SECURITIES & EXCHANGE COMMISSION EDGAR FILING
KINGOLD JEWELRY, INC.
Form: 10-K
Date Filed: 2014-03-31
Corporate Issuer CIK: 1089531
Symbol:
SIC Code:
Fiscal Year End:
KGJI
7389
12/31
© Copyright 2014, Issuer Direct Corporation. All Right Reserved. Distribution of this document is strictly prohibited, subject to the
terms of use.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x
o
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2013
Or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from: _____________ to _____________
KINGOLD JEWELRY, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or Other Jurisdiction
of Incorporation or Organization)
001-15819
(Commission
File Number)
13-3883101
(I.R.S. Employer
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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.001 par value
Name of each exchange on which registered
The NASDAQ Capital Market
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
o Yes x No
o Yes x No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days.
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).
x Yes o No
x Yes o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
x
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
Non-accelerated filer
o
o
Accelerated filer
Smaller reporting company
o
x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes x No
The aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant was approximately $72,652,464
as of June 28, 2013, the last business day of the registrant’s most recently completed second fiscal quarter.
The number of shares of the registrant’s common stock outstanding as of March 28, 2014 was 65,953,462.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the Proxy Statement relating to the 2014 Annual Meeting of Stockholders.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
2013 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosure
PART I
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosures
Controls and Procedures
Other Information
PART III
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Item 15.
SIGNATURES
Exhibits, Financial Statement Schedules
PART IV
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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:
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changes in the market price of gold;
our ability to implement the key initiatives of, and realize the gross and operating margins and projected benefits (in the
amounts and time schedules we expect) from, our business strategy;
non-performance of suppliers on their sale commitments and customers on their purchase commitments;
non-performance of third-party service providers;
adverse conditions in the industries in which our customers operate, including a general economic downturn, a
recession globally, or sudden disruption in business conditions, and our ability to withstand an economic downturn,
recession, cost inflation, competitive or other market pressures, or conditions;
the effect of political, economic, legal, tax and regulatory risks imposed on us, including foreign exchange or other
restrictions, adoption, interpretation and enforcement of foreign laws including any changes thereto, as well as reviews
and investigations by government regulators that have occurred or may occur from time to time, including, for example,
local regulatory scrutiny in China;
our ability to manage growth;
our ability to successfully identify new business opportunities and identify and analyze acquisition candidates, secure
financing on favorable terms and negotiate and consummate acquisitions as well as to successfully integrate or
manage any acquired business;
our ability to integrate acquired businesses;
the effect of economic factors, including inflation and fluctuations in interest rates and currency exchange rates, foreign
exchange restrictions and the potential effect of such factors on our business, results of operations and financial
condition;
our ability to retain and attract senior management and other key employees;
any internal investigations and compliance reviews of Foreign Corrupt Practices Act and related U.S. and foreign law
matters in China and additional countries, as well as any disruption or adverse consequences resulting from such
investigations, reviews, related actions or litigation;
changes in the People’s Republic of China or U.S. tax laws;
increased levels of competition, and competitive uncertainties in our markets, including competition from companies in
the gold jewelry industry in the PRC, some of which are larger than we are and have greater resources;
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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;
our continuing relationship with major banks in China with whom we have certain gold lease agreements and working
capital loans;
our ability to understand China’s commercial real estate market as we begin to build the recently acquired Kingold
Jewelry International Industry Park and to manage the relationships with the planned tenants in the Kingold Jewelry
International Industry Park;
our knowledge of and marketing capabilities in markets outside of China, particularly the Middle East, as we begin to
expand our business outside of China through our formation of a joint venture with a Kuwaiti entity; and
other risks, including those described in the “Risk Factors” discussion of this Annual Report.
We undertake no obligation to update any such forward-looking statements, except as required by law.
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ITEM 1. BUSINESS
Our Business
PART I
Through a variable interest entity relationship with Wuhan Kingold Jewelry Company Limited, or Wuhan Kingold, we believe that
we are one of the leading professional designers and manufacturers of high quality 24-karat gold jewelry and Chinese ornaments. We
are also engaged in developing, promoting, and selling a broad range of products to the rapidly expanding jewelry market across the
People’s Republic of China, or the PRC. We offer a wide range of in-house designed products including, but not limited to, gold
necklaces, rings, earrings, bracelets, and pendants. We have built a partnership with the Jewelry Institute of China University of
Geosciences to help us design new products.
We have historically sold our products directly to distributors, retailers and other wholesalers, who then sell our products to
consumers through retail counters located in both department stores and other traditional stand-alone jewelry stores. We sell our
products to our customers at a price that reflects the market price of the base material, plus a mark-up reflecting our design fees and
processing fees. Typically this mark-up is approximately around 3% 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 fast growth in the investment gold business sector, we have signed agreements with various leading banks in
China such as the Bank of Communication and China Merchant Bank to sell gold bars and coins and other products through bank
branches. We tested this business model in 2011, and investment gold accounted for approximately 8.9% of our total revenue in
2013 and 5.0% of our total revenue in 2012. We anticipate the investment gold business will continue to become an increasingly
important part of our business in the future.
To broaden our business lines and strengthen our processing capacity, in October 2013, we entered into an agreement to
acquire the operating rights for 66,667 square meters (approximately 717,598 square feet, or 16.5 acres) of land in Wuhan for an
aggregate purchase price of RMB1 billion (approximately US$164 million at the spot rate). We financed the installment payments
paid to date through bank loans, and may finance the remaining payments through either additional bank loans or other sources of
financing. We may finance part of the remaining payments through proceeds derived from the presale of some of the commercial
units if we can obtain the pre-sale permit from the governing authority in time. The land use rights are held in the Shanghai Creative
Industry Park, which we intend to rename the Kingold Jewelry International Industry Park, or the Jewelry Park for purposes of this
report. We intend to develop the land and to utilize the completed Jewelry Park as our new operation center and show center. We
also plan to rent spaces within the Jewelry Park to other jewelry manufacturers in China, and may sell developed commercial and
residential properties to individual and corporate buyers. The agreement was structured as an equity purchase of the company
holding the land use rights, with Wuhan Wansheng House Purchasing Limited initially granting us a portion of Wuhan Huayuan
Science and Technology Development Limited Company’s, or Wuhan Huayuan’s, ownership, granting us the right to appoint the chief
financial officer for the project to supervise and manage the use of funds, and naming Wuhan Huayuan as agent for the completion of
the construction. Accordingly, we now own 60% of the Jewelry Park. Upon our payment of the final installment payment, we will
become the 100% owner of the Jewelry Park. However, because no other assets or liabilities have been transferred with the
acquisition of Wuhan Wansheng, we are treating the Jewelry Park acquisition as an asset purchase for accounting purposes. For a
discussion of the installment payment schedule, see Note 5 to our audited consolidated financial statements appearing elsewhere in
this report, as well as “Management’s Discussion and Analysis of Results of Operations and Financial Condition—Liquidity and
Capital Resources.”
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Finally, in light of the growing demand for gold and gold products from the Middle East, we have entered into a joint venture
agreement with Kuwait Support Services Company W.L.L., or KSS, a major multi-business group headed by His Excellency Sheikh
Ameer Al Sabah of Kuwait. The joint venture was formed to allow us to source and finance gold, and to develop, market, and
distribute gold products including, but not limited to, gold coins, gold bullion, medals, ornaments, and jewelry in the Middle East
region. We expect that our joint venture will allow us to market these products initially to customers in Kuwait, and then to customers
in Bahrain, Oman, Qatar, Saudi Arabia, and the United Arab Emirates, and we expect to derive significant business opportunities
from this international expansion. Our initial efforts and activities in connection with this new joint venture are focused on
understanding the markets in the Middle East, to include identifying ways we can access and realize the potential benefit from having
access to these large target customer groups.
We are located in Wuhan, which is one of the largest cities in China. We processed approximately 51.1 metric tons of 24-karat
gold products in 2013, as compared to 37.8 metric tons of 24-karat gold products in 2012. For purposes of this Annual Report on
Form 10-K, 1 metric ton equals 35,274 ounces.
Industry and Market Overview
The Global Market
Global demand for gold in 2013 was 3,756.1 tons with total market size of US$170.4 billion, according to the World Gold Council’s
Gold Demand Trends 2013. In terms of tonnage, jewelry accounted for 58.8% of total demand in 2013, while investments (mainly
bars and coins) accounted for 20.6%, and central bank purchases and technology usage accounted for 9.8% and 10.8%,
respectively.
According to the World Gold Council, China and India continue to consume the most jewelry of any market in the world, and in
2013 together generated 52.8% of total annual jewelry demand globally. China overtook India as the world’s largest consumer of
jewelry, consuming 1,065.8 tons of gold in 2013, followed by India, which consumed 974.8 tons. Investment gold (bars and coins)
demand has increased substantially, particularly in China, from 288.0 tons in 2012 to 397.1 in 2013 (an increase of 37.9%).
The PRC Market
China’s market for jewelry and other luxury goods is expanding rapidly, in large part due to China’s rapid economic growth.
According to the State Bureau of Statistics of China, China’s real gross domestic product, or GDP, grew by approximately 7.7%, 7.8%
and 9.3% in 2013, 2012 and 2011, respectively. Economic growth in China has led to greater levels of personal disposable income
and increased spending among China’s expanding consumer base. According to the Economist Intelligence Unit, private
consumption has grown at a 9.0% compound annual growth rate over the last decade.
According to the World Gold Council, over the last two years, Chinese gold consumers have displayed a remarkably consistent
attitude towards gold: demand for investment and jewelry throughout 2013 has shown little variation over 2012 quarterly levels.
Chinese demand is primarily driven by: (i) the continued urbanization of the Chinese population; (ii) the dominance of 24-karat gold
and its role as a savings proxy; and (iii) increasing availability of gold investment products to a populace with a growing awareness of
gold’s investment properties, particularly in light of its role as an inflation hedge.
In volume terms, Chinese consumer demand for gold can best be described as stable. Total consumer demand was valued at
RMB262.7 billion (approximately US$49.1 billion) in 2013, an increase of 13.2% over the previous year as consumers in China
continue to allocate greater sums to their gold investment and jewelry purchases: demand in both sectors reached a record value in
2013. In tonnage terms, Chinese total consumer demand for gold reached 1,065.8 tons in 2013 (a 32.1% increase over 2012), with
jewelry accounting for 668.7 tons in 2013 (a 28.9% increase over 2012) and investment gold accounting for 397.1 tons in 2013 (a
37.9% increase over 2012).
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We believe that China’s gold jewelry market will continue to grow as China’s economy continues to develop. Because gold has
long been a symbol of wealth and prosperity in China, demand for gold jewelry, particularly 24-karat gold jewelry, is firmly embedded
in the country’s culture. Gold has long been viewed as both a secure and accessible savings vehicle, and as a symbol of wealth and
prosperity in Chinese culture. In addition, gold jewelry plays an important role in marriage ceremonies, child birth, and other major life
events in China. Gold ornaments, often in the shapes of dragons, horses and other cultural icons, have long been a customary gift for
newly married couples and newborn children in China. As China’s population becomes more urban, more westernized, and more
affluent, gold, platinum and other precious metal jewelry are becoming increasingly popular and affordable fashion accessories. The
gold jewelry market is currently benefiting from rising consumer spending and rapid urbanization of the Chinese population. We
believe that jewelry companies like us, with a developed distribution network, attractive designs, and reliable product quality, are well-
positioned to build up our brands and capture an increasing share of China’s growing gold jewelry market.
Our Strengths
We believe the following strengths contribute to our competitive advantages and differentiate us from our competitors:
We have a proven manufacturing capability.
We have developed seven proprietary processes that we believe are well integrated and are crucial to gold jewelry
manufacturing, namely the processes for 99.9% gold hardening, rubber mould opening efficiency, solder-less welding, pattern
carving, chain weaving, dewaxing casting, and our coloring methods.
We have a proven design capability.
We have a large and experienced in-house design team with a track record of developing products that are fashionable and well
received in the jewelry market. We have built up an exclusive partnership with the leading jewelry school in China, the Jewelry
Institute of China University of Geosciences (Wuhan), to help us design and launch new products. We are committed to further
strengthening our design team and continuing to improve the quality and novelty of our products so as to capture increased market
share in the high-end gold jewelry market.
We believe that we have superior brand awareness in China.
We have established the Kingold brand through our focused sales and marketing efforts, and we believe that it is well known in
China. We continue to devote significant efforts towards brand development and marketing in an attempt to enhance the market
recognition of our products, such as our Mgold jewelry line of products. Our brand awareness was demonstrated in part by “Kingold”
being named a “Famous Brand in Hubei Province,” “Famous Brand in China,” and “Famous Jewelry Brand” by the General
Administration of Quality Supervision and China Top Brand Strategy Promotion Committee in 2007. We believe these awards have
added credibility to and strengthened customers’ confidence in our products. We have also participated in various exhibitions and
trade fairs to promote our products and brands.
We have a well-established distribution network throughout China.
We have been actively operating in this industry for more than ten years since the gold jewelry industry became open to the
private sector in 2002. In the jewelry industry, a well-established and well-maintained distribution network is critical to success. We
have established stable and mutually beneficial business relationships with a range of business partners, including large distributors,
wholesalers, and retailers. These relationships are essential to our company, and provide us with a key competitive advantage. We
have distributors in most provinces, municipalities and autonomous regions in PRC.
We believe that we have significant advantages in the areas of capacity, technology and talent when compared to our
competitors.
We have expanded our capacity significantly in recent years. In 2013, we processed 24-karat gold jewelry and Chinese
ornaments with a total weight of approximately 51.1 tons, substantially exceeding prior year production of approximately 37.7 and
30.0 tons in 2012 and 2011, respectively. We attach great importance to the continuous improvement of our technology. Our gold
processing systems dramatically reduce waste during the manufacturing process to approximately just one gram per kilogram of gold.
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We have been awarded 26 patents granted by the State Intellectual Property Office of the PRC, 2 of which will expire in 2017, 21
of which will expire in 2019, and 3 of which will expire in 2029. We have made significant investments in training and retaining our
own in-house design and manufacturing team. We have an exclusive agreement with the China University of Geosciences School of
Jewelry in Wuhan, or the School of Jewelry in Wuhan, which provides us with new, unique and innovative designs through students
majoring in jewelry design and jewelry processing technology. These designs are proprietary to us, so our competitors do not have
access to these designs. We also provide internships to talented students at the School of Jewelry, which provides us with access to
the designs that we believe are best suited for strong consumer sales.
We are a member of the Shanghai Gold Exchange, which has very limited membership and which affords the right to
purchase gold directly from the Shanghai Gold Exchange.
We have been a member of the Shanghai Gold Exchange, or the Exchange, since 2003. Although the Chinese government
eliminated the absolute restriction on trading gold in general, the right to purchase gold directly from the Exchange is limited. The
Exchange possesses a membership system and only members can buy gold through its trading system. As of March 2014, there
were approximately 167 members of the Exchange throughout China. Non-members who want to purchase gold must deal with
members of the Exchange at a higher purchase price compared to the price afforded to members of the Exchange.
We have an experienced management team in the Chinese gold industry.
We have a strong and stable management team with valuable experience in the PRC jewelry industry. Zhihong Jia, Wuhan
Kingold’s major shareholder and founder, has been working in this industry for more than 10 years. Bin Zhao, our general manager,
has over 20 years of experience in the administration of jewelry businesses. Other members of our senior management team all have
significant experience in key aspects of our operations, including product design, manufacturing, and sales and marketing.
Our Strategy
Our goal is to be the leading designer and manufacturer of 24-karat gold jewelry products and to become a sizable supplier of
investment gold products in China. We intend to achieve our goal by implementing the following strategies:
We intend to increase production capacity and marketing abilities through both existing channels and the planned
Jewelry Park.
We intend to continue to expand the production capacity with our self-generated cash flow as well as bank loans. We also intend
to consider sub-contracting opportunities in order to further expand capacity. Given the fragmentation of the PRC gold jewelry and
design industry, we believe there may be attractive consolidation opportunities for us to acquire other jewelers, which would allow us
to further increase our market share and achieve economies of scale.
We also intend to increase our production capacity and marketing abilities through forming relationships with other jewelry
manufacturers in China, to whom we plan to lease space in our planned Jewelry Park.
We plan to continue to specialize in the manufacture of 24-karat gold jewelry.
We intend to leverage our experience in jewelry design to introduce new fashionable products with strong market recognition,
such as our Mgold jewelry line of products, to target niche markets such as the fast growing wedding market. By investing
significantly in research and development, we plan to design new product lines of 24-karat gold jewelry to address the specific needs
of our target customers. By staying on top of market trends, and expanding our design team and capabilities, we plan to continue to
increase our revenues and market share.
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We intend to further promote and improve the use of our brand recognition.
We intend to make continuous efforts in growing the brand recognition of our Kingold brand and increasing our market share.
Through marketing and the promotion of our high-end product lines such as Mgold, we believe the credentials and reputation of our
brand will be further enhanced.
We will increase the automation in our production line.
Our production lines use modern technologies and production techniques that we continuously strive to improve. We plan to
increase the level of automation in our production lines, which will lower our average costs and expand our production capacity. With
our entrance into the investment gold market, we intend to rely more on automated production processes.
We intend to enlarge our PRC customer base.
We intend to strive to expand our PRC customer base by strengthening current relationships with distributors, retailers and other
wholesalers in our existing markets. We also plan to expand upon our customer base by developing new relationships with strategic
distributors and retailers in markets we have not yet penetrated and adding customers in the PRC.
We intend to expand into the international gold market, specifically the Middle East.
Through our joint venture with KSS formed in January 2014, we plan to expand into the Middle East gold markets both to source
and finance gold, and to develop, market, and distribute gold products.
Products
We currently offer a wide range of 24-karat gold products, including 99.9% and 99% pure gold necklaces, rings, earrings,
bracelets, pendants and gold bars. We launch as many as 900 new products each month and approximately 10,000 every year.
Design and Manufacturing
We have adopted a systematic approach to product design and manufacturing that we believe is rigorous. We employ a senior
design team with members educated by top art schools or colleges in China, including an exclusive agreement with the School of
Jewelry in Wuhan, who have an average of three to five years of experience. Our design team develops and generates new ideas
from a variety of sources, including direct customer feedback, trade shows, and industry conferences. We generally test the market
potential and customer appeal of our new products and services through a wide outreach program in specific regions prior to a full
commercial launch. We have a large-scale production base that includes a 74,933 square foot factory, a dedicated design, sales and
marketing team, and more than 500 company-trained employees. Our production lines include automated jewelry processing
equipment and procedures that we can rapidly modify to accommodate new designs and styles.
We are currently working with Wuhan Wansheng House Purchasing Limited to build the Jewelry Park, with total floor space
expected to be approximately 193,000 square meters (approximately 2,068,275 square feet). We expect that the Jewelry Park will
become the new jewelry hub for Wuhan and central China in general. Upon its completion, we plan to transfer our headquarters to
the new Jewelry Park and to make it a state-of-art design center and additional location for manufacturing facilities.
Supply of Raw Materials
We purchase gold, our major raw material, directly from the Exchange. Our membership grants us the right to purchase gold from
the Exchange, a right that is not available to non-members. Beginning in 2013, we also started to lease gold from certain leading
Chinese commercial banks to provide an additional supply of raw materials, certain of which agreements we may renew in 2014.
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Beginning in 2014, pursuant to our joint venture with KSS, we plan to go beyond the Exchange and our PRC supply to source
gold raw materials from the Middle East. We expect that this will aid us in our plan to expand our business globally.
Security Measures
We believe that we implement the best of breed security measures to protect our assets, including our 24-karat gold, and which
we believe are well beyond those of our competitors. Our comprehensive security measures at our Wuhan facility include a 24-hour
onsite police station with direct deployment of officers and instant access to the Wuhan city police department, security guards at
each point of entry and who roam our facilities, security cameras (with video surveillance by both random and fixed cameras), and
alarm systems in our warehouse. Our gold is stored in a state of the art vault with encryption and authentication technology, which
requires several designated management employees to open the vault, all of whom have different access codes known only to a
limited number of officers. Therefore, no one individual can open our vault without the access codes of the others. In addition, every
employee or visitor is required to pass through a security check (to include a metal detector) when he or she enters and leaves the
jewelry production area. We review our security measures on an annual basis and regularly look to upgrade our systems after such
review.
Quality Control
We consider quality control an important factor for the success of our business. We have a strict quality control system that is
implemented by a well-trained team to ensure effective quality control over every step of our business operations, from design and
manufacturing to marketing and sales. We have received ISO 9001 accreditation from the International Organization for
Standardization attesting to our quality control systems. In 2004, we were named an “Honest and Trustworthy Enterprise” by the
Hubei Bureau of Quality and Technical Supervision.
Sales and Marketing
Currently we have approximately 300 major customers covering 25 provinces in China. We have very stable relationships with
our major customers who have generally increased order volume year by year. In 2012, we renovated our showroom in Wuhan where
we are based. Other than this showroom, we do not have retail sales. In 2012, we entered the TV shopping channel and in 2013, we
launched an online business. These new sales channels are still in the testing period and this China-based retail plan has not yet
generated meaningful business.
We plan to build up the Jewelry Park to allow us to work closely with other leading jewelers and jewelry manufacturers in China,
thereby creating opportunities for us to cross-sell and up-sell. We expect that our new Jewelry Park will become a driving force for our
sales and marketing efforts in China.
In addition, pursuant to our joint venture with KSS, we intend to leverage our partner’s supply and distribution channels to
gradually increase our sales and marketing capabilities throughout the gold and jewelry markets in the Middle East.
Major Customers
During the year ended December 31, 2013, approximately 27.4% of our net sales were generated from our five largest customers,
as compared to 25.0% for the year ended December 31, 2012. China Merchant Bank became our largest customer in 2013 (6.5% of
our total net sales in 2013) due to its purchase of investment gold products.
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Research and Development
We have our own Research and Development center made up of a design group and a technical development group. In 2013, we
spent $54,409 on new product development (including sponsoring design interns and recruiting top designers and technicians), and
$6,651 on technology improvements. In 2012, we spent $70,857 on new product development (including sponsoring design interns
and recruiting top designers and technicians), and $8,314 on technology improvements. We believe that our company is among the
few jewelry manufacturers in the PRC that is equipped with modern facilities and technology. Through years of research, we have
developed seven techniques that we believe have been key drivers of our competitive strengths and operating success. These
techniques include 99.99% gold hardening, rubber mold opening efficiency, solder-less welding, pattern carving, chain weaving,
dewaxing casting, and our coloring methods. Our track record of technical innovation has resulted in the development and acquisition
of industry-leading equipment. This equipment ensures that we are able to produce special patterns and styles efficiently.
Competition
The jewelry industry in China is highly fragmented and very competitive. No single competitor has a significant percentage of the
overall market. We believe that the market may become even more competitive as the industry grows and/or consolidates.
We produce high-quality jewelry for which the demand has grown year by year as income levels in China have risen and
customers continue to appreciate the high quality of our products. We believe the Kingold brand is well-recognized within the industry
across China, which has substantially differentiated us from most of our competitors.
We compete with local jewelry manufacturers and large foreign multinational companies that offer products similar to ours.
Examples of our competitors include, but are not limited to, Zhejiang Sun & Moon Jewelry Group Co., Ltd. (listed on the Shanghai
Stock Exchange), Shenzhen Bo Fook Jewelry Co., Ltd., Shenzhen Ganlu Jewelry Co., Ltd., Magfrey Jewelry Co., Ltd., and
Guangdong Chaohongji Co., Ltd.
Intellectual Property
We rely on a combination of patent, trademark and trade secret protection and other unpatented proprietary information to protect
our intellectual property rights and to maintain and enhance our competitiveness in the jewelry industry.
We currently have 26 patents granted by the State Intellectual Property Office of the PRC, 2 of which expire in 2017, and 21 in
2019 and 3 in 2029, respectively.
We have 17 registered trademarks in China, 3 of which expire in 2017, 1 in 2019, 6 in 2020 and 7 in 2021, and have filed
applications for registration of 1 trademark, which has been accepted and is currently under review by the Trademark Office of the
State Administration for Industry and Commerce of the PRC. In particular, “Kingold” has been named as a “Famous Brand in Hubei
Province,” “Famous Brand in China,” and “Famous Jewelry Brand” by the General Administration of Quality Supervision and China
Top Brand Strategy Promotion Committee.
We have implemented and enhanced intellectual property management procedures in an effort to protect our intellectual property
rights. However, there can be no assurance that our intellectual property rights will not be challenged, invalidated, or circumvented,
that others will not assert intellectual property rights to technologies that are relevant to us, or that our rights will give us a competitive
advantage. In addition, the laws of China may not protect our proprietary rights to the same extent as the laws in other jurisdictions.
Further, as we expand our business into the Middle East, we will need to pursue protection of our intellectual property rights in this
region.
