KINGOLD JEWELRY, INC. - Quarter Report: 2015 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended:

September 30, 2015

For the transition period from: _____________ to _____________

KINGOLD JEWELRY, INC.

(Exact name of registrant as specified in its charter)

15 Huangpu Science and Technology Park

Jiang’an District

Wuhan, Hubei Province, PRC 430023

(Address of principal executive offices) (Zip Code)

(011) 86 27 65694977

(Registrant’s telephone number, including area code)

 x  Yes  ¨  No                   

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

x  Yes  ¨  No                   

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

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

¨  Yes  x  No                   

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

As of November 16, 2015, there were issued and outstanding 65,963,502 shares of common stock, par value $0.001 per share.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

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:

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

PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

KINGOLD JEWELRY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN U.S. DOLLARS)

(UNAUDITED)

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

KINGOLD JEWELRY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)

(IN U.S. DOLLARS)

(UNAUDITED)

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

KINGOLD JEWELRY, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(IN U.S. DOLLARS)

(UNAUDITED)

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

KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1 — BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of Kingold Jewelry, Inc. (“Kingold” or the “Company”) have been prepared in accordance with generally accepted accounting principles (“U.S. GAAP”) for interim financial information pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary to make the financial statements not misleading have been included. Operating results for the interim period ended September 30, 2015 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2015. The information included in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis, and the financial statements and notes thereto included in the Company’s Form 10-K for the fiscal year ended December 31, 2014, filed with the SEC on March 31, 2015, as amended.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

In April 2015, Wuhan Kingold Jewelry Co., Inc. (“Wuhan Kingold”) established a new subsidiary Wuhan Kingold Internet Co., Ltd. (“Kingold Internet”). Total registered capital of Kingold Internet is RMB 1 million (approximately $0.16 million), of which Wuhan Kingold holds a 55% ownership interest and a third-party minority shareholder, Mr. Xiaofeng Lv, holds the remaining 45% ownership interest. Kingold Internet will engage in promoting the online sales of jewelry products through cooperation with Tmall.com, a large business-to-consumer online retail platform owned by Alibaba Group.

Based on the restructuring agreements and the subscription agreement, Wuhan Kingold is considered as a 100% contractually controlled affiliate. Kingold has, through its wholly owned subsidiaries Dragon Lead Group Limited (“Dragon Lead”) and Wuhan Vogue-Show Jewelry Co., Inc. (“Wuhan Vogue-Show”) and 55% owned subsidiary Kingold Internet, 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. For the foregoing reasons 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 under Accounting Standards Codification (“ASC”) 810-10-05-8A. Accordingly, Kingold consolidates Wuhan Kingold’s operating results, assets and liabilities. The Company makes an ongoing assessment to determine whether Wuhan Kingold is still a Variable Interest Entity.

The accompanying unaudited condensed consolidated financial statements include the financial statements of Kingold, Dragon Lead, Wuhan Vogue-Show, and Wuhan Kingold as well as the newly established 55% controlled subsidiary Wuhan Kingold Internet Co., Ltd. The non-controlling interest represents the minority stockholder’s 45% proportionate share of the results of Kingold Internet. All significant inter-company balances and transactions have been eliminated in consolidation.

Kingold, Dragon Lead, Wuhan Vogue-Show, Kingold Internet and Wuhan Kingold are hereinafter collectively referred to as the “Company.”

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. Actual results could differ from those estimates.

Restricted Cash

As of September 30, 2015, the Company had restricted cash of $28,126,941 compared to $14,793,632 as of December 31, 2014. Approximately $1.4 million was related to the bank loan with China CITIC Bank Corporation Limited (“CITIC Bank”) and $0.5 million was related to the bank loan with Minsheng Bank Trust Fund– see Note 6. Approximately $ 20.6 million was related to the gold lease deposits with Shanghai Pudong Development Bank (“SPD Bank”) and CITIC Bank– see Note 14 – Gold Lease Transactions. Approximately $5.5 million was related to the Debt payable deposit with China Shanghai Pudong Development Bank (“Pufa Bank”) – see Note 7 – Debts Payable.

Inventories

Inventories are stated at the lower of cost or market value, and cost is calculated on the weighted average basis. As of September 30, 2015 and December 31, 2014, there was no lower of cost or market adjustment because the carrying value of the Company’s inventories was below the market price of gold. The cost of inventories comprises all costs of purchases, costs of fixed and variable production overhead and other costs incurred in bringing the inventories to their present condition.

KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

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:

Construction in Progress

Construction in progress represents property and buildings under construction and consists of construction expenditures, equipment procurement, and other direct costs attributable to the construction. Construction in progress is not depreciated. Upon completion and when ready for intended use, construction in progress is reclassified to the appropriate category within property, plant and equipment or will be classified as an asset held for sale.

Land Use Right

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

Long-Lived Assets

Certain assets such as property, plant and equipment and construction in progress, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Recoverability of assets that are held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount exceeds the fair value of the asset. There were no events or changes in circumstances that necessitated a review of impairment of long-lived assets as of September 30, 2015 and December 31, 2014.

Fair Value of Financial Instruments

The Company follows 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, deposit payables, other payables and accrued expenses approximate their fair values because of the short-term nature of these instruments. The Company determined that the carrying value of the long term loans approximated their fair value by comparing the stated loan interest rate to the rate charged by similar financial institutions.

KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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 ASC 605 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.

Customized production fees

The Company recognizes services-based revenue (the processing fee) from such contracts when: (i) the contracted services have been performed and (ii) collectability is deemed probable. Net revenues from customized production services made up approximately 2.7% of total revenue for the nine months ended September 30, 2015, compared to 3.0% for the same period ended September 30, 2014.

Income Taxes

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

The provisions of ASC 740-10-25, “Accounting for Uncertainty in Income Taxes,” prescribe a more-likely-than-not threshold for consolidated financial statement recognition and measurement of a tax position taken (or expected to be taken) in a tax return. This interpretation also provides guidance on the recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, and related disclosures. The Company does not believe that there was any uncertain tax position at September 30, 2015 or at December 31, 2014.

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 2009 and after. As of September 30, 2015 the tax years ended December 31, 2009 through December 31, 2014 for the Company’s PRC subsidiaries remain open for statutory examination by PRC tax authorities.

Foreign Currency Translation

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

The Company’s principal country of operations is the PRC. The financial position and results of its operations are determined using RMB, the local currency, as the functional currency. The results of operations and the statement of cash flows denominated in foreign currency are translated at the average rate of exchange during the reporting period. Assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the applicable rates of exchange in effect at that date. The equity denominated in the functional currency is translated at the historical rate of exchange at the time of capital contribution. Because cash flows are translated based on the average translation rate, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet. Translation adjustments arising from the use of different exchange rates from period to period are included as a component of stockholders’ equity as “Accumulated Other Comprehensive Income.”

The value of RMB against US$ and other currencies may fluctuate and is affected by, among other things, changes in the PRC’s political and economic conditions. Any significant revaluation of RMB may materially affect the Company’s financial condition in terms of US$ reporting. See also Note 2, “Risks and Uncertainties”. The exchange rate as of September 30, 2015, December 31, 2014 and September 30, 2014 are as follows:

KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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

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

Share or Stock-Based compensation

The Company follows the provisions of ASC 718, “Compensation — Stock Compensation,” which establishes the accounting for employee stock-based awards. For employee stock-based awards, share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense with graded vesting on a straight-line basis over the requisite service period for the entire award. For the non-employee stock-based awards, the fair value of the awards to non-employees may be measured every reporting period based on the value of the Company’s common stock. The fair value of the equity instrument is calculated and then recognized as compensation expense over the requisite performance period.

