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EX-31.1 - CERTIFICATION - KINGOLD JEWELRY, INC.v312086_ex31-1.htm
EX-32.2 - CERTIFICATION - KINGOLD JEWELRY, INC.v312086_ex32-2.htm
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EX-31.2 - CERTIFICATION - KINGOLD JEWELRY, INC.v312086_ex31-2.htm



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM 10-Q


 

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

 

For the quarterly period ended:

March 31, 2012

 

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

 

For the transition period from: _____________ to _____________

 

 
 
KINGOLD JEWELRY, INC.
(Exact name of registrant as specified in its charter)
 

 

 

Delaware   001-15819   13-3883101
(State or Other Jurisdiction   (Commission   (I.R.S. Employer
of Incorporation)   File Number)   Identification No.)

 

15 Huangpu Science and Technology Park

Jiang’an District

Wuhan, Hubei Province, PRC 430023

(Address of Principal Executive Office) (Zip Code)

 

(011) 86 27 65694977

(Registrant’s telephone number, including area code)

 

(Former name, former address and former fiscal year, if changed since last report)  
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  
  x  Yes  No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
o Yes x No                                
 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
   
Large accelerated filer     Accelerated filer  o  
             
Non-accelerated filer o     Smaller reporting company x  
   
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes x  No
                   

 

 

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

 

As of May 7, 2012, there were 53,133,046 shares of common stock outstanding, par value $0.001.

 

 
 

 

QUARTERLY REPORT ON FORM 10-Q

 

TABLE OF CONTENTS

 

      Page Number  
PART I. FINANCIAL INFORMATION     2  
           
Item 1. Financial Statements     2  
           
  Condensed Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011 (Unaudited)     2  
           
  Condensed Consolidated Statements of Income and Comprehensive Income for the Three Months Ended March 31, 2012 and  2011 (Unaudited)     3  
           
  Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2012 and 2011 (Unaudited)     4  
           
  Notes to Condensed Consolidated Financial Statements (Unaudited)     5  
           
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations     13  
           
Item 3. Quantitative and Qualitative Disclosures About Market Risk     19  
           
Item 4. Controls and Procedures     20  
           
PART II. OTHER INFORMATION     20  
           
Item 1. Legal Proceedings     20  
           
Item 1A. Risk Factors     20  
           
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds     20  
           
Item 3. Defaults Upon Senior Securities     20  
           
Item 4. Mine Safety Disclosures     20  
           
Item 5. Other Information     20  
           
Item 6. Exhibits     21  
           
Signatures     22  

  

 
 

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

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

 

    changes in the market price of gold;
    our ability to implement the key initiatives of, and realize the gross and operating margins and projected benefits (in the amounts and time schedules we expect) from, our business strategy;
    non-performance of suppliers on their sale commitments and customers on their purchase commitments;
    non-performance of third-party service providers;
    adverse conditions in the industries in which our customers operate, including a general economic downturn , a recession globally, or sudden disruption in business conditions, and our ability to withstand an economic downturn, recession, cost inflation, competitive or other market pressures, or conditions;
    the effect of political, economic, legal, tax and regulatory risks imposed on us, including foreign exchange or other restrictions, adoption, interpretation and enforcement of foreign laws including any changes thereto, as well as reviews and investigations by government regulators that have occurred or may occur from time to time, including, for example, local regulatory scrutiny in China;
    our ability to manage growth;
    our ability to successfully identify new business opportunities and identify and analyze acquisition candidates, secure financing on favorable terms and negotiate and consummate acquisitions as well as to successfully integrate or manage any acquired business;
    our ability to integrate acquired businesses;
    the effect of economic factors, including inflation and fluctuations in interest rates and currency exchange rates, foreign exchange restrictions and the potential effect of such factors on our business, results of operations and financial condition;
    our ability to retain and attract senior management and other key employees;
    any internal investigations and compliance reviews of Foreign Corrupt Practices Act and related U.S. and foreign law matters in China and additional countries, as well as any disruption or adverse consequences resulting from such investigations, reviews, related actions or litigation;
    changes in PRC or U.S. tax laws;
    increased levels of competition, and competitive uncertainties in our markets, including competition from companies in the gold jewelry industry in the PRC, some of which are larger than we are and have greater resources;
    the impact of the seasonal nature of our business, adverse effect of rising energy, commodity and raw material prices, changes in market trends, purchasing habits of our consumers and changes in consumer preferences;
    our ability to protect our intellectual property rights;
    the risk of an adverse outcome in any material pending and future litigations;
    our ratings, our access to cash and financing and ability to secure financing at attractive rates;
    the success of our research and development activities;
    our ability to comply with environmental laws and regulations; and
   

other risks, including those described in the “Risk Factors” discussion of this periodic report and in our Annual Report on Form 10-K for the year ended December 31, 2011 filed with the Securities and Exchange Commission.