PRC Government Regulations
We are subject to various PRC laws and regulations that are relevant to our business. Our business license permits us to design,
manufacture, sell and market jewelry products to department stores throughout China, and allows us to engage in the retail
distribution of our products. Any further amendment to the scope of our business will require additional government approvals. We
cannot assure you that we will be able to obtain the necessary government approval for any change or expansion of our business.
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Under applicable PRC laws, the supply of precious metals such as platinum, gold and silver is highly regulated by certain
government agencies, such as the People’s Bank of China, or the PBOC. The Shanghai Gold Exchange is the only PBOC authorized
supplier of precious metal materials and is our primary source of supply for our raw materials, which substantially consist of precious
metals. We are required to obtain and hold several memberships and approval certificates from these government agencies in order
to continue to conduct our business. We may be required to renew such memberships and to obtain approval certificates periodically.
If we are unable to renew these periodic memberships or approval certificates, it would materially affect our business operations. We
are currently in good standing with these agencies.
We have also been granted independent import and export rights. These rights permit us to import and export jewelry into and out
of China. With the relatively lower cost of production in China, we intend to expand into overseas markets after the launch of our
China-based retail plan. We do not currently have plans to import jewelry into China.
Environmental Protection
Our production facilities in Wuhan are subject to environmental regulation by both the central government of the PRC and by local
government agencies. We have obtained all necessary operating permits as required from the Environmental Protection Bureau, and
believe that we are in compliance with local regulations governing waste production and disposal, and that our production facilities
have met the public safety requirements regarding refuse, emissions, lights, noise and radiation. Since commencement of our
operations, we have not been cited for any environmental violations. Because our production process creates almost no waste water
or pollution, our costs for environmental compliance have been minimal. In 2013 and 2012 our costs for environmental compliance
were approximately $7,257 and $10,933, respectively.
Tax
Wuhan Kingold was incorporated in the PRC and is subject to PRC income tax, which is computed according to the relevant laws
and regulations in the PRC. The applicable income tax rate is 25.0%.
Pursuant to the Provisional Regulation of China on Value-Added Tax, or VAT, and its implementing rules, all entities and
individuals that are engaged in the sale of goods, the provision of repairs and replacement services and the importation of goods in
China are generally required to pay VAT at a rate of 17.0% of the gross sales proceeds received, less any deductible VAT already
paid or borne by the taxpayer.
Foreign Currency Exchange
Under applicable PRC foreign currency exchange regulations, the Renminbi is convertible for current account items, including the
distribution of dividends, interest payments, trade and service-related foreign exchange transactions. Conversion of Renminbi for
capital account items, such as direct investment, loan, security investment and repatriation of investment, however, is still subject to
the approval of the PRC State Administration of Foreign Exchange, or SAFE. Foreign-invested enterprises may only buy, sell and/or
remit foreign currencies at those banks authorized to conduct foreign exchange business after providing valid commercial documents
and, in the case of capital account item transactions, obtaining approval from the SAFE. Capital investments by foreign-invested
enterprises outside of China are also subject to limitations, which include approvals by the Ministry of Commerce, the SAFE and the
State Reform and Development Commission.
Dividend Distributions
Under applicable PRC regulations, foreign-invested enterprises in China may pay dividends only out of their accumulated profits,
if any, determined in accordance with PRC accounting standards and regulations. In addition, a foreign-invested enterprise in China
is required to set aside at least 10.0% of its after-tax profits each year to its general reserves until the cumulative amount of such
reserves has reached 50.0% of its registered capital. These reserves are not distributable as cash dividends. The board of directors
of a foreign-invested enterprise has the discretion to allocate a portion of its after-tax profits to staff welfare and bonus funds, which
may not be distributed to equity owners except in the event of liquidation.
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Employees
As of December 31, 2013, we had approximately 532 full-time employees, all of whom were located in PRC except for our chief
financial officer. There are no collective bargaining contracts covering any of our employees. We believe our relationship with our
employees is satisfactory. Our full-time employees are entitled to employee benefits including medical care, work related injury
insurance, maternity insurance, unemployment insurance and pension benefits through a Chinese government mandated multi-
employer defined contribution plan. We are required to accrue those benefits based on certain percentages of the employees’ salaries
and make contributions to the plans out of the amounts accrued for medical and pension benefits. The total provisions and
contributions made for such employee benefits was $252,564 and $234,753 for the years ended December 31, 2013, and 2012,
respectively. The Chinese government is responsible for the medical benefits and the pension liability paid to these employees.
Effective from January 1, 2008, the PRC has introduced a labor contract law that enhances rights for the nation’s workers,
including open-ended work contracts and severance payments, and requires employers to enter into labor contracts with their
workers in writing, restricts the use of temporary laborers and makes it harder to lay off employees. It also requires that employees
with a fixed-term contract be entitled to an indefinite-term contract after the fixed-term contract has been renewed twice. Although the
labor contract law could increase our labor costs, we do not anticipate there will be any significant effects on our overall profitability
in the near future because such amount was historically not material to our operating cost. Management anticipates this may be a
step toward improving candidate retention for skilled workers.
Company History
Since December 2009, we have been engaged in the design, manufacturing and sale of gold jewelry in the PRC via a variable
interest entity relationship with Wuhan Kingold, a PRC company.
We were initially incorporated in 1995 in Delaware as Vanguard Enterprises, Inc. In 1999, we changed our corporate name to
Activeworlds.com, Inc. (and subsequently to Activeworlds Corp.), and through a wholly-owned subsidiary we provided internet
software products and services that enabled the delivery of three-dimensional content over the internet. We operated that business
until September 11, 2002, when we sold that business to our former management and we became a shell company with no
significant business operations. As a result of the consummation of a reverse acquisition transaction as described below, on
December 23, 2009, we ceased to be a shell company and became an indirect holding company for Wuhan Vogue-Show Jewelry
Co., Limited, or Vogue-Show, through Dragon Lead Group Limited, or Dragon Lead.
Acquisition of Kingold and Name Change
In December 2009, we acquired 100% of Dragon Lead from the shareholders of Dragon Lead in a share exchange transaction
pursuant to which the shareholders of Dragon Lead exchanged 100% ownership in Dragon Lead for 33,104,234 shares of our
common stock. As a result, Dragon Lead became our wholly owned subsidiary. Dragon Lead owns 100% of Vogue-Show and
Vogue-Show controls Wuhan Kingold through a series of variable interest entity agreements. We currently operate through Dragon
Lead and Vogue-Show.
In February 2010, we changed our name to Kingold Jewelry, Inc. to better reflect our business.
Organizational History of Dragon Lead and its Subsidiaries
Dragon Lead, a British Virgin Islands, or BVI corporation, was incorporated in the BVI on July 1, 2008 as an investment holding
company. Dragon Lead owns 100% of the ownership interest in Vogue-Show.
Vogue-Show was incorporated in the PRC as a wholly foreign owned enterprise, or WFOE, on February 16, 2009. Wuhan
Kingold was incorporated in the PRC as a limited liability company on August 2, 2002 by Zhihong Jia, as the major shareholder, and
Xue Su Yue who sold her shares in Wuhan Kingold to Zhihong Jia and Chen Wei in 2003. On October 26, 2007, Wuhan Kingold was
restructured as a joint stock company limited by shares. Its business activities are principally the design and manufacture of gold
ornaments in the PRC. Wuhan Kingold’s business license will expire on March 4, 2021 and is renewable upon expiration. The
registered and paid-in capital of Wuhan Kingold is RMB120 million.
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The Vogue-Show/Wuhan Kingold VIE Relationship
On June 30, 2009, Vogue-Show entered into a series of agreements with Wuhan Kingold and shareholders holding 95.83% of the
outstanding equity of Wuhan Kingold under which Wuhan Kingold agreed to pay 95.83% of its after-tax profits to Vogue-Show and
shareholders owning 95.83% of Wuhan Kingold’s shares have pledged their and delegated their voting power in Wuhan Kingold to
Vogue-Show. Such share pledge is registered with the PRC Administration for Industry and Commerce. These agreements were
subsequently amended on October 20, 2011, when the minority stockholder holding 4.17% of the equity of Wuhan Kingold became a
party to the applicable VIE agreements. Following execution of the amendments, shareholders holding 100% of the outstanding
equity of Wuhan Kingold were parties to the agreements such that Wuhan Kingold has agreed to pay 100% of its after-tax profits to
Vogue-Show and shareholders owning 100% of Wuhan Kingold’s shares have pledged and delegated their voting power in Wuhan
Kingold to Vogue-Show.
The VIE agreements, which are described below, currently cover 100% of the equity interest in Wuhan Kingold, and were initially
created so that upon the closing of the reverse acquisition, as described below, we would be able to acquire control of Wuhan
Kingold, as explained below.
These contractual arrangements enable us to:
•
•
•
exercise effective control over our variable interest entity, Wuhan Kingold;
receive substantially all of the economic benefits from variable interest entity, Wuhan Kingold; and
have an exclusive option to purchase 100% of the equity interest in our variable interest entity, Wuhan Kingold, when and to
the extent permitted by PRC law.
Through such arrangement, Wuhan Kingold has become Vogue-Show’s contractually controlled affiliate. In addition, Wuhan
Kingold shareholders agreed to grant Vogue-Show a ten-year option to purchase a 100% equity interest in Wuhan Kingold at a price
based on an appraisal provided by an asset evaluation institution that will be jointly appointed by Vogue-Show and the Wuhan
Kingold shareholders. Concurrently, Wuhan Kingold agreed to grant Vogue-Show a ten-year option to purchase all of Wuhan
Kingold’s assets at a price based on an appraisal provided by an asset evaluation institution that will be jointly appointed by Vogue-
Show and Wuhan Kingold.
The VIE Agreements
Our relationship with Wuhan Kingold and its shareholders is governed by a series of contractual arrangements, which agreements
provide as follows:
Exclusive Management Consulting and Technical Support Agreement. On June 30, 2009, Vogue-Show initially entered into
an Exclusive Management Consulting and Technical Support Agreement with Wuhan Kingold, as subsequently amended, which
agreement provided that Vogue-Show will be the exclusive provider of management consulting services to Wuhan Kingold, and
obligated Vogue-Show to provide services to fully manage and control all internal operations of Wuhan Kingold, in exchange for
receiving 95.83% of Wuhan Kingold’s profits. On October 20, 2011, Wuhan Kingold and Vogue-Show amended this agreement such
that Wuhan Kingold is now obligated to pay 100% of its after-tax profits to Vogue-Show. Payments will be made on a monthly basis.
The term of this agreement will continue until it is either terminated by mutual agreement of the parties or until such time as Vogue-
Show shall acquire 100% of the equity or assets of Wuhan Kingold.
Shareholders’ Voting Proxy Agreement. On June 30, 2009, shareholders holding 95.83% of the equity interest in Wuhan
Kingold entered into a Shareholders’ Voting Proxy Agreement authorizing Vogue-Show to exercise any and all shareholder rights
associated with their ownership in Wuhan Kingold, including the right to attend and vote their shares at shareholders’ meetings, the
right to call shareholders’ meetings and the right to exercise all other shareholder voting rights as stipulated in the Articles of
Association of Wuhan Kingold. Following the October 20, 2011 amendment to this agreement, shareholders holding 100% of the
equity interest in Wuhan Kingold have now entered into the Shareholders’ Voting Proxy Agreement. The term of this agreement will
continue until it is either terminated by mutual agreement of the parties or until such time as Vogue-Show shall acquire 100% of the
equity or assets of Wuhan Kingold.
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Purchase Option Agreement. On June 30, 2009, shareholders holding 95.83% of the equity interest in Wuhan Kingold entered
into a Purchase Option Agreement with Vogue-Show, which provided that Vogue-Show will be entitled to acquire such Shareholders’
shares in Wuhan Kingold upon certain terms and conditions, if such a purchase is or becomes allowable under PRC laws and
regulations. The Purchase Option Agreement also grants to Vogue-Show an option to purchase all of the assets of Wuhan Kingold.
Following the October 20, 2011 amendment to this agreement, shareholders holding 100% of the equity interest in Wuhan Kingold
have now entered into the Purchase Option Agreement. The exercise price for either the shares or the assets is to be as determined
by a qualified third party appraiser. The term of this agreement is ten years from the date thereof.
Pledge of Equity Agreement. On June 30, 2009, shareholders holding 95.83% of the equity interest in Wuhan Kingold entered
into a Pledge of Equity Agreement, pursuant to which each such shareholder pledges all of his shares of Wuhan Kingold to Vogue-
Show in order to guarantee performance under the Exclusive Management Consulting and Technical Support Agreement,
Shareholders’ Voting Proxy Agreement and the Purchase Option Agreement. Following the October 20, 2011 amendment to this
agreement, shareholders holding 100% of the equity interest in Wuhan Kingold have now entered into the Pledge of Equity
Agreement. If Wuhan Kingold or any of its respective shareholders breaches its respective contractual obligations, Vogue-Show, as
pledgee, will be entitled to certain rights, including the right to foreclose on the pledged equity interests.
Reverse Acquisition and Private Placement
On September 29, 2009, we entered into an Agreement and Plan of Reverse Acquisition with Vogue-Show, Dragon Lead, and the
stockholders of Dragon Lead, or the Dragon Lead Stockholders. Pursuant to the acquisition agreement, we agreed to acquire 100%
of the issued and outstanding capital stock of Dragon Lead in exchange for the issuance of 33,104,234 newly issued shares of our
common stock. The acquisition agreement closed on or about December 23, 2009. Following the closing, Dragon Lead became our
wholly-owned subsidiary.
The purpose of the reverse acquisition was to acquire control over Wuhan Kingold. We did not acquire Wuhan Kingold directly
through the issuance of stock to Wuhan Kingold’s stockholders because under PRC law it is uncertain whether a share exchange
would be legal. We instead chose to acquire control of Wuhan Kingold through the acquisition of Vogue-Show and the VIE
arrangements previously described in this Annual Report on Form 10-K. Certain rules and regulations in the PRC restrict the ability of
non-PRC companies that are controlled by PRC residents to acquire PRC companies. There is significant uncertainty as to whether
these rules and regulations require transactions of the type contemplated by our VIE arrangements, or of the type contemplated by
the Call Option described below, to be approved by the PRC Ministry of Commerce, the China Securities and Regulatory
Commission, or other agencies. For a discussion of the risks and uncertainties arising from these PRC rules and regulations, see
“Risk Factors — Risks Related to Doing Business in the PRC — Recent PRC regulations relating to acquisitions of PRC companies
by foreign entities may create regulatory uncertainties that could restrict or limit our ability to operate. Our failure to obtain the prior
approval of the China Securities Regulatory Commission, or CSRC for the listing and trading of our common stock could have a
material adverse effect on our business, operating results, reputation and trading price of our common stock,” beginning on page 21.
On December 23, 2009, immediately prior to the closing of the reverse acquisition, we completed a private placement with 14
investors. Pursuant to a securities purchase agreement entered into with the investors, we sold an aggregate of 5,120,483 newly
issued shares of our common stock at $0.996 per share, for aggregate gross proceeds of approximately $5.1 million. The investors in
the private placement also received five-year warrants to purchase up to 1,024,096 shares of common stock at the price of $0.996 per
share. After commissions and expenses, we received net proceeds of approximately $4.55 million in the private placement. In
addition, five-year warrants to purchase up to 1,536,145 shares of common stock at the price of $0.996 per share were issued to
various consultants who assisted in the transaction.
All share and per share information for dates prior to August 10, 2010 concerning our common stock in the above discussion
reflects a 1-for-2 reverse stock split.
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As a result of the above transactions, we ceased being a “shell company” as defined in Rule 12b-2 under the Securities Act.
Also, on December 23, 2009, Fok Wing Lam Winnie (whose Mandarin name is Huo Yong Lin), the sole shareholder of Famous
Grow and the majority shareholder of Dragon Lead prior to the closing of the reverse acquisition, entered into a call option agreement,
as amended and restated, or call option, with Zhihong Jia and Bin Zhao to comply with PRC regulations that restrict PRC residents
from owning offshore entities like us in direct exchange for their shares in the PRC operating company and as an inducement to
encourage them to provide services to Wuhan Kingold and our company. The call option does not include a vesting schedule and
continued employment is not a condition to the call option. Under the call option, as amended and restated, Fok Wing Lam Winnie
granted to Zhihong Jia and Bin Zhao the right to acquire up to 100% of the shares of Famous Grow at an exercise price of $1.00,
which is par value per share, or $0.001 per Famous Grow share, subject to any exercise notice at any time for a period of five years,
which was determined in an arm's length negotiation with the parties. While it is the case that our PRC counsel believes that this
arrangement is lawful under PRC laws and regulations, there are substantial uncertainties regarding the interpretation and application
of current and future PRC laws and regulations, including regulations governing the validity and legality of such call options.
Accordingly, we cannot assure you that PRC government authorities will not ultimately take a view contrary to the opinion of our PRC
legal counsel. For a discussion of the risks and uncertainties arising from these PRC rules and regulations, see “Risk Factors — Risks
Related to Doing Business in the PRC — Recent PRC regulations relating to acquisitions of PRC companies by foreign entities may
create regulatory uncertainties that could restrict or limit our ability to operate. Our failure to obtain the prior approval of the China
Securities Regulatory Commission, or CSRC for the listing and trading of our common stock could have a material adverse effect on
our business, operating results, reputation and trading price of our common stock,” beginning on page 21.
The following diagram illustrates our corporate structure as of the date of this Annual Report:
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Notes:
(1) Famous Grow is owned by Fok Wing Lam Winnie (whose Mandarin name is Huo Yong Lin). Pursuant to a Call Option
Agreement, our founder, chairman and chief executive officer Zhihong Jia, and general manager and director, Bin Zhao, have a
right to collectively acquire 100% of the ownership of Famous Grow.
(2) Wuhan Kingold is 55.31% owned by Zhihong Jia, our founder, chairman and chief executive officer, 1.67% owned by Bin Zhao,
our general manager and director, with the balance of 43.02% owned by a total of 45 other shareholders, who are all PRC
citizens. All of Wuhan Kingold’s shareholders have entered into the VIE agreements.
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ITEM 1A. RISK FACTORS
You should carefully consider each of the following risks associated with an investment in our publicly traded securities and all of the
other information in our 2013 Annual Report. Our business may also be adversely affected by risks and uncertainties not presently
known to us or that we currently believe to be immaterial. If any of the events contemplated by the following discussion of risks should
occur, our business, prospects, financial condition and results of operations may suffer.
Risks Related to our Business
Jewelry purchases are discretionary, may be particularly affected by adverse trends in the general economy, and an
economic decline will make it more difficult to generate revenue.
The success of our operations depends, to a significant extent, upon a number of factors relating to discretionary consumer
spending in China. These factors include economic conditions and perceptions of such conditions by consumers, employment rates,
the level of consumers’ disposable income, business conditions, interest rates, consumer debt levels, availability of credit and levels
of taxation in regional and local markets in China where we manufacture and sell our products. There can be no assurance that
consumer spending on jewelry will not be adversely affected by changes in general economic conditions in China and globally.
While the Chinese economy has experienced rapid growth in the past decade, such growth has been uneven among various
sectors of the economy and in different geographical areas of the country. Rapid economic growth can lead to growth in the money
supply and rising inflation. During the past two decades, the rate of inflation in China has been as high as approximately 20%. If
prices for our products rise at a rate that is insufficient to compensate for the rise in the costs of supplies such as raw materials, it may
have an adverse effect on our profitability. In recent years, Chinese economy has been slowing down, and in 2013, GDP growth was
7.7%. The slowing economy might have impact on consumer demand, which could adversely impact our business.
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. 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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Competition in the jewelry industry could cause us to lose market share, thereby materially and adversely affecting our
business, results of operations and financial condition.
The jewelry industry in China is highly fragmented and very competitive. We believe that the market may become even more
competitive as the industry grows and/or consolidates. We compete with local jewelry manufacturers and large foreign multinational
companies that offer products that are similar to ours. Some of these competitors have larger local or regional customer bases, more
locations, more brand equity, and substantially greater financial, marketing and other resources than we have. As a result of this
increasing competition, we could lose market share, thereby materially and adversely affecting our business, results of operations
and financial condition.
We may need to raise additional funds in the future. These funds may not be available on acceptable terms or at all, and,
without additional funds, we may not be able to maintain or expand our business.
Our operations require substantial funds to finance our operating expenses, to maintain and expand our manufacturing, marketing
and sales capabilities and to cover public company costs. Without these funds, we may not be able to meet our goals.
We may seek additional funding through public or private financing or through collaborative arrangements with strategic partners.
However, you should also be aware that in the future:
•
•
•
we cannot be certain that additional capital will be available on favorable terms, if at all;
any available additional financing may not be adequate to meet our goals; and
any equity financing would result in dilution to stockholders.
If we cannot raise additional funds when needed, or on acceptable terms, we may not be able to effectively execute our growth
strategy take advantage of future opportunities, or respond to competitive pressures or unanticipated requirements. In addition, we
may be required to scale back or discontinue expansion plans, or obtain funds through strategic alliances that may require us to
relinquish certain rights.
We recently acquired land-use rights and intend to develop industrial land into what we expect to be called the Kingold
Jewelry International Industry Park for approximately RMB1.0 billion. Even if we are able to raise the necessary financing,
we have no prior experience developing industrial land, nor as being a landlord or operator of real estate. Accordingly,
there is a risk that we may not realize the value of this investment.
On October 23, 2013, Wuhan Kingold acquired the operating rights for 66,667 square meters (approximately 717,598 square feet,
or 16.5 acres) of industrial land for use in the development of the Jewelry Park for approximately RMB1.0 billion (approximately
US$164 million at the spot rate). The acquisition agreement contemplates development and construction of the parcel with payments
for the project made upon completion of certain building installments, as outlined in the agreement. We currently intend to finance the
development predominantly with bank loans supplemented by operating cash flows, and where possible, deposits or advances we
may receive from lessees. However, there can be no guarantee that we will be successful in raising the necessary financing from
these sources, or on terms that we deem commercially reasonable, and may either need to seek alternative sources of financing, or
abandon the project. Accordingly, there is a risk that we may not complete the development of the project. Further, the land is
currently designated as industrial, while our plans are for a commercial use. If we are not successful in modifying the land use, a
procedure that can be complicated and lengthy in the PRC, it could affect the value of our investment and our plans. Moreover, even
if we obtain certain sales certificates giving us effectively the right to use the land for commercial purposes in the PRC, there can be
no guarantee that future government policies will continue to interpret land use regulations in this manner, and we may have to
undertake a formal modification of the land use registration.
In addition, even if we are successful in building out the Jewelry Park, which we currently intend to complete by mid-2015, there
can be no guarantee that we will be successful in attracting tenants to our project, or that even if we attract tenants, that it will be a
successful business endeavor. Accordingly, there is a risk that we may never realize the full benefit from this investment.
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Our ability to maintain or increase our revenue could be harmed if we are unable to strengthen and maintain our brand
image.
We believe that the primary factors in facilitating customer buying decisions in China’s jewelry sector include price, confidence in
the merchandise sold, and the level and quality of customer service. The ability to differentiate our products from competitors’ by our
brand-based marketing strategies is a key factor in attracting consumers, and if our strategies and efforts to promote our brand, such
as television and magazine advertising and beauty contest sponsorships fail to garner brand recognition, our ability to generate
revenue may suffer. If we are unable to differentiate our products, our ability to sell our products wholesale and our planned sale of
products retail will be adversely affected. If we fail to identify or react appropriately or timely to customer buying decisions, we could
experience a reduction in consumer recognition of our products, a diminished brand image, higher markdowns, and costs to recast
overstocked jewelry. These factors could result in lowering selling prices and sales volumes for our products, which could adversely
affect our financial condition and results of operations
There is only one source in China for us to obtain the precious metals used in our jewelry products; accordingly, any
interruptions of our arrangement with this source would disrupt our ability to fulfill customer orders and substantially affect
our ability to continue our business operations.
Under PRC law, the supply of precious metals such as platinum, gold, and silver is highly regulated by PRC government
agencies. The Exchange is the only supplier in China for gold used for our jewelry products (including the gold we lease from leading
PRC banks). We are required to obtain and maintain several membership and approval certificates from government agencies in
order to do business involving precious metals. The loss of our relationship or failure to renew our membership with the Exchange, or
its inability to furnish precious metals to us (or the banks we lease from) as anticipated in terms of cost, quality, and timeliness, would
adversely affect our ability to fulfill customer orders in accordance with our required delivery, quality, and performance requirements.
If this situation were to occur, we would not have any alternative suppliers in China to obtain our raw materials from, which would
result in a decline in revenue and revenue potential, and ultimately risk the overall continuation of our business operations.
If we are not able to adapt to changing jewelry trends in China, our inventory may be overstocked and we may be forced to
reduce the price of our overstocked jewelry or incur the cost to recast it into new jewelry.
