UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 2014
or
[ ] Transition Report Pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934
For the transition period from ______ to______
Commission file number 001-33997
KANDI TECHNOLOGIES GROUP, INC.
(Exact name of registrant as specified in charter)
Delaware |
90-0363723 |
(State or other jurisdiction of |
(I.R.S. Employer Identification No.) |
incorporation or organization) |
|
Jinhua City Industrial Zone
Jinhua, Zhejiang
Province
Peoples Republic of China
Post Code 321016
(Address of principal executive offices)
(86 - 579) 82239856
(Registrants telephone
number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes
[X] No [ ]
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files)
Yes
[X] No [ ]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See definitions of large accelerated filer, accelerated
filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] |
Accelerated
filer
[X] |
Non-accelerated filer [ ] |
Smaller reporting company [ ]
|
Indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act).
Yes [
] No [X]
As of November 5, 2014, the registrant had issued and
outstanding 46,274,855 shares of common stock, par value $0.001 per share.
TABLE OF CONTENTS
|
|
Page |
|
|
|
PART I--
FINANCIAL INFORMATION |
|
|
|
|
Item 1. |
Financial
Statements |
2 |
|
|
|
|
Condensed
Consolidated Balance Sheets as of September 30, 2014 (unaudited) and
December 31, 2013 |
2 |
|
|
|
|
Condensed
Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)
(unaudited) Three Months and Nine Months Ended September 30, 2014 and
2013 |
4 |
|
|
|
|
Condensed
Consolidated Statements of Cash Flows (unaudited) Nine Months Ended
September 30, 2014 and 2013 |
5 |
|
|
|
Item 2. |
Managements
Discussion and Analysis of Financial Condition and Results of Operations |
46 |
|
|
|
Item 3. |
Quantitative and
Qualitative Disclosures about Market Risk |
67 |
|
|
|
Item 4. |
Controls and
Procedures |
67 |
|
|
|
PART II--
OTHER INFORMATION |
|
|
|
|
Item 1. |
Legal Proceedings |
69 |
|
|
|
Item 1A. |
Risk Factors |
69 |
|
|
|
Item 6. |
Exhibits |
71 |
1
PART I-- FINANCIAL INFORMATION
Item 1. Financial Statements. (Unaudited)
KANDI TECHNOLOGIES GROUP, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
|
|
September 30, |
|
|
December 31, |
|
|
|
2014 |
|
|
2013 |
|
|
|
(Unaudited) |
|
|
|
|
CURRENT ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
$ |
49,500,712
|
|
$ |
12,762,369
|
|
Restricted cash |
|
12,995,452 |
|
|
1,636 |
|
Accounts receivable |
|
13,982,830 |
|
|
31,370,862 |
|
Inventories, net of provision for slow moving
inventory of $350,328 and $352,734 as of September 30, 2014 and December
31, 2013, respectively |
|
14,599,901 |
|
|
9,187,714 |
|
Notes receivable |
|
6,061,184 |
|
|
13,794,094 |
|
Other receivables |
|
448,152 |
|
|
556,904 |
|
Prepayments and prepaid
expenses |
|
412,122 |
|
|
505,513 |
|
Due from employees |
|
43,792 |
|
|
34,272 |
|
Advances to suppliers |
|
58,777,479 |
|
|
8,867,074 |
|
Amount due from JV Company, net |
|
52,028,753 |
|
|
2,917,592 |
|
Deferred tax |
|
- |
|
|
13,706 |
|
Total Current Assets |
|
208,850,377 |
|
|
80,011,736 |
|
|
|
|
|
|
|
|
LONG-TERM ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
Plant and equipment, net |
|
26,134,626 |
|
|
29,333,516 |
|
Land use rights, net |
|
15,740,126 |
|
|
14,453,191 |
|
Construction in progress |
|
55,491 |
|
|
16,356 |
|
Deferred taxes |
|
- |
|
|
81,076 |
|
Investment in associated company |
|
- |
|
|
96,838 |
|
Investment in JV Company |
|
82,544,376 |
|
|
79,331,930 |
|
Goodwill |
|
322,591 |
|
|
322,591 |
|
Intangible assets |
|
597,924 |
|
|
659,496 |
|
Total Long-Term
Assets |
|
125,395,134 |
|
|
124,294,994 |
|
|
|
|
|
|
|
|
TOTAL ASSETS |
$ |
334,245,511 |
|
$ |
204,306,730 |
|
See accompanying notes to condensed consolidated financial
statements
2
KANDI TECHNOLOGIES GROUP, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
September |
|
|
December |
|
|
|
30, |
|
|
31, |
|
|
|
2014 |
|
|
2013 |
|
|
|
(Unaudited) |
|
|
|
|
CURRENT LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
$ |
55,568,073
|
|
$ |
22,843,143
|
|
Other payables and accrued expenses |
|
4,847,485 |
|
|
2,422,613 |
|
Short-term bank loans |
|
22,417,154 |
|
|
34,020,281 |
|
Customer deposits |
|
152,030 |
|
|
44,404 |
|
Notes payable |
|
12,995,452 |
|
|
16,683,023 |
|
Income tax payable |
|
1,317,504 |
|
|
1,362,828 |
|
Due to employees |
|
433,033 |
|
|
10,297 |
|
Due to related party |
|
- |
|
|
- |
|
Deferred taxes |
|
426,767 |
|
|
- |
|
Financial derivatives - liability |
|
2,571,326 |
|
|
9,256,827 |
|
Total Current Liabilities |
|
100,728,824 |
|
|
86,643,416 |
|
|
|
|
|
|
|
|
LONG-TERM LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax |
|
1,299,882 |
|
|
1,009,477 |
|
Bond payable |
|
12,995,452 |
|
|
13,084,724 |
|
Financial derivatives - liability |
|
9,488,193 |
|
|
15,042,994 |
|
Total Long-Term Liabilities |
|
23,783,527 |
|
|
29,137,195 |
|
|
|
|
|
|
|
|
TOTAL LIABILITIES |
|
124,512,351 |
|
|
115,780,611 |
|
STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value; 100,000,000
shares authorized; 46,274,855 and 37,012,904 shares issued and outstanding
at September 30, 2014 and December 31, 2013, respectively |
|
46,275 |
|
|
37,013 |
|
Additional paid-in capital |
|
189,385,630 |
|
|
76,754,774 |
|
Retained earnings (the restricted portion
is $3,807,551 and $3,807,551 at September 30, 2014 and December 31, 2013,
respectively) |
|
14,723,713 |
|
|
4,119,086 |
|
Accumulated other comprehensive income |
|
5,577,542 |
|
|
7,615,246 |
|
TOTAL STOCKHOLDERS EQUITY |
|
209,733,160 |
|
|
88,526,119 |
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
$ |
334,245,511 |
|
$ |
204,306,730 |
|
See accompanying notes to condensed consolidated financial
statements
3
KANDI TECHNOLOGIES GROUP, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND
COMPREHENSIVE
INCOME (LOSS)
(UNAUDITED)
|
|
For Three Months Ended |
|
|
For Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2014 |
|
|
2013 |
|
|
2014 |
|
|
2013 |
|
REVENUE, NET |
$ |
44,206,992 |
|
$ |
17,145,512 |
|
$ |
117,338,351 |
|
$ |
43,975,463 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OF GOODS SOLD |
|
(38,698,452 |
) |
|
(13,032,352 |
) |
|
(99,748,314 |
) |
|
(33,673,048 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT |
|
5,508,540 |
|
|
4,113,160 |
|
|
17,590,037 |
|
|
10,302,415 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
(391,097 |
) |
|
(500,864 |
) |
|
(2,535,027 |
) |
|
(1,863,020 |
) |
Selling expenses |
|
(432,365 |
) |
|
(102,380 |
) |
|
(939,516 |
) |
|
(263,414 |
) |
General and administrative |
|
(2,076,749 |
) |
|
(2,893,935 |
) |
|
(11,720,693 |
) |
|
(4,826,622 |
) |
Total operating expenses |
|
(2,900,211 |
) |
|
(3,497,179 |
) |
|
(15,195,236 |
) |
|
(6,953,056 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) FROM CONTINUING
