5 (l) above)
(r) Loans payable to Chang’An Trust
(see Note 5 (o) above)
(s) Loans payable to China Aviation
Trust (see Note 5 (j) above)
(t) Loans payable to China Aviation Capital (see
Note 5 (e) above)
KINGOLD JEWELRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – LOANS (continued)
(u) Loans payable to National Trust (see
Note 5 (k) above)
(v) Loans payable to Zheshang Jinhui Trust
(see Note 5 (h) above)
(w) Loans payable to Sichuan Trust (see
Note 5 (d) above)
(x) Loans payable to Dongguan Trust
In July 2018, Wuhan Kingold entered into
a gold income rights transfer and repurchase agreement (the “Agreement”) with Dongguan Trust. The Agreement allows
the Company to obtain no more than approximately $145.4 million (RMB 1 billion) to exchange the income earning rights of the Company.
The Company committed to buy back the rights and repay the proceeds received, and shall pay a fixed interest of 11% over a term
of 18 months. The Company determined that this Agreement is essentially a loan agreement due to the nature of this transaction.
This loan is secured by 4,974 kilograms of Au9999 gold in aggregate with carrying value of approximately $165.8 million (RMB 1,140
million). The loan is also guaranteed by the CEO and Chairman of the Company. The Company also made a restricted deposit of approximately
$1.5 million (RMB 10 million) to secure the loan. The deposit will be refunded when the loan is repaid upon maturity.
The Company paid approximately $2.2 million
(RMB 15 million) as loan origination fee for obtaining this loan. The loan origination fee was recorded as deferred financing
cost against the loan balance. For year ended December 31, 2018, approximately $0.6 million (RMB 3.9 million) deferred financing
cost was amortized.
(y) Loans payable to Kunlun Trust
In December 2018, Wuhan Kingold entered
into a Trust Loan Contract in the amount of approximately $145.4 million (RMB 300 million) with China Kunlun Trust Co., Ltd. (“Kunlun
Trust”). The Trust Loan has a 24-month term and bears interest at a fixed annual rate of 10%. This loan is secured by 1,578
kilograms of Au9999 gold in aggregate with carrying value of approximately $54.6 million (RMB 375.2 million). The loan is also
guaranteed by the CEO and Chairman of the Company. The Company made a restricted deposit of approximately $0.4 million (RMB 3
million) to secure the loan. The deposit will be refunded when the loan is repaid upon maturity.
Total Interest for the long term loans
classified as balance sheet dates in the amount of $38.0
million and $59.7 million for
the years ended December 31, 2018 and 2017, respectively. The weighted average interest rates for the years ended December 31,
2018 and 2017 were 9.2%
and 11.6%, respectively.
KINGOLD JEWELRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 – INVESTMENTS IN GOLD
As of December 31, 2018 and 2017, the
Company allocated total of 61,122,210 and 59,523,000 grams of Au9999 gold in its inventories with carrying value of approximately
$2,078.5 million and $2,131.6 million as investments in gold for obtaining various loans from banks and financial institutions.
(See Note 5)
As of December 31, 2018 and 2017, the
Company pledged a total of 2,655 and 10,225 kilograms of gold, respectively, as guarantee for Wuhan Kangbo Biotech Limited (“Kangbo”),
a related party which is controlled by the CEO and Chairman of the Company, for obtaining total amount of RMB 500 million and
RMB 2 billion loan from Evergrowing Bank Huanshan Road Branch, respectively. (See Note 7)
As of December 31, 2018, the Company pledged
523 kilograms of gold as collateral for obtaining total amount of RMB 100 million loan from Wuhan Huayuan Technology Development
Limited (“Huayuan”), a related party which is controlled by the CEO and Chairman of the Company. (See Note 7)
As of December 31, 2018, the total of
19,629 kilograms of Au9999 gold with fair market value of approximately $700.2 million was pledged for long-term bank loans, and
therefore classified as non-current investments in gold. The remaining investments in gold of 44,671.21 kilograms of Au9999 gold
with fair market value of approximately $1,593.6 million was classified as current assets as of December 31, 2018.