Our jewelry sales depend on consumer fashions, preferences for jewelry and the demand for particular products in China. Jewelry
design trends in China can change rapidly. The ability to accurately predict future changes in taste, respond to changes in consumer
preferences, carry the inventory demanded by customers, deliver the appropriate quality, price products correctly, and implement
effective purchasing procedures all have an important influence on determining sales performance and maximizing gross margin. If
we fail to anticipate, identify or react appropriately to changes in styles and trends, we could experience excess inventories, higher
than normal markdowns or an inability to sell our products. If such a situation were to exist, we would need to incur additional costs to
recast our products to fit the demand, and the labor and manufacturing costs previously invested in the recast products would be lost.
Our failure to manage growth effectively could have an adverse effect on our employee efficiency, product quality, working
capital levels, and results of operations.
We intend to develop the retail distribution of our products, which we believe will result in rapid growth, but will also place
significant demands on our managerial, operational and financial resources. Any significant growth in the market for our current
wholesale business and our planned retail distribution would require us to expand our managerial, operational, financial, and other
resources. During any period of growth, we may face problems related to our operational and financial systems and controls,
including quality control and delivery and service capabilities. We also will need to continue to expand, train and manage our
employee base. If we are unable to successfully build these skills and expand our number of skilled management and staff, we may
be unsuccessful in achieving our intended level of growth.
Aside from increased difficulties in the management of human resources, we may also encounter working capital issues, as we
will need increased liquidity to finance the purchases of raw materials and supplies, development of new products and the hiring of
additional employees. Our failure to manage growth effectively may lead to operational and financial inefficiencies that will have a
negative effect on our profitability. We cannot assure you that we will be able to timely and effectively meet that demand and maintain
the quality standards required by our existing and potential customers.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
We rely on our distribution network for virtually all of our revenues. Failure to maintain good distributor relations could
materially disrupt our distribution business and harm our net sales.
Our business depends directly on the performance of roughly 300 of our major distributors, which we also refer to as our
customers. No customer accounted for more than 10% of our gross revenue in 2012 or 2013. As we do not have long-term contracts
with our distributors, it is critical that we maintain good relationships with them. However, maintaining good relationships with existing
distributors and replacing any distributor is difficult and time consuming. Our failure to maintain good relationships with our
distributors could materially disrupt our distribution business and harm our net sales.
We must maintain a relatively large inventory of our raw materials and jewelry products to support customer delivery
requirements, and if this inventory is lost due to theft, our results of operations would be negatively impacted.
We purchase large volumes of precious metals and store significant quantities of raw materials and jewelry products at our
warehouse and show room in Wuhan, China. Although we have an inventory security system in place, we may be subject to future
significant inventory losses due to third-party or employee theft from our warehouses or other forms of theft. The implementation of
enhanced security measures beyond those that we already utilize, which include onsite police station with direct deployment of
officers and instant access to Wuhan city police department, security cameras, and alarm systems in our warehouse, would increase
our operating costs. Also, any such losses of inventory could exceed the limits of, or be subject to an exclusion from, coverage under
our insurance policies. Claims filed by us under our insurance policies could lead to increases in the insurance premiums payable by
us or the termination of coverage under the relevant policy.
Our business could be materially adversely affected if we cannot protect our intellectual property rights.
We have developed trademarks, patents, know-how, trade-names and other intellectual property rights that are of significant
value to us. In particular, we have applied for patents on a limited number of designs of our jewelry products and trademarks as well.
However, the legal regime governing intellectual property in the PRC is still evolving and the level of protection of intellectual property
rights in the PRC may differ from those in other jurisdictions. Thus, it may be difficult to enforce our rights relating to these designs as
well as our trademarks. Any unauthorized use of, or other infringement upon our designs or trademarks, could result in potential
sales being diverted to such unauthorized sellers, and dilute the value of our brand.
We are dependent on certain key personnel, and the loss of these key personnel could have a material adverse effect on our
business, financial conditions and results of operations.
Our success, to a great extent, has been attributable to the management, sales and marketing, and operational and technical
expertise of certain key personnel. Moreover, our daily operation and performance rely heavily upon our senior management. There
can be no assurance that we will be able to retain these officers or that such personnel may not receive and/or accept competing
offers of employment. The loss of a significant number of these employees could have a material adverse effect upon our business,
financial condition, and results of operations. We do not maintain key-man life insurance for any of our senior management.
We have outstanding borrowings, and we may not be able to obtain extensions when they become mature.
Our notes payable to banks for short-term borrowings as of December 31, 2013 and 2012 were approximately $49.6 million and
$6.3 million, respectively. These loans are currently secured by restricted cash of approximately $7.4 million on deposit at the various
lender banks, as well as the personal credit of our Chairman and Chief Executive Officer. Our bank loans have been, and may be,
collateralized by gold inventory, our buildings, plant and machinery, as well as pledges of Au9995 gold (by both us and an affiliate) or
such other collateral as we may agree from time to time with the bank lender. Our notes payable to banks for long-term borrowings as
of December 31, 2013 and 2012 were approximately $29.0 million and $nil million, respectively. Interest expense paid for the years
ended December 31, 2013 and 2012 were $1.0 million and $0.4 million respectively.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Although we have renewed our borrowings in the past, we cannot assure you that we will be able to renew these loans in the
future as they mature or that we will choose to renew these loans 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, or if we choose not to obtain renewals of these
loans, 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 assure you that our business will generate sufficient cash flow from operations to repay these borrowings.
The loss or significant reduction in business of any of our key customers, or our inability to successfully execute our
planned expansion of our customer base, may affect our revenues and earnings.
We are dependent on a limited number of customers in China for a large portion of our business. During the year ended
December 31, 2013, approximately 27.4% of our net sales were generated from our five largest customers as compared to 25.0% for
the year ended December 31, 2012. Our largest customer accounted for approximately 6.5% of our net sales during the years ended
December 31, 2013. All purchases of our products by customers are made through purchase orders and we do not have long-term
contracts with any of our customers. The loss of those customers, or any of our other customers to which we sell a significant amount
of our products, or any significant portion of orders from those customers, or any material adverse change in the financial conditions
of such customers could negatively affect our revenues and decrease our earnings, if we cannot find new customers in a timely
manner.
In 2014, we plan to expand our business beyond the borders of China and to avail ourselves of opportunities to develop customer
base in the fast-growing Middle East gold market. If our proposed joint venture with KSS to source gold, manufacture gold products,
and sell such products is not successful and we cannot find customers in a timely manner, we may not realize any benefit from our
investment of time and resources in pursuing this opportunity.
We may not maintain sufficient insurance coverage for the risks associated with our business operations. As a result, we
may incur uninsured losses.
Except for property, accident and automobile insurance, we do not have other insurance of such as business liability or disruption
insurance coverage for our operations in the PRC. As a result, we may incur uninsured liabilities and losses as a result of the conduct
of our business. There can be no guarantee that we will be able to obtain additional insurance coverage in the future, and even if we
are able to obtain additional coverage, we may not carry sufficient insurance coverage to satisfy potential claims. Should uninsured
losses occur, it could adversely affect our business, results of operations and financial condition.
Global financial crises and economic downturns may have an adverse effect on our businesses, results of operation and
financial condition.
Global economic conditions can have an effect on our business. If there is an additional global financial crisis or economic
downturn, such as that which occurred in 2008, it may adversely affect economies and businesses around the world, including in
China, which in turn will have an adverse impact on our business and operations.
Potential environmental liability could have a material adverse effect on our operations and financial condition.
As a manufacturer, we are subject to various Chinese environmental laws and regulations on air emission, waste water
discharge, solid wastes and noise. Although we believe that our operations are in substantial compliance with current environmental
laws and regulations, we may not be able to comply with these regulations at all times as the Chinese environmental legal regime is
evolving and becoming more stringent. Therefore, if the Chinese government imposes more stringent regulations in the future, we
may have to incur additional and potentially substantial costs and expenses in order to comply with new regulations, which may
negatively affect our results of operations. Further, no assurance can be given that all potential environmental liabilities have been
identified or properly quantified or that any prior owner, operator, or tenant has not created an environmental condition unknown to us.
If we fail to comply with any of the present or future environmental regulations in any material aspects, we may suffer from negative
publicity and be subject to claims for damages that may require us to pay substantial fines or force us to suspend or cease
operations.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Compliance with changing regulation of corporate governance and public disclosure will result in additional expenses.
Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley
Act of 2002 and related Commission regulations, have created uncertainty for public companies and significantly increased the costs
and risks associated with accessing the public markets and public reporting. Our management team will need to invest significant
management time and financial resources to more fully comply with both existing and evolving standards for public companies, which
will lead to increased general and administrative expenses and a diversion of management time and attention from revenue
generating activities to compliance activities.
Risks Related to Doing Business in the PRC
Substantially all of our assets are located in China and as of March 2014, all of our revenues are currently derived from our
operations in China, and changes in the political and economic policies of the PRC government could have a significant
impact upon what business we may be able to conduct in the PRC and accordingly on the results of our operations and
financial condition.
Our business operations may be adversely affected by the current and future political environment in the PRC. The Chinese
government exerts substantial influence and control over the manner in which we must conduct our business activities. Our ability to
operate in China may be adversely affected by changes in Chinese laws and regulations, including those relating to taxation, import
and export tariffs, raw materials, environmental regulations, land use rights, property and other matters. Under the current
government leadership, the government of the PRC has been pursuing economic reform policies that encourage private economic
activity and greater economic decentralization. There is no assurance, however, that the government of the PRC will continue to
pursue these policies, or that it will not significantly alter these policies from time to time without notice.
Our operations are subject to PRC laws and regulations that are sometimes vague and uncertain. Any changes in such PRC
laws and regulations, or the interpretations thereof, may have a material and adverse effect on our business.
The PRC’s legal system is a civil law system based on written statutes. Unlike the common law system prevalent in the United
States, decided legal cases have little value as precedent in China. There are substantial uncertainties regarding the interpretation
and application of PRC laws and regulations including, but not limited to, the laws and regulations governing our business, or the
enforcement and performance of our arrangements with customers in the event of the imposition of statutory liens, death, bankruptcy
or criminal proceedings. The Chinese government has been developing a comprehensive system of commercial laws, and
considerable progress has been made in introducing laws and regulations dealing with economic matters such as foreign investment,
corporate organization and governance, commerce, taxation and trade. However, because these laws and regulations are relatively
new, and because of the limited volume of published cases and judicial interpretation and their lack of force as precedents,
interpretation and enforcement of these laws and regulations involve significant uncertainties. New laws and regulations that affect
existing and proposed future businesses may also be applied retroactively.
One of our principal operating subsidiaries, Vogue-Show, is considered a foreign invested enterprise under PRC laws, and as a
result is required to comply with PRC laws and regulations, including laws and regulations specifically governing the activities and
conduct of foreign invested enterprises. We cannot predict what effect the interpretation of existing or new PRC laws or regulations
may have on our businesses. If the relevant authorities find us in violation of PRC laws or regulations, they would have broad
discretion in dealing with such a violation, including, without limitation:
•
•
•
•
levying fines;
revoking our business license, other licenses or authorities;
requiring that we restructure our ownership or operations; and
requiring that we discontinue some or all of our business.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The scope of our business license in China is limited, and we may not expand or continue our business without government
approval and renewal, respectively.
Our operating affiliate, Wuhan Kingold, can only conduct business within its business scope, as detailed on its business license.
Our license permits us to design, manufacture, sell and market jewelry products to department stores throughout the PRC and to
engage in the retail distribution of our products. Any amendment to the scope of our business requires further application and
government approval. In order for us to expand our business beyond the scope of our license, we will be required to enter into a
negotiation with the authorities for the approval to expand the scope of our business. We cannot assure you that Wuhan Kingold will
be able to obtain the necessary government approval for any change or expansion of our business scope.
Because our revenues are generated in RMB and 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
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. 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.
Our PRC stockholders are required to register with the State Administration of Foreign Exchange and their failure to do so
could cause us to lose our ability to remit profits out of the PRC as dividends.
The State Administration of Foreign Exchange, or SAFE, has promulgated several regulations, including Circular No. 75, or
Circular 75, which became effective in November 2005, requiring PRC residents, including both PRC legal person residents and PRC
natural person residents, to register with the competent local SAFE branch before establishing or controlling any company outside of
the PRC for the purpose of equity financing with assets or equities of PRC companies, referred to in Circular 75 as an “offshore
special purpose company.” PRC residents that have established or controlled an offshore special purpose company, which has
finished a round-trip investment before the implementation of Circular 75, are required to register their ownership interests or control
in such “special purpose vehicles” with the local offices of SAFE. Under Circular 75, the term “PRC legal person residents” as used in
Circular 75 refers to those entities with legal person status or other economic organizations established within the territory of the
PRC. The term “PRC natural person residents” as used in Circular 75 includes all PRC citizens and all other natural persons,
including foreigners, who habitually reside in the PRC for economic benefit. The term “special purpose vehicle” refers to an offshore
entity established or controlled, directly or indirectly, by PRC residents or PRC entities for the purpose of seeking offshore equity
financing using assets or interests owned by such PRC residents or PRC entities in onshore companies, and the term “round-trip
investment” refers to the direct investment in the PRC by PRC residents through “special purpose vehicles,” including without
limitation, establishing foreign invested enterprises and using such foreign invested enterprises to purchase or control (by way of
contractual arrangements) onshore assets.
In addition, any PRC resident that is the shareholder of an offshore special purpose company is required to amend his/her/its
SAFE registration with the local SAFE branch upon (i) injection of equity interests or assets of an onshore enterprise to the offshore
entity, or (ii) subsequent overseas equity financing by such offshore entity. PRC residents are also required to complete amended
registrations or filing with the local SAFE branch within 30 days of any material change in the shareholding or capital of the offshore
entity not involving a round-trip investment, such as changes in share capital, share transfers and long-term equity or debt
investments, of already organized, or gained control of, offshore entities that have made onshore investments in the PRC before
Circular 75 was promulgated must register with their shareholdings in the offshore entities with the local SAFE branch on or before
March 31, 2006.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Under Circular 75, PRC residents are further required to repatriate into the PRC all of their dividends, profits or capital gains
obtained from their shareholdings in the offshore entity within 180 days of their receipt of such dividends, profits or capital gains. The
registration and filing procedures under the Circular 75 are prerequisites for other approval and registration procedures necessary for
capital inflow from the offshore entity, such as inbound investments or shareholders loans, or capital outflow to the offshore entity,
such as the payment of profits or dividends, liquidating distributions, equity sale proceeds, or the return of funds upon a capital
reduction.
To further clarify the implementation of Circular 75, SAFE issued Circular No. 106, or Circular 106, on May 9, 2007, which is a
guidance that SAFE issued to its local branches with respect to the operational process for SAFE registration that standardizing
mores specific and stringent supervision on the registration relating to the Circular 75. Under Circular 106, PRC subsidiaries of an
offshore special purpose company are required to coordinate and supervise the filing of SAFE registrations by the offshore holding
company’s shareholders who are PRC residents in a timely manner. If these shareholders and/or beneficial owners fail to comply, the
PRC subsidiaries are required to report such failure to the local SAFE authorities and, if the PRC subsidiaries do report the failure,
the PRC subsidiaries may be exempted from any potential liability to them related to the stockholders’ failure to comply. The failure of
these shareholders and/or beneficial owners to timely amend their SAFE registrations pursuant to the Circular 75 and Circular 106 or
the failure of future shareholders and/or beneficial owners of our company who are PRC residents to comply with the registration
procedures set forth in the Circular 75 and Circular 106 may subject such shareholders, beneficial owners and/or our PRC
subsidiaries to fines and legal sanctions and may also limit our ability to contribute additional capital into our PRC subsidiaries, limit
our PRC subsidiaries ability to distribute dividends to our company or otherwise adversely affect our business.
These regulations apply to our stockholders who are PRC residents. As of the date of this Annual Report, our chairman and chief
executive officer, Zhihong Jia, and our general manager, Bin Zhao, have obtained their registrations under Circular 75, and the other
PRC residents are in the process of obtaining such registrations. However, there is no assurance that such persons can successfully
complete such registrations, and there is no assurance that all of the PRC resident stockholders and beneficiary stockholders have
complied with and will comply with the SAFE registration requirements currently or in the future. In the event that these or other of our
PRC-resident stockholders do not follow the procedures required by SAFE, we could (i) be exposed to fines and legal sanctions, (ii)
lose the ability to contribute additional capital into our PRC subsidiaries or distribute dividends to our company, (iii) face liability for
evasion of foreign-exchange regulations, and/or (iv) lose the ability to consolidate the financial statements of our PRC subsidiaries
under applicable accounting principles.
Recent PRC regulations relating to acquisitions of PRC companies by foreign entities may create regulatory uncertainties
that could restrict or limit our ability to operate. Our failure to obtain the prior approval of the China Securities Regulatory
Commission, or CSRC for the listing and trading of our common stock could have a material adverse effect on our
business, operating results, reputation and trading price of our common stock.
On August 8, 2006, the PRC Ministry of Commerce, or MOFCOM, joined by the State-owned Assets Supervision and
Administration Commission of the State Council, the State Administration of Taxation, the State Administration for Industry and
Commerce, the China Securities Regulatory Commission, or CSRC, and SAFE, released a substantially amended version of the
Provisions for Foreign Investors to Merge with or Acquire Domestic Enterprises, or the Revised M&A Regulations, which took effect
September 8, 2006. These rules significantly revised China’s regulatory framework governing onshore-to-offshore restructurings and
foreign acquisitions of domestic enterprises. These rules signify greater PRC government attention to cross-border merger,
acquisition and other investment activities, by confirming MOFCOM as a key regulator for issues related to mergers and acquisitions
in China and requiring MOFCOM approval of a broad range of merger, acquisition and investment transactions. Further, these rules
establish reporting requirements for acquisition of control by foreigners of companies in key industries, and reinforce the ability of the
Chinese government to monitor and prohibit foreign control transactions in key industries.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
In addition, the Revised M&A Regulations include new provisions that purport to require that an offshore special purpose vehicle,
or SPV, formed for listing purposes and controlled directly or indirectly by PRC companies or individuals must obtain the approval of
the CSRC prior to the listing and trading of such SPV’s securities on any non-PRC stock exchange. On September 21, 2006, the
CSRC published on its official website procedures specifying documents and materials required to be submitted to it by SPVs seeking
CSRC approval of their overseas listings. However, the application of this PRC regulation remains unclear with no consensus
currently existing among the leading PRC law firms regarding the scope and applicability of the CSRC approval requirement.
Our wholly-owned BVI subsidiary, Dragon Lead, was formerly owned by eight BVI companies whose shareholders are non-PRC
individuals. We understand that some of these non-PRC individuals are nominee shareholders holding shares on behalf of and for the
interest of some PRC individuals and PRC companies who are also Wuhan Kingold minority shareholders. These minority Wuhan
Kingold shareholders do not have experience in conducting or managing businesses outside the PRC, and therefore believe that to
engage nominee shareholders to hold shares on their behalf are in their best commercial interest, and could provide them with
guidance when they evaluate whether to purchase, sell or dispose of our shares after the closing.
Also, on December 23, 2009, immediately before the reverse acquisition of Vogue Show, Fok Wing Lam Winnie (whose Mandarin
name is Huo Yong Lin), the sole shareholder of Famous Grow and the majority shareholder of Dragon Lead prior to the closing of the
reverse acquisition, entered into the call option with Zhihong Jia and Bin Zhao to comply with PRC regulations that restrict PRC
residents from owning offshore entities like us in direct exchange for their shares in the PRC operating company and as an
inducement to encourage them to provide services to Wuhan Kingold and our company. The call option does not include a vesting
schedule and continued employment is not a condition to the call option. Under the call option, as amended and restated, Fok Wing
Lam Winnie granted to Zhihong Jia and Bin Zhao certain call options to acquire up to 100% of the shares of Famous Grow at an
exercise price of $1.00, which is par value per share, or $0.001 per Famous Grow share, subject to any exercise notice, or Call
Option which was determined in an arm's length negotiation with the parties.
The PRC regulatory authorities may take the view that entry into the VIE Agreements by Vogue-Show and Wuhan Kingold and
entry into the call option agreement by Zhihong Jia, Bin Zhao and Fok Wing Lam Winnie may collectively constitute an onshore to
offshore restructuring and a related party acquisition under the M&A Regulations, because upon the consummation of these
transactions and after the Call Option is fully exercised, PRC individuals would become majority owners and effective controlling
parties of a foreign entity that acquired ownership of Wuhan Kingold. The PRC regulatory authorities may also take the view that the
relevant parties should fully disclose to the Wuhan SAFE or MOFCOM the overall restructuring arrangements, the existence of the
reverse acquisition and its connection with the VIE Agreement. Our PRC counsel has opined among other things that: (i) each of our
VIE agreements with Wuhan Kingold are valid and enforceable under relevant PRC laws, (ii) all government authorizations for the
execution, delivery, performance and enforcement of our VIE agreements have been obtained as required by PRC laws, (iii) the
ownership structure of Vogue Show and Wuhan Kingold created by our VIE agreements and the call options in favor of Zhihong Jia
and Bin Zhao do not violate any provisions of applicable PRC laws, and (iv) no PRC governmental approvals were required under the
Revised M&A Regulations in connection with our acquisition of our current ownership interests in any of our PRC subsidiaries or in
connection with the VIE agreements. Our PRC counsel has reviewed and approved of these statements.
We, however, cannot assure you that the PRC regulatory authorities, MOFCOM and CSRC will take the same view as our PRC
counsel. If the PRC regulatory authorities take the view that the reverse acquisition and VIE arrangement constitute a related party
acquisition under the revised M&A Regulations, we cannot assure you we will be able to obtain any approval required from the
national offices of MOFCOM or otherwise.
If the PRC regulatory authorities take the view that the call options or the VIE arrangement constitutes a related party acquisition
without the approval of the national offices of MOFCOM, they could invalidate the call options and VIE arrangement. We may also
face regulatory actions or other sanctions from the MOFCOM or other PRC regulatory agencies. These regulatory agencies may
impose fines and penalties on our operations in the PRC, limit our operating privileges in the PRC, or take other actions that could
have a material adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the
trading price of our shares.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
If we make equity compensation grants to persons who are PRC citizens, they may be required to register with the State
Administration of Foreign Exchange of the PRC, or SAFE. We may also face regulatory uncertainties that could restrict our
ability to adopt additional equity compensation plans for our directors and employees and other parties under PRC law.
On April 6, 2007, SAFE issued the “Operating Procedures for Administration of Domestic Individuals Participating in the Employee
Stock Ownership Plan or Stock Option Plan of An Overseas Listed Company,” also known as “Circular 78.” It is not clear whether
Circular 78 covers all forms of equity compensation plans or only those that provide for the granting of stock options. For any plans
that are so covered and are adopted by a non-PRC listed company, such as our company, after April 6, 2007, Circular 78 requires all
participants who are PRC citizens to register with and obtain approvals from SAFE prior to their participation in the plan. In addition,
Circular 78 also requires PRC citizens to register with SAFE and make the necessary applications and filings if they participated in an
overseas listed company’s covered equity compensation plan prior to April 6, 2007. We believe that the registration and approval
requirements contemplated in Circular 78 will be burdensome and time consuming.
Failure to comply with the United States Foreign Corrupt Practices Act could subject us to penalties and other adverse
consequences.
As we are a Delaware corporation, we are subject to the United States Foreign Corrupt Practices Act, which generally prohibits
U.S. companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining
business. Some foreign companies, including some that may compete with our company, may not be subject to these prohibitions.
Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices may occur from time-to-time in the PRC. We can make no
assurance, however, that our employees or other agents will not engage in conduct for which we might be held responsible. If our
employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences
that may have a material adverse effect on our business, financial condition and results of operations.
Under the New Enterprise Income Tax Law, we may be classified as a “resident enterprise” of China. Such classification will
likely result in unfavorable tax consequences to us and our non-PRC stockholders.
Under the New Enterprise Income Tax Law, or EIT Law, an enterprise established outside the PRC with its “de facto
management body” within the PRC is considered a resident enterprise and will be subject to the enterprise income tax at the rate of
25% on its worldwide income. The “de facto management body” is defined as the organizational body that effectively exercises
overall management and control over production and business operations, personnel, finance and accounting, and properties of the
enterprise. It remains unclear how the PRC tax authorities will interpret such a broad definition. If the PRC tax authorities determine
that we should be classified as a resident enterprise, then our worldwide income will be subject to income tax at a uniform rate of
25%, which may have a material adverse effect on our financial condition and results of operations. However, it remains unclear how
the PRC tax authorities will interpret the PRC tax resident treatment of an offshore company, like us, having indirect ownership
interests in PRC enterprises through intermediary holding vehicles.