OPERATIONS |
|
2,608,329 |
|
|
615,981 |
|
|
2,394,801 |
|
|
3,349,359 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest (expense) income, net |
|
(711,119 |
) |
|
(1,184,282 |
) |
|
(1,397,294 |
) |
|
(2,472,377 |
) |
Change in fair value of
financial instruments |
|
10,187,277 |
|
|
(6,864,624 |
) |
|
6,814,675 |
|
|
(6,956,963 |
) |
Government grants |
|
63,584 |
|
|
11,077 |
|
|
217,284 |
|
|
60,884 |
|
Share of gain (loss) in
associated companies |
|
38,702 |
|
|
(15,787 |
) |
|
(54,290 |
) |
|
(45,327 |
) |
Share of (loss) profit after tax of JV |
|
2,038,388 |
|
|
(109,641 |
) |
|
3,757,218 |
|
|
(120,017 |
) |
Other income, net |
|
21,814 |
|
|
40,647 |
|
|
141,641 |
|
|
217,160 |
|
Total other income (expense), net |
|
11,638,646 |
|
|
(8,122,610 |
) |
|
9,479,234 |
|
|
(9,316,640 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) FROM CONTINUING OPERATION
BEFORE PROVISION FOR INCOME TAXES |
|
14,246,975 |
|
|
(7,506,629 |
) |
|
11,874,035 |
|
|
(5,967,281 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION FOR INCOME TAXES |
|
(713,273 |
) |
|
(257,222 |
) |
|
(1,269,408 |
) |
|
(502,123 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) FROM CONTINUING OPERATION |
|
13,533,702 |
|
|
(7,763,851 |
) |
|
10,604,627 |
|
|
(6,469,404 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
DISCONTINUED OPERATION |
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued
operation |
|
- |
|
|
(350,320 |
) |
|
- |
|
|
(452,194 |
) |
Gain from disposition of discontinued
operation |
|
- |
|
|
425,129 |
|
|
- |
|
|
425,129 |
|
NET INCOME(LOSS) FROM DISCONTINUED
OPERATION |
|
- |
|
|
74,809 |
|
|
- |
|
|
(27,065 |
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) |
|
13,533,702 |
|
|
(7,689,042 |
)
|
|
10,604,627 |
|
|
(6,496,469 |
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE INCOME |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation |
|
(109,112 |
) |
|
322,798 |
|
|
(2,037,704 |
) |
|
1,632,143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME (LOSS) |
$ |
13,424,590 |
|
$ |
(7,366,244 |
) |
$ |
8,566,923 |
|
$ |
(4,864,326 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS (LOSS) PER SHARE: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
$ |
0.31 |
|
$ |
(0.21 |
)
|
$ |
0.26 |
|
$ |
(0.19 |
)
|
Diluted |
$ |
0.31 |
|
$ |
(0.21 |
) |
$ |
0.26 |
|
$ |
(0.19 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER OF COMMON SHARES: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
43,214,455 |
|
|
37,020,321 |
|
|
41,327,666 |
|
|
33,965,100 |
|
Diluted |
|
43,530,185 |
|
|
37,020,321 |
|
|
41,462,490 |
|
|
33,965,100 |
|
See accompanying notes to condensed consolidated financial
statements
4
KANDI TECHNOLOGIES GROUP, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
Nine Months Ended September 30, |
|
|
|
2014 |
|
|
2013 |
|
CASH FLOWS FROM OPERATING
ACTIVITIES: |
|
|
|
|
|
|
Net (loss) income |
$ |
10,604,627 |
|
$ |
(6,496,469 |
) |
Net (loss) income from
discontinued operation |
|
|
|
|
(27,065 |
) |
Net (loss) income from continuing operation |
|
10,604,627 |
|
|
(6,469,404 |
) |
Adjustments to reconcile net
(loss) income to net cash (used in) provided by operating activities: |
|
|
|
|
|
|
Depreciation and amortization |
|
4,157,606 |
|
|
6,144,086 |
|
Deferred taxes |
|
808,725 |
|
|
677,912 |
|
Change of derivative instruments fair value |
|
(6,814,675 |
) |
|
6,956,963 |
|
Loss in investment in
associated company |
|
54,290 |
|
|
45,327 |
|
Share of (profit) loss after tax of JV |
|
(3,757,218 |
) |
|
120,017 |
|
|
|
|
|
|
|
|
Changes in operating assets and
liabilities: |
|
|
|
|
|
|
(Increase) Decrease
In: |
|
|
|
|
|
|
Accounts receivable |
|
17,190,113 |
|
|
16,665,031 |
|
Inventories |
|
(5,480,008 |
) |
|
(14,846,384 |
) |
Other receivables and prepaid expenses |
|
105,092 |
|
|
(805,480 |
) |
Due from employees |
|
413,441 |
|
|
5,187 |
|
Prepayments and prepaid expenses |
|
(49,927,475 |
) |
|
(6,661,365 |
) |
Amount due from JV |
|
(49,177,160 |
) |
|
- |
|
|
|
|
|
|
|
|
Increase (Decrease)
In: |
|
|
|
|
|
|
Accounts payable |
|
32,911,627 |
|
|
(144,929 |
) |
Other payables and accrued
liabilities |
|
2,441,464 |
|
|
(963,422 |
) |
Customer deposits |
|
108,031 |
|
|
388,714 |
|
Due to related party |
|
- |
|
|
- |
|
Due to JV company |
|
- |
|
|
20,040,119 |
|
Income tax payable |
|
(36,060 |
) |
|
(222,100 |
) |
Net cash (used in) provided by
operating activities |
$ |
(46,397,580 |
) |
$ |
20,930,272 |
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
Purchases of plant and
equipment |
|
(813,246 |
) |
|
(44,250 |
) |
Purchases of land use rights |
|
(1,667,986 |
) |
|
- |
|
Purchase of construction in
progress |
|
(39,283 |
) |
|
- |
|
Issuance of notes receivable |
|
(21,698,986 |
) |
|
(1,972,619 |
) |
Repayments of notes
receivable |
|
29,344,951 |
|
|
310,674 |
|
Investment in Joint Venture Company |
|
- |
|
|
(80,366,213 |
) |
Disposal of subsidiary |
|
- |
|
|
64,292,970 |
|
Disposal of associated company |
|
(96,268 |
) |
|
|
|
Deposit for disposal of
subsidiary |
|
- |
|
|
12,858,594 |
|
Assets acquisition, net of deposit |
|
- |
|
|
(39,524,103 |
) |
Net cash provided by (used
in) investing activities |
$ |
5,029,182 |
|
$ |
(44,444,947 |
) |
See accompanying notes to condensed consolidated financial
statements
5
KANDI TECHNOLOGIES GROUP, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
Nine Months Ended September 30, |
|
|
|
2014 |
|
|
2013 |
|
CASH FLOWS FROM FINANCING
ACTIVITIES: |
|
|
|
|
|
|
Restricted cash |
$ |
(13,006,018 |
) |
$ |
4,820,363 |
|
Proceeds from short-term bank
loans |
|
28,616,816 |
|
|
29,735,499 |
|
Repayments of short-term bank loans |
|
(39,998,504 |
) |
|
(28,931,837 |
) |
Proceeds from notes payable |
|
13,007,644 |
|
|
68,473,621 |
|
Repayments of notes payable |
|
(16,584,746 |
) |
|
(66,543,224 |
) |
Common stock and warrants
issued |
|
78,155,627 |
|
|
26,387,498 |
|
Warrant exercise |
|
22,447,914 |
|
|
3,848,134 |
|
Option exercise & other
financing |
|
6,429,622 |
|
|
85,200 |
|
Repayment of bond |
|
|
|
|
(12,858,594 |
) |
Net cash provided by
financing activities |
|
79,068,355 |
|
|
25,016,660 |
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS |
|
37,699,957 |
|
|
1,501,985 |
|
Effect of exchange rate changes on cash |
|
(961,614 |
) |
|
(1,188,737 |
) |
Cash and cash equivalents at
beginning of period |
|
12,762,369 |
|
|
12,135,096 |
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
$ |
49,500,712 |
|
$ |
12,448,344 |
|
|
|
|
|
|
|
|
SUPPLEMENTARY CASH FLOW INFORMATION |
|
|
|
|
|
|
Income taxes paid |
$ |
1,305,468 |
|
$ |
724,223 |
|
Interest paid |
$ |
1,748,140 |
|
$ |
2,959,231 |
|
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
vehicle products, 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 and was dissolved in July 2014.