Debts Payable

During the quarter ended June 30, 2015, the Company adopted Accounting Standards Update (“ASU”) 2015-03, “Simplifying the Presentation of Debt Issuance Costs,” which requires that debt issuance cost related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts, without changing existing recognition and measurement guidance for debt issuance costs. The new guidance is required to be applied on a retrospective basis and to be accounted for as a change in an accounting principle. There was no impact on prior year financial statements and presentation because the debt issuance was consummated in March 2015.

Deposit payables - Jewelry Park

Deposit payables consist of amounts received from customers relating to the pre-sale of the Company’s residential or commercial units in the Jewelry Park. The Company receives these funds and recognizes them as a liability until the revenue can be recognized.

KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Risks and Uncertainties

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

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

The Company’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 in the December 31, 2014 Form 10-K, this may not be indicative of future results.

KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Recent Accounting Pronouncements

In August 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, or ASU 2015-14. This amendment defers the effective date of the previously issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606), or ASU 2014-09, until the interim and annual reporting periods beginning after December 15, 2017. Earlier application is permitted for interim and annual reporting periods beginning after December 15, 2016. The Company is evaluating the effect, if any, this update will have on the Company's consolidated financial position, results of operations and cash flows.

In April 2015, the FASB issued Accounting Standards Update (“ASU”) 2015-03, Simplifying the Presentation of Debt Issuance Costs” which requires that debt issuance cost related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts, without changing existing recognition and measurement guidance for debt issuance costs. The SEC staff noted that ASU 2015-03 does not address when a company has debt issuance costs related to lines-of-credit arrangements, which may not have an outstanding balance. As a result, in August 2015, the FASB issued ASU No. 2015-15, Interest - Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements - Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting. ASU 2015-15 states that the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The Company does not expect this update will have a material impact on the presentation of the Company's consolidated financial position, results of operations and cash flows.

In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments, which eliminates the requirement to retrospectively account for changes to provisional amounts initially recorded in a business acquisition opening balance sheet. Prior to the issuance of ASU 2015-16, an acquirer was required to restate prior period financial statements as of the acquisition date for adjustments to provisional amounts. This guidance is effective for fiscal years beginning after December 15, 2015, including interim periods within fiscal years. The Company does not expect this update will have a material impact on the presentation of the Company's consolidated financial position, results of operations and cash flows.

KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 3 - INVENTORIES, NET

Inventories as of September 30, 2015 and December 31, 2014 consisted of the following:

No lower of cost or market adjustment was recorded at September 30, 2015 and December 31, 2014.

NOTE 4 - PROPERTY AND EQUIPMENT, NET

The following is a summary of property and equipment as of September 30, 2015 and December 31, 2014:

Depreciation expense for the nine months ended September 30, 2015 and 2014 was $1,000,162, and $1,015,024, respectively. Depreciation expense for the three months ended September 30, 2015 and 2014 was $329,624 and $338,018, respectively.

NOTE 5 – DEPOSIT ON LAND USE RIGHT AND CONSTRUCTION IN PROGRESS - JEWELRY PARK

On October 23, 2013, the Company, through its wholly-owned subsidiary, Wuhan Kingold, entered into an agreement (the “Agreement”) with third-parties 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,” which is proposed to be renamed to “Kingold Jewelry Cultural Industry Park” (the “Jewelry Park”). Pursuant to the Agreement, Wuhan Kingold will acquire the land use rights for 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 RMB 1.0 billion (approximately $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 2,068,000 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 hotel.

KINGOLD JEWELRY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

As of September 30, 2015, Wuhan Kingold has made RMB 520 million (approximately $93 million) of payments toward the construction of the Jewelry Park project. Of the RMB 520 million, RMB 60.4 million (approximately $9.5 million) was allocated to the deposit on the Land Use Right, which represents the total cost of the Land Use Right. Wuhan Kingold is also required to make the construction payments to finance the entire construction project, as estimated based on certain construction project milestones listed below. Wuhan Kingold recorded approximately $81.7 million as “Construction in Progress,” which includes total payment made plus capitalized interest of RMB 46.2 million (approximately $7.27 million) on the long-term bank loan and plus capitalized interest of RMB 14.3 million (approximately $2.25 million) on the Debts. Due to a delay by the construction company Wuhan Wansheng in charge of the project’s construction, the Company has delayed its payments to the construction company by seven to eight months. However, this delay is not expected to impact the total expected cost of RMB 1.0 billion (approximately $164 million) and any over budget cost will be the construction company's liability. As of September 30, 2015, the Company was still obligated to pay the remaining amount of RMB 480 million (approximately $79 million) to the construction company.

In October 2015, we signed a supplemental agreement with the construction company Wuhan Wansheng to amend the original acquisition agreement dated October 23, 2013. Pursuant to this supplemental agreement, Wuhan Wansheng agreed to fully complete the construction and deliver the completed real estate property to us before January 15, 2016. We agreed to pay the balance of construction payments within ten days after Wuhan Wansheng fully completes the construction and delivers the completed real estate property to us.

Upon the completion of the whole project in accordance with the specific requirements agreed upon by the signing parties, Wuhan Kingold will have 100% ownership of the properties situated on the land and intends to either sell or lease various properties. The following table identifies the original payment milestones as well as the new payment milestones, which have been revised to reflect the delays with construction progress associated with those milestones. The Company will continue to evaluate the milestone payment commitments in relation to actual progress and completion and will revise as deemed necessary.

* Includes initial deposit made to seller

** In US$ based on current exchange rates

† Updated to reflect delay to payment schedule

Because the Land Use Right will not be transferred to Wuhan Kingold until the completion of the entire project, the payments of approximately RMB 460 million made plus capitalized interest of RMB 60.5 million as of September 30, 2015 are recorded as “Construction in Progress” on the balance sheet 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. As of September 30, 2015, the payments of RMB 60.4 million made were recorded as “Deposit on Land Use Right.”

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 6 - LOANS

Short term loans consist of the following:

a) Loans payable to CITIC Bank Wuhan Branch with an aggregate amount of RMB 80 million (approximately $13.0 million) consists of three working capital loan contracts originated on April 17, 2014, May 6, 2014 and May 29, 2014, with maturity dates of April 17, 2015, May 6, 2015 and May 29, 2015, respectively. The annual interest rate is 6.9%, 7.2% and 7.2%, respectively. All the loans from CITIC Bank Wuhan Branch were secured by restricted cash of RMB 18 million (approximately $3.0 million). The loan is also secured by 160 kilograms of Au9999 gold, approximately $3 million of which was pledged by Wuhan Kingold. In the second quarter of 2015, Wuhan Kingold paid off loans amounting to RMB 80 million (approximately $13.0 million) on their maturity dates. New loans with an aggregate amount of RMB 40 million (approximately $6.5 million) consists of two working capital loan contracts originated on May 29, 2015 and June 1, 2015, with maturity dates of March 29, 2016 and March 1, 2016, respectively. The annual interest rate of each such loan is 6.72%. All the loans from CITIC Bank Wuhan Branch were secured by restricted cash of RMB 9 million (approximately $1.5 million). In addition, the Company's subsidiary Wuhan Kingold and Mr. Zhihong Jia, Chairman and Chief Executive Officer of the Company, separately signed a maximum guarantee agreement with the bank, to provide a maximum RMB 155 million (approximately $25 million) guarantee for any bank borrowings that Wuhan Kingold borrows from CITIC Bank during May 25, 2015 through May 25, 2016.

b) Loan payable to Bank of Hubei, Wuhan Jiang’an Branch with an aggregate amount of RMB 20 million (approximately $3.3 million) originated on August 26, 2014, with a maturity date of August 26, 2015. The annual interest rate is 6.6%. This loan is secured by the Company’s building and land use rights. The loans were paid off upon maturity.

c) Loan payable to Minsheng Bank Trust Fund, with an aggregate amount of RMB 300 million (approximately $47.1 million) originated on September 17, 2015, with a maturity date of September 25, 2016. The annual interest rate is 12.5%. The loan is to be used for the Company’s working capital. Wuhan Kingold pledged 1,877.4 kilograms of gold valued at RMB 431.8 million (approximately $68 million) at September 30, 2015 to secure this loan.The Company was also required to pledge RMB 3 million (approximately $0.5 million) restricted cash with Mingsheng Bank as collateral. In addition, the Company’s CEO, Mr. Zhihong Jia and his wife, Ms. Lili Huang, jointly signed a guarantee agreement with the bank, to provide a guarantee for the loan.

 Interest expense for all of the loans mentioned above for the nine months ended September 30, 2015 and 2014 was $681,866 and $1,539,249, respectively. For the three months ended September 30, 2015 and 2014, it was $299,713 and $577,858, respectively.

Long term loan consists of the following:

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

d) On November 29, 2013, Wuhan Kingold entered into a Trust Loan Contract in the amount of RMB 200 million (approximately $31.5 million as of the spot rate on September 30, 2015) with Chang’an International Trust Co., Ltd. (the “Trust Loan”) in order to undertake the aforementioned acquisition of the Jewelry Park project (see Note 5). The Trust Loan was approved on December 3, 2013. The loan has a 24-month term, and bears interest at a fixed rate of 13.5% per annum. Wuhan Kingold pledged 1,000 kilograms of gold valued at approximately $39.2 million at September 30, 2015 to secure this loan. Interest for the Trust Loan in the amount of $3.1 million for the nine months and $0.9 million for the three months ended September 30, 2015 was capitalized into construction in progress and was not recorded as part of total interest expenses. The loan will mature on November 29, 2015 and the Company plans to fully repay this loan upon maturity by using the proceeds received from the Mingsheng Bank Trust Loan (see note c) above).

NOTE 7 - DEBTS PAYABLE

On February 9, 2015, Wuhan Kingold received a Notice of Acceptance of Registration (the “Acceptance”) from the PRC’s National Association of Financial Market Institutional Investors (the “NAFMII”), registering the issuance of up to RMB 750 million (approximately $120 million) of debt financing instruments by Wuhan Kingold pursuant to a Non-Public Oriented Debt Financing Instruments Private Placement Agreement, by and among Wuhan Kingold, Shanghai Pudong Development Bank Co., Ltd (“Pufa Bank”) and the other institutional investors named therein (together with Pufa Bank, the “Investors”), dated July 21, 2014 (the “Private Placement Agreement”). Such Private Placement Agreement became valid upon the Acceptance. In connection with the Private Placement Agreement, Wuhan Kingold and Pufa Bank entered into an Underwriting Agreement dated August 12, 2014, appointing Pufa Bank as the lead underwriter and bookkeeping manager for the issuance of the debt securities. The debt financing program is intended to operate similar to a commercial paper program. Under the program, Wuhan Kingold may issue the debt securities at any time within two years from the date of the Acceptance, with the initial issuance completed within six months from the date of the Acceptance. Wuhan Kingold is required to report any issuance to the NAFMII. The Private Placement Agreement provides that the Investors are entitled to, but are not required to, participate in any issuance, and prohibits using the proceeds from any issuance of debt securities for real estate and equity acquisition transactions.

On March 26, 2015, the Company completed the issuance of the first phase of debt financing instruments with the total amount of RMB 400 million (approximately $63 million) under the Private Placement Agreement. The debt has a one-year term and the annual interest rate is 7% and was secured by certain gold or gold products held by Wuhan Kingold and RMB 35 million (approximately $5.5 million) security deposit. The interest expense incurred on the debt financing instruments amounted to approximately $1.1 million for the three months ended September 30, 2015 and approximately $2.3 million for the nine months ended September 30, 2015.

A one-time financing cost of RMB 4 million (approximately $0.65 million) related to the issuance has been offset against the debts payable carrying amount and is being amortized on quarterly basis. As of September 30, 2015, deferred financing cost was $157,386. Amortization expense for the nine months and three months ended September 30, 2015 was $472,158 and $144,761.

The total amount of the second phase issuance will be RMB 350 million (approximately $56 million), and will be secured by certain real property and construction in progress (including the Jewelry Park project). In connection with the foregoing, Wuhan Kingold and Pufa Bank have entered into a Credit Agent Agreement (the “Credit Agent Agreement”), pursuant to which Pufa Bank serves as the agent of the holders of the debt securities. Zhihong Jia, Chairman and Chief Executive Officer of the Company, has executed a guaranty, to guarantee Wuhan Kingold’s obligations under the Credit Agent Agreement. The second phase issuance of RMB 350 million has not been realized as of September 30, 2015. The issuance is expected to happen before the first phase debt expiration date in March 2016 and the proceeds received will be used to pay back the first phase debt.

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 8- DEPOSIT PAYABLES - JEWELRY PARK

In August 2015, the Company started the pre-sale of certain real estate property in the Kingold Jewelry Park (see Note 5). 40,247.93 square meters (approximately 433,000 square feet) of office space have been pre-sold to various buyers at approximately RMB 6,000 per construction square meter and the Company received approximately RMB 144 million (approximately $22.7 million) from buyers. The Company expects to deliver these properties to the customers in January 2016 when the Jewelry Park construction is completed and passed the inspection conducted by the local government authority.

NOTE 9 - INCOME TAXES

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

Kingold is incorporated in the United States and has incurred net operating losses for income tax purposes for 2015 and 2014. The Company has loss carry forwards of approximately $14,902,000 for U.S. income tax purposes available for offsetting against future taxable U.S. income, expiring in 2035. 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 September 30, 2015 and December 31, 2014 was approximately $5,067,000 and $4,732,000, respectively. The net increase in the valuation allowance for the nine and three months ended September 30, 2015 was $335,000 and $66,000, respectively.

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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

Wuhan Vogue-Show, Wuhan Kingold and Kingold Internet 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 nine months ended September 30, 2015 and 2014.

The Company recorded $1.31 million deferred income tax liability-non-current as of September 30, 2015 compared to $0 as of December 31, 2014, from its foreign operations, which was related to the tax effect arising from capitalized interest incurred on the Kingold Jewelry Park construction.

The Company intends to reinvest its foreign profits indefinitely in order to avoid a tax liability upon repatriation to the United States.

Income (loss) from continuing operations before income taxes was allocated between the U.S. and foreign components for the three and nine months ended September 30, 2015 and 2014:

The components of deferred tax assets and deferred tax liability as of September 30, 2015 and December 31, 2014 consist of the following:

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 10 - EARNINGS PER SHARE

As of September 30, 2015, Kingold had 294,000 warrants issued and outstanding in connection with the issuance of its common stock in public offerings. All of these warrants were issued in 2011, of which 150,000 have an exercise price of $3.25 and will expire on January 13, 2016, and 144,000 of which have an exercise price of $3.99, and will expire on January 13, 2016. As of September 30, 2015, these warrants were anti-dilutive because the exercise prices were higher than the average market price for the three and nine months ended September 30, 2015. Accordingly, such warrants are not included in weighted average shares calculation for 2015.

As of September 30, 2015, Kingold also had 3,220,000 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, and will expire on October 31, 2021; 1,500,000 options were granted in 2011, with an exercise price of $2.59, and will expire on October 31, 2021; 1,300,000 options were granted in 2012, with an exercise price of $1.22, and will expire on January 9, 2022; 120,000 options were granted in 2012, with an exercise price of $1.49, and will expire on April 1, 2022; 90,000 options were granted in 2013, with an exercise price of $1.18, and will expire on July 16, 2023; and 90,000 options were granted in 2015, with an exercise price of $1.11 per share and will expire on February 25, 2025. As of September 30, 2015, all the options granted were anti-dilutive because the exercise prices were higher than the average market price for the three and nine months ended September 30, 2015. Accordingly, they are not included in weighted average shares calculation.

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

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED

NOTE 11 - OPTIONS

On February 25, 2015, the Company granted 90,000 options with an exercise price of $1.11 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, 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 115.20%, risk free interest rate of 1.96%, and expected term of 6.25 years. The aggregate fair value of the options was $85,822.

As of September 30, 2015 the Company had 2,922,500 outstanding vested stock options with a weighted average remaining term over 5.87 years. As of September 30, 2015, the Company had 297,500 unvested stock options with a weighted average remaining term over 6.01 years. Unrecorded stock-based compensation expense was $215,682 as of September 30, 2015. The Company recorded $417,470 and $1,838,985 stock-based compensation expense for the nine months ended September 30, 2015 and 2014, respectively. The Company recorded $102,343 and $612,995 stock-based compensation expense for the three months ended September 30, 2015 and 2014, respectively.

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

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 12- NONCONTROLLING INTEREST

Non-controlling interest represents the minority stockholders’ 45% proportionate share of the results of the newly established subsidiary Kingold Internet.  A reconciliation of non-controlling interest as of September 30, 2015 and December 31, 2014 are as follows:

NOTE 13 - CONCENTRATIONS AND RISKS

The Company maintains certain bank accounts in the PRC and BVI, which are not insured by Federal Deposit Insurance Corporation (“FDIC”) insurance or other insurance. The cash and restricted cash balance held in the PRC bank accounts was $57,741,123 and $16,052,999 as of September 30, 2015 and December 31, 2014, respectively. The cash balance held in the BVI bank accounts was $13,385 and $7,774 as of September 30, 2015 and December 31, 2014, respectively. As of September 30, 2015 and December 31, 2014, the Company held $119,265 and $61,986 of cash balances within the United States, and none of such U.S. balance was in excess of FDIC insurance limits of $250,000 as of September 30, 2015 and December 31, 2014, respectively.

For the periods ended September 30, 2015 and 2014, 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 periods was gold, which accounted for almost 100% of its total purchases for the three and nine months ended September 30, 2015 and 2014. 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 three and nine month periods ended September 30, 2015 and 2014.

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 14 - GOLD LEASE TRANSACTIONS

The Company leased 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.

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 September 25, 2015 (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.

During 2014, the Company leased total of 1,515 kilograms of gold, which amounted to RMB 317.7 million (approximately $60.5 million) and returned 880 kilograms of gold, which amounted to RMB 218.2 million (approximately $35.2 million) back to CCB upon lease maturity. The remaining amount not yet returned to the Bank is due in various months in 2015 and 2016.

During the first quarter of 2015, the Company renewed three gold lease agreements with CCB and leased an aggregate of 880 kilograms of gold from CCB, valued at RMB 218.2 million (approximately $35.2 million). The leases have initial terms of one year and provide an interest rate of 6% per annum.

During the third quarter of 2015, the Company renewed two gold lease agreements with CCB and leased an aggregate of 535 kilograms of gold from CCB, valued at RMB 124.6 million (approximately $19.6 million). The leases have initial terms of one year and provide an interest rate of 6% per annum.

At September 30, 2015, about 1,515 kilograms of leased gold were still outstanding and not yet returned to CCB, which amounted to approximately $58 million. Such leased gold is due in various months from December 2015 through August 2016.

On January 1, 2013, Wuhan Kingold entered into a gold lease framework agreement (the “Framework Agreement”) with SPD Bank, with initial term of 12 months and such Framework Agreement has been subsequently extended to April 2016. From January 2013 to April 2015, the Company entered into separate lease agreements with SPD Bank with interest rates of 3.2% to 7.5% per annum. Lease payments to SPD are due quarterly, and are calculated based on the stated annual rate, 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.

During 2014, the Company leased a total of 2,380 kilograms of gold, which amounted to RMB 644.9 million (approximately $104.9 million) and also returned 1,465 kilograms of gold, which amounted to RMB 410.3 million (approximately $66.8 million) back to SPD Bank upon lease maturity. The remaining amount not yet returned to the Bank is due in various months through 2015.

On April 10, 2015, the Company entered into a gold lease agreement with SPD Bank to lease additional 197 kilograms of gold (valued at approximately RMB 46.98 million or approximately $7.7 million). The lease has initial term of one year and provides an interest rate of 3.2% per annum. The Company is required to deposit cash into an account at SPD Bank equal to RMB 50 million (approximately $8 million).

In the third quarter of 2015, the Company leased an aggregate of 720 kilograms of gold from SPD Bank, valued at RMB 168.2 million (approximately $26.5 million). The leases have initial terms of one year and provide an interest rate of 2.8% to 6% per annum.

At September 30, 2015, about 1,202 kilograms of leased gold were outstanding and not yet returned to SPD Bank, which amounted to approximately $45 million. Such leased gold is due in various months from October 2015 through August 2016.

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

On August 28, 2013, Wuhan Kingold entered into a gold lease framework agreement with the Wuhan branch of CITIC Bank which has been subsequently extended to February 2016. The lease has an initial term of approximately 12 months, and provides for an interest rate of 5.6% to 6% per annum. Lease payments to CITIC Bank are due at the end of the leasing period. Under the gold lease agreement with CITIC Bank, the Company is required to pledge certain restricted cash into an account at CITIC as collateral.

During 2014, the Company leased a total of 1,300 kilograms of gold, which amounted to RMB 336.6 million (approximately $54.8 million), and returned 650 kilograms of gold, which amounted to RMB 169.7 million (approximately $27.6 million), back to CITIC Bank upon lease maturity. The remaining amount not yet returned to the Bank is due in various months through 2015.

On March 5, 2015, the Company entered into a gold lease agreement with CITTC Bank to lease an additional 150 kilograms of gold (valued at approximately RMB 36.8 million or approximately $6.0 million). The lease has an initial term of one month and provides an interest rate of 6% per annum. The Company is required to deposit cash into an account at CITTC Bank equal to RMB 8.0 million (approximately $1.3 million).

At September 30, 2015, about 500 kilograms of leased gold were outstanding and not yet returned to CITIC Bank, which amounted to approximately $19 million. Such leased gold is due in various months from November 2015 through February 2016.

As of September 30, 2015 and December 31, 2014, 3,217 kilograms and 3,080 kilograms of leased gold, at the approximate amounts of $121.2 million and $125.8 million, respectively, will be returned within fiscal year 2015 and 2016. Interest expense for the leased gold for the nine months ended September 30, 2015 and 2014 was $5.6 million and $5.2 million, respectively, which was included in the cost of sales. For the three months ended September 30, 2015 and 2014, interest expense was $1.9 million and $1.8 million, respectively, which was included in the cost of sales.

NOTE 15 – COMMITMENTS

Future payment commitments under the purchase agreement of “Kingold Jewelry Cultural Industry Park” amounted to RMB 480 million (approximately $79 million) are expected to be paid in January 2016 upon completion of the Jewelry Park construction. See Note 5 “Deposit on Land Use Right and Construction In Progress – JEWELRY PARK”.

On August 12, 2015, The Company signed a consulting agreement to engage Bespoke Independent Partners ("BIP"), a fully owned subsidiary of FPIA Partners LLC to operate as strategic advisors to Kingold in all matters relating to investor relations, capital markets and shareholder value creation strategy. The Company will pay an initial three month retainer fee of $12,000 as well as a due diligence fee of $15,000 upon execution of the contract. Thereafter, the Company shall pay BIP $4,000 per month, which fee shall be paid quarterly in advance. Pursuant to the agreement with BIP, an aggregate of 900,000 shares of warrants with exercise price ranges from $1.20 to $1.80 will be directly issued at no cost to BIP if certain stock performance targets are met within a three-year period.

NOTE 16 – CONVERTIBLE NOTE PURCHASE AGREEMENT

On April 2, 2015, the Company entered into a Convertible Note Purchase Agreement (the “Purchase Agreement”) with Fidelidade – Companhia de Seguros, S.A., a company duly incorporated and existing under the laws of Portugal and a majority-owned subsidiary of Fosun International Limited (the “Holder”). Pursuant to the Purchase Agreement, the Company agreed to issue and sell to the Holder $15 million aggregate principal amount 6.0% Senior Secured Convertible Note due 2018 (the “Note”), subject to customary closing conditions. The Company will sell the Note in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”). The Note and the underlying shares of the Company’s common stock issuable upon conversion of the Note have not been registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.

The Note will bear interest at a rate of 6.0% per year payable annually. The Note will mature on the third anniversary of the issuance date of the Note, unless earlier converted. The Note constitutes a general, senior, secured obligation of the Company. The Company granted the Holder a security interest in certain collateral as identified in the Purchase Agreement, to secure the payment, discharge and performance of all the Company’s obligations under the Note. Mr. Zhihong Jia, Chairman and Chief Executive Officer of the Company, will execute a guarantee in favor of the Holder, pursuant to which Mr. Jia will be jointly liable for the Company’s obligations under the Note.

Subject to and upon compliance with the provisions of the Purchase Agreement, the Holder has the right, at its option, to convert the principal amount of the Note or any portion of such principal amount which is $1,000 or an integral multiple of $1,000 in excess thereof, into shares of common stock at the applicable conversion rate. The conversion rate is initially 869.57 shares of common stock per $1,000 principal amount of Note (equivalent to an initial conversion price of approximately $1.15 per share), subject to adjustment in certain events described in the Purchase Agreement. Upon conversion, the Company will deliver shares of common stock as set forth in the Purchase Agreement. No fractional shares will be issued upon any conversion.

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In connection with the entry into the Purchase Agreement, the Company will enter into a registration rights agreement (the “Registration Rights Agreement”) with the Holder as a condition to closing the sale of the Note, which sets forth the rights of the Holder to have the shares of common stock issuable upon conversion of the Note registered with the SEC for public resale under the Securities Act. Pursuant to the Registration Rights Agreement, the Company is required to file a registration statement with the SEC (the “Initial Registration Statement”) within 60 days following the date of the issuance of the Note, registering the shares of common stock issuable upon conversion of the Note. The Company is required to use its reasonable best efforts to have the Initial Registration Statement declared effective as promptly as possible following the filing thereof and, in any event, by no later than 90 days after the date of the issuance of the Note. In addition, the agreement gives the Holder the ability to exercise certain piggyback registration rights in connection with registered offerings by the Company.

The Convertible Note Purchase Agreement was set to terminate automatically on May 31, 2015 in the absence of a closing or extension at the discretion of the Holder. Closing did not occur prior to such time because the Company had not secured a $15 million letter of credit required under the agreement. The Holder has not provided written notice to the Company of its intention either to terminate or to extend the Convertible Note Purchase Agreement, and the Company continues to pursue the $15 million letter of credit. While there can be no guarantee that the Company will locate a letter of credit on terms acceptable to the Holder, the Company remains willing to proceed under the Convertible Note Purchase Agreement.

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

The following discussion of our financial condition and results of operations should be read together with the financial statements and related notes included in this Report and in our Annual Report on Form 10-K for the year ended December 31, 2014. This discussion contains forward-looking statements that involve risks and uncertainties. See also the “Cautionary Statement for Purposes of the “Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995” appearing elsewhere in this Report. Our actual results may differ materially from those anticipated in those forward-looking statements as a result of certain factors, including, but not limited to, those contained in the “Risk Factors” section of this Report and in our Annual Report on Form 10-K for the year ended December 31, 2014.

Our Business

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

In April 2015, we established a new subsidiary Wuhan Kingold Internet Co., Ltd. ("Kingold Internet"). Total registered capital of Kingold Internet is RMB 1 million (approximately $0.16 million), of which we hold a 55% ownership interest and a third-party minority shareholder, Mr. Xiaofeng Lv, holds the remaining 45% ownership interest. Kingold Internet will be engaged in promoting the online sales of jewelry products through cooperation with Tmall.com, a large business-to-consumer online retail platform owned by Alibaba Group.

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

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

In light of the growth in the investment gold business sector, we have signed agreements with various leading banks in China, such as the Bank of Communication, China Merchant Bank and Hubei 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 1.7% of our total revenue in 2014, 8.9% of our total revenue in 2013 and 5.0% of our total revenue in 2012. Our total sales of investment gold for the first nine months of 2015 amounted to roughly $3.5 million. 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 RMB 1 billion (approximately $164 million). We have 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 as we secured pre-sale permission for five buildings in January 2015. The land use rights are held relating to the Shanghai Creative Industry Park, which we intend to rename the Kingold Jewelry Cultural Industry Park (“Jewelry Park”). 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 also sell developed commercial and residential properties built on this site to individual and corporate buyers. The total office space available to be sold is 192,000 square meters. During the quarter ended September 30, 2015, we started the pre-sale of the Jewelry Park and 40,247.93 square meters (approximately 433,000 square feet) office space have been pre-sold to various buyers at RMB 6,000 per construction square meter and the Company received RMB 144 million (approximately $22.7 million) in deposits from the buyers. We expect to deliver these properties to the buyers in January 2016 when the Jewelry Park construction is expected to be completed and pass the inspection conducted by the local government authority.

On October 23, 2013, we entered into an acquisition agreement with Wuhan Wansheng House Purchasing Limited, or Wuhan Wansheng, and Wuhan Huayuan Science and Technology Development Limited Company, or Wuhan Huayuan. The acquisition was structured as an equity purchase of Wuhan Huayuan, which owns the land use rights to the property in Wuhan, with Wuhan Wansheng granting us (i) a 60% ownership in Wuhan Huayuan after we pay the down payment of RMB 200 million; (ii) granting us the right to appoint the chief financial officer of Wuhan Huayuan to supervise and manage the use of funds for the project; and (iii) naming Wuhan Wansheng as agent for the completion of the project’s construction. Upon our payment of the final installment payment, we will become the 100% owner of Wuhan Huayuan, which owns the land use rights of the Jewelry Park. However, because no other assets or liabilities have been transferred with the acquisition of Wuhan Huayuan, we are treating the Jewelry Park acquisition as an asset purchase for accounting purposes. As of September 30, 2015, we have made RMB 520 million (approximately $93 million) of payments toward the construction of the Jewelry Park project and we are still obligated to pay the remaining amount of RMB 480 million (approximately $79 million). Any cost over budget will be Wuhan Wansheng's liability. In October 2015, we signed a supplemental agreement with the construction company Wuhan Wansheng to amend the original acquisition agreement. Pursuant to this supplemental agreement, Wuhan Wansheng agreed to fully complete the construction and deliver the completed project to us before January 15, 2016, and we agreed to pay the balance of construction payments within ten days after Wuhan Wansheng fully completes the construction and delivers the completed project to us.

Results of Operations

The following table sets forth our statements of operations (unaudited) for the three months and nine months ended September 30, 2015 and 2014 in U.S. dollars:

KINGOLD JEWELRY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)

(IN U.S. DOLLARS)

(UNAUDITED)

Three and Nine Month Period Ended September 30, 2015, compared to Three and Nine Month Period Ended September 30, 2014

Net Sales

Net sales for the three months ended September 30, 2015 amounted to $263.8 million, an increase of $12.8 million, or 5.1%, from net sales of $251.0 million for the three months ended September 30, 2014. The increase in net sales was primarily due to increased sales volume in our branded production products from 6.47 metric tons in the third quarter of 2014 to 7.82 metric tons in third quarter of 2015, an increase of 1.35 metric tons or 20.87%, which resulted from our strengthened marketing and sales efforts in the third quarter of 2015. On the other hand, such increase was offset by decreased unit selling price (average selling price for sales of our branded production, customized production and gold trade-in products decreased by 10%, 39% and 9%, respectively, from the three months ended September 30, 2014 to the three months ended September 30, 2015), which was affected by a decrease in the market price of gold during the period. The $12.8 million increase in net sales resulted primarily from following factors: approximately $42.5 million of the net sales increase was attributable to increased production and sales volume, which was offset by approximately $27.9 million attributable to the decrease in the price of gold, and further offset due to the translation loss from RMB into USD. The overall increase in revenue in three months ended September 30, 2015 as compared to the same period of 2014 reflected the above combined factors.

Net sales for the nine months ended September 30, 2015 amounted to $719.4 million, a decrease of $178.8 million, or 19.9%, from net sales of $898.2 million for the nine months ended September 30, 2014. The decrease was due to decreased sales volume by 6.6 metric tons or 14%. Of the $178.8 million decrease in net sales, approximately $103.2 million was attributable to decreased production and sales volume, and approximately $73.9 million was due to the decrease in the price of gold, with the remaining due to the translation loss from RMB into USD. China’s economy has slowed in 2015 and the price of gold has steadily decreased throughout 2015. In addition, Chinese consumers’ demand for gold has decreased substantially. The favorable Chinese stock market during the first half of 2015 also made the demand for gold much less appealing than in other periods. With the overall commodity market and gold market under continued pressure, we anticipate a weak demand for gold in China for the remainder of 2015, particularly with the significant government devaluation of the RMB since August 2015. However, we anticipate a stronger demand for gold in China at the beginning of 2016, because of the Chinese spring festival and Valentine's Day during that period.

In the third quarter of 2015, we processed a total of 13.5 metric tons of gold, of which branded production accounted for 7.8 metric tons (58.0%) and customized production accounted for 5.7 metric tons (42.0%). In the third quarter of 2014, we processed a total of 14.5 metric tons of gold, of which branded production accounted for 6.5 metric tons (44.6%) and customized production accounted for 8.0 metric tons (55.4%).

In the first nine months of 2015, we processed a total of 40.3 metric tons of gold, of which branded production accounted for 20.3 metric tons (50.4%) and customized production accounted for 20.0 metric tons (49.6%). In the first nine months of 2014, we processed a total of 46.9 metric tons of gold, of which branded production accounted for 23.1 metric tons (49.3%) and customized production accounted for 23.8 metric tons (50.7%).

Cost of Sales

Cost of sales for the three months ended September 30, 2015 amounted to $248.2 million, an increase of $7.1 million, or 3.0%, from $241.1 million for the same period in 2014. The increase was primarily due to increased sales volume which led to high amounts of gold and manufacturing overhead costs to be allocated. The increased cost of sales resulting from increase in sales volume was also offset by a decrease in unit costs of our inventory, because we purchased the inventory at a lower market price when the market price of gold dropped. The average price of gold for the three months ended September 30, 2015 was $1,124.3 per ounce, as opposed to $1,281.9 per ounce for the same period in 2014 (World Gold Council).

Cost of sales for the nine months ended September 30, 2015 amounted to $690.6 million, a decrease of $145.3 million, or 17.4%, from $835.9 million for the same period in 2014. The decrease was primarily due to decreased sales of our branded production and customized production products. The total sales volume decreased by 6.6 metric tons or 14% as mentioned above. The decrease of the cost of sales was also affected by decreased unit cost affected by lower purchase costs for gold. The average price of gold for the nine months ended September 30, 2015 was $1,178.4 per ounce for the three months ended September 30, 2014, as opposed to $1,287.8 per ounce for the same period in 2014 (World Gold Council).

Gross Profit

Gross profit for the three months ended September 30, 2015 was $15.6 million, an increase of $5.6 million, or 56.3%, from $10.0 million for the same period in 2014. The increase in gross profit was largely affected by increased sales volume of our branded production product by 1.35 metric tons with lower unit cost due to decreased inventory purchase costs. Accordingly, gross margin for the three months ended September 30, 2015 was 5.9%, compared to 4.0% for the same period in 2014.

Gross profit for the nine months ended September 30, 2015 was $28.8 million, a decrease of $33.6 million, or 53.9%, from $62.3 million for the same period in 2014. The decrease in our gross profit resulted from the following factors: (1) Due to decreased sales volume affected by decreased market demand, the Company’s gross profit and gross margin for the nine months ended September 30, 2015 was negatively affected. (2) The decrease in unit selling price also impacted the gross margin: The unit cost of our branded production sales was RMB 209.22 per gram for the nine months ended September 30, 2015 while the unit cost of our branded production sales was RMB 221.46 per gram for nine months ended September 30, 2014. On the other hand, the unit price of selling branded production was RMB 212.48 per gram for nine months ended September 30, 2015 while the unit price of selling branded production was RMB 231.02 per gram for the nine months ended September 30, 2014. As a result, the unit margin of branded production sales was RMB 3.27 per gram for the nine months ended September 30, 2015 compared to RMB 9.56 per gram for nine months ended September 30, 2014. The decrease in quantity sold and unit gross margin in brand production sales was the major reason which led the decrease in our gross profit. (3) Our customized production sales volume decreased from 23.72 metric tons in the nine months ended September 30, 2014 to 19.97 metric tons in the nine months ended September 30, 2015, and unit selling price in this segment also decreased from RMB 7.05 per gram in the nine months ended September 30, 2014 to only RMB 5.94 per gram in the nine months ended September 30, 2015; as the sales volume and selling price for customized production sales decreased, the overall gross margin was negatively affected. As a result of the above, our gross margin for the nine months ended September 30, 2015 was 4.0%, compared to 6.9% for the same period in 2014. The primary reason for the substantial decrease in gross margin was that the Company purchased a large quantity of gold inventory at year end of 2013 and beginning of 2014 at market prices, which were much lower than the same period one year ago, making the first nine months of 2014 production costs much lower than normal. In addition, we received more sales orders from our customized production segment in the first nine months of 2014 than the first nine months of 2015, which normally has higher profit margin than our branded production sales because we can charge higher selling prices to customers for services rendered. In the first nine months of 2015, due to the declined market price of gold, we received reduced sales orders from our customized production segment because the decrease in market price of gold negatively impacted customers’ perception of buying gold products and accordingly our gross margin was negatively affected. Gold prices varied from as low as $1,147.25 per ounce on March 18, 2015 to as high as $1,295.75 per ounce on January 22, 2015 in the period and dropped to $1,080.80 per ounce on July 23, 2015. The price of gold after the period end is important to our company, as it determines whether we need to revalue our inventory during the period.

Expenses

Total operating expenses for the three months ended September 30, 2015 were $3.4 million compared with $2.3 million for the same period in 2014. The increase in our operating expenses was mainly due to increased selling, general and administrative expenses for broader marketing efforts.

Interest expenses were $0.3 million for the three months ended September 30, 2015 compared with $0.6 million for the same period in 2014. Interest expenses decreased due to less bank loans were carried during the three months ended September 30, 2015 as compared to the same period of 2014.

Total operating expenses for the nine months ended September 30, 2015 were $7.6 million compared with $7.3 million for the same period in 2014.

Interest expenses were $0.5 million for the nine months ended September 30, 2015 compared with $1.5 million for the same period in 2014. Interest expenses decreased due to less bank loans were carried during the nine months ended September 30, 2015 as compared to the same period of 2014.

The provision for income tax expense was approximately $3.2 million for the three months ended September 30, 2015, an increase of $1.4 million, or 75.2%, from approximately $1.8 million for the same period in 2014. The increase was primarily due to the increase in our revenue and taxable income.

The provision for income tax expense was approximately $4.7 million for the nine months ended September 30, 2015, a decrease of $9.6 million, or 67.0%, from approximately $14.3 million for the same period in 2014. The decrease was primarily due to the decrease in our revenue and taxable income.

Net Income

Net income increased to $8.8 million for the three months ended September 30, 2015 from $5.2 million for the same period in 2014, an increase of $3.5 million, or 67.5%, as a result of the matters described above.

Net income decreased to $15.9 million for the nine months ended September 30, 2015 from $39.2 million for the same period in 2014, a decrease of $23.3 million, or 59.4%, as a result of the matters described above.

Cash Flows

Net cash provided by operating activities.

Net cash used in operating activities was $34.0 million for the nine months ended September 30, 2015, compared with net cash provided by operating activities of $6.5 million for the same period in 2014. The change was mainly because of the decrease in net income by $23.3 million, and the increased inventory purchase when the market price of gold was low.

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

Net cash used in investing activities.

Net cash used in investing activities amounted to $26.2 million for the nine months ended September 30, 2015, compared with net cash used in investing activities of $14.9 million for the nine months ended September 30, 2014. The increase in net cash used was mainly because of our increased cash payment for the land use rights and construction in progress on the Jewelry Park.

Analysis and Expectations. In the short-term, our cash used in investing activities may increase significantly depending on the progress of the Jewelry Park.

Net cash provided by financing activities.

Net cash provided by financing activities was $89.1 million for the nine months ended September 30, 2015, compared with net cash provided by financing activities of $13.2 million for the nine months ended September 30, 2014.

On March 26, 2015, we completed the issuance of the first phase of debt financial instruments in the aggregate amount of RMB 400 million (approximately $65 million) under the Private Placement Agreement underwritten by Shanghai Pudong Development Bank. On September 17, 2015, the Company obtained loans from Minsheng Bank Trust Fund, with an aggregate amount of RMB 300 million (approximately $47.1 million). See Note 6 to our consolidated financial statements appearing elsewhere in this Report. The Company also paid off some loans from CITIC Bank totaling approximately $13.0 million. See Note 6 to our consolidated financial statements appearing elsewhere in this Report.

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 the construction of the Jewelry Park.

Off-Balance Sheet Arrangements

We originally guaranteed payment to a non-related third-party of RMB 68 million (approximately $11.1 million) in bank loans. The guarantee terminated in May 2015.

As of September 30, 2015 and December 31, 2014, 3,217 kilograms and 3,080 kilograms of leased gold, at the approximate amounts of $121.2 million and $125.8 million, respectively, will be returned within fiscal year 2015 and 2016. Interest expense for the leased gold for the periods ended September 30, 2015 and 2014 was $5.6 million and $5.2 million, respectively, which was included in the cost of sales. For the three months ended September 30, 2015 and 2014, interest expense was $1.9 million and $1.8 million, respectively, which was included in the cost of sales.

Please refer to Note 14 Gold Lease Transactions for more details.

Liquidity and Capital Resources

As of September 30, 2015, we had approximately $29.6 million in cash and cash equivalents. We also had approximately $28.1 million restricted cash with several PRC banks. We have financed our operations with cash flow generated from operations and through borrowing of short-term bank loans generally with a term of one year as well as through private and public borrowings and offerings in the U.S. and Chinese capital markets, such as our recent placement under our commercial paper program with Shanghai Pudong Development Bank.

At September 30, 2015, we had total outstanding short-term loans of $53.5 million from Minsheng Trust Bank ($47.2 million) as well as CITIC Bank ($6.3 million). 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, please see Note 6 to our consolidated financial statements included elsewhere in this Report.

As of September 30, 2015, we had a positive working capital of $167.0 million. We have maintained a very good relationship with the banks from where we leased gold. Therefore we believe that we are able to renew current gold leases upon maturity and obtain additional gold leases from the banks, if necessary. We are expecting to generate additional cash flows in the coming period of time from developing new customers, expanding our sales through our online sales platform and an increase in our revenue during the upcoming sales season. In addition, we began our pre-sale efforts of the Jewelry Park properties in August 2015 and received RMB 144 million (approximately $22.7 million), and we will continue this effort through the completion of the Jewelry Park which is expected to finish by January 15, 2016. We believe our existing cash and cash equivalents will be sufficient to maintain our operations at present level for at least the next 12 months.

On October 23, 2013, we entered into an acquisition agreement with Wuhan Wansheng and Wuhan Huayuan. The acquisition agreement provides for the acquisition of the Shanghai Creative Industry Park, which is proposed to be renamed as the Kingold Jewelry Cultural Industry Park (the “Jewelry Park”). The Jewelry Park is located at No. 12, Han Huang Road, Jiang’An District, Wuhan.

Pursuant to the acquisition 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 for RMB 1.0 billion (approximately $164 million) from Wuhan Wansheng, and authorized Wuhan Wansheng, as agent, to complete construction of the Jewelry Park.

We currently intend to finance the Jewelry Park predominantly with bank loans supplemented by our operating cash flows, and where possible, deposits or advances that may be received from lessees.