Moreover, under the New EIT Law, foreign shareholders of an entity that is classified as a PRC resident enterprise may be
subject to a 10% withholding tax upon dividends payable by such entity, unless the jurisdiction of incorporation of the foreign
shareholder of such entity has a tax treaty with the PRC that provides for a reduced rate of withholding tax, and gains realized on the
sale or other disposition of shares, if such income is sourced from within the PRC. It remains unclear whether the dividends payable
by our PRC subsidiary or the gains our foreign shareholders may realize will be regarded as income from sources within the PRC if
we are classified as a PRC resident enterprise. Any such tax will reduce the returns on your investment in our Shares.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Because our business is located in the PRC, we may have difficulty establishing adequate management, legal and financial
controls, which we are required to do in order to comply with U.S. securities laws.
PRC companies have historically not adopted a Western style of management and financial reporting concepts and practices,
which includes strong corporate governance, internal controls and, computer, financial and other control systems. Most of our middle
and top management staff are not educated and trained in the Western system, and we may have difficulty hiring new employees in
the PRC with such training. In addition, we may need to rely on a new and developing communication infrastructure to efficiently
transfer our information from retail outlets to our headquarters. As a result of these factors, we may experience difficulty in
establishing management, legal and financial controls, collecting financial data and preparing financial statements, books of account
and corporate records and instituting business practices that meet Western standards. Therefore, we may, in turn, experience
difficulties in implementing and maintaining adequate internal controls as required under Section 404 of the Sarbanes-Oxley Act of
2002. This may result in significant deficiencies or material weaknesses in our internal controls, which could impact the reliability of
our financial statements and prevent us from complying with Commission rules and regulations and the requirements of the Sarbanes-
Oxley Act of 2002. Any such deficiencies, weaknesses or lack of compliance could have a materially adverse effect on our business.
You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original
actions in China or the Middle East based upon U.S. laws, including the federal securities laws, or other foreign laws
against us or our management.
All of our current operations, including the manufacturing and distribution of jewelry, are conducted in China, and are planned to
expand into the Middle East in 2014. Moreover, most of our directors and officers are nationals and residents of China. All or
substantially all of the assets of these persons are located outside the United States. As a result, it may not be possible to effect
service of process within the United States or elsewhere outside China upon these persons. In addition, uncertainty exists as to
whether the courts of China or the Middle East would recognize or enforce judgments of U.S. courts obtained against us or such
officers and/or directors predicated upon the civil liability provisions of the securities laws of the United States or any state thereof, or
be competent to hear original actions brought in China or the Middle East against us or such persons predicated upon the securities
laws of the United States or any state thereof.
Governmental control of currency conversions could prevent us from paying dividends.
All of our revenue is earned in RMB and current and future restrictions on currency conversions may limit our ability to use
revenue generated in RMB to make dividend or other payments in United States dollars. Although the PRC government introduced
regulations in 1996 to allow greater convertibility of the RMB for current account transactions, significant restrictions still remain,
including the restrictions that foreign-invested enterprises like us may buy, sell or remit foreign currencies only after providing valid
commercial documents at a PRC bank specifically authorized to conduct foreign-exchange business.
In addition, conversion of RMB for capital account items, including direct investment and loans, is subject to governmental
approval in the PRC, and companies are required to open and maintain separate foreign-exchange accounts for capital account
items. There is no guarantee that PRC regulatory authorities will not impose additional restrictions on the convertibility of the RMB.
These restrictions could prevent us from distributing dividends and thereby reduce the value of our stock.
Inflation in China may inhibit our ability to conduct business in China.
In recent years, the Chinese economy has experienced periods of rapid expansion and high rates of inflation. Rapid economic
growth can lead to growth in the money supply and rising inflation. If prices for our products rise at a rate that is insufficient to
compensate for the rise in the costs of supplies, it may have an adverse effect on profitability. These factors have led to the adoption
by Chinese government, from time to time, of various corrective measures designed to restrict the availability of credit or regulate
growth and contain inflation. High inflation may, in the future, cause Chinese government to impose controls on credit and/or prices,
or to take other action, which could inhibit economic activity in China, and thereby harm the market for our products.
Currency fluctuations and restrictions on currency exchange may adversely affect our business, including limiting our
ability to convert Chinese Renminbi into foreign currencies and, if Chinese Renminbi were to decline in value, reducing our
revenue in U.S. dollar terms.
Our reporting currency is the U.S. dollar and our operations in China use their local currency, the Renminbi, as their functional
currency. Substantially all of our revenue and expenses are in Chinese Renminbi. We are subject to the effects of exchange rate
fluctuations with respect to any of these currencies. For example, the value of the Renminbi depends to a large extent on Chinese
government policies and China’s domestic and international economic and political developments, as well as supply and demand in
the local market. Since 1994, the official exchange rate for the conversion of Renminbi to the U.S. dollar had generally been stable
and the Renminbi had appreciated slightly against the U.S. dollar. However, on July 21, 2005, the Chinese government changed its
policy of pegging the value of Chinese Renminbi to the U.S. dollar. Under the new policy, Chinese Renminbi may fluctuate within a
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
narrow and managed band against a basket of certain foreign currencies. It is possible that the Chinese government could adopt a
more flexible currency policy, which could result in more significant fluctuation of Chinese Renminbi against the U.S. dollar. We can
offer no assurance that Chinese Renminbi will be stable against the U.S. dollar or any other foreign currency.
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The income statements of our operations are translated into U.S. dollars at the average exchange rates in each applicable period.
To the extent the U.S. dollar strengthens against foreign currencies, the translation of these foreign currencies denominated
transactions results in reduced revenue, operating expenses and net income for our international operations. Similarly, to the extent
the U.S. dollar weakens against foreign currencies, the translation of these foreign currency denominated transactions results in
increased revenue, operating expenses and net income for our international operations. We are also exposed to foreign exchange
rate fluctuations as we convert the financial statements of our foreign subsidiaries into U.S. dollars in consolidation. If there is a
change in foreign currency exchange rates, the conversion of the foreign subsidiaries’ financial statements into U.S. dollars will lead
to a translation gain or loss that is recorded as a component of other comprehensive income. In addition, we have certain assets and
liabilities that are denominated in currencies other than the relevant entity’s functional currency. Changes in the functional currency
value of these assets and liabilities create fluctuations that will lead to a transaction gain or loss. We have not entered into
agreements or purchased instruments to hedge our exchange rate risks, although we may do so in the future. The availability and
effectiveness of any hedging transaction may be limited and we may not be able to successfully hedge our exchange rate risks.
Risks Related to the VIE Agreements
If the PRC government determines that the contractual arrangements through which we control Wuhan Kingold do not
comply with applicable regulations, our business could be adversely affected.
Although we believe our contractual relationships through which we control Wuhan Kingold comply with current licensing,
registration and regulatory requirements of the PRC, we cannot assure you that the PRC government would agree, or that new and
burdensome regulations will not be adopted in the future. If the PRC government determines that our structure or operating
arrangements do not comply with applicable law, it could revoke our business and operating licenses, require us to discontinue or
restrict our operations, restrict our right to collect revenues, require us to restructure our operations, impose additional conditions or
requirements with which we may not be able to comply, impose restrictions on our business operations or on our customers, or take
other regulatory or enforcement actions against us that could be harmful to our business.
The PRC government may determine that the VIE Agreements are not in compliance with applicable PRC laws, rules and
regulations.
Vogue-Show manages and operates our gold jewelry business through Wuhan Kingold pursuant to the rights it holds under the
VIE Agreements. Almost all economic benefits and risks arising from Wuhan Kingold’s operations are transferred to Vogue-Show
under these agreements. Details of the VIE Agreements are set out in “Business — Company History” of this Annual Report on page
9.
There are risks involved with the operation of our business in reliance on the VIE Agreements, including the risk that the VIE
Agreements may be determined by PRC regulators or courts to be unenforceable. Our PRC counsel has provided a legal opinion
that the VIE Agreements are binding and enforceable under PRC law, but has further advised that if the VIE Agreements were for
any reason determined to be in breach of any existing or future PRC laws or regulations, the relevant regulatory authorities would
have broad discretion in dealing with such breach, including:
•
•
imposing economic penalties;
discontinuing or restricting the operations of Vogue-Show or Wuhan Kingold;
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•
•
•
•
imposing conditions or requirements in respect of the VIE Agreements with which Vogue-Show may not be able to
comply;
requiring our company to restructure the relevant ownership structure or operations;
taking other regulatory or enforcement actions that could adversely affect our company’s business; and
revoking the business licenses and/or the licenses or certificates of Vogue-Show, and/or voiding the VIE Agreements.
Any of these actions could adversely affect our ability to manage, operate and gain the financial benefits of Wuhan Kingold, which
would have a material adverse impact on our business, financial condition and results of operations.
Our ability to manage and operate Wuhan Kingold under the VIE Agreements may not be as effective as direct ownership.
We conduct our jewelry processing and sales businesses in the PRC and generate virtually all of our revenues through the VIE
Agreements. Our plans for future growth are based substantially on growing the operations of Wuhan Kingold. However, the VIE
Agreements may not be as effective in providing us with control over Wuhan Kingold as direct ownership. Under the current VIE
arrangements, as a legal matter, if Wuhan Kingold fails to perform its obligations under these contractual arrangements, we may
have to (i) incur substantial costs and resources to enforce such arrangements, and (ii) reply on legal remedies under PRC law,
which we cannot be sure would be effective. Therefore, if we are unable to effectively control Wuhan Kingold, it may have an adverse
effect on our ability to achieve our business objectives and grow our revenues.
As the VIE agreements are governed by PRC law, we would be required to rely on PRC law to enforce our rights and
remedies under them; PRC law may not provide us with the same rights and remedies as are available in contractual
disputes governed by the law of other jurisdictions.
The VIE Agreements are governed by the PRC law and provide for the resolution of disputes through court proceedings pursuant
to PRC law. If Wuhan Kingold or its shareholders fail to perform the obligations under the VIE Agreements, we would be required to
resort to legal remedies available under PRC law, including seeking specific performance or injunctive relief, or claiming damages.
We cannot be sure that such remedies would provide us with effective means of causing Wuhan Kingold to meet its obligations, or
recovering any losses or damages as a result of non-performance. Further, the legal environment in China is not as developed as in
other jurisdictions. Uncertainties in the application of various laws, rules, regulations or policies in PRC legal system could limit our
liability to enforce the VIE Agreements and protect our interests.
The VIE Agreements may be subject to audit or challenge by PRC tax authorities. A finding that we owe additional taxes
could substantially reduce our net earnings and the value of your investment
Under PRC laws and regulations, arrangements and transactions among affiliated parties may be subject to audit or challenge by
the PRC tax authorities. We could face material and adverse tax and financial consequences if the PRC tax authorities determine that
the VIE Agreements do not represent arm’s-length prices. As a result of such a determination, the PRC tax authorities could adjust
any of the income in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among other things, result in a
reduction of expense deductions for PRC tax purposes recorded by us or Wuhan Kingold or an increase in taxable income, all of
which could increase our tax liabilities. In addition, the PRC tax authorities may impose late payment fees and other penalties on us
or Wuhan Kingold for under-paid taxes.
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Our shareholders have potential conflicts of interest with us which may adversely affect our business.
Zhihong Jia is our chief executive officer and our chairman, and is also the largest shareholder of Wuhan Kingold. There could be
conflicts that arise from time to time between our interests and the interests of Mr. Jia. There could also be conflicts that arise
between us and Wuhan Kingold that would require our shareholders and Wuhan Kingold’s shareholders to vote on corporate actions
necessary to resolve the conflict. There can be no assurance in any such circumstances that Mr. Jia will vote his shares in our best
interest or otherwise act in the best interests of our company. If Mr. Jia fails to act in our best interests, our operating performance
and future growth could be adversely affected. In addition, some or all of our shareholders could violate the non-competition
agreements they have signed with our company by diverting business opportunities from our company to others. In such event, our
business, financial condition and results of operation could be adversely affected.
We rely on the approval certificates and business license held by Vogue-Show and any deterioration of the relationship
between Vogue-Show and Wuhan Kingold could materially and adversely affect our business operations.
We operate our jewelry processing and sales businesses in China on the basis of the approval certificates, business license and
other requisite licenses held by Vogue-Show. There is no assurance that Vogue-Show will be able to renew its license or certificates
when their terms expire with substantially similar terms as the ones they currently hold.
Further, our relationship with Wuhan Kingold is governed by the VIE Agreements that are intended to provide us with effective
control over the business operations of Wuhan Kingold. However, the VIE Agreements may not be effective in providing control over
the application for and maintenance of the licenses required for our business operations. Wuhan Kingold could violate the VIE
Agreements, go bankrupt, suffer from difficulties in its business or otherwise become unable to perform its obligations under the VIE
Agreements and, as a result, our operations, reputations and business could be severely harmed.
If Vogue-Show exercises the purchase options it holds over Wuhan Kingold’s share capital and assets pursuant to the VIE
Agreements, the payment of the purchase price could materially and adversely affect our financial position.
Under the VIE Agreements, Wuhan Kingold’s shareholders have granted Vogue-Show a ten-year option to purchase 100% of the
share capital in Wuhan Kingold at a price determined by appraisal by an asset evaluation institution to be jointly appointed by Vogue-
Show and Wuhan Kingold’s shareholders. Concurrently, Wuhan Kingold granted Vogue-Show a ten-year option to purchase Wuhan
Kingold’s assets at a price determined by appraisal by such asset evaluation institution. As Wuhan Kingold is already our
contractually controlled affiliate, Vogue-Show’s exercising of the above two options would not bring immediate benefits to our
company, and payment of the purchase prices could adversely affect our financial position.
Risks Related to Our Common Stock
Following the exercise of his Call Option, our Chairman and Chief Executive Officer would exercise significant influence
over us.
Our chairman and chief executive officer, Zhihong Jia, will beneficially own or control approximately 24.5% of our outstanding
shares if he chooses to fully exercise his Call Option to purchase shares of Famous Grow. Mr. Jia thereafter could possibly have a
controlling influence in determining the outcome of any corporate transaction or other matters submitted to our stockholders for
approval, including mergers, consolidations and the sale of all or substantially all of our assets, election of directors, and other
significant corporate actions. Mr. Jia may also have the power to prevent or cause a change in control. In addition, without the
consent of Mr. Jia, we could be prevented from entering into transactions that could be beneficial to us. The interests of Mr. Jia may
differ from the interests of our other stockholders.
We do not foresee paying cash dividends in the foreseeable future and, as a result, our investors’ sole source of gain, if
any, will depend on capital appreciation, if any.
We do not plan to declare or pay any cash dividends on our shares of common stock in the foreseeable future and currently
intend to retain any future earnings for funding growth. As a result, investors should not rely on an investment in our securities if they
require the investment to produce dividend income. Capital appreciation, if any, of our shares may be investors’ sole source of gain
for the foreseeable future. Moreover, investors may not be able to resell their shares of our company at or above the price they paid
for them.
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Because we do not intend to pay dividends on our shares, stockholders will benefit from an investment in our shares only if those
shares appreciate in value.
We currently intend to retain all future earnings, if any, for use in the operations and expansion of the business. As a result, we do not
anticipate paying cash dividends in the foreseeable future. Any future determination as to the declaration and payment of cash
dividends will be at the discretion of our board of directors and will depend on factors our board of directors deems relevant, including
among others, our results of operations, financial condition and cash requirements, business prospects, and the terms of our credit
facilities, if any, and any other financing arrangements. Accordingly, realization of a gain on stockholders’ investments.
The market price for our shares may be volatile.
The market price for our shares is likely to be highly volatile and subject to wide fluctuations in response to factors including the
following:
•
•
•
•
•
•
•
actual or anticipated fluctuations in our quarterly operating results and changes or revisions of our expected results;
changes in financial estimates by securities research analysts;
conditions in the markets for our products;
changes in the economic performance or market valuations of companies specializing in gold jewelry;
announcements by us, or our competitors of new products, acquisitions, strategic relationships, joint ventures or capital
commitments;
addition or departure of senior management and key personnel; and
fluctuations of exchange rates between the RMB and the U.S. dollar.
The market price for our shares increased from $1.17 on January 2, 2013 to $2.13 on October 17, 2013, and then dropped to
$1.68 as of December 31, 2013. Volatility in the price of our shares may result in shareholder litigation that could in turn result in
substantial costs and a diversion of our management’s attention and resources.
The financial markets in the United States and other countries have experienced significant price and volume fluctuations, and
market prices have been and continue to be extremely volatile. Volatility in the price of our shares may be caused by factors outside
of our control and may be unrelated or disproportionate to our results of operations. In the past, following periods of volatility in the
market price of a public company’s securities, shareholders have frequently instituted securities class action litigation against that
company. Litigation of this kind could result in substantial costs and a diversion of our management’s attention and resources.
If we continue to fail to maintain effective internal control over financial reporting or effective disclosure controls and
procedures, the price of our common stock may be adversely affected.
We are required to establish and maintain appropriate internal control over financial reporting and put in place appropriate
disclosure controls and procedures to allow our management to make timely decisions regarding required disclosures. Failure to
establish those controls, or any failure of those controls once established, could adversely impact our public disclosures regarding
our business, financial condition or results of operations. Any failure of our internal control over financial reporting could also prevent
us from maintaining accurate accounting records and discovering accounting errors and financial fraud.
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For 2013, our management determined that we had a material weakness in our internal control over financial reporting due to
some problems with cash management, as well as continued ineffective disclosure controls and procedures, and other significant
deficiencies due to inadequate controls over the appropriate approval procedures for certain material transactions, inadequate
controls over certain material cash transactions, and lack of technical competency in review and recording of non-routine or complex
transactions. Although we intend to put in place a remedial plan to rectify such material weakness in 2014, and have already adopted
resolutions limiting the power of management to engage in certain transactions above a certain financial threshold absent board
approval, issues could arise in the future. Moreover, our management concluded that our disclosure controls and procedures
continued to be ineffective this year because we continued to fail to disclose the entry into certain material agreements within the time
periods required by the Commission.
Although we are evaluating how to improve the effectiveness of our disclosure controls and procedures and are evaluating
additional remedial measures, such efforts may not be successful. In addition, management’s assessment of internal control over
financial reporting may identify additional material weaknesses or significant deficiencies that need to be addressed or other potential
matters that may raise concerns for investors. Any actual or perceived material weaknesses or significant deficiencies that need to be
addressed in our internal control over financial reporting, or the actual or perceived ineffectiveness of our disclosure controls and
procedures could have an adverse impact on the price of our common stock.
New SEC regulations concerning conflict minerals could negatively impact our business.
In response to provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act, in August 2012, the Securities and
Exchange Commission adopted annual disclosure and reporting requirements regarding the use of certain minerals, known as
“conflict minerals,” mined from the Democratic Republic of Congo (“DRC”) and adjoining countries. Conflict minerals include gold.
These new requirements and the changes we may adopt as a result of compliance with them may prove both costly and time-
consuming. The disclosure requirements, which begin in 2014, will necessitate due diligence efforts to identify the sources of conflict
minerals contained in our products. Because we currently acquire our gold directly from the Exchange or leading Chinese banks, or
lease it from leading Chinese banks, there is uncertainty as to the amount of diligence we may be able to do on our supply chain.
Further, we now plan to expand into the Middle East, which will add additional sources of gold, but raise additional challenges for us
to diligence our supply chain.
Implementation of these regulations will require us to divert management attention and resources away from our business
operations. In addition, as conflict-free minerals may only be available from a limited pool of suppliers, it may or may not include the
Exchange, our primary source of gold. In addition, if we are unable to sufficiently verify the origin of all conflict minerals used in our
products, we may face reputational challenges with customers, stockholders, or other stakeholders.
Our quarterly results may fluctuate because of many factors and, as a result, investors should not rely on quarterly
operating results as indicative of future results.
Fluctuations in operating results or the failure of operating results to meet the expectations of public market analysts and investors
may negatively impact the value of our securities. Quarterly operating results may fluctuate in the future due to a variety of factors
that could affect revenues or expenses in any particular quarter. Fluctuations in quarterly operating results could cause the value of
our securities to decline. Investors should not rely on quarter-to-quarter comparisons of results of operations as an indication of future
performance. As a result of the factors listed below, it is possible that in future periods the results of operations may be below the
expectations of public market analysts and investors. This could cause the market price of our securities to decline. Factors that may
affect our quarterly results include:
•
•
vulnerability of our business to a general economic downturn in China;
fluctuation and unpredictability of costs related to the gold, platinum and precious metals and other commodities used to
manufacture our products;
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•
•
•
•
seasonality of our business;
changes in the laws of the PRC that affect our operations;
competition from our competitors; and
our ability to obtain all necessary government certifications and/or licenses to conduct our business.
We may need additional capital, and the sale of additional shares or equity or debt securities could result in additional
dilution to our shareholders.
We believe that our current cash and cash equivalents and anticipated cash flow from operations will be sufficient to meet our
anticipated cash needs for the foreseeable future. We may, however, require additional cash resources due to changed business
conditions or other future developments, including any investments or acquisitions we may decide to pursue. If these resources are
insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain one or more additional
credit facilities. The sale of additional equity securities could result in additional dilution to our shareholders. The incurrence of
indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would
restrict our operations. It is uncertain whether financing will be available in amounts or on terms acceptable to us, if at all.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our principal executive offices and our factory are located in #15 Huangpu Science and Technology Park, Jiang’an District,
Wuhan, Hubei Province, China, with a total construction area of approximately 74,933 square feet built on a parcel of state owned
land. We own all of our office and factory facilities except for land with regard to which we own land use rights. There is no private
ownership of land in the PRC. All land ownership is held by the government of the PRC, its agencies and collectives. Land use rights
can be transferred upon approval by the land administrative authorities of the PRC (State Land Administration Bureau) upon payment
of the required land transfer fee. Our land use certificate for our current offices and factory expires on January 26, 2055. Our Vogue-
Show subsidiary rents 96 square meters of office space from Wuhan Kingold at an annual rental rate of $1,500 per year. The lease on
this office space expires at the end of January, 2022.
We believe that our current offices and facilities are adequate to meet our needs, and that additional facilities will be available for
lease, if necessary, to meet our future needs.
In October 2013, Wuhan Kingold our controlled subsidiary, entered into an agreement with Wuhan Wansheng House Purchasing
Limited to acquire 100% ownership of the Shanghai Creative Industry Park, which is proposed to be renamed the Kingold Jewelry
International Industry Park, which we refer to as the Jewelry Park. The Park is located at No. 12, Han Huang Road, Jiang’An District,
Wuhan.
Pursuant to the Agreement, we acquired the operating rights for 66,667 square meters (approximately 717,598 square feet, or
16.5 acres) of industrial land for use in the development of the Jewelry Park, and authorized Wuhan Wansheng, as agent, to complete
construction of the Jewelry Park. The total floor space of the Jewelry Park is expected to be approximately 193,000 square meters
(approximately 2,068,275 square feet). We plan to utilize the completed Jewelry Park as our new operation center, an additional
manufacturing facility, as well as a show center and space for both Kingold as well as other jewelry manufacturers in China.
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ITEM 3. LEGAL PROCEEDINGS
From time to time, we may be subject to legal proceedings and claims in the ordinary course of business. We are not currently a
party to any litigation the outcome of which, if determined adversely to us, would individually or in the aggregate be reasonably
expected to have a material adverse effect on our business, operating results, cash flows or financial condition.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is listed on the NASDAQ Capital Market under the symbol “KGJI.” Prior to August 18, 2010, our common
stock was listed for quotation on the OTC Bulletin Board or, the OTCBB, under the symbol “KGJI.”
The following table sets forth, for the periods indicated, the range of quarterly high and low sales prices for our common stock in
U.S. dollars. Prior to our listing on the NASDAQ Capital Market, these quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission, involving our common stock during each calendar quarter, and may not represent actual transactions.
2013
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2012
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Holders
High
Low
$
$
$
$
$
$
$
$
1.60 $
1.50 $
1.74 $
2.45 $
2.24 $
2.93 $
1.86 $
1.55 $
1.08
1.09
0.96
1.52
1.12
1.34
1.31
0.97
On March 28, 2013, the closing sale price of our shares of common stock was $1.62 per share and there were 65,953,462 shares
of our common stock outstanding. On that date, our shares of common stock were held by approximately 82 shareholders of record.
The number of record holders was determined from the records of our transfer agent and does not include beneficial owners of our
common stock whose shares are held in the names of various security brokers, dealers, and registered clearing agencies.
Dividend Policy
We currently intend to retain all available funds and any future earnings for use in the operation and expansion of our business
and do not anticipate paying any cash dividends on our common stock for the foreseeable future. Investors seeking cash dividends in
the immediate future should not purchase our common stock. Future cash dividends, if any, will be at the discretion of our board of
directors and will depend upon our future operations and earnings, capital requirements and surplus, general financial condition,
contractual restrictions and other factors as our board of directors may deem relevant. We can pay dividends only out of our profits or
other distributable reserves and dividends or distribution will only be paid or made if we are able to pay our debts as they fall due in
the ordinary course of business. Payment of future dividends, if any, will be at the discretion of the board of directors after taking into
account various factors, including current financial condition, operating results, current and anticipated cash needs and regulations
governing dividend distributions by wholly foreign owned enterprises in China.