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 electric 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, had a 30% ownership interest in Jinhua Service. As of September 30, 2014, Jinhua Service ceased its operations and was dissolved. Jinhua Services was established in order to provide 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 and most of them have switched to self-charging,
Jinhua Service ceased its operations and was dissolved accordingly.
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 the
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.
8
KANDI TECHNOLOGIES GROUP, INC. |
AND SUBSIDIARIES |
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
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 growth rate in Hainan
province. To capture this opportunity, the Company signed an agreement with Wanning city government and invested a total of RMB 1 billion to develop a factory in Wanning with an annual production of 100,000 EVs . Currently, Kandi Wanning is planning
to launch its trial production by 2015. According to the JV Agreement, once Kandi Wanning becomes fully operational, its entire equity interests will be transferred to the JV Company.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 businesses. 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 Energy’s
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.
9
KANDI TECHNOLOGIES GROUP, INC. |
AND SUBSIDIARIES |
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
The Company’s 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 September 30, 2014, the Company’s working capital surplus was $108,121,553.
As of September 30, 2014, the amount of advances to suppliers was $58,777,479, which included the advance of RMB353 million or approximately $57,342,430 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 September 30, 2014, the Company had credit lines from commercial banks of $41,910,331, of which $35,412,606 was used as of September 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, including its $71 million registered direct offering financing completed on September 4, 2014 and established relationships with PRC banks will enable it to meet its obligations and fund its ongoing operations.
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.
10
KANDI TECHNOLOGIES GROUP, INC. |
AND SUBSIDIARIES |
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
On September 4, 2014, the Company raised approximately $71.00 million before deducting fees to the placement agent and other offering expenses incurred by the Company from the sale to six institutional investors of an aggregate of 4,127,908
shares of its common stock at a price of $17.20 per share. As part of the transaction terms, the Company also issued to the investors warrants for the purchase of up to 743,024 shares of common stock at an exercise price of $21.50 per share,
which warrants have a term of 17 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 nine-month periods ended September 30, 2014 and 2013 are 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 Company’s condensed consolidated financial statements for these interim periods.
The results of operations for the three-month and nine-month periods ended September 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)
|
11
KANDI TECHNOLOGIES GROUP, INC. |
AND SUBSIDIARIES |
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
(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 Company’s proportionate share of the net income or loss of its equity method investees.
|
| |
(vi) |
Kandi Electric Vehicles Group Co., Ltd. (the “JV Company”) (a 50% owned subsidiary of Kandi Vehicles)
|
| |
(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), which was dissolved in July 2014.
|
| |
|
All intra-entity profits and losses with the Company’s equity method investees have been eliminated.
|
12
KANDI TECHNOLOGIES GROUP, INC. |
AND SUBSIDIARIES |
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
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 Company’s operations are conducted in the PRC. As a result, the Company’s 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 Company’s earnings are subject to movements in foreign currency exchange rates when transactions are denominated in Renminbi (“RMB”), which is the Company’s functional currency.
Accordingly, the Company’s operating results are affected by changes in the exchange rate between the U.S. dollar and the RMB.
The Company’s operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political,
economic and legal environment and foreign currency exchange. The Company’s 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.
(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 1—defined as observable inputs such as quoted prices in active markets;
-
Level 2—defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and
-
Level 3—defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
13
KANDI TECHNOLOGIES GROUP, INC. |
AND SUBSIDIARIES |
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
As of September 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 Measurements at Reporting Date Using
Quoted Prices in Carrying Value as of September 30,
2014 |
|
|
Active Markets for Identical Assets
(Level 1) |
|
|
Significant Other Observable Inputs
(Level 2) |
|
|
Significant Unobservable Inputs
(Level 3) |
|
Cash and cash equivalents |
$ |
49,500,712 |
|
$ |
49,500,712 |
|
|
- |
|
|
- |
|
Restricted cash |
|
12,995,452 |
|
|
12,995,452 |
|
|
- |
|
|
- |
|
Warrants |
|
12,059,519 |
|
|
- |
|
|
- |
|
|
12,059,519 |
|
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).
(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 September 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 September 30, 2014, the Companys
restricted cash was $12,995,452.
(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.
14
KANDI TECHNOLOGIES GROUP, INC. |
AND SUBSIDIARIES |
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
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 September 30, 2014 and December 31, 2013, the Company had no allowance for doubtful accounts, as per the management’s judgment based on their best
knowledge.
As of September 30, 2014 and December 31, 2013, the credit terms with the Company’s 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 September 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 Company’s receipt of raw materials. Prepayment will be offset against purchase amount after equipment is delivered.
(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:
15
KANDI TECHNOLOGIES GROUP, INC. |
AND SUBSIDIARIES |
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
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.
16
KANDI TECHNOLOGIES GROUP, INC. |
AND SUBSIDIARIES |
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
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 seller’s price to the buyer is fixed or determinable; and
-
Collectability is reasonably assured.
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 $391,097 and $500,864 for the three months
ended September 30, 2014 and 2013, respectively. Research and development expenses were $2,535,027 and $1,863,020 for the nine months ended September 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 nine months ended September 30, 2014 and 2013, $63,584 and $11,077, and $217,284 and $60,844, respectively, were 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 management’s 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.
17
KANDI TECHNOLOGIES GROUP, INC. |
AND SUBSIDIARIES |
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
(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
|
September 30, |
December 31, |
September 30, |
|
2014 |
2013 |
2013 |
Period end RMB : USD exchange
rate |
6.1560 |
6.1140 |
6.1514 |
Average RMB : USD exchange rate |
6.1502 |
6.1982 |
6.2215 |
(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.
18
KANDI TECHNOLOGIES GROUP, INC. |
AND SUBSIDIARIES |
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
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 nine months ended September 30, 2014 was $0. See Note 18.
(t) Warrant Cost
The Company’s 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 Company’s expected volatility assumption is based on the historical volatility of the
Company’s 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 Company’s expected volatility assumption is based on the historical volatility of the
Company’s 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.
(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.
19
KANDI TECHNOLOGIES GROUP, INC. |
AND SUBSIDIARIES |
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
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 September 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
September 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.
20
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 organization’s
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 organization’s 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 Company’s financial statements upon adoption.
NOTE 8 – CONCENTRATIONS
(a) Customers
For the nine-month period ended September 30, 2014, the Company’s major customers, each of whom accounted for more than 10% of the Company’s consolidated revenue, were as follows:
21
KANDI TECHNOLOGIES GROUP, INC. |
AND SUBSIDIARIES |
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
|
Sales |
Accounts Receivable |
|
Nine Months |
Nine
Months |
|
|
|
Ended |
Ended |
|
|
|
September |
September |
September |
December |
|
30, |
30, |
30, |
31, |
Major
Customers |
2014 |
2013 |
2014 |
2013 |
|
|
|
|
|
Kandi Electric Vehicles (Changxing) Co.,
Ltd. |
44% |
- |
47% |
- |
Shanghai Maple Auto Co., Ltd |
15% |
- |
2% |
52% |
Kandi Electric Vehicles (Shanghai) Co.,
Ltd. |
21% |
- |
- |
- |
For the three-month period ended September 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 |
Three |
|
|
|
Months |
Months |
|
|
|
Ended |
Ended |
|
|
|
September |
September |
September |
December |
|
30, |
30, |
30, |
31, |
Major
Customers |
2014 |
2013 |
2014 |
2013 |
|
|
|
|
|
Kandi Electric Vehicles (Changxing) Co.,
Ltd. |
49% |
- |
47% |
- |
Kandi Electric Vehicles (Shanghai) Co., Ltd. |
30% |
- |
- |
- |
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 nine months ended September 30, 2014, the
Company sold $33,655,560 and $10,427,219 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.