As of December 31, 2017, the total of
26,689 kilograms of Au9999 gold with fair market value of approximately $957.1 million was pledged for long-term bank loans, and
therefore classified as non-current investments in gold. The remaining investments in gold of 43,582 kilograms of Au9999 gold
with fair market value of approximately $1,562.9 million was classified as current assets as of December 31, 2017.
For the year ended December 31, 2018,
the fair market value of investments in gold increased by approximately $106.9 million, which resulted in net unrealized gain
of approximately $81.0 million, net of tax for the year ended December 31, 2018. The Company recorded the change in unrealized
gain as other comprehensive income, net of tax.
NOTE 7 – RELATED PARTIES LOANS
|
(a)
|
Loans payable
to Wuhan Kangbo Biotech Limited
|
On January 13, 2017, Wuhan Kingold entered
into a loan agreement with Wuhan Kangbo Biotech Limited (“Kangbo”), a related party which is controlled by the CEO
and Chairman of the Company, for a loan of approximately $145.4 million (RMB 1 billion). The loan had one-year term from January
12, 2017 to January 10, 2018 and bore fixed interest of 4.75%. In order for Kangbo to obtain the loan from the bank, Wuhan Kingold
signed the guarantee agreement with Evergrowing Bank - Yantai Huangshan Road Branch on January 11, 2017. As a guarantor of the
bank loan, Wuhan Kingold pledged 5,470 kilograms of gold in aggregate with carrying value of approximately $182.7 million (RMB
1.3 billion) as collateral.
On February 20, 2017, Wuhan Kingold entered
into a second loan agreement with Kangbo for a loan of approximately $145.4 million (RMB 1 billion). The loan had one-year term
from February 20, 2017 to February 20, 2018 bore fixed interest of 4.75%. In order for Kangbo to obtain the loan from the bank,
Wuhan Kingold signed the guarantee agreement with Evergrowing Bank - Yantai Huangshan Road Branch on February 16, 2017. As a guarantor
of the bank loan, Wuhan Kingold pledged 4,755 kilograms of gold in aggregate with carrying value of approximately $163.6 million (RMB
1.1 billion) as collateral.
KINGOLD JEWELRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 – RELATED PARTIES LOANS
(continued)
The Company repaid $226.7 million (RMB
1.5 billion) loans to Kangbo upon maturity in January 2018 and February 2018. 7,870 kilograms of pledged gold in Evergrowing Bank
- Yantai Huanshan Road Branch were released to the Company accordingly with 2,355 kilograms are still pledged as guarantee. For
the remaining $72.7 million (RMB 500 million) loan that matured on March 2, 2018, the Company entered into a loan extension agreement
with Kangbo to extend the loan borrowing period for additional seven months until October 2, 2018 with additional 300 kilograms
of gold pledged as collateral. Upon the maturity of the loan, the Company entered into a supplemental agreement with the related
party Kangbo to extend the term of the loan for 12 months, the 2,655 kilograms of Au9999 gold with carrying value of approximately
$91.3 million (RMB 627.3 million) will still be pledged in Yantai Huanshan Road Branch of Evergrowing Bank for Kangbo to obtain
the loan.
Total interest expenses for above related
party loans were approximately $5.4 million and $12.9 million, respectively for the years ended December 31, 2018 and 2017.
|
(b)
|
Loans payable
to Wuhan Kingold Industrial Group
|
Between November 23, 2016 and November
29, 2016, the Company entered into multiple loan agreements of RMB 3.2 billion in aggregate with Wuhan Kingold Industrial Group,
a related party which is controlled by the CEO and Chairman of the Company, as working capital loans in order to subsequently
purchase raw material of gold.
On February 22, 2017, the Company signed
a non-interest bearing credit line agreement with Wuhan Kingold Industrial Group for additional loan of RMB 800 million with a
5 year maturity to February 21, 2022.
In April 2017, the Company signed three
additional non-interest bearing credit line agreements with Wuhan Kingold Industrial Group for additional loans totaling RMB 1.35
billion with 5 year maturity to April 2022.