 


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

 

1
 

PART I – FINANCIAL INFORMATION

 

Item 1.  Financial Statements 

 

KINGOLD JEWELRY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN US DOLLARS)
(UNAUDITED)
         
   March 31,   December 31, 
   2012   2011 
         
ASSETS
         
CURRENT ASSETS          
Cash and cash equivalents  $2,954,410   $8,810,173 
Accounts receivable   363,510    896,949 
Inventories   122,865,734    108,088,420 
Other current assets and prepaid expenses   340,486    72,333 
Value added tax recoverable   5,093,005    4,750,847 
Total Current Assets   131,617,145    122,618,722 
           
PROPERTY AND EQUIPMENT, NET   12,632,290    12,942,902 
           
OTHER ASSETS          
Other assets   153,336    153,102 
Intangible assets, net   513,328    515,543 
Total other assets   666,664    668,645 
TOTAL ASSETS  $144,916,099   $136,230,269 
           
LIABILITIES AND STOCKHOLDERS' EQUITY
           
CURRENT LIABILITIES          
Short term loan  $6,353,270   $6,343,578 
Other payables and accrued expenses   678,874    870,454 
Income tax payable   2,696,367    1,451,929 
Other taxes payable   162,154    562,027 
Total Current Liabilities   9,890,665    9,227,988 
           
COMMITMENTS AND CONTINGENCIES   -    - 
           
EQUITY          
Preferred stock, $0.001 par value, 500,000 shares          
authorized, none issued or outstanding          
as of March 31, 2012 and December 31, 2011   -    - 
Common stock $0.001 par value, 100,000,000 shares          
authorized, 53,107,343 shares issued and outstanding          
as of March 31, 2012 and December 31, 2011   53,108    53,108 
Additional paid-in capital   56,084,448    55,728,009 
Retained earnings          
 Unappropriated   67,250,131    59,936,120 
 Appropriated   967,543    967,543 
Accumulated other comprehensive income   10,670,204    10,317,501 
Total Equity   135,025,434    127,002,281 
           
TOTAL LIABILITIES AND EQUITY  $144,916,099   $136,230,269 

  

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

 

2
 

KINGOLD JEWELRY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(IN US DOLLARS)
(UNAUDITED)
         
   For the three months ended March 31, 
   2012   2011 
         
         
NET SALES  $224,967,394   $157,712,467 
           
COST OF SALES          
Cost of sales   (213,102,255)   (148,461,128)
Depreciation   (297,788)   (285,207)
Total cost of sales   (213,400,043)   (148,746,335)
           
GROSS PROFIT   11,567,351    8,966,132 
           
OPERATING EXPENSES          
Selling, general and administrative expenses   1,058,342    1,154,032 
Stock compensation expense   356,439    122,500 
Depreciation   33,420    31,914 
Amortization   2,996    2,873 
Total Operating Expenses   1,451,197    1,311,319 
           
INCOME FROM OPERATIONS   10,116,154    7,654,813 
           
OTHER INCOME (EXPENSES)          
Interest expense   (111,136)   (83,648)
Total Other Expenses, net   (111,136)   (83,648)
           
NET INCOME BEFORE PROVISION FOR INCOME TAXES   10,005,018    7,571,165 
           
PROVISION FOR INCOME TAXES   (2,691,006)   (2,025,604)
           
NET INCOME  $7,314,012   $5,545,560 
Less: net income attribute to the noncontrolling interest   -    (253,403)
           
NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS  $7,314,012   $5,292,157 
           
OTHER COMPREHENSIVE INCOME          
Total foreign currency translation gains   352,704    656,149 
Less: foreign currency translation gains          
attributable to noncontrolling interest   -    (15,509)
Foreign currency translation gains          
attributable to common stockholders   352,704    640,640 
           
COMPREHENSIVE INCOME  $7,666,716   $5,932,797 
           
Earnings per share          
Basic  $0.14   $0.11 
Diluted  $0.13   $0.11 
Weighted average number of shares          
Basic   53,107,343    48,249,588 
Diluted   54,358,067    49,724,008 

 

 

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

 

3
 

KINGOLD JEWELRY, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN US DOLLARS)
(UNAUDITED)
         
   For the three months ended March 31, 
   2012   2011 
CASH FLOWS FROM OPERATING ACTIVITIES        
Net income  $7,314,012   $5,545,560 
Adjusted to reconcile net income to cash used in          
operating activities:          
Depreciation   331,208    317,121 
Amortization of intangible assets   2,996    2,873 
Share based compensation   356,439    122,500 
Changes in operating assets and liabilities          
(Increase) decrease in:          
Accounts receivable   533,746    959,184 
Inventories   (14,583,108)   (25,666,030)
Other current assets and prepaid expenses   (255,292)   61,844 
    Deferred offering costs   -    666,364 
Value added tax recoverable   (334,233)   (2,695,585)
Increase (decrease) in:          
Other payables and accrued expenses   (203,998)   (713,329)
Income tax payable   1,239,750    (167,321)
Other taxes payable   (399,935)   (473,637)
Net cash used in operating activities   (5,998,415)   (22,040,456)
           
CASH FLOWS FROM INVESTING ACTIVITIES          
Purchase of property and equipment   (1,476)   (39,500)
Net cash used in investing activities   (1,476)   (39,500)
           
CASH FLOWS FROM FINANCING ACTIVITIES          
Net proceeds from stock issuance in public offering   -    20,144,255 
Net proceeds from exercise of warrants   -    49,800 
Net cash provided by financing activities   -    20,194,055 
           
EFFECT OF EXCHANGE RATES ON CASH & CASH EQUIVALENTS   144,129    (6,264)
           
NET DECREASE IN CASH AND CASH EQUIVALENTS   (5,855,763)   (1,892,166)
           
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD   8,810,173    9,151,536 
           
CASH AND CASH EQUIVALENTS, END OF PERIOD  $2,954,410   $7,259,370 
           
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION          
           
Cash paid for interest expense  $117,302   $84,750 
Cash paid for income tax  $1,450,421   $2,192,925 

  

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

 

4
 

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 1 — BASIS OF PRESENTATION

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“US GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles 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 March 31, 2012 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2012. 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 our Form 10-K for the fiscal year ended December 31, 2011, filed with the Securities and Exchange Commission on March 26, 2012.