22
KANDI TECHNOLOGIES GROUP, INC. |
AND SUBSIDIARIES |
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
(b) Suppliers
For the nine-month period ended September 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 |
|
Nine Months |
Nine Months |
|
|
|
Ended |
Ended |
September |
December 31, |
|
September 30, |
September 30, |
30, |
|
Major
Suppliers |
2014 |
2013 |
2014 |
2013 |
|
|
|
|
|
Shandong Henyuan New Energy Tech Co., Ltd. |
30% |
- |
25% |
- |
Zhejiang Xinneng Automotive Systems Co. Ltd. |
16% |
- |
29% |
- |
Zhongju (Tianjin) New Energy Investment
Co., Ltd. |
11% |
- |
15% |
- |
For the three-month period ended September 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 |
Ended |
|
|
|
September
30, |
September
30, |
September 30, |
December 31, |
Major
Suppliers |
2014 |
2013 |
2014 |
2013 |
|
|
|
|
|
Zhejiang Xinneng Automotive Systems Co.
Ltd. |
38% |
- |
29% |
- |
Shandong Henyuan New Energy Tech Co., Ltd. |
30% |
- |
25% |
- |
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 September 30, 2014 and 2013, the number of potentially dilutive common
shares was 315,730 and 0, respectively. For the nine months ended September 30, 2014 and
2013, the number of potentially dilutive common shares was 134,824 and 0,
respectively.
23
KANDI TECHNOLOGIES GROUP, INC. |
AND SUBSIDIARIES |
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
The following is the calculation of earnings per share:
|
|
For the three months ended |
|
|
For the nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2014 |
|
|
2013 |
|
|
2014 |
|
|
2013 |
|
Net income (loss) |
$ |
13,533,702 |
|
$ |
(7,689,042 |
) |
$ |
10,604,627 |
|
$ |
(6,496,469 |
) |
Weighted average shares used in basic computation |
|
43,214,455 |
|
|
37,020,321 |
|
|
41,327,666 |
|
|
33,965,100 |
|
Dilutive shares |
|
315,730 |
|
|
- |
|
|
134,824 |
|
|
- |
|
Weighted average shares used in diluted computation |
|
43,530,185 |
|
|
37,020,321 |
|
|
41,462,490 |
|
|
33,965,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
$ |
0.31 |
|
$ |
(0.21 |
) |
$ |
0.26 |
|
$ |
(0.19 |
) |
Diluted |
$ |
0.31 |
|
$ |
(0.21 |
) |
$ |
0.26 |
|
$ |
(0.19 |
) |
Also see Note 18.
NOTE 10 - INVENTORIES
Inventories are summarized as follows:
|
|
September |
|
|
December |
|
|
|
30, 2014 |
|
|
31, |
|
|
|
(Unaudited) |
|
|
2013 |
|
Raw material |
$ |
2,240,832 |
|
$ |
2,646,041 |
|
Work-in-progress |
|
10,141,925 |
|
|
5,065,126 |
|
Finished goods |
|
2,567,472 |
|
|
1,829,281 |
|
|
|
14,950,229 |
|
|
9,540,448 |
|
Less: reserve for slow moving
inventories |
|
(350,328 |
) |
|
(352,734 |
) |
Inventories, net |
$ |
14,599,901 |
|
$ |
9,187,714 |
|
24
KANDI TECHNOLOGIES GROUP, INC. |
AND SUBSIDIARIES |
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
NOTE 11 - NOTES RECEIVABLE
Notes receivable are summarized as follows:
|
|
September |
|
|
December 31, |
|
|
|
30, 2014 |
|
|
|
|
|
|
(Unaudited) |
|
|
2013 |
|
Notes receivable from
unrelated companies: |
|
|
|
|
|
|
Due September 30, 2014, interest at 9.6% per
annum 1$ |
|
5,809,397 |
|
$ |
13,794,094 |
|
|
|
5,809,397 |
|
|
13,794,094 |
|
|
|
|
|
|
|
|
Bank acceptance notes: |
|
|
|
|
|
|
Bank acceptance notes |
|
251,787 |
|
|
- |
|
Notes receivable |
$ |
6,061,184 |
|
$ |
13,794,094 |
|
Details of Notes receivable from unrelated parties as of
December 31, 2013
|
|
|
|
|
Manner of |
Index |
Amount ($) |
Counter party |
Relationship |
Purpose of |
settlement |
|
|
|
|
Loan
|
|
1 |
13,794,094 |
Yongkang HuiFeng
Guarantee Co., Ltd |
No relationship
beyond loan |
Receive interest
income |
Not due
|
Details of Notes receivable from unrelated parties as of
September 30, 2014
|
|
|
|
|
Manner of |
Index |
Amount
($) |
Counter party |
Relationship |
Purpose of Loan |
settlement |
1 |
5,809,397 |
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:
|
|
September |
|
|
December |
|
|
|
30, 2014 |
|
|
31, 2013 |
|
|
|
(Unaudited) |
|
|
|
|
Cost of land use rights |
$ |
17,778,947 |
|
$ |
16,223,208 |
|
Less: Accumulated amortization |
|
(2,038,821 |
) |
|
(1,770,017 |
) |
Land use rights, net |
$ |
15,740,126 |
|
$ |
14,453,191 |
|
25
KANDI TECHNOLOGIES GROUP, INC. |
AND SUBSIDIARIES |
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
As of September 30, 2014 and December 31, 2013, the net book
value of land use rights pledged as collateral for the Companys bank loans was
$6,287,538 and $9,983,647, respectively. Also see Note 14.
The amortization expense for the nine months ended September
30, 2014 and 2013 was $281,143 and $264,181, respectively. The amortization
expense for the three months ended September 30, 2014 and 2013 was $97,238 and
$88,805, respectively. Amortization expense for the next five years and
thereafter is as follows:
2014 (three months) |
$ |
93,714 |
|
2015 |
|
374,857 |
|
2016 |
|
374,857 |
|
2017 |
|
374,857 |
|
2018 |
|
374,857 |
|
Thereafter |
|
14,146,984 |
|
Total |
$ |
15,740,126 |
|
NOTE 13 PLANT AND EQUIPMENT
Plant and equipment consisted of the following:
|
|
September |
|
|
|
|
|
|
30, 2014 |
|
|
December 31, |
|
|
|
(Unaudited) |
|
|
2013 |
|
At cost: |
|
|
|
|
|
|
Buildings |
$ |
14,487,064 |
|
$ |
14,514,873 |
|
Machinery and equipment |
|
10,926,516 |
|
|
10,771,899 |
|
Office equipment |
|
276,496 |
|
|
251,690 |
|
Motor vehicles |
|
336,093 |
|
|
288,004 |
|
Molds |
|
34,433,070 |
|
|
34,230,014 |
|
|
|
60,459,239 |
|
|
60,056,480 |
|
Less : Accumulated
depreciation |
|
|
|
|
|
|
Buildings |
$ |
(3,356,682 |
) |
$ |
(3,010,451 |
) |
Machinery and equipment |
|
(10,309,832 |
) |
|
(10,278,409 |
) |
Office equipment |
|
(214,751 |
) |
|
(196,303 |
) |
Motor vehicles |
|
(243,576 |
) |
|
(228,442 |
) |
Molds |
|
(19,841,458 |
) |
|
(16,648,583 |
) |
|
|
(33,966,298 |
) |
|
(30,362,188 |
) |
Less: provision for impairment for fixed
assets |
|
(358,315 |
) |
|
(360,776 |
) |
Plant and equipment, net |
$ |
26,134,626 |
|
$ |
29,333,516 |
|
26
KANDI TECHNOLOGIES GROUP, INC. |
AND SUBSIDIARIES |
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
As of September 30, 2014 and December 31, 2013, the net book
value of plant and equipment pledged as collateral for bank loans was $8,229,842
and $11,292,649, respectively.
Depreciation expense for nine months ended September 30, 2014
and 2013 was $3,814,892 and $5,818,334, respectively. Depreciation expense for
three months ended September 30, 2014 and 2013 was $1,274,860 and $1,789,731,
respectively.
NOTE 14 SHORT TERM BANK LOANS
Short-term loans are summarized as follows:
|
|
September 30, |
|
|
December 31, |
|
|
|
2014 |
|
|
2013 |
|
|
|
(Unaudited) |
|
|
|
|
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 |
$ |
1,624,431 |
|
$ |
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 |
|
812,216 |
|
|
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 |
|
3,248,863 |
|
|
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. |
|
812,216 |
|
|
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. |
|
12,670,565 |
|
|
- |
|
27
KANDI TECHNOLOGIES GROUP, INC. |
AND SUBSIDIARIES |
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
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. |
|
- |
|
|
6,542,362 |
|
|
|
|
|
|
|
|
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. |
|
- |
|
|
4,906,771 |
|
|
|
|
|
|
|
|
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. |
|
3,248,863 |
|
|
- |
|
|
$ |
22,417,154 |
|
$ |
34,020,281 |
|
Interest expense for the three months ended September 30, 2014
and 2013 was $558,806 and $576,980, respectively, and for the nine months ended
September 30, 2014 and 2013 was $1,728,432, and $1,702,772, respectively.
As of September 30, 2014, the aggregate amount of short-term
loans that was guaranteed by various third parties was $22,417,154.
- $12,670,565
was guaranteed by Zhejiang Mengdeli Electric Co Ltd (ZMEC).
-
$3,248,863, was guaranteed by Zhejiang Kangli Metal Manufacturing Company, whose
bank loan of $4,873,294 was guaranteed by the Company. Also see Note 23.
$3,248,863 of the $3,248,863 was guaranteed by Lv Qingjiang and Lv Qingbo, two
major shareholders of Zhejiang Kangli Metal Manufacturing Company. Also see Note
23.
-
$3,248,863 was guaranteed by Zhejiang Shuguang industrial Co., Ltd., whose bank
loan of $4,873,294 was guaranteed by the Company. Also see Note 23.
28
KANDI TECHNOLOGIES GROUP, INC. |
AND SUBSIDIARIES |
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
- $12,670,565
was guaranteed by Nanlong Group Co., Ltd., whose bank loans of $9,746,589 was
also guaranteed by the Company. Also see Note 23.
- $812,216
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:
|
|
September |
|
|
December 31, |
|
|
|
30,2014 |
|
|
|
|
|
|
(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 |
|
12,995,452 |
|
|
- |
|
Subtotal |
$ |
12,995,452 |
|
$ |
16,683,023 |
|
|
|
|
|
|
|
|
Notes payable to unrelated
companies: |
|
|
|
|
|
|
|
$ |
- |
|
$ |
- |
|
Subtotal |
$ |
- |
|
$ |
- |
|
|
|
|
|
|
|
|
Total |
$ |
12,995,452 |
|
$ |
16,683,023 |
|
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 $0 and $59 for the three months
ended September 30, 2014 and 2013, and were $6,498 and $13,824 for the nine
months ended September 30, 2014 and 2013.
No restricted cash was held as collateral for the notes payable
as of September 30, 2014 and December 31, 2013.
29
KANDI TECHNOLOGIES GROUP, INC. |
AND SUBSIDIARIES |
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
NOTE 16 BOND PAYABLE
Due Date |
|
Face Value |
|
|
Coupon |
|
|
Interest |
|
|
Interest |
|
|
|
|
|
|
rate |
|
|
record |
|
|
pay date |
|
|
|
|
|
|
|
|
|
date |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 27, 2016 |
$ |
12,995,452 |
|
|
11.5% |
|
|
December 27 |
|
|
December 27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total face value |
$ |
12,995,452 |
|
|
|
|
|
|
|
|
|
|
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 nine
months ended September 30, 2014, the Companys CIT before reduction for the
Companys high technology tax benefit was $447,014, or 25% of the Companys
$1,788,056 taxable income for such period which reduced to $130,563 after giving
effect to the Companys research and development tax credit of $316,449 was 25%
of 50% of $2,531,589 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 nine months ended September 30,
2014 was reduced from $178,896, or 10% of the Companys $1,788,056
attributed taxable income for such period to $52,226 or 2.92% 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 $316,449 for the
nine months ended September 30, 2014 combining with the un-utilized portion of R&D tax credit carried forward from the prior period. As a result, the Company’s effective income tax rate for the nine months ended September 30, 2014 was
4.38% after the research and development credit and high technology tax reduction.
30
KANDI TECHNOLOGIES GROUP, INC. |
AND SUBSIDIARIES |
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
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 Company’s Annual Report on Form 10-K.
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 September 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 September 30,
2014, the Company was not aware of any pending income tax examinations by the PRC tax authorities. The Company’s policy is to record interest and penalties on uncertain tax provisions as income tax expense. As of September 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 nine months ended September 30, 2014 due to
the net operating loss carry forward in the United States.
31
KANDI TECHNOLOGIES GROUP, INC. |
AND SUBSIDIARIES |
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
Income tax expense (benefit) for the Nine Months Ended
September 30, 2014 and 2013 is summarized as follows:
|
|
For the Nine Months Ended |
|
|
|
September 30, |
|
|
|
(Unaudited) |
|
|
|
2014 |
|
|
2013 |
|
Current: |
|
|
|
|
|
|
Provision for CIT |
$ |
1,269,408 |
|
$ |
842,863 |
|
Provision for Federal Income Tax |
|
- |
|
|
- |
|
Deferred: |
|
|
|
|
|
|
Provision for CIT |
|
- |
|
|
- |
|
Income tax expense (benefit) |
$ |
1,269,408 |
|
$ |
842,863 |
|
The Companys income tax expense (benefit) differs from the
expected tax expense for the nine months ended September 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:
|
|
For the Nine Months Ended |
|
|
|
September 30, |
|
|
|
(Unaudited) |
|
|
|
2014 |
|
|
2013 |
|
Computed expected expense |
$ |
1,594,293 |
|
$ |
897,840 |
|
Favorable tax rate |
|
(368,675 |
) |
|
(799,986 |
) |
Permanent differences |
|
(877,509 |
) |
|
737,764 |
|
Valuation allowance |
|
921,299 |
|
|
7,245 |
|
Income tax expense (benefit) |
$ |
1,269,408 |
|
$ |
842,863 |
|
The tax effects of temporary differences that give rise to the
Companys net deferred tax assets and liabilities as of September 30, 2014 and
December 31, 2013 are summarized as follows:
32
KANDI TECHNOLOGIES GROUP, INC. |
AND SUBSIDIARIES |
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
|
|
September |
|
|
December |
|
|
|
30, 2014 |
|
|
31, 2013 |
|
|
|
(Unaudited) |
|
|
|
|
Current portion: |
|
|
|
|
|
|
Deferred tax assets
(liabilities): |
|
|
|
|
|
|
Expense |
$ |
91,904 |
|
$ |
47,224 |
|
Subtotal |
|
91,904 |
|
|
47,224 |
|
|
|
|
|
|
|
|
Deferred tax assets
(liabilities): |
|
|
|
|
|
|
Sales cut-off (CIT
tax reporting on VAT tax system) |
|
(379,908 |
) |
|
(33,518 |
) |
Other |
|
(138,763 |
) |
|
|
|
Subtotal |
|
(518,671 |
) |
|
(33,518 |
) |
|
|
|
|
|
|
|
Total deferred tax assets (liabilities)
current portion |
|
(426,767 |
) |
|
13,706 |
|
|
|
|
|
|
|
|
Non-current portion: |
|
|
|
|
|
|
Deferred tax assets
(liabilities): |
|
|
|
|
|
|
Depreciation |
|
- |
|
|
81,076 |
|
Loss carried forward |
|
921,299 |
|
|
3,992,906 |
|
Valuation
allowance |
|
(921,299 |
) |
|
(3,992,906 |
) |
Subtotal |
|
- |
|
|
81,076 |
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
Accumulated other
comprehensive gain |
|
(1,299,882 |
) |
|
(1,009,477 |
) |
Subtotal |
|
(1,299,882 |
) |
|
(1,009,477 |
) |
|
|
|
|
|
|
|
Total deferred tax assets
non-current portion |
|
(1,299,882 |
) |
|
(928,401 |
) |
|
|
|
|
|
|
|
Net deferred tax assets
(liabilities) |
$ |
(1,726,649 |
) |
$ |
(914,695 |
)
|
(b) Tax Benefit (Holiday) Effect
For the nine months ended September 30, 2014 and 2013, the PRC
CIT rate was 25%. Certain subsidiaries of the Company are entitled to tax
benefit (holidays) for the nine months ended September 30, 2014 and 2013.