In January 2018, the Company signed an
agreement and borrowed additional $305.3 million (RMB 2.1 billion) non-interest bearing loan from Wuhan Kingold Industrial Group
as working capital with 5 year maturity to January 2023.
During the year ended December 31, 2018,
the Company repaid loans totaling $561.7 million (RMB 3.7 billion) and obtained loans totaling $545.9 million (RMB 3.6 billion).
On November 30, 2018, Wuhan Kingold Industrial
Group signed an agreement with the CEO and Chairman of the Company to transfer the credit right for its loan to the Company of
approximately $143.9 million (RMB 1 billion). As the result, the CEO and Chairman of the Company resume the credit right. The
CEO and Chairman subsequently transferred this credit right to paid-in capital through a share restructuring on November 31, 2018.
(See Note 8)
As of December 31, 2018, the aggregate
borrowing amount from Wuhan Kingold Industrial Group was $362.9 million (RMB 2.5 billion). The Company classified these loans
as non-current liabilities. As of December 31, 2017, the aggregate borrowing amount from Wuhan Kingold Industrial Group was approximately
$553.3 million (RMB 3.6 billion).
KINGOLD JEWELRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 – RELATED PARTIES LOANS
(continued)
|
(c)
|
Loans payable
to Wuhan Huayuan Technology Development Limited
|
On June 8, 2017, Wuhan Kingold signed
a loan agreement with Wuhan Huayuan Technology Development Limited (“Wuhan Huayuan”), a related party which is controlled
by the CEO and Chairman of the Company, for a loan of $14.5 million (RMB 100 million). The purpose for the loans is for working
capital and purchasing gold. The loan has four years term from June 8, 2017 to June 8, 2021, and bears fixed interest of 7%. The
Company also pledged 523 kilograms of Au9999 gold with carrying value of approximately $19.1 million (RMB 124.4 million) as collateral
to secure this loan.
During the year ended December 31, 2018,
the Company repaid $3.4 million (RMB 22.6 million), results in the outstanding balance of $10.5 million (RMB 72.0 million) as
of December 31, 2018. During the year ended December 31, 2017, the Company repaid approximately $3.4 million (RMB 22.6 million),
results in the outstanding balance of $10.5 million (RMB 72 million) as of December 31, 2017.
Interest expense of $1,017,045 and $574,228
was recorded for this loan for the years ended December 31, 2018 and 2017, respectively.
NOTE 8 – OTHER RELATED PARTY
TRANSACTIONS
For the years ended December 31, 2018
and 2017, the Company received working capital proceeds from the CEO and Chairman of the Company, to pay certain expense to various
service providers on behalf of the Company. Such amount is unsecured and payable on demand with no interest. As of December 31,
2018 and 2017, the amount due to this related party were $3,941,846 and $2,630,301, respectively.
On November 30, 2018, Wuhan Kingold Industrial
Group signed an agreement with the CEO and Chairman of the Company to transfer the credit right for its loan to the Company of
approximately $143.9 million (RMB 1 billion). As the result, the CEO and Chairman of the Company resume the credit right. The
CEO and Chairman subsequently transferred this credit right to paid-in capital through a share restructuring on November 31, 2018.
(See Note 7(b)). As a result, the Company recorded this transaction by increasing the additional paid-in capital as of December
31, 2018.
In connection with the Company’s
borrowings of approximately $42.2 (RMB 290 million) loans from China Construction Bank (Note 5), related party Wuhan Huayuan pledged
fixed assets buildings as collaterals to secure these loans.
On June 27, 2016, Wuhan Kingold signed
certain 5 years lease agreements with Wuhan Huayuan, a related party which is controlled by the CEO and Chairman of the Company,
to rent office and store space at the Jewelry Park, commencing in July 2016 and October 2016, respectively, with aggregate annual
rent of approximately $0.3 million (RMB 2.3 million). On July 1, 2017, Wuhan Kingold signed another 5 years lease agreement with
Wuhan Huayuan to rent additional office space at the Jewelry Park commencing in July 2017 with aggregate annual rent of approximately
$87,058 (RMB 576,000). The lease agreement with Wuhan Huayuan has been amended on November 16, 2017, pursuant to which two office
spaces and a dormitory were no longer leased. The lease agreement was further amended on September 1, 2018, pursuant to which
the store space was no longer leased.
