News Column

KINGOLD JEWELRY, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

August 13, 2014

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, 2013. 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, 2013. 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 developing, promoting, and selling 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. 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 fast growth in the investment gold business sector, we have signed agreements with various leading banks in China, such as the Bank of Communication and China Merchant Bank, to sell gold bars and coins and other products through bank branches. We tested this business model in 2011, and investment gold accounted for approximately 8.9% of our total revenue in 2013 and 5.0% of our total revenue in 2012. Our total sales of investment gold for the first six months of 2014 amounted to roughly $14.1 million. We anticipate that the investment gold business will continue to become an increasingly important part of our business in the future. To broaden our business lines and strengthen our processing capacity, in October 2013, we entered into an agreement to acquire the operating rights for 66,667 square meters (approximately 717,598 square feet, or 16.5 acres) of land in Wuhan for an aggregate purchase price of RMB1 billion (approximately US$164 million at the spot rate). We 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 if we can obtain the pre-sale permit from the governing authority in time. The land use rights are held in the Shanghai Creative Industry Park, which we intend to rename the Kingold Jewelry International Industry Park, or the Jewelry Park for purposes of this report. We intend to develop the land and to utilize the completed Jewelry Park as our new operation center and show center. We also plan to rent spaces within the Jewelry Park to other jewelry manufacturers in China, and may also sell developed commercial and residential properties built on this site to individual and corporate buyers. The agreement was structured as an equity purchase of the company holding the land use rights, with Wuhan Wansheng House Purchasing Limited initially granting us a portion of Wuhan Huayuan Science and Technology Development Limited Company's, or Wuhan Huayuan's, ownership, granting us the right to appoint the chief financial officer for the project to supervise and manage the use of funds, and naming Wuhan Huayuan as agent for the completion of the construction. Accordingly, we now own 60% of the Jewelry Park. Upon our payment of the final installment payment, we will become the 100% owner of the Jewelry Park. However, because no other assets or liabilities have been transferred with the acquisition of Wuhan Wansheng, we are treating the Jewelry Park acquisition as an asset purchase for accounting purposes. 24 Results of Operations



The following table sets forth our statements of operations (unaudited) for the three months and six months ended June 30, 2014 and 2013 in U.S. dollars:

For the three months ended June 30, For the six months ended June 30, 2014 2013 2014 2013 NET SALES $ 339,766,164$ 367,042,088$ 647,219,263$ 588,450,210 COST OF SALES Cost of sales (314,950,855 ) (356,510,182 ) (594,244,102 ) (571,967,488 ) Depreciation (306,688 ) (302,694 ) (614,967 ) (601,776 ) Total Cost of Sales (315,257,543 ) (356,812,876 ) (594,859,069 ) (572,569,264 ) GROSS PROFIT 24,508,621 10,229,212 52,360,194 15,880,946 OPERATING EXPENSES Selling, general and administrative expenses 1,053,314 871,886 3,618,490 1,995,756 Stock compensation expenses 612,995

510,830 1,225,990 758,788 Depreciation 30,933 37,158 62,040 73,993 Amortization 3,065 3,045 6,154 6,054

Total Operating Expenses 1,700,307 1,422,919 4,912,674 2,834,591 INCOME FROM OPERATIONS 22,808,314

8,806,293 47,447,520 13,046,355 OTHER EXPENSE Interest expense (282,868 ) (99,539 ) (961,391 ) (194,048 ) Total Other Expense (282,868 ) (99,539 ) (961,391 ) (194,048 )

INCOME FROM OPERATIONS BEFORE TAXES 22,525,446 8,706,754 46,486,129 12,852,307 INCOME TAX PROVISION (BENEFIT) Current 5,714,928 2,976,395 12,203,971 4,795,298 Deferred - (594,907 ) 274,548 (1,301,887 ) TOTAL INCOME TAX PROVISION 5,714,928

2,381,488 12,478,519 3,493,411 NET INCOME $ 16,810,518$ 6,325,266$ 34,007,610$ 9,358,896 OTHER COMPREHENSIVE INCOME (LOSS) Total foreign currency translation gains (loss) $ 332,315 $ 2,539,475$ (1,666,440 )$ 3,502,015 COMPREHENSIVE INCOME $ 17,142,833$ 8,864,741$ 32,341,170$ 12,860,911 Earnings per share Basic $ 0.25 $ 0.10 $ 0.52 $ 0.15 Diluted $ 0.25 $ 0.10 $ 0.51 $ 0.15 Weighted average number of shares Basic 65,953,462 64,002,331 65,881,239 62,428,297 Diluted 66,088,514 64,253,053 66,337,896 62,727,247 25



