UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549








FORM
10-Q








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




For the
quarterly period ended:


September
30, 2010





 ̈
            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.
      Employerof
      Incorporation)
            File
      Number)
            Identification
      No.)




15
Huangpu Science and Technology Park
 Jiang’an
District
 Wuhan,
Hubei Province, PRC 430023
 (Address
of Principal Executive Office) (Zip Code)




(011)
86 27 65660703


(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. þ 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).


 ̈ 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
            þ





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).    ̈ Yes þ 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
October 15th, 2010 (the last practicable date) there were 42,343,073 shares of
common stock outstanding, par value $0.001.










KINGOLD
JEWELRY, INC.


(FORMERLY:
ACTTIVEWORLDS CORP.)


(UNAUDITED)


TABLE
OF CONTENTS





Page NumberPART I. Financial
      Statements
              5Item 1.
              Condensed
      Consolidated Financial
      Information (Unaudited)
              5Condensed
      Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009
      (Unaudited)
              5Condensed
      Consolidated Statements of Income for the Three and Nine Months Ended
      September 30, 2010 and September 30, 2009 (Unaudited)
              6Condensed
      Consolidated Statements of Cash Flows for the Nine Months Ended
      September 30, 2010 and September 30, 2009 (Unaudited)
              7Notes
      to Condensed Consolidated Financial Statements – September 30, 2010
      (unaudited)
              8Item 2.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              23Item 3.
              Quantitative
      and Qualitative Disclosures About Market Risk
              31Item 4.
              Controls
      and Procedures
              31PART II. Other
      Information
              31Item 1.
              Legal
      Proceedings
              31Item 1A.
              Risk
      Factors
              31Item 2.
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              31Item 3.
              Defaults
      Upon Senior Securities
              32Item 4.
              Submission
      of Matters to a Vote of Security Holders
              32Item 5.
              Other
      Information
              32Item 6.
              Exhibits
              32Signatures
              
              32





CAUTIONARY
STATEMENT RELEVANT TO FORWARD-LOOKING INFORMATION




All
statements, other than statements of historical fact, included in this Form
10-Q, including without limitation the statements under “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” are, or may be
deemed to be, forward-looking statements. Such forward-looking statements
involve assumptions, known and unknown risks, uncertainties and other factors,
which may cause the actual results, levels of activity, performance or
achievements of Kingold Jewelry, Inc. (formerly known as Activeworlds Corp.), a
Delaware corporation, and our wholly-owned subsidiaries, Dragon Lead, a BVI
corporation, Wuhan Vogue-Show Jewelry Co., Ltd., a PRC wholly foreign owned
enterprise, and Wuhan Kingold Jewelry Company Limited, or Wuhan Kingold, our
contractually controlled entity and a PRC company limited by shares
(collectively, the “Company”), to be materially different from any future
results, levels of activity, performance or achievements expressed, implied or
inferred by such forward-looking statements contained in this Form 10-Q. In our
capacity as Company management, we may from time to time make written or oral
forward-looking statements with respect to our long-term objectives or
expectations which may be included in our filings with the Securities and
Exchange Commission (the “SEC”), reports to stockholders and information
provided in our web site.




The words
or phrases “will likely,” “are expected to,” “is anticipated,” “is predicted,”
“forecast,” “estimate,” “project,” “plans to continue,” “believes,” or similar
expressions identify “forward-looking statements.” Such forward-looking
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from historical earnings and those presently
anticipated or projected. We caution you not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. We are calling
to your attention important factors that could affect our financial performance
and could cause actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods in any current
statements.




The
following list of important factors may not be all-inclusive, and we
specifically decline to undertake an obligation to publicly revise any
forward-looking statements that have been made to reflect events or
circumstances after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events. Among the factors that could have an impact
on our ability to achieve expected operating results and growth plan goals
and/or affect the market price of our stock are:




·
            changes
      in the market price of gold;




·
            changes
      in political, economic or regulatory conditions generally and in the PRC
      markets in which we operate;




·
            non-performance
      of suppliers on their sale
commitments;




·
            customers
      on their purchase commitments;




·
            non-performance
      of third-party service providers;




·
            adverse
      conditions in the industries in which our customers operate, including a
      continuation of the global
recession;




·
            our
      ability to manage growth;




·
            our
      ability to integrate acquired
businesses;




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




3


·
            changes
      in PRC or U.S. tax laws;




·
            increased
      levels of competition;




·
            our
      ability to comply with environmental laws and regulations;
    and




·
            other
      risks, including those described in our Annual Form 10-K for the year
      ended December 31, 2009 and in the “Risk Factors” discussion of this Form
      10-Q.




CERTAIN
DEFINED TERMS




Throughout
this Quarterly Report on Form 10-Q, the terms “we,” “us,” “our,” ” Company,” and
“our Company” refer to Kingold Jewelry, Inc. (formerly known as Activeworlds
Corp.), a Delaware corporation, and our wholly-owned subsidiaries, Dragon Lead,
a BVI corporation, Wuhan Vogue-Show Jewelry Co., Ltd., a PRC wholly foreign
owned enterprise, and Wuhan Kingold Jewelry Company Limited, our contractually
controlled entity and a PRC company limited by shares.




4


PART
I – FINANCIAL INFORMATION




Item
      1.
            Financial
      Statements.




KINGOLD
JEWELRY INC.


(FORMERLY
ACTIVEWORLDS CORP.)


CONDENSED
CONSOLIDATED BALANCE SHEETS


(UNAUDITED)





September
      30,
                                                  
                                                  
                                                  December
      31,2010
                                                  
                                                  
                                                  2009ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                                                  
                                                  $
                                                  9,484,044
                                                  
                                                  
                                                  $
                                                  7,964,120Restricted
      cash
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  1,462,587Accounts
      receivable
                                                  
                                                  
                                                  334,749
                                                  
                                                  
                                                  
                                                  485,399Inventories
                                                  
                                                  
                                                  50,660,556
                                                  
                                                  
                                                  
                                                  31,756,009Other
      current assets and prepaid expenses
                                                  
                                                  
                                                  455,536
                                                  
                                                  
                                                  
                                                  101,189Deferred
      offering costs
                                                  
                                                  
                                                  125,994
                                                  
                                                  
                                                  
                                                  -Value
      added tax recoverable
                                                  
                                                  
                                                  4,287,164
                                                  
                                                  
                                                  
                                                  5,792,014Total
      Current Assets
                                                  
                                                  
                                                  65,348,044
                                                  
                                                  
                                                  
                                                  47,561,318PROPERTY
      AND EQUIPMENT, NET
                                                  
                                                  
                                                  13,525,483
                                                  
                                                  
                                                  
                                                  14,126,950OTHER
      ASSETSOther
      assets
                                                  
                                                  
                                                  144,280
                                                  
                                                  
                                                  
                                                  141,198Intangible
      assets, net
                                                  
                                                  
                                                  499,958
                                                  
                                                  
                                                  
                                                  497,572Total
      other assets
                                                  
                                                  
                                                  644,238
                                                  
                                                  
                                                  
                                                  638,770TOTAL
      ASSETS
                                                  
                                                  $
                                                  79,517,765
                                                  
                                                  
                                                  $
                                                  62,327,038LIABILITIES AND STOCKHOLDERS'
      EQUITYCURRENT
      LIABILITIESShort
      term loans
                                                  
                                                  $
                                                  8,967,055
                                                  
                                                  
                                                  $
                                                  8,775,522Other
      payables and accrued expenses
                                                  
                                                  
                                                  1,375,197
                                                  
                                                  
                                                  
                                                  368,196Income
      tax payable
                                                  
                                                  
                                                  2,004,715
                                                  
                                                  
                                                  
                                                  1,347,295Other
      taxes payable
                                                  
                                                  
                                                  61,757
                                                  
                                                  
                                                  
                                                  192,415Total
      Current Liabilities
                                                  
                                                  
                                                  12,408,723
                                                  
                                                  
                                                  
                                                  10,683,428STOCKHOLDERS'
      EQUITYPreferred
      stock, $0.001 par value, 500,000 shares authorized, none issued or
      outstanding as of September 30, 2010 and December 31,
      2009
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -Common
      stock $0.001 par value, 100,000,000 shares authorized, 42,343,073 and
      41,766,404 shares issued and outstanding as of September 30, 2010 and
      December 31, 2009, respectively
                                                  
                                                  
                                                  42,343
                                                  
                                                  
                                                  
                                                  41,766Additional
      paid-in capital
                                                  
                                                  
                                                  31,076,541
                                                  
                                                  
                                                  
                                                  31,077,118Retained
      earningsUnappropriated
                                                  
                                                  
                                                  29,108,122
                                                  
                                                  
                                                  
                                                  15,669,257Appropriated
                                                  
                                                  
                                                  940,528
                                                  
                                                  
                                                  
                                                  878,911Accumulated
      other comprehensive income
                                                  
                                                  
                                                  4,476,027
                                                  
                                                  
                                                  
                                                  3,156,305Total
      Stockholders' Equity
                                                  
                                                  
                                                  65,643,561
                                                  
                                                  
                                                  
                                                  50,823,356Noncontrolling
      interest
                                                  
                                                  
                                                  1,465,482
                                                  
                                                  
                                                  
                                                  820,254Total
      Equity
                                                  
                                                  
                                                  67,109,042
                                                  
                                                  
                                                  
                                                  51,643,610TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                                                  
                                                  $
                                                  79,517,765
                                                  
                                                  
                                                  $
                                                  62,327,038





The
accompanying notes are an integral part of these unaudited Condensed
Consolidated Financial Statements


5


KINGOLD
JEWELRY INC.


(FORMERLY
ACTIVEWORLDS CORP.)