For the years ended December 31, 2018
and 2017, the Company recorded $202,167 and $211,692 rent expense, respectively. As of December 31, 2018 and 2017, the Company
had lease payables to Wuhan Huayuan of $443,992 and $263,740, respectively, which were included in other payables and accrued
expenses.
KINGOLD JEWELRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - INCOME TAXES
The Company is subject to income taxes
on an entity basis on income arising in or derived from the tax jurisdiction in which each entity is domiciled.
Kingold is incorporated in the United
States and has incurred net operating loss for income tax purposes through December 31, 2018. The Company has utilized approximately
$6.2 million of net operating loss carry forward to offset the one-time transition tax for the year ended December 31, 2017 and
the tax benefit derived from the utilization of this net operating loss was approximately $2.2 million.
Dragon Lead is incorporated in the BVI,
and under current laws of the BVI, income earned is not subject to income tax.
Wuhan Vogue-Show and Wuhan Kingold are
incorporated in the PRC and are subject to PRC income tax, which is computed according to the relevant laws and regulations in
the PRC. The applicable tax rate is 25% for the years ended December 31, 2018 and 2017. The Company recorded deferred income tax
liabilities of $24,218,911 and deferred income tax assets of $6,677,675 as of December 31, 2018 and 2017, respectively.
Recent U.S. federal tax legislation, commonly
referred to as the Tax Cuts and Jobs Act (the “U.S. Tax Reform”), was signed into law on December 22, 2017. The U.S.
Tax Reform significantly modified the U.S. Internal Revenue Code by, among other things, reducing the statutory U.S. federal corporate
income tax rate from 35% to 21% for taxable years beginning after December 31, 2017; limiting and/or eliminating many business
deductions; migrating the U.S. to a territorial tax system with a one-time transition tax on a mandatory deemed repatriation of
previously deferred foreign earnings of certain foreign subsidiaries; subject to certain limitations, generally eliminating U.S.
corporate income tax on dividends from foreign subsidiaries; and providing for new taxes on certain foreign earnings. Taxpayers
may elect to pay the one-time transition tax over eight years or in a single lump sum. The U.S. Tax Reform also includes provisions
for a new tax on GILTI effective for tax years of foreign corporations beginning after December 31, 2017. The GILTI provisions
impose a tax on foreign income in excess of a deemed return on tangible assets of controlled foreign corporations (“CFCs”),
subject to the possible use of foreign tax credits and a deduction equal to 50 percent to offset the income tax liability, subject
to some limitations.
For the years ended December 31, 2018,
the Company recognized a transition tax of approximately $10.8 million that represented management’s estimate of the amount
of U.S. corporate income tax based on the deemed repatriation to the United States of the Company’s share of previously
deferred earnings of certain non-U.S. subsidiaries and VIE of the Company mandated by the U.S. Tax Reform. U.S. Treasury regulations,
administrative interpretations or court decisions interpreting the Tax Act may require further adjustments and changes in our
estimates. The Company provided an additional $0.9 million for the interest and penalty due on the late payment of the one-time
transition tax.