The combined effects of the income tax expense exemptions and
reductions available to the Company for the nine months ended September 30, 2014
and 2013 are as follows:
33
KANDI TECHNOLOGIES GROUP, INC. |
AND SUBSIDIARIES |
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
|
|
For the Nine Months Ended |
|
|
|
September 30, |
|
|
|
(Unaudited) |
|
|
|
2014 |
|
|
2013 |
|
Tax benefit (holiday) credit |
$ |
368,675 |
|
$ |
489,815 |
|
Basic net income per share effect |
$ |
0.009 |
|
$ |
0.014 |
|
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 September 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 September 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:
34
KANDI TECHNOLOGIES GROUP, INC. |
AND SUBSIDIARIES |
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
|
|
|
Number of |
|
|
Exercise |
|
|
|
Shares |
|
|
Price |
|
Outstanding as of January 1,
2014 |
|
326,660 |
|
$ |
1.01 |
|
Granted |
|
- |
|
|
- |
|
Exercised |
|
(226,660 |
) |
|
- |
|
Cancelled |
|
(100,000 |
) |
|
1.50
|
|
Outstanding as of September
30, 2014 |
|
- |
|
|
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.
(b) Warrants
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 September 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 September 30, 2014, the fair value of the Fourth Round Warrants was $7.38 per share.
35
KANDI TECHNOLOGIES GROUP, INC. |
AND SUBSIDIARIES |
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
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 Company’s 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 Company’s common stock at an exercise price of $22.80 per share. The Fourth
Round Warrants have a term of eighteen months and are exercisable by the holders at any time after the date of issuance. As of September 30, 2014, the fair value of the Fourth Round Warrants was $7.26 per share.
On September 4, 2014,the Company entered in a Securities Purchase Agreement with certain purchasers (the “Fifth Round Investors”) pursuant to which the Company sold to the Fifth Round Investors, in a registered direct offering, an
aggregate of 4,127,908 shares of its common stock at a price of $17.20 per share, for aggregate gross proceeds to the Company of approximately $71 million, before deducting fees to the placement agent and other estimated offering expenses
payable by the Company. As part of the transaction, the Fifth Round Investors also received warrants for the purchase of up to 743,024 shares of the Company’s common stock at an exercise price of $21.50 per share (the “Fifth Round
Warrants”). The Fifth Round Warrants have a term of seventeen months and are exercisable by the holders at any time after the date of issuance. In addition, the placement agent for this transaction also received warrants for the purchase of up
to 206,395 shares of the Company’s common stock at an exercise price of $20.64 per share. The placement agent’s warrants are exercisable for a term of seventeen months after the six months from the issuance. As of September 30, 2014,
the fair value of the Fifth Round Warrants was $7.52 per share.
In addition, any Fifth Round Investor that invests more than $30 million in the initial offering of shares and warrants in the Fifth Round will have an option to purchase its pro rata share of up to a $30 million of shares, or 1,744,186
shares of common stock and its pro rata share of warrants to purchase an aggregate of up to 313,954 shares of our comment stock at $17.20 for a period commencing from September 4, 2014 and ending on November 17, 2014.
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 Company’s restricted common stock every six
months from July 2011.
36
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 Company’s 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 Company’s 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 Company’s common stock every year beginning in January 2012 and 2,500 shares of Company’s 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 Company’s 2008 Omnibus Long-Term Incentive Plan (the “Plan”), if the Company’s determination that the Company’s “Non-GAAP Net Income” for the fiscal year
increased by 10% comparing to that of the prior year’s. 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 Company’s 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 Company’s 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 Company’s 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 nine months of 2014. The compensation expense is recognized
in General and Administrative Expenses.
37
KANDI TECHNOLOGIES GROUP, INC. |
AND SUBSIDIARIES |
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
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:
|
|
Remaining |
|
|
|
|
|
|
|
|
|
useful |
|
|
September |
|
|
|
|
|
|
life as of |
|
|
30, 2014 |
|
|
|
|
|
|
September |
|
|
(Unaudited) |
|
|
December |
|
|
|
30,
|
|
|
|
|
|
31, 2013 |
|
|
|
2014 |
|
|
|
|
|
|
|
Gross carrying amount: |
|
|
|
|
|
|
|
|
|
Trade name |
|
7.25 years |
|
$ |
492,235 |
|
|
492,235 |
|
Customer relations |
|
7.25 years |
|
|
304,086 |
|
|
304,086 |
|
|
|
|
|
|
796,321 |
|
|
796,321 |
|
Less : Accumulated
amortization |
|
|
|
|
|
|
|
|
|
Trade name |
|
|
|
$ |
(122,636 |
) |
|
(84,576 |
) |
Customer relations |
|
|
|
|
(75,760 |
) |
|
(52,249 |
) |
|
|
|
|
|
(198,396 |
) |
|
(136,825 |
) |
Intangible assets, net |
|
|
|
$ |
597,924 |
|
|
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 September 30, 2014 and 2013,
respectively, and $61,571 and $61,571 for the nine months ended September 30,
2014 and 2013, respectively.
Amortization expense for the next five years and thereafter is
as follows:
2014 (three months) |
$ |
20,524 |
|
2015 |
|
82,095 |
|
2016 |
|
82,095 |
|
2017 |
|
82,095 |
|
2018 |
|
82,095 |
|
Thereafter |
|
249,020 |
|
Total |
$ |
597,924 |
|
38
KANDI TECHNOLOGIES GROUP, INC. |
AND SUBSIDIARIES |
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
NOTE 21 – SUMMARIZED INFORMATION OF EQUITY METHOD INVESTMENT IN THE JV COMPANY
The Company’s consolidated net income includes the Company’s proportionate share of the net income or loss of the Company’s equity method investees. When the Company records its proportionate share of net income, it increases
equity income (loss) – net in the Company’s consolidated statements of income and the Company’s 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 Company’s consolidated statements of income and the Company’s carrying value in that investment. All intra-entity profits and losses with the Company’s 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.
39
KANDI TECHNOLOGIES GROUP, INC. |
AND SUBSIDIARIES |
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
As of September 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 Nine Months Ended September 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 |
|
|
|
September 30, |
|
|
|
2014 |
|
|
2013 |
|
Condensed income statement
information: |
|
|
|
|
|
|
Net sales |
$ |
46,847,556 |
|
$ |
- |
|
Gross income (loss) |
|
7,025,415 |
|
|
- |
|
Net income (loss) |
|
4,398,828 |
|
|
(219,281 |
) |
Companys equity in net
income of JV |
$ |
2,199,414 |
|
$ |
(109,640 |
) |
|
|
Nine months ended September |
|
|
|
30, |
|
|
|
2014 |
|
|
2013 |
|
Condensed income statement
information: |
|
|
|
|
|
|
Net sales |
$ |
126,763,793 |
|
$ |
- |
|
Gross income (loss) |
|
13,944,898 |
|
|
- |
|
Net income (loss) |
|
6,782,272 |
|
|
(240,033 |
) |
Companys equity in net
income of JV |
$ |
3,391,136 |
|
$ |
(120,016 |
) |
40
KANDI TECHNOLOGIES GROUP, INC. |
AND SUBSIDIARIES |
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
|
|
September |
|
|
December 31, |
|
|
|
30, 2014 |
|
|
2013 |
|
Condensed balance sheet information: |
|
|
|
|
|
|
Current assets |
$ |
197,823,997 |
|
$ |
108,139,053 |
|
Noncurrent assets |
|
155,694,228 |
|
|
146,130,466 |
|
Total assets |
$ |
353,518,225 |
|
$ |
254,269,519 |
|
Current liabilities |
|
179,144,285 |
|
|
93,772,816 |
|
Noncurrent liabilities |
|
8,196,329 |
|
|
- |
|
Equity |
|
166,177,611 |
|
|
160,496,703 |
|
Total liabilities and equity
|
$ |
353,518,225 |
|
$ |
254,269,519 |
|
During the first nine months of 2014, 99.2% of the JV Companys
revenues were derived from the sales of EV products in the PRC with a total of
7,279 units sold during such period, among which, a total of 1,950 units of EV
products were sold during the three months ended September 30, 2014. 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 nine months ended September 30, 2014 and 2013 are as follows:
|
|
Nine Months Ended September |
|
|
|
30, |
|
|
|
2014 |
|
|
2013 |
|
Investment in JV Company,
beginning of the period, |
$ |
79,331,930 |
|
$ |
- |
|
Investment in JV Company |
|
- |
|
|
81,282,310 |
|
Share of profit (loss) |
|
3,391,136 |
|
|
(120,017 |
) |
Intercompany transaction elimination |
|
(544,941 |
) |
|
- |
|
Year 2013 unrealized profit
realized |
|
911,023 |
|
|
- |
|
Exchange difference |
|
(544,772 |
) |
|
(1,368 |
) |
Investment in JV Company, end
of the period |
$ |
82,544,376 |
|
$ |
81,160,925 |
|
41
KANDI TECHNOLOGIES GROUP, INC. |
AND SUBSIDIARIES |
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
Sales to our customers, the JV Companys subsidiaries, for the
three and nine months ended September 30, 2014 were $36,071,967 and $78,540,158,
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 $21,697,691 and $51,271,121, respectively, Kandi
Shanghai amounted to $13,334,005 and $24,120,011, respectively and Kandi Jinhua
amounted to $1,040,860 and $2,557,746. 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 nine months ended September 30, 2014, approximately 78% 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.