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Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth certain information regarding stock option and warrant grants made to employees, directors and
consultants as of December 31, 2013:
Number of Securities to
be Issued Upon
Exercise of Outstanding
Options
(A)
Weighted Average
Exercise Price of
Outstanding Options
(B)
Plan Category
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation
Plans (Excluding
Securities Reflected in
Column A)
(C)
Equity Plan Approved by Security Holders (2011) (1)
Equity Plan Approved by Security Holders (2012) (2)
1,710,000 $
1,300,000 $
2.50
1.22
3,290,000
2,080,000
(1) On March 24, 2011, our Board of Directors voted to adopt the 2011 Stock Incentive Plan, or the Plan, which was
approved at our annual shareholders’ meeting held on June 6, 2012, or the Plan Adoption Date. The Plan and the
conditional option grants previously approved by our Compensation Committee were ratified by our shareholders at our
annual meeting on October 31, 2011. The Plan permits the granting of stock options (including incentive stock options as
well as nonstatutory stock options), stock appreciation rights, restricted and unrestricted stock awards, restricted stock
units, performance awards, other stock-based awards or any combination of the foregoing. Under the terms of the Plan,
up to 5,000,000 shares of our common stock will be granted.
(2) On January 9, 2012, our Compensation Committee granted options to purchase 1,300,000 shares of the
Company’s common stock with an exercise price of $1.22 to certain members of management and our directors under the
2011 Stock Incentive Plan. All of these options are exercisable for ten years from the grant date. At December 31, 2012,
there are 2,080,000 shares of common stock that may be issued in the future pursuant to the Plan.
(3) On July 16, 2013, we granted 90,000 options with an exercise price of $1.18 to certain members of management
and directors. These options can be exercised within ten years from the Plan Adoption Date once they become
exercisable. At December 31, 2013, there were 1,990,000 shares of common stock that may be issued in the future
pursuant to the Plan.
Purchases of Equity Securities
During the year ended December 31, 2013, we did not purchase any of our equity securities, nor did any person or entity
purchase any of our equity securities on our behalf.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
Forward-Looking Information
The following discussion and analysis of the consolidated financial condition and results of operations should be read in
conjunction with our consolidated financial statements and related notes appearing elsewhere. This discussion and analysis contains
forward-looking statements that involve risks, uncertainties and assumptions. Our actual results could differ materially from the results
described in or implied by these forward-looking statements as a result of various factors. See the “Cautionary Statement for
Purposes of the “Safe Harbor” Statement Under the Private Securities Litigation Reform Act of 1995” immediately preceding Part I of
this Report.
Key Components of Operating Results
Sources of Revenue
We derive our revenue almost entirely from the sales of 24-karat jewelry and Chinese ornaments and from design and processing
fees we receive from other jewelry companies who hire us to design and produce 24-karat jewelry and Chinese ornaments using gold
they supply us. We offer a wide range of in-house designed products including but not limited to gold necklaces, rings, earrings,
bracelets, and pendants. In our jewelry business, we only sell on a wholesale basis to distributors and retailers. Pricing of our jewelry
business products is made at the time of sale based upon the then-current price of gold and sales are made on a cash or credit on
delivery basis.
We have also recently begun developing our investment gold business. We sell our investment gold products through banks.
Similar to our jewelry business, pricing of our investment gold products is made at the time of sale based upon the then-current price
of gold, and sales are made on a cash or credit on delivery basis.
Cost of Sales
Our cost of sales consists principally of the cost for raw materials, primarily gold. We generally purchase gold directly from the
Shanghai Gold Exchange, of which we are a member. Beginning in 2013, we also started to lease gold from leading commercial
banks in China to increase our gold supply and fuel our growth. We generally do not enter into long term purchase agreements for
gold. During recent years, the price of gold on the international gold market has experienced periods of significant fluctuation. We
have been attempting to offset gold price fluctuations by locking in the price at the time an order is placed, as well as passing on the
price to purchasers. See “Quantitative and Qualitative Disclosures About Market Risk — Commodity Price Risk.”
Operating Expenses
We classify our operating expenses into four categories: selling, general and administrative, stock compensation and depreciation
and amortization. Our operating expenses consist primarily of personnel costs, which include salaries, bonuses, taxes and employee
benefit costs. Other expenses include advertising and promotional costs, facilities costs and legal, audit and tax, consulting and other
professional service fees.
The government owns all of the land in the PRC. Companies or individuals are authorized to use the land only through land use
rights granted by the PRC government. Accordingly, we paid for land use rights in advance and such prepayments are being
amortized and recorded as lease expenses using the straight-line method over the use terms of the lease. Amortization expense was
$12,205 and $11, 978 for 2013 and 2012, respectively.
Gross Profit, Gross Margin and Inventory Carrying Value
Our gross profit margin and profitability as well as the carrying value of our inventory are affected by changes in the price of gold.
If there is an increase in the price of gold that increases our production costs beyond the amount we may be able to pass to our
customers, it has a negative effect on our gross margin and profitability. Furthermore, the carrying value of our inventory may be
affected if the price of gold decreases relative to the price that we paid for that inventory. At December 31, 2013, we had
approximately 5.0 metric tons of gold in our inventory, all of which had been sold in excess of the carrying value by the date of this
report.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
34
General and Administrative
General and administrative expenses consist primarily of personnel costs for our executive, finance, human resources and
administrative personnel, legal, audit and tax and other professional fees, depreciation expenses, insurance and other corporate
expenses.
Sales
Selling expenses consist primarily of freight and transportation expenses, advertising and promotional costs and personnel costs
for our sales team.
Other Income (Expense), Net
Other income (expense), net consists of interest we earn on our cash and cash equivalents, interest expenses on our loans from
Chinese local banks and fees we pay in connection with guarantees of our loans.
Provision for Income Taxes
Our provision for income taxes primarily consists of corporate income taxes related to profits earned in the PRC from sales of our
products. In December 2004 and 2006, we were awarded the status of a nationally recognized High and New Technology Enterprise,
which entitled us to tax-free treatment from January 2004 to December 2008. Starting in January 2008, we became subject to the
regular PRC corporate tax rate of 25%.
Inflation
Although the Chinese government has implemented measures to curb inflation, it is foreseeable that the Chinese economy may
remain under inflationary pressure at least for the near term. It is difficult to estimate the impact of continued rise in inflation on us. On
the one hand, inflation may lead to, among other things, higher operating expenses for us and erosion of our customers’ purchases,
adversely affecting our results. On the other hand, inflation may also make our products more attractive to Chinese consumers who
traditionally have perceived gold as a safe haven investment from inflation.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires the use of
estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures
in the financial statements. Critical accounting policies are those accounting policies that may be material due to the levels of
subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and that
have a material impact on financial condition or operating performance. While we base our estimates and judgments on our
experience and on various other factors that we believe to be reasonable under the circumstances, actual results may differ from
these estimates under different assumptions or conditions. We believe the following critical accounting policies used in the
preparation of our financial statements require significant judgments and estimates. For additional information relating to these and
other accounting policies, see Note 2 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-
K.
35
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Inventories
Inventory is stated at the lower of cost or market value. Cost is determined using the weighted average method. We continually
evaluate the composition of our inventory, turnover of our products, the price of gold and the ability of our customers to pay for their
products. We write-down slow-moving and obsolete inventory based on an assessments of these factors, but principally customer
demand. Such assessments require the exercise of significant judgment by management. Additionally, the value of our inventory may
be affected by commodity prices. Decreases in the market value of gold would result in a lower stated value of our inventory, which
may require us to take a charge for the decrease in the value. In addition, if the price of gold changes substantially in a very short
period, it might trigger customer defaults, which could result in inventory obsolescence. If any of these factors were to become less
favorable than those projected, inventory write-downs could be required, which would have a negative effect on our earnings and
working capital.
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 2013 and 2012, 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.
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 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.
36
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Results of Operations
YEARS ENDED DECEMBER 31, 2013 AND 2012
The following table sets forth information from our statements of income and comprehensive income for the years ended December
31, 2013 and 2012 in U.S. dollars.
KINGOLD JEWELRY, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(IN U.S. DOLLARS)
NET SALES
COST OF SALES
Cost of sales
Depreciation
Total cost of sales
GROSS PROFIT
OPERATING EXPENSES
Selling, general and administrative expenses
Stock compensation expenses
Depreciation
Amortization
Total operating expenses
INCOME FROM OPERATIONS
OTHER INCOME (EXPENSES)
Interest income
Other expense
Interest expense
Total other expenses, net
INCOME FROM OPERATIONS BEFORE TAXES
INCOME TAX PROVISION (BENEFIT)
Current
Deferred
Total income tax provision
For the years ended December 31,
2013
2012
$
1,189,915,923 $
915,732,800
(1,137,310,949)
(1,277,374)
(1,138,588,323)
(863,563,502)
(1,253,256)
(864,816,758)
51,327,600
50,916,042
4,749,488
1,532,563
155,216
12,205
6,449,472
4,550,669
1,178,313
148,979
11,978
5,889,939
44,878,128
45,026,103
56,253
(81)
(5,411,812)
(5,355,640)
-
(17,407)
(444,997)
(462,404)
39,522,488
44,563,699
11,454,787
(272,225)
11,182,562
11,893,370
-
11,893,370
NET INCOME
$
28,339,926 $
32,670,329
OTHER COMPREHENSIVE INCOME (LOSS)
Total foreign currency translation gains (loss)
COMPREHENSIVE INCOME
Earnings per share
Basic
Diluted
Weighted average number of shares
Basic
Diluted
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
$
$
$
$
5,820,020 $
(62,772)
34,159,946 $
32,607,557
0.45 $
0.44 $
0.61
0.60
63,495,520
63,902,912
53,590,528
54,359,564
37
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Fiscal Year Ended December 31, 2013 Compared to Fiscal Year Ended December 31, 2012
Net Sales
Net sales for the year ended December 31, 2013 increased to $1,189.9 million, an increase of $274.2 million, or 29.9%, from net
sales of $915.7 million for the year ended December 31, 2012. The increase in net sales was primarily driven by the increased
amount of products sold, partially offset by the decrease in the price of gold. Approximately $402.5 million of the increase was
attributable to increases in demand and volume, which were offset by approximately $145.7 million due to the decrease in the price of
gold, and the remaining increase was due to the translation gain.
We have taken full advantage of continued demand for gold products from Chinese consumers. According to the World Gold
Council, total consumer demand for gold in China reached 1,065.8 tons in 2013, a 32.1% increase over 2012, with jewelry accounting
for 668.7 tons in 2013 (a 28.9% increase over 2012), and investment gold accounting for 397.1 tons in 2013 (a 37.9% increase over
2012).
More specifically, the increase in net sales was mainly attributable to growth in our investment gold business, which accelerated in
2013. In 2012, we signed agreements with four major Chinese national banks (the Bank of Communications, China Merchant Bank,
CITIC Bank and Wuhan Rural Commercial Bank). In 2013, we expanded our investment gold business with additional banks,
including China Construction Bank, one of the largest banks in China, and Xingye Bank. Total revenue from our investment gold
business reached approximately $106.0 million in 2013, or approximately 8.9% of our total revenue in 2013 (as compared with
approximately $44.4 million, or 4.8% of our total revenue in 2012). Our investment gold business has been developed in Beijing,
Hubei, Jiangsu, Jiangxi, Liaoning, Zhejiang, Henan and Sichuan Provinces. We believe that there are opportunities to expand this
business into more than 4,000 additional retail bank branches. To provide an adequate supply of gold for this expansion, beginning in
2013, we entered into gold lease arrangements with certain major Chinese commercial banks, initially China Construction Bank and
Shanghai Pudong Development Bank Ltd, and later in the year, CITIC Bank Corporation Limited.
Gold processed for the twelve months ended December 31,
2012
Sales
($ Million)
Metric
Tons
Sales/
Metric Ton
($ Million)
Metric
Tons
2013
Sales
($ Million)
Sales/
Metric Ton
($ Million)
37.8 $
18.9 $
18.9 $
915.7 $
893.9 $
21.8 $
24.3
47.4
1.2
51.1 $
28.6 $
22.5 $
1,190.0 $
1,159.6 $
30.4 $
23.3
40.5
1.4
Total
Branded
Customized
38
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Cost of sales
Cost of sales for the year ended December 31, 2013 increased to $1,138.6 million, an increase of $273.8 million, or 31.7% from
$864.8 million for 2012. The increase was primarily attributable to the increased amount of gold required to fulfill our increased sales
volume for the year ended December 31, 2013. Approximately $388.8 million of the increase was due to increased amount of gold
purchased to meet increased demand, which was partially offset by approximately $130.7 million due to decreases in the price of gold
price, and the remaining increase in cost of sales was due to the translation gain from exchange rate fluctuations.
Gross profit
Gross profit for the year ended December 31, 2013 increased to $51.3 million, an increase of $0.4 million, or 0.8%, from $50.9
million for 2012. Gross profit decreased mainly because the price of gold decreased in 2013, and we had higher cost per unit due to
gold purchased in 2012, which had a higher price in 2012. Gross margin decreased primarily because our product mix shifted more
toward branded production (where we buy the gold), which has lower margin than customized production (where customers furnish
the gold). Branded production accounted for 56.0% of total production (28.6 metric tons) in 2013 compared to 49.9% of total
production (18.9 metric tons) in 2012; the more branded production as percentage of total sales, the lower the total gross margin.
Expenses
Total operating expenses for the year ended December 31, 2013 were $6.4 million, an increase of $0.6 million or 9.5%, from $5.9
million for 2012. The increase was mainly due to increased stock compensation expense of $0.4 million due to the issuance of stock,
as well as $0.2 million additional selling, general and administrative expenses due to our expanded sales efforts in our investment
gold business.
Interest expense was $5.4 million for the year ended December 31, 2013, a substantial increase of $5.0 million, compared to $0.4
million in 2012. Interest expense increased mainly because we had gold leases for all of 2013 and obtained an aggregate of
approximately $49.6 million in short-term loans in the fourth quarter of 2013 to finance the down payment on the Jewelry Park (see
Note 6 to our consolidated financial statements included elsewhere in this report for a description of these loans and Note 5 for a
description of the Jewelry Park acquisition and the discussion in “—Liquidity and Capital Resources below). Approximately $18 million
due to CITIC Bank was due in March 2014 and has already been paid off. An aggregate of $31.7 million is maturing in April 2014
($7.9 million due to Xingye Bank, $15.6 million due to CITIC Bank and $8.2 million due to Bank of Hubei), and we current plan to pay
them off at maturity.
Our provision for income tax expense was $11.2 million for the year ended December 31, 2013, a decrease of $0.7 million, or
6.0%, from $11.9 million for 2012. The decrease was primarily due to less taxable income as a result of increased operating
expenses and interest expenses.
Other comprehensive income attributable to common stockholders was approximately $5.8 million for the year ended December
31, 2013, compared to other comprehensive loss of $0.6 million for the year ended December 31, 2012. In 2013, the RMB
appreciated substantially against the U.S. dollar while remaining relatively stable in 2012.
Net Income Attributable to Common Stockholders
For the foregoing reasons, our net income decreased to $28.3 million for the year ended December 31, 2013, from $32.6 million
for the same period in 2012, a decrease of $4.3 million or 13.3%.
Cash Flow
Net cash used in operating activities.
We generated $7.7 million of net cash from operating activities for the year ended December 31, 2013, compared to using $7.1
million of net cash for operating activities in 2012. Our operating activities provided more cash in 2013 mainly because our inventory
build-up was slowed in 2013 due to the fact that we began leasing gold in 2013, which is not part of inventory, as well as the volatility
of the gold market in 2013.
39
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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 accounts payable, purchases of gold and income taxes. Looking forward, we
expect the net cash that we generate from operating activities to continue to fluctuate as our inventories, receivables, accounts
payables and the other factors described above change with increased production and the purchase of larger or smaller quantities of
raw materials. These fluctuations could cause net cash from operating activities to decrease, even if our net income grows as we
continue to expand. Although we expect that net cash from operating activities will increase over the long term, we cannot predict
how these fluctuations will affect our cash flow in any particular accounting period.
Net cash used in investing activities.
We used $32.4 million of net cash for investing activities for the year ended December 31, 2013, compared to $150,091 in 2012.
The drastic increase is due to our $32.3 million down payment to acquire the Jewelry Park. See Note 5 to our consolidated financial
statements for additional information regarding this acquisition and the discussion in “—Liquidity and Capital Resources” below.
Analysis and Expectations. While our net cash used in investing activities did not fluctuate much historically, we expect that cash
used in investing activities will continue to fluctuate significantly in the short-term future as we continue to invest in the development
of the Jewelry Park and make payments pursuant to the terms of our agreement.
Net cash provided by financing activities.
Net cash provided by financing activities was $23.3 million for the year ended December 31, 2013, compared to $1.0 million in
2012. The substantial change resulted from the following: in January 2013, we issued 7.0 million shares and warrants to acquire an
additional 2.8 million shares to three individual investors for gross proceeds of $12.6 million, and in April 2013, warrants were
exercised to acquire 2.5 million shares for gross proceeds of $4.5 million. In addition, in the fourth quarter, we borrowed an aggregate
of approximately $49. 6 million in short-term loans from CITIC Bank, Xingye Bank and Bank of Hubei to finance the Jewelry Park
acquisition. These activities were partially offset by our loan of approximately $65.4 million to a company owned by one of the
directors of Wuhan Kingold on December 31, 2013, to provide temporary funds for its capital verification purposes. These funds were
subsequently repaid in full on January 2, 2014. In December 2013, Wuhan Kingold borrowed approximately $12.9 million loan from
the same entity to meet its temporary working capital needs. The loan had an annual interest rate of 6.0% and was repaid at maturity
on January 28, 2014.
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 and to make additional payments to finance the
planned Jewelry Park project.
Foreign Currency Translations
We use the U.S. dollar as the reporting currency for our financial statements. Our operations are conducted through our PRC
operating subsidiary, Vogue-Show, and our functional currency is the Renminbi (“RMB”). Foreign currency transactions during the
year are translated to the RMB at the approximate rates of exchange on the dates of transactions. Monetary assets and liabilities
denominated in foreign currencies on the balance sheet are translated at the approximate rates of exchange at the respective
balance sheet date. Non-monetary assets and liabilities are translated at the rates of exchange prevailing at the time that the asset or
liability was acquired. Exchange gains or losses are recorded in the statement of operations.
Our financial statements are translated into U.S. dollars using the closing rate method. The balance sheet items are translated
into U.S. dollars using the exchange rates at the respective balance sheet dates. The capital and various reserves are translated at
historical exchange rates prevailing at the time of the transactions while income and expenses items are translated at the average
exchange rate for the year. All gains and losses attributable to foreign currency exchange are recorded within equity.
The exchange rates used to translate amounts in RMB into U.S. dollars for the purposes of preparing the financial statements
were as follows:
40
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December 31,
2013
December 31,
2012
December 31,
2011
Balance sheet items, except for share capital,
additional paid in capital and retained earnings, as
of year end
Amounts included in the statements of operations
and cash flows for the year
$1=RMB 6.1122
$1=RMB 6.3086
$1=RMB 6.3056
$1=RMB 6.1943
$1=RMB 6.3116
$1=RMB 6.4615
Total translation loss recorded for the year ended December 31, 2012 was $62,772. Total translation gain recorded for the year
ended December 31, 2013 was $5,820,020.
No representation is made that RMB amounts have been, or could be, converted into U.S. dollars at the above rates or at all.
Although Chinese government regulations now allow convertibility of RMB for current account transactions, significant restrictions still
remain. Hence, such translations should not be construed as representations that RMB can be converted into U.S. dollars at the
above conversion rate, or any other rate.
The value of the RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes
in China’s political and economic conditions. Any significant revaluation of RMB may materially affect our financial condition in terms
of U.S. dollar reporting.
Liquidity and Capital Resources
At December 31, 2013, we had $2.3 million in cash and cash equivalents compared to $2.5 million at December 31, 2012. At
December 31, 2013, we had $12.6 million in restricted cash compared to nil at December 31, 2012. This restricted cash (along with
our Chairman and Chief Executive Officer’s personal credit) secures our obligations under our bank loans and gold lease agreements.
We have historically financed our operations with cash flow generated from operations, as well as through short-term bank loans
(which generally have a term of one year, although our recent loans have been for three or four month terms). At December 31, 2012,
we had an outstanding short-term loan from CITIC Bank Corporation Limited for an aggregate amount of $6.3 million, which had an
interest rate of 6.6% and was paid at maturity in November 2013. At December 31, 2013, we had outstanding short-term loans of
$49.6 million from Xing Ye Bank ($7.9 million), CITIC Bank ($33.6 million) as well as Hubei Bank ($8.1 million), some of which has
been repaid. The amounts outstanding under these bank loans are presented in our financial statements as “short-term loans.” For
additional information regarding our short-term loans (some of which have already matured and been repaid), see Note 6 to our
consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
In China, it is customary practice for banks and borrowers to negotiate roll-overs or renewals of short-term borrowings on an
ongoing basis shortly before they mature. Although we have generally renewed our short-term borrowings in the past, we cannot
assure you that we will be able to renew these loans in the future as they mature. We may also choose not to renew them, such as
the short-term loans that matured in March 2014. 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 assure you 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, including to pay required installments under the Jewelry Park acquisition
agreement. 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.
41
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We have an aggregate of RMB1.0 billion of payments due under the Jewelry Park acquisition agreement (approximately RMB250
million has been paid to date). The payment schedule is as follows:
Date
October 2013*
January 2014
June 2014
September 2014
January 2015
June 2015
Total
* Includes initial deposit made to seller
** In US$ based on the spot rate
Payment Commitment
(RMB in millions)
Payment
Commitment
(US$ in millions)**
200
50
100
150
250
250
RMB1,000 $
33
8
16
5
41
41
164
For additional information regarding this acquisition agreement, see Note 5 to our consolidated financial statements appearing
elsewhere in this report.
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 our
availability of cash. A majority of our revenue being earned and currency received is denominated 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 incurred outside the PRC, which
could adversely affect our business and prospects or our ability to meet our cash obligations.
When we deem appropriate, we may use our cash on hand to purchase shares of our common stock in the open market.
However, the Stock Repurchase Plan authorized in July 2012 providing for the repurchase by us of up to $10 million of issued and
outstanding shares of our common stock in the open market or in privately negotiated transactions at any time and from time to time
during the twelve-month period ending July 12, 2013 was never utilized.
Off-Balance Sheet Arrangements
We have no material off-balance sheet transactions.
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 consolidated financial position, results of operations, or cash flows
42
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Exchange Rate Risk
Given that substantially all of our revenues are generated in RMB, yet our results are reported in U.S. dollars, devaluation of the
RMB could negatively impact our results of operations. The value of RMB is subject to changes in 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 the 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 five years,
RMB has appreciated 13.5% against the U.S. dollar (from 1 U.S. dollar = 7.2946 RMB on January 1, 2008 to 1 U.S. dollar = 6.1122
RMB on December 31, 2013). 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 notes payable to banks for short-term borrowings as of December 31, 2013 and 2012 were approximately $49.6 million, and
$6.3 million, respectively. Our notes payable to banks for long-term borrowings as of December 31, 2013 and 2012 were
approximately $29.0 million, and $nil million, respectively. Interest expense paid for the years ended December 31, 2013 and 2011
were $1.0 million, and $444,997, respectively.
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.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
43
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at December 31, 2013 and 2012
Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2013, and 2012
Consolidated Statements of Changes in Equity for the years ended December 31, 2013 and 2012
Consolidated Statements of Cash Flows for the years ended December 31, 2013 and 2012
Notes to Consolidated Financial Statements
Financial Statement Schedules (Item 15(a)(2))
Page
F-1
F-2
F-3
F-4
F-5
F-6
Financial statement schedules have been omitted because either they are not applicable or the required information is included in
the financial statements or the notes thereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
In evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how
well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is
required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our management
evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure
controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Due to the timing of the disclosures
regarding the entry into certain material agreements and our ineffective cash management, our Chief Executive Officer and our Chief
Financial Officer concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this
report to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of
1934 (1) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission
rules and forms, and (2) is accumulated and communicated to management, including our Chief Executive Officer and our Chief
Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
In order to remedy our ineffective disclosure controls and procedures, we intend to implement additional new processes and
procedures to clarify internal reporting channels to ensure that the information we are required to disclose in reports that we file or
submit under the Securities Exchange Act of 1934 (1) is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms, and (2) is accumulated and communicated to management,
including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Management’s Report on Internal Control Over Financial Reporting
Management, under the supervision of our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and
maintaining adequate internal control over financial reporting. Internal control over financial reporting (as defined in Rules 13a-15(f)
and 15d(f) under the Exchange Act) is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles in the United States, or GAAP. Internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of
assets, (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with GAAP, (3) provide reasonable assurance that receipts and expenditures are being made only in accordance with
appropriate authorization of management and the board of directors, and (4) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the financial
statements. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2013. Management
based the assessment on criteria for effective internal control over financial reporting described in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework). Management’s
assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational
effectiveness of its internal control over financial reporting. Management reviewed the results of its assessment with the Audit
Committee of our Board of Directors.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is
a reasonable possibility that a material misstatement of our annual or interim financial statements will be prevented or detected on a
timely basis.