Income (loss) from continuing operations
before income taxes was allocated between the U.S. and foreign components for the years ended December 31, 2018 and 2017:
|
|
For the years ended December
31,
|
|
|
|
2018
|
|
|
2017
|
|
United States
|
|
$
|
(1,645,957
|
)
|
|
$
|
(1,331,862
|
)
|
Foreign
|
|
|
82,929,004
|
|
|
|
36,699,373
|
|
|
|
$
|
81,283,047
|
|
|
$
|
35,367,511
|
|
KINGOLD JEWELRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - INCOME TAXES (continued)
Significant components of the income tax
provision were as follows for the years ended December 31, 2018 and 2017:
|
|
For the years ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Current tax provision
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
10,784,973
|
|
|
$
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
Foreign
|
|
|
16,187,186
|
|
|
|
17,678,757
|
|
|
|
$
|
26,972,159
|
|
|
$
|
17,678,757
|
|
|
|
|
|
|
|
|
|
|
Deferred tax provision (benefit)
|
|
|
|
|
|
|
|
|
Federal
|
|
|
-
|
|
|
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
Foreign
|
|
|
4,764,174
|
|
|
|
(8,503,898
|
)
|
|
|
|
4,764,174
|
|
|
|
(8,503,898
|
)
|
Income tax provision
|
|
$
|
31,736,333
|
|
|
$
|
9,174,859
|
|
The components of deferred tax assets
and deferred tax liability as of December 31, 2018 and 2017 consist of the following:
|
|
As of December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Accrued interest
|
|
$
|
557,941
|
|
|
$
|
1,824,171
|
|
Inventory Valuation
|
|
|
(680,780
|
)
|
|
|
4,545,708
|
|
Accrued expenses
|
|
|
(966,667
|
)
|
|
|
330,663
|
|
Deferred financing costs on loans
|
|
|
3,646,606
|
|
|
|
741,008
|
|
Other temporary difference
|
|
|
(47,321
|
)
|
|
|
56,062
|
|
|
|
$
|
2,509,779
|
|
|
$
|
7,497,612
|
|
|
|
|
|
|
|
|
|
|
Deferred financing costs on the loans
|
|
|
-
|
|
|
|
-
|
|
Deferred tax liability from capitalized interest
|
|
|
-
|
|
|
|
-
|
|
Unrealized gain due to change in fair value of investments in gold
|
|
|
(26,728,690
|
)
|
|
|
(819,937
|
)
|
Deferred tax assets (liability)
- Net
|
|
$
|
(24,218,911
|
)
|
|
$
|
6,677,675
|
|
The following table reconciles the U.S. statutory rates to
the Company’s effective rate for the years ended December 31, 2018 and 2017:
|
|
For the years ended December
31,
|
|
|
|
2018
|
|
|
2017
|
|
US statutory rate
|
|
|
21.0
|
%
|
|
|
34.0
|
%
|
Foreign income and loss not recognized in the U.S.
|
|
|
(21.0
|
)%
|
|
|
(34.0
|
)%
|
One-time transition tax
|
|
|
13.3
|
%
|
|
|
|
|
China income tax
|
|
|
25
|
%
|
|
|
25.0
|
%
|
Miscellanies and non-deductible expense
|
|
|
0.7
|
%
|
|
|
0.9
|
%
|
Effective tax rate
|
|
|
39.0
|
%
|
|
|
25.9
|
%
|
KINGOLD JEWELRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - EARNINGS PER SHARE
For the year ended December 31, 2018,
the effect of potential shares of common stock was dilutive since the exercise prices for the warrant and options were lower than
the average market price for the year ended December 31, 2018. As a result, total of 79,035 unexercised warrants and options are
dilutive, and were included in the computation of diluted EPS.
For the year ended December 31, 2017,
the effect of potential shares of common stock was dilutive since the exercise prices for the warrant and options were lower than
the average market price for the year ended December 31, 2017. As a result, total of 421,548 unexercised warrants and options
are dilutive, and were included in the computation of diluted EPS.
The following table presents a reconciliation
of basic and diluted net income per share:
The Company recorded $21,456 and $33,014
stock-based compensation expense for the years ended December 31, 2018 and 2017, respectively.
As of December 31, 2018, the Company had
3,214,636 outstanding vested stock options with a weighted average remaining term over 2.75 years and 5,364 unvested stock options
with a weighted average remaining term over 6 years. Unamortized stock-based compensation expense was $3,576 and $25,032 as of
December 31, 2018 and 2017, respectively. The following table summarized the Company’s stock option activity:
On August 12, 2015, the Company signed
a consulting agreement to engage Bespoke Independent Partners (“BIP”), a wholly owned subsidiary of FPIA Partners
LLC to operate as a strategic advisor to Kingold in matters relating to investor relations, capital markets and shareholder value
creation strategy. As the part of the agreement with BIP, an aggregate of 900,000 shares of warrants with exercise price ranging
from $1.20 to $1.80 will be directly issued at no cost to BIP if certain stock performance targets are met within a three-year
period. As of September 30, 2018, no warrants were issued to BIP because the performance target has not been met.
