UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended:

September 30, 2014

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

For the transition period from: _____________ to _____________

KINGOLD JEWELRY, INC.

(Exact name of registrant as specified in its charter)

Delaware	001-15819	13-3883101
(State or other jurisdiction	(Commission	(I.R.S. Employer
of incorporation)	File Number)	Identification No.)

15 Huangpu Science and Technology Park

Jiang’an District

Wuhan, Hubei Province, PRC 430023

(Address of principal executive offices) (Zip Code)

(011) 86 27 65694977

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x   Yes  ¨   No

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

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.

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	x

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 11, 2014, there were 65,953,462 shares of common stock outstanding, par value $0.001.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

		Page Number
PART I. FINANCIAL INFORMATION		1
Item 1.	Financial Statements	1
	Condensed Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013 (Unaudited)	1
	Condensed Consolidated Statements of Income and Comprehensive Income for the Three and Nine Months Ended September 30, 2014 and 2013 (Unaudited)	2
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013 (Unaudited)	3
	Notes to Condensed Consolidated Financial Statements (Unaudited)	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26
Item 4.	Controls and Procedures	27
PART II. OTHER INFORMATION		28
Item 1.	Legal Proceedings	28
Item 1A.	Risk Factors	28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28
Item 3.	Defaults Upon Senior Securities	28
Item 4.	Mine Safety Disclosures	28
Item 5.	Other Information	28
Item 6.	Exhibits	28
Signatures		29

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

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

• changes in the market price of gold;

• our ability to implement the key initiatives of, and realize the gross and operating margins and projected benefits (in the amounts and time schedules we expect) from, our business strategy;

• non-performance of suppliers of their sale commitments and customers of their purchase commitments;

• non-performance of third-party service providers;

• adverse conditions in the industries in which our customers operate, including a general economic downturn , a recession globally, or sudden disruption in business conditions, and our ability to withstand an economic downturn, recession, cost inflation, competitive or other market pressures, or conditions;

• the effect of political, economic, legal, tax and regulatory risks imposed on us, including foreign exchange or other restrictions, adoption, interpretation and enforcement of foreign laws including any changes thereto, as well as reviews and investigations by government regulators that have occurred or may occur from time to time, including, for example, local regulatory scrutiny in China;

• our ability to manage growth;

• our ability to complete the construction and development of, and then successfully manage, the proposed Kingold International Jewelry and Cultural Industry Park;

• our ability to successfully identify new business opportunities and identify and analyze acquisition candidates, secure financing on favorable terms and negotiate and consummate acquisitions as well as to successfully manage any acquired business;

• our ability to integrate acquired businesses;

• the effect of economic factors, including inflation and fluctuations in interest rates and currency exchange rates, foreign exchange restrictions and the potential effect of such factors on our business, results of operations and financial condition;

• our ability to retain and attract senior management and other key employees;

• any internal investigations and compliance reviews of the Foreign Corrupt Practices Act and related U.S. and foreign law matters in China and additional countries, as well as any disruption or adverse consequences resulting from such investigations, reviews, related actions or litigation;

• changes in People’s Republic of China (“PRC”) or U.S. tax laws;

• increased levels of competition, and competitive uncertainties in our markets, including competition from companies in the gold jewelry industry in the PRC, some of which are larger than we are and have greater resources;

• the impact of the seasonal nature of our business, adverse effect of rising energy, commodity and raw material prices, changes in market trends, purchasing habits of our consumers and changes in consumer preferences;

• our ability to protect our intellectual property rights;

• the risk of an adverse outcome in any material pending and future litigations;

• our ratings, our access to cash and financing and ability to secure financing at attractive rates;

• the success of our research and development activities;

• our continuing relationship with major banks in China with whom we have certain gold lease agreements and from whom we obtain certain working capital loans;

• our ability to understand China’s commercial real estate market as we begin to build the recently acquired Kingold International Jewelry and Cultural Industry Park and to manage the relationships with the planned tenants in such park;

• our ability to obtain the government permits necessary to sell certain commercial property that we are developing in the Kingold International Jewelry and Cultural Industry Park;

• our knowledge of and marketing capabilities in markets outside of China, particularly the Middle East, as we begin to expand our business outside of China through our formation of a joint venture with a Kuwaiti entity; and

• other risks, including those described in the “Risk Factors” discussion of this periodic report and in our Annual Report on Form 10-K for the year ended December 31, 2013 filed with the Securities and Exchange Commission.

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

i

PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

KINGOLD JEWELRY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN U.S. DOLLARS)

(UNAUDITED)

	September 30,		December 31,
	2014		2013
ASSETS
CURRENT ASSETS
Cash	$	6,554,801	$	2,284,930
Restricted cash		16,709,130		12,668,749
Accounts receivable		13,668		532,386
Inventories, net		215,652,024		174,433,501
Other current assets and prepaid expenses		1,215,344		8,252,387
Due from related party		-		52,354,308
Value added tax recoverable		5,812,722		6,220,866
Deferred income tax assets		1,573,587		275,882
Total Current Assets		247,531,276		257,023,009
PROPERTY AND EQUIPMENT, NET		9,772,205		10,686,947
OTHER ASSETS
Deposit on land use right		47,177,693		32,721,442
Other assets		153,258		157,946
Land use right		494,403		507,117
Total Other Assets		47,825,354		33,386,505
TOTAL ASSETS	$	305,128,835	$	301,096,461
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short term loans	$	16,247,746	$	49,572,985
Other payables and accrued expenses		2,667,052		3,499,717
Income tax payable		3,381,538		3,269,908
Other taxes payable		696,394		848,739
Total Current Liabilities		22,992,730		57,191,349
Long term loans		32,471,120		29,004,287
TOTAL LIABILITIES		55,463,850		86,195,636
EQUITY
Preferred stock, $0.001 par value, 500,000 shares
authorized, none issued or outstanding
as of September 30, 2014 and December 31, 2013		-		-
Common stock $0.001 par value, 100,000,000 shares
authorized, 65,953,462 and 64,953,462 shares issued and outstanding
as of September 30, 2014 and December 31, 2013		65,953		64,953
Additional paid-in capital		79,239,190		76,847,205
Retained earnings
Unappropriated		154,911,706		120,946,375
Appropriated		967,543		967,543
Accumulated other comprehensive income		14,480,593		16,074,749
Total Stockholders' Equity		249,664,985		214,900,825
TOTAL LIABILITIES AND EQUITY	$	305,128,835	$	301,096,461

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

1

KINGOLD JEWELRY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(IN U.S. DOLLARS)

(UNAUDITED)

	For the three months ended September 30,						For the nine months ended September 30,
	2014			2013			2014			2013
NET SALES	$	251,006,255		$	283,890,000		$	898,225,518		$	872,340,210
COST OF SALES
Cost of sales		(240,742,984	)		(266,705,520	)		(834,987,086	)		(838,673,009	)
Depreciation		(307,790	)		(304,815	)		(922,756	)		(906,590	)
Total Cost of Sales		(241,050,774	)		(267,010,335	)		(835,909,842	)		(839,579,599	)
GROSS PROFIT		9,955,481			16,879,665			62,315,676			32,760,611
OPERATING EXPENSES
Selling, general and administrative expenses		1,699,795			1,143,882			5,318,285			3,139,638
Stock compensation expenses		612,995			375,002			1,838,985			1,133,790
Depreciation		30,228			36,293			92,268			110,286
Amortization		3,068			26			9,222			6,080
Total Operating Expenses		2,346,086			1,555,203			7,258,760			4,389,794
INCOME FROM OPERATIONS		7,609,395			15,324,462			55,056,916			28,370,817
OTHER EXPENSE
Interest expense		(577,858	)		(96,866	)		(1,539,249	)		(290,914	)
Total Other Expense		(577,858	)		(96,866	)		(1,539,249	)		(290,914	)
INCOME FROM OPERATIONS BEFORE TAXES		7,031,537			15,227,596			53,517,667			28,079,903
INCOME TAX PROVISION (BENEFIT)
Current		3,373,114			3,402,482			15,577,085			8,197,780
Deferred		(1,575,575	)		830,419			(1,301,027	)		(471,468	)
TOTAL INCOME TAX PROVISION		1,797,539			4,232,901			14,276,058			7,726,312	)
NET INCOME		5,233,998			10,994,695			39,241,609			20,353,591
OTHER COMPREHENSIVE INCOME (LOSS)
Total Foreign Currency Translation Gains (Loss)		72,284			1,278,588			(1,594,156	)		4,780,603
COMPREHENSIVE INCOME	$	5,306,282		$	12,273,283		$	37,647,453		$	25,134,194
Earnings per share
Basic	$	0.08		$	0.17		$	0.60		$	0.32
Diluted	$	0.08		$	0.17		$	0.59		$	0.32
Weighted average number of shares
Basic		65,953,462			64,334,400			65,905,667			63,073,008
Diluted		66,137,568			64,486,938			66,285,370			63,310,034