Payments for the project will be made to Wuhan Wansheng in tranches, as follows, in line with the completion of certain building installments, as outlined in the acquisition agreement:

According to the acquisition agreement, upon payment of the down payment of RMB 200 million, Wuhan Wansheng transferred 60% of Wuhan Huayuan’s ownership to Wuhan Kingold and registered Wuhan Kingold as the 60% shareholder. At that time, Wuhan Kingold appointed the chief financial officer of Wuhan Huayuan to supervise and manage the use of the funds of the project. Upon payment of the final installment, Wuhan Wansheng will register the remaining interests in Wuhan Kingold’s name and Wuhan Kingold will be the 100% owner of Wuhan Huayuan, which owns the land use rights of the Jewelry Park.

Under the original acquisition agreement, if Wuhan Kingold was more than 45 days late in any payment, Wuhan Wansheng could unilaterally terminate the agreement. Upon termination, Wuhan Kingold will be required to return ownership to Wuhan Wansheng within 15 days after receiving written notice of the rescission of the acquisition agreement. Wuhan Wansheng would also be required to return all capital paid by Wuhan Kingold within 60 days after the termination of the acquisition agreement.

In October 2015, we signed a supplemental agreement with the construction company Wuhan Wansheng to amend the original acquisition agreement dated October 23, 2013. Pursuant to this supplemental agreement, Wuhan Wansheng agreed to fully complete the construction and deliver the completed real estate property to us before January 15, 2016. Wuhan Kingold had not made all payments according to the schedule under the original acquisition agreement because of delays in construction; however, pursuant to the supplemental agreement, we agreed to pay the balance of construction payments within ten days after Wuhan Wansheng fully completes the construction and delivers the completed real estate property to us.

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

We are required to contribute a portion of our employees’ total salaries to the PRC government’s social insurance funds, including pension insurance, medical insurance, unemployment insurance, workers’ compensation 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 Wuhan Vogue-Show Jewelry Co., Inc. or “Wuhan 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 the PRC due to PRC exchange control regulations that restrict our ability to convert RMB into U.S. dollars. Accordingly, Wuhan Vogue-Show’s funds may not be readily available to us to satisfy obligations that have been incurred outside the PRC, which could adversely affect our business and prospects or our ability to meet our cash obligations.

Critical Accounting Policies and Estimates

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 Report.

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 assessment of these factors, but principally customer demand. Such assessments require the exercise of significant judgment by management. Additionally, the value of our inventory may be affected by commodity prices. Decreases in the market value of gold would result in a lower stated value of our inventory, which may require us to take a charge for the decrease in the value. In addition, if the price of gold changes substantially in a very short period, it might trigger customer defaults, which could result in inventory obsolescence. If any of these factors were to become less favorable than those projected, inventory write-downs could be required, which would have a negative effect on our earnings and working capital.

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.

Item 3. Quantitative and Qualitative Disclosure about Market Risk

Foreign Currency Exchange Rate Risk

Given that 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 the PRC’s governmental policies and to international economic and political developments. In January 1994, the PRC government implemented a unitary managed floating rate system. Under this system, the People’s Bank of China, or PBOC, began publishing a daily base exchange rate with reference primarily to the supply and demand of RMB against the U.S. dollar and other foreign currencies in the market during the previous day. Authorized banks and financial institutions are allowed to quote buy and sell rates for RMB within a specified band around the PBOC’s daily exchange rate. On July 21, 2005, the PBOC announced an adjustment of the exchange rate of the U.S. dollar to RMB from 1:8.27 to 1:8.11 and modified the system by which the exchange rates are determined. Over the past four years, RMB has appreciated 15.7% against the U.S. dollar (from USD1 = RMB 7.2946 on January 1, 2008 to USD1 = RMB 6.3538 on September 30, 2015). 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. For example, in early August 2015, the PBOC devalued China’s currency in an effort to make the RMB more market-oriented and to help China’s exporters sell more of their goods abroad. As all of our net revenues are recorded in RMB, any further devaluation of RMB against the U.S. dollar could negatively impact our results of operations.

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

Interest Rate Risk

Our short term borrowings as of September 30, 2015 were approximately $53.5 million, and interest expenses paid were $0.7 million for the nine months ended September 30, 2015. We did not have long term borrowings as of September 30, 2015.

At the end of September 30, 2015, our weighted average interest rate was approximately 11.5%. We do not expect the interest expense will change dramatically as we have secured the gold leases for a period of 12 months. We currently have no interest rate hedging 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. If we were to experience a significant or prolonged shortage of gold, we would be unable to meet our production schedules and to ship products to our customers in a timely manner, which would adversely affect our sales, margins and customer relations.

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

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

In connection with the preparation of this Report, management determined that, as of September 30, 2015, we did not maintain effective internal control over financial reporting due to the existence of the following material weaknesses: (i) lack of appropriate approval procedures for certain material transactions; (ii) insufficient resources with technical competency to review and record non-routine or complex transactions; and (iii) lack of full-time U.S. GAAP personnel in the accounting department to monitor the recording of the transactions. While our Board adopted resolutions requiring management to seek Board approval prior to entering into any transactions with a value in excess of $250,000, we are still exploring implementing additional policies and procedures to address these material weaknesses, which may include: (i) reporting other material transactions to the Board and obtaining proper approval; and (ii) 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 Controls

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 during the nine months ended September 30, 2015. Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. Further, because of changes in conditions, effectiveness of internal controls over financial reporting may vary over time. Our system contains self-monitoring mechanisms, and actions are taken to correct deficiencies as they are identified.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we may be subject to legal proceedings and claims in the ordinary course of business. We are not currently a party to any litigation the outcome of which, if determined adversely to us, would individually or in the aggregate be reasonably expected to have a material adverse effect on our business, operating results, cash flows or financial condition. Our business may also be adversely affected by risks and uncertainties not presently known to us or that we currently believe to be immaterial. If any of the events contemplated by the following discussion of risks should occur, our business, prospects, financial condition and results of operations may suffer.

Item 1A.  Risk Factors

Except as set forth below, there have been no material changes to our risk factors as previously disclosed in Item 1A “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014.

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 PBOC’s daily exchange rate. On July 21, 2005, the PBOC announced an adjustment of the exchange rate of the U.S. dollar to RMB from 1:8.27 to 1:8.11 and modified the system by which the exchange rates are determined. 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. For example, in early August 2015, the PBOC devalued its currency in an effort to make its currency more market-oriented and to help China’s exporters sell their goods abroad. As all of our net revenues are recorded in RMB, any further devaluation of RMB against the U.S. dollar could negatively impact our results of operations.

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

On August 11, 2015, we received from the Nasdaq OMX Group (“Nasdaq”) a letter (the “Nasdaq Letter”) indicating that we are not in compliance with the minimum $1.00 per share minimum bid price requirement for continued inclusion on the Nasdaq Capital Market set forth in Nasdaq Marketplace Rule 5550(a)(2), as a result of the bid price of our ordinary shares having closed below $1.00 for the last 30 consecutive business days prior to the date of the letter.

The Nasdaq letter advises us that we will be provided 180 calendar days, or until February 8, 2016, to regain compliance. The letter further advises that such compliance can be achieved if, at any time before February 8, 2014, the bid price of our ordinary shares closes at $1.00 or more per share for a minimum of 10 consecutive business days.

There can be no guarantee that we will be able to regain compliance with the continued listing requirement of Nasdaq Marketplace Rule 5550(a)(2). If we do not regain compliance by February 8, 2016, Nasdaq will provide written notification to us that our ordinary shares may be delisted.

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

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits

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

Date: November 16, 2015