Based on the assessment, management determined that, as of December 31, 2013, we did not maintain effective internal control
over financial reporting due to the existence of the following material weaknesses:
·
·
·
Lack of appropriate approval procedures for certain material transactions;
Inadequate controls over material cash transactions with a related party, including failure to obtain board approval and failure
to record in a timely manner; and
Lack of resources with technical competency to review and record non-routine or complex transactions.
In order to remedy the material weakness of inadequate controls over cash management as described above, our Board has
already adopted resolutions requiring management to seek Board approval prior to entering into any transactions with a value in
excess of $250,000. Further, we intend to explore implementing additional policies and procedures which may include:
·
·
Reporting other material transactions to the Board and obtain proper approval; and
Recruiting qualified professionals with appropriate levels of knowledge and experience to assist in resolving accounting
issues in non-routine or complex transactions.
Changes in Internal Control over Financial Reporting
Except for the material weaknesses described above, there have been no changes in our internal control over financial reporting
that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting during our fourth
fiscal quarter of 2013.
Although not required because we are a smaller reporting company, the effectiveness of our internal control over financial
reporting as of December 31, 2013 has been audited by Friedman LLP, an independent registered public accounting firm, as stated
in their report which is included under Item 9A of this Annual Report. Their report expresses an adverse opinion as of December 31,
2013.
45
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Kingold Jewelry, Inc.
We have audited the internal control over financial reporting of Kingold Jewelry, Inc. (the “Company”) as of December 31, 2013,
based on criteria established in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying
Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing
such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for
our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of
the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could
have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
46
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will be prevented or
detected on a timely basis. The following material weaknesses have been identified and included in management’s assessment as of
December 31, 2013:
•
•
•
Lack of appropriate approval procedures for certain material transactions;
Inadequate controls over material cash transactions with a related party, including failure to obtain board approval and failure to
record timely; and
Lack of resources with technical competency to review and record non-routine or complex transactions.
The material weaknesses were considered in determining the nature, timing and extent of audit tests applied in our audit of the
Company’s consolidated financial statements for the year ended December 31, 2013, and our opinion regarding the effectiveness of
the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements.
In our opinion, the Company did not maintain effective internal control over financial reporting as of December 31, 2013, based on
criteria established in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated financial statements as of and for the year ended December 31, 2013, of the Company and our report dated March 31,
2014 expressed an unqualified opinion on those financial statements.
/s/ Friedman LLP
New York, New York
March 31, 2014
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ITEM 9B. OTHER INFORMATION
None.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
a) Directors of the Registrant.
PART III
Information with respect to our Directors is set forth under the heading “Election of Directors” in our Proxy Statement for the
2014 Annual Meeting of Stockholders and is incorporated herein by reference.
b) Executive Officers of the Registrant.
Information with respect to our executive officers is set forth under the heading “Management” in our Proxy Statement for the
2014 Annual Meeting of Stockholders and is incorporated herein by reference.
c) Section 16(a) Compliance.
Information concerning compliance with Section 16(a) of the Securities Exchange Act of 1934 is set forth under the heading
“Section 16(a) Beneficial Ownership Compliance” in our Proxy Statement for the 2014 Annual Meeting of Stockholders and is
incorporated herein by reference.
d)
Identification of the Audit Committee.
Information concerning our audit committee is set forth under the heading “Committee Composition” in our Proxy Statement
for the 2014 Annual Meeting of Stockholders and is incorporated herein by reference.
e) Audit Committee Financial Expert.
Information concerning our audit committee financial expert is set forth under the heading “Committee Composition” in our
Proxy Statement for the 2014 Annual Meeting of Stockholders and is incorporated herein by reference.
f) Corporate Governance/Nominating Committee.
Information concerning any material changes to the way in which security holders may recommend nominees to our Board of
Directors is set forth under the heading “Director Nominations” in our Proxy Statement for the 2014 Annual Meeting of Stockholders
and is incorporated herein by reference.
g) Code of Ethics for Chief Executive Officer and Senior Financial Officers.
We have adopted a code of business conduct and ethics that applies to all of our employees, officers and directors, including
those officers responsible for financial reporting. The most recent version is available on the Investor Relations section of our website
at www.kingoldjewelry.com. The information contained on our website is not incorporated by reference into this Annual Report on
Form 10-K. If we make any substantive amendments to the code or grant any waiver from a provision of the code to any executive
officer or director, we will promptly disclose the nature of the amendment or waiver on our website, as well as via any other means
required by applicable law.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is set forth under the headings “Executive Compensation” and “Compensation
Committee Interlocks and Insider Participation” in our Proxy Statement for the 2014 Annual Meeting of Stockholders and is
incorporated herein by reference.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
Information regarding security ownership of certain beneficial owners and management appearing under “Security Ownership of
Certain Beneficial Owners and Management” in our Proxy Statement for the 2014 Annual Meeting of Stockholders is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information appearing under “Certain Relationships and Related Transactions” and “Corporate Governance” in our Proxy
Statement for the 2014 Annual Meeting of Stockholders is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information appearing under “Ratification of the Appointment of the Independent Registered Public Accounting Firm” in our Proxy
Statement for the 2014 Annual Meeting of Stockholders is incorporated herein by reference.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Financial Statements and Financial Statement Schedules
(1) Financial Statements:
Financial statements are shown in the Index to Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.
(2) Financial Statement Schedules:
Financial statement schedules have been omitted because either they are not applicable or the required information is included in the
financial statements or the notes thereto.
(3) Exhibits
Exhibit
No.
2.1
3.1
3.2
Description
Reverse Acquisition Agreement, dated September 29, 2009, by and between the Registrant, Baytree
Capital Associates, LLC, Wuhan Vogue-Show Jewelry Co., Ltd., Dragon Lead Group Limited and the
stockholders of Dragon (incorporated by reference to Exhibit 2.1 to our Current Report on Form 8-K filed
with the Commission on October 5, 2009).
Certificate of Incorporation of Registrant (incorporated by reference to Exhibit 3.1 to our Registration
Statement filed on Form SB-2 with the Commission on August 13, 1999).
Amendment to Certificate of Incorporation of Registrant, dated September 29, 1995 (incorporated by
reference to Exhibit 3.2 to our Registration Statement filed on Form SB-2 with the Commission on August
13, 1999).
3.3
Amendment to Certificate of Incorporation of Registrant, dated October 12, 1995 (incorporated by
reference to Exhibit 3.3 to our Registration Statement filed on Form SB-2 with the Commission on August
13, 1999).
3.4
Amendment to Certificate of Incorporation of Registrant, dated January 21, 1999 (incorporated by
3.5
3.6
3.7
3.8
4.1
4.2
reference to Exhibit 3.4 to our Registration Statement filed on Form SB-2 with the Commission on August
13, 1999).
Amendment to Certificate of Incorporation of Registrant, dated April 7, 2000 (incorporated by reference to
Exhibit 3.5 to our Registration Statement filed on Form SB-2/A with the Commission on April 12, 2000).
Amendment to Certificate of Incorporation of Registrant, dated December 18, 2009 (incorporated by
reference to Exhibit 3.6 to our Registration Statement filed on Form S-1 with the Commission on October
1, 2010).
Amendment to Certificate of Incorporation of Registrant, dated June 8, 2010 (incorporated by reference to
Exhibit 3.7 to our Registration Statement filed on Form S-1 with the Commission on October 1, 2010).
Amended and Restated Bylaws of Registrant (incorporated by reference to Exhibit 3.1 to our Current
Report filed on Form 8-K with the Commission on September 30, 2010).
Form of Common Stock Certificate of Registrant (incorporated by reference to Exhibit 4.1 to our
Registration Statement filed on Form SB-2 with the Commission on August 13, 1999).
Warrant to purchase 200,803 shares of the Registrant’s Common Stock issued to Parkland Ltd., dated
December 22, 2009 (incorporated by reference to Exhibit 4.5 to our Registration Statement filed on Form
S-1 with the Commission on October 1, 2010).
4.3
Warrant to purchase 100,402 shares of the Registrant’s Common Stock issued to Great Places LLC,
dated December 22, 2009 (incorporated by reference to Exhibit 4.8 to our Registration Statement filed on
Form S-1 with the Commission on October 1, 2010).
4.4
Warrant to purchase 30,120 shares of the Registrant’s Common Stock issued to Donald Rosenfeld, dated
December 22, 2009 (incorporated by reference to Exhibit 4.9 to our Registration Statement filed on Form
S-1 with the Commission on October 1, 2010).
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
4.5
Warrant to purchase 20,080 shares of the Registrant’s Common Stock issued to Randall Cox, dated
December 22, 2009 (incorporated by reference to Exhibit 4.12 to our Registration Statement filed on Form
S-1 with the Commission on October 1, 2010).
4.6
Warrant to purchase 20,080 shares of the Registrant’s Common Stock issued to Silicon Prairie Partners,
dated December 22, 2009 (incorporated by reference to Exhibit 4.13 to our Registration Statement filed
on Form S-1 with the Commission on October 1, 2010).
4.7
Warrant to purchase 10,040 shares of the Registrant’s Common Stock issued to Michael Harris, dated
December 22, 2009 (incorporated by reference to Exhibit 4.14 to our Registration Statement filed on Form
S-1 with the Commission on October 1, 2010).
4.8
Warrant to purchase 1,684,789 shares of the Registrant’s Common Stock issued to Michael Gardner,
dated December 22, 2009 (incorporated by reference to Exhibit 4.16 to our Registration Statement filed
on Form S-1 with the Commission on October 1, 2010).
4.9
Warrant to purchase 850,000 shares of the Registrant’s Common Stock issued to Sienna Holdings
Limited, dated December 22, 2009 (incorporated by reference to Exhibit 4.17 to our Registration
Statement filed on Form S-1 with the Commission on October 1, 2010).
4.10
Warrant to purchase 100,000 shares of the Registrant’s Common Stock issued to David Jaroslawicz,
dated December 22, 2009 (incorporated by reference to Exhibit 4.24 to our Registration Statement filed
on Form S-1 with the Commission on October 1, 2010).
4.11
Warrant to purchase 100,000 shares of the Registrant’s Common Stock issued to JP Huang, dated
4.12
4.13
4.14
December 22, 2009 (incorporated by reference to Exhibit 4.25 to our Registration Statement filed on Form
S-1 with the Commission on October 1, 2010).
Warrant to purchase 750,000 shares of the Registrant’s Common Stock issued to Michael Gardner, dated
October 6, 2008, as amended on December 16, 2009 (incorporated by reference to Exhibit 4.27 to our
Registration Statement filed on Form S-1 with the Commission on October 1, 2010).
Warrant to purchase 125,000 shares of the Registrant’s Common Stock issued to Daryl Cramer, dated
October 6, 2008, as amended on December 16, 2009 (incorporated by reference to Exhibit 4.28 to our
Registration Statement filed on Form S-1 with the Commission on October 1, 2010).
Warrant to purchase 125,000 shares of the Registrant’s Common Stock issued to Michael Harris, dated
October 6, 2008, as amended on December 16, 2009 (incorporated by reference to Exhibit 4.29 to our
Registration Statement filed on Form S-1 with the Commission on October 1, 2010).
4.15
Form of Warrant, dated January 10, 2013 (incorporated by reference to Exhibit 10.2 to our Current Report
filed on Form 8-K with the Commission on January 11, 2013).
10.1
Exclusive Management Consulting and Technical Support Agreement, dated June 30, 2009, by and
between Vogue-Show and Wuhan Kingold (incorporated by reference to Exhibit 10.6 to our Registration
Statement filed on Form S-1 with the Commission on October 29, 2010).
10.2
Shareholders’ Voting Proxy Agreement, dated June 30, 2009, by and between Vogue-Show and
shareholders of Wuhan Kingold (incorporated by reference to Exhibit 10.7 to our Registration Statement
filed on Form S-1 with the Commission on October 29, 2010).
10.3
Purchase Option Agreement, dated June 30, 2009, by and between Vogue-Show and shareholders of
Wuhan Kingold (incorporated by reference to Exhibit 10.8 to our Registration Statement filed on Form S-1
with the Commission on October 8, 2010).
10.4
Pledge of Equity Agreement, dated June 30, 2009, by and between Vogue-Show and shareholders of
Wuhan Kingold (incorporated by reference to Exhibit 10.9 to our Registration Statement filed on Form S-1
with the Commission on October 29, 2010).
10.5
Amended and Restated Call Option Agreement, dated December 17, 2009, by and between Zhihong Jia,
Bin Zhao and Fok Wing Lam Winnie (whose Mandarin name is Huo Yong Lin) (incorporated by reference
to Exhibit 10.11 to our Registration Statement filed on Form S-1 with the Commission on October 1,
2010).
10.6
Lease Agreement (English translation), dated February 1, 2009, by and between Wuhan Kingold and
Vogue Show (incorporated by reference to Exhibit 10.16 to our Registration Statement filed on Form S-1
with the Commission on November 18, 2010). The Lease Agreement terminated in February 2012 and
was renewed for another three years.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
10.7
Form of Indemnification Agreement (incorporated by reference to Exhibit 10.17 to our Registration
Statement filed on Form S-1 with the Commission on October 1, 2010).
10.8**
Employment Agreement, dated November 18, 2010, between Registrant and Zhihong Jia (incorporated
by reference to Exhibit 10.18 to our Registration Statement filed on Form S-1 with the Commission on
November 18, 2010).
10.9**
Employment Agreement, dated April 1, 2008, and amended October 28, 2010 between Wuhan Kingold
and Bin Zhao (incorporated by reference to Exhibit 10.19 to our Registration Statement filed on Form S-1
with the Commission on December 1, 2010).
10.10**
Acknowledgement Letter, dated October 29, 2010, between Zhihong Jia and Bin Zhao (incorporated by
10.11**
10.12
10.13
10.14
reference to Exhibit 10.20 to our Registration Statement filed on Form S-1 with the Commission on
November 18, 2010).
Supplemental Agreement to Exclusive Management Consulting and Technical Support Agreement, dated
October 20, 2011, by and between Vogue-Show and Wuhan Kingold (incorporated by reference to Exhibit
10.1 to our Quarterly Report on Form 10-Q filed with the Commission on November 9, 2011).
Shareholders’ Voting Proxy Agreement, dated October 20, 2011, by and between Vogue-Show,
Registrant and shareholders of Wuhan Kingold (incorporated by reference to Exhibit 10.2 to our Quarterly
Report on Form 10-Q filed with the Commission on November 9, 2011).
Purchase Option Agreement, dated October 20, 2011, by and between Vogue-Show, Registrant, and
shareholders of Wuhan Kingold (incorporated by reference to Exhibit 10.3 to our Quarterly Report on
Form 10-Q filed with the Commission on November 9, 2011).
Pledge of Equity Agreement, dated October 20, 2011, by and between Vogue-Show and shareholders of
Wuhan Kingold (incorporated by reference to Exhibit 10.4 to our Quarterly Report on Form 10-Q filed with
the Commission on November 9, 2011).
10.15**
2011 Stock Incentive Plan (incorporated by reference to Exhibit A to the Company’s Definitive Proxy
Statement on Schedule 14A filed with the Securities and Exchange Commission on September 29,
2011).
10.16**
Form of Nonqualified Stock Option Grant Agreement (incorporated by reference to Exhibit 10.2 to our
Current Report filed on Form 8-K with the Commission on December 30, 2011).
10.17**
Form of Incentive Stock Option Grant Agreement (incorporated by reference to Exhibit 10.3 to our Current
Report filed on Form 8-K with the Commission on December 30, 2011).
10.18
Code of Business Conduct and Ethics (incorporated by reference to Exhibit 14.1 to our Registration
Statement filed on Form S-1 with the Commission on October 29, 2010).
10.19
Stock Loan and Repurchase Agreement, dated October 4, 2012, between Kingold Jewelry, Inc. and
Equities First Holdings LLC (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K
filed with the Commission on October 4, 2012).
10.20
Subscription Agreement, dated January 10, 2013, between Kingold Jewelry, Inc. and the subscribers
10.21
10.22
named therein (incorporated by reference to Exhibit 10.1 to our Current Report filed on Form 8-K with the
Commission on January 11, 2013).
Working Capital Loan Contract (English translation), dated November 28, 2012, between Wuhan Kingold
Jewelry Company Limited and CITIC Bank Corporation Limited (Incorporated by reference to Exhibit 10.1
to our Current Report filed on Form 8-K with the Commission on January 16, 2013).
Working Capital Loan Contract (English translation), dated November 28, 2012, between Wuhan Kingold
Jewelry Company Limited and CITIC Bank Corporation Limited (incorporated by reference to Exhibit 10.2
to our Current Report filed on Form 8-K with the Commission on January 16, 2013).
10.23
Gold Leasing Agreement (English translation), dated December 20, 2012, between Wuhan Kingold
Jewelry Company Limited and China Construction Bank Corporation - Wuhan Jiang’an Branch
(incorporated by reference to Exhibit 10.3 to our Current Report filed on Form 8-K with the Commission
on January 16, 2013).
10.24
Gold Lease Framework Agreement (English translation), dated January 1, 2013, between Wuhan Kingold
Jewelry Company Limited and Shanghai Pudong Development Bank Ltd., Wuhan Branch (incorporated
by reference to Exhibit 10.1 to our Current Report filed on Form 8-K with the Commission on March 6,
2013).
10.25
Gold Leasing Agreement (English translation), dated January 25, 2013, between Wuhan Kingold Jewelry
Company Limited and Shanghai Pudong Development Bank Ltd., Wuhan Branch (incorporated by
reference to Exhibit 10.2 to our Current Report filed on Form 8-K with the Commission on March 6, 2013).
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
10.26
Gold Leasing Agreement (English translation), dated February 22, 2013, between Wuhan Kingold Jewelry
Company Limited and Shanghai Pudong Development Bank Ltd., Wuhan Branch (incorporated by
reference to Exhibit 10.3 to our Current Report filed on Form 8-K with the Commission on March 6, 2013).
10.27**
Executive Employment Agreement between Kingold Jewelry, Inc. and Bin Liu, dated April 3, 2013
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
(incorporated by reference to Exhibit 10.1 to our Current Report filed on Form 8-K with the Commission
on April 5, 2013).
Acquisition Agreement (English translation), dated October 23, 2013, among Wuhan Kingold Jewelry
Company Limited, Wuhan Wansheng House Purchasing Limited and Wuhan Huayuan Science and
Technology Development Limited Company (incorporated by reference to Exhibit 10.1 to our Current
Report filed on Form 8-K with the Commission on October 29, 2013).
Notice of Credit Line Changes (English translation), dated August 8, 2013, from China Construction Bank
Corporation Wuhan Jiang’an Branch (incorporated by reference to Exhibit 10.2 to our Current Report filed
on Form 8-K with the Commission on October 29, 2013).
Working Capital Loan Contract (English translation), dated December 5, 2013, between Wuhan Kingold
Jewelry Company Limited and Wuhan Branch China CITIC Bank Corporation Limited (incorporated by
reference to Exhibit 10.1 to our Current Report filed on Form 8-K with the Commission on February 20,
2014).
Working Capital Loan Contract (English translation), dated December 5, 2013, between Wuhan Kingold
Jewelry Company Limited and Wuhan Branch China CITIC Bank Corporation Limited (incorporated by
reference to Exhibit 10.2 to our Current Report filed on Form 8-K with the Commission on February 20,
2014).
Working Capital Loan Contract (English translation), dated December 5, 2013, between Wuhan Kingold
Jewelry Company Limited and Wuhan Branch China CITIC Bank Corporation Limited (incorporated by
reference to Exhibit 10.3 to our Current Report filed on Form 8-K with the Commission on February 20,
2014).
Working Capital Loan Contract (English translation), dated December 6, 2013, between Wuhan Kingold
Jewelry Company Limited and Wuhan Branch China CITIC Bank Corporation Limited (incorporated by
reference to Exhibit 10.4 to our Current Report filed on Form 8-K with the Commission on February 20,
2014).
Working Capital Loan Contract (English translation), dated December 6, 2013, between Wuhan Kingold
Jewelry Company Limited and Wuhan Branch China CITIC Bank Corporation Limited (incorporated by
reference to Exhibit 10.5 to our Current Report filed on Form 8-K with the Commission on February 20,
2014).
Working Capital Loan Contract (English translation), dated December 6, 2013, between Wuhan Kingold
Jewelry Company Limited and Wuhan Branch China CITIC Bank Corporation Limited (incorporated by
reference to Exhibit 10.6 to our Current Report filed on Form 8-K with the Commission on February 20,
2014).
10.36
Loan Contract of Circulating Fund (English translation), dated December 10, 2013, between Wuhan
10.37
Kingold Jewelry Company Limited and Hubei Bank Co., Ltd. (Jiang’an Wuhan Branch) (incorporated by
reference to Exhibit 10.7 to our Current Report filed on Form 8-K with the Commission on February 20,
2014).
Loan Contract of Circulating Fund (English translation), dated December 10, 2013, between Wuhan
Kingold Jewelry Company Limited and Industrial Bank Co., Ltd. (Wuhan Branch) (incorporated by
reference to Exhibit 10.8 to our Current Report filed on Form 8-K with the Commission on February 20,
2014).
10.38
Trust Loan Contract (English translation), dated November 29, 2013, between Wuhan Kingold Jewelry
Company Limited and Chang’An International Trust Co., Ltd. (incorporated by reference to Exhibit 10.9 to
our Current Report filed on Form 8-K with the Commission on February 20, 2014).
21.1
List of Subsidiaries (incorporated by reference to Exhibit 21.1 to our Registration Statement filed on Form
S-1 with the Commission on October 1, 2010).
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23.1
31.1
Consent of Friedman, LLP*
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 Herewith
Indicates a management contract or compensatory plan or arrangement
*
**
XBRL (eXtensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or
prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the
Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.
Kingold’s Annual Report on Form 10-K for the year ended December 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 Annual Report on Form 10-K.
55
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 31, 2014
Kingold Jewelry, Inc.
By:
/s/ Zhihong Jia
Zhihong Jia
Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated:
Name
Title
Date
/s/ Zhihong Jia
Zhihong Jia
/s/ Bin Liu
Bin Liu
/s/ Bin Zhao
Bin Zhao
/s/ Zhang Bin Nan
Zhang Bin Nan
/s/ Xu Hai Xiao
Xu Hai Xiao
/s/ H. David Sherman.
H. David Sherman
Chairman of the Board and Chief Executive Officer
March 31, 2014
(Principal Executive Officer)
Chief Financial Officer
March 31, 2014
(Principal Financial and Accounting Officer)
Director
Director
Director
Director
56
March 31, 2014
March 31, 2014
March 31, 2014
March 31, 2014
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Kingold Jewelry, Inc.
We have audited the accompanying consolidated balance sheets of Kingold Jewelry, Inc. (the “Company”) as of December 31, 2013
and 2012, and the related consolidated statements of income and comprehensive income, changes in stockholders’ equity, and cash
flows for each of the two years in the period ended December 31, 2013. The Company’s management is responsible for these
financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
the Company as of December 31, 2013 and 2012, and the results of its operations and its cash flows for each of the two years in the
period ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
Company’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control—
Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our
report dated March 31, 2014 expressed an adverse opinion on the Company’s internal control over financial reporting.
/s/ Friedman LLP
New York, New York
March 31, 2014
F-1
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
KINGOLD JEWELRY, INC.