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

2

KINGOLD JEWELRY, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(IN U.S. DOLLARS)

(UNAUDITED)

	For the nine months ended September 30,			For the nine months ended September 30,
	2014			2013
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	39,241,609		$	20,353,591
Adjusted to reconcile net income to cash provided by operating activities:
Depreciation		1,015,024			1,016,876
Amortization of intangible assets		9,222			6,080
Share based compensation		1,838,985			1,133,790
Inventory valuation allowance		6,301,209			7,115,531
Deferred tax benefit		(1,301,027	)		(471,468	)
Changes in operating assets and liabilities
(Increase) decrease in:
Accounts receivable		515,603			425,686
Inventories		(48,770,478	)		(22,251,264	)
Other current assets and prepaid expenses		8,136,861			(291,007	)
Value added tax recoverable		365,586			(989,335	)
Increase (decrease) in:
Other payables and accrued expenses		(826,274	)		(444,964	)
Income tax payable		134,356			756,440
Other taxes payable		(146,645	)		(55,351	)
Net cash provided by operating activities		6,514,031			6,304,605
CASH FLOWS FROM INVESTING ACTIVITIES
Cash deposit for land use right		(14,694,597	)		-
Purchase of property and equipment		(173,164	)		(53,669	)
Net cash used in investing activities		(14,867,761	)		(53,669	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank loans-short term		23,991,542			-
Repayments of bank loans-short term		(57,010,410	)		-
Proceeds from long term loan		3,671,113			-
Restricted cash		(4,132,361	)		(4,284,287	)
Proceeds from related party loan		64,990,983			1,501,252
Repayments of related party loan		(12,998,197	)		-
Cash dividend paid		(5,276,277	)		-
Net proceeds from exercise of warrants		-			4,500,000
Net proceeds from stock issuance		-			12,522,000
Net cash provided by financing activities		13,236,393			14,238,965
EFFECT OF EXCHANGE RATES ON CASH		(612,792	)		283,017
NET INCREASE IN CASH		4,269,871			20,772,918
CASH, BEGINNING OF PERIOD		2,284,930			2,544,114
CASH, END OF PERIOD	$	6,554,801		$	23,317,032
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest expense	$	10,192,638		$	3,235,628
Cash paid for income tax	$	15,442,729		$	7,441,340

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

3

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, 2014 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2014. 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, 2013, filed with the SEC on March 31, 2014.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

Based on the restructuring agreements and the subscription agreement described in full in the Company’s Form 10-K for the fiscal year ended December 31, 2013, Wuhan Kingold Jewelry Co., Inc. (“Wuhan Kingold”) should be considered as a 100% contractually controlled affiliate. Kingold is empowered, through its wholly owned subsidiaries Dragon Lead Group Limited (“Dragon Lead”) and Wuhan Vogue-Show Jewelry Co., Inc. (“Wuhan Vogue-Show”), with the ability to control and substantially influence Wuhan Kingold’s daily operations and financial affairs, appoint its senior executives and approve all matters requiring shareholders’ approval. Kingold is also obligated to absorb a majority of expected losses of Wuhan Kingold, which enables Kingold to receive a majority of expected residual returns from Wuhan Kingold, and because Kingold has the power to direct the activities of Wuhan Kingold that most significantly impact Wuhan Kingold’s economic performance, Kingold, through its wholly-owned subsidiaries, accounts for Wuhan Kingold as its Variable Interest Entity under 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. All significant inter-company balances and transactions have been eliminated in consolidation.

Kingold, Dragon Lead, Wuhan Vogue-Show 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. Significant estimates required to be made by management include, but are not limited to, useful lives of property, plant and equipment, intangible assets, the recoverability of long-lived assets, inventory valuation and share based compensation. Actual results could differ from those estimates.

Restricted Cash

As of September 30, 2014, the Company had restricted cash of $16,709,130 compared to $12,668,749 as of December 31, 2013. Approximately $3.0 million was related to the bank loan with China CITIC Bank Corporation Limited (“CITIC Bank”) – see Note 6 for details. Approximately $13.7 million was related to the gold lease deposits with Shanghai Pudong Development Bank (“SPD Bank”) and CITIC Bank– see Note 13 – Gold Lease Transactions. 

Accounts Receivable

The Company generally receives cash payment upon delivery of a product, but may extend unsecured credit to its customers in the ordinary course of business. The Company mitigates the associated risks by performing credit checks and actively pursuing past due accounts. An allowance for doubtful accounts is established and recorded based on management’s assessment of the credit history of the customers and current relationships with them. At September 30, 2014 and December 31, 2013, there was no allowance recorded as the Company considers all of the accounts receivable fully collectible.

4

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Inventories

Inventories are stated at the lower of cost or market value, cost being calculated on the weighted average basis. As of September 30, 2014 and December 31, 2013, respectively, the Company recorded a lower of cost or market adjustment of $6.3 million and $1.1 million to adjust the carrying value to market. The cost of inventories comprises all costs of purchases, costs of fixed and variable production overhead and other costs incurred in bringing the inventories to their present location and condition.

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:

	Estimated Useful Life
Buildings	30 years
Plant and machinery	15 years
Motor vehicles	10 years
Office furniture and electronic equipment	5 – 10 years

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.

Land Use Right

Under the People’s Republic of China (“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, 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, 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.

5

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The carrying value of accounts receivable, other current assets and prepaid expenses, short term loans, other payables and accrued expenses approximate their fair values because of the short-term nature of these instruments. The Company 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.

Revenue recognition

Net sales are primarily composed of sales of branded products to wholesale and retail customers, as well as fees generated from customized production. In customized production, a customer supplies the Company with the raw materials and the Company creates products per that customer’s instructions, whereas in branded production the Company generally purchases gold directly and manufactures and markets the products on its own. The Company recognizes revenues under FASB Codification Topic 605 (ASC Topic 605) 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. Revenues from customized production services made up approximately 3.0% of total revenue for the period ended September 30, 2014, compared to 2.2% for the period ended September 30, 2013.

Income taxes

The Company accounts for income taxes under FASB Codification Topic 740 (ASC 740). Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized 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, 2014 or at December 31, 2013.

To the extent applicable, the Company records interest and penalties as a general and administrative expense. The statute of limitations for the Company’s U.S. federal income tax returns and certain state income tax returns remains open for tax years 2008 and after. As of September 30, 2014, the tax years ended December 31, 2008 through December 31, 2013 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.”

6

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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

	September 30,	December 31,
	2014	2013
Balance sheet items, except for share capital,
additional paid in capital and retained earnings, as of the period ended	US$1=RMB 6.1547	US$1=RMB 6.1122
Amounts included in the statements of operations and cash flows for the period	US$1=RMB 6.1480	US$1=RMB 6.1943

Comprehensive income

Comprehensive income consists of two components, net income and other comprehensive income. The foreign currency translation gain or loss resulting from translation of the financial statements expressed in RMB to US$ is reported in other comprehensive income in the consolidated statements of income and comprehensive income and the consolidated statements of changes in equity.