 

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

 

The accompanying unaudited consolidated financial statements include the financial statements of Kingold, ourwholly owned subsidiaries, Dragon Lead Group Limited (“Dragon Lead”) and Wuhan Vogue-Show Jewelry Co., Inc. (“Wuhan Voge-Show”) and Wuhan Kingold Jewelry Co., Inc. (“Wuhan Kingold”), our 100% contractually controlled affiliate. All significant inter-company balances and transactions have been eliminated in consolidation.

 

Use of Estimates

 

The preparation of the consolidated financial statements in conformity with generally accepted accounting principles (“US GAAP”) requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements as well as the reported amounts of revenues and expenses during the reporting period. Significant estimates required to be made by management include, but are not limited to, useful lives of property, plant and equipment, intangible assets, the recoverability of long-lived assets and the valuation of accounts receivable, deferred tax assets, inventories, stock options and common stock to exchange for minority interest. Actual results could differ from those estimates.

 

 

Inventories

 

Inventories are stated at the lower of cost or market value, cost being calculated on the weighted average basis. 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 location and condition. We provide inventory allowances based on excess and obsolete inventories determined principally by customer demand.

 

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.

 

Depreciation is provided on a straight-line basis, less estimated residual value, over an asset’s estimated useful life.

 

5
 

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Long-lived assets

 

The Company accounts for long-lived assets under the FASB Codification Topic 360 (ASC Topic 360) "Accounting for Goodwill and Other Intangible Assets" and "Accounting for Impairment or Disposal of Long-Lived Assets". Finite-lived assets and intangibles are also reviewed for impairment test when circumstance requires it. For purposes of evaluating the recoverability of long-lived assets, when undiscounted future cash flows will not be sufficient to recover an asset's carrying amount, the asset is written down to its fair value. The long-lived assets of the Company, which are subject to evaluation, consist primarily of property, plant and equipment and land use rights. For the periods ended March 31, 2012 and March 31, 2011 the Company has not recognized any allowances for impairment.

 

Fair value of financial instruments

 

ASC 820, Fair Value Measurements and Disclosures 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 then 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. We are of the opinion that we are not exposed to significant interest or credit risks arising from these financial instruments.

 

Revenue recognition

 

Net sales are primarily composed of sales of branded products to wholesale and retail customers, as well as fees generated from customized production. In customized production, a customer supplies us with the raw materials and we create products per their instructions, whereas in branded production we purchase gold directly once a customer has placed an order. We recognize revenues under the FASB Codification Topic 605 ("ASC Topic 605"). Pursuant to this guidance, revenue is recognized when all of the following have occurred: (i) there is persuasive evidence of an arrangement with a customer, (ii) the contracted services have been performed, (iii) the fees to be paid under the agreement are either fixed or determinable and (iv) our collection of such fees is reasonably assured. These criteria, as related to our revenues, are considered to have been met as follows:

 

Sales of branded products

We recognize revenue on sales of branded products when the goods are delivered and title to the goods passes to the customer provided that: there are no uncertainties regarding customer acceptance; persuasive evidence of an arrangement exists; the sales price is fixed and determinable; and collectability is deemed probable.

 

Customized production fees

We also provide customized production services to our customers based on fixed-price contracts. We recognize services-based revenue from such contracts when: (i) the contracted for services have been performed, (ii) the customer has approved the completion of the services, (iii) an invoice has been issued and (iv) collectability is deemed probable. The revenues from customized production services made up approximately 2.01% of the total revenue recognized during the period ended March 31, 2012, compared to 2.36% for the period ended March 31, 2011.

 

6
 

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Income taxes

 

We account for income taxes under the FASB Codification Topic 740-10-25 (“ASC 740-10-25”). 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 as income in the period included 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" prescribes 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. There was no uncertain tax position recorded at March 31, 2012 or at December 31, 2011.

 

To the extent applicable, we record interest and penalties as a general and administrative expense. The statute of limitations for our U.S. federal income tax returns and certain state income tax returns remain open for tax years 2008 and after. As of March 31, 2012, the tax year ended December 31, 2005 through December 31, 2011 for the Company’s PRC subsidiaries remain open for statutory examination by the PRC tax authorities.

 

Foreign currency translation

 

The Company, as well as our wholly owned subsidiary, Dragon Lead, maintains accounting records in United States Dollars (“US$”), whereas Wuhan Vogue-Show and Wuhan Kingold maintain their accounting records in the currency of Renminbi (“RMB”), being the primary currency of the economic environment in which their operations are conducted.

 

Our principal country of operations is the PRC. The financial position and results of our 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. Due to the fact that 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 China’s political and economic conditions, any significant revaluation of RMB may materially affect our 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:

 

 

    March 31,    December 31, 
    2012    2011 
           
Balance sheet items, except for share capital,          
additional paid in capital and retained earnings, as of year end   $1=RMB 6.29597    $1=RMB 6.30559 
           
Amounts included in the statements of operations and cash flows for the year   $1=RMB 6.30851    $1=RMB 6.46153 

  

 

Recent Accounting Pronouncements

 

We do not believe that any recently issued, but not yet effective, accounting standards, if currently adopted, will have a material effect on our condensed consolidated financial position, results of operations, or cash flows.