As of September 30, 2014 and December 31, 2013, the amount due
from the JV Company, net was $52,028,753 and $2,917,592, respectively, of which
the majority was the balances with Kandi Changxing and Kandi Shanghai. As of
September 30, 2014 and December 31, 2013, the amount due from Kandi Changxing,
net was $33,817,187 and $1,576,408, respectively, and the amount due from Kandi
Shanghai, net was $10,414,241 and $0, respectively.
NOTE 22 ACCOUNTS RECEIVABLE
Accounts receivable are summarized as follows:
|
|
September |
|
|
December |
|
|
|
30, |
|
|
31, |
|
|
|
2014 |
|
|
2013 |
|
|
|
(Unaudited) |
|
|
|
|
Accounts receivable |
$ |
13,982,830 |
|
$ |
31,370,862 |
|
Less: Provision for doubtful debts |
|
- |
|
|
- |
|
Accounts receivable, net |
$ |
13,982,830 |
|
$ |
31,370,862 |
|
During the nine months ended September 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 $2,784,596 and
$5,227,616, respectively. During the three months ended September 30, 2014 and 2013, the Company sold products to
Kandi USA Inc., amounting to $597,481 and $2,150,564, respectively. As of
September 30, 2014 and December 31, 2013, outstanding receivable due from Eliteway was $955,302 and $ 2,800,958, respectively.
42
KANDI TECHNOLOGIES GROUP, INC. |
AND SUBSIDIARIES |
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
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 nine months ended September 30, 2014,
Eliteway and Mr. Hu Wangyuan were financially independent from the Company. The
transactions between the Company and Eliteway were carried out at arms length
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 September 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. |
$ |
4,873,294
|
|
Zhejiang Shuguang industrial Co., Ltd. |
|
4,873,294 |
|
Nanlong Group Co., Ltd. |
|
9,746,589 |
|
Total |
$ |
19,493,177 |
|
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 $4,873,294 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 $4,873,294 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.
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 $3,248,863 and $6,497,726, 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.
43
KANDI TECHNOLOGIES GROUP, INC. |
AND SUBSIDIARIES |
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
(2) Pledged collateral for a third partys bank loans
As of September 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:
|
|
Nine Months Ended September 30, |
|
|
|
2014 |
|
|
2013 |
|
|
|
|
|
|
|
|
|
|
|
|
Long Lived |
|
|
|
Sales |
|
|
Long Lived |
|
|
Sales |
|
|
Assets |
|
|
|
Revenue |
|
|
Assets |
|
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
$ |
2,703,468 |
|
$ |
- |
|
$ |
4,388,519 |
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe and other region |
|
3,302,120 |
|
|
- |
|
|
1,010,655 |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China |
|
111,332,763 |
|
|
125,395,134 |
|
|
38,576,289 |
|
|
127,580,275 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
$ |
117,338,351 |
|
$ |
125,395,134 |
|
$ |
43,975,463 |
|
$ |
127,580,275 |
|
44
KANDI TECHNOLOGIES GROUP, INC. |
AND SUBSIDIARIES |
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
|
|
Three Months Ended September 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
|
2013 |
|
|
|
|
|
|
|
|
|
|
|
|
Long Lived |
|
|
|
Sales |
|
|
Long Lived |
|
|
Sales |
|
|
Assets |
|
|
|
Revenue |
|
|
Assets |
|
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
$ |
580,154 |
|
$ |
- |
|
$ |
1,664,986 |
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe and other region |
|
2,070,438 |
|
|
- |
|
|
393,227 |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China |
|
41,556,400 |
|
|
125,395,134 |
|
|
15,087,299 |
|
|
127,580,275 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
$ |
44,206,992 |
|
$ |
125,395,134 |
|
$ |
17,145,512 |
|
$ |
127,580,275 |
|
45
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.
46
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.
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 September 30, 2014 and December 31, 2013, we recorded no allowance for doubtful accounts. This determination was made per our management’s 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.
47
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 seller’s price to the buyer is fixed or determinable; and Collectability is reasonably assured.
The revenue recognition policies for our legacy products, including all-terrain vehicles (“ATVs”), go-karts and electric vehicle (“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 with. 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 liabilities 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.
48
Results of Operations
Comparison of Three Months Ended September 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 the three months ended
September 30, 2014 and 2013.
|
|
For Three |
|
|
|
|
|
For Three |
|
|
|
|
|
|
|
|
|
|
|
|
Months |
|
|
|
|
|
Months |
|
|
|
|
|
|
|
|
|
|
|
|
Ended |
|
|
% Of |
|
|
Ended |
|
|
% Of |
|
|
Change In |
|
|
Change |
|
|
|
9/30/2014 |
|
|
Revenue |
|
|
9/30/2013 |
|
|
Revenue |
|
|
Amount |
|
|
In % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES, NET |
$ |
44,206,992 |
|
|
100.0% |
|
$ |
17,145,512 |
|
|
100.0% |
|
$ |
27,061,480 |
|
|
157.8% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OF GOODS SOLD |
|
(38,698,452 |
)
|
|
(87.5% |
)
|
|
(13,032,352 |
)
|
|
(76.0% |
)
|
|
(25,666,100 |
)
|
|
196.9% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT |
|
5,508,540 |
|
|
12.5% |
|
|
4,113,160 |
|
|
24.0% |
|
|
1,395,380 |
|
|
33.9% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
(391,097 |
)
|
|
(0.9% |
)
|
|
(500,864 |
)
|
|
(2.9% |
)
|
|
109,767 |
|
|
(21.9% |
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing |
|
(432,365 |
)
|
|
(1.0% |
)
|
|
(102,380 |
)
|
|
(0.6% |
)
|
|
(329,985 |
)
|
|
322.3% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
(2,076,749 |
)
|
|
(4.7% |
)
|
|
(2,893,935 |
)
|
|
(16.9% |
)
|
|
817,186 |
|
|
(28.2% |
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM OPERATIONS |
|
2,608,329 |
|
|
5.9% |
|
|
615,981 |
|
|
3.6% |
|
|
1,992,348 |
|
|
323.4% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest (expense), net |
|
(711,119 |
)
|
|
(1.6% |
)
|
|
(1,184,282 |
)
|
|
(6.9% |
)
|
|
473,163 |
|
|
(40.0% |
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of financial
instruments |
|
10,187,277 |
|
|
23.0% |
|
|
(6,864,624 |
)
|
|
(40.0% |
)
|
|
17,051,901 |
|
|
(248.4% |
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government grants |
|
63,584 |
|
|
0.1% |
|
|
11,077 |
|
|
0.1% |
|
|
52,507 |
|
|
474.0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share of income (loss) in associated
companies |
|
38,702 |
|
|
0.1% |
|
|
(15,787 |
)
|
|
(0.1% |
)
|
|
54,489 |
|
|
(345.2% |
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share of profit (loss) after tax of JV
Company |
|
2,038,388 |
|
|
4.6% |
|
|
(109,641 |
)
|
|
(0.6% |
)
|
|
2,148,029 |
|
|
(1959.1% |
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income, net |
|
21,814 |
|
|
0.0% |
|
|
40,647 |
|
|
0.2% |
|
|
(18,833 |
)
|
|
(46.3% |
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) FROM CONTINUING
OPERATION BEFORE INCOME TAXES |
|
14,246,975 |
|
|
32.2% |
|
|
(7,506,629 |
)
|
|
(43.8% |
)
|
|
21,753,604 |
|
|
(289.8% |
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAX EXPENSE |
|
(713,273 |
)
|
|
(1.6% |
)
|
|
(257,222 |
)
|
|
(1.5% |
)
|
|
(456,051 |
)
|
|
177.3% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) FROM CONTINUING
OPERATION |
|
13,533,702 |
|
|
30.6% |
|
|
(7,763,851 |
)
|
|
(45.3% |
)
|
|
21,297,553 |
|
|
(274.3% |
)
|
49
(a) Revenue
For the three months ended September 30, 2014, our revenue was
$44,206,992 compared to $17,145,512 for the three months ended September 30,
2013, an increase of $27,061,480 or 157.8% . The increase in revenue was mainly
due to the increased EV parts sales during the third quarter of 2014.