Earnings per share

The Company computes earnings per share (“EPS”) in accordance with ASC 260 “Earnings per Share” (ASC 260), and SEC Staff Accounting Bulletin No. 98 (SAB 98). ASC 260 requires companies with complex capital structures to present basic and diluted EPS. Basic EPS is measured as net income divided by the weighted average common shares outstanding for the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (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-Based compensation

The Company follows the provisions of ASC 718, “Compensation — Stock Compensation,” which establishes the accounting for non-employee and employee stock-based awards. Under the provisions of ASC 718, the fair value of the stock issued is used to measure the fair value of services received as the Company believes such approach is a more reliable method of measuring the fair value of the services. For 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.

For employee stock-based awards, share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense with graded vesting on a straight-line basis over the requisite service period for the entire award.

Risks and Uncertainties

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

7

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The Company’s operations are located in the PRC. Accordingly, the Company’s business, financial condition, and results of operations may be influenced by the political, economic, and legal environments in the PRC, as well as by the general state of the PRC economy. The Company’s operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment, and foreign currency exchange. The Company’s results may be adversely affected by changes in the political, regulatory and social conditions in the PRC, and by changes in governmental policies or interpretations with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation, among other things. In addition, the Company only controls Wuhan Kingold through a series of agreements. Although the Company believes the contractual relationships through which it controls Wuhan Kingold comply with current licensing, registration and regulatory requirements of the PRC, it cannot assure you that the PRC government would agree, or that new and burdensome regulations will not be adopted in the future. If the PRC government determines that the Company’s structure or operating arrangements do not comply with applicable law, it could revoke the Company’s business and operating licenses, require it to discontinue or restrict its operations, restrict its right to collect revenues, require it to restructure its operations, impose additional conditions or requirements with which the Company may not be able to comply, impose restrictions on its business operations or on its customers, or take other regulatory or enforcement actions against the Company that could be harmful to its business. If such agreements were cancelled, modified or otherwise not complied with, the Company would not be able to retain control of this consolidated entity and the impact could be material to the Company’s operations. Although the Company has not experienced losses from these situations and believes that it is in compliance with existing laws and regulations, including the organization and structure disclosed in Note 1, this may not be indicative of future results.

Recent Accounting Pronouncements

The Company does not believe that any recently issued, but not yet effective, accounting standards, if currently adopted, will have a material effect on its consolidated financial position, results of operations, or cash flows.

In June 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-12, Compensation-Stock Compensation: Topic 718. This amendment requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. This ASU is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. The Company does not expect the adoption of this guidance will have a significant impact on the Company’s unaudited condensed consolidated financial statements.

Reclassification

Certain prior quarter amounts have been reclassified to conform to the current quarter presentation. Interest expense related to the cost of gold for the gold lease transactions in the amount of $1,264,808 and $2,821,682 was reclassified to cost of sales for the three months and nine months ended September 30, 2013, respectively (see Note 13). This reclassification has no effect on the accompanying condensed consolidated statements of operation and cash flows.

NOTE 3 - INVENTORIES, NET

Inventories as of September 30, 2014 and December 31, 2013 consist of the following:

	As of
	September 30,			December 31,
	2014			2013
Raw materials (A)	$	53,897,285		$	42,882,587
Work-in-progress (B)		125,418,611			97,503,987
Finished goods (C)		42,630,477			35,150,454
Inventory valuation allowance		(6,294,349	)		(1,103,527	)
Total inventory	$	215,652,024		$	174,433,501

(A) Included 1,539,446 grams of Au9999 gold.

(B) Included 3,530,477 grams of Au9999 gold.

(C) Included 1,188,186 grams of Au9999 gold.

8

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

As of September 30, 2014, the Company recorded a $6,294,349 lower of cost or market adjustment compared to the adjustment of $1,103,527 as of December 31, 2013.

NOTE 4 - PROPERTY AND EQUIPMENT, NET

The following is a summary of property and equipment as of September 30, 2014 and December 31, 2013:

	As of
	September 30,			December 31,
	2014			2013
Buildings	$	2,492,484		$	2,509,815
Plant and machinery		19,463,722			19,444,059
Motor vehicles		37,045			71,906
Office and electric equipment		647,034			630,626
Subtotal		22,640,285			22,656,406
Less: accumulated depreciation		(12,868,080	)		(11,969,459	)
Property and equipment, net	$	9,772,205		$	10,686,947

Depreciation expense for the nine months ended September 30, 2014 and 2013 was $1,015,024 and $1,016,876, respectively. Depreciation expense for the three months ended September 30, 2014 and 2013 was $338,018 and $341,108, respectively.

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

On October 23, 2013, the Company, through its wholly-owned subsidiary, Wuhan Kingold, entered into an agreement (the “Agreement”) with Wuhan Wansheng House Purchasing Limited (“Wuhan Wansheng”) and Wuhan Huayuan Science and Technology Development Limited Company (“Wuhan Huayuan”). The Agreement provides for the build out of the planned “Shanghai Creative Industry Park Project,” which is proposed to be renamed to “Kingold International Jewelry and Cultural Industry Park” (the “Jewelry Park Project” or the “Project”). 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 RMB1.0 billion (approximately US$164 million) for the acquisition of this Land Use Right and to finance the entire development and construction of a total of 192,149 square meters (approximately 2,068,000 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 five-star hotel.

As of September 30, 2014, Wuhan Kingold had made a RMB270 million (approximately US$43.8 million) 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 full construction, as estimated based on certain construction project milestones listed below. Due to a delay by the construction company in charge of the Project’s construction (the “Construction Company”), the Company has delayed its payments due to the Construction Company by five to six months. However, this delay has not impacted the total expected cost of RMB1.0 billion (approximately US$164 million).

Upon the completion of the whole project in accordance with the specific requirements agreed upon by both 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.

9

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Date	Original Payment Commitment (RMB in millions)		Revised Payment Commitment (RMB in millions)		Payment Commitment (US$ in millions)**
October 2013*		200		200	$	32.72
January 2014		50		50		8
June 2014		100		-		-
September 2014		150		20		3.3
November 2014†		-		80		12.7
December 2014		-		150		25
January 2015		250		250		41
June 2015		250		250		41
Total		1,000		1,000	$	164

* 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 RMB270 million made as of September 30, 2014 were recorded as “Deposit on Land Use Right” on the balance sheet. Any future payments towards the construction of the Jewelry Park Project will be recorded as “Construction-in-Progress” until the Project is completed and certified for use. Upon the completion of the Project, the excess of RMB1.0 billion commitment over the actual amount spent on the construction of the Project shall be deemed as the actual cost of the Land Use Right.

NOTE 6 – LOANS

Short term loans consist of the following:

	As of
	September 30,		December 31,
	2014		2013
a)  Loan payable to Xing Ye Bank Wuhan Branch	$	-	$	7,853,146
b)  Loans payable to CITIC Bank Wuhan Branch		-		17,996,793
c)  Loans payable to CITIC Bank Wuhan Branch		12,998,197		15,542,685
d)  Loan payable to Jiang’an Wuhan Branch of Hubei Bank Co		3,249,549		8,180,361
e)  Loans payable to CITIC Bank Wuhan Branch		-		-
Total short term loans	$	16,247,746		49,572,985

a) Loan payable to Xing Ye Bank Wuhan Branch with an aggregate amount of RMB48 million (equivalent to approximately US$7.8 million) consists of one Loan Contract signed on December 10, 2013, with a maturity date of April 17, 2014, and has an annual interest rate of 6.6%. This loan is guaranteed by the Company’s Chairman and Chief Executive Officer’s personal credit. The loan was repaid on April 17, 2014.

b) Loans payable to CITIC Bank Wuhan Branch with an aggregate amount of RMB110 million (equivalent to approximately US$18.1 million) consists of three working capital loan contracts originated on December 5, 2013, with maturity dates of March 1, 2014, March 5, 2014, and March 20, 2014, respectively. The annual interest rate is 6.6%. All the loans from CITIC Bank Wuhan Branch were secured by restricted cash of RMB22 million (equivalent to approximately US$3.6 million). The Loans were paid off by their due dates and restricted cash of RMB16 million (equivalent to approximately US$2.6 million) was released as of March 31, 2014. The remaining restricted cash of RMB6 million (equivalent to approximately US$1 million) was released in April, 2014.

c) Loans payable to CITIC Bank Wuhan Branch with an aggregate amount of RMB95 million (equivalent to approximately US$15.4 million) consists of three working capital loan contracts signed on December 6, 2013 with maturity dates of April 11, 2014, April 18, 2014 and May 8, 2014, respectively. The annual interest rate is 6.9%. All loans from CITIC Bank Wuhan Branch were secured by restricted cash of RMB23 million (equivalent to approximately US$3.8 million). 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) 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 RMB18 million (equivalent to approximately US$3 million). The loan is also secured by 160 kilograms of Au9999 gold, approximately $6.3 million of which was pledged by Wuhan Kingold as at September 30, 2014.