 

7
 

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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, we have not hedged our 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 our production costs beyond the amount that we are able to pass on to our customers, which would adversely affect our sales and profitability. A significant disruption in our supply of gold, or other commodities could decrease our production and shipping levels, materially increase our operating costs and materially and adversely affect our profit margins. Shortages of gold, or other commodities, or interruptions in transportation systems, labor strikes, work stoppages, war, acts of terrorism, or other interruptions to or difficulties in the employment of labor or transportation in the markets in which we purchase our raw materials, may adversely affect our ability to maintain production of our products and sustain profitability. Although we generally attempt to pass increased commodity prices to our customers, there may be circumstances in which we are not able to do so. In addition, if we were to experience a significant or prolonged shortage of gold, we would be unable to meet our production schedules and to ship products to our customers in a timely manner, which would adversely affect our sales, margins and customer relations.

 

Furthermore, the value of our inventory may be affected by commodity prices. We record the value of our inventory using 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 our inventory, which may require us to take a charge for the decrease in the value of our inventory.

 

The operations of the Company 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 exchanges 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. If such agreements were cancelled, modified or otherwise not complied with, the Company may 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 we are in compliance with existing laws and regulations including the organization and structure disclosed in Note 1, this may not be indicative of future results.

 

 

NOTE 3 — INVENTORIES, NET

 

Inventories as of March 31, 2012 and December 31, 2011 are consisted of the following:

 

   As of 
   March 31,   December 31, 
   2012   2011 
Raw materials  $28,245,153   $17,301,339 
Work-in-progress   75,698,971    62,933,479 
Finished goods   18,921,610    27,853,602 
Total inventory  $122,865,734   $108,088,420 

 

For the three months ended March 31, 2012 and March 31, 2011, no provision for obsolete inventories was considered necessary. 

 

8
 

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 4 — PROPERTY AND EQUIPMENT, NET

 

The following is a summary of property and equipment as of March 31, 2012 and December 31, 2011:

 

   As of 
   March 31,   December 31, 
   2012   2011 
Buildings  $1,957,203   $1,954,217 
Plant and machinery   18,845,128    18,816,377 
Motor vehicles   78,083    77,964 
Office and electric equipment   585,328    582,958 
Subtotal   21,465,742    21,431,517 
Less: accumulated depreciation   (9,142,221)   (8,796,912)
           
Construction in progress   308,769    308,298 
Property and equipment, net  $12,632,290   $12,942,902 
           

 

Depreciation expense for the periods ended March 31, 2012 and 2011 was $331,208 and $317,121, respectively.

 

NOTE 5 — SHORT TERM LOAN

 

Short term loan consists of the following:

 

   As of 
   March 31,   December 31, 
   2012   2011 
         
a) Loan payable to CITIC Bank Corporation Limited  $6,353,270.00   $6,343,577.68 
           
Total short term loans  $6,353,270   $6,343,578 

  

 

a) Loan payable to CITIC Bank Corporation Limited is pursuant to two Working Capital Loan Contracts with a one year term from November 29, 2011 to November 29, 2012 carrying an interest rate of 7% per year. The loans are secured by all the Company’s buildings, plant and machinery.

 

NOTE 6 — INCOME TAXES

 

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

 

We were incorporated in the United States and have incurred net operating loss for income tax purposes for 2012 and 2011. We had loss carry forwards of approximately $4,742,677 for U.S. income tax purposes available for offsetting against future taxable U.S. income, expiring in 2032. Management believes that the realization of the benefits from these losses appears uncertain due to our limited operating history income and continuing losses. Accordingly, a full deferred tax asset valuation allowance has been provided and no deferred tax asset benefit has been recorded. The valuation allowance as of March 31, 2012 was $1,612,510. The net change in the valuation allowance was an increase of $203,224.

 

Dragon Lead was 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 were 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 periods ended March 31, 2012 and 2011.

 

We do not have any deferred tax assets or liabilities from our foreign operations.

 

9
 

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Significant components of the income tax provision were as follows for the three months ended March 31, 2012 and 2011:

 

   For the Three Months Ended March 31, 
   2012   2011 
Current tax provision          
Federal  $-   $- 
State   -    - 
Foreign   2,691,006    2,025,604 
    2,691,006    2,025,604 
Deferred tax provision          
Federal  $-   $- 
State   -    - 
Foreign   -    - 
    -    - 
Income tax provision  $2,691,006   $2,025,604 

 

 

Income from continuing operations before income taxes were allocated between the United States and Foreign components for the three months ended March 31, 2012 and 2011:

   For the Three Months Ended March 31, 
   2012   2011 
         
United States  $(597,719)  $(428,494)
Foreign   10,602,737    7,999,658 
    10,005,018    7,571,164 

 

 

The following table reconciles the U.S. statutory rates to our effective rate for the three months ended March 31, 2012 and 2011:

 

   For the Three Months Ended March 31, 
   2012   2011 
US Statutory rate   34%   34%
Foreign income not recognized in USA   (34%)   (34%)
China income tax   25%   25%
Non-dedcutible expenses   2%   2%
           
 Effective tax rate   27%   27%

 

10
 

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 7 — EARNINGS PER SHARE

 

As of March 31, 2012, we had warrants outstanding for the acquisition of 2,408,050 shares of our common stock. Of such warrants, 125,000 warrants were issued in 2008, with an exercise price of $1.196, and 1,989,050 warrants were issued in 2009, with an exercise price of $0.996. In January 2011, we issued 150,000 warrants with an exercise price of $3.25, and 144,000 warrants with an exercise price of $3.99. As of March 31, 2012, the warrants issued in 2008 and 2009 were considered dilutive and were included in the weighted average shares-diluted calculation using the treasury stock method. The warrants issued in 2011 were anti-dilutive because the exercise prices were higher than average market price. They are not included in weighted average shares calculation. 