On March 29, 2016, pursuant to the consulting
agreement, the Company’s obligation to issue BIP warrants to purchase 150,000 shares of the Company’s common stock
for $1.20 per share (the “First Tranche Warrants”) was triggered as a result of certain milestone accomplishments.
The warrants were exercised on June 28, 2017, and the Company is in the process of issuing the shares. Accordingly, the Company
recorded $64,204 consulting expense and included in the general administrative expense. The fair value of the warrants was calculated
using the Black-Scholes options pricing model using the following assumptions: volatility of 81%, risk free interest rate of 0.84%,
and expected term of 1.25 years. The fair value of the warrants was $64,204.
On April 18, 2016, pursuant to the consulting
agreement, the Company’s obligation to issue BIP warrants to purchase 150,000 shares of the Company’s common stock
for $1.50 per share (the “Second Tranche Warrants”) was triggered as a result of certain milestone accomplishments.
The warrants were scheduled to expire on July 17, 2017. Accordingly, the Company recorded $65,091 consulting expense and included
in the general administrative expense. The fair value of the warrants was calculated using the Black-Scholes options pricing model
using the following assumptions: volatility of 79.7%, risk free interest rate of 0.63%, and expected term of 1.25 years. The fair
value of the warrants was $65,091.
On May 10, 2016, the Company terminated
the consulting agreement. On June 27, 2016, the Company and BIP signed a settlement agreement (the “Settlement Agreement”).
In connection with the Settlement Agreement, the Company and BIP agreed that (1) the First Tranche Warrants and the Second Tranche
Warrants would remain vested and outstanding, (2) the third, fourth and fifth tranches of success fee warrants would be cancelled;
and (3) crediting of $66,439 in outstanding but unpaid fees against the exercise price of the First Tranche Warrants would be
the only payment made or required under the Service Agreement. As a result, BIP received (a) 55,365 shares, (b) warrants to purchase
94,635 shares for $1.2 per share, which expired June 28, 2017, and (c) warrants to purchase 150,000 shares for $1.50 per share,
which may be exercised until July 17, 2017. As a result of the Settlement Agreement, the Company does not have any liability for
future warrants issuance to BIP. During the year ended December 31, 2017, 94,635 warrants were exercised and these shares were
issued in August 2017. On July 17, 2017, the Company received notice from BIP not to exercise the remaining 150,000 warrants.
For the years ended December 31, 2018
and 2017, there were no warrants costs recorded in the general administrative expenses of the Company, respectively.
The Company maintains certain bank accounts
in the PRC and BVI, which are not insured by Federal Deposit Insurance Corporation (“FDIC”) insurance or other insurance.
The cash and restricted cash balance held in the PRC bank accounts were $12,749,593 and $17,632,270 as of December 31, 2018 and
2017, respectively. The cash balance held in the BVI bank accounts were $Nil as of December 31, 2018 and 2017, respectively. As
of December 31, 2018 and 2017, the Company held $22,953 and $266,012 of cash balances within the United States,
For the years ended December 31, 2018
and 2017, almost 100% of the Company's assets were located in the PRC and 100% of the Company's revenues were derived from its
subsidiaries located in the PRC.
The Company’s principal raw material
used during the years was gold, which accounted for almost 100% of its total purchases for the years ended December 31, 2018 and
2017. The gold purchased by the Company was solely from the Shanghai Gold Exchange, the largest gold trading platform in the PRC.
During the years ended December 31, 2018
and 2017, approximately 23.9% and 23.3% of the Company’s net sales were generated from the Company’s five largest
customers, respectively. No customer accounted for more than 10% of annual sales for the years ended December 31, 2018 and 2017.