Three and Six Month Period Ended June 30, 2014, compared to Three and Six Months Period Ended June 30, 2013

Net Sales Net sales for the three months ended June 30, 2014 amounted to $339.8 million, a decrease of $27.3 million, or 7.4%, from net sales of $367.0 million for the three months ended June 30, 2013. The decrease in net sales was primarily due to an overall decrease in the price of gold in the second quarter of 2014. Net sales for the six months ended June 30, 2014 amounted to $647.2 million, an increase of $58.8 million, or 10.0%, from net sales of $588.4 million for the six months ended June 30, 2013. The increase in net sales was primarily due to increased production in the amount of $137.4 million, which was partially offset by the decrease in the price of gold in the second quarter of 2014 ($88.1 million), with the remaining increase due to the translation gain from RMB

into US$.

In the second quarter of 2014, we processed a total of 17.9 metric tons of gold, of which branded production accounted for 8.7 metric tons (48.6%) and customized production accounted for 9.2 metric tons (51.4%). In the second quarter of 2013, we processed a total of 15.2 metric tons of gold, of which branded production accounted for 8.5 metric tons (55.9%) and customized production accounted for 6.7 metric tons (44.1%). In the first half of 2014, we processed a total of 32.3 metric tons of gold, of which branded production accounted for 16.6 metric tons (51.4%) and customized production accounted for 15.7 metric tons (48.6%).In the first half of 2013, we processed a total of 23.8 metric tons of gold, of which branded production accounted for 13.2 metric tons (55.5%) and customized production accounted for 10.6 metric tons (44.5%). Gold Processed for the Three Months Ended June 30, 2014 In Metric Tons 2014 2013 Branded 8.7 48.6 % 8.5 55.9 % Customized 9.2 51.4 % 6.7 44.1 % TOTAL 17.9 100.0 % 15.2 100.0 % Gold Processed for the Six Months Ended June 30, 2014 In Metric Tons 2014 2013 Branded 16.6 51.4 % 13.2 55.5 % Customized 15.7 48.6 % 10.6 44.5 % TOTAL 32.3 100.0 % 23.8 100.0 % Cost of Sales Cost of sales for the three months ended June 30, 2014 amounted to $315.3 million, a decrease of $41.6 million, or 11.6%, from $356.8 million for the same period in 2013. The $41.6 million decrease was primarily due to the decrease in the price of gold in the second quarter of 2014. Cost of sales for the six months ended June 30, 2014 amounted to $594.9 million, an increase of $22.3 million, or 3.9%, from $572.6 million for the same period in 2013. Of the $22.3 million increase in cost of sales, approximately $124.6 million was due to increased production, offset by approximately $103.4 million due to the decrease in the price of gold in the second quarter of 2014, and the remainder was due to foreign exchange gains. 26 Gross Profit

Gross profit for the three months ended June 30, 2014 was $24.5 million, an increase of $14.3 million, or 139.6%, from $10.2 million for the same period in 2013. Accordingly, gross margin for the three months ended June 30, 2014 was 7.2%, compared to 2.8% for the same period in 2013. The primary reason for the substantial increase in gross margin was that we increased the volume of higher margin customized production. During the second quarter of 2014, we were very successful in selling customized gold coins by piece instead of by weight. In addition, in the second quarter of 2013, we had $2.4 million write-down of inventory, raising cost of goods sold and reducing the gross margin, and similar adjustments were not required in the second quarter of 2014. Gross profit for the six months ended June 30, 2014 was $52.4 million, an increase of $36.5 million, or 229.7%, from $15.9 million for the same period in 2013. Accordingly, gross margin for the six months ended June 30, 2014 was 8.1%, compared to 2.7% for the same period in 2013. The primary reason for the substantial increase in gross margin was that we purchased large quantities of gold inventory at year end of 2013 and at the beginning of 2014 at low market prices, making the first half production at a cost much lower than normal. Gold prices increased from $1,202 per ounce on December 31, 2013 to as high as $1,379 per ounce on March 14, 2014 before decreasing to $1,330 on June 30, 2014. The gross margin in the future periods is not likely to be this high and may well return to the level of past periods. We also increased the volume of higher margin customized production. During the first half of 2014, we were very successful in selling customized gold coins by piece instead of by weight. In addition, in the first half of 2013, we had a $5.2 million write-down of inventory, raising cost of goods sold and reducing the gross margin, and similar adjustments were not required in the first half of 2014. Expenses

Total operating expenses for the three months ended June 30, 2014 were $1.7 million compared with $1.4 million for the same period in 2013. The increase 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 June 30, 2014 compared with $0.1 million for the same period in 2013. Interest expenses increased due to increased bank loans.

Total operating expenses for the six months ended June 30, 2014 were $4.9 million compared with $2.8 million for the same period in 2013. The increase was mainly due to increased selling, general and administrative expenses for broader marketing efforts.



Interest expenses were $1.0 million for the six months ended June 30, 2014 compared with $0.2 million for the same period in 2013. Interest expenses increased due to increased bank loans.

Interest expenses increased in the first half of 2014 as a result of several short term loans, namely:

(1) We borrowed RMB48 million (equivalent to approximately US$7.8 million) from Xing Ye Bank Wuhan Branch on December 10, 2013, with a maturity date of April 17, 2014 and with an annual interest rate of 6.6%. The loan was repaid in full. (2) We borrowed an aggregate amount of RMB110 million (equivalent to approximately US$18.1 million) from CITIC Bank Wuhan Branch on December 5, 2013, with maturity dates of March 1, 2014, March 5, 2014, and March 20, 2014, respectively, and with an annual interest rate of 6.6%. The loans were paid off by their respective due dates. (3) We borrowed an aggregate amount of RMB95 million (equivalent to approximately US$15.4 million) from CITIC Bank Wuhan Branch on December 6, 2013 with maturity dates of April 11, 2014, April 18, 2014 and May 8, 2014, respectively, with an annual interest rate of 6.9%. The loans were repaid. New loans payable to CITIC Bank Wuhan Branch with an aggregate amount of RMB80 million (equivalent to approximately US$12.9 million) consisting of three working capital loan contracts were 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 rates are 6.9%, 7.2% and 7.2%, respectively. 27



(4) We borrowed an aggregate amount of RMB50 million (equivalent to approximately US$8.1 million) from Bank of Hubei, Wuhan Jiang'an Branch on December 10, 2013 with a maturity date of April 18, 2014, and with has an interest rate of 6.6%. The loans were repaid.

(5) We borrowed an aggregate amount of RMB47.5 million (equivalent to approximately US$7.7 million) Loan from CITIC Bank Wuhan Branch on March 18, 2014 with a maturity date of September 18, 2014. The annual interest rate is 6.9%.



For additional information regarding our short term loans, please see Note 6 to our consolidated financial statements included elsewhere in this Quarterly Report.

With regard to our long term loan, we borrowed RMB200 million (equivalent to approximately US$32.5 million as of the spot rate at June 30, 2014) from Chang'an International Trust Co., Ltd. (the "Trust Loan") in order to perform the aforementioned acquisition of the Jewelry Park Project (see Note 5 to our consolidated financial statements included elsewhere in this Quarterly Report). The Trust Loan was approved by Chang'an International Trust Co. on December 3, 2013. The Trust Loan has a 24-month term, and bears interest at a fixed rate of 13.5% per annum. Interest for the Trust Loan will be capitalized and was not recorded as part of total interest expenses.



The provision for income tax expense was approximately $5.7 million for the three months ended June 30, 2014, an increase of $3.3 million, or 139.9%, from approximately $2.4 million for the same period in 2013. The increase was primarily due to the increase in our net income before taxes.

The provision for income tax expense was approximately $12.5 million for the six months ended June 30, 2014, an increase of $9.0 million, or 257.2%, from approximately $3.5 million for the same period in 2013. The increase was primarily due to the increase in our net income before taxes.

Net Income Attributable to Common Stockholders

Net income attributable to common stockholders increased to $16.8 million for the three months ended June 30, 2014 from $6.3 million for the same period in 2013, an increase of $10.5 million, or 165.8%, as a result of the matters described above.



Net income attributable to common stockholders increased to $34.0 million for the six months ended June 30, 2014 from $9.4 million for the same period in 2013, an increase of $24.6 million, or 263.4%, as a result of the matters described above.

Cash Flows



Net cash provided by (used in) operating activities.