CONSOLIDATED BALANCE SHEETS
(IN U.S. DOLLARS)
ASSETS
CURRENT ASSETS
Cash
Restricted cash
Accounts receivable
Inventories
Other current assets and prepaid expenses
Due from related party
Value added tax recoverable
Deferred income tax assets
Total current assets
PROPERTY AND EQUIPMENT, NET
OTHER ASSETS
Deposit on land use right
Other assets
Land use right
Total other assets
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short term loans
Other payables and accrued expenses
Related party loan
Income tax payable
Other taxes payable
Total current liabilities
Long term loans
TOTAL LIABILITIES
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $0.001 par value, 500,000 shares authorized, none issued or outstanding
as of December 31, 2013 and December 31, 2012
Common stock $0.001 par value, 100,000,000 shares authorized, 64,953,462 and
54,521,140 shares issued and outstanding as of December 31, 2013 and December 31,
2012
Additional paid-in capital
Retained earnings
Unappropriated
Appropriated
Accumulated other comprehensive income
Total stockholders' equity
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
December 31,
2013
December 31,
2012
$
$
$
2,284,930 $
12,668,749
532,386
174,433,501
8,252,387
52,354,308
6,220,866
275,882
257,023,009
2,544,114
-
692,762
150,041,421
133,539
-
7,031,374
-
160,443,210
10,686,947
11,683,987
32,721,442
157,946
507,117
33,386,505
301,096,461 $
-
153,029
503,313
656,342
172,783,539
49,572,985 $
3,499,717
-
3,269,908
848,739
57,191,349
6,340,551
1,445,513
209,890
2,587,680
659,989
11,243,623
29,004,287
86,195,636
-
11,243,623
-
-
-
-
64,953
76,847,205
54,521
57,656,674
120,946,375
967,543
16,074,749
214,900,825
301,096,461 $
92,606,449
967,543
10,254,729
161,539,916
172,783,539
$
The accompanying notes are an integral part of these consolidated Financial Statements
F-2
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
KINGOLD JEWELRY, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(IN U.S. DOLLARS)
NET SALES
COST OF SALES
Cost of sales
Depreciation
Total cost of sales
GROSS PROFIT
OPERATING EXPENSES
Selling, general and administrative expenses
Stock compensation expenses
Depreciation
Amortization
Total operating expenses
INCOME FROM OPERATIONS
OTHER INCOME (EXPENSES)
Interest income
Other expense
Interest expense
Total other expenses, net
INCOME FROM OPERATIONS BEFORE TAXES
INCOME TAX PROVISION (BENEFIT)
Current
Deferred
Total income tax provision
For the years ended December 31,
2013
2012
$
1,189,915,923 $
915,732,800
(1,137,310,949)
(1,277,374)
(1,138,588,323)
(863,563,502)
(1,253,256)
(864,816,758)
51,327,600
50,916,042
4,749,488
1,532,563
155,216
12,205
6,449,472
4,550,669
1,178,313
148,979
11,978
5,889,939
44,878,128
45,026,103
56,253
(81)
(5,411,812)
(5,355,640)
-
(17,407)
(444,997)
(462,404)
39,522,488
44,563,699
11,454,787
(272,225)
11,182,562
11,893,370
-
11,893,370
NET INCOME
$
28,339,926 $
32,670,329
OTHER COMPREHENSIVE INCOME (LOSS)
Total foreign currency translation gains (loss)
COMPREHENSIVE INCOME
Earnings per share
Basic
Diluted
Weighted average number of shares
Basic
Diluted
$
$
$
$
5,820,020 $
(62,772)
34,159,946 $
32,607,557
0.45 $
0.44 $
0.61
0.60
63,495,520
63,902,912
53,590,528
54,359,564
The accompanying notes are an integral part of these consolidated Financial Statements
F-3
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
KINGOLD JEWELRY, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
(IN U.S. DOLLARS)
Preferred stock
Par value
Common stock
Par value
Shares Amount
Shares
Amount
Additional
paid-in
capital
Unappropriated Appropriated Accumulated other
comprehensive
retained
retained
earnings
earnings
gain
Total
Balance at December 31, 2011
- $
- 53,107,343 $ 53,108 $ 55,728,009 $
59,936,120 $
967,543 $
10,317,501 $ 127,002,281
Net income for the year
-
-
-
-
-
32,670,329
Shares issued for stock loan
-
-
850,000
850
750,915
Shares issued for services
-
-
-
-
193,000
Options granted for services
-
-
-
-
985,313
Shares issued for warrant exercise
-
-
563,797
564
(564)
Foreign currency translation gain (loss)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
- 32,670,329
-
751,765
-
193,000
-
985,313
-
-
(62,772)
(62,772)
Balance at December 31, 2012
- $
- 54,521,140 $ 54,521 $ 57,656,674 $
92,606,449 $
967,543 $
10,254,729 $ 161,539,916
Net income for the year
-
-
-
-
-
28,339,926
Shares issued for subscription agreement
-
- 7,000,000
7,000 12,515,000
Shares issued for services
-
-
810,000
810 1,202,590
Options granted for services
-
-
-
-
875,163
Net proceeds for warrant exercise
-
- 2,622,322
2,622 4,597,778
Foreign currency translation gain (loss)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
- 28,339,926
- 12,522,000
-
1,203,400
-
875,163
-
4,600,400
5,820,020
5,820,020
Balance at December 31, 2013
- $
- 64,953,462 $ 64,953 $ 76,847,205 $
120,946,375 $
967,543 $
16,074,749 $ 214,900,825
See accompanying Notes to Consolidated Financial Statements
F-4
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
KINGOLD JEWELRY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN U.S. DOLLARS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
Adjusted to reconcile net income to cash used in operating activities:
Depreciation
Amortization of intangible assets
Share based compensation for services
Inventory valuation allowance
Deferred tax provision (benefit)
Changes in operating assets and liabilities
(Increase) decrease in:
Accounts receivable
Inventories
Other current assets and prepaid expenses
Value added tax recoverable
Increase (decrease) in:
Other payables and accrued expenses
Income tax payable
Other taxes payable
Net cash provided by (used in) operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Cash deposit for land use right
Purchase of property and equipment
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Net Proceeds from stock repurchase agreement
Proceeds from bank loans-short term
Repayments of bank loans-short term
Proceeds from long term loan
Restricted cash
Due from related party
Proceeds from officer loan
Net proceeds from stock issuance
Net proceeds from exercise of warrants
Net cash provided by financing activities
For the years ended December 31,
2013
2012
$
28,339,926 $
32,670,329
1,432,591
12,205
1,532,563
1,088,901
(272,225)
1,402,235
11,978
1,178,313
-
-
180,215
(20,400,387)
(7,566,421)
1,022,705
203,662
(41,984,607)
(48,588)
(2,281,708)
1,611,132
591,138
165,322
7,737,665
562,823
1,135,904
98,184
(7,051,475)
(32,287,748)
(78,306)
(32,366,054)
-
(150,091)
(150,091)
-
48,915,939
(6,457,550)
28,619,860
(12,500,836)
(52,354,308)
-
12,522,000
4,600,400
23,345,505
751,765
6,337,537
(6,337,537)
-
-
209,510
-
-
961,275
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS
1,023,700
(25,768)
NET DECREASE IN CASH AND CASH EQUIVALENTS
(259,184)
(6,266,059)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
2,544,114
8,810,173
CASH AND CASH EQUIVALENTS, END OF YEAR
$
2,284,930 $
2,544,114
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest expense
Cash paid for income tax
$
$
4,444,627 $
10,863,648 $
470,455
10,757,465
The accompanying notes are an integral part of these consolidated Financial Statements
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
F-5
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
KINGOLD JEWELRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — ORGANIZATION AND BASIS OF PRESENTATION
Kingold Jewelry, Inc. (“Kingold” or the “Company”) was incorporated in the State of Delaware on September 5, 1995.
Dragon Lead Group Limited (“Dragon Lead”) was incorporated in the British Virgin Islands (“BVI”) on July 1, 2008 as an investment
holding company and was 100% controlled by Kingold. Wuhan Vogue-Show Jewelry Co., Limited (“Wuhan Vogue-Show”), which is
principally engaged in design and manufacture of gold and platinum ornaments in the People’s Republic of China (“PRC”), was
incorporated in the PRC as a wholly-owned foreign enterprise on February 16, 2009, and was 100% owned by Dragon Lead. Wuhan
Vogue-Show’s business permit expires on February 16, 2019, and is renewable upon expiration. Wuhan Kingold Jewelry Co., Limited
(“Wuhan Kingold”) was incorporated in the PRC on August 2, 2002 as a limited liability company. On October 26, 2007, Wuhan
Kingold was restructured as a joint stock company limited by shares and its business activities are the same as those of Wuhan
Vogue-Show. Wuhan Kingold’s business permit expires on March 4, 2021 and is renewable upon expiration.
Wuhan Kingold is effectively controlled by Wuhan Vogue-Show through a series of agreements and Amendment Agreements
(collectively referred to as the Restructuring Agreements). In accordance with the Agreements and Amendments, shareholders
holding 100% of the outstanding equity of Wuhan Kingold were parties to the agreements such that Wuhan Kingold has agreed to pay
100% of its after-tax profits to Wuhan Vogue-Show and shareholders owning 100% of Wuhan Kingold’s shares have pledged and
delegated their voting power in Wuhan Kingold to Wuhan Vogue-Show.
These contractual arrangements enable Wuhan Vogue-Show to:
·
·
·
exercise effective control over Wuhan Kingold;
receive substantially all of the economic benefits from Wuhan Kingold; and
have an exclusive option to purchase 100% of the equity interest in Wuhan Kingold, when and to the extent permitted by PRC
law.
Through such arrangements, Wuhan Kingold has become Wuhan Vogue-Show’s contractually controlled affiliate. Kingold is
empowered, through its wholly owned subsidiaries Dragon Lead and Wuhan Vogue-Show, with the ability to control and substantially
influence Wuhan Kingold’s daily operations and financial affairs, appoint its senior executives and approve all matters requiring
shareholders’ approval. Kingold is also obligated to absorb a majority of expected losses of Wuhan Kingold, which enables Kingold to
receive a majority of expected residual returns from Wuhan Kingold, and because Kingold has the power to direct the activities of
Wuhan Kingold that most significantly impact Wuhan Kingold’s economic performance, Kingold, through its wholly-owned
subsidiaries, accounts for Wuhan Kingold as its Variable Interest Entity (“VIE”) under ASC 810-10-05-8A. Accordingly, Kingold
consolidates Wuhan Kingold’s operating results, assets and liabilities.
Kingold, Dragon Lead, Wuhan Vogue-Show and Wuhan Kingold are hereinafter collectively referred to as “the Company.”
F-6
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
KINGOLD JEWELRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the financial statements of Kingold, Dragon Lead, Wuhan Vogue-Show
and Wuhan Kingold. All significant inter-company balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements as well as the reported amounts of revenues and expenses during the reporting period.
Significant estimates required to be made by management include, but are not limited to, useful lives of property, plant and
equipment, intangible assets, the recoverability of long-lived assets and the valuation of accounts receivable, deferred tax assets,
inventories and share based compensation. Actual results could differ from those estimates.
Restricted Cash
As of December 31, 2013, the Company had restricted cash of $12,668,749 compared to $0 as of December 31, 2012. $7.4 million
was related to the bank loan with China CITIC Bank Corporation Limited (“CITIC Bank”) – see Note 6 for details. $5.1 million was
related to the gold lease deposits with Shanghai Pudong Development Bank (“SPD Bank”) and CITIC Bank– see Note 14 – Gold
Lease Transactions.
Accounts Receivable
The Company generally receives cash payment upon delivery of a product, but may extend unsecured credit to its customers in the
ordinary course of business. The Company mitigates the associated risks by performing credit checks and actively pursuing past due
accounts. An allowance for doubtful accounts is established and recorded based on management’s assessment of the credit history
of the customers and current relationships with them. At December 31, 2013 and December 31, 2012, 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 or market value, cost being calculated on the weighted average basis. As of December 31,
2013 and 2012, respectively, the Company recorded a lower of cost or market adjustment of $1.1 million and $nil to adjust the
carrying value to market. 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.
F-7
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
KINGOLD JEWELRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. The estimated
useful lives used in connection with the preparation of the financial statements are as follows:
Buildings
Plant and machinery
Motor vehicles
Office furniture and electronic equipment
Land Use Right
Estimated
Useful Life
30 years
15 years
10 years
5 – 10 years
Under PRC law, all land in the PRC is owned by the government and cannot be sold to an individual or company. The government
grants individuals and companies the right to use parcels of land for specified periods of time. These land use rights are sometimes
referred to informally as “ownership.” Land use rights are stated at cost less accumulated amortization. Amortization is provided over
the respective useful lives, using the straight-line method. Estimated useful life is 50 years, and is determined in connection with the
term of the land use right.
F-8
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
KINGOLD JEWELRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Long-lived assets
The Company accounts for long-lived assets under 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 testing when circumstances require. 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 that are subject to evaluation consist primarily of property, plant and equipment, and
land use rights. For the years ended December 31, 2013 and 2012, the Company did not recognize any allowances for impairment of
its long-lived assets.
Fair value of financial instruments
The Company adopted the provisions of ASC 820, “Fair Value Measurements and Disclosures.” ASC 820 clarifies the definition of fair
value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair
value as follows:
Level 1-Observable inputs such as unadjusted quoted prices in active markets for identical assets or liabilities available at the
measurement date.
Level 2-Inputs other than quoted prices that are observable for the asset or liability in active markets, quoted prices for identical or
similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived
from or corroborated by observable market data.
Level 3-Inputs are unobservable inputs which reflect management’s assumptions based on the best available information.
The carrying value of accounts receivable, other current assets and prepaid expenses, short term loans, other payables and accrued
expenses approximate their fair values because of the short-term nature of these instruments. The Company is of the opinion that it is
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 the Company with the raw materials and the Company
creates products per that customer’s instructions, whereas in branded production the Company generally purchases gold directly and
manufactures and markets the products on its own. The Company recognizes revenues under 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 and (ii) the Company’s collection of such fees is reasonably assured. These criteria, as related to
the Company’s revenues, are considered to have been met as follows:
Sales of branded products
The Company recognizes 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.
F-9
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
KINGOLD JEWELRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Customized production fees
The Company recognizes services-based revenue from such contracts when: (i) the contracted services have been performed and (ii)
collectability is deemed probable. Revenues from customized production services made up approximately 2.19% of total revenue for
the year ended December 31, 2013, compared to 2.22% for the year ended December 31, 2012.
Income taxes
The Company accounts for income taxes under FASB Codification Topic 740 (ASC 740). 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,” 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 did not record any uncertain tax position at December 31, 2013 or at December 31, 2012.
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 2008
and after. As of December 31, 2013, the tax years ended December 31, 2007 through December 31, 2012 for the Company’s
People’s Republic of China (“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.”
F-10
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
KINGOLD JEWELRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The value of RMB against US$ and other currencies may fluctuate and is affected by, among other things, changes in the PRC’s
political and economic conditions. Any significant revaluation of RMB may materially affect the Company’s financial condition in terms
of US$ reporting. The following table outlines the currency exchange rates that were used in creating the consolidated financial
statements in this report:
December 31,
2013
December 31,
2012
Balance sheet items, except for share capital, additional paid in capital and retained
earnings, as of the year ended
$1=RMB 6.1122 $1=RMB 6.30860
Amounts included in the statements of operations and cash flows for the year
$1=RMB 6.1943 $1=RMB 6.31160
Comprehensive income
Comprehensive income consists of two components, net income and other comprehensive income. The foreign currency translation
gain or loss resulting from translation of the financial statements expressed in RMB to US$ is reported in other comprehensive
income in the consolidated statements of income and comprehensive income and the consolidated statements of changes in equity.
Earnings per share
The Company computes earnings per share (“EPS”) in accordance with ASC 260 “Earnings per Share” (ASC 260), and SEC Staff
Accounting Bulletin No. 98 (SAB 98). ASC 260 requires companies with complex capital structures to present basic and diluted EPS.
Basic EPS is measured as net income divided by the weighted average common shares outstanding for the period. Diluted EPS is
similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., convertible securities,
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.
Stock-Based compensation
The Company follows the provisions of ASC 718, “Compensation — Stock Compensation,” which establishes the accounting for non-
employee and employee stock-based awards. Under the provisions of ASC 718, the fair value of the stock issued is used to measure
the fair value of services received as the Company believes such approach is a more reliable method of measuring the fair value of
the services. For non-employee stock-based awards, fair value is measured based on the value of the Company’s common stock on
the date that the commitment for performance by the counterparty has been reached or the counterparty’s performance is complete.
The fair value of the equity instrument is calculated and then recognized as compensation expense over the requisite performance
period. 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.
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 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.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
F-11
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
KINGOLD JEWELRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Furthermore, the value of the Company’s inventory may be affected by commodity prices. The Company records the value of its
inventory using the lower of cost or market value, cost calculated on the weighted average method. As a result, decreases in the
market value of precious metals such as gold would result in a lower stated value of the Company’s inventory, which may require it to
take a charge for the decrease in the value of its inventory.
The Company’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, including the organization and structure disclosed in Note 1, this
may not be indicative of future results.
Recent Accounting Pronouncements
The Company does not believe that any recently issued, but not yet effective, accounting standards, if currently adopted, will have a
material effect on its consolidated financial position, results of operations, or cash flows.
F-12
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
KINGOLD JEWELRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - INVENTORIES, NET
Inventories as of December 31, 2013 and December 31, 2012 consisted of the following:
Raw materials
Work-in-progress
Finished goods
Inventory in transit
Inventory valuation allowance
Total inventory
As of
December 31,
2013
December 31,
2012
$
$
42,882,587 $
97,503,987
35,150,454
-
(1,103,527)
174,433,501 $
8,548,288
109,311,733
26,899,404
5,281,996
-
150,041,421
As of December 31, 2013, the Company recorded a lower of cost or market adjustment of $1,103,527.
NOTE 4 - PROPERTY AND EQUIPMENT, NET
The following is a summary of property and equipment as of December 31, 2013 and December 31, 2012:
Buildings
Plant and machinery
Motor vehicles
Office and electric equipment
Subtotal
Less: accumulated depreciation
Property and equipment, net
As of
December 31,
December 31,
2013
2,509,815 $
19,444,059
71,906
630,626
22,656,406
(11,969,459)
10,686,947 $
2012
2,412,024
18,807,970
69,667
584,515
21,874,176
(10,190,189)
11,683,987
$
$
Depreciation expense for the years ended December 31, 2013 and 2012 was $1,432,591 and $1,402,235, respectively.
F-13
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
KINGOLD JEWELRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – DEPOSIT ON LAND USE RIGHT
On October 23, 2013, the Company, through its wholly-owned subsidiary, Wuhan Kingold, entered into an agreement (the
“Agreement”) with Wuhan Wansheng House Purchasing Limited (“Wuhan Wansheng”) and Wuhan Huayuan Science and Technology
Development Limited Company (“Wuhan Huayuan”). The Agreement provides for the build out of the planned “Shanghai Creative
Industry Park Project,” which is proposed to be renamed to “Kingold Jewelry International Industry Park” (the “Jewelry Park Project”
or the “Project”). Pursuant to the Agreement, Wuhan Kingold will acquire the land use right of a parcel of land (the “Land”) in Wuhan
for a total of 66,667 square meters (approximately 717,598 square feet, or 16.5 acres) (the “Land Use Right”), which has been
approved for real estate development use. Wuhan Kingold has committed to provide a total sum of RMB1.0 billion (approximately
US$164 million) for the acquisition of this Land Use Right and to finance the entire development and construction of a total of 192,149
square meters (approximately 2,068,275 square feet) of commercial properties, which are proposed to include a commercial
wholesale center for various jewelry manufacturers, two commercial office buildings, a commercial residence of condominiums as
well as a five-star hotel.
As of December 31, 2013, Wuhan Kingold had made the RMB200 million (approximately US$33 million) deposit on the Land Use
Right. Wuhan Kingold is also required to make the construction payments to finance the entire construction, as estimated based on
certain construction project milestones listed below. Wuhan Kingold will appoint a financial controller for the project to supervise and
monitor the use of milestone payments. Upon the completion of the whole project in accordance with the specific requirements
agreed upon by both signing parties, Wuhan Kingold will have complete ownership of the properties situated on the land and intends
to either sell or lease various properties.
Date
October 2013*
January 2014
June 2014
September 2014
January 2015
June 2015
Total
* Includes initial deposit made to seller
** In USD based on current exchange rates
Payment Commitment
(RMB in millions)
Payment Commitment
(US$ in millions)**
200 $
50
100
150
250
250
1,000 $
33
8
16
25
41
41
164
Because the Land Use Right will not be transferred to Wuhan Kingold until the completion of the entire project, the initial payment of
RMB200 million was recorded as “Deposit on Land Use Right” on the balance sheet. Any future payments towards the construction of
the Jewelry City Project will be recorded as “Construction in Progress” until the Project is completed and certified for use. Upon the
completion of the Project, the excess of RMB1.0 billion commitment over the actual amount spent on the construction of the Project
shall be deemed as the actual cost of the land use right.
F-14
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
KINGOLD JEWELRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - LOANS
Short term loans consist of the following:
a) Loans payable to CITIC Bank Corporation Limited
b) Loan payable to Xing Ye Bank Wuhan Branch
c) Loans payable to CITIC Bank Wuhan Branch
d) Loans payable to CITIC Bank Wuhan Branch
e) Loan payable to Jiang’an Wuhan Branch of Hubei Bank Co
As of
December 31,
2013
December 31,
2012
$
- $
7,853,146
17,996,793
15,542,685
8,180,361
6,340,551
-
-
-
Total short term loans
$
49,572,985 $
6,340,551
a) Loans payable to CITIC Bank consists of two working capital loan contracts with original one-year terms from November 29, 2011
to November 29, 2012. The loans were renewed for another year and matured November 29, 2013. The Company paid them in full at
maturity. These loans carried a fixed interest rate of 6.6% per annum and were secured by the Company’s buildings, and its plants
and machinery.
b) Loan payable to Xing Ye Bank Wuhan Branch with an aggregated amount of RMB48 million (equivalent to approximately US$7.9
million) consists of one Loan Contract signed on December 10, 2013, with a maturity date of April 17, 2014, and has an annual
interest rate of 6.6%. This loan is guaranteed by the Company’s Chairman and Chief Executive Officer’s personal credit.
c) Loans payable to CITIC Bank Wuhan Branch with an aggregated amount of RMB110 million (equivalent to approximately US$18.1
million) consists of three working capital loan contracts originated on December 5, 2013, with a maturity date of March 1, 2014,
March 5, 2014, and March 20, 2014, respectively. The annual interest rate is 6.6%. All the loans from CITIC Bank Wuhan Branch are
secured by restricted cash of RMB22 million (equivalent to approximately US$3.6 million)
d) Loans payable to CITIC Bank Wuhan Branch with an aggregated amount of RMB95 million (equivalent to approximately US$15.6
million) consists of three working capital loan contracts signed on December 6, 2013 with a maturity date of April 11, 2014, April 18,
2014 and May 8, 2014, respectively. The annual interest rate is 6.9%. All loans from CITIC Bank Wuhan Branch are secured by
restricted cash of RMB23 million (equivalent to approximately US$3.8 million)
e) Loan payable to Bank of Hubei, Wuhan Jiang’an Branch with an aggregated amount of RMB50 million (equivalent to approximately
US$8.2 million) consists of one Loan Contract signed on December 10, 2013 with a maturity date of April 18, 2014. The annual
interest rate is 6.6%. This loan is guaranteed by the Company’s Chairman and Chief Executive Officer’s personal credit.
F-15
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
KINGOLD JEWELRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Long term loans consists of the following:
As of
December 31,
2013
December 31,
2012
f) Loan payable to Chang’an International Trust Co., Ltd.
Total long term loans
$
$
29,004,287 $
29,004,287 $
-
-
f) On November 29, 2013, Wuhan Kingold entered into a Trust Loan Contract in the amount of RMB200 million (equivalent to
approximately US$32.8 million) with Chang’an International Trust Co., Ltd. in order to undertake the aforementioned acquisition of
Jewelry Park Project (see Note 5). The Trust Loan was approved on December 3, 2013. The loan has a 24-month term, and bears a
fixed annual interest rate of 13.5%. The loan is secured by 1,000 kilograms of Au99995 gold pledged by Wuhan Kingold. As of
December 31, 2013, the Company received a total of RMB177 million (equivalent to approximately US$29 million).
Interest expense for the above mentioned loans amounted to $1,047,981 and $444,997 for the years ended December 31, 2013 and
2012, respectively.
NOTE 7 - 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 for 2013 and 2012. The
Company had loss carry forwards of approximately $9,064,118 for U.S. income tax purposes available for offsetting against future
taxable U.S. income, expiring in 2033. Management believes that the realization of the benefits from these losses is uncertain due to
its history of continuing losses in the United States. 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 December 31, 2013 was $3,081,800. The net
increase in the valuation allowance for the year ended December 31, 2013 was $907,577.
Dragon Lead is incorporated in the BVI, and under current laws of the BVI, income earned is not subject to income tax.
Wuhan Vogue-Show and Wuhan Kingold are incorporated in the PRC and are subject to PRC income tax, which is computed
according to the relevant laws and regulations in the PRC. The applicable tax rate is 25% for the years ended December 31, 2013
and 2012.
The Company has deferred income tax assets of $0.275 million as of December 31, 2013, from its foreign operations, which are
related to an inventory allowance reflecting the decline in gold prices.
The Company intends to reinvest foreign profits indefinitely in order to avoid recording a deferred tax liability upon repatriation to the
United States.
F-16
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
KINGOLD JEWELRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Significant components of the income tax provision were as follows for the year ended December 31, 2013 and 2012:
Current tax provision
Federal
State
Foreign
Deferred tax provision (benefit)
Federal
State
Foreign
Income tax provision
For the years ended December 31,
2013
2012
- $
-
11,454,787
11,454,787
-
-
11,893,370
11,893,370
- $
-
(272,225)
(272,225)
11,182,562 $
-
-
-
-
11,893,370
$
$
$
Income from continuing operations before income taxes was allocated between the U.S. and foreign components for the years ended
December 31, 2013 and 2012 as follows:
United States
Foreign
For the years ended December 31,
2013
2012
$
(2,669,344) $
42,191,832
39,522,488
(2,249,816)
46,813,515
44,563,699
The following table reconciles the U.S. statutory rates to the Company’s effective rate for the years ended December 31, 2013 and
2012:
U.S. statutory rate
Foreign income not recognized in U.S.A.
China income tax
Non-deductible expenses
Effective tax rate
NOTE 8 - EARNINGS PER SHARE
For the years ended December 31,
2013
2012
34%
(34)%
25%
3%
28%
34%
(34)%
25%
2%
27%
Through December 31, 2013, Kingold had 1,417,778 warrants issued and outstanding in connection with the issuance of its common
stock in public offerings. Of these warrants: 823,778 warrants were issued in 2009, with an exercise price of $0.996; 150,000
warrants were issued in 2011, with an exercise price of $3.25; 144,000 warrants were issued in 2011, with an exercise price of $3.99;
and 300,000 warrants were issued in January 2013, with an exercise price of $1.80. As of December 31, 2013, the warrants issued in
2009 were considered dilutive and were included in the weighted average shares-diluted calculation using the treasury stock method.
The warrants issued in 2011 and 2013 were anti-dilutive because the exercise prices were higher than the average market price for
the year ended December 31, 2013. Accordingly, such warrants are not included in weighted average shares calculation.
F-17
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
KINGOLD JEWELRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2013, Kingold also had 3,130,000 options outstanding to purchase the same number of shares of the Company’s
common stock. Of those 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; 1,300,000 options were granted in 2012, with an exercise price of $1.22; 120,000
options were granted in 2012, with an exercise price of $1.49; and 90,000 options were granted in 2013, with an exercise price of
$1.18. As of December 31, 2013, 1,300,000 options granted in 2012 and 90,000 options granted in 2013 were considered dilutive and
were included in the weighted average shares-diluted calculation using the treasury stock method. The options granted in 2011 and
120,000 options granted in 2012 were anti-dilutive because the exercise prices were higher than the average market price for the
year ended December 31, 2013. Accordingly, they are not included in weighted average shares calculation.
The following table presents a reconciliation of basic and diluted net income per share:
Net income
For the years ended December 31,
2013
2012
$
28,339,926 $
32,670,329
Weighted average number of common shares outstanding - Basic
63,495,520
53,590,528
Effect of dilutive securities:
Unexercised warrants and options
407,392
769,036
Weighted average number of common shares outstanding - Diluted
63,902,912
54,359,564
Earnings per share-Basic
Earnings per share-Diluted
NOTE 9 - EQUITY
$
$
0.45 $
0.44 $
0.61
0.60
On January 10, 2013, the Company entered into a subscription agreement with three individuals (the “Subscription Agreement”), and
issued an aggregate of 7,000,000 shares of its common stock at a price of $1.80 per share for aggregate gross proceeds of
$12,600,000 in accordance therewith. The Company received net proceeds of $12,522,000 after deducting offering costs of $78,000.
On April 3, 2013, the Compensation Committee of the Company’s Board of Directors approved a grant to the Company’s Chief
Financial Officer (“CFO”) of 360,000 shares of common stock for renewing a three year contract. Accordingly, on April 7, 2013, the
Company issued 223,076 shares to the CFO with a value of $305,614 and the remaining 136,924 shares with a value of $169,786
were issued on September 3, 2013. The Company recorded a total of $475,400 as share-based compensation for the year ended
December 31, 2013.
On October 25, 2013, 400,000 shares were issued to Financial Buzz Media Networks LLC (“Financial Buzz”) for its consulting
services. According to the consulting service agreement between the company and Financial Buzz (the “Financial Buzz Agreement”),
the consulting service period is from October 2013 to September 2014. Pursuant to the Financial Buzz Agreement, the company is
obligated to issue an additional 600,000 shares to Financial Buzz. The fair value of this common stock compensation is based on the
closing stock price on the date at which the 400,000 shares were granted. $182,000 of stock compensation expense was recognized
for the year ended December 31, 2013. The Company included $546,000 of prepaid expenses in “other current assets and prepaid
expenses” on the balance sheet as of December 31, 2013.
F-18
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
KINGOLD JEWELRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 2013, the Company issued 2,622,322 shares for the exercise of the warrants (see Note
10 — Warrants).
As of December 31, 2013, the Company had 64,953,462 shares of common stock issued and outstanding and warrants outstanding to
purchase up to 1,417,778 shares of its common stock.
NOTE 10 - WARRANTS
In connection with the Subscription Agreement, the Company issued warrants to acquire an aggregate of 2,800,000 shares of its
common stock with an exercise price of $1.80 to three individuals on January 10, 2013. All such warrants are exercisable at any time
in whole or in part within 12 months of the date of the Subscription Agreement.
On April 15, 2013, warrants to acquire an aggregate 2,500,000 shares at $1.80 per share were exercised for a cash payment of
$4,500,000 to the Company.
On November 14, 2013, warrants to receive 30,120 shares (2009 warrants) with an exercise price of $0.996 were exercised for
cashless and 15,195 shares of common stock were issued.
On December 18, 2013, warrants (2009) to acquire an aggregate 100,400 shares at $0.996 per share were exercised for a cash
payment of $100,400 to the Company.
On December 27, 2013, warrants to receive 15,060 shares (2009 warrants) with an exercise price of $0.996 were exercised for
cashless and 6,727 shares of common stock were issued.
Following is a summary of the status of warrant activities as of December 31, 2013:
Warrants Outstanding
Weighted Average
Exercise Price
Outstanding, January 1, 2013
Granted
Forfeited
Exercised
Outstanding, December 31, 2013
NOTE 11 - OPTIONS
1,388,358 $
2,800,000
(125,000)
(2,645,580)
1,417,778 $
Average Remaining Life in Years
2.04
0.03
1.57
1.80
1.20
1.74
1.74
0.86
On March 24, 2011, the Board of Directors voted to adopt the 2011 Stock Incentive Plan (the “Plan”), which was later ratified by the
Company’s stockholders on October 31, 2011, at the 2011 annual meeting.
The Plan permits the granting of stock options (including incentive stock options as well as nonstatutory stock options), stock
appreciation rights, restricted and unrestricted stock awards, restricted stock units, performance awards, other stock-based awards or
any combination of the foregoing. Under the terms of the Plan, upon stockholder approval, up to 5,000,000 shares of the Company’s
common stock will be granted.
For options issued prior to January 1, 2012, the compensation expense of $441,754 and $477,977 were recorded as part of operating
expense-stock compensation for the 1,620,000 options above for the years ended December 31, 2013 and 2012, respectively.
F-19
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
KINGOLD JEWELRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On January 9, 2012, the Company 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 (such date is 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
options 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. In accordance with the vesting
periods, $379,109 and $379,109 were recorded as part of operating expense-stock compensation for the 1,300,000 options above for
the years ended December 31, 2013 and 2012, respectively.
On April 1, 2012, the Company granted 120,000 options with an exercise price of $1.49 to its CFO per his employment agreement.
These options can be exercised within ten years from the grant date once they become exercisable. The options become exercisable
every 3 months starting from grant date for the one year service period from April 1, 2012. The fair value of the options was calculated
using the Black-Scholes options pricing model using the following assumptions: volatility of 124.50%, risk free interest rate of 2.23%,
and expected term of 10 years. The fair value of the options was $170,967. In accordance with the vesting periods, $42,742 and
$128,225 were recorded as part of operating expense-stock compensation for the 120,000 options above for the years ended
December 31, 2013 and 2012, respectively.
On July 16, 2013, the Company granted 90,000 options with an exercise price of $1.18 to its non-employee directors, which options
expire ten years from the grant date under the Plan. These options became exercisable in accordance with the following schedule:
(a) 25% of the options became exercisable on the first anniversary of the grant date (the “Initial Vesting Date”), and (b) 6.25% of the
options became 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 options was calculated using the Black-Scholes options pricing
model using the following assumptions: volatility of 118.01%, risk free interest rate of 2.55%, and expected term of 6.25 years. The
fair value of the options was $92,458. In accordance with the vesting periods, $11,557 and $0 were recorded as part of operating
expense-stock compensation for the 90,000 options above for the years ended December 31, 2013 and 2012, respectively.
As of December 31, 2013, the Company had 1,849,375 outstanding vested stock options with a weighted average remaining term
over 7.78 years. As of December 31, 2013, the Company had 1,280,625 unvested stock options with a weighted average remaining
term over 7.80 years. Unrecorded stock-based compensation expense was $1,391,311 as of December 31, 2013.
The following table summarizes the Company’s stock option activity:
Number of
options
Weighted Average
Exercise Price
Weighted Average
Remaining
Life in Years
Fair Value
Outstanding, January 1, 2012
Granted
Forfeited
Exercised
Outstanding, December 31, 2012
Exercisable, December 31, 2012
Granted
Forfeited
Exercised
Outstanding, December 31, 2013
Exercisable, December 31, 2013
1,620,000 $
1,420,000
-
-
3,040,000 $
883,125 $
90,000
-
-
3,130,000 $
1,849,375 $
F-20
2.57
1.24
-
-
1.95
2.43
1.18
-
-
1.93
2.08
9.25
1,947,970
10.00
-
-
8.61
8.35
9.50
-
-
7.66
7.78
1,687,402
-
-
3,635,372
1,082,249
92,458
-
-
3,727,830
2,230,185
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
KINGOLD JEWELRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - CONCENTRATIONS AND RISKS
The Company maintains certain bank accounts in the PRC and BVI, which are not protected by Federal Deposit Insurance
Corporation (“FDIC”) insurance or other insurance. The cash and restricted cash balance held in the PRC bank accounts was
$14,660,013 and $2,515,264 as of December 31, 2013 and December 31, 2012, respectively. The cash balance held in the BVI bank
accounts was $9,847 and $18,457 as of December 31, 2013 and December 31, 2012, respectively. As of December 31, 2013 and
December 31, 2012, the Company held $274,016 and $10,393 of cash balances within the United States, of which $24,016 and $0
was in excess of FDIC insurance limits of $250,000 as of December 31, 2013 and December 31, 2012, respectively.
During the years ended December 31, 2013 and 2012, almost 100% of the Company's assets were located in the PRC and 100% of
the Company's revenues were derived from its subsidiaries located in the PRC.
The Company’s principal raw material used during the year was gold, which accounted for almost 100% of its total purchases for the
years ended December 31, 2013 and 2012. The Company purchased gold directly, and solely, from the Shanghai Gold Exchange,
the largest gold trading platform in the PRC.
No customer accounted for more than 10% of annual sales for the years ended December 31, 2013 or 2012.
NOTE 13 - RELATED PARTY TRANSACTIONS
As of December 31, 2012, the Company had a related party loan payable of $209,890, due to the Company’s Chairman and Chief
Executive Officer, who lends funds for the Company’s operations whenever necessary. This loan is unsecured, non-interest bearing
and due on demand. The payable was settled in 2013.
On December 31, 2013, the Company temporarily advanced a total of RMB400 million (approximately US$65 million) to a company
owned by one of the directors of Wuhan Kingold. The purpose of the temporary advancement was to provide temporary funds in
connection with such company’s annual capital verification in China. The funds were returned to the Company in full on January 2,
2014. The Company also previously borrowed RMB80 million (approximately US$13 million) from the same company to meet its
temporary working capital needs on December 2, 2013. The loan had an annual interest rate of 6% and matured on January 28,
2014. The loan was repaid on the due date.
NOTE 14 - GOLD LEASE TRANSACTIONS
On December 20, 2012, Wuhan Kingold entered into a gold lease agreement with China Construction Bank’s Wuhan Jiang’an Branch
(“CCB”) that became effective in January 2013, originally terminated on October 26, 2013 and extended to July 22, 2014 (the “Gold
Lease Agreement”). Gold leased under the Gold Lease Agreement bears interest at a rate of approximately 6% per annum and is
calculated based on the actual weight of gold leased (in grams), the price of gold (yuan/gram) at the time of delivery, and number of
days the gold was leased. The Company leased 676 kilograms of gold (valued at approximately RMB226 million or US$36 million)
from CCB in January 2013. At the end of the lease, the Company will need to return 676 kilograms of gold to CCB. Wuhan Kingold
received notification from CCB that the total credit line under the Gold Lease Agreement was increased in August 2013 to RMB400
million (approximately US$65.4 million), an increase of RMB150 million from the original credit line of RMB250 million. Wuhan
Kingold used the increased credit line to lease roughly 575 kilograms of additional gold in the third quarter of 2013. On December 18,
2013 and January 13, 2014 the Company returned 430 and 246 kilograms of gold to CCB, respectively. On January 14, 2014 and
February 12, 2014, the Company leased additional 570 and 310 kilograms of gold based on the Gold Lease Agreement, respectively
with aggregate market value of RMB218 million (approximately US$35.7 million).
On January 1, 2013, Wuhan Kingold entered into a gold lease framework agreement (the “Framework Agreement”) with SPD Bank. In
February 2013, Wuhan Kingold leased an aggregate of 530 kilograms of gold with a market price of approximately RMB176 million
(US$28.1 million) from SPD Bank pursuant to separate lease agreements entered into under the Framework Agreement. The
Company is required to deposit cash into an account at SPD Bank equal to approximately RMB15.8 million (approximately US$2.5
million) and pledge the amount to SPD Bank. The leases each have an initial term of approximately 12 months, and provide for an
interest rate of 6% per annum. Lease payments to SPD are due quarterly beginning in March 2013, and are calculated based on the
stated annual rate of 6%, the actual weight of gold leased (in grams), the fair market price of gold at the time of delivery, and the
actual number of days the gold was leased. At the end of the leases in February 2014, the Company returned 530 kilograms of gold
to SPD Bank.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
F-21
KINGOLD JEWELRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On July 25, 2013, Wuhan Kingold borrowed an aggregate of 100 kilograms of gold with a market price of approximately RMB26.8
million (approximately US$4.4 million). This gold lease agreement has an initial term of approximately 6 months with a lease rate of
6% per annum. Wuhan Kingold secured its obligation to pay rent (and return the leased gold to SPD Bank at the end of the lease
term) by depositing cash into an account at SPD Bank equal to approximately RMB2.4 million (approximately US$391,000) and
pledging the account to SPD Bank. On January 24, 2014, the Company extended the lease period to an additional 12 months when
the lease expired. Wuhan Kingold is required to deposit cash into an account at SPD Bank equal to approximately RMB2.0 million
(approximately US$327,000).
On December 16, 2013, Wuhan Kingold leased an aggregate of 120 kilograms of gold with a market price of approximately RMB29.7
million (US$4.85 million) from SPD Bank pursuant to separate lease agreements entered into under the Framework Agreement. The
Company is required to deposit cash into an account at SPD Bank equal to approximately RMB3 million (US$490,000) and pledge
the amount to SPD Bank. This gold lease agreement has an initial term of approximately 12 months with a lease rate of 6% per
annum. At the end of the leases, the Company will need to return 120 kilograms of gold to SPD Bank.
On August 28, 2013, Wuhan Kingold entered into a gold lease framework agreement with the Wuhan branch of CITIC Bank, and
subsequently leased an aggregate of 150 kilograms of gold (valued at approximately RMB41.6 million or approximately US$6.7
million) from CITIC Bank pursuant to lease agreement entered into under the framework agreement. The lease has an initial term of
approximately 12 months, and provides for an interest rate of 5.6% per annum. Lease payments to CITIC Bank are due at the end of
the leasing period. At the end of the lease, the Company will need to return 150 kilograms of gold to CITIC Bank. Under the
gold lease agreement with CITIC Bank, the Company is required to deposit cash into an account at CITIC equal to approximately
RMB8.4 million (approximately US$1.4 million) and pledge the amount to CITIC Bank. On January 27, 2014, Wuhan Kingold leased
additional 150 kilograms of gold (valued at approximately RMB36.5 million or approximately US$5.9 million), pursuant to separate
lease agreements entered into under the Framework Agreement. The Company is required to deposit cash into an account at CITIC
equal to approximately RMB7.3 million (approximately US$1.2 million) and pledge the amount to CITIC Bank. On February 21, 2014,
Wuhan Kingold leased additional 200 kilograms of gold (valued at approximately RMB55.5 million or approximately US$9.1 million)
pursuant to separate lease agreements entered into under the Framework Agreement. The Company is required to deposit cash into
an account at CITIC equal to approximately RMB10.5 million (approximately US$1.7 million) and pledge the amount to CITIC Bank.
On March 5, 2014, Wuhan Kingold leased an additional 150 kilograms of gold (valued at approximately RMB39.9 million or
approximately US$6.5 million) pursuant to separate lease agreements entered into under the Framework Agreement. The Company
is required to deposit cash into an account at CITIC equal to approximately RMB9 million (approximately US$1.5 million) and pledge
the amount to CITIC Bank. These three leases have a term of 6 months and provides for an interest rate of 6% per annum.
The Company leased the gold as a way to fuel its growth and will return the same amount of gold to CCB, SPD Bank and CITIC
Bank at the end of the respective lease agreements. Under these gold lease arrangements, each of CCB, SPD Bank and CITIC Bank
retains beneficial ownership of the gold leased to the Company and treats it as if the gold is placed on consignment to the Company.
All three banks have their own representatives on the Company’s premises to monitor on a daily basis the use and security of the
gold leased to the Company. Accordingly, the Company records these gold lease transactions as operating leases because the
Company does not have ownership nor has it assumed the risk of loss for the leased gold. The Company records the lease payments
as interest expense.
F-22
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
KINGOLD JEWELRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2013, 1,721 kilograms of leased gold, at the amount of $83.7 million, will be returned in within fiscal year 2014.
Interest expense for the leased gold for the years ended December 31, 2013 and 2012 was $4,360,248 and $0, respectively.
NOTE 15 – COMMITMENTS AND CONTINGENCIES
Commitments
Future payment commitments under the purchase agreement of “Kingold Jewelry International Industry Park” amounted to RMB800
million (US$131 million). See Note 5 “Deposit on land use right.”
Guarantee
The Company guaranteed payment to a nonrelated third party, Wuhan Hengtong Weibang Trading LTD Co. (“Wuhan Hengtong”), of
RMB20 million (approximately US$3.2 million) in bank loans (the “Guarantee”). Such Guarantee will terminate upon payment and/or
cancellation of the obligation once it is repaid. A payment by the Company would be triggered by failure of the guaranteed party to
fulfill its obligation covered by the Guarantee. The Guarantee expires in September 2014. Wuhan Hengtong deposited RMB8 million
(approximately US$1.3 million) with the Company as the collateral, which was included in “other payables and accrued expenses” on
the balance sheet. The Company’s performance risk under this Guarantee is reviewed regularly, and has resulted in no changes to
its initial valuations.
NOTE 16 – SUBSEQUENT EVENTS
On January 2, 2014, Wuhan Kingold entered into a gold lease agreement with SPD Bank and leased an aggregate of 85 kilograms of
gold with a market price of approximately RMB20.5 million (US$3.4 million) The lease has an initial term of approximately 12 months,
and provides for an interest rate of 7.5% per annum. Lease payments to SPD are due quarterly beginning in March 2014, and are
calculated based on the stated annual rate of 7.5%, the actual weight of gold leased (in grams), the fair market price of gold at the
time of delivery, and the actual number of days the gold was leased. At the end of the lease, the Company will need to return 85
kilograms of gold to SPD Bank.
On January 10, 2014,Wuhan Kingold entered into a gold lease agreement with SPD Bank and leased an aggregate of 210 kilograms
of gold with a market price of approximately RMB51.02 million (US$8.35 million). The lease has an initial term of approximately 6
months, and provides for an interest rate of 7% per annum. The Company is required to deposit cash into an account at SPD Bank
equal to approximately RMB5 million (approximately US$808,000) and pledge the amount to SPD Bank. Lease payments to SPD are
due quarterly beginning in March 2014, and are calculated based on the stated annual rate of 7%, the actual weight of gold leased (in
grams), the fair market price of gold at the time of delivery, and the actual number of days the gold was leased. At the end of the
lease, the Company will need to return 210 kilograms of gold to SPD Bank.
On January 10, 2014, the Company entered into a consulting agreement with Sailesh C. Barchha (the “Consulting Agreement”).
Pursuant to the terms of the Consulting Agreement, Mr. Barchha will provide certain management consulting and financial advisory
services to the Company over the two year term of the Consulting Agreement. In exchange for such services, the Company has
issued to Mr. Barchha an aggregate of 1,000,000 shares of common stock of the Company in accordance with the attainment of
certain milestones as provided in the Consulting Agreement.
On February 12, 2014, Wuhan Kingold entered into a gold lease framework agreement (the “Framework Agreement”) with SPD Bank.
In February 2014, Wuhan Kingold leased an aggregate of 320 kilograms of gold with a market price of approximately RMB81.7 million
(US$13.4 million) from SPD Bank pursuant to separate lease agreements entered into under the Framework Agreement. The lease
has an initial term of approximately 4 months, and provides for an interest rate of 6% per annum. The Company is required to deposit
cash into an account at SPD Bank equal to approximately RMB15.8 million (approximately US$2.6 million). Lease payments to SPD
are due quarterly beginning in March 2014, and are calculated based on the stated annual rate of 6%, the actual weight of gold
leased (in grams), the fair market price of gold at the time of delivery, and the actual number of days the gold was leased. At the end
of the lease, the Company will need to return 320 kilograms of gold to SPD Bank.
F-23
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
KINGOLD JEWELRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On February 28, 2014, the Company entered into a joint venture agreement with Kuwait Support Services Company W.L.L. (“KSS”),
a major multi-business group headed by his Excellency Sheikh Ameer Al Sabah of Kuwait. The Company and KSS will form a
combined entity that is expected to source and finance gold, and to develop, market, and distribute gold products including, but not
limited to, gold coins, gold bullion, medals, ornaments, and jewelry. The Company expects to market these products initially to
customers in Kuwait, and then to customers throughout the Middle East. As of the reporting date, there were no payments or other
contributions from the Company or its joint venture partner.
F-24
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-179694 and No. 333-
179260) and Form S-8 (No. 333-177661) of Kingold Jewelry, Inc. of our reports dated March 31, 2014, relating to the consolidated
financial statements and the effectiveness of internal control over financial reporting, which appear in this Annual Report on Form 10-
K of the Company for the year ended December 31, 2013.
/s/ Friedman LLP
New York, NY
March 31, 2014
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
EXHIBITS
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
UNDER
SECTION 302 OF THE SARBANES-OXLEY ACT
EXHIBIT 31.1
I, Zhihong Jia, certify that:
1. I have reviewed this Annual Report on Form 10-K of Kingold Jewelry, Inc. (the “registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing
the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 31, 2014
/s/ Zhihong Jia
Zhihong Jia
Chairman of the Board and Chief Executive Office
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
CERTIFICATION OF CHIEF FINANCIAL OFFICER
UNDER
SECTION 302 OF THE SARBANES-OXLEY ACT
EXHIBIT 31.2
I, Bin Liu, certify that:
1. I have reviewed this Annual Report on Form 10-K of Kingold Jewelry, Inc. (the “registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing
the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 31, 2014
/s/ Bin Liu
Bin Liu
Chief Executive Officer
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.1
In connection with the Annual Report of Kingold Jewelry, Inc. (the “Registrant”) on Form 10-K for the year ended December 31, 2013
as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned Chairman of the Board and
Chief Executive Officer of the Registrant, certifies, in accordance with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Registrant.
/s/ Zhihong Jia
Zhihong Jia
Chairman of the Board and Chief Executive Officer
Date: March 31, 2014
The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, and is not being “filed” as part of the Form 10-K or as a separate disclosure document for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to liability under that
section. This certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as
amended, or the Exchange Act except to the extent that this Exhibit 32.1 is expressly and specifically incorporated by reference in
any such filing.
A signed original of this written statement required by Section 906 has been provided to the Registrant and will be retained by the
Registrant and furnished to the Securities and Exchange Commission or its staff upon request.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.2
In connection with the Annual Report of Kingold Jewelry, Inc. (the “Registrant”) on Form 10-K for the year ended December 31, 2013
as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned Chief Financial Officer of
the Registrant, certifies, in accordance with 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Registrant.
/s/ Bin Liu
Bin Liu
Chief Financial Officer
Date: March 31, 2014
The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, and is not being “filed” as part of the Form 10-K or as a separate disclosure document for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to liability under that
section. This certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as
amended, or the Exchange Act except to the extent that this Exhibit 32.2 is expressly and specifically incorporated by reference in
any such filing.
A signed original of this written statement required by Section 906 has been provided to the Registrant and will be retained by the
Registrant and furnished to the Securities and Exchange Commission or its staff upon request.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.