10

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

d) Loan payable to Bank of Hubei, Wuhan Jiang’an Branch with an aggregate amount of RMB50 million (equivalent to approximately US$8.1 million) consists of one Loan Contract signed on December 10, 2013 with a maturity date of April 18, 2014. The annual interest rate is 6.6%. This loan is guaranteed by the Company’s Chairman and Chief Executive Officer’s personal credit. This loan was repaid in full on April 18, 2014. New loans payable to Bank of Hubei, Wuhan Jiang’an Branch with an aggregate amount of RMB20 million (equivalent to approximately US$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.

e) Loan payable to CITIC Bank Wuhan Branch with an aggregate amount of RMB47.5 million (equivalent to approximately US$7.7 million) consists of one working capital loan signed on March 18, 2014 with a maturity date of September 18, 2014 was repaid. The annual interest rate is 6.9%. The restricted cash of RMB50 million (equivalent to approximately US$8 million) was released after repayment.

Interest expense for all of the loans mentioned above for the nine months ended September 30, 2014 and 2013 was $1,539,249 and $290,914, respectively. For the three months ended September 30, 2014 and 2013, it was $577,858 and $96,866, respectively.

Long term loan consists of the following:

	As of
	September 30,		December 31,
	2014		2013
f)  Loan payable to  Chang’an International Trust Co., Ltd.	$	32,471,120	$	29,004,287
Total long term loans	$	32,471,120	$	29,004,287

f)On November 29, 2013, Wuhan Kingold entered into a Trust Loan Contract in the amount of RMB200 million (equivalent to approximately US$32.5 million as of the spot rate on September 30, 2014) 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. The loan is secured by 1,000 kilograms of Au9999 gold, which approximately $39.2 million as at September 30, 2014 was pledged by Wuhan Kingold. Interest for the Trust Loan in the amount of $3.3 million for the first nine months was capitalized and was not recorded as part of total interest expenses.

NOTE 7 - INCOME TAXES

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

Kingold is incorporated in the United States and has incurred net operating loss for income tax purposes for 2014 and 2013. The Company has loss carry forwards of approximately $11,373,000 for U.S. income tax purposes available for offsetting against future taxable U.S. income, expiring in 2034. 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, 2014 was $4,160,494. The net increase in the valuation allowance for the period ended September 30, 2014 was $1,078,694.

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

Wuhan Vogue-Show and Wuhan Kingold are incorporated in the PRC and are subject to PRC income tax, which is computed according to the relevant laws and regulations in the PRC. The applicable tax rate is 25% for the periods ended September 30, 2014 and 2013.

The Company recorded $1,573,587 deferred income tax assets as of September 30, 2014 compared to $0.275 million as of December 31, 2013, from its foreign operations, which was related to an inventory allowance reflecting the decline in gold prices.

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

11

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Significant components of the income tax provision were as follows for the three and nine months ended September 30, 2014 and 2013:

	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
	2014			2013		2014			2013
Current tax provision
Federal	$	-		$	-	$	-		$	-
State		-			-		-			-
Foreign		3,373,114			3,402,482		15,577,085			8,197,780
		3,373,114			3,402,482		15,577,085			8,197,780
Deferred tax provision (benefit)
Federal	$	-		$	-	$	-		$	-
State		-			-		-			-
Foreign		(1,575,575	)		830,419		(1,301,027	)		(471,468	)
		(1,575,575	)		830,419		(1,301,027	)		(471,468	)
Income tax provision	$	1,797,539		$	4,232,901	$	14,276,058		$	7,726,312

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, 2014 and 2013:

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2014			2013			2014			2013
United States	$	(864,242	)	$	(669,423	)	$	(3,172,630	)	$	(1,821,093	)
Foreign		7,895,779			15,897,019			56,690,297			29,900,996
		7,031,537			15,227,596			53,517,667			28,079,903

NOTE 8 - EARNINGS PER SHARE

As of September 30, 2014, Kingold had 1,117,778 warrants issued and outstanding in connection with the issuance of its common stock in public offerings. Of these warrants: 823,778 warrants were issued in 2009, with an exercise price of $0.996; 150,000 warrants were issued in 2011, with an exercise price of $3.25; and 144,000 warrants were issued in 2011, with an exercise price of $3.99. As of September 30, 2014, the warrants issued in 2009 were considered dilutive and were included in the weighted average shares-diluted calculation using the treasury stock method. The warrants issued in 2011 were anti-dilutive because the exercise prices were higher than the average market price for the nine months ended September 30, 2014. Accordingly, such warrants are not included in weighted average shares calculation.

As of September 30, 2014, Kingold also had 3,130,000 options outstanding to purchase the same number of shares of the Company’s common stock. Of those options, 120,000 options were granted in 2011, with an exercise price of $2.27; 1,500,000 options were granted in 2011, with an exercise price of $2.59; 1,300,000 options were granted in 2012, with an exercise price of $1.22; 120,000 options were granted in 2012, with an exercise price of $1.49; and 90,000 options were granted in 2013, with an exercise price of $1.18. As of September 30, 2014, 1,300,000 options granted in 2012 and 90,000 options granted in 2013 were considered dilutive and were included in the weighted average shares-diluted calculation using the treasury stock method. The other options granted were anti-dilutive because the exercise prices were higher than the average market price for the nine months ended September 30, 2014. Accordingly, they are not included in weighted average shares calculation.

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

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2014		2013		2014		2013
Net income	$	5,233,998	$	10,994,695	$	39,241,609	$	20,353,591
Weighted average number of common shares outstanding - Basic		65,953,462		64,334,400		65,905,667		63,073,008
Effect of dilutive securities:
Unexercised warrants and options		184,106		152,538		379,703		237,026
Weighted average number of common shares outstanding - Diluted		66,137,568		64,486,938		66,285,370		63,310,034
Earnings per share-Basic	$	0.08	$	0.17	$	0.60	$	0.32
Earnings per share-Diluted	$	0.08	$	0.17	$	0.59	$	0.32

12

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 9 - EQUITY

On October 25, 2013, 400,000 shares were issued to Financial Buzz Media Networks LLC. $546,000 and $nil stock compensation expense was recognized in connection with this transaction for the nine months ended September 30, 2014 and 2013, respectively. $182,000 and $nil stock compensation expense was recognized in connection with this transaction for the three months ended September 30, 2014 and 2013, respectively.

On January 10, 2014, the Company entered into a consulting agreement with Sailesh C. Barchha (the “Consulting Agreement”) to assist the Company in expanding into the international market. Pursuant to the terms of the Consulting Agreement, the Company has entered into a joint venture agreement with Kuwait Support Services Company W.L.L., or KSS, a major multi-business group headed by His Excellency Sheikh Ameer Al Sabah of Kuwait. In connection with such joint venture with KSS, Mr. Barchha will provide certain management consulting and financial advisory services to the Company over a two year term from January 10, 2014 to January 9, 2016. In exchange for such services, the Company has issued to Mr. Barchha an aggregate of 1,000,000 shares of common stock of the Company on January 14, 2014. The fair value of this common stock compensation is based on the closing stock price on the date at which the 1,000,000 shares were granted. $220,000 and $660,000 of stock compensation expense was recognized for the three months and nine months ended September 30, 2014. The Company included $1,100,000 of prepaid expenses in “other current assets and prepaid expenses” on the balance sheet as of September 30, 2014. The Company is continuing to work with KSS in connection with the joint venture and planned business operations. However, as of September 30, 2014, the Company had not made any contributions to the joint venture and no operations under the joint venture had commenced.

