KGJI 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:

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.

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1 – ORGANIZATION AND BASIS OF PRESENTATION (continued)

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

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation 

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

Use of Estimates

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

Cash

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

Restricted Cash

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

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

Accounts Receivable

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

Inventories

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

Short-term Investments

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

Property and Equipment

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

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

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Land Use Right

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

Long-Lived Assets

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

Fair Value of Financial Instruments

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

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

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

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

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

 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.

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. 

 KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Revenue Recognition (continued)

Contract Balances and Remaining Performance Obligations

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

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

Revenue by category

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

Income Taxes

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

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

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

To the extent applicable, the Company records interest and penalties as a general and administrative expense. The statute of limitations for the Company’s U.S. federal income tax returns and certain state income tax returns remains open for tax years 2016 and after. As of September 30, 2019, the tax years ended December 31, 2013 through December 31, 2018 for the Company’s PRC subsidiaries remain open for statutory examination by PRC tax authorities.

Foreign Currency Translation

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

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

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Comprehensive income (loss)

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

Earnings (Loss) Per Share (“EPS”)

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

Share or Stock-Based compensation

For employee stock-based awards, share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense with graded vesting on a straight-line basis over the requisite service period for the entire award. For the non-employee stock-based awards, the fair value of the awards to non-employees are measured every reporting period based on the value of the Company’s common stock. 

Debt Issuance Origination Costs

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

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. 

 KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Risks and Uncertainties (continued)

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

Recent Accounting Pronouncements

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

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

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

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 5 – LOANS (continued)

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

From February 24, 2016 to March 24, 2016, Wuhan Kingold signed ten Loan Agreements with the Yantai Huangshan Road Branch of Evergrowing Bank for loans of approximately $140.1 million (RMB 1 billion) in aggregate. The purpose of the loans was for purchasing gold. The original terms of loans are two years and bear fixed interest of 4.75% per year. Based on the loan repayment plan as specified in the loan agreements, $140,089 (RMB 1 million) was repaid in August 2016, $140,089 (RMB 1 million) was repaid on February 23, 2017 and another $140,089 (RMB 1 million) was repaid in August 23, 2017. The Company repaid approximately $69.6 million (RMB 497 million) to Evergrowing bank Yantai Huangshan Road Branch upon maturity.

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

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

(b) Loans payable to Sichuan Trust

On September 7, 2016, the Company entered into two trust loan agreements with the Sichuan Trust Ltd. (“Sichuan Trust”) to borrow a maximum of approximately $280.2 million (RMB 2 billion) as working capital loan. The required annual interest rate is 8.46%. The Company paid the first interest payment equal to 1.21% of the principle received as loan origination fee on annual basis, then the rest of interest payments are calculated based on a fixed interest rate of 7.25%. The Company pledged 7,258 kilograms of Au9999 gold with carrying value of approximately $236.4 million (RMB 1.7 billion) as collateral to secure this loan. The loan is guaranteed by the CEO and Chairman of the Company. The Company also made a restricted deposit of approximately $2.1 million (RMB 15 million) to secure these loans. The deposit will be refunded when the loan is repaid upon maturity. As of September 30, 2019, the Company received an aggregate of approximately $210.1 million (RMB 1.5 billion) from the loan.

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

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

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 5 – LOANS (continued)

(c) Loans payable to Zheshang Jinhui Trust

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

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

(d) Loans payable to China Aviation Trust

On January 25, 2017, Wuhan Kingold entered into a trust loan agreement with China Aviation Trust Ltd. to borrow a maximum of approximately $43.4 million (RMB 310 million) for working capital with a period of 24 months from the date of releasing the loan. The Company is required to make interest payments that are calculated based on a fixed annual interest rate of 8%. The Company pledged 1,647 kilograms of Au9999 gold with carrying value of approximately $53.0 million (RMB 378.4 million) as collateral to secure this loan. The loan is guaranteed by the CEO and Chairman of the Company. The Company also made a restricted deposit of approximately $0.4 million (RMB 3.1 million) to secure these loans. The deposit will be refunded when the loan is repaid upon maturity. In January 2019, the Company made fully repayment to China Aviation Trust, The pledged gold and restricted deposit were released and returned upon the repayment. 

The Company paid approximately $1.3 million (RMB 9.3 million) as loan origination fee for obtaining the loan. The loan origination fee was recorded as deferred financing cost against the loan balance. For the years ended December 31, 2018 and 2017, approximately $0.7 million (RMB 4.7 million) and $0.7 million (RMB 4.3 million) deferred financing costs were amortized, respectively. For the three and nine months ended September 30, 2019, $Nil and $42,833 (RMB 305,753) deferred financing cost was amortized, respectively. For the three and nine months ended September 30, 2018, approximately $0.2 million (RMB 1.2 million) and $0.5 million (RMB 3.5 million) deferred financing cost was amortized, respectively. 