Net cash provided by operating activities was $8.8 million for the six months ended June 30, 2014, compared with net cash used in operating activities of $11.4 million for the same period in 2013. The change was mainly because of the substantial increase of net income, which was offset by the increase in inventory. 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. 28



Net cash used in investing activities.

Net cash used in investing activities amounted to $10.5 million for the six months ended June 30, 2014, compared with net cash used in investing activities of $44,545 for the six months ended June 30, 2013. The increase in net cash used was mainly because of the cash deposit we made to acquire the land use rights for 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 Industrial Park.

Net cash provided by financing activities.

Net cash provided by financing activities was $6.7 million for the six months ended June 30, 2014, compared with net cash provided by financing activities of $14.5 million for the six months ended June 30, 2013. The decrease was mainly due to the repayment of a loan we extended to a company owned by one of the directors of Wuhan Kingold in December 2013, which was repaid in January 2014 (approximately $64.9 million), offset by repayment in January 2014 of a loan extended to us by the same entity (approximately $12.9 million), as well as repayment of bank loans (approximately $49.0 million). 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

On December 20, 2012, we entered into a gold lease agreement with China Construction Bank's Wuhan Jiang'an Branch ("CCB") that became effective in January 2013, originally terminated on October 26, 2013 and extended to July 22, 2014 (the "Gold Lease Agreement"). Gold leased under the Gold Lease Agreement bears interest at a rate of approximately 6% per annum and is calculated based on the actual weight of gold leased (in grams), the price of gold (yuan/gram) at the time of delivery, and number of days the gold was leased. We leased 676 kilograms of gold (valued at approximately RMB226 million or US$36 million) from CCB in January 2013. At the end of the lease, we will need to return 676 kilograms of gold to CCB. We received notice from CCB that the total credit line under the Gold Lease Agreement was increased in August 2013 to RMB400 million (approximately US$65.4 million), an increase of RMB150 million from the original credit line of RMB250 million. We used the increased credit line to lease roughly 575 kilograms of additional gold in the third quarter of 2013. On December 18, 2013 and January 13, 2014, we returned 430 and 246 kilograms of gold to CCB, respectively. On January 14, 2014 and February 12, 2014, we leased an additional 570 and 310 kilograms of gold based on the Gold Lease Agreement, respectively with aggregate market value of RMB218 million (approximately US$35.7 million). On January 1, 2013, we entered into a gold lease framework agreement (the "Framework Agreement") with SPD Bank. In February 2013, we leased an aggregate of 530 kilograms of gold with a market price of approximately RMB176 million (US$28.1 million) from SPD Bank pursuant to separate lease agreements entered into under the Framework Agreement. We are required to deposit cash into an account at SPD Bank equal to approximately RMB15.8 million (approximately US$2.5 million) and pledge the amount to SPD Bank. The leases each have an initial term of approximately 12 months, and provide for an interest rate of 6% per annum. Lease payments to SPD are due quarterly beginning in March 2013, and are calculated based on the stated annual rate of 6%, the actual weight of gold leased (in grams), the fair market price of gold at the time of delivery, and the actual number of days the gold was leased. At the end of the leases in February 2014, we returned 530 kilograms of gold to SPD Bank. On July 25, 2013, we borrowed an aggregate of 100 kilograms of gold with a market price of approximately RMB26.8 million (approximately US$4.4 million). This gold lease agreement has an initial term of approximately 6 months with a lease rate of 6% per annum. We secured our obligation to pay rent (and return the leased gold to SPD Bank at the end of the lease term) by depositing cash into an account at SPD Bank equal to approximately RMB2.4 million (approximately US$391,000) and pledging the account to SPD Bank. On January 24, 2014, we extended the lease period to an additional 12 months when the lease expired. We are required to deposit cash into an account at SPD Bank equal to approximately RMB4.4 million (approximately US$713,915). 29