On June 17, 2014, the Company issued a press release announcing that the Board of Directors of the Company approved a special cash dividend of US$0.08 per share of common stock. The total amount of approximately US$5.3 million cash dividend was paid in August 2014.

As of September 30, 2014, the Company had 65,953,462 shares of common stock issued and outstanding and warrants outstanding to purchase up to 1,117,778 shares of its common stock.

NOTE 10 - WARRANTS

Following is a summary of the status of warrant activities as of September 30, 2014:

	Warrants Outstanding			Weighted Average Exercise Price		Average Remaining Life in Years
Outstanding, January 1, 2014		1,417,778		$	1.74		0.86
Granted
Forfeited		(300,000	)	$	1.80
Exercised
Outstanding, September 30, 2014		1,117,778		$	1.68		0.11

NOTE 11 - OPTIONS

On March 24, 2011, the Board of Directors voted to adopt the 2011 Stock Incentive Plan (the “Plan”), which was later ratified by the Company’s stockholders on October 31, 2011, at the 2011 annual meeting.

The Plan permits the granting of stock options (including incentive stock options as well as nonstatutory stock options), stock appreciation rights, restricted and unrestricted stock awards, restricted stock units, performance awards, other stock-based awards or any combination of the foregoing. Under the terms of the Plan, up to 5,000,000 shares of the Company’s common stock may be granted.

For options issued prior to January 1, 2012, the compensation expense of $331,317 and $331,316 were recorded as part of operating expense-stock compensation for the 1,620,000 options above for the nine months ended September 30, 2014 and 2013, respectively. $110,439 and $110,439 were recorded as part of operating expense-stock compensation for the 1,620,000 options above for the three months ended September 30, 2014 and 2013, respectively.

On January 9, 2012, the Company granted 1,300,000 options with an exercise price of $1.22 to certain members of management and directors. These options can be exercised within ten years from the grant date once they become exercisable. The options become exercisable in accordance with the schedule below: (a) 25% of the options become exercisable on the first anniversary of the grant date (such date is the initial vesting date), and (b) 6.25% of the options become exercisable on the date three months after the initial vesting date and on such date every third month thereafter, through the fourth anniversary of the grant date. The fair value of the options was calculated using the Black-Scholes options pricing model using the following assumptions: volatility of 124.81%, risk free interest rate of 1.98 %, and expected term of 10 years. The fair value of the options was $1,516,435. In accordance with the vesting periods, $284,332 and $284,332 were recorded as part of operating expense-stock compensation for the 1,300,000 options above for the nine months ended September 30, 2014 and 2013, respectively. $94,777 and $94,777 were recorded as part of operating expense-stock compensation for the 1,300,000 options above for the three months ended September 30, 2014 and 2013, respectively.

13

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

On April 1, 2012, the Company granted 120,000 options with an exercise price of $1.49 to its Chief Financial Officer (“CFO”) per his employment agreement. These options can be exercised within ten years from the grant date once they become exercisable. The options become exercisable every three months starting from grant date for the one year service period from April 1, 2012. The fair value of the options was calculated using the Black-Sholes options pricing model using the following assumptions: volatility of 124.50%, risk free interest rate of 2.23%, and expected term of 10 years. The fair value of the options was $170,967. Since the service period from April 1, 2012 to April 1, 2013, $0 and $42,742 were recorded as part of operating expense-stock compensation for the 120,000 options above for the nine months ended September 30, 2014 and 2013, respectively. No operating expense-stock compensation was recorded for the three months ended September 30, 2014 and 2013.

On April 3, 2013, the Compensation Committee of the Company’s Board of Directors approved a grant to the Company’s CFO of 360,000 shares of common stock. The Company recorded a total of $475,400 as share-based compensation for the nine months ended September 30, 2013.

On July 16, 2013, the Company granted 90,000 options with an exercise price of $1.18 to its non-employee directors, which options expire ten years from the grant date under the Plan. These options became exercisable in accordance with the following schedule: (a) 25% of the options became exercisable on the first anniversary of the grant date (the “Initial Vesting Date”), and (b) 6.25% of the options became exercisable on the date three months after the Initial Vesting Date and on such date every third month thereafter, through the fourth anniversary of the grant date. The fair value of the options was calculated using the Black-Scholes options pricing model using the following assumptions: volatility of 118.01%, risk free interest rate of 2.55%, and expected term of 6.25 years. The fair value of the options was $92,458. In accordance with the vesting periods, $17,336 and $0 were recorded as part of operating expense-stock compensation for the 90,000 options above for the nine months ended September 30, 2014 and 2013, respectively. $5,779 and $0 were recorded as part of operating expense-stock compensation for the 90,000 options above for the three months ended September 30, 2014 and 2013, respectively.

As of September 30, 2014, the Company had 2,391,250 outstanding vested stock options with a weighted average remaining term over 6.83 years. As of September 30, 2014, the Company had 738,750 unvested stock options with a weighted average remaining term over 6.91 years. Unrecorded stock-based compensation expense was $758,326 as of September 30, 2014.

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

	Number of options		Weighted Average Exercise Price		Weighted Average Remaining Life in Years		Fair Value
Outstanding, December 31, 2013		3,130,000	$	1.93		7.66		3,727,830
Exercisable, December 31, 2013		1,849,375	$	2.08		7.78		2,230,185
Granted
Forfeited
Exercised
Outstanding, September 30, 2014		3,130,000	$	1.93		6.91		3,727,830
Exercisable, September 30, 2014		2,391,250	$	2.04		6.83		2,868,946

NOTE 12 - CONCENTRATIONS AND RISKS

The Company maintains certain bank accounts in the PRC and BVI, which are not protected by Federal Deposit Insurance Corporation (“FDIC”) insurance or other insurance.  The cash and restricted cash balance held in the PRC bank accounts was $23,163,279 and $14,660,013 as of September 30, 2014 and December 31, 2013, respectively. The cash balance held in the BVI bank accounts was $14,914 and $9,847 as of September 30, 2014 and December 31, 2013, respectively.  As of September 30, 2014 and December 31, 2013, the Company held $20,707 and $274,016 of cash balances within the United States, of which $0 and $24,016 was in excess of FDIC insurance limits of $250,000 as of September 30, 2014 and December 31, 2013, respectively.

For the periods ended September 30, 2014 and 2013, almost 100% of the Company's assets were located in the PRC and 100% of the Company's revenues were derived from its subsidiaries located in the PRC.

The Company’s principal raw material used during the year was gold, which accounted for almost 100% of its total purchases for the periods ended September 30, 2014 and 2013. 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 months ended September 30, 2014 or 2013.

14

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 13 - GOLD LEASE TRANSACTIONS

On December 20, 2012, Wuhan Kingold entered into a gold lease agreement with China Construction Bank’s Wuhan Jiang’an Branch (“CCB”) that became effective in January 2013, originally terminated on October 26, 2013 and extended to 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. The Company leased 676 kilograms of gold (valued at approximately RMB226 million or US$36 million) from CCB in January 2013. At the end of the lease, the Company will need to return 676 kilograms of gold to CCB. Wuhan Kingold received notification from CCB that the total credit line under the Gold Lease Agreement was increased in August 2013 to RMB400 million (approximately US$65.4 million), an increase of RMB150 million from the original credit line of RMB250 million. In September 2014, the credit line was extended to another 12 months. Wuhan Kingold used the increased credit line to lease roughly 575 kilograms of additional gold in the third quarter of 2013. In the third quarter of 2014, the Company returned 575 kilograms of gold to CCB. On December 18, 2013 and January 13, 2014 the Company returned 430 and 246 kilograms of gold to CCB, respectively. On January 14, 2014 and February 12, 2014, the Company leased additional 570 and 310 kilograms of gold, respectively, with aggregate market value of RMB218 million (approximately US$35.7 million). On September 19, 2014 and September 25, 2014, the Company leased an additional 235 and 300 kilograms of gold, respectively, with aggregate market value of RMB129 million (approximately US$21.1 million), based on the Gold Lease Agreement.