 

As of March 31, 2012, we had options outstanding for the acquisition of 2,920,000 shares (See Note 9 — Options). Of such Options, 120,000 options were granted in 2011, with an exercise price of $2.27, 1,500,000 options were granted in 2011 with an exercise price of $2.59 and 1,300,000 options were granted in 2012 with an exercise price of $1.22. As of March 31, 2012, the options granted in 2012 were considered dilutive and were included in the weighted average shares-diluted calculation using the treasury stock method. The options granted in 2011 were anti-dilutive because the exercise prices were higher than the average market price. They are not included in weighted average shares calculation.

 

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

 

   For the Three Months Ended March 31, 
   2012   2011 
         
Net income attributable to Common stockholders  $7,314,012   $5,292,157 
           
Weighted average number of common shares outstanding - Basic   53,107,343    48,249,588 
Effect of dilutive securities:          
Unexercised warrants and options   1,250,724    1,474,420 
Weighted average number of common shares outstanding - Diluted   54,358,067    49,724,008 
           
Earnings per share-Basic  $0.14   $0.11 
           
Earnings per share-Diluted  $0.13   $0.11 

  

 

Note 8 — WARRANTS

 

Following is a summary of the status of warrants activities as of March 31, 2012:

 

   Warrants Outstanding   Weighted Average Exercise Price   Average Remaining Life in Years 
Outstanding, January 1, 2012   2,408,050   $1.33    3.03 
Granted   -    -    - 
Forfeited   -    -    - 
Exercised   -    -    - 
Outstanding, March 31, 2012   2,408,050   $1.33    2.78 

 

11
 

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 9 — OPTIONS

 

On January 9, 2012 (“Grant Date”),we granted 1,300,000 options with an exercise price of $1.22 to certain members of management and directors. These options can be exercised within ten years from the Grant Date once they become exercisable. The options become exercisable in accordance with the schedule below: (a) 25% of the options become exercisable on the first anniversary of the Grant Date (the “Initial Vesting Date”), and (b) 6.25% of the options become exercisable on the date three months after the Initial Vesting Date and on such date every third month thereafter, through the fourth anniversary of the Grant Date. The fair value of the warrants was calculated using the Black-Scholes options pricing model using the following assumptions: volatility of 124.81%, risk free interest rate of 1.98 %, and expected term of 10 years. The fair value of the options was $1,516,435, and according to vesting period, $94,777 is recorded as part of stock compensation expenses and is classified as additional paid-in capital for the period ended March 31, 2012.

 

As of March 31, 2012, of the options issued in 2011, the Company had 517,500 outstanding vested stock options with an amount of $291,392 in a weighted average period over 9 years. The 1,102,500 unvested stock options amounted to $1,656,578 in a weighted average period over 9.25 years. Of the options issued in 2012, the 1,300,000 unvested stock options amounted to $1,421,658 in a weighted average period over 9.75 years.

 

NOTE 10- CONCENTRATIONS AND RISKS

 

We maintain certain bank accounts in the PRC and BVI which are not protected by FDIC insurance or other insurance.  The cash balance held in the PRC bank accounts was $2,808,338 and $8,439,261 as of March 31, 2012 and December 31, 2011, respectively. The cash balance held in the BVI bank accounts was $31,135 and $49,945 as of March 31, 2012 and December 31, 2011, respectively.  As of March 31, 2012 and December 31, 2011, the Company held $113,937and $320,967 of cash balances within the United States of which, $0 and $70,967 was in excess of FDIC insurance limits of $250,000 as of March 31, 2012 and December 31, 2011, respectively.

 

During the periods ended March 31, 2012 and March 31, 2011, almost 100% of the Company's assets were located in the PRC and 100% of the Company's revenues were derived from the subsidiaries located in the PRC.

 

Our principal raw material used during the period was gold, which accounted for 97.56% and 99.95% of our total purchases for the periods ended March 31, 2012 and March 31, 2011, respectively. We purchased gold directly, and solely, from The Shanghai Gold Exchange, the largest gold trading platform in the PRC.

  

12
 

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

 

The following discussion of our financial condition and results of operations should be read together with the financial statements and related notes included in this Report.  This discussion contains forward-looking statements that involve risks and uncertainties.  Our actual results may differ materially from those anticipated in those forward-looking statements as a result of certain factors, including, but not limited to, those contained in the discussion on forward-looking statements that follows this section. We assume no obligation to revise or update any forward-looking statements for any reason, except as required by law.

 

Our Business

 

Through a variable interest entity relationship with Wuhan Kingold Jewelry Company Limited, a PRC corporation, we believe that we are one of the leading professional designers and manufacturers of high quality 24 Karat gold jewelry and Chinese ornaments developing, promoting, and selling a broad range of products to the rapidly expanding jewelry market across the People’s Republic of China. We offer a wide range of in-house designed products including but not limited to gold necklaces, rings, earrings, bracelets, and pendants.