CONDENSED
CONSOLIDATED STATEMENTS OF INCOME


(IN
US DOLLARS)


(UNAUDITED)




For the three months ended September 30,
                                                                                    
                                                                                    
                                                                                    For the nine months ended September 30,2010
                                                                                    
                                                                                    
                                                                                    2009
                                                                                    
                                                                                    
                                                                                    2010
                                                                                    
                                                                                    
                                                                                    2009NET
      SALES
                                                                                    
                                                                                    $
                                                                                    169,706,497
                                                                                    
                                                                                    
                                                                                    $
                                                                                    93,703,615
                                                                                    
                                                                                    
                                                                                    $
                                                                                    338,062,808
                                                                                    
                                                                                    
                                                                                    $
                                                                                    192,036,951COST
      OF SALESCost
      of sales
                                                                                    
                                                                                    
                                                                                    (160,792,165
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (89,797,397
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (315,574,745
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (181,600,448
                                                                                    )Depreciation
                                                                                    
                                                                                    
                                                                                    (277,204
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (278,001
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (832,288
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (833,781
                                                                                    )Total
      cost of sales
                                                                                    
                                                                                    
                                                                                    (161,069,369
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (90,075,398
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (316,407,033
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (182,434,229
                                                                                    )GROSS
      PROFIT
                                                                                    
                                                                                    
                                                                                    8,637,128
                                                                                    
                                                                                    
                                                                                    
                                                                                    3,628,217
                                                                                    
                                                                                    
                                                                                    
                                                                                    21,655,775
                                                                                    
                                                                                    
                                                                                    
                                                                                    9,602,722OPERATING
      EXPENSESSelling,
      general and administrative expenses
                                                                                    
                                                                                    
                                                                                    1,007,909
                                                                                    
                                                                                    
                                                                                    
                                                                                    376,917
                                                                                    
                                                                                    
                                                                                    
                                                                                    2,133,475
                                                                                    
                                                                                    
                                                                                    
                                                                                    1,107,683Depreciation
                                                                                    
                                                                                    
                                                                                    30,665
                                                                                    
                                                                                    
                                                                                    
                                                                                    31,799
                                                                                    
                                                                                    
                                                                                    
                                                                                    86,942
                                                                                    
                                                                                    
                                                                                    
                                                                                    91,153Amortization
                                                                                    
                                                                                    
                                                                                    2,792
                                                                                    
                                                                                    
                                                                                    
                                                                                    2,762
                                                                                    
                                                                                    
                                                                                    
                                                                                    8,330
                                                                                    
                                                                                    
                                                                                    
                                                                                    8,286Total
      Operating Expenses
                                                                                    
                                                                                    
                                                                                    1,041,366
                                                                                    
                                                                                    
                                                                                    
                                                                                    411,478
                                                                                    
                                                                                    
                                                                                    
                                                                                    2,228,747
                                                                                    
                                                                                    
                                                                                    
                                                                                    1,207,122INCOME
      FROM OPERATIONS
                                                                                    
                                                                                    
                                                                                    7,595,762
                                                                                    
                                                                                    
                                                                                    
                                                                                    3,216,739
                                                                                    
                                                                                    
                                                                                    
                                                                                    19,427,028
                                                                                    
                                                                                    
                                                                                    
                                                                                    8,395,600OTHER
      INCOME (EXPENSES)Other
      income
                                                                                    
                                                                                    
                                                                                    14,881
                                                                                    
                                                                                    
                                                                                    
                                                                                    3,328
                                                                                    
                                                                                    
                                                                                    
                                                                                    18,933
                                                                                    
                                                                                    
                                                                                    
                                                                                    4,292Interest
      income
                                                                                    
                                                                                    
                                                                                    926
                                                                                    
                                                                                    
                                                                                    
                                                                                    1,492
                                                                                    
                                                                                    
                                                                                    
                                                                                    3,232
                                                                                    
                                                                                    
                                                                                    
                                                                                    2,471Interest
      expense
                                                                                    
                                                                                    
                                                                                    (135,638
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (175,340
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (405,174
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (589,256
                                                                                    )Other
      expenses
                                                                                    
                                                                                    
                                                                                    (1,469
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (83,993
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (1,469
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (183,767
                                                                                    )Total
      Other Expenses, net
                                                                                    
                                                                                    
                                                                                    (121,300
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (254,513
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (384,477
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (766,260
                                                                                    )INCOME
      FROM OPERATIONS BEFORE TAXES
                                                                                    
                                                                                    
                                                                                    7,474,462
                                                                                    
                                                                                    
                                                                                    
                                                                                    2,962,226
                                                                                    
                                                                                    
                                                                                    
                                                                                    19,042,551
                                                                                    
                                                                                    
                                                                                    
                                                                                    7,629,340PROVISION
      FOR INCOME TAXES
                                                                                    
                                                                                    
                                                                                    (1,979,290
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (730,493
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (4,925,385
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (1,873,422
                                                                                    )NET
      INCOME
                                                                                    
                                                                                    $
                                                                                    5,495,172
                                                                                    
                                                                                    
                                                                                    $
                                                                                    2,231,733
                                                                                    
                                                                                    
                                                                                    $
                                                                                    14,117,166
                                                                                    
                                                                                    
                                                                                    $
                                                                                    5,755,918Less:
      net income attribute to the noncontrolling interest
                                                                                    
                                                                                    
                                                                                    (247,601
                                                                                    )
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    (616,684
                                                                                    )
                                                                                    
                                                                                    
                                                                                    -NET
      INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS
                                                                                    
                                                                                    $
                                                                                    5,247,571
                                                                                    
                                                                                    
                                                                                    $
                                                                                    2,231,733
                                                                                    
                                                                                    
                                                                                    $
                                                                                    13,500,482
                                                                                    
                                                                                    
                                                                                    $
                                                                                    5,755,918OTHER
      COMPREHENSIVE INCOMETotal
      foreign currency translation gains
                                                                                    
                                                                                    
                                                                                    895,091
                                                                                    
                                                                                    
                                                                                    
                                                                                    34,589
                                                                                    
                                                                                    
                                                                                    
                                                                                    1,348,265
                                                                                    
                                                                                    
                                                                                    
                                                                                    72,366Less:
      foreign currency translation gains attributable to noncontrolling
      interest
                                                                                    
                                                                                    
                                                                                    (19,388
                                                                                    )
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    (28,543
                                                                                    )
                                                                                    
                                                                                    
                                                                                    -Foreign
      currency translation gains attributable to common
    stockholders
                                                                                    
                                                                                    
                                                                                    875,703
                                                                                    
                                                                                    
                                                                                    
                                                                                    34,589
                                                                                    
                                                                                    
                                                                                    
                                                                                    1,319,722
                                                                                    
                                                                                    
                                                                                    
                                                                                    72,366COMPREHENSIVE
      INCOME
                                                                                    
                                                                                    $
                                                                                    6,123,274
                                                                                    
                                                                                    
                                                                                    $
                                                                                    2,266,322
                                                                                    
                                                                                    
                                                                                    $
                                                                                    14,820,204
                                                                                    
                                                                                    
                                                                                    $
                                                                                    5,828,284Earnings
      per shareBasic
                                                                                    
                                                                                    $
                                                                                    0.13
                                                                                    
                                                                                    
                                                                                    $
                                                                                    0.07
                                                                                    
                                                                                    
                                                                                    $
                                                                                    0.32
                                                                                    
                                                                                    
                                                                                    $
                                                                                    0.17Diluted
                                                                                    
                                                                                    $
                                                                                    0.12
                                                                                    
                                                                                    
                                                                                    $
                                                                                    0.07
                                                                                    
                                                                                    
                                                                                    $
                                                                                    0.31
                                                                                    
                                                                                    
                                                                                    $
                                                                                    0.17Weighted
      average number of sharesBasic
                                                                                    
                                                                                    
                                                                                    41,861,457
                                                                                    
                                                                                    
                                                                                    
                                                                                    33,104,234
                                                                                    
                                                                                    
                                                                                    
                                                                                    41,798,205
                                                                                    
                                                                                    
                                                                                    
                                                                                    33,104,234Diluted
                                                                                    
                                                                                    
                                                                                    44,222,499
                                                                                    
                                                                                    
                                                                                    
                                                                                    33,104,234
                                                                                    
                                                                                    
                                                                                    
                                                                                    43,932,055
                                                                                    
                                                                                    
                                                                                    
                                                                                    33,104,234


The
accompanying notes are an integral part of these unaudited Condensed
Consolidated Financial Statements


6


KINGOLD
JEWELRY INC.


(FORMERLY
ACTIVEWORLDS CORP.)


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(IN
US DOLLARS)


(UNAUDITED)




For the nine months ended September 30,2010
                                                                      
                                                                      
                                                                      2009CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income
                                                                      
                                                                      $
                                                                      14,117,166
                                                                      
                                                                      
                                                                      $
                                                                      5,755,918Adjusted
      to reconcile net income to cash provided by (used in) operating
      activities:Depreciation
      and amortization
                                                                      
                                                                      
                                                                      919,230
                                                                      
                                                                      
                                                                      
                                                                      924,934Amortization
      of intangible assets
                                                                      
                                                                      
                                                                      8,330
                                                                      
                                                                      
                                                                      
                                                                      8,286Changes
      in operating assets and liabilities(Increase)
      decrease in:Accounts
      receivable
                                                                      
                                                                      
                                                                      158,509
                                                                      
                                                                      
                                                                      
                                                                      1,053,595Inventories
                                                                      
                                                                      
                                                                      (17,902,549
                                                                      )
                                                                      
                                                                      
                                                                      540,624Other
      current assets and prepaid expenses
                                                                      
                                                                      
                                                                      (348,268
                                                                      )
                                                                      
                                                                      
                                                                      75,044Deferred
      offering costs
                                                                      
                                                                      
                                                                      (125,994
                                                                      )
                                                                      
                                                                      
                                                                      -Value
      added tax recoverable
                                                                      
                                                                      
                                                                      1,603,596
                                                                      
                                                                      
                                                                      
                                                                      (3,649,907
                                                                      )Increase
      (decrease) in:Other
      payables and accrued expenses
                                                                      
                                                                      
                                                                      997,823
                                                                      
                                                                      
                                                                      
                                                                      (39,907
                                                                      )Income
      tax payable
                                                                      
                                                                      
                                                                      678,071
                                                                      
                                                                      
                                                                      
                                                                      (756,856
                                                                      )Value
      added tax payable
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      (910,936
                                                                      )Other
      taxes payable
                                                                      
                                                                      
                                                                      (193,280
                                                                      )
                                                                      
                                                                      
                                                                      124,722Net
      cash provided by (used in) operating activities
                                                                      
                                                                      
                                                                      (87,366
                                                                      )
                                                                      
                                                                      
                                                                      3,125,517CASH
      FLOWS FROM INVESTING ACTIVITIESPurchase
      of property and equipment
                                                                      
                                                                      
                                                                      (24,862
                                                                      )
                                                                      
                                                                      
                                                                      (5,979
                                                                      )Net
      cash used in investing activities
                                                                      
                                                                      
                                                                      (24,862
                                                                      )
                                                                      
                                                                      
                                                                      (5,979
                                                                      )CASH
      FLOWS FROM FINANCING ACTIVITIESRestricted
      cash
                                                                      
                                                                      
                                                                      1,469,160
                                                                      
                                                                      
                                                                      
                                                                      (6,553
                                                                      )Proceeds
      from bank loans
                                                                      
                                                                      
                                                                      5,876,639
                                                                      
                                                                      
                                                                      
                                                                      5,845,808Repayments
      of bank loans
                                                                      
                                                                      
                                                                      (5,876,639
                                                                      )
                                                                      
                                                                      
                                                                      (11,253,180
                                                                      )Capital
      Contribution by stockholders
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      9,360,009Net
      cash provided by financing activities
                                                                      
                                                                      
                                                                      1,469,160
                                                                      
                                                                      
                                                                      
                                                                      3,946,084EFFECT
      OF EXCHANGE RATES ON CASH & CASH EQUIVALENTS
                                                                      
                                                                      
                                                                      162,992
                                                                      
                                                                      
                                                                      
                                                                      5,581NET
      INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                                                                      
                                                                      
                                                                      1,519,924
                                                                      
                                                                      
                                                                      
                                                                      7,071,203CASH
      AND CASH EQUIVALENTS, BEGINNING OF PERIOD
                                                                      
                                                                      
                                                                      7,964,120
                                                                      
                                                                      
                                                                      
                                                                      281,994CASH
      AND CASH EQUIVALENTS, END OF PERIOD
                                                                      
                                                                      $
                                                                      9,484,044
                                                                      
                                                                      
                                                                      $
                                                                      7,353,197Cash
      paid for interest expense
                                                                      
                                                                      $
                                                                      357,198
                                                                      
                                                                      
                                                                      $
                                                                      589,256Cash
      paid for income tax
                                                                      
                                                                      $
                                                                      4,267,965
                                                                      
                                                                      
                                                                      $
                                                                      2,630,279





The
accompanying notes are an integral part of these unaudited Condensed
Consolidated Financial Statements


7


KINGOLD
JEWELRY, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)





NOTE
1 — BASIS OF PRESENTATION





The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles (“US GAAP”)
for interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary to make the
financial statements not misleading have been included. Operating results for
the periods ended September 30, 2010 and 2009 are not necessarily indicative of
the results that may be expected for the full year. 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 2009 Form 10-K filed on March 31, 2010 as well as Form 8-K filed on
December 28, 2009.





NOTE
2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Principles
of Consolidation





The
accompanying condensed consolidated financial statements include the financial
statements of Kingold Jewelry Inc. (Kingold), its wholly owned subsidiaries,
Dragon Lead Group Limited (“Dragon Lead”) and Wuhan Vogue-Show Jewelry Co.,
Limited (“Wuhan Vogue-Show”) and Wuhan Kingold Jewelry Co., Limited (“Wuhan
Kingold”), its 95.83% contractually controlled affiliate. The noncontrolling
interests represent the minority stockholders’ 4.17% proportionate share of the
results of Wuhan Kingold. All significant inter-company balances and
transactions have been eliminated in consolidation.





Use
of Estimates





The
preparation of the financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect the reported amount of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.





Cash
and Cash Equivalents





Cash and
cash equivalents include cash on hand and demand deposits with a bank with an
original maturity of less than three months.


8


KINGOLD
JEWELRY, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)





NOTE
2 — SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES – (continued)





Restricted
cash




The
Company’s financing facilities require a minimum cash deposit as security for
borrowings outstanding under its demand financing facilities. The restricted
cash amount is classified as a current asset in the balance sheets since the
borrowings it secures are classified as current liabilities. As of September 30,
2010 the balance was $0, compared to the balance of $1,462,587 as of December
31, 2009. Because of our accumulated good credit record, the restricted cash is
currently waived by the financing facilities.





Accounts
Receivables





The
Company extends unsecured credit to its customers in the ordinary course of
business but 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 managements’ assessment of the credit history
with the customers and current relationships with them. As of September 30, 2010
and December 31, 2009, the Company has not recorded any write off of customer
receivables and there was no allowance for doubtful accounts established. The
Company considers all the accounts receivable fully collectible.





Inventories





Inventories
are stated at the lower of cost or market value, cost being calculated on the
weighted average basis. The cost of inventories comprises all costs of
purchases, costs of fixed and variable production overheads and other costs
incurred in bringing the inventories to their present location and condition.
The Company provides inventory allowances based on excess and obsolete
inventories determined principally by customer demand. The Company has not
recorded any write down of inventory as a result of the Company’s entire
inventory is turned over usually within thirty to sixty days. Therefore, the
Company has determined no allowance for inventories is considered necessary for
the nine months ended September 30, 2010 and 2009.





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.




9


KINGOLD
JEWELRY, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)





NOTE
2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 – (continued)








Estimated Useful LifeBuildings
            30
      yearsPlant
      and machinery
            15
      yearsMotor
      vehicles
            10
      yearsOffice
      furniture and electronic equipment
            5-10
      years





Long-lived
assets





The
Company accounts for long-lived assets under the FASB Codification Topic 360
(ASC Topic 360) “Accounting for Goodwill and Other Intangible Assets” and
“Accounting for Impairment or Disposal of Long-Lived Assets.” In accordance with
ASC Topic 360, indefinite-lived intangible assets held and used by the Company
are reviewed for impairment annually in the fourth quarter or more frequently if
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Finite-lived assets and intangibles are also reviewed
for impairment test when circumstance requires it. For purposes of evaluating
the recoverability of long-lived assets, when undiscounted future cash flows
will not be sufficient to recover an asset’s carrying amount, the asset is
written down to its fair value. The long-lived assets of the Company, which are
subject to evaluation, consist primarily of property, plant and equipment and
land use rights. No impairment loss is recorded for the nine months ended
September 30, 2010 and 2009.





Fair
value of financial instruments





FASB
Codification Topic 825(“ASC Topic 825”), “Disclosure about Fair Value of
Financial Instruments,” requires certain disclosures regarding the fair value of
financial instruments. Fair value of financial instruments is made at a specific
point in time, based on relevant information about financial markets and
specific financial instruments. As these estimates are subjective in nature,
involving uncertainties and matters of significant judgment, they cannot be
determined with precision. Changes in assumptions can significantly affect
estimated fair values.





The
carrying value of accounts receivable, other current assets and prepaid
expenses, other payables and accrued expenses approximate their fair values
because of the short-term nature of these instruments. The management of the
Company is of the opinion that the Company is not exposed to significant
interest or credit risks arising from these financial
instruments.


10


KINGOLD
JEWELRY, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)





NOTE
2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 – (continued)





Revenue
recognition





Net sales
are primarily composed of sales of products to wholesale and retail customers
and subcontracting fees. The Company recognizes revenues under the FASB
Codification Topic 605 (“ASC Topic 605”), Revenue is recognized when all of the
following have occurred: persuasive evidence of arrangement with the customer,
services has been performed, fees are fixed or determinable and collectability
of the fees is reasonably assured. These criteria as related to the Company’s
revenues are considered to have been met as follows:





Sales
of products





The
Company recognizes revenue on sales of products when the goods are delivered and
title to the goods passes to the customers 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.





Sub-contracting
fees





The
Company also provides sub-contracting services to its customers based on a
fixed-price contract. The Company recognizes services-based revenue from all its
contracts when the services have been performed, the customers have approved the
completion of services, invoices have been issued and collectability is deemed
probable. The revenues from sub-contracting services only consist of
approximately 3.98% of the total revenue recognized.





Income
taxes





The
Company accounts for income taxes under the FASB Codification Topic 740-10-25
(“ASC 740-10-25”). Under ASC 740-10-25, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the consolidated financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. Under ASC 740-10-25, the effect on deferred tax assets and liabilities
of a change in tax rates is recognized as income in the period included the
enactment date.





On
January 1, 2007, the Company adopted the provisions of ASC 740-10-25,
“Accounting for Uncertainty in Income Taxes.” ASC 740-10-25 prescribes a
more-likely-than-not threshold for consolidated financial statement recognition
and measurement of a tax position taken (or expected to be taken) in a tax
return. This Interpretation also provides guidance on the recognition of income
tax assets and liabilities, classification of current and deferred income tax
assets and liabilities, accounting for interest and penalties associated with
tax positions, accounting
for interest and penalties associated with tax positions. The adoption of ASC
740-10-25 has not resulted in any material impact on the Company’s financial
position or results.


11


KINGOLD
JEWELRY, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)





NOTE
2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 – (continued)




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 remain open for tax years 2007 and after. The
Company’s foreign tax returns, mainly PRC, remain open for tax years 2008 and
after.





Foreign
currency translation





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





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





The value
of RMB against US$ and other currencies may fluctuate and is affected by, among
other things, changes in China’s political and economic conditions, Any
significant revaluation of RMB may materially affect the Company’s financial
condition in terms of US$ reporting.





Other
comprehensive income





The
foreign currency translation gain or loss resulting from translation of the
financial statements expressed in HK$ and RMB to US$ is reported as other
comprehensive income in the statements of operations and stockholders’
equity.





Other
comprehensive income for the nine months ended September 30, 2010 and 2009 was
$1,319,723 and $72,366, respectively, and for three months ended September 30,
2010 and 2009 was $875,704 and $34,589, respectively.


12


KINGOLD
JEWELRY, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)





NOTE
2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 – (continued)





Earnings
per share





The
Company computes earnings per share (“EPS’) in accordance with ASC 260 “Earnings
per Share” (“ASC 260”). ASC 260 requires companies with complex capital
structures to present basic and diluted EPS. Basic EPS is measured as net income
divided by the weighted average common shares outstanding for the period.
Diluted EPS is similar to basic EPS but presents the dilutive effect on a per
share basis of potential common shares (e.g., convertible securities, options
and warrants) as if they had been converted at the beginning of the periods
presented, or issuance date, if later. Potential common shares that have an
anti-dilutive effect (i.e., those that increase income per share or decrease
loss per share) are excluded from the calculation of diluted EPS.





Segments





The
Company operates in only one segment. As a result, segment disclosure is not
presented.





Recent
Accounting Pronouncements





In May
2009, the FASB issued ASC 855-10, “Subsequent Events” (“ASC 855-10”), which
establishes principles and standards related to the accounting for and
disclosure of events that occur after the balance sheet date but before the
financial statements are issued. ASC 855-10 requires an entity to recognize, in
the financial statements, subsequent events that provide additional information
regarding conditions that existed at the balance sheet date. Subsequent events
that provide information about conditions that did not exist at the balance
sheet date shall not be recognized in the financial statements under ASC 855-10.
ASC 855-10 was effective for interim and annual reporting periods on or after
June 15, 2009. The adoption of ASC 855-10 did not have a material effect on the
Company’s financial position or results of operations.





In
February 2010, the FASB issued ASU 2010-09 “Subsequent
Events — Amendments to Certain Recognition and Disclosure
Requirements” (“ASU 2010-09”), which removed the requirements in ASC 855-10 for
an SEC filer to disclose the date through which subsequent events have been
evaluated for both issued and revised financial statements. ASU 2010-09 became
effective upon issuance and the adoption of ASU 2010-09 did not have a material
effect on the Company’s financial position or results of
operations.


13


KINGOLD
JEWELRY, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)





NOTE
3 — INVENTORIES, NET





Inventories
are consisted of the following:





As ofSeptember 30,
                      
                      
                      December 31,2010
                      
                      
                      2009Raw
      materials
                      
                      $
                      12,555,076
                      
                      
                      $
                      9,645,402Work-in-progress
                      
                      
                      31,463,714
                      
                      
                      
                      17,894,676Finished
      goods
                      
                      
                      6,641,766
                      
                      
                      
                      4,215,931Total
      inventory
                      
                      $
                      50,660,556
                      
                      
                      $
                      31,756,009





For the
nine months ended September 30, 2010 and 2009, no provision for obsolete
inventories was recorded by the Company.





NOTE
4 — PROPERTY AND EQUIPMENT, NET




The
following is a summary of property and equipment as of September 30, 2010 and
December 31, 2009:





As ofSeptember 30,
                      
                      
                      December 31,2010
                      
                      
                      2009Buildings
                      
                      $
                      1,876,132
                      
                      
                      $
                      1,881,339Plant
      and machinery
                      
                      
                      17,603,672
                      
                      
                      
                      17,325,868Motor
      vehicles
                      
                      
                      39,396
                      
                      
                      
                      38,555Office
      and electric equipment
                      
                      
                      604,812
                      
                      
                      
                      423,658Subtotal
                      
                      
                      20,124,012
                      
                      
                      
                      19,669,420Less:
      accumulated depreciation
                      
                      
                      (6,598,529
                      )
                      
                      
                      (5,542,470
                      )Property
      and equipment, net
                      
                      $
                      13,525,483
                      
                      
                      $
                      14,126,950





Depreciation
expense for the nine months ended September 30, 2010 and 2009 were $919,230 and
$924,934, respectively. Depreciation expense for the three months ended
September 30, 2010 and 2009 were $307,868 and $309,800,
respectively.





NOTE
5 — OTHER ASSETS





Other
assets as of September 30, 2010 and December 31, 2009 consist of the Company’s
investment in the membership certificates at Shanghai Diamond Exchange and
Shanghai Gold Exchange.


14


KINGOLD
JEWELRY, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)





NOTE
5 — OTHER ASSETS (continued)





In
accordance with ASC 940-340, membership certificates at Shanghai Diamond
Exchange and Shanghai Gold Exchange owned by the Company are originally carried
at cost, or, if another-than-temporary impairment in value has occurred, at
adjusted cost. In determining whether another-than-temporary decline in value
has occurred, the Company uses ASC 320, ASC 958 and Section M of Topic 5 of the
SEC Staff Accounting Bulletin series (“SAB 59”) as analogous guidance. There was
no impairment of these assets as of September 30, 2010 and December 31,
2009.





NOTE
6 — INTANGIBLE ASSETS, NET





Intangible
assets as of September 30, 2010 and December 31, 2009 consist of land use rights
and computer software program acquired. The Company has the right to use the
land for fifty years and the right to use the software for five years and the
Company amortizes the assets on a straight line basis over its terms from the
acquisition date. Amortization expense was $ 8,330 and $8,286 for the nine
months ended September 30, 2010 and 2009, respectively, and was $2,792 and
$2,762 for the three months ended September 30, 2010 and 2009,
respectively.





NOTE
7 — SHORT TERM LOANS




The Short
term loans include the following:





As ofSeptember 30,
                        
                        
                        December 31,2010
                        
                        
                        2009a)
      Loan payable to Pufa bank
                        
                        
                        5,978,037
                        
                        
                        
                        5,850,348c)
      Loan payable to Xinye Bank, Hanzhengjie branch
                        
                        
                        2,989,018
                        
                        
                        
                        2,925,174Total
      short term loans
                        
                        $
                        8,967,055
                        
                        
                        $
                        8,775,522





a) Loan
payable to Pufa bank, Jiangan branch was originally one year term from May 2009
to May 2010 at the interest rate of 5.31% per year. The loan was paid off by the
due date, and then, as customary in China, the principal was re-borrowed for
another one year term from May 2010 to May, 2011 at the interest rate of 5.5755%
per year pursuant to a new note. This loan has been guaranteed by the buildings,
plants and machinery of the Company.





b) Loan
payable to Xinye bank, Hanzhengjie branch was one year term from December 2009
to December 2010 at the interest rate of 4.425% per year. This loan has been
guaranteed by a non-related third party.


15


KINGOLD
JEWELRY, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)





NOTE
7 — SHORT TERM LOANS (continued)




Interest
expense for the nine months ended September 30, 2010 and 2009 was $405,174 and
$589,256, respectively. Interest expense for the three months ended September
30, 2010 and 2009 was $135,638 and $175,340, respectively.





NOTE
8 — 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
was incorporated in the United States and has incurred net operating loss for
income tax purpose for 2009 and 2008. Kingold had loss carry forwards of
approximately $586,000 for U.S. income tax purposes available for offset against
future taxable U.S. income expiring in 2029. Management believes that the
realization of the benefits from these losses is uncertain due to the Company’s
limited operating history and continuing losses. Accordingly, a full valuation
allowance has been provided and no deferred tax asset benefit has been recorded.
The valuation allowance as of September 30, 2009 was approximately
$200,000.





Dragon
Lead was incorporated in the BVI and under current laws of the BVI; income
earned is not subject to income tax.





Wuhan
Vougue-Show and Wuhan Kingold were incorporated in the PRC and are subject to
PRC income tax which is computed according to the relevant laws and regulations
in the PRC. The applicable tax rate is 25% for the nine months ended September
30, 2010 and 2009.





The
Company does not have any deferred tax assets or liabilities from its foreign
operations.





Significant
components of the income tax provision were as follows for the nine months ended
September 30, 2010 and 2009:





For the Three Months
                    
                    
                    For the Nine MonthsEnded September 30,
                    
                    
                    Ended September 30,2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009Current
      tax provisionFederal
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -State
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Foreign
                    
                    $
                    1,979,290
                    
                    
                    $
                    730,493
                    
                    
                    $
                    4,925,385
                    
                    
                    $
                    1,873,422Total
      current tax provision
                    
                    $
                    1,979,290
                    
                    
                    $
                    730,493
                    
                    
                    $
                    4,925,385
                    
                    
                    $
                    1,873,422Deferred
      tax provisionFederal
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -State
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Foreign
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Total deferred
      tax provision
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -Income
      tax provision
                    
                    $
                    1,979,290
                    
                    
                    $
                    730,493
                    
                    
                    $
                    4,925,385
                    
                    
                    $
                    1,873,422


16




KINGOLD
JEWELRY, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
 NOTE
8 — INCOME TAXES (continued)
  Income
from continuing operations were allocated between the United States and foreign
components for the nine months ended September 30, 2010 and 2009 as
follows:
 
 For the Nine Months Ended September 30,2010
                            
                            
                            2009United
      States
                            
                            $
                            (210,690
                            )
                            
                            $
                            -Foreign
                            
                            $
                            14,327,857
                            
                            
                            $
                            5,755,918Total
                            
                            $
                            14,117,167
                            
                            
                            $
                            5,755,918
 
 ASC
740-10 clarifies the accounting and reporting of income taxes recognized in the
financial statements and provides how tax benefits may be recognized. Income tax
positions must meet a more-likely-than-not recognition threshold at the
effective date to be recognized in subsequent periods. On January 1, 2007, we
adopted the provisions of this topic. At September 30, 2010 and December 31,
2009 we had no unrecognized tax benefits.
 
 The
Company recognizes interest and penalties accrued related to unrecognized tax
benefits and penalties, if any, as income tax expense. The Company files income
tax returns with U.S. Federal Government, as well as Delaware State and the
Company files returns in foreign jurisdictions of BVI and PRC China. With few
exceptions, the Company is subject to U.S. federal and state income tax
examinations by tax authorities for years on or after 1995.
 
 The
Company’s foreign subsidiaries also file income tax returns with both the
National Tax Bureau (with its branches in Wuhan) and the Local Tax Bureaus
(Hubei Provincial Tax Bureau and Wuhan Municipal Tax Bureau). The Company is
subject to income tax examinations by these foreign tax authorities. The Company
has passed all tax examinations by both National and Local tax authorities since
the inception of the Company in 2002.
 
 The
following table reconciles the U.S. statutory rates to the Company’s effective
rate for the nine months ended September 30, 2010 and 2009:
 
 For the Nine Months Ended September 30,2010
                  
                  
                  2009US
      Statutory rate
                  
                  
                  34
                  %
                  
                  
                  34
                  %Foreign
      Income not recognized in USA
                  
                  
                  (-34
                  )%
                  
                  
                  (-34
                  )%China
      income tax
                  
                  
                  25
                  %
                  
                  
                  25
                  %Effective
      tax rate
                  
                  
                  25
                  %
                  
                  
                  25
                  %
  17
  KINGOLD
JEWELRY, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
 NOTE
9 — EARNINGS PER SHARE
 
 In
December 23, 2009, the Company entered into a reverse merger transaction with
Dragon Lead. The Company computes the weighted-average number of common shares
outstanding in accordance with ASC 805. ASC 805 states that in calculating the
weighted average shares when a reverse merger took place in the middle of the
year, the number of common shares outstanding from the beginning of that period
to the acquisition date shall be computed on the basis of the weighted-average
number of common shares of the legal acquiree (the accounting acquirer)
outstanding during the period multiplied by the exchange ratio established in
the merger agreement. The number of common shares outstanding from the
acquisition date to the end of that period will be the actual number of common
shares of the legal acquirer (the accounting acquiree) outstanding during that
period.
 
 As of
September 30, 2010, the Company had outstanding warrants to acquire 2,685,241
shares of common stock. 2,560,241 warrants have an excise price of $0.996, while
125,000 warrants have an exercise price of $1.196. As of September 30, 2010, all
the outstanding warrants were considered dilutive and were included in the
weighted average shares-diluted calculation using the treasury stock method. The
following table presents a reconciliation of basic and diluted net income per
share:
 
 For the Three Months
                  
                  
                  For the Nine MonthsEnded September 30,
                  
                  
                  Ended September 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Net
      income attributable to Common stockholders
                  
                  $
                  5,247,572
                  
                  
                  $
                  2,231,733
                  
                  
                  $
                  13,500,483
                  
                  
                  $
                  5,755,918Weighted
      average number of common shares outstanding – Basic
                  
                  
                  41,861,457
                  
                  
                  
                  33,104,234
                  
                  
                  
                  41,798,205
                  
                  
                  
                  33,104,234Diluted
      earnings per share:Effect
      of diluted warrants
                  
                  
                  2,361,042
                  
                  
                  
                  -
                  
                  
                  
                  2,361,042
                  
                  
                  
                  -Weighted
      average number of common shares outstanding – Diluted
                  
                  
                  44,222,499
                  
                  
                  
                  33,104,234
                  
                  
                  
                  43,932,055
                  
                  
                  
                  33,104,234Earnings
      per share – Basic
                  
                  $
                  0.13
                  
                  
                  $
                  0.07
                  
                  
                  $
                  0.32
                  
                  
                  $
                  0.17Earnings
      per share – Diluted
                  
                  $
                  0.12
                  
                  
                  $
                  0.07
                  
                  
                  $
                  0.31
                  
                  
                  $
                  0.17
 
 On June
7, 2010, the Company’s Board of Directors authorized a one-for-two reverse split
of its common stock. The reverse split was effective on August 10, 2010. All
shares and per share data provided herein give effect to this stock split and
have been applied retroactively.
  18
  KINGOLD
JEWELRY, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
 Note
10 — STOCKHOLDERS’ EQUITY
 
 (1)
Issuance of Common Stock for recapitalization
 
 Before
the acquisition of Dragon Lead, the Company had 3,125,018 shares of common stock
issued and outstanding. In addition, the Company has outstanding warrants issued
to former officers and consultants to purchase up to a maximum of 775,000 shares
of common stock, which were amended to increase the exercise price changed to
$1.196 per share.
 
 On
December 23, 2009, the Company issued 33,104,234 shares of common stock in
connection with the acquisition of Dragon Lead for the recapitalization of
Dragon Lead and re-organization of Kingold.
 
 On
December 23, 2009, 416,668 shares of common stock were issued to a consultant
for advisory services related to the acquisition of Dragon Lead. This expense is
recorded at fair value of $0.996 per share at the grant date for a total of
$415,001.
 
 (2)
Issuance of Common Stock in Private Placement
 
 In
accordance with the Securities Purchase Agreement (“Securities Purchase
agreement”) entered into between the Company and a group of accredited
investors  (as defined under Rule 501 (a) of Regulation D promulgated
under the Securities Act) (“investors”) on December 23, 2009, the Company
received $5,100,000 (or $4,472,482 net proceeds after deducting the offering
expenses and reverse merger service expense) from the Investors for an issuance
of 5,120,484 shares of restricted common stock at $0.996 by a private placement
and warrants to purchase 1,024,096 shares of Common stock at an exercise price
of $0.996 per share, exercisable within five years of the date of issue. The
Company relied on an exemption from registration pursuant to Section 4(2) under
the Securities Act of 1933 in connection with the issuance of these
shares.
 
 In
connection with the private placement and pursuant to the Securities Purchase
Agreement, the placement agent and advisors received the following compensation:
(i) $368,518 cash as an engagement and documentation fee; (ii) $200,000 as a
placement commission; (iii) $59,000 cash as reverse merger service fee, and (iv)
warrants to purchase up to 1,536,145 shares of Common Stock with the same term
of the warrants issued to investors.
 
 After the
reverse merger, the Company has 41,766,404 shares of common stock issued and
outstanding and warrant to purchase of 3,335,241 shares of common
stock.
 
 In
September 2010, 650,000 warrants (2008 warrants) were exercised and 576,660
shares were issued. Pursuant to the cashless exercise provision, an additional
73,340 were issued, surrendered and canceled to reflect the payment of the
exercise price on the 650,000 warrants. As of September 30, 2010, the Company
has 42,343,073 shares of common stock issued and outstanding and warrants to
purchase up to 2,685,241 shares of common stock.
  19
  KINGOLD
JEWELRY, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
 Note
10 — STOCKHOLDERS’ EQUITY (continued)
 
 (3)
Appropriated retained earnings
 
 The
Company is required to make appropriations to the statutory surplus reserve
based on the after-tax net income determined in accordance with the laws and
regulations of the PRC. Prior to January 1, 2006 the appropriation to the
statutory surplus reserve should be at least 10% of the after tax net income
determined in accordance with the laws and regulations of the PRC until the
reserve is equal to 50% of the entities’ registered capital. Appropriations to
the statutory public welfare fund are at 5% to 10% of the after tax net income
determined by the Board of Directors. Effective January 1, 2006, the Company is
only required to contribute to one statutory reserve fund at 10 percent of net
income after tax per annum, such contributions not to exceed 50 percent of the
respective company’s registered capital.
 
 The
statutory reserve funds cannot be used to set off against prior period losses,
expansion of production and operation or for the increase in the registered
capital of the Company. These reserves are not transferable to the Company in
the form of cash dividends, loans or advances. These reserves are therefore not
available for distribution except in liquidation.
 
 For the
nine months ended September 30, 2010 and 2009, the Company appropriated $61,617
and $380,440, respectively to the reserves funds based on its net income in
accordance with the laws and regulations of the PRC.
 
 Note
11 — WARRANTS
 
 In
October 2008, prior to the acquisition of Dragon Lead, the Company issued
warrants to formers officers and consultants to purchase up to 775,000 shares of
common stock, the original exercise price was $0.32 per share, exercisable
within 5 years of the date of issue, in connection with the acquisition, the
exercise price changed to $1.196 per share with all other terms the
same.
 
 The
Company has determined that the warrants meet the conditions for equity
classification pursuant to ASC 815. Therefore, these warrants were classified as
equity and included in Additional Paid-in Capital. The fair value of the
warrants was calculated using the Black-Scholes options pricing model using the
following assumptions: volatility 100%, risk free interest rate 1.51% (no
dividend yield) and expected term of four years. The fair value of those
warrants was recalculated at the reverse merge date at
$1,119,172.
  20
  KINGOLD
JEWELRY, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
 Note
11 — WARRANTS (continued)
 
 In
conjunction with the private placement, warrants were issued to investor and
placement agent to purchase a total of 2,560,241 shares of common stock at an
exercise price of $0.996 per share, exercisable within five years of the date of
issue. No separate consideration was paid for such warrants. The exercise price
of such warrant is subject to adjustments under certain circumstances and the
warrants permit cashless exercise by the holders. This expense directly related
to private placement is recorded as Additional Paid-in Capital in the
accompanying financial statements. The Company relied on the exemption from
registration provided by Section 4(2) of the Securities Act for the issuance of
common stock and warrants to the placement agent. The warrants issued to the
placement agent, qualify as permanent equity, the value of which warrants has
created offsetting debit and credit entries to additional paid-in
capital.
 
 The
Company has determined that the warrants meet the conditions for equity
classification pursuant to ASC 815, “Derivatives and Hedging”. Therefore, these
warrants were classified as equity and included in Additional Paid-in Capital.
The fair value of the warrants was calculated using the Black-Scholes options
pricing model using the following assumptions: volatility 100%, risk free
interest rate 2.51% (no dividend yield) and expected term of five years. The
fair value of those warrants at the grant date was calculated at
$4,020,876.
 
 In
September 2010, 650,000 warrants (2008 warrants) were exercised and 576,660
shares were issued. Pursuant to the cashless exercise provision, an additional
73,340 were issued, surrendered and canceled to reflect the payment of the
exercise price on the 650,000 warrants.
 
 Following
is a summary of the status of warrants activities as of September 30,
2010:
 
 Weighted
                          
                          
                          AverageWarrants
                          
                          
                          Average
                          
                          
                          Remaining
      Life in
                          
                          
                          AggregateOutstanding
                          
                          
                          Exercise Price
                          
                          
                          Years
                          
                          
                          Intrinsic ValueOutstanding,
      January 1, 2010
                          
                          
                          3,335,241
                          
                          
                          
                          1.04
                          
                          
                          
                          4.77
                          
                          
                          
                          471,084GrantedForfeitedExercised
                          
                          
                          650,000Outstanding,
      September 30, 2010
                          
                          
                          2,685,241
                          
                          
                          
                          1.01
                          
                          
                          
                          4.02
                          
                          
                          
                          21,628,783
  21
  KINGOLD
JEWELRY, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
 Note
12 — COMMITMENTS AND CONTINGENCIES
 
 Escrowed
share arrangement
 
 In
accordance with the Securities Purchase Agreement, a majority stockholder of
Dragon Lead, immediately following the closing of the reverse merger
acquisition, entered into a make good escrow agreement with the Investors,
pursuant to which a total of 1,895,609 of their beneficially owned shares of
common stock were delivered to an escrow agent in order to secure the Company’s
obligations under the Securities Purchase Agreement to deliver additional common
stock to the private placement investors in the event the Company fails to
achieve certain after-PRC — tax net income of Wuhan Kingold targets
for fiscal years 2009, 2010 and 2011 (“Make Good Escrow Shares”). Those targets
are RMB65 million, RMB100 million and RMB150 million in after-tax net income for
the fiscal years ended December 31, 2009 and ending December 31, 2010 and 2011,
respectively. In the event the Company is not able to achieve the net income
target, the Company is obligated to transfer 1,895,609 shares of common stock to
the Investors on a pro-rata basis. Of the 33,104,234 shares of common stock
issued in the Share Exchange, 1,895,609 have been deposited by the majority
stockholder of Dragon Lead into escrow to secure these obligations.
 
 As the
performance threshold was met for fiscal year 2009, 631,869 escrowed shares will
be returned to stockholders in 2009, the remaining 1,263,740 shares will be
released in fiscal years 2010 and 2011 if the performance thresholds for fiscal
years 2010 and 2011 are also met.
 
 Liquidated
damages
 
 Pursuant
to the Securities Purchase Agreement, the Company was obligated to make efforts
to file a registration statement with the SEC for the registration of 5,120,484
shares of common stock offered by selling stockholders to be declared effective
by the SEC on or before June 23, 2010. After June 23, 2010 and for each monthly
anniversary date thereafter in which the registration statement fails to be
declared effective, the Company shall pay liquidated damages to investors equal
to 1% of the funds raised, subject to a cap of 6% of total funds raised.
Majority of the Investors have waived their registration rights and the Company
will not pay for the penalty as the result. Accordingly, the Company has not
accrued for these liquidated damages.
  22
  Item
      2.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations.  The
following discussion of our financial condition and results of operations should
be read together with the financial statements and related notes included in
this Report.  This discussion contains forward-looking statements that
involve risks and uncertainties.  Our actual results may differ
materially from those anticipated in those forward-looking statements as a
result of certain factors, including, but not limited to, those contained in the
discussion on forward-looking statements that follows this section.
  Our
Business
 
 We are
engaged in the production and sale of 24 karat gold jewelry and ornaments in the
PRC under the Kingold brand through a variable interest entity relationship with
Wuhan Kingold Jewelry Company Limited, a PRC corporation. All of our sales are
made within the central part of the PRC including Hubei, Hunan, Henan, Jiangxi,
Anhui and Sichuan provinces.
  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 (24K gold), plus a mark-up reflecting our
design and processing fees. Typically this mark-up ranges from 4-6% of the
price of the base material.
  We aim to
become an increasingly more significant 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 nationwide well-known
brand, Kingold.
  We have
been a member of the Shanghai Gold Exchange since 2003. Although the Chinese
government eliminated the absolute restriction on trading gold in general, the
right to purchase gold directly from the Shanghai Gold Exchange is
limited.  The Shanghai Gold Exchange implements a membership system
and only members can buy gold through its trading system.  There were
only 162 members of the Shanghai Gold Exchange throughout China in
2008.  Non-members who want to purchase gold must deal with members at
a higher purchase price compared to that for members.
  Results
of Operations
 
 The
following table sets forth information from our statements of operations
(unaudited) for the three and nine months ended September 30, 2010 and 2009 in
U.S. dollars:
  23
 KINGOLD
JEWELRY INC.
 (FORMERLY
ACTIVEWORLDS CORP.)
 CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
 (IN
US DOLLARS)
 (UNAUDITED)
 For the three months ended September 30,
                              
                              
                              For the nine months ended September 30,2010
                              
                              
                              2009
                              
                              
                              2010
                              
                              
                              2009NET
      SALES
                              
                              $
                              169,706,497
                              
                              
                              $
                              93,703,615
                              
                              
                              $
                              338,062,808
                              
                              
                              $
                              192,036,951COST
      OF SALESCost
      of sales
                              
                              
                              (160,792,165
                              )
                              
                              
                              (89,797,397
                              )
                              
                              
                              (315,574,745
                              )
                              
                              
                              (181,600,448
                              )Depreciation
                              
                              
                              (277,204
                              )
                              
                              
                              (278,001
                              )
                              
                              
                              (832,288
                              )
                              
                              
                              (833,781
                              )Total
      cost of sales
                              
                              
                              (161,069,369
                              )
                              
                              
                              (90,075,398
                              )
                              
                              
                              (316,407,033
                              )
                              
                              
                              (182,434,229
                              )GROSS
      PROFIT
                              
                              
                              8,637,128
                              
                              
                              
                              3,628,217
                              
                              
                              
                              21,655,775
                              
                              
                              
                              9,602,722OPERATING
      EXPENSESSelling,
      general and administrative expenses
                              
                              
                              1,007,909
                              
                              
                              
                              376,917
                              
                              
                              
                              2,133,475
                              
                              
                              
                              1,107,683Depreciation
                              
                              
                              30,665
                              
                              
                              
                              31,799
                              
                              
                              
                              86,942
                              
                              
                              
                              91,153Amortization
                              
                              
                              2,792
                              
                              
                              
                              2,762
                              
                              
                              
                              8,330
                              
                              
                              
                              8,286Total
      Operating Expenses
                              
                              
                              1,041,366
                              
                              
                              
                              411,478
                              
                              
                              
                              2,228,747
                              
                              
                              
                              1,207,122INCOME
      FROM OPERATIONS
                              
                              
                              7,595,762
                              
                              
                              
                              3,216,739
                              
                              
                              
                              19,427,028
                              
                              
                              
                              8,395,600OTHER
      INCOME (EXPENSES)Other
      income
                              
                              
                              14,881
                              
                              
                              
                              3,328
                              
                              
                              
                              18,933
                              
                              
                              
                              4,292Interest
      income
                              
                              
                              926
                              
                              
                              
                              1,492
                              
                              
                              
                              3,232
                              
                              
                              
                              2,471Interest
      expense
                              
                              
                              (135,638
                              )
                              
                              
                              (175,340
                              )
                              
                              
                              (405,174
                              )
                              
                              
                              (589,256
                              )Other
      expenses
                              
                              
                              (1,469
                              )
                              
                              
                              (83,993
                              )
                              
                              
                              (1,469
                              )
                              
                              
                              (183,767
                              )Total
      Other Expenses, net
                              
                              
                              (121,300
                              )
                              
                              
                              (254,513
                              )
                              
                              
                              (384,477
                              )
                              
                              
                              (766,260
                              )INCOME
      FROM OPERATIONS BEFORE TAXES
                              
                              
                              7,474,462
                              
                              
                              
                              2,962,226
                              
                              
                              
                              19,042,551
                              
                              
                              
                              7,629,340PROVISION
      FOR INCOME TAXES
                              
                              
                              (1,979,290
                              )
                              
                              
                              (730,493
                              )
                              
                              
                              (4,925,385
                              )
                              
                              
                              (1,873,422
                              )NET
      INCOME
                              
                              $
                              5,495,172
                              
                              
                              $
                              2,231,733
                              
                              
                              $
                              14,117,166
                              
                              
                              $
                              5,755,918Less:
      net income attribute to the noncontrolling interest
                              
                              
                              (247,601
                              )
                              
                              
                              -
                              
                              
                              
                              (616,684
                              )
                              
                              
                              -NET
      INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS
                              
                              $
                              5,247,571
                              
                              
                              $
                              2,231,733
                              
                              
                              $
                              13,500,482
                              
                              
                              $
                              5,755,918OTHER
      COMPREHENSIVE INCOMETotal
      foreign currency translation gains
                              
                              
                              895,091
                              
                              
                              
                              34,589
                              
                              
                              
                              1,348,265
                              
                              
                              
                              72,366Less:
      foreign currency translation gains attributable to noncontrolling
      interest
                              
                              
                              (19,388
                              )
                              
                              
                              -
                              
                              
                              
                              (28,543
                              )
                              
                              
                              -Foreign
      currency translation gains attributable to common
    stockholders
                              
                              
                              875,703
                              
                              
                              
                              34,589
                              
                              
                              
                              1,319,722
                              
                              
                              
                              72,366COMPREHENSIVE
      INCOME
                              
                              $
                              6,123,274
                              
                              
                              $
                              2,266,322
                              
                              
                              $
                              14,820,204
                              
                              
                              $
                              5,828,284
  24
  Three
Months and Nine Months Ended September 30, 2010 Compared to Three Months and
Nine Months Ended September 30, 2009
 
 Net
SalesNet
sales for the three months ended September 30, 2010 increased to $169.7 million,
an increase of $76.0 million, or 81.1%, from net sales of $93.7 million for the
three months ended September 30, 2009. Net sales for the nine months ended
September 30, 2010 increased to $338.1 million, an increase of $146.0 million,
or 76%, from net sales of $ 192.0 million for the nine months ended
September 30, 2009.
 
 The
increase in net sales was primarily driven by the increased amount of products
sold and by the increased price of gold (average gold prices have increased from
RMB244/gram at the end of 2009 to RMB282/gram at the end of September 2010 at
the Shanghai Gold Exchange). The increase in revenue was mainly attributable to
the following factors: (1) for the three months ended September 30, 2009, the
Company was still privately held and had relatively lower brand name recognition
than it now has, and the Company’s market coverage was smaller than is currently
the case; (2) for the three months ended September 30, 2010, the Company was a
public company in the US and has experienced greater brand recognition,
which, in turn, has helped to attract more customers; (3) the Company’s
increased working capital has allowed it to take advantage of the surge in
demand for the items it manufactures; (4) the Company has expanded its business
operations into additional geographic areas which, in turn, has broadened sales
opportunities. The Company has successfully gained market share in new
geographical areas by securing major, regional jewelry wholesalers and
distributors, such as Shenyang Xinglong Jewelry; Fuzhou Xingfulong Jewelry and
Hangzhou Junhao Jewelry. (5) The Company has also made efforts to grow in the
rapidly expanding 24K gold gift and ornament markets. The Company has worked
closely with China Jewelry Institute to customize design gold gift products for
both Corporate and Individual clients. The products have been received at
national industry show held in Shenzhen.
 
 Cost of
SalesCost of sales for the
three months ended September 30, 2010 increased to $160.8 million, an
increase of $70.9 million, or 79.1% from $89.8 million for the same period in
2009. The increase was primarily due to the increase in the cost of gold and the
increased amount of gold required to fulfill our increased sales volume for the
three months ended September 30, 2010.
 
 Cost of
sales for nine months ended September 30, 2010 increased to $315.6 million,
an increase of $134 million, or 73.8% from $181.6 million for the same period in
2009. The increase was primarily due to the increase in the cost of gold and the
increased amount of gold required to fulfill our increased sales volume for the
nine months ended September 30, 2010.
 
 Gross
ProfitGross profit for the
three months ended September 30, 2010 increased to $8.6 million, an increase of
$5.0 million, or 138%, from $3.6 million for the same period in 2009.
Accordingly, gross margin for the three months ended September 30, 2010 was
5.1%, compared to 3.9% for the same period in 2009. The increase in our gross
profit and the increase in our gross margin were primarily due to the increase
in production and sales volume of gold, as well as an increase in processing
fees. In addition, since 2009, we have continued to focus on the production of
gold jewelry rather than other jewelry products, and to focus on production of
our proprietary brands rather than custom production. Our increased gross margin
reflects this shift in focus.
 
 Gross
profit for the nine months ended September 30, 2010 increased to $21.7 million,
an increase of $12.1 million, or 125.5%, from $9.6 million for the same period
in 2009. Accordingly, gross margin for the nine months ended September 30, 2010
was 6.4%, compared to 5.0% for the same period in 2009. The increase in our
gross profit and the increase in our gross margin were primarily due to the
increase in production and sales volume of gold, as well as an increase in
processing fees. In addition, since 2009, we have continued to focus on the
production of gold jewelry rather than other jewelry products, and to focus on
production of our proprietary brands rather than custom production. Our
increased gross margin reflects this shift in focus.
 
 25
 ExpensesTotal
operating expenses for the three months ended September 30, 2010 were $1.04
million, an increase of $0.63 million or 151.3%, from $0.41 million for
the same period in 2009. Total operating expenses for the nine months ended
September 30, 2010 were $2.23 million, an increase of $1.02 million or 84.6%,
from $1.21 million for the same period in 2009.
 
 The
increase in operating expenses was primarily due to increased administrative
expenses associated with operating a public company in the United States,
such as increased travel and consulting expenses related to the Company’s recent
listing on the NASDAQ Capital Market Exchange. As further consequence of
listing, the Company has incurred additional legal and accounting expenses, as
well as listing fees to NASDAQ. For the same period in 2009, the Company was
still a privately held company and no such expenses were incurred.
 
 Interest
expenses were $0.135 million for three months ended September 30, 2010, a
decrease of $0.04 million or 22.6%, from $0.175 million for same period
in 2009. The decrease in interest expense was primarily a result of a
decrease of average loan balance for the three months ended September 30,
2010. Interest expenses were $0.405 million for nine months ended September
30, 2010, a decrease of $0.184 million or 31.2%, from $0.589 million for same
period in 2009. The decrease in interest expense was primarily a result of
a decrease of average loan balance for the three months ended September 30,
2010.
 
 Provision
for income tax expense was approximately $1.98 million for three months ended
September 30, 2010, an increase of $1.25 million, or 171%, from approximately
$0.73 million for the same period in 2009. The increase was primarily due to our
increase in gross profit. Provision for income tax expense was
approximately $4.93 million for nine months ended September 30, 2010, an
increase of $3.05 million, or 162.9%, from approximately $1.87 million for the
same period in 2009. The increase was primarily due to our increase in gross
profit.
 
 Net
IncomeNet
income attributable to common stockholders increased to $5.25 million for the
three months ended September 30, 2010 from $2.23 million for the same period in
2009, an increase of $3.02 million, or 135.1%. The increase in our net
profit was primarily due to the increase in production and sales volume of
gold.
 Net
income attributable to common stockholders increased to $13.5 million for the
nine months ended September 30, 2010 from $5.76 million for the same period in
2009, an increase of $7.74 million, or 134.5%. The increase in our net
profit was primarily due to the increase in production and sales volume of gold.
In addition, the Company is able to realize certain economies of scale in its
production processes as the volume of its business increases.
 
 Net cash provided
by(used in)operating
activities.Net cash used in operating activities was $87,365
for the nine months ended September 30, 2010, compared to net cash provided
by operating activities of $3.1 million for the same period in 2009. This
decrease was primarily because we had purchased a significant amount of gold
during the nine month period ended September 30, 2010 to meet high demands for
our product. Compared with our inventory balance as of December 31, 2009,
our inventory increased by $17.9 million by the end of September 30,
2010.
 
 Analysis and
Expectations.  Our net cash from operating activities can
fluctuate significantly due to changes in our inventories. Other factors that
may vary significantly include our accounts payable, purchases of gold and
income taxes. Looking forward, we expect the net cash that we generate from
operating activities to continue to fluctuate as our inventories, receivables,
accounts payables and the other factors described above change with increased
production and the purchase of larger 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.
 
 26
 Net cash used in
investing activities.Net cash used in investing activities amounted
to $24,862 for the nine months ended September 30, 2010, compared to net
cash used in investing activities of $5,979 for the nine months ended
September 30, 2009. The slight increase in net cash used in investing activities
was as a result of a small increase in the purchase of property and
equipment.
 
 Analysis and
Expectations.  Our net cash used in investing activities did
not fluctuate significantly in the comparable periods due to only small
increases in the amount of equipment we purchased. We do not expect that cash
used in investing activities will increase significantly in the short term
future.
 
 Net cash provided
byfinancing activities.Net cash provided by financing activities was $1.46 million for the nine
months ended September 30, 2010, compared to net cash provided by financing
activities of $3.9 million for the nine months ended September 30, 2009. The
change reflects our repayment of bank loans and the release of a bank loan
guarantee, as well as new capital contributions from three institutional
investors and one individual investor in September 2009. We expect that cash
generated from financing activities may increase significantly as a result of
additional financing being obtained.
 
 
 Off-Balance
Sheet Arrangements
 
 We have
no material off-balance sheet transactions.
 
 
 Liquidity
and Capital Resources
 
 At
September 30, 2010, we had $9.48 million in cash and cash equivalents. We have
historically financed our operations with cash flow generated from operations,
as well as through borrowing of short-term bank loans, generally with a term of
one year. At September 30, 2010, we had outstanding short-term loans with banks
in an aggregate amount of $8.97 million with a weighted average interest rate of
5.02%. Specifically, at September 30, 2010, we had a loan in the amount of
$5,978,037 from Shanghai Pudong Development Bank due in May, 2011 and a loan in
the amount of $2,989,018 from Xinye bank due on December 14, 2010. Our loans
from Shanghai Pudong Development Bank were paid off in full and then refinanced
in the same principal amounts and the same terms. Our loans are secured by
buildings, plant and machinery and/or guaranteed by non-affiliates. The amounts
outstanding under these bank loans are presented in our financial statements as
“short term loans.” In China, it is customary practice for banks and borrowers
to negotiate roll-overs or renewals of short-term borrowings on an on-going
basis shortly before they mature.
 
 Although
we have renewed our short-term borrowings in the past, it is not guaranteed that
we will be able to renew these loans in the future. If we are unable to obtain
renewals of these loans or sufficient alternative funding on reasonable terms
from banks or other parties, we will have to repay these borrowings with the
cash on our balance sheet or cash generated by our operations. We cannot assure
you that our business will generate sufficient cash flow from operations to
repay these borrowing or that additional debt or equity financing will be
available on acceptable terms, or at all. Failure to maintain financing
arrangements on acceptable terms would have a material adverse effect on our
business, results of operations and financial condition.
 
 27
 Our
business is dependent upon consumer demand for gold products which may be
affected by economic changes in China. In response to the recent global economic
downturn, the Chinese government has taken preemptive actions to stimulate the
PRC economy, implementing a series of policies aimed at boosting domestic
consumer spending. Management believes that these government policies have
increased the demand for 24K gold products. Accordingly, we have shifted our
production from other jewelry manufacturing to focus exclusively on 24K gold
jewelry design and manufacturing to meet this demand. We expect this increased
demand to continue over the next 12 months, and our long term strategy is now
focused on the design, production and sales of 24K gold jewelry and Chinese
ornaments.
 
 We
believe that our current cash and cash flow from operations will be sufficient
to meet our anticipated cash needs, including working capital, for the next 12
months. We may, however, require additional cash due to changing business
conditions or other 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 Chinese
government’s social insurance funds, including pension insurance, medical
insurance, unemployment insurance, job injuries insurance, and maternity
insurance, in accordance with relevant regulations. We expect that the amount of
our contribution to the government’s social insurance funds will increase in the
future as we expand our workforce and operations and commence contributions to
an employee housing fund.
 
 The
ability of Vogue-Show to pay dividends may be restricted due to the PRC’s
foreign exchange control policies and our availability of cash. A majority of
our revenue being earned and currency received is denominated in RMB. We may be
unable to distribute any dividends outside of China due to PRC exchange control
regulations that restrict our ability to convert RMB into U.S. Dollars.
Accordingly, Vogue-Show’s funds may not be readily available to us to satisfy
obligations which have been incurred outside the PRC, which could adversely
affect our business and prospects or our ability to meet our cash
obligations.
 
 
 CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
 
 Management’s
discussion and analysis of results of operations and financial condition are
based upon our consolidated financial statements. These statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America. These principles require management to make certain
estimates and assumptions that affect amounts reported and disclosed in the
financial statements and related notes. See Note 2 to our consolidated financial
statements, “Summary of Significant Accounting Policies.” We believe that the
following paragraphs reflect our most critical accounting policies that
currently affect our financial condition and results of operations.
 
 28
 Principles
of Consolidation
 
 The
accompanying consolidated financial statements include the financial statements
of Kingold, its wholly owned subsidiaries, Dragon Lead and Wuhan Vogue-Show and
Wuhan Kingold, its 95.83% contractually controlled affiliate. The noncontrolling
interests represent the minority stockholders’ 4.17% proportionate share of the
results of Wuhan Kingold. All significant inter-company balances and
transactions have been eliminated in consolidation.
 
 Inventories
 
 Inventories
consisting of finished goods, materials on hand, packaging materials and raw
materials are stated at the lower of cost or market value. The value of finished
goods is comprised of direct materials, direct labor and an appropriate
proportion of overhead. We continually evaluate the composition of our
inventories assessing the turnover of our products. To minimize the adverse
effect of fluctuating gold prices, the Company locks in the price it pays for
gold only when customer places an order and when the customer has advanced a
down payment equal to 20-30% of the overall order. Accordingly, we do not make
any reserve for inventory obsolescence.
 
 Land
Use Rights
 
 Under PRC
law, all land in the PRC is owned by the government and cannot be sold to an
individual or company. The government grants individuals and companies the right
to use parcels of land for specified periods of time. These land use rights are
sometimes referred to informally as “ownership.” Land use rights are stated at
cost less accumulated amortization. Amortization is provided over the respective
useful lives, using the straight-line method. Estimated useful lives typically
range from 30 to 40 years, and are determined in the connection with the term of
the land use right.
 
 Property,
Plant and Equipment
 
 Plant and
equipment are carried at cost less accumulated depreciation. Depreciation is
provided over the assets’ estimated useful lives using the straight-line method
while taking into account the assets’ estimated residual value. The estimated
useful lives and residual values are as follows:
 Estimated Useful LifeBuildings
                    30
      yearsPlant
      and machinery
                    15
      yearsMotor
      vehicles
                    10
      yearsOffice
      furniture and electronic equipment
                    5-10
      years
  29
 The cost
and related accumulated depreciation of assets sold or otherwise retired are
eliminated from the account and any gain or loss is included in the statement of
income for that period. The cost of maintenance and repairs is charged to income
as incurred, whereas material renewals and betterments are
capitalized.
 
 
 Accounting
for the Impairment of Long-Lived Assets
 
 The
long-lived assets held and used by us are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of such
assets may not be fully recoverable. It is possible that these assets could
become impaired as a result of technology or other industry changes. The
recoverability value of an asset to be held and used is determined by comparing
the carrying amount of such asset against the future net undiscounted cash flows
to be generated by the asset. Our principal long-lived assets are our
property, plant and equipment assets.
 If the
value of such an asset is determined to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the asset
exceeds the fair value of the asset. Assets to be disposed of are reported at
the lower of the carrying amount or the fair value less disposition
costs.
 We did
not recognize any impairment loss in 2008, 2009 or the six-month period ended
June 30, 2010. Competitive pricing pressure and changes in interest rates, could
materially and adversely affect our estimates of future net cash flows to be
generated by our long-lived assets, and this could result in future impairment
losses.
 
 Revenue
Recognition
 
 Our
revenue is derived from the sales price of goods sold and fees for services
provided. We recognize revenue for goods sold when they are delivered to the
customer. We recognize revenue for services provided when the services have been
performed, the customers have approved the completion of services, invoices have
been issued and collectability is deemed probable. Management has not made an
allowance for estimated sales returns because they are considered immaterial
when viewed in light of our overall revenue and historical experience. In
recognizing revenue, we assume that the currency we receive from customers is
valid legal tender in the PRC, our electronic record-keeping system has not been
tampered with nor malfunctioned, and that we have not inadvertently sold
significant amounts of defective goods. If any of these assumptions were proven
to be incorrect, we could have to restate our revenue. Historically, as of the
date of this Report, none of these assumptions have proven to be
incorrect.
 
 30
 Item
      3.
              Quantitative
      and Qualitative Disclosure about Market
Risk
  Not
required for Smaller Reporting Companies
 
 Item
      4.
              Controls
      and Procedures
  Evaluation
of Effectiveness of Disclosure Controls and Procedures
 
 We
conducted an evaluation, under the supervision and participation of management,
including our chief executive officer and our chief financial officer, of the
effectiveness of our “disclosure controls and procedures” (as defined in Rule
13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended), as
of September 30, 2010.
 
 Management
recognizes that a control system, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the objectives of the
control system are met. Management necessarily applied its judgment in assessing
the benefits of controls relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
within the company have been detected. The design of any system of controls is
based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions, regardless of how remote.
Because of the inherent limitations in a control system, misstatements due to
error or fraud may occur and may not be detected.
 
 Based on
their evaluation, our chief executive officer and chief financial officer
concluded that our disclosure controls and procedures were effective as of
September 30, 2010.
 
 Changes in Internal Control over
Financial Reporting
 
 There
have been no changes in our internal control over financial reporting (as
defined in Exchange Act Rule 13a-15(f)) during the fiscal quarter ended
September 30, 2010, that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
 
 PART
II – OTHER INFORMATION
  Item
      1.
              Legal
      Proceedings.
  None
  Item
      1A.
              Risk
      Factors.
  Not
Applicable.
  Item
      2.
              Unregistered
      Sales of Equity Securities and Use of
Proceeds.
  None
  31
  Item
      3.
              Defaults
      Upon Senior Securities.
  None
  Item
      4.
              Submission
      of Matters to a Vote of Security
Holders.
  None
  Item
      5.
              Other
      Information.
  Not
Applicable.
  Item
      6.
              Exhibits.
  Exhibit Number
                                    
                                    Description31.1
                                    
                                    Certification
      of Principal Executive Officer required under Section 302 of the
      Sarbanes-Oxley Act of 2002 - Rule 13a-14(a)/15d-14(a)31.2
                                    
                                    Certification
      of Principal Financial Officer required under Section 302 of the
      Sarbanes-Oxley Act of 2002 - Rule 13a-14(a)/15d-14(a)32.1
                                    
                                    Principal
      Executive Officer Certification pursuant to 18 USC Section 1350 as Adopted
      Pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
                                    
                                    Principal
      Financial Officer Certification pursuant to 18 USC Section 1350 as Adopted
      Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 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 12, 2010
 
 KINGOLD
      JEWELRY, INC.By:
              /s/
      Zhihong
      JiaZhihong
      JiaChairman,
      Chief Executive Officer and Principal Executive
  OfficerBy:
              /s/
      Bin
      LiuBin
      LiuChief
      Financial Officer and Principal Accounting
  Officer
  32