On January 1, 2013, Wuhan Kingold entered into a gold lease framework agreement (the “Framework Agreement”) with SPD Bank. In February 2013, Wuhan Kingold leased an aggregate of 530 kilograms of gold with a market price of approximately RMB176 million (US$28.1 million) from SPD Bank pursuant to separate lease agreements entered into under the Framework Agreement. The Company is required to deposit cash into an account at SPD Bank equal to approximately RMB15.8 million (approximately US$2.5 million) and pledge the amount to SPD Bank. The leases each have an initial term of approximately 12 months, and provide for an interest rate of 6% per annum. Lease payments to SPD are due quarterly beginning in March 2013, and are calculated based on the stated annual rate of 6%, the actual weight of gold leased (in grams), the fair market price of gold at the time of delivery, and the actual number of days the gold was leased. At the end of the leases in February 2014, the Company returned 530 kilograms of gold to SPD Bank.

On July 25, 2013, Wuhan Kingold borrowed an aggregate of 100 kilograms of gold with a market price of approximately RMB26.8 million (approximately US$4.4 million). This gold lease agreement has an initial term of approximately 6 months with a lease rate of 6% per annum. Wuhan Kingold secured its obligation to pay rent (and return the leased gold to SPD Bank at the end of the lease term) by depositing cash into an account at SPD Bank equal to approximately RMB2.4 million (approximately US$391,000) and pledging the account to SPD Bank. On January 24, 2014, the Company extended the lease period to an additional 12 months when the lease expired. Wuhan Kingold is required to deposit cash into an account at SPD Bank equal to approximately RMB4.4 million (approximately US$713,915). On July 10, 2014, the Company returned 100 kilograms of gold to SPD Bank and entered a new lease agreement to borrow 310 kilograms of gold with an aggregate market value of RMB81.4 million (approximately US$13.2 million). This gold lease agreement has an initial term of approximately 12 months with a lease rate of 6% per annum.

On December 16, 2013, Wuhan Kingold leased an aggregate of 120 kilograms of gold with a market price of approximately RMB29.7 million (US$4.9 million) from SPD Bank pursuant to separate lease agreements entered into under the Framework Agreement. The Company is required to deposit cash into an account at SPD Bank equal to approximately RMB3 million (US$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, the Company will need to return 120 kilograms of gold to SPD Bank.

On January 2, 2014, Wuhan Kingold entered into a gold lease agreement with SPD Bank and leased an aggregate of 85 kilograms of gold with a market price of approximately RMB20.5 million (US$3.3 million) The lease has an initial term of approximately 12 months, and provides for an interest rate of 7.5% per annum. The Company is required to deposit cash into an account at SPD Bank equal to approximately RMB2 million (approximately US$324,507) 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 7.5%, the actual weight of gold leased (in grams), the fair market price of gold at the time of delivery, and the actual number of days the gold was leased. At the end of the lease, the Company will need to return 85 kilograms of gold to SPD Bank.

On January 10, 2014, Wuhan Kingold entered into a gold lease agreement with SPD Bank and leased an aggregate of 210 kilograms of gold with a market price of approximately RMB51.0 million (US$8.3 million). The lease has an initial term of approximately 6 months, and provides for an interest rate of 7% per annum. The Company is required to deposit cash into an account at SPD Bank equal to approximately 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.

15

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

On February 12, 2014, Wuhan Kingold entered into a gold lease framework agreement (the “Framework Agreement”) with SPD Bank. In February 2014, Wuhan Kingold leased an aggregate of 320 kilograms of gold with a market price of approximately RMB81.7 million (US$13.4 million) from SPD Bank pursuant to separate lease agreements entered into under the Framework Agreement. The lease has an initial term of approximately 4 months, and provides for an interest rate of 6% per annum. The Company is required to deposit cash into an account at SPD Bank equal to approximately 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, the Company 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. The Company is 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, Wuhan Kingold entered into a gold lease framework agreement with the Wuhan branch of CITIC Bank, and subsequently leased an aggregate of 150 kilograms of gold (valued at approximately RMB41.6 million or approximately US$6.7 million) from CITIC Bank pursuant to lease agreement entered into under the framework agreement. The lease has an initial term of approximately 12 months, and provides for an interest rate of 5.6% per annum. Lease payments  to CITIC Bank are due at the end of the leasing period.  At the end of the lease, the Company extended the lease period by an additional nine months with a value of approximately RMB38.1 million or approximately US$6.2 million. Under the gold lease agreement with CITIC Bank, the Company is required to deposit cash into an account at CITIC equal to approximately RMB8.4 million (approximately US$1.4 million) and pledge the amount to CITIC Bank. On January 27, 2014, Wuhan Kingold leased additional 150 kilograms of gold (valued at approximately RMB36.5 million or approximately US$5.9 million), pursuant to separate lease agreements entered into under the Framework Agreement. The Company is required to deposit cash into an account at CITIC equal to approximately RMB7.3 million (approximately US$1.2 million) and pledge the amount to CITIC Bank. On February 21, 2014, Wuhan Kingold leased additional 200 kilograms of gold (valued at approximately RMB51.6 million or approximately US$8.4 million) pursuant to separate lease agreements entered into under the Framework Agreement. The Company is required to deposit cash into an account at CITIC equal to approximately RMB10.5 million (approximately US$1.7 million) and pledge the amount to CITIC Bank. On March 5, 2014, Wuhan Kingold leased an additional 150 kilograms of gold (valued at approximately RMB39.9 million or approximately US$6.5 million) pursuant to separate lease agreements entered into under the Framework Agreement. The Company is required to deposit cash into an account at CITIC equal to approximately RMB9 million (approximately US$1.5 million) and pledge the amount to CITIC Bank. These three leases have a term of 6 months and provides for an interest rate of 6% per annum. At the end of these leases, the Company extended the lease period by an additional nine months with an aggregate value of approximately RMB129 million (approximately US$20.9 million).

The Company leased the gold as a way to fuel its growth and will return the same amount of gold to CCB, SPD Bank and CITIC Bank at the end of the respective lease agreements. Under these gold lease arrangements, each of CCB, SPD Bank and CITIC Bank retains beneficial ownership of the gold leased to the Company and treats it as if the gold is placed on consignment to the Company. All three banks have their own representatives on the Company’s premises to monitor on a daily basis the use and security of the gold leased to the Company. Accordingly, the Company records these gold lease transactions as operating leases because the Company does not have ownership nor has it assumed the risk of loss for the leased gold.

As of September 30, 2014 and December 31, 2013, 2,900 kilograms and 1,721 kilograms of leased gold, at the amount of $118.7 million and $83.7 million, respectively, will be returned within fiscal year 2015. Interest expense for the leased gold for the nine months ended September 30, 2014 and 2013 was $5.2 million and $2.8 million, respectively. For the three months ended September 30, 2014 and 2013, interest expense was $1.8 million and $1.3 million, respectively, which was included in the cost of sales.

NOTE 14 – RELATED PARTIES

On December 31, 2013, the Company temporarily advanced a total of RMB400 million (approximately US$65 million) to a company owned by one of the directors of Wuhan Kingold. The purpose of the temporary advancement was to provide temporary funds in connection with such company’s annual capital verification in China. The funds were returned to the Company in full on January 2, 2014. The Company also previously borrowed RMB80 million (approximately US$13 million) from the same company to meet its temporary working capital needs on December 2, 2013. The loan had an annual interest rate of 6% and matured on January 28, 2014. The loan was repaid on the due date.

16

KINGOLD JEWELRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 15 – COMMITMENTS AND CONTINGENCIES

Commitments

Future payment commitments under the purchase agreement of “Kingold International Jewelry and Cultural Industry Park” amounted to RMB730 million (US$120 million). See Note 5 “Deposit on Land Use Right.”