On December 16, 2013, we leased an aggregate of 120 kilograms of gold with a market price of approximately RMB29.7 million (US$4.85 million) from SPD Bank pursuant to separate lease agreements entered into under the Framework Agreement. We are required to deposit cash into an account at SPD Bank equal to approximately RMB3 million (US$486,760) and pledge the amount to SPD Bank. This gold lease agreement has an initial term of approximately 12 months with a lease rate of 6% per annum. At the end of the leases, we will need to return 120 kilograms of gold to SPD Bank. On January 2, 2014, we entered into a gold lease agreement with SPD Bank and leased an aggregate of 85 kilograms of gold with a market price of approximately RMB20.5 million (US$3.3 million) The lease has an initial term of approximately 12 months, and provides for an interest rate of 7.5% per annum. We are required to deposit cash into an account at SPD Bank equal to approximately RMB2 million (approximately US$324,507) and to pledge the amount to SPD Bank. Lease payments to SPD are due quarterly beginning in March 2014, and are calculated based on the stated annual rate of 7.5%, the actual weight of gold leased (in grams), the fair market price of gold at the time of delivery, and the actual number of days the gold was leased. At the end of the lease, we will need to return 85 kilograms of gold to SPD Bank. On January 10, 2014, we entered into a gold lease agreement with SPD Bank and leased an aggregate of 210 kilograms of gold with a market price of approximately RMB51.0 million (US$8.9 million). The lease has an initial term of approximately 6 months, and provides for an interest rate of 7% per annum. We are required to deposit cash into an account at SPD Bank equal to approximately RMB11.4 million (approximately US$1.9 million) and pledge the amount to SPD Bank. Lease payments to SPD are due quarterly beginning in March 2014, and are calculated based on the stated annual rate of 7%, the actual weight of gold leased (in grams), the fair market price of gold at the time of delivery, and the actual number of days the gold was leased. At the end of the lease in July 2014, the Company returned 210 kilograms of gold to SPD Bank. On February 12, 2014, we entered into a gold lease framework agreement (the "Framework Agreement") with SPD Bank. In February 2014, Wuhan Kingold leased an aggregate of 320 kilograms of gold with a market price of approximately RMB81.7 million (US$13.4 million) from SPD Bank pursuant to separate lease agreements entered into under the Framework Agreement. The lease has an initial term of approximately 4 months, and provides for an interest rate of 6% per annum. We are required to deposit cash into an account at SPD Bank equal to approximately RMB20.4 million (approximately US$3.3 million). Lease payments to SPD are due quarterly beginning in March 2014, and are calculated based on the stated annual rate of 6%, the actual weight of gold leased (in grams), the fair market price of gold at the time of delivery, and the actual number of days the gold was leased. At the end of the lease, we returned the 320 kilograms of gold to SPD Bank. On June 27, 2014, Wuhan Kingold leased an another aggregate of 320 kilograms of gold with a market price of approximately RMB84.4 million (US$13.7 million) from SPD Bank pursuant to separate lease agreements entered into under the Framework Agreement. The lease has an initial term of approximately 12 months, and provides for an interest rate of 6% per annum. We are required to deposit cash into an account at SPD Bank equal to approximately RMB27.4 million (approximately US$4.5 million). On August 28, 2013, we entered into a gold lease framework agreement with the Wuhan branch of CITIC Bank, and subsequently leased an aggregate of 150 kilograms of gold (valued at approximately RMB41.6 million or approximately US$6.7 million) from CITIC Bank pursuant to lease agreement entered into under the framework agreement. The lease has an initial term of approximately 12 months, and provides for an interest rate of 5.6% per annum. Lease payments to CITIC Bank are due at the end of the leasing period. At the end of the lease, we will need to return 150 kilograms of gold to CITIC Bank. Under the gold lease agreement with CITIC Bank, we are required to deposit cash into an account at CITIC equal to approximately RMB8.4 million (approximately US$1.4 million) and pledge the amount to CITIC Bank. On January 27, 2014, we leased an additional 150 kilograms of gold (valued at approximately RMB36.5 million or approximately US$5.9 million), pursuant to separate lease agreements entered into under the Framework Agreement. We are required to deposit cash into an account at CITIC equal to approximately RMB7.3 million (approximately US$1.2 million) and pledge the amount to CITIC Bank. At the end of the lease in July 2014, the Company returned 150 kilograms of gold to CITIC Bank. On February 21, 2014, we leased additional 200 kilograms of gold (valued at approximately RMB51.6 million or approximately US$8.4 million) pursuant to separate lease agreements entered into under the Framework Agreement. We are required to deposit cash into an account at CITIC equal to approximately RMB10.5 million (approximately US$1.7 million) and pledge the amount to CITIC Bank. On March 5, 2014, we leased an additional 150 kilograms of gold (valued at approximately RMB39.9 million or approximately US$6.5 million) pursuant to separate lease agreements entered into under the Framework Agreement. We are required to deposit cash into an account at CITIC equal to approximately RMB9 million (approximately US$1.5 million) and pledge the amount to CITIC Bank. These three leases have a term of six months and provide for an interest rate of 6% per annum. 30 We leased the gold as a way to fuel our 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 us and treats it as if the gold is placed on consignment to us. All three banks have their own representatives on our premises to monitor on a daily basis the use and security of the gold leased to us. Accordingly, we record these gold lease transactions as operating leases because we do not have ownership nor have we assumed the risk of loss for the leased gold. We record the lease payments as interest expense. As of June 30, 2014 and December 31, 2013, 2,940 kilograms and 1,721 kilograms of leased gold, at the amount of $122.5 million and $83.7 million, respectively, will be returned within fiscal year 2014. Interest expense for the leased gold for the three months ended June 30, 2014 and 2013 were $3.5 million and $1.6 million, respectively. For the three months ended June 30, 2014 and 2013, interest expenses was $1.9 million and $0.9 million, respectively, which was included in cost of sales. Under these gold lease arrangements, each of CCB, SPD Bank and CITIC Bank retain beneficial ownership of the gold leased to us and treat it as if the gold is placed on consignment with our company. Accordingly, we record these gold lease transactions as operating leases.