 

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

 

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

 

In view of the rapid growth in the investment gold business sector, we have entered into agreements with three leading banks in China to sell gold bars and coins and other products through bank branches. We tested this business model in 2011 and sales of investment gold have totaled approximately $9.9 million in the first quarter of 2012. We anticipate the investment gold business will become an increasingly important part of our future business.

 

We are located in Wuhan which is one of the largest cities in China. We produced approximately 30 metric tons of 24K gold products in 2011 and 8.8 metric tons of 24K gold products in the first quarter of 2012.

  

13
 

Results of Operations

 

The following table sets forth information from our statements of operations (unaudited) for the three months ended March 31, 2012 and 2011 in U.S. dollars:

  

 

KINGOLD JEWELRY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(IN US DOLLARS)
(UNAUDITED)
         
   For the three months ended March 31, 
   2012   2011 
         
         
NET SALES  $224,967,394   $157,712,467 
           
COST OF SALES          
Cost of sales   (213,102,255)   (148,461,128)
Depreciation   (297,788)   (285,207)
Total cost of sales   (213,400,043)   (148,746,335)
           
GROSS PROFIT   11,567,351    8,966,132 
           
OPERATING EXPENSES          
Selling, general and administrative expenses   1,058,342    1,154,032 
Stock compensation expense   356,439    122,500 
Depreciation   33,420    31,914 
Amortization   2,996    2,873 
Total Operating Expenses   1,451,197    1,311,319 
           
INCOME FROM OPERATIONS   10,116,154    7,654,813 
           
OTHER INCOME (EXPENSES)          
Interest expense   (111,136)   (83,648)
Total Other Expenses, net   (111,136)   (83,648)
           
NET INCOME BEFORE PROVISION FOR INCOME TAXES   10,005,018    7,571,165 
           
PROVISION FOR INCOME TAXES   (2,691,006)   (2,025,604)
           
NET INCOME  $7,314,012   $5,545,560 
Less: net income attribute to the noncontrolling interest   -    (253,403)
           
NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS  $7,314,012   $5,292,157 
           
OTHER COMPREHENSIVE INCOME          
Total foreign currency translation gains   352,704    656,149 
Less: foreign currency translation gains          
attributable to noncontrolling interest   -    (15,509)
Foreign currency translation gains          
attributable to common stockholders   352,704    640,640 
           
COMPREHENSIVE INCOME  $7,666,716   $5,932,797 

 

14
 

Three Months Ended March 31, 2012 Compared to the Three Months Ended March 31, 2011

 

Net Sales 

 

Net sales for the three months ended March 31, 2012 increased to $225 million, an increase of $67.3 million, or 42.6%, from net sales of $157.7 million for the three months ended March 31, 2011. The increase in net sales was primarily driven by increased branded production as well as by the increase in the price of gold. Of the $67.3 million increase in net sales, approximately $35.3 million was attributable to increased branded production, approximately $25.2 million to the increase in the price of gold and the remaining was due to the translation gain from RMB into USD. In branded production, where we purchase gold directly only once a customer has placed an order, we include the cost of gold in our cost of goods sold. In customized production, where customers supply us with the raw materials, the cost of gold is not included in the cost of goods sold.

 

More specifically, the increase in net sales was mainly attributable to the following additional factors: (1) we expanded our customer base in the first quarter of 2012, including major new clients such as Harbin Hengyuan Gold Corp, Hangzhou Xingya Jewelry, Wuxi Yinglou and Datong Jintai Jewelry; and (2) our investment gold business has started to ramp up, and generated revenue of approximately $9.9 million for us in the first quarter of 2012. The investment gold business has developed in Beijing, Hubei, Jiangsu, Jiangxi, Liaoning, Zhejiang, Henan and Sichuan Provinces. We expect that sales for banking business will further accelerate once the national rolling out is in full speed.

 

In the first quarter of 2012, we processed a total of 8.84 metric tons of gold, of which branded production accounted for 4.56 metric tons (51.6%) and customized production accounted for 4.28 metric tons (48.4%). In the first quarter of 2011, we processed a total of 7.52 metric tons of gold, of which branded production accounted for 3.84 metric tons (51.1%) and the customized production accounted for 3.68 metric tons (48.8%).

 

 

Cost of Sales  

 

Cost of sales for the three months ended March 31, 2012 increased to $213.4 million, an increase of $64.7 million, or 43.5%, from $148.7 million for the same period in 2011. The increase was primarily due to the increased price of gold and the concurrent increase in the amount of gold purchased for branded production to meet the higher sales volumes in the category.  Of the $64.7 million increase, approximately $33.4 million was attributable to increases in branded production, approximately $24 million was due to increases in the price of gold and the remaining was due to the translation gain from exchange rate fluctuations.

 

Gross Profit  

 

Gross profit for the three months ended March 31, 2012 increased to $11.6 million, an increase of $2.6 million, or 29%, from $9 million for the same period in 2011. Accordingly, gross margin for the three months ended March 31, 2012 was 5.1%, compared to 5.7% for the same period in 2011. Gross margin dropped slightly primarily because the price of gold increased substantially and the Company could not raise the processing fee proportionally.

 

 

Expenses

 

Total operating expenses for the three months ended March 31, 2012 were $1.45 million, an increase of $0.14 million, or 10.7%, from $1.31 million for the same period in 2011. The increase in operating expenses was primarily due to the option expenses incurred.