Guarantee

On September 6, 2013, the Company guaranteed payment to a nonrelated third party, Wuhan Hengtong Weibang Trading LTD Co. (“Wuhan Hengtong”), of RMB20 million (approximately US$3.2 million) in bank loans (the “Guarantee”). Such Guarantee will terminate upon payment and/or cancellation of the obligation once it is repaid. A payment by the Company would be triggered by failure of the guaranteed party to fulfill its obligation covered by the Guarantee. The Guarantee expired in September 2014. The Company refunded the deposit of RMB8 million to Wuhan Hengtong in September 2014.

NOTE 16 – SUBSEQUENT EVENTS

On October 22, 2014, the Company leased an additional 80 kilograms of gold (valued at approximately RMB19.8 million or approximately US$3.2 million) from Shanghai Pudong Development Bank. The lease has an initial term of approximately 12 months and provides for an interest rate of 6% per annum.

17

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, 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, 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 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 2014 amounted to roughly $19.1 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 International Jewelry and Cultural 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.

18

Results of Operations

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

	For the three months ended September 30,						For the nine months ended September 30,
	2014			2013			2014			2013
NET SALES	$	251,006,255		$	283,890,000		$	898,225,518		$	872,340,210
COST OF SALES
Cost of sales		(240,742,984	)		(266,705,520	)		(834,987,086	)		(838,673,009	)
Depreciation		(307,790	)		(304,815	)		(922,756	)		(906,590	)
Total Cost of Sales		(241,050,774	)		(267,010,335	)		(835,909,842	)		(839,579,599	)
GROSS PROFIT		9,955,481			16,879,665			62,315,676			32,760,611
OPERATING EXPENSES
Selling, general and administrative expenses		1,699,795			1,143,882			5,318,285			3,139,638
Stock compensation expenses		612,995			375,002			1,838,985			1,133,790
Depreciation		30,228			36,293			92,268			110,286
Amortization		3,068			26			9,222			6,080
Total Operating Expenses		2,346,086			1,555,203			7,258,760			4,389,794
INCOME FROM OPERATIONS		7,609,395			15,324,462			55,056,916			28,370,817
OTHER EXPENSE
Interest expense		(577,858	)		(96,866	)		(1,539,249	)		(290,914	)
Total Other Expense		(577,858	)		(96,866	)		(1,539,249	)		(290,914	)
INCOME FROM OPERATIONS BEFORE TAXES		7,031,537			15,227,596			53,517,667			28,079,903
INCOME TAX PROVISION (BENEFIT)
Current		3,373,114			3,402,482			15,577,085			8,197,780
Deferred		(1,575,575	)		830,419			(1,301,027	)		(471,468	)
TOTAL INCOME TAX PROVISION		1,797,539			4,232,901			14,276,058			7,726,312	)
NET INCOME		5,233,998			10,994,695			39,241,609			20,353,591
OTHER COMPREHENSIVE INCOME (LOSS)
Total Foreign Currency Translation Gains (Loss)		72,284			1,278,588			(1,594,156	)		4,780,603
COMPREHENSIVE INCOME	$	5,306,282		$	12,273,283		$	37,647,453		$	25,134,194
Earnings per share
Basic	$	0.08		$	0.17		$	0.60		$	0.32
Diluted	$	0.08		$	0.17		$	0.59		$	0.32
Weighted average number of shares
Basic		65,953,462			64,334,400			65,905,667			63,073,008
Diluted		66,137,568			64,486,938			66,285,370			63,310,034

19

Three and Nine Month Period Ended September 30, 2014, compared to Three and Nine Month Period Ended September 30, 2013

Net Sales

Net sales for the three months ended September 30, 2014 amounted to $251.0 million, a decrease of $32.9 million, or 11.6%, from net sales of $283.9 million for the three months ended September 30, 2013. The decrease in net sales was primarily due to an overall decrease in the price of gold in the third quarter of 2014.

Net sales for the nine months ended September 30, 2014 amounted to $898.2 million, an increase of $25.9 million, or 3.0%, from net sales of $872.3 million for the nine months ended September 30, 2013. The increase in net sales was primarily due to increased branded production in the amount of $113.2 million, which was partially offset by the decrease in the price of gold in the amount of $97.3 million, with the remaining increase primarily due to the translation gain from RMB into USD.

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 (44.8%) and customized production accounted for 8.0 metric tons (55.2%). In the third quarter of 2013, we processed a total of 13.0 metric tons of gold, of which branded production accounted for 7.17 metric tons (55.2%) and customized production accounted for 5.8 metric tons (44.8%).

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%). In the first nine months of 2013, we processed a total of 36.8 metric tons of gold, of which branded production accounted for 20.3 metric tons (55.2%) and customized production accounted for 16.5 metric tons (44.8%).

Gold Processed for the Three Months Ended September 30, 2014
In Metric Tons	2014				2013
Branded		6.5	44.8	%		7.2	55.2	%
Customized		8.0	55.2	%		5.8	44.8	%
TOTAL		14.5	100.0	%		13.0	100.0	%

Gold Processed for the Nine Months Ended September 30, 2014
In Metric Tons	2014				2013
Branded		23.1	49.3	%		20.3	55.2	%
Customized		23.8	50.7	%		16.5	44.8	%
TOTAL		46.9	100.0	%		36.8	100.0	%

Cost of Sales

Cost of sales for the three months ended September 30, 2014 amounted to $240.7 million, a decrease of $26.0 million, or 9.7%, from $266.7 million for the same period in 2013. The decrease was primarily due to the decrease in the price of gold in the third quarter of 2014, which more than offset a $6.3 million write-down of inventory to market. The average price of gold for the three months ended September 30, 2014 was $1,281.9 per ounce for the three months ended September 30, 2014, compared to $1,326.3 per ounce for the same period in 2013 (World Gold Council).

Cost of sales for the nine months ended September 30, 2014 amounted to $835.0 million, a decrease of $3.7 million, or 0.4%, from $838.7 million for the same period in 2013. The decrease was primarily due to the decrease in the price of gold in the third quarter of 2014. The average price of gold for the nine months ended September 30, 2014 was $1,287.8 per ounce for the three months ended September 30, 2014, compared to $1,457.6 per ounce for the same period in 2013 (World Gold Council).

20

Gross Profit

Gross profit for the three months ended September 30, 2014 was $10.0 million, a decrease of $6.9 million, or 41.0%, from $16.9 million for the same period in 2013. Accordingly, gross margin for the three months ended September 30, 2014 was 4.0%, compared to 5.9% for the same period in 2013. The primary reason for the decrease in gross margin was that we had $6.3 million write-down of inventory in the third quarter of 2014, which write-down more than offset the margin improvement from the increase in customized production.

Gross profit for the nine months ended September 30, 2014 was $62.3 million, an increase of $29.6 million, or 90.2%, from $32.7 million for the same period in 2013. Accordingly, gross margin for the nine months ended September 30, 2014 was 6.9%, compared to 3.8% 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 $1,204.5 per ounce on December 31, 2013 to as high as $1,385.0 per ounce on March 14, 2014 before decreasing to $1,216.5 on September 30, 2014 (World Gold Council). Gross profit was also negatively affected by a write-down in the amount of $6.3 million in the third quarter of 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.

Expenses

Total operating expenses for the three months ended September 30, 2014 were $2.3 million compared with $1.6 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 $0.6 million for the three months ended September 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 nine months ended September 30, 2014 were $7.3 million compared with $4.4 million for the same period in 2013. The increase was mainly due to increased selling, general and administrative expenses for broader marketing efforts during the first nine months of 2014. We strengthened our efforts to penetrate more retail branches for investment gold business. We also made marketing efforts in an attempt to break into the Middle Eastern jewelry markets.

Interest expenses were $1.5 million for the nine months ended September 30, 2014 compared with $0.3 million for the same period in 2013. Interest expenses increased due to increased bank loans.

Interest expenses increased in the first nine months 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.

(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 which 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%.