For more information related to these gold leases, see Note 13 to our consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Other than the gold lease arrangements described above, we have no material off-balance sheet transactions.

Liquidity and Capital Resources

As of June 30, 2014, we had approximately $6.8 million in cash and cash equivalents. On June 17, 2014, we declared a special one-time cash dividend of $0.08 per share of common stock payable no later than August 28, 2014 to stockholders of record as of June 30, 2014, and we recorded a total amount of approximately $5.3 million cash dividend payable as of June 30, 2014 in connection therewith. We have financed our operations with cash flow generated from operations through borrowing of short term bank loans generally with a term of one year or less as well as through long term bank loans and private and public offerings in the U.S. capital markets. At June 30, 2014, we had total outstanding short-term loans of $20.7 million from CITIC Bank. 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 Quarterly Report. On October 23, 2013, we entered into an Acquisition Agreement (the "Acquisition Agreement") with Wuhan Wansheng House Purchasing Limited ("Wuhan Wansheng") and Wuhan Science. The Acquisition Agreement provides for the acquisition of the Shanghai Creative Industry Park, which is proposed to be renamed the Kingold Jewelry International Industry 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 approximately RMB1.0 billion (approximately USD$164 million at the spot exchange rates) from Wuhan Science (which had acquired the rights from Wuhan Wansheng in July 2013), and authorized Wuhan Wansheng, as agent, to complete construction of the Park. 31 We currently intend to finance the Jewelry Park predominantly with bank loans supplemented by our operating cash flows and, where possible, deposits or advances that may be received from lessees. As of the reporting date, we had not yet secured financing for the full completion of the project. Payments for the project will be made to Wuhan Wansheng in tranches, as follows, in line with the completion of certain building installments, as outlined in the Acquisition Agreement: Payment Commitment Payment Commitment Date (RMB in millions) (US$ in millions)** October 2013* 200 $ 32.72 January 2014 50 8 September 2014† 100 16 November 2014 150 25 January 2015 250 41 June 2015 250 41 Total 1,000 $ 164 * Includes initial deposit made to seller ** In US$ based on the spot rate † Updated to reflect delay to payment schedule The Acquisition Agreement specifies that upon payment of the initial RMB200 million tranche, that Wuhan Wansheng will transfer a portion of Wuhan Science's ownership to Wuhan Kingold and register Wuhan Kingold as the 60% shareholder of the Jewelry Park, and gives Wuhan Kingold the right to appoint the chief financial officer for the project to supervise and manage the use of the funds. Upon payment of the final installment, Wuhan Wansheng will register the remaining interests in Wuhan Kingold's name and it will be the 100% owner of the Park. If Wuhan Kingold is more than 45 days late in any payment, Wuhan Wansheng may 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. 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, job injuries insurance, and maternity insurance, in accordance with relevant regulations. We expect that the amount of our contribution to the government's social insurance funds will increase in the future as we expand our workforce and operations, and commence contributions to an employee housing fund. The ability of 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 or experience a delay in distributing 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 which have been incurred outside the PRC, which could adversely affect our business and prospects or its ability to meet our cash obligations. 32



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 Quarterly Report on Form 10-Q. 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.


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Source: Edgar Glimpses


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