 

Interest expenses were $0.11 million for the three months ended March 31, 2012, a decrease of $0.03 million or 32.9%, from $0.08 million for same period in 2011.

 

The provision for income tax expense was approximately $2.7 million for the three months ended March 31, 2012, an increase of $0.67 million, or 32.8%, from approximately $2 million for the same period in 2011. The increase was primarily due to an increase in net income before taxes.

 

 

Net Income 

 

Net income attributable to common stockholders increased to $7.3 million for the three months ended March 31, 2012 from $5.5 million for the same period in 2011, an increase of $2 million, or 38.2% as result of the matters described above.

  

 

Cash Flows

 

Net cash provided by (used in) operating activities. 

 

Net cash used in operating activities was $6.0 million for the three months ended March 31, 2012, compared to net cash used in operating activities of $22 million for the same period in 2011. This decrease occurred primarily because we had purchased a significant amount of gold during the three month period ended March 31, 2011 with capital raised in a public offering.

 

15
 

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

 

Net cash provided by (used in) investing activities.

 

Net cash used in investing activities amounted to $1,467 for the three months ended March 31, 2012, compared to net cash used in investing activities of $39,500 for the three months ended March 31, 2011.

 

Analysis and Expectations.  Our net cash used in investing activities did not fluctuate significantly in the comparable periods due to only small increases in the amount of equipment we purchased. We do not expect that cash used in investing activities will increase significantly in the short-term future.

 

Net cash provided by (used in) financing activities.

 

Net cash provided by financing activities was $0 for the three months ended March 31, 2012, compared to net cash provided by financing activities of $20.2 million for the three months ended March 31, 2011. The change was the result of a public offering of 7.2 million shares of common stock in January 2011.

 

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

 

Off-Balance Sheet Arrangements

 

We have no material off-balance sheet transactions.

 

 

Liquidity and Capital Resources

 

As of March 31, 2012, we had $3.0 million in cash and cash equivalents. We have financed our operations with cash flow generated from operations, through borrowing of short-term bank loans, generally with a term of one year as well as through a public offering in the capital markets.

 

At the end of March 31, 2012, we had outstanding short-term loan from CITIC Bank Corporation Limited in the aggregate amount of $6.35 million with an interest rate of 7% due in November 2012. Our loans are secured by all of the Company’s buildings, plant and machinery. The amounts outstanding under these bank loans are presented in our financial statements as “short-term loans.”

 

In China, it is customary practice for banks and borrowers to negotiate roll-overs or renewals of short-term borrowings on an on-going basis shortly before they mature. Although we have renewed our short-term borrowings in the past, we cannot ensure that we will be able to renew these loans in the future as they mature. If we are unable to obtain renewals of these loans or sufficient alternative funding on reasonable terms from banks or other parties, we will have to repay these borrowings with the cash on our balance sheet or cash generated by our future operations, if any. We cannot ensure that our business will generate sufficient cash flow from operations to repay these borrowing or that additional debt or equity financing will be available on acceptable terms, or at all. Failure to maintain financing arrangements on acceptable terms would have a material adverse effect on our business, results of operations and financial condition.

 

We believe that our current cash and cash flow from operations will be sufficient to meet our anticipated cash needs, including our cash needs for working capital, for the next 12 months. We may, however, require additional cash resources due to changing business conditions or other future developments, including any investments or acquisitions we may decide to pursue. Our ability to maintain sufficient liquidity depends partially on our ability to achieve anticipated levels of revenue, while continuing to control costs. If we do not have sufficient available cash, we will have to seek additional debt or equity financing through other external sources, which may not be available on acceptable terms, or at all. Failure to maintain financing arrangements on acceptable terms could have a material adverse effect on our business, results of operations and financial condition.

 

16
 

We are required to contribute a portion of our employees’ total salaries to the Chinese government’s social insurance funds, including pension insurance, medical insurance, unemployment insurance, job injuries insurance, and maternity insurance, in accordance with relevant regulations. We expect that the amount of our contribution to the government’s social insurance funds will increase in the future as we expand our workforce and operations, and commence contributions to an employee housing fund.

 

The ability of Vogue-Show to pay dividends may be restricted due to the PRC’s foreign exchange control policies and the availability of cash. A majority of our revenue is earned and received in RMB. We may be unable to distribute any dividends outside of China due to PRC exchange control regulations that restrict our ability to convert RMB into U.S. Dollars. Accordingly, Vogue-Show’s funds may not be readily available to us to satisfy obligations which have been incurred outside the PRC, which could adversely affect our business and prospects or our ability to meet our cash obligations.

 

 

 

Critical Accounting Policies and Estimates

 

Management’s discussion and analysis of results of operations and financial condition are based upon our consolidated financial statements. These statements have been prepared in accordance with accounting principles generally accepted in the United States of America. These principles require management to make certain estimates and assumptions that affect amounts reported and disclosed in the financial statements and related notes. See Note 2 to our consolidated financial statements, “Summary of Significant Accounting Policies.” We believe that the following paragraphs reflect our most critical accounting policies that currently affect our financial condition and results of operations.

 

Principles of Consolidation

 

The accompanying consolidated financial statements include the financial statements of Kingold, its wholly owned subsidiaries, Dragon Lead and Wuhan Vogue-Show and Wuhan Kingold, its 100% contractually controlled affiliate.