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 5 – LOANS (continued)

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

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

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

(e) Loans payable to National Trust

On February 28, 2017, Wuhan Kingold entered into a trust loan agreement with National Trust Ltd. (“National Trust”) to borrow a maximum of approximately $49.0 million (RMB 350 million) for working capital with a period of 24 months from the date of releasing the loan. The Company is required to make interest payments that are calculated based on a fixed annual interest rate of 8.617%. The Company pledged 1,745 kilograms of Au9999 gold with carrying value of approximately $57.1 million (RMB 408.1 million) as collateral to secure this loan. The loan is guaranteed by the CEO and Chairman of the Company. The loan was fully repaid on March 1, 2019, and the pledged gold was released and returned upon the repayment. 

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

 KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 5 – LOANS (continued)

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

In January 2016, Wuhan Kingold signed a Collective Trust Loan Agreement with Anxin Trust Co., Ltd. (“Anxin Trust”). The agreement allowed the Company to access of approximately $420.3 million (RMB 3 billion) within 60 months. Each individual loan will bear a fixed annual interest of 14.8% or 11% with various maturity dates from February 19, 2019 to October 12, 2019. The purpose of this trust loan was to provide working capital for the Company to purchase gold. The loan is secured by 15,450 kilograms of Au9999 gold in aggregate with carrying value of approximately $504.3 million (RMB 3.6 billion). The loan is also guaranteed by the CEO and Chairman of the Company. As of December 31, 2018, the Company received full amount from the loan.

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

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

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

(g) Loan payable to China Construction Bank

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

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

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

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

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 5 – LOANS (continued)

(h) Loan payable to Minsheng Trust

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

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

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

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

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

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 5 – LOANS (continued)

(i) Loans payable to Dongguan Trust

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

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

(j) Loans payable to Chang’An Trust

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

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

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 5 – LOANS (continued)

(k) Loans payable to Sichuan Trust

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

(l) Loans payable to Northern International Trust

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

(m) Loans payable to Zhangjiakou Bank

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

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

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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

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

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

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

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 5 – LOANS (continued)

(r) Loans payable to Kunlun Trust

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

(s) Loans payable to North International Trust

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

(t) Loans payable to Tianjin Trust

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

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

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 6 – INVESTMENTS IN GOLD

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

As of September 30, 2019 and December 31, 2018, the Company pledged a total of 2,655 kilograms of gold, as guarantee for Wuhan Kangbo Biotech Limited (“Kangbo”), a related party which is controlled by the CEO and Chairman of the Company, for obtaining total amount of approximately $69.8 million (RMB 498.5 million) and $70.0 million (RMB 500 million) loan from Evergrowing Bank Huanshan Road Branch, respectively (See Note 7).

As of September 30, 2019, the Company pledged a total of 339 kilograms of gold as collateral for obtaining total amount of $7.5 million (RMB 53.8 million) loan from Wuhan Huayuan Technology Development Limited (“Huayuan”), a related party which is controlled by the CEO and Chairman of the Company. (See Note 7).   

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

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

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

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 7 – RELATED PARTIES LOANS 

On January 13, 2017, Wuhan Kingold entered into a loan agreement with Wuhan Kangbo Biotech Limited (“Kangbo”), a related party which is controlled by the CEO and Chairman of the Company, for a loan of approximately $140.1 million (RMB 1 billion). The loan had one-year term from January 12, 2017 to January 10, 2018 and bore fixed interest of 4.75%. In order for Kangbo to obtain the loan from the bank, Wuhan Kingold signed the guarantee agreement with Evergrowing Bank - Yantai Huangshan Road Branch on January 11, 2017. As a guarantor of the bank loan, Wuhan Kingold pledged 5,470 kilograms of gold in aggregate with carrying value of approximately $176.1 million (RMB 1.3 billion) as collateral.

On February 20, 2017, Wuhan Kingold entered into a second loan agreement with Kangbo for a loan of approximately $140.1 million (RMB 1 billion). The loan had one-year term from February 20, 2017 to February 20, 2018 bore fixed interest of 4.75%. In order for Kangbo to obtain the loan from the bank, Wuhan Kingold signed the guarantee agreement with Evergrowing Bank - Yantai Huangshan Road Branch on February 16, 2017. As a guarantor of the bank loan, Wuhan Kingold pledged 4,755 kilograms of gold in aggregate with carrying value of approximately $157.7 million (RMB 1.1 billion) as collateral.

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

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

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

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.

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 7 – RELATED PARTIES LOANS (continued)

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

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

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

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

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

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

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

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

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

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

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 8 – OTHER RELATED PARTY TRANSACTIONS

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

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

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

NOTE 9 – INCOME TAXES 

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

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

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

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

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 9 – INCOME TAXES (continued)

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

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

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