With regard to our long term loan, we borrowed RMB200 million (equivalent to approximately US$32.5 million as of the spot rate at September 30, 2014) from Chang’an International Trust Co., Ltd. (the “Trust Loan”) in order to perform the aforementioned acquisition of the Jewelry Park (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.

21

The provision for income tax expense was approximately $1.8 million for the three months ended September 30, 2014, a decrease of $2.4 million, or 57.5%, from approximately $4.2 million for the same period in 2013. The decrease was primarily due to the decrease in our net income before taxes.

The provision for income tax expense was approximately $14.3 million for the nine months ended September 30, 2014, an increase of $6.6 million, or 84.8%, from approximately $7.7 million for the same period in 2013. The increase was primarily due to the increase in our net income before taxes.

Net Income 

Net income decreased to $5.2 million for the three months ended September 30, 2014 from $11.0 million for the same period in 2013, a decrease of $5.8 million, or 52.4%, as a result of the matters described above.

Net income increased to $39.2 million for the nine months ended September 30, 2014 from $20.4 million for the same period in 2013, an increase of $18.9 million, or 92.8%, as a result of the matters described above.

Cash Flows

Net cash provided by operating activities.

Net cash provided by operating activities was $6.5 million for the nine months ended September 30, 2014, compared with net cash provided by operating activities of $6.3 million for the same period in 2013. The change was mainly because of the increase in 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.

Net cash used in investing activities.

Net cash used in investing activities amounted to $14.9 million for the nine months ended September 30, 2014, compared with net cash used in investing activities of $53,669 for the nine months ended September 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 Park.

Net cash provided by financing activities.

Net cash provided by financing activities was $13.2 million for the nine months ended September 30, 2014, compared with net cash provided by financing activities of $14.2 million for the nine months ended September 30, 2013. The decrease was mainly due to a cash dividend paid to stockholders, which was offset by bank borrowings.

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 an aggregate market value of RMB218 million (approximately US$35.7 million).

22

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).

On December 16, 2013, we leased an aggregate of 120 kilograms of gold with a market price of approximately RMB29.7 million (US$4.9 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 October 22, 2014, we entered into a lease for an additional 80 kilograms of gold (valued at approximately RMB19.8 million or approximately US$3.2 million) from SPD Bank. The lease has an initial term of approximately 12 months and provides for an interest rate of 6% per annum.

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 extended the lease period by an additional nine months with a value of approximately RMB38.1 million, or approximately US$6.2 million. 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 to 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. On February 21, 2014, we leased an 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 RMB9.2 million (approximately US$1.5 million) and pledge the amount to CITIC Bank. These three leases have a term of 6 months and provides for an interest rate of 6% per annum. At the end of these lease periods, we extended the leases by an additional nine months with aggregate value of approximately RMB129.1 million (approximately US$20.9 million). 

23

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 September 30, 2014 and December 31, 2013, 2,900 kilograms and 1,721 kilograms of leased gold, at the amount of $118.7 million and $83.7 million, respectively, will be returned within fiscal year 2015. Interest expense for the leased gold for the nine months ended September 30, 2014 and 2013 was $5.2 million and $2.8 million, respectively. For the three months ended September 30, 2014 and 2013, interest expense was $1.8 million and $1.3 million, respectively, which was included in the cost of sales.

Under these gold lease arrangements, each of CCB, SPD Bank and CITIC Bank retains 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 September 30, 2014, we had approximately $6.6 million in cash and cash equivalents. In August 2014, we paid a special one-time cash dividend of $0.08 per share of common stock, or approximately $5.3 million in the aggregate, to stockholders of record as of June 30, 2014. We have financed our operations with cash flows generated from operations and 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 September 30, 2014, we had total outstanding short-term loans of $16.2 million, of which approximately $13.0 million was 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 International Jewelry and Cultural 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 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. We have not secured financing for the completion of the project. In the event that we fail to secure financing for the remainder of the project, we will only keep our approximately 60% interest in the Jewelry Park.

Payments for the project will be made to Wuhan Wansheng in tranches, as follows, in line with the completion of certain building installments, as originally outlined in the Acquisition Agreement and as subsequently revised by the parties to reflect construction delays:

24

Date	Original Payment Commitment (RMB in millions)		Revised Payment Commitment (RMB in millions)		Payment Commitment (US$ in millions)**
October 2013*		200		200	$	32.72
January 2014		50		50		8
June 2014		100		-		-
September 2014		150		20		3.3
November 2014		-		80		12.7
December 2014		-		150		25
January 2015		250		250		41
June 2015		250		250		41
Total		1,000		1,000	$	164

* Includes initial deposit made to seller

** In US$ based on the October 2013 spot rate

Updated to reflect delay to payment schedule

The Acquisition Agreement specifies that upon payment of the initial RMB200 million tranche, 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 Jewelry 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.

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. We recorded a $6.3 million inventory valuation allowance at the end of September 30, 2014 in light of the decrease in the price of gold as at September 30, 2014.

25

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 central bank’s daily exchange rate. On July 21, 2005, PBOC announced an adjustment of the exchange rate of the U.S. dollar to RMB from 1:8.27 to 1:8.11 and modified the system by which the exchange rates are determined. Over the past four years, RMB has appreciated 15.7% against the U.S. dollar (from US$1 = RMB 7.2946 on January 1, 2008 to US$1 = RMB6.1382 on September 30, 2014). While the international reaction to the RMB revaluation has generally been positive, there remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in further fluctuations of the exchange rate of RMB against the U.S. dollar, including possible devaluations. As all of our net revenues are recorded in RMB, any future devaluation of RMB against the U.S. dollar could negatively impact our results of operations.

Along these lines, the income statements of our operations are translated into U.S. dollars at the average exchange rates in each applicable period. To the extent the U.S. dollar strengthens against foreign currencies, the translation of these foreign currency 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, 2014, were approximately $16.2 million, and interest expenses paid were $1.5 million for the nine months ended September 30, 2014. Our long-term borrowings as of September 30, 2014 were approximately $32.5 million.

At the end of September 30, 2014, our weighted average interest rate was approximately 10.3%. 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. Although we generally attempt to pass increased commodity prices to our customers, there may be circumstances in which we are not able to do so. In addition, if we were to experience a significant or prolonged shortage of gold, we would be unable to meet our production schedules and to ship products to our customers in a timely manner, which would adversely affect our sales, margins and customer relations. Furthermore, the value of our inventory may be affected by commodity prices. We record the value of our inventory using the weighted average method. As a result, decreases in the market value of precious metals such as gold would result in a lower stated value of our inventory, which may require us to take a charge for the decrease in the value of our inventory.

26

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 our 2013 financial statements, management determined that, as of December 31, 2013, we did not maintain effective internal control over financial reporting due to the existence of the following material weaknesses: (i) lack of appropriate approval procedures for certain material transactions; (ii) inadequate controls over material cash transactions with a related party, including failure to obtain board approval and failure to record in a timely manner; and (iii) lack of resources with technical competency to review and record non-routine or complex 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.

Changes in Internal Controls

Except for implementing policies to address the material weaknesses described above, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting during our third fiscal quarter of 2014. 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.

27

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

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, 2013.

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

Exhibit No.	Description
31.1	Certification of Principal Executive Officer pursuant to Rules 13a-14 and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Principal Financial Officer pursuant to Rules 13a-14 and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Principal Executive Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Principal Financial Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

Kingold’s Periodic Report on Form 10-Q for the period ended September 30, 2014, at the time of filing with the Securities and Exchange Commission, shall modify and supersede all prior documents filed pursuant to Section 13, 14 or 15(d) of the Securities Exchange Act of 1934 for purposes of any offers or sales of any securities after the date of such filing pursuant to any Registration Statement or Prospectus filed pursuant to the Securities Act of 1933, which incorporates by reference such Periodic Report on Form 10-Q.

28

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 13, 2014

KINGOLD JEWELRY, INC.
By:	/s/ Zhihong Jia
	Zhihong Jia
	Chairman, Chief Executive Officer and Principal Executive Officer
By:	/s/ Bin Liu
	Bin Liu
	Chief Financial Officer and Principal Accounting Officer

29