 

Inventories

 

Inventories consisting of finished goods, materials on hand, packaging materials and raw materials are stated at the lower of cost or market value. The value of finished goods is comprised of direct materials, direct labor and an appropriate proportion of overhead. Cost is determined using the weighted average method. We continually evaluate the composition of our inventories assessing the turnover of our products. Inventories are stated at the lower of cost or market value, cost being calculated on the weighted average basis. The cost of inventories includes all costs of purchases, costs of fixed and variable production overheads and other costs incurred in bringing the inventories to their present location and condition. We provide inventory allowances based on excess and obsolete inventories determined principally by customer demand. We did not record a provision for obsolete inventories as of either December 31, 2011 or March 31, 2012.

 

However, we do realize if the price of gold changes substantially in a very short period, it might trigger customer default, resulting in inventory obsolescence.

 

Accounting for the Impairment of Long-Lived Assets

 

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

 

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

 

If the value of such an asset is determined to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or the fair value, less disposition costs. No events or changes in our business or circumstances required us to test for impairment of our long-lived assets during 2010 and 2011, and accordingly, we did not recognize any impairment loss during these periods.

 

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

 

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Revenue Recognition

 

Our revenue is derived from the sales price of goods sold and fees for services provided. We recognize revenue for goods sold when they are delivered to the customer. We recognize revenue for services provided when the services have been performed, the customers have approved the completion of services, invoices have been issued and collectability is deemed probable. Management has not made an allowance for estimated sales returns because they are considered immaterial when viewed in light of our overall revenue and historical experience. In recognizing revenue, we assume that the currency we receive from customers is valid legal tender in the PRC, our electronic record-keeping system has not been tampered with nor malfunctioned, and that we have not inadvertently sold significant amounts of defective goods. If any of these assumptions were proven to be incorrect, we could have to restate our revenue. As of the date of this Report, none of these assumptions have proven to be incorrect.

 

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Item 3. Quantitative and Qualitative Disclosure about Market Risk

 

Foreign Currency Exchange Rate Risk

 

Given that all of our revenues are generated in Chinese RMB, yet our results are reported in U.S. dollars, devaluation of the RMB could negatively impact our results of operations. The value of RMB is subject to changes in China’s governmental policies and to international economic and political developments. In January 1994, the PRC government implemented a unitary managed floating rate system. Under this system, the People’s Bank of China, or PBOC, began publishing a daily base exchange rate with reference primarily to the supply and demand of RMB against the U.S. dollar and other foreign currencies in the market during the previous day. Authorized banks and financial institutions are allowed to quote buy and sell rates for RMB within a specified band around the central bank’s daily exchange rate. On July 21, 2005, PBOC announced an adjustment of the exchange rate of the U.S. dollar to RMB from 1:8.27 to 1:8.11 and modified the system by which the exchange rates are determined. Over the past four years, RMB has appreciated 15.7% against the USD (from 1 USD = 7.2946 RMB on January 1, 2008 to 1 USD = 6.29597 RMB on March 31, 2012). While the international reaction to the RMB revaluation has generally been positive, there remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in further fluctuations of the exchange rate of RMB against the U.S. dollar, including possible devaluations. As all of our net revenues are recorded in RMB, any future devaluation of RMB against the U.S. dollar could negatively impact our results of operations.

 

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

  

 

Interest Rate Risk

 

Our short-term borrowings as of March 31, 2012 were approximately $6.4 million and interest expense paid for the period ended March 31, 2012 was $0.1 million. We expect the interest will increase slightly when we renew the loan agreement as the central bank of China has raised the baseline rates over the past couple of months.

 

At the end of March 31, 2012, our weighted average interest rate was 7%. We currently have no interest rate hedge positions in place to reduce our exposure to interest rates.

 

Commodity Price Risk

 

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

 

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Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures designed to provide reasonable assurance that material information required to be disclosed by us in the reports filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission (“SEC”) rules and forms, and that the information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on our review, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level as of the end of the period covered by this Report.

 

 

Changes in Internal Controls

 

 

Other than as described above, there have been no changes in our internal control over financial reporting during the most recent financial quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. Further, because of changes in conditions, effectiveness of internal controls over financial reporting may vary over time. Our system contains self-monitoring mechanisms, and actions are taken to correct deficiencies as they are identified.

 

 

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

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

 

Item 1A. Risk Factors.

 

Not applicable.

 

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

 

None.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

None.

 

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Item 6. Exhibits

 

 

 

     

Exhibit

No.

  Description
31.1    Certification of Principal Executive Officer pursuant to Rules 13a-14 and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.2    Certification of Principal Financial Officer pursuant to Rules 13a-14 and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
32.1   Certification of Principal Executive Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
32.2    Certification of Principal Financial Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
     

 

* Filed Herein

 

 Kingold’s Periodic Report on Form 10-Q for the period ended March 31, 2012, at the time of filing with the Securities and Exchange Commission, shall modify and supersede all prior documents filed pursuant to Section 13, 14 or 15(d) of the Securities Exchange Act of 1934 for purposes of any offers or sales of any securities after the date of such filing pursuant to any Registration Statement or Prospectus filed pursuant to the Securities Act of 1933, which incorporates by reference such Periodic Report on Form 10-Q.

  

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

 

Date: May 9, 2012

 

  KINGOLD JEWELRY, INC.
     
  By: /s/ Zhihong Jia
    Zhihong Jia
   

Chairman, Chief Executive Officer and

Principal Executive Officer

     
  By: /s/ Bin Liu
    Bin Liu
   

Chief Financial Officer and Principal

Accounting Officer

   

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