On January 3, 2017, Wuhan Kingold entered
into a gold lease agreement with Shuntianyi to lease a total of 4,000 kilograms of Au9999 gold in aggregate with carrying value
of approximately $131.1 million for a period from January 3, 2017 to February 28, 2017. The leased gold was fully returned by
the Company to Shuntianyi on February 28, 2017.
As of December 31, 2018 and 2017, the
Company had no leased gold outstanding from any related party, respectively.
The Company leased gold as a way to finance
its growth and will return the same amount of gold to China Construction Bank (“CCB”), Shanghai Pudong Development
Bank (“SPD Bank”) and CITIC Bank at the end of the respective lease agreements. Under these gold lease arrangements,
each of CCB, SPD Bank and CITIC Bank retains beneficial ownership of the gold leased to the Company and treats it as if the gold
is placed on consignment to the Company. All three banks have their own representatives on the Company’s premises to monitor
on a daily basis the use and security of the gold leased to the Company. Accordingly, the Company records these gold lease transactions
as operating leases because the Company does not have ownership nor has it assumed the risk of loss for the leased gold.
As of December 31, 2018 and 2017, no leased
gold was outstanding and no restricted cash was pledged as collateral to safeguard any gold leases from financial institutions.
Interest expense for all gold lease arrangements
for the year ended December 31, 2018 was $Nil. Interest expense for all gold lease arrangements for the year ended December 31,
2017 was approximately $0.1 million, which was included in the cost of sales.
In connection with the Company’s
borrowings of approximately $145.4 million (RMB 1 billion) from Dongguan Trust (Note 5), the Company and Dongguan Trust entered
into a gold income rights transfer and repurchase agreement. The Agreement allows the Company to obtain no more than approximately
$145.4 million (RMB 1 billion) to exchange the income earning rights of the Company. The Company committed to buy back the rights
and repay the proceeds received, and shall pay a fixed interest of 11% over a term of 18 months. The Company determined that this
agreement is essentially a loan agreement due to the nature of this transaction. This loan is secured by 4,974 kilograms of Au9999
gold in aggregate with carrying value of approximately $166.0 million (RMB 1,140 million). The loan is also guaranteed by the
CEO and Chairman of the Company. The Company also made a restricted deposit of approximately $1.5 million (RMB 10 million) to
secure the loan. The deposit will be refunded when the loan is repaid upon maturity.
On June 27, 2016, Wuhan Kingold signed
certain 5 years lease agreements with Wuhan Huayuan, a related party which is controlled by the CEO and Chairman of the Company,
to rent office and store space at the Jewelry Park, commencing in July 2016 and October 2016, respectively, with aggregate annual
rent of approximately $0.3 million (RMB 2.3 million). On July 1, 2017, Wuhan Kingold signed another 5 years lease agreement with
Wuhan Huayuan to rent additional office space at the Jewelry Park commencing in July 2017 with aggregate annual rent of approximately
$87,058 (RMB 576,000). The lease agreement with Wuhan Huayuan has been amended on November 16, 2017, pursuant to which two office
spaces and a dormitory were no longer leased. The lease agreement was further amended on September 1, 2018, pursuant to which
the store space was no longer leased.
For the years ended December 31, 2018
and 2017, the Company recorded $202,167 and $211,692 rent expense, respectively. As of December 31, 2018 and 2017, the Company
had lease payables to Wuhan Huayuan of $443,992 and $263,740, respectively, which were included in other payables and accrued
expenses.
The Company adopted ASU No. 2016-18, “Statement
of Cash Flows: Restricted Cash” on January 1, 2018. As a result, the Company retroactively applied the new standard on the
condensed consolidated statement of cash flows for the year ended December 31, 2018 to conform to the current period presentation.
The following table provides a reconciliation
of cash and restricted cash reported within the condensed consolidated statement of balance sheets that sum to the total of the
same such amounts shown in the unaudited condensed consolidated statement of cash flows for the years ended December 31, 2018
and 2017: