KANDI TECHNOLOGIES GROUP, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND
COMPREHENSIVE
INCOME
(LOSS)
(UNAUDITED)
|
|
For
Three Months Ended June30,
|
|
|
For
Six Months Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
REVENUE, NET
|
$
|
32,960,055
|
|
$
|
12,157,827
|
|
$
|
73,131,359
|
|
$
|
26,820,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OF GOODS SOLD
|
|
(25,738,967
|
)
|
|
(9,350,206
|
)
|
|
(61,049,862
|
)
|
|
(20,640,696
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
7,221,088
|
|
|
2,807,621
|
|
|
12,081,497
|
|
|
6,179,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
(971,673
|
)
|
|
(672,491
|
)
|
|
(2,143,930
|
)
|
|
(1,362,156
|
)
|
Selling expenses
|
|
(435,894
|
)
|
|
(71,420
|
)
|
|
(507,151
|
)
|
|
(161,034
|
)
|
General and administrative
|
|
(3,173,178
|
)
|
|
(1,332,279
|
)
|
|
(9,643,944
|
)
|
|
(2,025,243
|
)
|
Total operating expenses
|
|
(4,580,745
|
)
|
|
(2,076,190
|
)
|
|
(12,295,025
|
)
|
|
(3,548,433
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) FROM CONTINUING OPERATIONS
|
|
2,640,343
|
|
|
731,431
|
|
|
(213,528
|
)
|
|
2,631,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest (expense) income, net
|
|
(214,995
|
)
|
|
(617,601
|
)
|
|
(686,175
|
)
|
|
(1,287,810
|
)
|
Change in fair value of financial
instruments
|
|
8,941,569
|
|
|
(1,082,735
|
)
|
|
(3,372,602
|
)
|
|
(92,339
|
)
|
Government grants
|
|
153,700
|
|
|
49,807
|
|
|
153,700
|
|
|
49,807
|
|
Share of (loss) in associated companies
|
|
(77,187
|
)
|
|
(15,517
|
)
|
|
(92,992
|
)
|
|
(29,540
|
)
|
Share of (loss) profit after tax of JV
|
|
(9,526
|
)
|
|
(10,376
|
)
|
|
1,718,830
|
|
|
(10,376
|
)
|
Other income, net
|
|
60,247
|
|
|
54,148
|
|
|
119,827
|
|
|
176,513
|
|
Total other income (expense), net
|
|
8,853,808
|
|
|
(1,622,274
|
)
|
|
(2,159,412
|
)
|
|
(1,193,745
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES
|
|
11,494,151
|
|
|
(890,843
|
)
|
|
(2,372,940
|
)
|
|
1,437,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION FOR INCOME TAXES
|
|
(337,066
|
)
|
|
(153,457
|
)
|
|
(556,135
|
)
|
|
(244,901
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
11,157,085
|
|
|
(1,044,300
|
)
|
|
(2,929,075
|
)
|
|
1,192,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
(717,476
|
)
|
|
724,430
|
|
|
(1,928,592
|
)
|
|
1,309,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME (LOSS)
|
$
|
10,439,609
|
|
$
|
(319,870
|
)
|
$
|
(4,857,667
|
)
|
$
|
2,501,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS (LOSS) PER SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.27
|
|
$
|
(0.03
|
)
|
$
|
(0.07
|
)
|
$
|
0.04
|
|
Diluted
|
$
|
0.27
|
|
$
|
(0.03
|
)
|
$
|
(0.07
|
)
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER OF COMMON SHARES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
41,142,346
|
|
|
32,546,877
|
|
|
40,364,986
|
|
|
32,427,538
|
|
Diluted
|
|
41,254,507
|
|
|
32,546,877
|
|
|
40,364,986
|
|
|
32,676,702
|
|
See accompanying notes to condensed consolidated financial
statements
4
KANDI TECHNOLOGIES GROUP, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
Six Months Ended June 30
|
|
|
|
2014
|
|
|
2013
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net (loss) income
|
$
|
(2,929,075
|
)
|
$
|
1,192,573
|
|
Adjustments to reconcile net (loss)
income to net cash (used in) provided by operating activities:
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
2,764,984
|
|
|
4,245,026
|
|
Deferred taxes
|
|
924,449
|
|
|
337,149
|
|
Change of derivative
instruments fair value
|
|
3,372,602
|
|
|
92,339
|
|
Loss in investment in associated
company
|
|
96,364
|
|
|
29,540
|
|
Share of (profit) loss
after tax of JV
|
|
(1,718,830
|
)
|
|
10,376
|
|
|
|
|
|
|
|
|
Changes in operating
assets and liabilities:
|
|
|
|
|
|
|
(Increase) Decrease In:
|
|
|
|
|
|
|
Accounts receivable
|
|
11,955,855
|
|
|
9,073,693
|
|
Inventories
|
|
(8,544,033
|
)
|
|
(9,822,727
|
)
|
Other receivables and
prepaid expenses
|
|
(231,945
|
)
|
|
13,044
|
|
Due from employees
|
|
(2,390
|
)
|
|
8,421
|
|
Prepayments and prepaid
expenses
|
|
(44,194,377
|
)
|
|
(27,114,014
|
)
|
Amount due from JV
|
|
(31,680,191
|
)
|
|
-
|
|
|
|
|
|
|
|
|
Increase (Decrease) In:
|
|
|
|
|
|
|
Accounts payable
|
|
31,083,370
|
|
|
1,787,019
|
|
Other payables and accrued liabilities
|
|
2,344,763
|
|
|
475,451
|
|
Customer deposits
|
|
107,199
|
|
|
(246,983
|
)
|
Due to related party
|
|
-
|
|
|
4,001,319
|
|
Income tax payable
|
|
(533,133
|
)
|
|
(342,863
|
)
|
Net cash (used in) operating
activities
|
$
|
(37,184,388
|
)
|
$
|
(16,260,637
|
)
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
Purchases of plant and
equipment
|
|
(308,838
|
)
|
|
(54,451
|
)
|
Purchases of land use rights
|
|
(1,669,648
|
)
|
|
-
|
|
Purchase of construction in
progress
|
|
(23,046
|
)
|
|
(53,144
|
)
|
Issuance of notes receivable
|
|
(21,468,326
|
)
|
|
(1,964,278
|
)
|
Repayments of notes
receivable
|
|
26,020,234
|
|
|
-
|
|
Investment in Joint Venture Company
|
|
-
|
|
|
(80,026,377
|
)
|
Deposit for disposal of
subsidiary
|
|
-
|
|
|
60,019,783
|
|
Deposit for acquisition
|
|
-
|
|
|
(14,188,677
|
)
|
Net cash provided by
(used in) investing activities
|
$
|
2,550,376
|
|
$
|
(36,267,144
|
)
|
See accompanying notes to condensed consolidated financial
statements
5
KANDI TECHNOLOGIES GROUP, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
Six Months Ended June 30
|
|
|
|
2014
|
|
|
2013
|
|
CASH FLOWS FROM FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
Restricted cash
|
$
|
1,628
|
|
$
|
4,799,980
|
|
Proceeds from
short-term bank loans
|
|
16,764,023
|
|
|
22,407,385
|
|
Repayments of short-term bank loans
|
|
(16,764,023
|
)
|
|
(22,407,385
|
)
|
Proceeds from notes
payable
|
|
13,020,600
|
|
|
68,184,073
|
|
Repayments of notes payable
|
|
(16,601,265
|
)
|
|
(25,608,441
|
)
|
Common stock and
warrants issued
|
|
11,067,734
|
|
|
-
|
|
Warrant exercise
|
|
22,447,914
|
|
|
3,848,134
|
|
Option exercise &
other financing
|
|
4,405,697
|
|
|
38,100
|
|
Net cash provided by financing
activities
|
|
34,342,308
|
|
|
51,261,846
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND
CASH
EQUIVALENTS
|
|
(291,704
|
)
|
|
(1,265,935
|
)
|
Effect of exchange rate
changes on cash
|
|
(1,183,045
|
)
|
|
(786,949
|
)
|
Cash and cash equivalents at beginning of
period
|
|
12,762,369
|
|
|
12,135,096
|
|
CASH AND CASH
EQUIVALENTS AT END OF
PERIOD
|
$
|
11,287,620
|
|
$
|
10,082,212
|
|
|
|
|
|
|
|
|
SUPPLEMENTARY CASH FLOW
INFORMATION
|
|
|
|
|
|
|
Income taxes paid
|
$
|
1,145,600
|
|
$
|
587,765
|
|
Interest paid
|
$
|
1,170,556
|
|
$
|
1,964,649
|
|
See accompanying notes to condensed consolidated financial
statements
6
KANDI TECHNOLOGIES GROUP, INC.
|
AND SUBSIDIARIES
|
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(UNAUDITED)
|
NOTE 1 - ORGANIZATION AND PRINCIPAL ACTIVITIES
Kandi Technologies Group, Inc. (Kandi Technologies) was
incorporated under the laws of the State of Delaware on March 31, 2004. Kandi
Technologies changed its name from Stone Mountain Resources, Inc. to Kandi
Technologies, Corp. on August 13, 2007. On December 21, 2012, Kandi Technologies
changed its name to Kandi Technologies Group, Inc. As used herein, the term the
Company means Kandi Technologies and its operating subsidiaries, as described
below.
Headquartered in the Jinhua city, Zhejiang Province, China, the
Company is one of Chinas leading producers and manufacturers of electrical
vehicles, all-terrain vehicles, go-karts, specialized utility vehicles and a
variety of other specialty vehicles for sale in the Peoples Republic of China
(the PRC) and global markets. The Company conducts its primary business
operations through its wholly-owned subsidiary, Zhejiang Kandi Vehicles Co.,
Ltd. (Kandi Vehicles), and the partial and wholly-owned subsidiaries of Kandi
Vehicles.
The Companys organizational chart is as follows:
* The box with dotted-line border represents the entity that
has ceased operation, pending dissolution.
7
KANDI TECHNOLOGIES GROUP, INC.
|
AND SUBSIDIARIES
|
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(UNAUDITED)
|
Operating Subsidiaries:
Pursuant to relevant agreements executed in January 2011, Kandi
Vehicles is entitled to 100% of the economic benefits, voting rights and
residual interests (100% profits and loss absorption rate) of Jinhua Kandi New
Energy Vehicles Co., Ltd. (Kandi New Energy), a company in which Kandi
Vehicles has a 50% interest. Kandi New Energy was established in accordance with
relevant Chinese government regulations on automobile manufacturing enterprises,
which prohibit foreign ownership of greater than 50%.Kandi New Energy currently
holds vehicle production rights (license) on manufacturing Kandi brand electric
utility vehicles (Special-purpose Vehicles) and production rights (license) on
manufacturing battery packs used in Kandi brand EVs. Kandi New Energy supplies
battery packs for Kandi brand electrical vehicles (EVs).
Jinhua Three Parties New Energy Vehicles Service Co., Ltd.
(Jinhua Service) was formed as a joint venture, by and among our wholly-owned
subsidiary, Kandi Vehicles, the State Grid Power Corporation and Tianneng Power
International. The Company, indirectly through Kandi Vehicles, has a 30%
ownership interest in Jinhua Service. As of June 30, 2014, Jinhua Service ceased
its operations and will be dissolved. Jinhua Services was established in order
to public charging stations for lead-acid batteries for EVs in Jinhua city.
Currently, most of EV customers in Jinhua have the ability to charge their EVs
by themselves. Since self-charging is more cost-effective for customers and most
of its customers have switched to self-charging, Jinhua Service ceased its
operations and will be dissolved.
In April 2012, pursuant to a share exchange agreement, the
Company acquired 100% of Yongkang Scrou Electric Co, Ltd. (Yongkang Scrou), a
manufacturer of automobile and electric vehicle parts. Yongkang Scrou currently
manufactures and sells EV drive motors, EV controllers, air conditioners and
other electrical products to the JV Company.
In March 2013, pursuant to a joint venture agreement (the JV
Agreement) entered into between Kandi Vehicles and Shanghai Maple Guorun
Automobile Co., Ltd. (Shanghai Guorun), a 99%-owned subsidiary of Geely
Automobile Holdings Ltd. (Geely), the parties established Zhejiang Kandi
Electric Vehicles Co., Ltd. (the JV Company) to develop, manufacture and sell
EVs and related auto parts. Each of Kandi Vehicles and Shanghai Guorun has a 50%
ownership interest in the JV Company. In March 2014, the JV Company changed its
name to Kandi Electric Vehicles Group Co., Ltd. At present, the JV Company is a
holding company with products that are manufactured by its subsidiaries.
In March 2013, Kandi Vehicles formed Kandi Electric Vehicles
(Changxing) Co., Ltd. (Kandi Changxing) in the Changxing (National) Economic
and Technological Development Zone. Kandi Changxing is engaged in the production
of EVs. In fourth quarter of 2013, Kandi Vehicles entered into an ownership
transfer agreement with JV Company pursuant to which Kandi Vehicles transferred
100% of its ownership in Kandi Changxing to the JV Company. The Company,
indirectly through its 50% ownership interest in the JV Company, has a 50%
economic interest in Kandi Changxing.
In April 2013, Kandi Electric Vehicles (Wanning) Co., Ltd.
(Kandi Wanning) was formed in Wanning City of Hainan Province by Kandi
Vehicles and Kandi New Energy. Kandi Vehicles has a 90% ownership in Kandi
Wanning, and Kandi New Energy has the remaining 10% interest. However, by
contract, Kandi Vehicles is, effectively, entitled to 100% of the economic
benefits, voting rights and residual interests (100% profits and losses ) of
Kandi Wanning. Hainan Province is planned as an international tourism island by
the Chinese government and there is a high possibility that all non-EV vehicles
will be banned from use within the province. Therefore, the Company believes EV
business has a great potential for growth in Hainan province. To capture this
opportunity, the Company signed an agreement with Wanning city government and
invest a total of RMB 1 billion to develop a factory in Wanning with an annual production of 100,000 EV
products.
Currently, Kandi Wanning is planning to launch its trial production by 2015. According to the JV
Agreement, once it becomes fully operational, the entire equity interests of
Kandi Wanning will be transferred to the JV Company.
8
KANDI TECHNOLOGIES GROUP, INC.
|
AND SUBSIDIARIES
|
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(UNAUDITED)
|
In July 2013, Zhejiang ZuoZhongYou Electric Vehicle Service
Co., Ltd. (the Service Company) was formed. The Service Company is engaged in
various pure EV leasing business. The JV Company has a 19% ownership interest in
the Service Company. The Company, indirectly through its 50% ownership interest
in the JV Company, has a 9.5% economic interest in the Service Company.
In November 2013, Zhejiang Kandi Electric Vehicles Jinhua Co.,
Ltd. (Kandi Jinhua) was formed by the JV Company. The JV Company has 100%
ownership interest in Kandi Jinhua, and the Company, indirectly through its 50%
ownership interest in the JV Company, has a 50% economic interest in Kandi
Jinhua. According to the terms of the JV Agreement, except the JV Company and
its subsidiaries, Kandi Vehicle and its subsidiaries are not allowed to
manufacture pure EVs. However, Kandi New Energy holds the production rights
(license) on manufacturing of Special-purpose Vehicles. Therefore, it is
necessary to establish Kandi Jinhua, which is in charge of the Special-purpose
vehicle business and entitles to use Kandi New Energys Special-purpose Vehicle
production rights (license).
In November 2013, Zhejiang JiHeKang Electric Vehicle Sales Co.,
Ltd. (JiHeKang) was formed by the JV Company and is engaged in car sales
business. The JV Company has 100% ownership interest in JiHeKang, and the
Company, indirectly through its 50% ownership interest in the JV Company, has a
50% economic interest in JiHeKang.
In December 2013, the JV Company entered into an ownership
transfer agreement with Shanghai Guorun pursuant to which the JV Company
acquired 100% ownership of Kandi Electric Vehicles (Shanghai) Co., Ltd. (Kandi
Shanghai). As a result, Kandi Shanghai is a wholly-owned subsidiary of the JV
Company, and the Company, indirectly through its 50% ownership interest in the
JV Company, has a 50% economic interest in Kandi Shanghai. In January 2014,
Zhejiang Kandi Electric Vehicles Jiangsu Co., Ltd. (Kandi Jiangsu) was formed
by the JV Company. The JV Company has 100% ownership interest in Kandi Jiangsu,
and the Company, indirectly through its 50% ownership interest in the JV
Company, has a 50% economic interest in Kandi Jiangsu.
The Companys primary business operations are the design,
development, manufacturing and commercialization of EV products, all-terrain vehicles
(ATVs), go-karts, and other related specialized automobiles. As part of its
strategic objective to become a leader in EV products manufacturing and
related services, the Company has increased its focus on fuel efficient, pure EV
products with a particular emphasis on expanding its market share in China.
NOTE 2 LIQUIDITY
As of June 30, 2014, the Companys working capital surplus was
$28,708,114.
As of June 30, 2014, the amount of advances to suppliers was
$52,841,904, which included the advance of RMB 323 million or approximately
$52,454,650 for a prepayment by Kandi Wanning to an equipment supplier - Nanjing
Shangtong Auto Technologies Co., Ltd. (Nanjing Shangtong) for equipment
purchases. The equipment will be purchased and delivered according to the
construction schedule and development of Kandi Wanning. This advance will be
used to offset the equipment purchase price upon delivery.
As of June 30, 2014, the Company had credit lines from
commercial banks of $53,266,642, of which $33,778,846 was used as of June 30,
2014.
The Company believes that its cash flows generated internally
may not be sufficient to support the growth of future operations and to repay
short-term bank loans for the next twelve (12) months, if needed. However, the
Company believes its access to existing financing sources and established
relationships with PRC banks will enable it to meet its obligations and fund its
ongoing operations.
9
KANDI TECHNOLOGIES GROUP, INC.
|
AND SUBSIDIARIES
|
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(UNAUDITED)
|
The Company has historically financed its operations through
short-term commercial bank loans from PRC banks. The term of these loans is
typically for one year, and upon the payment of all outstanding principal and
interest in a particular loan, the banks have typically rolled over the loan for
an additional one-year terms, with adjustments made to the interest rate to
reflect prevailing market rates. The Company believes this situation has not
changed and that short-term bank loans will be available on normal trade terms
if needed.
On March 24, 2014, the Company raised approximately $11.05
million from the sale to two institutional investors of an aggregate of 606,000
shares of its common stock at a price of $18.24 per share. As part of the
transaction, the Company also issued to the investors warrants for the purchase
of up to 90,900 shares of common stock at an exercise price of $22.80 per share,
which warrants have a term of 18 months from the date of issuance.
NOTE 3 - BASIS OF PRESENTATION
The Company maintains its general ledger and journals with the
accrual method accounting for financial reporting purposes. The financial
statements and notes are representations of management. Accounting policies
adopted by the Company conform to generally accepted accounting principles in
the United States and have been consistently applied in the presentation of
financial statements.
The financial information included herein for the three-month
and six-month periods ended June 30, 2014 and 2013 is unaudited; however, such
information reflects all adjustments, consisting of normal recurring
adjustments, that are, in the opinion of management, necessary for a fair
presentation of the Companys condensed consolidated financial statements for
these interim periods
.
The results of operations for the three-month and six-month
periods ended June 30, 2014 are not necessarily indicative of the results
expected for the entire fiscal year ending December 31, 2014.
NOTE 4 PRINCIPLES OF CONSOLIDATION
|
The consolidated financial statements reflect the
accounts of the Company and its ownership interest in following
subsidiaries:
|
|
|
(i)
|
Continental Development Limited. (Continental) (a
wholly-owned subsidiary of the Company)
|
|
|
(ii)
|
Zhejiang Kandi Vehicles Co., Ltd. (Kandi Vehicles) (a
wholly-owned subsidiary of Continental)
|
|
|
(iii)
|
Jinhua Kandi New Energy Vehicles Co., Ltd. (Kandi New
Energy) (a 50% owned subsidiary of Kandi Vehicles. Pursuant to relevant
agreements executed in January 2011, Kandi Vehicles is entitled to 100% of
the economic benefits, voting rights and residual interests of Kandi New
Energy)
|
|
|
(iv)
|
Yongkang Scrou Electric. Co., Ltd (Yongkang Scrou) (a
wholly-owned subsidiary of Kandi Vehicles)
|
|
|
(v)
|
Kandi Electric Vehicles (Wanning) Co., Ltd. (Kandi
Wanning) (a subsidiary 10% owned by Kandi New Energy and 90% owned by
Kandi Vehicles)
|
|
|
|
All inter-company accounts and transactions have been
eliminated in consolidation.
|
|
|
|
Equity Method Investees
|
|
|
|
The consolidated net income also includes the Companys
proportionate share of the net income or loss of its equity method
investees.
|
|
|
(vi)
|
Zhejiang Kandi Electric Vehicles Co., Ltd. (the JV
Company) (a 50% owned subsidiary of Kandi
Vehicles)
|
10
KANDI TECHNOLOGIES GROUP, INC.
|
AND SUBSIDIARIES
|
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(UNAUDITED)
|
(vii)
|
Kandi Electric Vehicles (Changxing) Co., Ltd. (Kandi
Changxing) (a wholly-owned subsidiary of the JV Company). The Company,
indirectly through its 50% ownership interest in the JV Company, has a 50%
economic interest)
|
|
|
(viii)
|
Zhejiang Kandi Electric Vehicles Jinhua Co., Ltd. (Kandi
Jinhua) (a wholly-owned subsidiary of the JV Company. The Company,
indirectly through its 50% ownership interest in the JV Company, has a 50%
economic interest)
|
|
|
(ix)
|
Zhejiang JiHeKang Electric Vehicle Sales Co., Ltd.
(JiHeKang) (a wholly-owned subsidiary of the JV Company, The Company,
indirectly through its 50% ownership interest in the JV Company, has a 50%
economic interest)
|
|
|
(x)
|
Kandi Electric Vehicles (Shanghai) Co., Ltd. (Kandi
Shanghai) (a wholly-owned subsidiary of the JV Company, The Company,
indirectly through its 50% ownership interest in the JV Company, has a 50%
economic interest)
|
|
|
(xi)
|
Kandi Electric Vehicles Jiangsu Co., Ltd. (Kandi
Jiangsu) (a wholly-owned subsidiary of the JV Company, The Company,
indirectly through its 50% ownership interest in the JV Company, has a 50%
economic interest)
|
|
|
(xii)
|
Zhejiang ZuoZhongYou Electric Vehicle Service Co., Ltd.
(the Service Company) (a 19% owned subsidiary of the JV Company. The
Company, indirectly through its 50% ownership interest in the JV Company,
has a 9.5% economic interest)
|
|
|
(xiii)
|
Jinhua Three Parties New Energy Vehicles Service Co.,
Ltd. (Jinhua Service) (a 30% owned subsidiary of Kandi
Vehicles)
|
|
|
|
All intra-entity profits and losses with the Companys
equity method investees have been eliminated.
|
NOTE 5 USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements, and the reported amounts of
revenue and expenses during the reporting period. Management makes these
estimates using the best information available at the time the estimates are
made; however actual results when ultimately realized could differ from those
estimates.
NOTE 6 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Economic and Political Risks
The Companys operations are conducted in the PRC. As a result,
the Companys business, financial condition and results of operations may be
influenced by the political, economic and legal environments in the PRC, and by
the general state of the PRC economy. In addition, the Companys earnings are
subject to movements in foreign currency exchange rates when transactions are
denominated in Renminbi (RMB), which is the Companys functional currency.
Accordingly, the Companys operating results are affected by changes in the
exchange rate between the U.S. dollar and the RMB.
The Companys operations in the PRC are subject to special
considerations and significant risks not typically associated with companies in
North America and Western Europe. These include risks associated with, among
others, the political, economic and legal environment and foreign currency
exchange. The Companys performance may be adversely affected by changes in the political and
social conditions in the PRC, and by changes in governmental policies with
respect to laws and regulations, anti-inflationary measures, currency
conversion, remittances abroad, and rates and methods of taxation, among other
things.
11
KANDI TECHNOLOGIES GROUP, INC.
|
AND SUBSIDIARIES
|
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(UNAUDITED)
|
(b) Fair Value of Financial Instruments
ASC 820 establishes a three-tier fair value hierarchy, which
prioritizes the inputs used in measuring fair value. The hierarchy prioritizes
the inputs into three levels based on the extent to which inputs used in
measuring fair value are observable in the market.
These tiers include:
-
Level 1defined as observable inputs such as quoted prices in active
markets;
-
Level 2defined as inputs other than quoted prices in active markets that
are either directly or indirectly observable; and
-
Level 3defined as unobservable inputs in which little or no market data
exists, therefore requiring an entity to develop its own assumptions.
As of June 30, 2014, the Companys assets, measured at fair
value, on a recurring basis, subject to the disclosure requirements of ASC 820,
were as follows:
|
|
Fair Value
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
Measurements
|
|
|
Active Markets
|
|
|
Other
|
|
|
Significant
|
|
|
|
at Reporting
|
|
|
for Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
Date Using
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Carrying
|
|
|
|
|
|
|
|
|
|
|
|
|
Value as of
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30, 2014
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Cash and cash equivalents
|
$
|
11,287,620
|
|
$
|
11,287,620
|
|
|
-
|
|
|
-
|
|
Warrants
|
|
13,749,338
|
|
|
-
|
|
|
-
|
|
|
13,749,338
|
|
Cash and cash equivalents consist primarily of highly-rated
money market funds at a variety of well-known institutions with original
maturities of three months or less. Restricted cash represents time deposits on
account, some of which are used to secure short-term bank loans and notes
payable. The original cost of these assets approximates fair value due to their
short term maturity.
Warrants, which are accounted as liabilities, are treated as
derivative instruments, which will be measured at each reporting date for their
fair value using Level 3 inputs. Also see Note 6 (t).
12
KANDI TECHNOLOGIES GROUP, INC.
|
AND SUBSIDIARIES
|
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(UNAUDITED)
|
(c) Cash and Cash Equivalents
The Company considers highly-liquid investments purchased with
original maturities of three months or less to be cash equivalents.
Restricted cash, as of June 30, 2014 and December 31, 2013,
represented time deposits on account, some of which were used to secure
short-term bank loans and notes payable. As of June 30, 2014, the Companys
restricted cash was $0.
(d) Inventories
Inventories are stated at the lower of cost or net realizable
value (market value). The cost of raw materials is determined on the basis of
weighted average. The cost of finished goods is determined on the weighted
average basis and comprises direct materials, direct labor and an appropriate
proportion of overhead.
Net realizable value is based on estimated selling prices less
any further costs expected to be incurred for completion and selling expense.
Adjustments to reduce the cost of inventory to its net realizable value are
made, if required, for estimated excess, obsolescence, or impaired balances.
(e) Accounts Receivable
Accounts receivable are recognized and carried at net
realizable value. An allowance for doubtful accounts is recorded in periods in
which the Company determines a loss is probable, based on its assessment of
specific factors, such as troubled collections, historical experience, accounts
aging, ongoing business relations and other factors. Accounts are written off
after an exhaustive collection effort. If accounts receivable are to be provided
for, or written off, they are recognized in the consolidated statement of
operations within the operating expenses line item. As of June 30, 2014 and
December 31, 2013, the Company had no allowance for doubtful accounts, as per
the managements judgment based on their best knowledge.
As of June 30, 2014 and December 31, 2013, the credit terms
with the Companys customers were typically 90 to 120 days after delivery.
(f) Note receivable
Notes receivable represent short-term loans to third parties
with the maximum term of one year. Interest income will be recognized according
to each agreement between a borrower and the Company on an accrual basis. If
notes receivable are paid back, or written off, that transaction will be
recognized in the relevant year if the loan default is probable, reasonably
assured and the loss can be reasonably estimated. The Company will recognize
income if the written-off loan is recovered at a future date. In case of any
foreclosure proceedings or legal actions being taken, the Company will provide
an accrual for the related foreclosure expenses and related litigation expenses.
(g) Prepayments
Prepayments represent cash paid in advance to suppliers. As of
June 30, 2014, prepayments included advances to raw material suppliers, mold
manufacturers, and suppliers of equipment.
Advances for raw materials purchases typically are settled
within two months by the Companys receipt of raw materials. Prepayment will be
offset against purchase amount after equipment is delivered.
13
KANDI TECHNOLOGIES GROUP, INC.
|
AND SUBSIDIARIES
|
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(UNAUDITED)
|
(h) 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. Leasehold improvements are amortized over the
life of the asset or the term of the lease, whichever is shorter. Estimated
useful lives are as follows:
Buildings
|
30 years
|
Machinery and equipment
|
10 years
|
Office equipment
|
5 years
|
Motor vehicles
|
5 years
|
Molds
|
5 years
|
The cost and related accumulated depreciation of assets sold or
otherwise retired are eliminated from the accounts and any gain or loss is
included in the statement of income. The cost of maintenance and repairs is
charged to expense as incurred, whereas significant renewals and betterments are
capitalized.
(i) Construction in Progress
Construction in progress represents the direct costs of
construction, the acquisition cost of buildings or machinery and design fees.
Capitalization of these costs ceases, and the construction in progress is
transferred to plant and equipment, when substantially all the activities
necessary to prepare the assets for their intended use are completed. No
depreciation is provided until the assets are completed and ready for their
intended use.
(j) Land Use Rights
According to Chinese laws, land in the PRC is owned by the
government and land ownership rights cannot be sold to an individual or to a
private company. However, the government grants the user a land use right to
use the land. The land use rights granted to the Company are being amortized
using the straight-line method over the term of fifty years.
(k) Accounting for the Impairment of Long-Lived Assets
The Company periodically evaluates the carrying value of
long-lived assets to be held and used, including intangible assets subject to
amortization, when events and circumstances warrant such a review, pursuant to
the guidelines established in Statement of Financial Accounting Standards
(SFAS) No. 144 (now known as ASC 360). The carrying value of a long-lived
asset is considered impaired when the anticipated undiscounted cash flow from
such asset is separately identifiable and is less than its carrying value. In
that event, a loss is recognized based on the amount by which the carrying value
exceeds the fair market value of the long-lived asset. Fair market value is
determined primarily using the anticipated cash flows discounted at a rate
commensurate with the risk involved. Losses on long-lived assets to be disposed
of are determined in a similar manner, except that fair market values are
reduced for the cost to dispose.
During the reporting period, no impairment loss was recognized.
(l) Revenue Recognition
Revenue represents the invoiced value of goods sold. Revenue is
recognized when the Company ships the goods to its customers and all of the
following criteria are met:
-
Persuasive evidence of an arrangement exists;
-
Delivery has occurred or services have been rendered;
-
The sellers price to the buyer is fixed or determinable; and
-
Collectability is reasonably assured.
14
KANDI TECHNOLOGIES GROUP, INC.
|
AND SUBSIDIARIES
|
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(UNAUDITED)
|
When the products are transferred to the other party while the
risks are transferred to it, and at that time the Company recognizes
revenue.
(m) Research and Development
Expenditures relating to the development of new products and
processes, including significant improvements to existing products, are expensed
as incurred. Research and development expenses were $971,673 and $672,491 for
the three months ended June 30, 2014 and 2013, respectively. Research and
development expenses were $2,143,930 and $1,362,156 for the six months ended
June 30, 2014 and 2013, respectively.
(n) Government Grant
Grants and subsidies received from the PRC Government are
recognized when the proceeds are received or collectible.
For the three and six months ended June 30, 2014 and 2013,
$153,700 and $49,807, respectively, was received by Kandi Vehicle from the PRC
government.
(o) Income Taxes
The Company accounts for income tax using an asset and
liability approach, which allows for the recognition of deferred tax benefits in
future years. Under the asset and liability approach, deferred taxes are
provided for the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. The accounting for deferred tax
calculation represents the managements best estimate on the most likely future
tax consequences of events that have been recognized in our financial statements
or tax returns and related future anticipation. A valuation allowance is
provided for deferred tax assets if it is more likely than not these items will
either expire before the Company is able to realize their benefits, or that
future realization is uncertain.
(p) Foreign Currency Translation
The accompanying consolidated financial statements are
presented in United States dollars. The functional currency of the Company is
the Renminbi (RMB). Capital accounts of the consolidated financial statements
are translated into United States dollars from RMB at their historical exchange
rates when the capital transactions occurred.
Assets and liabilities are translated at the exchange rates as
of balance sheet date. Income and expenditures are translated at the average
exchange rate of the reporting period, which rates are obtained from the
website:
http://www.oanda.com
|
June 30,
|
December 31,
|
June 30,
|
|
2014
|
2013
|
2013
|
Period end RMB : USD exchange rate
|
6.1577
|
6.1140
|
6.1882
|
Average RMB : USD exchange rate
|
6.1441
|
6.1982
|
6.2479
|
15
KANDI TECHNOLOGIES GROUP, INC.
|
AND SUBSIDIARIES
|
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(UNAUDITED)
|
(q) Comprehensive Income
Comprehensive income is defined to include all changes in
equity except those resulting from investments by owners and distributions to
owners. Among other disclosures, all items that are required to be recognized
under current accounting standards as components of comprehensive income are
required to be reported in a financial statement that is presented with the same
prominence as other financial statements. Comprehensive income includes net
income and the foreign currency translation changes.
(r) Segments
In accordance with ASC 280-10,
Segment Reporting
(ASC
280-10), the Companys chief operating decision makers rely upon consolidated
results of operations when making decisions about allocating resources and
assessing performance of the Company. As a result of the assessment made by the
chief operating decision makers, the Company has only one single operating
segment. The Company does not distinguish between markets or segments for the
purpose of internal reporting.
(s) Stock Option Cost
The Companys stock option cost is recorded in accordance with
ASC 718 and ASC 505.
The fair value of stock options is estimated using the
Black-Scholes-Merton model. The Companys expected volatility assumption is
based on the historical volatility of the Companys common stock. The expected
life assumption is primarily based on the expiration date of the option. The
risk-free interest rate for the expected term of the option is based on the U.S.
Treasury yield curve in effect at the time of grant.
Stock option expense recognized is based on awards expected to
vest, and there were no estimated forfeitures. ASC standards require forfeitures
to be estimated at the time of grant and revised in subsequent periods, if
necessary, if actual forfeitures differ from those estimates.
The stock-based option expense for the three and six months
ended June 30, 2014 was $0. See Note 18.
(t) Warrant Cost
The Companys warrant costs are recorded in liabilities and
equities, respectively, in accordance with ASC 480, ASC 505 and ASC 815.
The fair value of a warrant, which is classified as a
liability, is estimated using the Black-Scholes-Merton model and the lattice
valuation model. The Companys expected volatility assumption is based on the
historical volatility of the Companys common stock. The expected life
assumption is primarily based on the expiration date of the warrant. The
risk-free interest rate for the expected term of the warrant is based on the
U.S. Treasury yield curve in effect at the time of measurement. The warrants,
which are freestanding derivatives and are classified as liabilities on the
balance sheet, will be measured at fair value on each reporting date, with
decreases in fair value recognized in earnings and increases in fair values were
recognized in expenses.
The fair value of equity-based warrants, which are not
considered derivatives under ASC 815, is estimated using the
Black-Scholes-Merton model. The Companys expected volatility assumption is
based on the historical volatility of the Companys common stock. The expected
life assumption is primarily based on the expiration date of the warrant. The
risk-free interest rate for the expected term of the option is based on the U.S.
Treasury yield curve in effect at the time of grant.
16
KANDI TECHNOLOGIES GROUP, INC.
|
AND SUBSIDIARIES
|
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(UNAUDITED)
|
(u) Goodwill
The Company allocates goodwill to reporting units based on the
reporting unit expected to benefit from the business combination. The Company
evaluates its reporting units on an annual basis and, if necessary, reassigns
goodwill using a relative fair value allocation approach. Goodwill is tested for
impairment at the reporting unit level on an annual basis and between annual
tests if an event occurs or circumstances change that would more likely than not
reduce the fair value of a reporting unit below its carrying value. These events
or circumstances could include a significant change in the business climate,
legal factors, operating performance indicators, competition, or sale or
disposition of a significant portion of a reporting unit.
Application of the goodwill impairment test requires judgment,
including the identification of reporting units, assignment of assets and
liabilities to reporting units, assignment of goodwill to reporting units, and
determination of the fair value of each reporting unit. The Company first
assesses qualitative factors to determine whether it is more likely than not
that goodwill is impaired. If the more likely than not threshold is met, the
Company performs a quantitative impairment test. As of June 30, 2014, the
Company determined that goodwill was not impaired.
(v) Intangible assets
Intangible assets consist of tradenames and customer relations
associated with the purchase price allocation of Yongkang Scrou. Such assets are
being amortized over their estimated useful lives of 9.7 years. Intangible
assets are amortized as of June 30, 2014.
NOTE 7 NEW ACCOUNTING PRONOUNCEMENTS
Recent Accounting Pronouncements
The FASB has issued Accounting Standards Update (ASU) No.
2014-07, Applying Variable Interest Entities Guidance to Common Control Leasing
Arrangements. The guidance addresses the consolidation of lessors in certain
common control leasing arrangements and is based on a consensus reached by the
Private Company Council (PCC). Under current U.S. GAAP, a company is required to
consolidate an entity in which it has a controlling financial interest. The
assessment of controlling financial interest is performed under either: (a) a
voting interest model; or (b) a variable interest entity model. In a variable
interest entity model, the company has a controlling financial interest when it
has: (a) the power to direct the activities that most significantly affect the
economic performance of the entity; and (b) the obligation to absorb losses or
the right to receive benefits of the entity that could be potentially
significant to the entity. To determine which model applies, a company preparing
financial statements must first determine whether it has a variable interest in
the entity being evaluated for consolidation and whether that entity is a
variable interest entity. The new guidance allows a private company to elect
(when certain conditions exist) not to apply the variable interest entity
guidance to a lessor under common control. Instead, the private company would
make certain disclosures about the lessor and the leasing arrangement.
Under the amendments in this ASU, a private company lessee
could elect an alternative not to apply variable interest entity guidance to a
lessor when:-The private company lessee and the lessor are under common
control;-The private company lessee has a leasing arrangement with the
lessor;-Substantially all of the activity between the private company lessee and
the lessor is related to the leasing activities (including supporting leasing
activities) between those two companies, and-If the private company lessee
explicitly guarantees or provides collateral for any obligation of the lessor
related to the asset leased by the private company, then the principal amount of
the obligation at inception does not exceed the value of the asset leased by the
private company from the lessor. If elected, the accounting alternative should
be applied to all leasing arrangements meeting the above conditions. The
alternative should be applied retrospectively to all periods presented, and is
effective for annual periods beginning after December 15, 2014, and interim
periods within annual periods beginning after December 15, 2015. Early
application is permitted for all financial statements that have not yet been
made available for issuance.
17
KANDI TECHNOLOGIES GROUP, INC.
|
AND SUBSIDIARIES
|
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(UNAUDITED)
|
The FASB has issued Accounting Standards Update (ASU) No.
2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant,
and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of
Disposals of Components of an Entity. The amendments in the ASU change the
criteria for reporting discontinued operations while enhancing disclosures in
this area. It also addresses sources of confusion and inconsistent application
related to financial reporting of discontinued operations guidance in U.S. GAAP.
Under the new guidance, only disposals representing a strategic shift in
operations should be presented as discontinued operations. Those strategic
shifts should have a major effect on the organizations operations and financial
results. Examples include a disposal of a major geographic area, a major line of
business, or a major equity method investment. In addition, the new guidance
requires expanded disclosures about discontinued operations that will provide
financial statement users with more information about the assets, liabilities,
income, and expenses of discontinued operations. The new guidance also requires
disclosure of the pre-tax income attributable to a disposal of a significant
part of an organization that does not qualify for discontinued operations
reporting. This disclosure will provide users with information about the ongoing
trends in a reporting organizations results from continuing operations. The
amendments in this ASU enhance convergence between U.S. GAAP and International
Financial Reporting Standards (IFRS). Part of the new definition of discontinued
operation is based on elements of the definition of discontinued operations in
IFRS 5, Non-Current Assets Held for Sale and Discontinued Operations. The
Company does not expect the adoption of 2014-08 to have a material effect on its
operating results or financial position. Other accounting standards that have
been issued or proposed by the FASB or other standards-setting bodies that do
not require adoption until a future date are not expected to have a material
impact on the Companys financial statements upon adoption.
NOTE 8 CONCENTRATIONS
(a) Customers
For the six-month period ended June 30, 2014, the Companys
major customers, each of whom accounted for more than 10% of the Companys
consolidated revenue, were as follows:
|
Sales
|
Accounts Receivable
|
|
Six Months
|
Six Months
|
|
|
|
Ended June 30,
|
Ended June 30,
|
|
December 31,
|
Major
Customers
|
2014
|
2013
|
June 30, 2014
|
2013
|
|
|
|
|
|
Kandi Electric Vehicles (Changxing) Co.,
Ltd.
|
40%
|
-
|
-
|
-
|
Shanghai Maple Auto Co., Ltd
|
24%
|
-
|
58%
|
52%
|
Kandi Electric Vehicles (Shanghai) Co.,
Ltd.
|
15%
|
-
|
-
|
-
|
For the three-month period ended June 30, 2014, the Companys
major customers, each of whom accounted for more than 10% of the Companys
consolidated revenue, were as follows:
|
Sales
|
Accounts Receivable
|
|
Three Months
|
Three Months
|
|
|
|
Ended June 30,
|
Ended June 30,
|
|
December 31,
|
Major
Customers
|
2014
|
2013
|
June 30, 2014
|
2013
|
|
|
|
|
|
Kandi Electric Vehicles (Changxing) Co.,
Ltd.
|
37%
|
-
|
-
|
-
|
Shanghai Maple Auto Co., Ltd
|
31%
|
-
|
58%
|
52%
|
Kandi Electric Vehicles (Shanghai) Co.,
Ltd.
|
12%
|
-
|
-
|
-
|
18
KANDI TECHNOLOGIES GROUP, INC.
|
AND SUBSIDIARIES
|
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(UNAUDITED)
|
Both Kandi Changxing and Kandi Shanghai are wholly-owned
subsidiaries of the JV Company. The Company indirectly has a 50% economic
interest in each of Kandi Changxing and Kandi Shanghai through its 50% ownership
interest in the JV Company. For the six months ended June 30, 2014, the Company
sold $29,573,430 and $10,786,012 of battery packs, body parts, motors, air
conditioning units, and other auto parts to Kandi Changxing and Kandi Shanghai,
respectively. The balance due from both Kandi Changxing and Kandi Shanghai were
included in amount due from JV Company, net on the Companys balance sheets. See
Note 21.
(b) Suppliers
For the six-month period ended June 30, 2014, the Companys
material suppliers, each of whom accounted for more than 10% of the Companys
total purchases, were as follows:
|
Purchases
|
Accounts Payable
|
|
Six Months
|
|
|
|
|
Ended June 30,
|
Six Months Ended
|
|
December 31,
|
Major Suppliers
|
2014
|
June 30, 2013
|
June 30, 2014
|
2013
|
|
|
|
|
|
Shandong Henyuan New Energy
Tech Co., Ltd.
|
30%
|
-
|
62%
|
-
|
Zhongju (Tianjin) New Energy Investment Co.,
Ltd.
|
15%
|
-
|
22%
|
-
|
Zhejiang Wanxiang Yineng
Power Battery Co., Ltd
|
11%
|
-
|
21%
|
-
|
For the three-month period ended June 30, 2014, the Companys
material suppliers, each of whom accounted for more than 10% of the Companys
total purchases, were as follows:
|
Purchases
|
Accounts Payable
|
|
Three Months
|
Three Months
|
|
|
|
Ended June 30,
|
Ended June 30,
|
|
December 31,
|
Major Suppliers
|
2014
|
2013
|
June 30, 2014
|
2013
|
|
|
|
|
|
Shandong Henyuan New Energy
Tech Co., Ltd.
|
52%
|
-
|
62%
|
-
|
Zhongju (Tianjin) New Energy Investment Co.,
Ltd.
|
15%
|
-
|
22%
|
-
|
NOTE 9 EARNINGS (LOSS) PER SHARE
The Company calculates earnings per share in accordance with
ASC 260,
Earnings Per Share
, which requires a dual presentation of basic
and diluted earnings per share. Basic earnings per share are computed using the
weighted average number of shares outstanding during the reporting period.
Diluted earnings per share represents basic earnings per share adjusted to
include the potentially dilutive effect of outstanding stock options, warrants
and convertible notes (using the if-converted method). For the three months
ended June 30, 2014 and 2013, the number of potentially dilutive common shares
was 112,161 and 0, respectively. For the six months ended June 30, 2014 and
2013, the number of potentially dilutive common shares was 124,898 and 249,164,
respectively.
The following is the calculation of earnings per share:
|
|
For the three months ended
|
|
|
For the six months ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Net income (loss)
|
$
|
11,157,085
|
|
$
|
(1,044,300
|
)
|
$
|
(2,929,075
|
)
|
$
|
1,192,573
|
|
19
KANDI TECHNOLOGIES GROUP, INC.
|
AND SUBSIDIARIES
|
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(UNAUDITED)
|
Weighted average shares used in basic
computation
|
|
41,142,346
|
|
|
32,546,877
|
|
|
40,364,986
|
|
|
32,427,538
|
|
Dilutive shares
|
|
112,161
|
|
|
-
|
|
|
-
|
|
|
249,164
|
|
Weighted average shares used in diluted
computation
|
|
41,254,507
|
|
|
32,546,877
|
|
|
40,364,986
|
|
|
32,676,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.27
|
|
$
|
(0.03
|
)
|
$
|
(0.07
|
)
|
$
|
0.04
|
|
Diluted
|
$
|
0.27
|
|
$
|
(0.03
|
)
|
$
|
(0.07
|
)
|
$
|
0.04
|
|
Also see Note 18.
NOTE 10 - INVENTORIES
Inventories are summarized as follows:
|
|
June 30, 2014
|
|
|
|
|
|
|
(Unaudited)
|
|
|
December 31, 2013
|
|
Raw material
|
$
|
2,342,942
|
|
$
|
2,646,041
|
|
Work-in-progress
|
|
12,885,681
|
|
|
5,065,126
|
|
Finished goods
|
|
2,769,294
|
|
|
1,829,281
|
|
|
|
17,997,917
|
|
|
9,540,448
|
|
Less: reserve for slow moving
inventories
|
|
(350,231
|
)
|
|
(352,734
|
)
|
Inventories, net
|
$
|
17,647,686
|
|
$
|
9,187,714
|
|
NOTE 11 - NOTES RECEIVABLE
Notes receivable are summarized as follows:
|
|
June 30, 2014
|
|
|
December 31,
|
|
|
|
(Unaudited)
|
|
|
2013
|
|
Notes receivable from
unrelated companies:
|
|
|
|
|
|
|
Due September 30, 2014, interest at 9.6% per
annum
1
|
$
|
9,154,337
|
|
$
|
13,794,094
|
|
|
|
9,154,337
|
|
|
13,794,094
|
|
|
|
|
|
|
|
|
Bank acceptance notes:
|
|
|
|
|
|
|
Bank acceptance notes
|
|
-
|
|
|
-
|
|
Notes receivable
|
$
|
9,154,337
|
|
$
|
13,794,094
|
|
Details of Notes receivable from unrelated parties as of
December 31, 2013
|
|
|
|
|
Manner of
|
Index
|
Amount
($)
|
Counter party
|
Relationship
|
Purpose of Loan
|
settlement
|
1
|
13,794,094
|
Yongkang HuiFeng
Guarantee Co., Ltd
|
No relationship
beyond loan
|
Receive interest
income
|
Not due
|
20
KANDI TECHNOLOGIES GROUP, INC.
|
AND SUBSIDIARIES
|
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(UNAUDITED)
|
Details of Notes receivable from unrelated parties as of June
30, 2014
|
|
|
|
|
Manner of
|
Index
|
Amount
($)
|
Counter party
|
Relationship
|
Purpose of Loan
|
settlement
|
1
|
9,154,337
|
Yongkang HuiFeng
Guarantee Co., Ltd
|
No relationship
beyond loan
|
Receive interest
income
|
Not due
|
NOTE 12 LAND USE RIGHTS
Land use rights consisted of the following:
|
|
June 30, 2014
|
|
|
|
|
|
|
(Unaudited)
|
|
|
December 31, 2013
|
|
Cost of land use rights
|
$
|
17,774,039
|
|
$
|
16,223,208
|
|
Less: Accumulated amortization
|
|
(1,940,955
|
)
|
|
(1,770,017
|
)
|
Land use rights, net
|
$
|
15,833,084
|
|
$
|
14,453,191
|
|
As of June 30, 2014 and December 31, 2013, the net book value
of land use rights pledged as collateral for the Companys bank loans was
$9,784,368 and $9,983,647, respectively. Also see Note 14.
The amortization expense for the six months ended June 30, 2014
and 2013 was $183,905 and $175,376, respectively. The amortization expense for
the three months ended June 30, 2014 and 2013 was $94,382 and $88,216,
respectively. Amortization expense for the next five years and thereafter is as
follows:
2014 (six months)
|
$
|
183,905
|
|
2015
|
|
367,810
|
|
2016
|
|
367,810
|
|
2017
|
|
367,810
|
|
2018
|
|
367,810
|
|
Thereafter
|
|
14,177,939
|
|
Total
|
$
|
15,833,084
|
|
21
KANDI TECHNOLOGIES GROUP, INC.
|
AND SUBSIDIARIES
|
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(UNAUDITED)
|
NOTE 13 PLANT AND EQUIPMENT
Plant and equipment consisted of the following:
|
|
June 30, 2014
|
|
|
|
|
|
|
(Unaudited)
|
|
|
December 31, 2013
|
|
At cost:
|
|
|
|
|
|
|
Buildings
|
$
|
14,483,064
|
|
$
|
14,514,873
|
|
Machinery and equipment
|
|
10,902,258
|
|
|
10,771,899
|
|
Office equipment
|
|
271,182
|
|
|
251,690
|
|
Motor vehicles
|
|
292,252
|
|
|
288,004
|
|
Moulds
|
|
33,989,689
|
|
|
34,230,014
|
|
|
|
59,938,445
|
|
|
60,056,480
|
|
Less : Accumulated
depreciation
|
|
|
|
|
|
|
Buildings
|
$
|
(3,233,466
|
)
|
$
|
(3,010,451
|
)
|
Machinery and equipment
|
|
(10,269,565
|
)
|
|
(10,278,409
|
)
|
Office equipment
|
|
(208,277
|
)
|
|
(196,303
|
)
|
Motor vehicles
|
|
(239,485
|
)
|
|
(228,442
|
)
|
Moulds
|
|
(18,730,291
|
)
|
|
(16,648,583
|
)
|
|
|
(32,681,084
|
)
|
|
(30,362,188
|
)
|
Less: provision for impairment for fixed
assets
|
|
(358,215
|
)
|
|
(360,776
|
)
|
Plant and equipment, net
|
$
|
26,899,146
|
|
$
|
29,333,516
|
|
As of June 30, 2014 and December 31, 2013, the net book value
of plant and equipment pledged as collateral for bank loans was $11,046,509 and
$11,292,649, respectively.
Depreciation expense for six months ended June 30, 2014 and
2013 was $2,540,032 and $4,028,603, respectively. Depreciation expense for three
months ended June 30, 2014 and 2013 was $1,263,552 and $2,026,310, respectively.
NOTE 14 SHORT TERM BANK LOANS
Short-term loans are summarized as follows:
22
KANDI TECHNOLOGIES GROUP, INC.
|
AND SUBSIDIARIES
|
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(UNAUDITED)
|
|
|
June 30,
|
|
|
|
|
|
|
2014
|
|
|
December 31,
|
|
|
|
(Unaudited)
|
|
|
2013
|
|
Loans from Jinhua Bank
|
|
|
|
|
|
|
Monthly interest only payments at 6.30% per annum, due
October 10, 2014, guaranteed by Mr. Hu Xiaoming and Ms. Ling Yueping, and
secured by the assets of the Company. Also see Note 12 and Note 13
|
$
|
1,623,983
|
|
$
|
1,635,590
|
|
|
|
|
|
|
|
|
Monthly interest only payments at 6.30% per annum, due
December 2, 2014, guaranteed by Mr. Hu Xiaoming and Ms. Ling Yueping, and
secured by the assets of the Company. Also see Note 12 and Note 13
|
|
811,991
|
|
|
817,795
|
|
|
|
|
|
|
|
|
Monthly interest only payments at 6.30% per annum, due
December 2, 2014, guaranteed by Zhejiang Kangli Metal Manufacturing
Company, Mr. Hu Xiaoming, Ms. Ling Yueping, Mr. Lv Qingbo and Mr. Lv
Qingjiang, and secured by the assets of the Company. Also see Note 12 and
Note 13
|
|
3,247,966
|
|
|
3,271,181
|
|
|
|
|
|
|
|
|
Loans from Yongkang Rural Cooperative Bank
|
|
|
|
|
|
|
Monthly interest only payments at 0.927% per month,
due January 31, 2015, guaranteed by Yongkang Sanli Metal Co., Ltd.
|
|
811,991
|
|
|
817,795
|
|
|
|
|
|
|
|
|
Loans from China Ever-bright Bank
|
|
|
|
|
|
|
Monthly interest only payments at 6.94% per annum, due May
14, 2014, secured by the assets of the Company, guaranteed by Mr. Hu
Xiaoming, Mr. Hu Wangyuan, Nanlong Group Co., Ltd. and Zhejiang Mengdeli
Electric Co., Ltd. The loan was fully repaid. Also see Note 12 and Note
13.
|
|
-
|
|
|
12,757,606
|
|
|
|
|
|
|
|
|
Monthly interest only payments at 7.08% per annum, due May 11, 2015,
secured by the assets of the Company, guaranteed by Mr. Hu Xiaoming, Mr. Hu Wangyuan, Nanlong Group Co., Ltd. and Zhejiang Mengdeli
Electric Co., Ltd. Also see Note 12 and Note 13.
|
|
12,667,067
|
|
|
-
|
|
|
|
|
|
|
|
|
Loans from Shanghai Pudong Development Bank
|
|
|
|
|
|
|
Monthly interest only payments at 6.60% per
annum, due September 4,2014, secured by the assets of the Company,
guaranteed by Mr. HuXiaoming. Also see Note 12 and Note 13.
|
|
6,495,933
|
|
|
6,542,362
|
|
|
|
|
|
|
|
|
Loans from Bank of Shanghai
|
|
|
|
|
|
|
Monthly interest only payments at 6.60% per annum, due
December 27, 2014, guaranteed by Mr. Hu Xiaoming, Ms. Ling Yueping,
Zhejiang Kangli Metal Manufacturing Company and Nanlong Group Co., Ltd.
|
|
4,871,949
|
|
|
4,906,771
|
|
|
|
|
|
|
|
|
Loans from China Ever-growing Bank
|
|
|
|
|
|
|
Monthly interest only payments at 7.20% per
annum, due April 22, 2014, guaranteed by Mr. Hu Xiaoming, Ms. Ling
Yueping, Zhejiang Shuguang industrial Co., Ltd. and Zhejiang Mengdeli
Electric Company. The loan was fully repaid.
|
|
-
|
|
|
3,271,181
|
|
Monthly interest only
payments at 7.20% per annum, due April 22, 2015, guaranteed by Mr. Hu
Xiaoming, Ms. Ling Yueping, and Zhejiang Shuguang industrial Co., Ltd.
|
|
3,247,966
|
|
|
-
|
|
|
$
|
33,778,846
|
|
$
|
34,020,281
|
|
23
KANDI TECHNOLOGIES GROUP, INC.
|
AND SUBSIDIARIES
|
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(UNAUDITED)
|
Interest expense for the three months ended June 30, 2014 and
2013 was $590,979 and $572,862, respectively, and for the six months ended June
30, 2014 and 2013 was $1,169,626, and $1,125,792, respectively.
As of June 30, 2014, the aggregate amount of short-term loans
that was guaranteed by various third parties was $27,282,914.
- $12,667,067 was guaranteed by
Zhejiang Mengdeli Electric Co Ltd (ZMEC).
- $8,119,915, was guaranteed by
Zhejiang Kangli Metal Manufacturing Company, whose bank loan of $4,871,949 was
guaranteed by the Company. Also see Note 23. $3,247,966 of the $8,119,915 was
guaranteed by Lv Qingjiang and Lv Qingbo, two major shareholders of Zhejiang
Kangli Metal Manufacturing Company. Also see Note 23.
- $3,247,966 was guaranteed by
Zhejiang Shuguang industrial Co., Ltd., whose bank loan of $4,871, 949 was
guaranteed by the Company. Also see Note 23.
- $17,539,016 was guaranteed by
Nanlong Group Co., Ltd., whose bank loans of $9,743,898 was also guaranteed by
the Company. Also see Note 23.
- $811,991 was guaranteed by Yonnkang
Sanli Metal Co., Ltd.
It is a common business practice among companies in the region
of the PRC in which the Company is located to exchange guarantees for bank debt
with no additional consideration given. It is considered a favor for favor
business practice and is commonly required by Chinese lending banks, as in these
cases.
NOTE 15 NOTES PAYABLE
By issuing bank note payables rather than paying cash to
suppliers, the Company can defer the payments until the date the bank note
payable is due. Simultaneously, the Company is required to deposit restricted
cash in banks to back up the bank note payable. The restricted cash deposited in
banks will generate interest income.
Notes payable are summarized as follows:
|
|
June 30,2014
|
|
|
December 31,
|
|
|
|
(Unaudited)
|
|
|
2013
|
|
Bank acceptance notes:
|
|
|
|
|
|
|
Due March 18, 2014
|
$
|
-
|
|
$
|
1,962,709
|
|
Due May 19, 2014
|
|
|
|
|
8,177,952
|
|
Due May 21, 2014
|
|
|
|
|
6,542,362
|
|
Due November 16, 2014
|
|
12,991,864
|
|
|
-
|
|
Subtotal
|
$
|
12,991,864
|
|
$
|
16,683,023
|
|
|
|
|
|
|
|
|
Notes payable to unrelated
companies:
|
|
|
|
|
|
|
|
$
|
-
|
|
$
|
-
|
|
Subtotal
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
Total
|
$
|
12,991,864
|
|
$
|
16,683,023
|
|
KANDI TECHNOLOGIES GROUP, INC.
|
AND SUBSIDIARIES
|
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(UNAUDITED)
|
All of the bank acceptance notes do not bear interest, but are
subject to bank charges of 0.05% of the principal as a commission on each
transaction. Bank charges for notes payable were $6,510 and $13,765 for the
three months ended June 30, 2014 and 2013, and were $6,510 and $13,765 for the
six months ended June 30, 2014 and 2013.
No restricted cash was held as collateral for the notes payable
as of June 30, 2014 and December 31, 2013.
NOTE 16 BOND PAYABLE
Due Date
|
|
Face Value
|
|
|
Coupon rate
|
|
|
Interest record date
|
|
|
Interest pay date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 27, 2016
|
$
|
12,991,864
|
|
|
11.5%
|
|
|
December 27
|
|
|
December 27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total face value
|
$
|
12,991,864
|
|
|
|
|
|
|
|
|
|
|
On December 27, 2013, the Company issued bonds in the aggregate
principal amount of RMB 80,000,000 to China Ever-bright Securities Co. Ltd. and
CITIC Securities Company Limited. The bonds mature in 3 years, and the interest
rate is 11.5% per annum. Bond interest is payable on December 27 in each of
2014, 2015 and 2016.
NOTE 17 TAX
(a) Corporation Income Tax (CIT)
In accordance with the relevant tax laws and regulations of the
PRC, the applicable CIT rate is 25%. However, Kandi Vehicle is qualified as a
high technology company in the PRC and is entitled to pay a reduced income tax
rate of 15%.
Kandi New Energy is a subsidiary of the Company and its
applicable CIT rate is 25%. Yongkang Scrou is a subsidiary of the Company and
its applicable CIT rate was 25%. Kandi Wanning is a subsidiary of the Company
and its applicable CIT rate is 25%.
The Company has a 50% ownership interest in the JV Company and
the JV Company, including each of its subsidiaries applicable CIT rate is 25%.
Kandi Vehicle qualifies as a high technology company in the PRC
and is entitled to pay CIT at the reduced rate of 15%. However, as the tax
policy in the PRC does not allow double tax benefits, the Companys high
technology tax benefit of 10% must be reduced by the research and development
tax benefits to which the Company also is entitled, which amount to 25% of an
amount equal to 50% of allowable research and development expenses. For the six
months ended June 30, 2014, the Companys CIT before reduction for the Companys
high technology tax benefit was $42,822, or 25% of the Companys $171,287
taxable income for such period which reduced to $0 after giving effect to the
Companys research and development tax credit of $42,822 was 7.32% of 50% of
$1,169,395 allowable research and development expenses) for such period. To
comply with the PRC policy prohibiting double tax benefits, the Companys high
technology tax benefit for the six months ended June 30, 2014 was reduced from
10% of the Companys attributed taxable income for such period, of such taxable
income. Since the R&D tax credit is not refundable, the maximum R&D tax
credit allowance was limited to the maximum tax due, which was $42,822 for the
six months ended June 30, 2014. The un-utilized portion of R&D tax credit
will be carried forward to the next period upon fully deducted. As a result, the
Companys effective income tax rate for the six months ended June 30, 2014 was
0% after the research and development credit and high technology tax reduction.
According to the PRC CIT reporting system, the CIT sales
cut-off base is concurrent with the value-added tax (VAT), which will be
reported to the State Administration of Taxation (SAT) on a quarterly basis.
Since the VAT and CIT are accounted for on a VAT tax basis that recorded
all sales on a State provided official invoices reporting system, the Company
is reporting the CIT according to the SAT prescribed tax reporting rules. Under
the VAT tax reporting system, sales cut-off is not done on an accrual basis but
rather on a VAT taxable reporting basis. Therefore, when the Company adopted
U.S. GAAP using an accrual basis, the sales cut-off CIT timing (due to the VAT
reporting system) created a temporary sales cut-off timing difference. This
difference is reflected in the deferred tax assets or liabilities calculations
on the income tax estimate reported in the Companys Annual Report on Form 10-K.
25
KANDI TECHNOLOGIES GROUP, INC.
|
AND SUBSIDIARIES
|
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(UNAUDITED)
|
Effective January 1, 2007, the Company adopted ASC 740,
Income Taxes
. The interpretation addresses the determination of whether
tax benefits claimed or expected to be claimed on a tax return should be
recorded in the financial statements.
Under ASC 740, the Company may recognize the tax benefit from
an uncertain tax position only if it is more likely than not that the tax
position will be sustained on examination by the taxing authorities, based on
the technical merits of the position. The tax benefits recognized in the
financial statements from such a position should be measured based on the
largest benefit that has a greater than fifty percent likelihood of being
realized upon ultimate settlement. ASC 740 also provides guidance on
de-recognition, classification, interest and penalties on income taxes,
accounting in interim periods and requires increased disclosures.
As of June 30, 2014, the Company did not have a liability for
unrecognized tax benefits. The Company files income tax returns to the U.S.
Internal Revenue Services (IRS) and to states in which the Company has
operations. The Company is subject to U.S. federal or state income tax
examinations by the IRS and relevant state tax authorities for years after 2006.
During the periods open to examination, the Company had net operating loss carry
forwards (NOLs) for U.S. federal and state tax purposes that have attributes
from closed periods. Since these NOLs may be utilized in future periods, they
remain subject to examination. The Company also files certain tax returns in the
PRC. As of June 30, 2014, the Company was not aware of any pending income tax
examinations by the PRC tax authorities. The Companys policy is to record
interest and penalties on uncertain tax provisions as income tax expense. As of
June 30, 2014, the Company had no accrued interest or penalties related to
uncertain tax positions. The Company has not recorded a provision for U.S.
federal income tax for the six months ended June 30, 2013 due to the net
operating loss carry forward in the United States.
Income tax expense (benefit) for the six months ended June 30,
2014 and 2013 is summarized as follows:
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
|
(Unaudited)
|
|
|
|
2014
|
|
|
2013
|
|
Current:
|
|
|
|
|
|
|
Provision for CIT
|
$
|
556,135
|
|
$
|
244,901
|
|
Provision for Federal Income Tax
|
|
-
|
|
|
-
|
|
Deferred:
|
|
|
|
|
|
|
Provision for CIT
|
|
-
|
|
|
-
|
|
Income tax expense (benefit)
|
$
|
556,135
|
|
$
|
244,901
|
|
The Companys income tax expense (benefit) differs from the
expected tax expense for the six months ended June 30, 2014 and 2013 (computed
by applying the U.S. Federal Income Tax rate of 34% and PRC CIT rate of 25%,
respectively, to income before income taxes) as follows:
26
KANDI TECHNOLOGIES GROUP, INC.
|
AND SUBSIDIARIES
|
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(UNAUDITED)
|
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
|
(Unaudited)
|
|
|
|
2014
|
|
|
2013
|
|
Computed expected expense
|
$
|
(4,178,865
|
)
|
$
|
270,920
|
|
Favorable tax rate
|
|
(442,822
|
)
|
|
(294,960
|
)
|
Permanent differences
|
|
(11,464
|
)
|
|
31,346
|
|
Valuation allowance
|
|
4,789,286
|
|
|
237,595
|
|
Income tax expense (benefit)
|
$
|
556,135
|
|
$
|
244,901
|
|
The tax effects of temporary differences that give rise to the
Companys net deferred tax assets and liabilities as of June 30, 2014 and
December 31, 2013 are summarized as follows:
|
|
June 30, 2014
|
|
|
December 31,
|
|
|
|
(Unaudited)
|
|
|
2013
|
|
Current portion:
|
|
|
|
|
|
|
Deferred tax assets
(liabilities):
|
|
|
|
|
|
|
Expense
|
$
|
(92,709
|
)
|
$
|
47,224
|
|
Subtotal
|
|
(92,709
|
)
|
|
47,224
|
|
|
|
|
|
|
|
|
Deferred tax assets
(liabilities):
|
|
|
|
|
|
|
Sales cut-off (CIT tax
reporting on VAT tax system)
|
|
(161,556
|
)
|
|
(33,518
|
)
|
Other
|
|
(393,812
|
)
|
|
|
|
Subtotal
|
|
(555,368
|
)
|
|
(33,518
|
)
|
|
|
|
|
|
|
|
Total deferred tax assets (liabilities)
current portion
|
|
(648,077
|
)
|
|
13,706
|
|
|
|
|
|
|
|
|
Non-current portion:
|
|
|
|
|
|
|
Deferred tax assets
(liabilities):
|
|
|
|
|
|
|
Depreciation
|
|
(1,790
|
)
|
|
81,076
|
|
Loss
carried forward
|
|
4,789,286
|
|
|
3,992,906
|
|
Valuation allowance
|
|
(4,789,286
|
)
|
|
(3,992,906
|
)
|
Subtotal
|
|
(1,790
|
)
|
|
81,076
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
Accumulated other
comprehensive gain
|
|
(1,192,636
|
)
|
|
(1,009,477
|
)
|
Subtotal
|
|
(1,192,636
|
)
|
|
(1,009,477
|
)
|
|
|
|
|
|
|
|
Total deferred tax assets
non-current portion
|
|
(1,194,426
|
)
|
|
(928,401
|
)
|
|
|
|
|
|
|
|
Net deferred tax assets
(liabilities)
|
$
|
(1,842,503
|
)
|
$
|
(914,695
|
)
|
(b) Tax Benefit (Holiday) Effect
For the six months ended June 30, 2014 and 2013, the PRC CIT
rate was 25%. Certain subsidiaries of the Company are entitled to tax benefit
(holidays) for the six months ended June 30, 2014 and 2013.
The combined effects of the income tax expense exemptions and
reductions available to the Company for the six months ended June 30, 2014 and
2013 are as follows:
27
KANDI TECHNOLOGIES GROUP, INC.
|
AND SUBSIDIARIES
|
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(UNAUDITED)
|
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
|
(Unaudited)
|
|
|
|
2014
|
|
|
2013
|
|
Tax benefit (holiday) credit
|
$
|
42,822
|
|
$
|
294,960
|
|
Basic net income per share effect
|
$
|
0.001
|
|
$
|
0.009
|
|
NOTE 18 - STOCK OPTIONS, WARRANTS AND CONVERTIBLE NOTES
(a) Stock Options
On February 11, 2009, the Compensation Committee of the Board
of Directors of the Company approved the grant of stock options to purchase
2,600,000 shares of common stock at an exercise price of $0.80 per share to ten
of the Companys employees and directors. The stock options vested ratably over
three years and expire on the tenth anniversary of the grant date. The Company
valued the stock options at $2,062,964 and amortized the stock compensation
expense using the straight-line method over the service period from February 11,
2009 through February 11, 2012. The value of the options was estimated using the
Black Scholes Model with an expected volatility of 164%, expected life of 10
years, risk-free interest rate of 2.76% and expected dividend yield of 0.00% .
As of June 30, 2014, options for 2,366,672 shares had been exercised and options
for 6,668 shares had been forfeited.
On October 6, 2009, the Company executed an agreement with Wang
Rui and Li Qiwen, third-party consultants, whereby Mr. Wang and Mr. Li were to
provide to the Company business development services in China in exchange for
options to purchase 350,000 shares of the Companys common stock at an exercise
price of $1.50 per share. Per the agreement, options to purchase 250,000 shares
vested and became exercisable on March 6, 2010, and options to purchase 100,000
shares vested and became exercisable on June 6, 2010. The options are issued
under and subject to the terms of the Companys 2008 Omnibus Long-Term Incentive
Plan. As of June 30, 2014, options for 250,000 shares had been exercised and
remaining option to purchase 100,000 shares were forfeited due to the
non-performance of services.
The following is a summary of the stock option activities of
the Company:
|
|
|
|
|
Weighted Average
|
|
|
|
Number of Shares
|
|
|
Exercise Price
|
|
Outstanding as of January 1,
2014
|
|
326,660
|
|
$
|
1.01
|
|
Granted
|
|
-
|
|
|
-
|
|
Exercised
|
|
-
|
|
|
-
|
|
Cancelled
|
|
(100,000
|
)
|
|
1.50
|
|
Outstanding as of June 30,
2014
|
|
226,660
|
|
|
0.80
|
|
The following table summarizes information about stock options
outstanding as of June 30, 2014:
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual life
|
|
|
Number of
|
|
|
Exercise
|
|
Shares
|
|
|
Price
|
|
|
(in years)
|
|
|
Shares
|
|
|
Price
|
|
226,660
|
|
$
|
0.80
|
|
|
4.75
|
|
|
226,660
|
|
$
|
0.80
|
|
The fair value per share of the 2,600,000 options issued to the
employees and directors in February 2009 is $0.7934 per share.
28
KANDI TECHNOLOGIES GROUP, INC.
|
AND SUBSIDIARIES
|
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(UNAUDITED)
|
(b) Warrants
On December 21, 2010, the Company sold to certain institutional
investors 3,027,272 shares of the Companys common stock and warrants to
purchase up to 1,210,912 shares of the Companys common stock in fixed
combination, with each combination consisting of one share of common stock and a
warrant to purchase 0.40 shares of common stock in a registered direct public
offering (the Second Round Warrants). The Second Round Warrants became
exercisable immediately following the closing date of the offering and initially
were exercisable for three years thereafter at an exercise price of $6.30 per
share. The exercise price of the Second Round Warrants was adjusted to $5.40 on
September 9, 2013 as a result of the registered direct offering that closed on
July 1, 2013. On December 12, 2013, the expiration date of the Second Round
Warrants was extended to June 30, 2014. As of June 30, 2014, all 1,210,912 of
the Second Round Warrants had been exercised.
On June 26, 2013, the Company entered into a Securities
Purchase Agreement (the 2013 Securities Purchase Agreement) with certain
institutional investors (the Third Round Investors) that closed on July 1,
2013 pursuant to which the Company sold to the Third Round Investors, in a
registered direct offering, an aggregate of 4,376,036 shares of the Companys
common stock at a negotiated purchase price of $6.03 per share. Under the 2013
Securities Purchase Agreement, the Third Round Investors also received Series A
warrants for the purchase of up to 1,750,415 shares of the Companys common
stock at an exercise price of $7.24 per share and an option to make an
additional investment in the form of Series B warrants and Series C warrants:
Series B warrants to purchase a maximum aggregate of 728,936 shares of the
Companys common stock at an exercise price of $7.24 per share and the Series C
warrants to purchase a maximum aggregate of 291,574 shares of the Companys
common stock at an exercise price of $8.69 (the Third Round Warrants). In
addition, the placement agent for this transaction also received warrants for
the purchase of up to 262,562 shares of the Companys common stock at an
exercise price of $7.24 per share (the Third Round Placement Agent Warrants).
As of June 30, 2014 all the Third Round Series A, Series B and Series C warrants
had been exercised on a cash basis and the Third Round Placement Agent Warrants,
which will expire on July 1, 2016, had a fair value of $8.69 per share.
On January 15, 2014, the Company sold to certain institutional
investors warrants to purchase an aggregate of 1,429,393 shares of the Companys
common stock at an exercise price of $15 per share (the Fourth Round Warrants)
for a total purchase price of approximately $14,294. According to the warrant
subscription agreement by and among the Company and the holders, the exercise
price shall be reduced by a credit of $0.01, which reflects the price per
warrant share paid in connection with the issuance of the Fourth Round Warrants.
Consequently, the effective exercise price per warrant share shall be $14.99.
The Fourth Round Warrants were immediately exercisable and will expire on
January 30, 2015. As of June 30, 2014, the fair value of the Fourth Round
Warrants was $7.38.
On March 19, 2014, the Company entered into a Securities
Purchase Agreement with certain purchasers (the Fourth Round Investors)
pursuant to which the Company sold to the Fourth Round Investors, in a
registered direct offering, an aggregate of 606,000 shares of common stock, at a
negotiated purchase price of $18.24 per share, for aggregate gross proceeds to
the Company of approximately $11,053,440, before deducting fees to the placement
agent and other estimated offering expenses payable by the Company. As part of
the transaction, the Fourth Round Investors also received warrants for the
purchase of up to 90,900 shares of the Companys common stock at an exercise
price of $22.80 per share (the Fifth Round Warrants). In addition, the
placement agent for this transaction also received warrants for the purchase of
up to 36,360 shares of the Companys common stock at an exercise price of $22.80
per share. The Fifth Round Warrants have a term of eighteen months and are
exercisable by the holders at any time after the date of issuance. As of June
30, 2014, the fair value of the Fifth Round Warrants was $7.26.
NOTE 19 STOCK AWARD
In connection with his appointment to the Board of Directors,
and as compensation for serving, the Board of Directors has authorized the
issuance by the Company to Mr. Henry Yu of 5,000 shares of Companys restricted
common stock every six months from July 2011.
29
KANDI TECHNOLOGIES GROUP, INC.
|
AND SUBSIDIARIES
|
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(UNAUDITED)
|
As compensation for his services, the Board of Directors has
authorized the issuance by the Company to Mr. Jerry Lewin of 5,000 shares of
Companys restricted common stock every six months, from August 2011.
As compensation for her services, the Board of Directors
authorized the issuance by the Company to Ms. Kewa Luo of 5,000 shares of
Companys common stock every six months, beginning in September 2013.
As compensation for his services, the Board of Directors
authorized the issuance by the Company to Mr. Wei Chen of 10,000 shares of
Companys common stock every year beginning in January 2012 and 2,500 shares of
Companys common stock every three months, beginning in January 2014. As of June
1, 2014, Mr. Chen was no longer with the Company.
The fair value of stock awards based on service is determined
based on closing price of the common stock on the date the shares are granted.
The compensation costs for awards of common stock are recognized over the
requisite service period of six months.
On December 30, 2013, the Board of Directors approved a
proposal (as submitted by the Compensation Committee) of an award for selected
executives and other key employees comprising a total of 335,000 shares of
common stock for each fiscal year, beginning with the 2013 fiscal year, under
the Companys 2008 Omnibus Long-Term Incentive Plan (the Plan), if the
Companys determination that the Companys Non-GAAP Net Income for the fiscal
year increased by 10% comparing to that of the prior years. The specific number
of shares of common stock to be issued in respect of such award could
proportionally increase or decrease if the actual Non-GAAP Net Income increase
is more or less than 10%. Non-GAAP Net Income means the Companys net income
for a particular year calculated in accordance with GAAP, excluding
option-related expenses, stock award expenses, and the effects caused by the
change of fair value of financial derivatives. For example, if Non-GAAP Net
Income for the 2014 fiscal year increases by 10% compared to the Non-GAAP Net
Income for the 2013 fiscal year, the selected executives and other key employees
each will be granted his or her target amount of common stock of the Company. If
Non-GAAP Net Income in 2014 is less than Non-GAAP Net Income in 2013, then no
common stock will be granted. If Non-GAAP Net Income in 2014 increases compared
to Non-GAAP Net Income in 2013 but the increase is less than 10%, then the
target amount of the common stock grant will be proportionately decreased. If
Non-GAAP Net Income in 2014 increases compared to Non- GAAP Net Income in 2013
but the increase is more than 10%, then the target amount of the common stock
grant will be proportionately increased up to 200% of the target amount. Any
such increase in the grant will be subject to the total number of shares
available under the Plan, and the Companys Board of Directors and shareholders
will need to approve an increase in the number of shares reserved under the Plan
if the number of shares originally reserved is used up.
The fair value of each award granted under the Plan is
determined based on the closing price of the Companys stock on the date of
grant of the award. To the extent that the performance goal is not met and so no
shares become due, no compensation cost is recognized and any recognized
compensation cost during the applicable year is reversed. The number of shares
of common stock granted under the Plan with respect to fiscal 2014 would be
670,000 shares according to the estimation of Non-GAAP Net Income of the whole
year of 2014 based on the Non-GAAP Net Income of the first six months of 2014.
The compensation expense is recognized in General and Administrative Expenses.
NOTE 20 INTANGIBLE ASSETS
The following table provides the gross carrying value and
accumulated amortization for each major class of intangible assets other than
goodwill:
30
KANDI TECHNOLOGIES GROUP, INC.
|
AND SUBSIDIARIES
|
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(UNAUDITED)
|
|
|
|
|
|
Remaining useful
life as of June 30,
|
|
|
June 30, 2014
(Unaudited)
|
|
|
December 31,
2013
|
|
|
|
|
|
|
2014
|
|
|
|
|
|
|
|
Gross carrying amount:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade name
|
|
|
|
|
7.5 years
|
|
$
|
492,235
|
|
|
492,235
|
|
Customer relations
|
|
|
|
|
7.5 years
|
|
|
304,086
|
|
|
304,086
|
|
|
|
|
|
|
|
|
|
796,321
|
|
|
796,321
|
|
Less : Accumulated
amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade name
|
|
|
|
|
|
|
$
|
(109,949
|
)
|
|
(84,576
|
)
|
Customer relations
|
|
|
|
|
|
|
|
(67,924
|
)
|
|
(52,249
|
)
|
|
|
|
|
|
|
|
|
(177,873
|
)
|
|
(136,825
|
)
|
Intangible assets, net
|
|
|
|
|
|
|
$
|
618, 448
|
|
|
659,496
|
|
The aggregate amortization expense for those intangible assets
that continue to be amortized is reflected in amortization of intangible assets
in the consolidated statements of income, and comprehensive income was $20,524
and $20,524 for the three months ended June 30, 2014 and 2013, respectively, and
$41,048 and $41,048 for the six months ended June 30, 2014 and 2013,
respectively.
Amortization expense for the next five years and thereafter is
as follows:
2014 (six months)
|
$
|
41,047
|
|
2015
|
|
82,095
|
|
2016
|
|
82,095
|
|
2017
|
|
82,095
|
|
2018
|
|
82,095
|
|
Thereafter
|
|
249,021
|
|
Total
|
$
|
618,448
|
|
NOTE 21 SUMMARIZED INFORMATION OF EQUITY METHOD INVESTMENT
IN THE JV COMPANY
The Companys consolidated net income includes the Companys
proportionate share of the net income or loss of the Companys equity method
investees. When the Company records its proportionate share of net income, it
increases equity income (loss) net in the Companys consolidated statements of
income and the Companys carrying value in that investment. Conversely, when the
Company records its proportionate share of a net loss, it decreases equity
income (loss) net in the Companys consolidated statements of income and the
Companys carrying value in that investment. All intra-entity profits and losses
with the Companys equity method investees have been eliminated.
Kandi Electric Vehicles Group Co., Ltd. (the JV Company)
In March 2013, pursuant to a joint venture agreement (the JV
Agreement) entered into between Kandi Vehicles and Shanghai Maple Guorun
Automobile Co., Ltd. (Shanghai Guorun), a 99%-owned subsidiary of Geely
Automobile Holdings Ltd. (Geely), the parties established Zhejiang Kandi
Electric Vehicles Co., Ltd. (the JV Company) to develop, manufacture and sell
electrical vehicles (EVs) and related auto parts. Each of Kandi Vehicles and
Shanghai Guorun has a 50% ownership interest in the JV Company. In fourth
quarter of 2013, Kandi Vehicles entered into an ownership transfer agreement
with the JV Company pursuant to which Kandi Vehicles transferred 100% of its
ownership in Kandi Changxing to the JV Company. As a result, the Company
indirectly has a 50% economic interest in Kandi Changxing through its 50%
ownership interest in the JV Company after this transfer. In November 2013,
Zhejiang Kandi Electric Vehicles Jinhua Co., Ltd. (Kandi Jinhua) was formed by
the JV Company. The JV Company has 100% ownership interest in Kandi
Jinhua, and the Company, indirectly through its 50% ownership interest in the JV
Company, has a 50% economic interest in Kandi Jinhua. In November 2013, Zhejiang
JiHeKang Electric Vehicle Sales Co., Ltd. (JiHeKang) was formed by the JV
Company. The JV Company has 100% ownership interest in JiHeKang, and the
Company, indirectly through its 50% ownership interest in the JV Company, has a
50% economic interest in JiHeKang. In December 2013, the JV Company entered into
an ownership transfer agreement with Shanghai Maple pursuant to which the JV
Company acquired 100% ownership of Kandi Electric Vehicles (Shanghai) Co., Ltd.
(Kandi Shanghai). As a result, Kandi Shanghai is a wholly-owned subsidiary of
the JV Company, and the Company, indirectly through its 50% ownership interest
in the JV Company, has a 50% economic interest in Kandi Shanghai. In January
2014, Zhejiang Kandi Electric Vehicles Jiangsu Co., Ltd. (Kandi Jiangsu) was
formed by the JV Company. The JV Company has 100% ownership interest in Kandi
Jiangsu, and the Company, indirectly through its 50% ownership interest in the
JV Company, has a 50% economic interest in Kandi Jiangsu. In addition, In July
2013, Zhejiang ZuoZhongYou Electric Vehicle Service Co., Ltd. (the Service
Company) was formed. The JV Company has a 19% ownership interest in the Service
Company. The Company, indirectly through its 50% ownership interest in the JV
Company, has a 9.5% of economic interest in the Service Company. In March 2014,
the JV Company changed its name to Kandi Electric Vehicles Group Co., Ltd.
31
KANDI TECHNOLOGIES GROUP, INC.
|
AND SUBSIDIARIES
|
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(UNAUDITED)
|
As of June 30, 2014, the JV Company consolidated the following
entities on its financial statements: (1) 100% interest in Kandi Changxing; (2)
100% interest in Kandi Jinhua; (3) 100% interest in JiHeKang; (4) 100% interest
in Kandi Shanghai; and (5) 100% interest in Kandi Jiangsu.
The Company accounted for its investments in the JV Company
under the equity method of accounting as the Company has a 50% ownership
interest in the JV Company. Therefore, the Companys consolidated net income for
the six months ended June 30, 2014, included equity income from the JV Company
during such periods.
The combined results of operations and financial position of
the JV Company are summarized below:
|
|
Three months ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
Condensed income statement
information:
|
|
|
|
|
|
|
Net sales
|
$
|
45,135,796
|
|
$
|
-
|
|
Gross income (loss)
|
|
2,638,447
|
|
|
-
|
|
Net income (loss)
|
|
728,994
|
|
|
(20,752
|
)
|
Companys equity in net
income of JV
|
$
|
364,497
|
|
$
|
(10,376
|
)
|
|
|
Six months ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
Condensed income statement
information:
|
|
|
|
|
|
|
Net sales
|
$
|
79,995,840
|
|
$
|
-
|
|
Gross income (loss)
|
|
6,926,375
|
|
|
-
|
|
Net income (loss)
|
|
2,385,818
|
|
|
(20,752
|
)
|
Companys equity in net
income of JV
|
$
|
1,192,909
|
|
$
|
(10,376
|
)
|
|
|
June 30, 2014
|
|
|
December 31, 2013
|
|
Condensed balance sheet information:
|
|
|
|
|
|
|
Current assets
|
$
|
164,363,860
|
|
$
|
108,139,053
|
|
Noncurrent assets
|
|
157,786,890
|
|
|
146,130,466
|
|
Total assets
|
$
|
322,150,750
|
|
$
|
254,269,519
|
|
Current liabilities
|
|
155,466,409
|
|
|
93,772,816
|
|
Noncurrent liabilities
|
|
4,946,100
|
|
|
-
|
|
Equity
|
|
161,738,241
|
|
|
160,496,703
|
|
Total liabilities and
equity
|
$
|
322,150,750
|
|
$
|
254,269,519
|
|
32
KANDI TECHNOLOGIES GROUP, INC.
|
AND SUBSIDIARIES
|
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(UNAUDITED)
|
During the first half of 2014, 99.2% of the JV Companys
revenues were derived from the sales of EV products in the PRC with a total of
5,329 units sold during such period. The growth of sales of EV products was
mainly driven by the demand by Hangzhou Public EV Sharing System (the
Car-Share Project) and group long-term lease project. As the Company only has
a 50% ownership interest in the JV Company and accounted for its investments in
the JV Company under the equity method of accounting, the Company didnt
consolidate the JV Companys financial results but included equity income from
the JV Company during such periods.
Note: The following table illustrates the captions used in the
Companys Income Statements for its equity basis investments in the JV Company.
Changes in the Companys equity method investment in JV Company
for the six months ended June 30, 2014 and 2013 are as follows:
|
|
Six Months Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
Investment in JV Company,
beginning of the period,
|
$
|
79,331,930
|
|
$
|
-
|
|
Investment in JV Company
|
|
-
|
|
|
80,798,940
|
|
Share of profit (loss)
|
|
1,192,909
|
|
|
(10,376
|
)
|
Intercompany transaction elimination
|
|
(386,009
|
)
|
|
-
|
|
Year 2013 unrealized profit realized
|
|
911,930
|
|
|
-
|
|
Exchange difference
|
|
(566,796
|
)
|
|
(100
|
)
|
Investment in JV Company, end of the period
|
$
|
80,483,964
|
|
$
|
80,788,464
|
|
Sales to our customers, the JV Companys subsidiaries, for the
three and six months ended June 30, 2014 were $17,745,909 and $42,468,191,
respectively, and they were primarily the sales of battery packs, body parts, EV
drive motors, EV controllers, air conditioning units and other auto parts, of
which the majority of sales were to Kandi Changxing amounted to $12,347,137 and
$29,573,430, respectively, Kandi Shanghai amounted to $3,884,233 and
$10,786,012, respectively and Kandi Jinhua amounted to $1,516,886. Theses EV
parts were used in manufacturing of pure products by the JVs Companys
subsidiaries to sell entirely to the JV Companys customer or Shanghai Maple
Auto Co., Ltd.(Shanghai Maple). Shanghai
Maple holds the countrys vehicle production rights of sedan, equivalent
to license, that qualifies it to sell the EV products to the end
customers. Shanghai Maple is 90% owned by Geely and 10% owned by Zhejiang Maple
Asset Management Co. Ltd. According to the JV agreement, before the JV Company
receives vehicle production rights (license), the JV Company and its
subsidiaries all may sell their products through the channel of Shanghai Maples
vehicle production rights (license) to the end customers or the Service Company,
which purchased and used the cars in Hangzhou Public EV sharing System and group
long-term lease project. Of the total sales to the JV Company and its
subsidiaries for the six months ended June 30, 2014, approximately 72% of the
sales were related to the sales of battery packs because Kandi New Energy holds
a production rights (license) to manufacture requisite battery packs used in
manufacturing of Kandi brands EVs. Under the JV agreement, the Companys EV
product
manufacturing business will be gradually transferred to the JV Company. The
Company will be mainly responsible for supplying the JV Company with EV parts in
the future and the JV Company will be responsible to
produce EV products and to sell finished goods through channel to its end customers.
33
KANDI TECHNOLOGIES GROUP, INC.
|
AND SUBSIDIARIES
|
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(UNAUDITED)
|
As of June 30, 2014 and December 31, 2013, the amount due from
the JV Company, net was $34,507,160 and $2,917,592, respectively, of which the
majority was the balances with Kandi Changxing and Kandi Shanghai. As of June
30, 2014 and December 31, 2013, the amount due from Kandi Changxing, net was
$26,488,465 and $1,576,408, respectively, and the amount due from Kandi
Shanghai, net was $10,388,436 and $0, respectively.
NOTE 22 ACCOUNTS RECEIVABLE
Accounts receivable are summarized as follows:
|
|
June 30,
|
|
|
|
|
|
|
2014
|
|
|
December 31,
|
|
|
|
(Unaudited)
|
|
|
2013
|
|
Accounts receivable
|
$
|
19,218,760
|
|
$
|
31,370,862
|
|
Less: Provision for doubtful debts
|
|
-
|
|
|
-
|
|
Accounts receivable, net
|
$
|
19,218,760
|
|
$
|
31,370,862
|
|
During the six months ended June 30, 2014 and 2013, the Company
sold products to Kandi USA Inc., a company that operates under the trade name of
Eliteway Motorsports (Eliteway), amounting to $2,187,115 and $3,077,052,
respectively. During the three months ended June 30, 2014 and 2013, the Company
sold products to Kandi USA Inc., , amounting to $1,628,096 and $1,892,872,
respectively. As of June 30, 2014 and December 31, 2013, outstanding receivable
due from Eliteway was $1,125,183 and $ 2,800,958, respectively.
Mr. Hu Wangyuan is the sole shareholder and officer of
Eliteway, which serves as a U.S. importer of the Companys products. Mr. Hu
Wangyuan is the adult son of the Companys chairman and Chief Executive Officer,
Mr. Hu Xiaoming. As of and for the six months ended June 30, 2014, Eliteway and
Mr. Hu Wangyuan were financially independent from the Company. The transactions
between the Company and Eliteway were carried out at armslength without
preferential terms compared with other customers that placed orders comparable
in size or volume.
NOTE 23 COMMITMENTS AND CONTINGENCIES
Guarantees and Pledged collateral for third party bank loans
As of June 30, 2014, the Company provided guarantees for the
following third parties:
(1) Guarantees for bank loans
Guarantee provided
to
|
|
Amount
|
|
Zhejiang Kangli Metal Manufacturing
Company.
|
$
|
4,871,949
|
|
Zhejiang Shuguang industrial Co., Ltd.
|
|
4,871,949
|
|
Nanlong Group Co., Ltd.
|
|
9,743,898
|
|
Total
|
$
|
19,487,796
|
|
On December 27, 2013, the Company entered into a guarantee
contract to serve as the guarantor for the bank loan borrowed from Shanghai Bank
Hangzhou branch in the amount of $4,871,949 by Zhejiang Kangli Metal
Manufacturing Company (ZKMMC) for the period from December 27, 2013 to
December 27, 2014. ZKMMC is not related to the Company. Under this guarantee
contract, the Company agrees to perform all obligations of ZKMMC under the loan
contract if ZKMMC fails to perform its obligations as set forth therein.
On March 4, 2014, the Company entered into a guarantee contract
to serve as the guarantor for the bank loan borrowed from PingAn Bank in the
amount of $4,871,949 by Zhejiang Shuguang industrial Co., Ltd. (ZSICL) for the
period from March 4, 2014 to March 4, 2015. ZSICL is not related to the Company.
Under this guarantee contract, the Company agrees to perform all obligations of
ZSICL under the loan contracts if ZSICL fails to perform its obligations as set
forth therein.
34
KANDI TECHNOLOGIES GROUP, INC.
|
AND SUBSIDIARIES
|
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(UNAUDITED)
|
On March 15, 2013 and December 27, 2013, the Company entered
into two guarantee contracts to serve as the guarantor for the bank loans
borrowed from Shanghai Pudong Development Bank Jinhua Branch and Shanghai Bank
Hangzhou branch in the amount of $3,247,966 and $6,495,932, respectively, by
Nanlong Group Co., Ltd. (NGCL) for the period from March 15, 2013 to March 15,
2016, and December 27, 2013 to December 27, 2014, respectively. NGCL is not
related to the Company. Under these guarantee contracts, the Company agrees to
perform all obligations of NGCL under the loan contracts if NGCL fails to
perform its obligations as set forth therein.
(2) Pledged collateral for a third partys bank loans
As of June 30, 2014 and December 31, 2013, none of the
Companys land use rights or plant and equipment were pledged as collateral
securing bank loans to third parties.
NOTE 24 SEGMENT REPORTING
The Company has only one single operating segment. The
Companys revenue and long-lived assets are primarily derived from and located
in the PRC. The Company only has operations in the PRC.
The following table sets forth revenues by geographic area:
|
|
Six Months Ended June 30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
Long Lived
|
|
|
|
Sales Revenue
|
|
|
Long Lived Assets
|
|
|
Sales Revenue
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
$
|
2,123,314
|
|
$
|
-
|
|
$
|
2,723,533
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe and other region
|
|
1,231,682
|
|
|
-
|
|
|
617,428
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China
|
|
69,776,363
|
|
|
124,197,148
|
|
|
23,479,387
|
|
|
128,908,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
73,131,359
|
|
$
|
124,197,148
|
|
$
|
26,820,348
|
|
$
|
128,908,847
|
|
35
KANDI TECHNOLOGIES GROUP, INC.
|
AND SUBSIDIARIES
|
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(UNAUDITED)
|
|
|
Three Months Ended June 30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
Long Lived
|
|
|
|
Sales Revenue
|
|
|
Long Lived Assets
|
|
|
Sales Revenue
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
$
|
1,554,096
|
|
$
|
-
|
|
$
|
1,095,453
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe and other region
|
|
705,080
|
|
|
-
|
|
|
206,711
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China
|
|
30,700,879
|
|
|
124,197,148
|
|
|
10,855,663
|
|
|
128,908,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
32,960,055
|
|
$
|
124,197,148
|
|
$
|
12,157,827
|
|
$
|
128,908,847
|
|
36
Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations.
This report contains forward-looking statements within the
meaning of the federal securities laws that relate to future events or our
future financial performance. In some cases, you can identify forward-looking
statements by terminology, such as may, will, should, could, expect,
plan, anticipate, believe, estimate, project, predict, intend,
potential or continue or the negative of such terms or other comparable
terminology, although not all forward-looking statements contain such terms.
In addition, these forward-looking statements include, but are
not limited to, statements regarding implementing our business strategy;
development and marketing of our products; our estimates of future revenue and
profitability; our expectations regarding future expenses, including research
and development, sales and marketing, manufacturing and general and
administrative expenses; difficulty or inability to raise additional financing,
if needed, on terms acceptable to us; our estimates regarding our capital
requirements and our needs for additional financing; attracting and retaining
customers and employees; sources of revenue and anticipated revenue; and
competition in our market.
Forward-looking statements are only predictions. Although we
believe that the expectations reflected in these forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. All of our forward-looking information is subject to risks and
uncertainties that could cause actual results to differ materially from the
results expected. Although it is not possible to identify all factors, these
risks and uncertainties include the risk factors and the timing of any of those
risk factors described in our Annual Report on Form 10-K for the year ended
December 31, 2013 and those set forth from time to time in our other filings
with the Securities and Exchange Commission (SEC). These documents are
available on the SECs Electronic Data Gathering and Analysis Retrieval System
at http://www.sec.gov.
Critical Accounting Policies and Estimates
This section should be read together with the Summary of
Significant Accounting Policies in the attached condensed consolidated financial
statements included in this report.
Policy affecting options and warrants
Our stock option cost is recorded in accordance with ASC 718
and ASC 505. The fair value of stock options is estimated using the
Black-Scholes-Merton model. Our expected volatility assumption is based on the
historical volatility of our common stock. The expected life assumption is
primarily based on the expiration date of the option. The risk-free interest
rate for the expected term of the option is based on the U.S. Treasury yield
curve in effect at the time of grant. Stock option expense recognition is based
on awards expected to vest. There were no estimated forfeitures. ASC standards
require forfeitures to be estimated at the time of grant and revised in
subsequent periods, if necessary, if actual forfeitures differ from those
estimates.
Our warrant costs are recorded in liabilities and equities,
respectively, in accordance with ASC 480, ASC 505 and ASC 815. The fair value of
a warrant, which is classified as a liability, is estimated using the
Black-Scholes-Merton model and the lattice valuation model. Our expected
volatility assumption is based on the historical volatility of our common stock.
The expected life assumption is primarily based on the expiration date of the
warrant. The risk-free interest rate for the expected term of the warrant is
based on the U.S. Treasury yield curve in effect at the time of measurement. The
warrants, which are freestanding derivatives classified as liabilities on the
balance sheet, are measured at fair value on each reporting date, with decreases
in fair value recognized in earnings and increases in fair values recognized in
expenses.
The fair value of equity-based warrants, which are not
considered derivatives under ASC 815, is estimated using the
Black-Scholes-Merton model. Our expected volatility assumption is based on the
historical volatility of our common stock. The expected life assumption is
primarily based on the expiration date of the warrant. The risk-free interest
rate for the expected term of the option is based on the U.S. Treasury yield
curve in effect at the time of grant.
37
Estimates affecting accounts receivable and inventories
The preparation of our consolidated financial statements
requires management to make estimates and assumptions that affect our reporting
of assets and liabilities (and contingent assets and liabilities). These
estimates are particularly significant where they affect the reported net
realizable value of our accounts receivable and inventories.
Accounts receivable are recognized and carried at net
realizable value. An allowance for doubtful accounts is recorded in the period
when a loss is probable based on an assessment of specific factors, such as
troubled collection, historical experience, accounts aging, ongoing business
relations and other factors. Accounts are written off after exhaustive efforts
at collection. If accounts receivable are to be provided for, or written off,
they would be recognized in the consolidated statement of operations within
operating expenses. As of June 30, 2014 and December 31, 2013, we recorded no
allowance for doubtful accounts. This determination was made per our
managements judgment, which was based on their best knowledge.
Inventory is stated at the lower of cost, determined on a
weighted average basis, or net realizable value. Net realizable value is the
estimated selling price in the ordinary course of business less the estimated
cost of completion and the estimated costs necessary to make the sale.
Adjustments to reduce the cost of inventory to its net realizable value are
made, if required, for estimated excess, obsolescence, or impaired balances.
When inventories are sold, their carrying amount is charged to expense in the
year in which the revenue is recognized. Write-downs for declines in net
realizable value or for losses of inventories are recognized as an expense in
the year the impairment or loss occurs.
Although we believe that there is little likelihood that actual
results will differ materially from current estimates, if customer demand for
our products decreases significantly in the near future, or if the financial
condition of our customers deteriorates in the near future, we could realize
significant write downs for slow-moving inventories or uncollectible accounts
receivable.
Revenue Recognition
Our revenue recognition policy plays a key role in our
consolidated financial statements. Revenues represent the invoiced value of
goods sold, recognized upon the shipment of goods to customers, and revenues are
recognized when all of the following criteria are met:
Persuasive evidence of an arrangement exists;
Delivery has
occurred or services have been rendered;
The sellers price to the buyer is
fixed or determinable; and
Collectability is reasonably assured.
The revenue recognition policies for our legacy products,
including ATVs, go-karts and EV products, are the same: When the products are delivered,
the associated risk of loss is deemed transferred, and at that time we recognize
revenue.
Warranty Liability
Most of our non-EV products (the Legacy Products) are
exported out of China to foreign countries that have legal and regulatory
requirements with which we are not familiar. Development of warranty policies
for our Legacy Products in each of these countries would be virtually impossible
and prohibitively expensive. Therefore, we provide price incentives and free
parts to our customers and in exchange, our customers establish appropriate
warranty policies and assume warranty responsibilities. Consequently, warranty
issues are taken into consideration during the price negotiation for our
products. The free parts are delivered along with the products, and when
products are sold, the related parts are recorded as cost of goods sold. Due to
the reliable quality of our products, we have been able to maintain this
warranty policy and we have not had any product liability attributed to the
quality of our products.
For the EV products that we sell in China, there is a three
year or 50,000 kilometer manufacturer warranty. This warranty affects us through
our participation and investment in the JV Company, which manufactures the EVs.
38
Results of Operations
Comparison of Six Months Ended June 30, 2014 and 2013
The following table sets forth the amounts and percentage
relationship to revenue of certain items in our condensed consolidated
statements of income and comprehensive income
|
|
For Six Months
|
|
|
|
|
|
For Six Months
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
% Of
|
|
|
Ended
|
|
|
% Of
|
|
|
Change In
|
|
|
Change
|
|
|
|
June 30, 2014
|
|
|
Revenue
|
|
|
June 30, 2013
|
|
|
Revenue
|
|
|
Amount
|
|
|
In %
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES, NET
|
$
|
73,131,359
|
|
|
100.0%
|
|
$
|
26,820,348
|
|
|
100.0%
|
|
$
|
46,311,011
|
|
|
172.7%
|
|
COST OF GOODS SOLD
|
|
(61,049,862
|
)
|
|
(83.5%
|
)
|
|
(20,640,696
|
)
|
|
(77.0%
|
)
|
|
(40,409,166
|
)
|
|
195.8%
|
|
GROSS PROFIT
|
|
12,081,497
|
|
|
16.5%
|
|
|
6,179,652
|
|
|
23.0%
|
|
|
5,901,845
|
|
|
95.5%
|
|
Research and development
|
|
(2,143,930
|
)
|
|
(2.9%
|
)
|
|
(1,362,156
|
)
|
|
(5.1%
|
)
|
|
(781,774
|
)
|
|
57.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and distribution expenses
|
|
(507,151
|
)
|
|
(0.7%
|
)
|
|
(161,034
|
)
|
|
(0.6%
|
)
|
|
(346,117
|
)
|
|
214.9%
|
|
General and administrative
expenses
|
|
(9,643,944
|
)
|
|
(13.2%
|
)
|
|
(2,025,243
|
)
|
|
(7.6%
|
)
|
|
(7,618,701
|
)
|
|
376.2%
|
|
(LOSS) INCOME FROM
OPERATIONS
|
|
(213,528
|
)
|
|
(0.3%
|
)
|
|
2,631,219
|
|
|
9.8%
|
|
|
(2,844,747
|
)
|
|
(108.1%
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest (expense) income, net
|
|
(686,175
|
)
|
|
(0.9%
|
)
|
|
(1,287,810
|
)
|
|
(4.8%
|
)
|
|
601,635
|
|
|
(46.7%
|
)
|
Change in fair value of
financial instruments
|
|
(3,372,602
|
)
|
|
(4.6%
|
)
|
|
(92,339
|
)
|
|
(0.3%
|
)
|
|
(3,280,263
|
)
|
|
3552.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government grants
|
|
153,700
|
|
|
0.2%
|
|
|
49,807
|
|
|
0.2%
|
|
|
103,893
|
|
|
208.6%
|
|
Share of (loss) invested in associated
company
|
|
(92,992
|
)
|
|
(0.1%
|
)
|
|
(29,540
|
)
|
|
(0.1%
|
)
|
|
(63,452
|
)
|
|
214.8%
|
|
Share of profit (loss) after
tax of JV
|
|
1,718,830
|
|
|
2.4%
|
|
|
(10,376
|
)
|
|
(0.0%
|
)
|
|
1,729,206
|
|
|
(16665.4%
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income, net
|
|
119,827
|
|
|
0.2%
|
|
|
176,513
|
|
|
0.7%
|
|
|
(56,686
|
)
|
|
(32.1%
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(LOSS) INCOME FROM
OPERATIONS BEFORE
INCOME TAXES
|
|
(2,372,940
|
)
|
|
(3.2%
|
)
|
|
1,437,474
|
|
|
5.4%
|
|
|
(3,810,414
|
)
|
|
(265.1%
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAX (EXPENSE)
|
|
(556,135
|
)
|
|
(0.8%
|
)
|
|
(244,901
|
)
|
|
(0.9%
|
)
|
|
(311,234
|
)
|
|
127.1%
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET (LOSS) INCOME
|
$
|
(2,929,075
|
)
|
|
(4.0%
|
)
|
$
|
1,192,573
|
|
|
4.4%
|
|
$
|
(4,121,648
|
)
|
|
(345.6%
|
)
|
39
(a) Revenue
For the six months ended June 30, 2014, we had revenues of
$73,131,359 as compared to revenues of $26,820,348 for the six months ended June
30, 2013, an increase of $46,311,011 or 172.7% . For the six months ended June
30, 2014 and 2013, 95% and 88%, respectively, of our revenues were derived from
the sales of our products in the PRC.
The following table summarizes our revenues as well as the unit
sold by product types for the six months ended June 30, 2014 and 2013:
|
|
Six
Months Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
Unit
|
|
|
Sales
|
|
|
Unit
|
|
|
Sales
|
|
EV parts
|
|
47,484
|
|
$
|
42,238,297
|
|
|
-
|
|
|
-
|
|
EV products
|
|
1,531
|
|
|
21,617,300
|
|
|
632
|
|
$
|
3,758,907
|
|
Go-Kart
|
|
5,610
|
|
|
5,079,004
|
|
|
18,411
|
|
|
15,628,994
|
|
ATV
|
|
6,231
|
|
|
3,982,277
|
|
|
8,480
|
|
|
4,272,289
|
|
Auto generator
|
|
1,664
|
|
|
57,933
|
|
|
35,724
|
|
|
1,183,527
|
|
Three wheeled motorcycle
|
|
2
|
|
|
1,018
|
|
|
179
|
|
|
234,012
|
|
OEM - EV
|
|
320
|
|
|
155,530
|
|
|
-
|
|
|
-
|
|
Utility vehicles (UTVs)
|
|
-
|
|
|
-
|
|
|
340
|
|
|
863,818
|
|
Refitted car
|
|
-
|
|
|
-
|
|
|
33
|
|
|
878,801
|
|
Total
|
|
62,842
|
|
$
|
73,131,359
|
|
|
63,799
|
|
$
|
26,820,348
|
|
EV Parts
During the six months ended June 30, 2014, our revenues from
the sale of EV parts were $42,238,297. We started the EV parts business in the
first quarter of 2014, and our revenue for the six months ended June 30, 2014
primarily consisted of the sales of battery packs, body parts, EV drive motors,
EV controllers, air conditioning units and other auto parts to the JV Company
for manufacturing of EV products. Of the total EV parts sales to the JV Company for the
six months ended June 30, 2014, approximately 72% of the sales were related to
the sales of battery packs because the auto industry is highly regulated in
China and we hold the necessary production license to manufacture the battery
packs used in the manufacturing of Kandi brands EVs. Under the JV agreement,
our EV manufacturing business will be gradually transferred to the JV Company.
We will be primarily responsible for supplying the JV Company with EV parts in
the future and the JV Company will be primarily responsible to produce the EV
products.
EV Products
We continued to sell certain EV products during the first half
of 2014. Our revenues from the sale of EV products increased by $17,858,393 or
475.1% from $3,758,907 for the six months ended June 30, 2013 to $21,617,300 for
the six months ended June 30, 2014, representing a 142.2% of increase in unit
sales and a 137.4% increase in the average unit price. Of the total sales of EV
products for the six months ended June 30, 2014, approximately $21,016,349 or
approximately 97% was sold to Shanghai Maple Auto Co., Ltd., an unaffiliated
company that holds the countrys vehicle production rights of sedan that
qualifies it to sell the products to the end customer. The increased sales
of EV products were mainly driven by the demand by Hangzhou Public EV Sharing
System (the Car-Share Project) and group long-term lease project. The group
long-term lease project is a lease model that uses enterprise, community or
village as a lease unit and each unit leases a minimum of 100 EVs with a group
lease term at a minimum of three years.
40
Go-Karts
During the six months ended June 30, 2014, our revenues from
the sale of go-karts declined by $10,549,990, or 67.5%, primarily as a result of
a 69.5% decrease in unit sales as compared to the same period of last year.
However, the decline of unit sales was partially was offset by a 6.7% increase
in the average unit price during the first six months of 2014. The decrease in
go-kart sales was primarily due to the realignment of our product mix for more
efficient use of resources to capture more sales opportunities in the
fast-growing EV market in China.
ATV
During the six months ended June 30, 2014, our revenues from
the sale of ATVs decreased by $290,012, or 6.8%, as a result of a 26.5% decrease
in unit sales that was offset in part by a 26.9% increase in the average unit
price compared to the same period of 2013. The decrease in revenue was primarily
attributable to our continued efforts to optimize our product offering and focus
our efforts on the EV market in China. The average unit price increased as more high-end and middle-end products sold
during this reporting period.
Auto Generators
During the six months ended June 30, 2014, our sales of auto
generators decreased by $1,125,594, or 95.1%, as a result of a 95.3% decrease in
unit sales that was partially offset by a 5.1% increase in the average unit
price compared to the same period of last year. The decrease in revenue was
primarily due to the realignment of Yongkang Scrous product offering to focus
on manufacturing automobile motors, air-conditioning systems, controllers, and
accelerator pedals for EVs.
Motorcycles
During the six months ended June 30, 2014, our revenues from
the sale of three-wheeled motorcycles declined by $232,994 or 99.6%, as a result
of a 98.9% of decrease in unit sales and a 61.1% decrease in the average unit
price compared to the same period of last year. The decrease was primarily
because we adjusted our product offering and focused more efforts on increasing
EV demand in the China auto market.
OEM EV
During the six months ended June 30, 2014, our revenues from
our OEM business were $155,530. We started our OEM business in the second
quarter of 2014, and our sales for the six months ended June 30, 2014 were
primarily derived from assembling EV products for Kandi Jinhua, a wholly-owned
subsidiary of the JV Company. Indirectly through our 50% ownership interest in
the JV Company, we have a 50% economic interest in Kandi Jinhua.
UTV
During the six months ended June 30, 2014, our utility vehicles
(UTVs) revenue was nil. This is mainly due to our continued efforts to
optimize our product offering and focused our efforts on increasing EV demand in
the China auto market. Therefore, we stopped manufacturing UTV products.
Refitted Car
During the six months ended June 30, 2014, we did not record
any revenue from this business line as we discontinued manufacturing this
product in the third quarter of 2013 to focus our efforts on the China EV auto market.
The following table shows the breakdown of our revenues from
our customers during the six months ended June 30, 2014 and 2013 by geographical
markets based on the location of the customer:
41
|
|
Six
Months Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
Sales
|
|
|
Percentage
|
|
|
Sales
|
|
|
Percentage
|
|
North America
|
$
|
2,123,314
|
|
|
3%
|
|
$
|
2,723,533
|
|
|
10%
|
|
China
|
|
69,776,363
|
|
|
95%
|
|
|
23,479,387
|
|
|
88%
|
|
Europe & other region
|
|
1,231,682
|
|
|
2%
|
|
|
617,428
|
|
|
2%
|
|
Total
|
$
|
73,131,359
|
|
|
100%
|
|
$
|
26,820,348
|
|
|
100%
|
|
(b) Cost of goods sold
Cost of goods sold during the six months ended June 30, 2014
was $61,049,862, representing an increase of $40,409,166 or 195.8% from
$20,640,696 in the corresponding period of 2013. This increase was primarily due
to the corresponding increased sales for the six months ended June 30, 2014.
However, the increase in cost of goods sold outpaced the growth of our revenues,
which was largely due to relatively less profitable raw material purchases in
our newly-added EV parts product line, and the sale of EV parts accounted for
57.8% of total revenue for the six months ended June 30, 2014. As a result, cost
of goods sold for our EV parts product line comprised the majority, or 62.8%, of
the total cost of goods sold for the six months ended June 30, 2014. The battery
sales accounted the majority of our EV parts sales and its corresponding cost of
goods sold accounted for 47.6% of total cost of goods sold.
For the six months ended June 30, 2014, excluding the battery
business mentioned above, our cost of raw materials had a percentage increase of
0.23% compared to the sales increase in the same period of time year over year.
Excluding the battery business mentioned above, total wages and
salaries for the six months ended June 30, 2014, had an
increase of 0.34% compared to the sale increase in the same period of time year
over year.
Excluding the battery business mentioned above, our other
overhead costs for the six months ended June 30, 2014 had a decrease of 4.43%
compared to the sales increase in the same period of time year over year.
For the six months ended June 30, 2014, raw material costs
comprised approximately 95.4% of total cost of goods sold, labor costs comprised
approximately 1.5% of total cost of goods sold, and manufacturing overhead
comprised approximately 3.1% of the total cost of goods sold. For the six months
ended June 30, 2013, raw material costs comprised approximately 88.8% of total
cost of goods sold, labor costs comprised approximately 2.6% of total cost of
goods sold, and manufacturing overhead comprised approximately 8.6% of the total
cost of goods sold.
(c) Gross profit
Gross profit for the first six months of 2014 was $12,081,497
as compared to $6,179,652 for the same period last year, an increase of
$5,901,845 or 95.5% . This increase was primarily attributable to the increase
in our revenue. However, our gross margin in the first six months of 2014
decreased to 16.5% compared to 23.0% for the same period of 2013. The decreased
gross margin was mainly because the majority of our revenue growth during the
first half year came from the relatively less profitable EV parts product lines,
which had 9.2% of gross margin compared to 16.5% of gross margin for the company
as a whole.
(d) Selling and distribution expenses
Selling and distribution expenses were $507,151 for the six
months ended June 30, 2014, compared to $161,034 for the same period in 2013, an
increase of $346,117 or 214.9% . This increase was primarily attributable to
warranty expenses of $303,647 for repair and maintenance charged during the
second quarter of 2014. We contracted a qualified third party to provide repair
and maintenance works for the 1,620 units we sold of Kandi 7001 series EV
sedans. The total price of this service is $3,176,080 and will be amortized over
three years. Excluding this charge, our selling and distribution expenses
increased $42,470 or 26.4% as compared to the same period of last year. The increase was largely due to the increased expenses in trade
shows and advertising as we increased our sales and marketing efforts this
year.
42
(e) General and administrative expenses
General and administrative expenses were $9,643,944 for the
first six months ended June 30, 2014, compared to $2,025,243 for the same period
in 2013, an increase of $7,618,701 or 376.2% . For the six months ended June 30,
2014, general and administrative expenses included $4,429,247 in expenses for
common stock awards to employees and consultants for their services, compared to
$53,042 for the same period in 2013. Excluding stock award costs, our net
general and administrative expenses for the six months ended June 30, 2014 were
$5,214,697, an increase of $3,242,496 or 164.4% over the $1,972,201 of such
expenses for the same period of 2013. This increase was primarily attributable
to costs related to the capital raise that occurred in the first quarter of
2014.
(f) Research and development
Research and development expenses were $2,143,930 for the six
months ended June 30, 2014, compared to $1,362,156 from the same period in 2013,
an increase of $781,774 or 57.4% . This increase was primarily due to our
increased costs of materials, testing and inspection related to the development
and commercialization of our new EV model - SMA7005BEV, the development of our
new auto air conditioning system, and the development of our EV intelligent
control system used in our EV products.
(g) Government grants
Government grants totaled $153,700 for the six months ended
June 30, 2014, an increase of $103,893 or 208.6% from $49,807 in the
corresponding period in 2013. The increases were largely due to the awards from
the Chinese government for promoting local business.
(h) Net interest (expense) income
Net interest expense was $686,175 for the six months ended June
30, 2014, compared to $1,287,810 for the same period last year, a decrease of
$601,635 or 46.7% . This change was primarily attributable to an increase in
interest income earned on loans made to third parties. For the six months ended
June 30, 2014, we recorded interest income of $1,232,135, which included
$1,210,287 earned on loans made to third parties and $21,848 earned on bank
deposits. For the six months ended June 30, 2014, we recorded interest expense
of $1,918,311, which included bank loan interest of $1,169,626 and bond interest
of $748,685.
(i) Change in fair value of financial instruments
For the six months ended June 30, 2014, the expense related to
changes in the fair value of the derivative liability relating to the warrants
issued to investors and placement agents was $3,372,602, compared to $92,339 for
the same period of last year, an increase of $3,280,263 or 3,552.4% . The
increase was largely due to the increase of our stock price during this year.
(j) Share of (Loss) of Associated Company
Investment losses were $92,992 for the first six months ended
June 30, 2014, compared to a loss of $29,540 for the corresponding period in
2013, an increase of $63,452 or 214.8% . For the six months ended June 30, 2014
and 2013, these losses were attributable to our 30% equity interest investment
in Jinhua Service. As of June 30, 2014, Jinhua Service ceased its operations and
will be dissolved. As a result, we wrote off the remaining investment in this
entity and associated liabilities due to this entity.
(k) Share of Profit (Loss) after Tax of the JV Company
The JV Company recorded net income of $2,385,818 for the
six-month period ended June 30, 2014. We accounted for our investments in the JV
Company under the equity method of accounting as we have a 50% ownership
interest in the JV Company. As a result, we recorded 50% of the JV Companys
profit, or $1,192,909 for the six-month period ended June 30, 2014. After eliminating intra-entity
profits and loss, our share of the after tax profit of the JV Company was
$1,718,830 for the six months ended June 30, 2014, compared to a loss of $10,376
representing our share of the JV Companys loss for the same period of last
year. We expect the JV Company will continue to perform well as the demand for
EV products continues to grow in China, as evidenced by the orders from Hangzhou
Public EV Sharing System (the Carshare Project). Also refer to Note 21.
43
(l) Other Income, Net
Other income was $119,827 for the six months ended June 30,
2014, compared to $176,513 for the same period of last year, a decrease of
$56,686, or 32.1% . This decrease was primarily attributable to the decrease in
lease income we received during this reporting period.
(m) Net income (loss)
We incurred a net loss of $2,929,075 for the six months ended
June 30, 2014, compared to net income of $1,192,573 for the same period in 2013,
a change of $4,121,648 or 345.6% . The net loss was primarily attributable to
the change in the fair value of warrant derivatives and the expense incurred for
stock awards.
Excluding (i) the effects of stock award expenses, which were
$4,429,247 and $53,042 for the six months ended June 30, 2014 and 2013,
respectively, and (ii) the change of the fair value of financial derivatives,
which were expenses of $3,372,602 and $92,339 for the six months ended June 30,
2014 and 2013, respectively, our net income was $4,872,774 (non-GAAP) for the
six months ended June 30, 2014 as compared to net income of $1,337,954 (non-GAAP)
for the same period of 2013, an increase of $3,534,820 or 264.2%. The increase
in such net income was primarily attributable to the increase of revenue and
gross profits during the first half year of 2014.
The Company makes reference to certain non-GAAP financial
measure, i.e., the adjusted net income. Management believes that such adjusted
term is useful to investors in evaluating the Companys operating performance
because it presents a meaningful measure of corporate performance. See the non-GAAP
reconciliation table below. Any non-GAAP measures should not be considered as a
substitute for, and should only be read in conjunction with, measures of
financial performance prepared in accordance with GAAP.
|
|
Six Months Ended June 30
|
|
|
2014
|
|
|
2013
|
|
GAAP net (loss) income
|
$
|
(2,929,075
|
)
|
$
|
1,192,573
|
|
Stock award expenses
|
|
4,429,247
|
|
|
53,042
|
|
Change of the fair value of financial
derivatives
|
|
3,372,602
|
|
|
92,339
|
|
Non-GAAP net income
|
|
4,872,774
|
|
|
1,337,954
|
|
Comparison of Three Months Ended June 30, 2014 and
2013
The following table sets forth the amounts and percentage
relationship to revenue of certain items in our condensed consolidated
statements of income and comprehensive income.
|
|
For Three
|
|
|
|
|
|
For Three
|
|
|
|
|
|
|
|
|
|
|
|
|
Months Ended
|
|
|
% Of
|
|
|
Months Ended
|
|
|
% Of
|
|
|
Change In
|
|
|
Change
|
|
|
|
June 30, 2014
|
|
|
Revenue
|
|
|
June 30, 2013
|
|
|
Revenue
|
|
|
Amount
|
|
|
In %
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES, NET
|
$
|
32,960,055
|
|
|
100.0%
|
|
$
|
12,157,827
|
|
|
100%
|
|
$
|
20,802,228
|
|
|
171.1%
|
|
COST OF GOODS SOLD
|
|
(25,738,967
|
)
|
|
(78.1%
|
)
|
|
(9,350,206
|
)
|
|
(76.9%
|
)
|
|
(16,388,761
|
)
|
|
175.3%
|
|
GROSS PROFIT
|
|
7,221,088
|
|
|
21.9%
|
|
|
2,807,621
|
|
|
23.1%
|
|
|
4,413,467
|
|
|
157.2%
|
|
Research and development
|
|
(971,673
|
)
|
|
(2.9%
|
)
|
|
(672,491
|
)
|
|
(5.5%
|
)
|
|
(299,182
|
)
|
|
44.5%
|
|
Selling and distribution expenses
|
|
(435,894
|
)
|
|
(1.3%
|
)
|
|
(71,420
|
)
|
|
(0.6%
|
)
|
|
(364,474
|
)
|
|
510.3%
|
|
General and administrative expenses
|
|
(3,173,178
|
)
|
|
(9.6%
|
)
|
|
(1,332,279
|
)
|
|
(11.0%
|
)
|
|
(1,840,899
|
)
|
|
138.2%
|
|
INCOME FROM
OPERATIONS
|
|
2,640,343
|
|
|
8.0%
|
|
|
731,431
|
|
|
6.0%
|
|
|
1,908,912
|
|
|
261.0%
|
|
Interest (expense) income, net
|
|
(214,995
|
)
|
|
(0.7%
|
)
|
|
(617,601
|
)
|
|
(5.1%
|
)
|
|
402,606
|
|
|
(65.2%
|
)
|
Change in fair value of financial
instruments
|
|
8,941,569
|
|
|
27.1%
|
|
|
(1,082,735
|
)
|
|
(8.9%
|
)
|
|
10,024,304
|
|
|
(925.8%
|
)
|
Government grants
|
|
153,700
|
|
|
0.5%
|
|
|
49,807
|
|
|
0.4%
|
|
|
103,893
|
|
|
208.6%
|
|
Share of (loss) invested in associated
company
|
|
(77,187
|
)
|
|
(0.2%
|
)
|
|
(15,517
|
)
|
|
(0.1%
|
)
|
|
(61,670
|
)
|
|
397.4%
|
|
Share of loss after tax of JV
|
|
(9,526
|
)
|
|
(0.0%
|
)
|
|
(10,376
|
)
|
|
(0.1%
|
)
|
|
850
|
|
|
(8.2%
|
)
|
Other income, net
|
|
60,247
|
|
|
0.2%
|
|
|
54,148
|
|
|
0.4%
|
|
|
6,099
|
|
|
11.3%
|
|
INCOME (LOSS) FROM
OPERATIONS BEFORE
INCOME TAXES
|
|
11,494,151
|
|
|
34.9%
|
|
|
(890,843
|
)
|
|
(7.3%
|
)
|
|
12,384,994
|
|
|
(1390.3%
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAX (EXPENSE)
|
|
(337,066
|
)
|
|
(1.0%
|
)
|
|
(153,457
|
)
|
|
(1.3%
|
)
|
|
(183,609
|
)
|
|
119.6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
(LOSS)
|
$
|
11,157,085
|
|
|
33.9%
|
|
$
|
(1,044,300
|
)
|
|
(8.6%
|
)
|
$
|
12,201,385
|
|
|
(1168.4%
|
)
|
44
(a) Revenue
For the three months ended June 30, 2014, our revenue was
$32,960,055 compared to $12,157,827 for the three months ended June 30, 2013, an
increase of $20,802,228 or 171.1% . The increase of revenue was mainly due to
the commencement of sales of EV parts in the first quarter of 2014 and increased
EV products sales during the second quarter of 2014. The EV products revenue,
which was derived primarily from the sale of Kandi 7001 model, increased
$11,217,339 or 552.1% year over year. Of the total revenues during the three
months ended June 30, 2014, approximately 52.3% of total revenue resulted from
the sales of EV parts and approximately 40.2% of total revenues resulted from
the sales of EV products. ATV and Go-Kart revenues for the three months ended
June 30, 2014 decreased 62.6% and 76.3%, respectively, year over year due to our
realignment of our product mix for more efficient use of our resources to grow
our business in the fast-growing EV market in China. The OEM business is a
newly- added business line during the second quarter mainly to assemble EV
products
for the JV Company.
The following table summarizes our revenues as well as the unit
sold by product types for the three months ended June 30, 2014 and 2013:
|
|
Three Months Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
Unit
|
|
|
Sales
|
|
|
Unit
|
|
|
Sales
|
|
EV parts
|
|
29,331
|
|
$
|
17,224,231
|
|
|
-
|
|
|
-
|
|
EV products
|
|
911
|
|
|
13,249,212
|
|
|
330
|
|
$
|
2,031,873
|
|
Go-Kart
|
|
1,774
|
|
|
1,686,355
|
|
|
8,500
|
|
|
7,105,600
|
|
ATV
|
|
1,002
|
|
|
644,727
|
|
|
3,546
|
|
|
1,722,779
|
|
Auto generator
|
|
-
|
|
|
-
|
|
|
16,385
|
|
|
549,591
|
|
Three wheeled motorcycle
|
|
-
|
|
|
-
|
|
|
81
|
|
|
166,349
|
|
OEM - EV
|
|
320
|
|
|
155,530
|
|
|
-
|
|
|
-
|
|
Utility vehicles (UTVs)
|
|
-
|
|
|
-
|
|
|
100
|
|
|
285,145
|
|
Refitted car
|
|
-
|
|
|
-
|
|
|
11
|
|
|
296,490
|
|
Total
|
|
33,338
|
|
$
|
32,960,055
|
|
|
28,953
|
|
$
|
12,157,827
|
|
The following table shows the breakdown of our revenues from
our customers during the three months ended June 30, 2014 and 2013 by
geographical markets based on the location of the customer:
|
|
Three Months Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
Sales
|
|
|
Percentage
|
|
|
Sales
|
|
|
Percentage
|
|
North America
|
$
|
1,554,096
|
|
|
5%
|
|
$
|
1,095,453
|
|
|
9%
|
|
China
|
|
30,700,879
|
|
|
93%
|
|
|
10,855,663
|
|
|
89%
|
|
Europe & other region
|
|
705,080
|
|
|
2%
|
|
|
206,711
|
|
|
2%
|
|
Total
|
$
|
32,960,055
|
|
|
100%
|
|
$
|
12,157,827
|
|
|
100%
|
|
(b) Cost of goods sold
Cost of goods sold during the three months ended June 30, 2014
was $25,738,967, representing an increase of $16,388,761, or 175.3%, compared to
$9,350,206 for three months ended June 30, 2013. This increase was mainly due to
the increase in corresponding sales. However, the increase in cost of goods sold
outpaced the growth of our revenues, which was largely due to relatively less
profitable raw material purchases in our newly-added EV parts product line, and the sale of EV parts accounted for 52.3% of
total revenue for the three months ended June 30, 2014. As a result, cost of
goods sold for our EV parts product line comprised the majority, or 56.3%, of
the total cost of goods sold for the three months ended June 30, 2014. The
battery sales corresponding cost of goods sold accounted for 26.4% of total
cost of goods sold.
45
For the three months ended June 30, 2014, excluding the battery
business mentioned above, our cost of raw materials had a decrease of 0.31%
compared to the sales increase in the same period of time year over year.
Excluding the battery business mentioned above, total wages and
salaries for the three months ended June 30, 2014, had an increase of 0.63%
compared to the sale increase in the same period of time year over year.
Excluding the battery business mentioned above, our other
overhead costs for the three months ended June 30, 2014 had a decrease of 5.84%
compared to the sales increase in the same period of time year over year.
For the three months ended June 30, 2014, raw material costs
comprised approximately 93.7% of total cost of goods sold, labor costs comprised
approximately 2.5% of total cost of goods sold, and manufacturing overhead
comprised approximately 3.8% of the total cost of goods sold. For the three
months ended June 30, 2013, raw material costs comprised approximately 89.2% of
total cost of goods sold, labor costs comprised approximately 3.0% of total cost
of goods sold, and manufacturing overhead comprised approximately 7.8% of the
total cost of goods sold.
(c) Gross profit
Gross profit for the second quarter of 2014 increased 157.2% to
$7,221,088, compared to $2,807,621 for the same period last year. This was
primarily attributable to our significantly increased revenue during the
quarter. Our gross margin decreased to 21.9% compared to 23.1% for the same
period of 2013. The decreased gross margin was mainly because a large portion of
our revenue growth during the second quarter came from the relatively less
profitable EV parts product line, which accounted for 52.3% of total revenue for
the quarter and had 15.9% of gross margin compared to 21.9% of gross margin for
the company as a whole.
(d) Selling and distribution expenses
Selling and distribution expenses were $435,894for the three
months ended June 30, 2014, compared to $71,420 for the same period in 2013, an
increase of $364,474 or 510.3% . This increase was primarily attributable to a
charge of $303,647 for repair and maintenance warranty during the second quarter
of 2014 as discussed above. Excluding this charge, the selling and distribution
expenses for the three months ended June 30, 2014 increased $60,827 or 85.2% as
compared to the same period of last year, which was largely due to the increases
of the expenses in trade shows and advertising as we increased sales and
marketing efforts during the quarter.
(e) General and administrative expenses
General and administrative expenses were $3,173,178 for the
three months ended June 30, 2014, compared to $1,332,279 for the same period in
2013, an increase of $1,840,899 or 138.2% . For the three months ended June 30,
2014, general and administrative expenses included $1,008,616 in expenses for
common stock awards to employees and consultants, compared to $35,350 for the
same period in 2013. Excluding stock award costs, our net general and
administrative expenses for the three months ended June 30, 2014 were
$2,164,562, an increase of $867,633, or 66.9%, from $1,296,929 for the same
period of 2013. The increase was largely due to the increased office expenses
during the quarter.
(f) Research and development
Research and development expenses were $971,673 for the three
months ended June 30, 2014, compared to $672,491 from the same period in 2013,
an increase of $299,182 or 44.5% . This increase was primarily due to our
increased costs of material, testing and inspection related to the development
and commercialization of our new EV model - SMA7005BEV, the development of our new auto air
conditioning system, and the development of our EV intelligent control system
used in our EV products.
46
(g) Government grants
Government grants totaled $153,700 for the three months ended
June 30, 2014, an increase of $103,893 or 208.6% from $49,807 in the
corresponding period in 2013. The increases were largely due to the awards from
the Chinese government for promoting local business.
(h) Net interest (expense) income
Net interest expense was $214,995 for the three months ended
June 30, 2014, compared to $617,601 for the same period last year, a decrease of
$402,606 or 65.2% . This change was primarily attributable to an increase in
interest income earned on loans made to third parties. For the three months
ended June 30, 2014, we recorded interest income of $748,842, which included
$739,145 earned on loans made to third parties and $9,697 earned on bank
deposits. For the three months ended June 30, 2014, we recorded interest expense
of $963,838, which included bank loan interest of $590,979 and bond interest of
$372,859.
(i) Change in fair value of financial instruments
For the three months ended June 30, 2014, the income related to
changes in the fair value of derivative liability relating to the warrants
issued to investors and placement agents was $8,941,569, compared to an expense
of $1,082,735 for the same period of last year, a change of $10,024,304 or
925.8% .
(j) Share of (Loss) of Associated Company
Investment losses were $77,187 for the three months ended June
30, 2014, compared to a loss of $15,517 for the corresponding period in 2013, an
increase of $61,670 or 397.4% primarily due to the write-off of our investment
in Jinhua Service as this entity ceased operation and will be dissolved. For the
three months ended June 30, 2014 and 2013, these losses were attributable to our
30% equity interest investment in Jinhua Service.
(k) Share of Profit (Loss) after Tax of the JV Company
The JV Company recorded a net income of $728,994 for the
three-month period ended June 30, 2014. As a result, we recorded 50% of its
profit, or $364,497 for the three month period ended June 30, 2014, due to our
50% ownership interest in the JV Company. After eliminating intra-entity profits
and losses, our share of the after tax loss of the JV Company was $9,526 for the
three months ended June 30, 2014, compared to $10,376 for the same period of
last year, a decrease in loss of $850 or 8.2% . Also refer to Note 21.
(l) Other Income, Net
Net other income was $60,247 for the three months ended June
30, 2014, compared to $54,148 for the same period of last year, an increase of
$6,099 or 11.3% . The increase was largely due to the sales of scrap.
(m) Net income
Net income was $11,157,085 for the three months ended June 30,
2014, compared to net loss of $1,044,300 for the same period in 2013, a change
of $12,201,385 or 1168.4% . The increase in net income was primarily
attributable to the change in the fair value of warrants.
Excluding (i) the effects of stock award expenses, which were
$1,008,616 and $35,350 for the three months ended June 30, 2014 and 2013,
respectively, and (ii) the change of the fair value of financial derivatives,
which was an income of $8,941,569 and a expense of $1,082,735 for the three
months ended June 30, 2014 and 2013, respectively, our net income was $3,224,132
(non-GAAP) for the three months ended June 30, 2014 as compared to a net income
of $73,785 (non-GAAP) for the same period of 2013, an increase of $3,150,347 or
4269.6%. This increase in net income was primarily attributable to the increase
of revenue and gross profits during the six-month period.
The Company makes reference to certain non-GAAP financial measure,
i.e., the adjusted net income. Management believes that such adjusted term is
useful to investors in evaluating the Companys operating performance because it
presents a meaningful measure of corporate performance. See the non-GAAP
reconciliation table below. Any non-GAAP measures should not be considered as a
substitute for, and should only be read in conjunction with, measures of
financial performance prepared in accordance with GAAP.
47
|
|
Three Months Ended June 30
|
|
|
2014
|
|
|
2013
|
|
GAAP net (loss) income
|
$
|
11,157,085
|
|
$
|
(1,044,300
|
)
|
Stock award expenses
|
|
1,008,616
|
|
|
35,350
|
|
Change of the fair value of financial
derivatives
|
|
(8,941,569
|
)
|
|
1,082,735
|
|
Non-GAAP net income
|
|
3,224,132
|
|
|
73,785
|
|
Financial Condition
Liquidity and Capital Resources
Working Capital
We had a working capital surplus of $28,708,114 as of June 30,
2014, compared to a working capital deficit of $34,705,168 as of June 30, 2013.
As of June 30, 2014, the amount of advances to suppliers was
$52,841,904, which included the advance of RMB 323 million, or approximately
$52,454,650, for a prepayment by Kandi Wanning to an equipment supplier -
Nanjing Shangtong Auto Technologies Co., Ltd. (Nanjing Shangtong) for
equipment purchases relating to develop Kandi Wannings manufacturing factory in
Wanning. The equipment will be purchased and delivered according to the
construction schedule and development of Kandi Wanning. This advance will be
used to offset the equipment purchase price upon delivery.
As of June 30, 2014, we had credit lines from commercial banks
of $53,266,642, of which $33,778,846 was used as of June 30, 2014.
We believe that our cash flows generated internally may not be
sufficient to support the future growth in our operations and to repay
short-term bank loans for the next twelve (12) months, if needed. However, we
believe our access to existing financing sources and established relationships
with PRC banks will enable us to meet our obligations and fund our ongoing
operations.
We have historically financed our operations through short-term
commercial bank loans from PRC banks. The term of these loans is typically for
one year, and upon the payment of all outstanding principal and interest on a
particular loan, the banks have typically rolled over the loan for additional
one-year terms, with adjustments made to the interest rate to reflect prevailing
market rates. We believe this situation has not changed and that short-term bank
loans will be available on normal trade terms if needed.
On March 24, 2014, we raised approximately $11.05 million by
selling an aggregate of 606,000 shares of our common stock to two institutional
investors at a price of $18.24 per share. As part of the transaction, we also
issued to the investors warrants for the purchase of up to 90,900 shares of
common stock at an exercise price of 22.80 per share, which warrants have a term
of 18 months from the date of issuance.
Capital Requirements and Capital Provided
Capital requirements and capital provided for the six months
ended June 30, 2014 were as follows:
|
|
Six Months Ended
|
|
|
|
June 30, 2014
|
|
Capital requirements
|
|
(In thousands)
|
|
Purchase
of plant and equipment
|
$
|
309
|
|
Purchases of land use
rights
|
|
1,670
|
|
Purchase
of construction in progress
|
|
23
|
|
Issuance of notes
receivable
|
|
21,468
|
|
Repayments of short-term bank loans
|
|
16,764
|
|
Repayments of notes
payable
|
|
16,601
|
|
Internal
cash used in operations
|
|
37,184
|
|
Total capital requirements
|
$
|
94,019
|
|
48
|
|
|
|
Capital provided
|
|
|
|
Repayments of notes receivable
|
|
26,020
|
|
Decrease in restricted
cash
|
|
2
|
|
Proceeds
from short-term bank loan
|
|
16,764
|
|
Proceeds from notes
payable
|
|
13,021
|
|
Common
stock and warrants issued
|
|
11,068
|
|
Warrant exercise
|
|
22,448
|
|
Other
financing activities
|
|
4,406
|
|
Decrease in cash
|
|
1,475
|
|
Total capital provided
|
$
|
95,204
|
|
For further information, see the Statement of Cash Flows.
The difference between capital provided and capital requirement
is the effect of exchange rate changes over the past six months.
Cash Flow
For the six months ended June 30, 2014, cash used in operating
activities was $37,184,388, as compared to cash used in operating activities of
$16,260,637 for the six months ended June 30, 2013. The major operating
activities that provided cash for the six months ended June 30, 2014 were an
increase in accounts payable of $31,083,370 and a decrease in accounts
receivable of $11,955,855. The major operating activities that used cash for the
six months ended June 30, 2014 were net loss of $2,929,075, an increase in
receivables from JV of $31,680,191, an increase in prepayment and prepaid
expenses of $44,194,377, and an increase in inventories of $8,544,033.
Cash provided by investing activities for the six months ended
June 30, 2014 was $2,550,376, as compared to cash used in investing activities
of $36,267,144 for the six months ended June 30, 2013. Cash provided by
investing activities for the six months ended June 30, 2014 was primarily the
result of the repayment of notes receivable of $26,020,234. Cash used in
investing activities for the six months ended June 30, 2014 was primarily the
result of the issuance of notes receivable of $21,468,326.
Cash provided by financing activities for the six months ended
June 30, 2014 was $34,342,308, as compared to cash provided by financing
activities of $51,261,846 for the six months ended June 30, 2013. Cash provided
by financing activities for the six months ended June 30, 2014 was primarily the
result of proceeds from short-term loans of $16,764,023, proceeds from notes
payable of $13,020,600, common stock and warrants issued of $11,067,734, and
warrant exercises of $22,447,914. Cash used in financing activities for the six
months ended June 30, 2014 was primarily the result of repayment of short-term
loans of $16,764,023 and repayments of notes payable of $16,601,265.
As of June 30, 2014, we had unrestricted cash of $11,287,620.
Our total current assets were $146,098,513, and our total current liabilities
were $117,390,399, which resulted in a net working capital of $28,708,114.
Recent Development Activities:
On July 1, 2014, Mr. Zhou Guohui, Head of Science and
Technology Department of Zhejiang Province, Mr. Li Shufu, Chairman of the Board
of Directors of the JV Company and Mr. Hu Xiaoming, President of the JV Company,
made a special visit to Mr. Wan Gang, the Minister of PRC Ministry of Science
and Technology, presenting the industrial development of the JV Company, the
group long-term lease project, and the business model utilizing pure electric
vehicles in Hangzhou Public EV Sharing System (the Car-Share Project), by
which Minister Wan provided full support and promised to go to Hangzhou in
furtherance of promotion at an appropriate time.
On July 9, 2014, the first supplier conference of the JV
Company was successfully held in Hangzhou First World Hotel. The mutual goal was
to seize opportunities to achieve win-win outcomes. With an aim to strengthen
communication between the JV Company and its suppliers, so as to establish an
effective platform and beneficial long-term relationships, the conference
attracted more than 160 suppliers across the country. In the conference, the
debut of Kandis "Urban Beauty" EV model was made. This EV model was
newly developed by the JV Company. All delegates showed great interest as the
level of intelligence in this newly developed pure electrical vehicle largely
exceeds previous standard.
At the same time, a research institute aimed at developing
small-size electric vehicle was established to meet market demand and fulfill
customers need and Mr. Yu Wei was appointed as the head of the institute.
From April to July 2014, government officials from many pilot
cities for new energy vehicle visited the JV Company to learn more about the
business model of the Car-Share Project and group long-term lease.
49
Item 3. Quantitative and Qualitative Disclosures About
Market Risk.
Exchange Rate Risk
Our operations are conducted mainly in The Peoples
Republic of China (the PRC). As such, our earnings are subject to movements in
foreign currency exchange rates when transactions are denominated in Chinese
Renminibi (RMB), which is our functional currency. Accordingly, our operating
results are affected by changes in the exchange rate between the U.S. dollar and
RMB currencies.
Economic and Political Risks
Our operations in the PRC are subject to special considerations
and significant risks not typically associated with companies in North America
and Western Europe. These include risks associated with, among others, the
political, economic and legal environment in the PRC and foreign currency
exchange. Our performance may be adversely affected by changes in the political
and social conditions in the PRC, and by changes in governmental policies with
respect to laws and regulations, anti-inflationary measures, currency
conversion, remittances abroad, and rates and methods of taxation, among other
things.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We have evaluated, under the supervision of our Chief Executive
Officer and our Chief Financial Officer, the effectiveness of disclosure
controls and procedures as of June 30, 2014. This is done in order to ensure
that information we are required to disclose in reports that are filed or
submitted under the Securities Exchange Act of 1934, as amended (the Exchange
Act), is: (i) recorded, processed, summarized and reported within the time
periods specified in SEC rules and forms and (ii) accumulated and communicated
to our management, including our Chief Executive Officer and our Chief Financial
Officer, as appropriate, to allow timely decisions regarding disclosure.
Based on this evaluation, our Chief Executive Officer and our
Chief Financial Officer concluded that our disclosure controls and procedures
were not effective as of June 30, 2014, due to significant deficiencies in
internal controls, which, in the aggregate, lead to a conclusion that a material
weakness exists in the control environment as follows:
|
1.
|
We have a lack of adequate policies and procedures in
internal audit function, which may potentially result in: (1) lack of
communication between our internal audit department and the Audit
Committee and our Board of Directors; (2) insufficient internal audit
work to ensure that our policies and procedures have been carried out as
planned.
|
50
|
2.
|
There was no self-assessment performed by the Audit
Committee to assess the effectiveness of its in oversight of
management.
|
|
|
|
|
3.
|
We have an inadequate design of internal controls over
the approval procedures for related-party
transactions.
|
Changes in Internal Control over Financial Reporting
During the first six months of 2014, we took the initiative to
enhance the effective and timely communication between our internal audit
department and our Audit Committee. We reorganized our internal audit department
so that the head of such department reports directly to the Audit Committee on
any reportable issue to enhance the independence and objectivity of the internal
audit function. In addition, the internal audit department revisited the
policies and procedures of internal audit and made modification to keep internal
audit workflow in compliance with SEC requirements. On May 30, 2014, the Audit
Committee of the Board of Directors held a special meeting and approved the new
Internal Audit Activity Charter.
During the first six months of 2014, the Board of Directors
also evaluated the design of internal controls over the approval procedures for
related-party transactions, and developed a set of revised approval procedures
for related-party transactions. On May 30, 2014, the Audit Committee of the
Board of Directors held a special meeting and approved the new Management Policy
on Related Party Transactions.
In July 2014, the Chairman of the Audit Committee of the Board
of Directors met with our management, our internal audit team and our
independent auditor to review the progress of implementation of the remediation
measures and spearheaded a comprehensive remediation plan to fully address the
deficiencies in our internal controls. We intend to complete the project in a
timely fashion and will conduct quarterly assessments of the state of our
financial reporting measures and systems, as a whole.
Aside from the remediation measures that we initiated during
this reporting period described above, there was no change to our internal
control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) that occurred during the period covered by this report
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
51