EV Parts
Among our total revenues during the three months ended
September 30, 2014, approximately $35,805,450, or 81.0%, resulted from the sale
of EV parts. We started the EV parts business in the first quarter of 2014, and
our revenue of EV parts increased $18,581,219 or 107.9% in the third quarter as
compared to the second quarter of 2014. Our EV parts sales 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 revenue during the three months ended
September 30, 2014, approximately $30,404,499, or 84.9%, resulted from the sale
of battery packs.
EV Products
Among our total revenues during the three months ended
September 30, 2014, approximately $741,109, or 1.7%, resulted from the sale of
EV products. The EV products revenue decreased $2,109,392, or 74.0% in the
quarter ended September 30, 2014 as compared to the corresponding period last
year. Under our agreement with our joint venture partner, Shanghai Maple Guorun
Automobile Co., Ltd., a 99%-owned subsidiary of Geely Automobile Holdings Ltd.
in March 2013, our EV products 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 for the production of the EV products.
ATV, Go-Karts and OEM - EV
ATV and Go-Kart revenues for the three months ended September
30, 2014 decreased 34.7% and 48.5%, 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 that was
added during the second quarter of 2014 mainly to assemble EV products for the
JV Company accounted $ 271,635, or 0.6% of total revenue, for the third quarter.
The following table summarizes our revenues as well as the
number of units sold by product types for the three months ended September 30,
2014 and 2013:
50
|
|
Three Months Ended September 30, |
|
|
|
2014 |
|
|
2013 |
|
|
|
Unit |
|
|
Sales |
|
|
Unit |
|
|
Sales |
|
EV parts |
|
29,142 |
|
$ |
35,805,450 |
|
|
- |
|
|
- |
|
EV products |
|
135 |
|
|
741,109 |
|
|
494 |
|
$ |
2,850,501 |
|
Go-Kart |
|
5,117 |
|
|
5,104,327 |
|
|
10,296 |
|
|
9,909,296 |
|
All-terrain vehicles (ATVs) |
|
4,070 |
|
|
2,284,471 |
|
|
5,824 |
|
|
3,500,309 |
|
Auto generator |
|
- |
|
|
- |
|
|
8,225 |
|
|
276,280 |
|
Three wheeled motorcycle |
|
- |
|
|
- |
|
|
58 |
|
|
146,736 |
|
OEM - EV |
|
579 |
|
|
271,635 |
|
|
- |
|
|
- |
|
Utility vehicles (UTVs) |
|
- |
|
|
- |
|
|
100 |
|
|
287,067 |
|
Refitted car |
|
- |
|
|
- |
|
|
6 |
|
|
175,323 |
|
Total |
|
39,043 |
|
$ |
44,206,992 |
|
|
25,003 |
|
$ |
17,145,512 |
|
The following table shows the breakdown of our revenues from
our customers during the three months ended September 30, 2014 and 2013 by
geographical markets based on the location of the customers:
|
|
Three Months Ended September 30, |
|
|
|
2014 |
|
|
2013 |
|
|
|
Sales |
|
|
Percentage |
|
|
Sales |
|
|
Percentage |
|
North America |
$ |
580,154 |
|
|
1% |
|
$ |
1,664,986 |
|
|
10% |
|
China |
|
41,556,400 |
|
|
94% |
|
|
15,087,299 |
|
|
88% |
|
Europe & other regions |
|
2,070,438 |
|
|
5% |
|
|
393,227 |
|
|
2% |
|
Total |
$ |
44,206,992 |
|
|
100%
|
|
$ |
17,145,512 |
|
|
100%
|
|
(b) Cost of goods sold
Cost of goods sold during the three months ended September 30,
2014 was $38,698,452, representing an increase of $25,666,100, or 196.9%,
compared to $13,032,352 for three months ended September 30, 2013. This increase
was mainly due to the increase in corresponding sales. However, the increase in
cost of goods sold as a percentage of revenue 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. The sale of EV parts
accounted for 81.0% of total revenue for the three months ended September 30,
2014. As a result, cost of goods sold for our EV parts product line comprised
the majority, or 83.7%, of the total cost of goods sold for the three months
ended September 30, 2014. The cost of goods sold of our battery sales accounted
for 71.3% of total cost of goods sold.
For the three months ended September 30, 2014, excluding the
battery business mentioned above, our cost of raw materials decreased 1.52%
compared to the sales increase year over year.
Excluding the battery business mentioned above, total wages and
salaries for the three months ended September 30, 2014, increased 3.66% compared
to the sales increase year over year.
51
Excluding the battery business mentioned above, our other
overhead costs for the three months ended September 30, 2014 increased 1.84%
compared to the sales increase year over year.
For the three months ended September 30, 2014, raw material
costs comprised approximately 94.3% of total cost of goods sold, labor costs
comprised approximately 1.9% 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 September 30, 2013, raw material costs comprised
approximately 85.7% of total cost of goods sold, labor costs comprised
approximately 2.5% of total cost of goods sold, and manufacturing overhead
comprised approximately 11.8% of the total cost of goods sold.
(c) Gross profit
Gross profit for the third quarter of 2014 increased 33.9% to
$5,508,540, compared to $4,113,160 for the same period last year. This was
primarily attributable to our significantly increased revenue during the
quarter. Our gross margin decreased to 12.5% compared to 24.0% for the same
period of 2013. The decreased gross margin was mainly because the majority of
our revenue growth during the third quarter came from the relatively less
profitable EV parts product line, which accounted for 81.0% of total revenue for
the quarter and had gross margin of 9.6% compared to gross margin of 12.5% for
the company as a whole.
(d) Selling and distribution expenses
Selling and distribution expenses were $432,365 for the three
months ended September 30, 2014, compared to $102,380 for the same period in
2013, an increase of $329,985 or 322.3% . This increase was primarily
attributable to a charge of $264,108 for repair and maintenance warranty during
the third quarter of 2014 as discussed above. Excluding this charge, the selling
and distribution expenses for the three months ended September 30, 2014
increased $65,877, or 64.3%, as compared to the same period of last year, which
was largely due to increased shipping and handling expenses during the quarter.
(e) General and administrative expenses
General and administrative expenses were $2,076,749 for the
three months ended September 30, 2014, compared to $2,893,935 for the same
period in 2013, a decrease of $817,186 or 28.2% . For the three months ended
September 30, 2014, general and administrative expenses included $2,024,550 in
expenses for common stock awards to employees and consultants, compared to
$28,000 for the same period in 2013. Excluding stock award costs, our net
general and administrative expenses for the three months ended September 30,
2014 were $52,199, a decrease of $2,813,736 or 98.2%, from $2,865,935 for the
same period of 2013. The decease was primarily because the costs for our
registered direct offering consummated during this third quarter were directly
deducted from its gross proceeds, while the costs related to our capital raises
during the corresponding period last year were included in our general
administrative expenses.
52
(f) Research and development
Research and development expenses were $391,097 for the three
months ended September 30, 2014, compared to $500,864 from the same period in
2013, a decrease of $109,767 or 21.9% . This decrease was primarily due to the
certain machinery were used in our R&D process in the past few quarters
while being used to regular operation during the current period.
(g) Government grants
Government grants totaled $63,584 for the three months ended
September 30, 2014, an increase of $52,507, or 474.0%, from $11,077 in the
corresponding period in 2013. The increases were largely due to the subsidies we
received from the Chinese government for promoting local business.
(h) Net interest (income) expense
Net interest expense was $711,119 for the three months ended
September 30, 2014, compared to $1,184,282 for the same period last year, a
decrease of $473,163 or 40.0% . This change was primarily attributable to an
increase in interest income earned on loans made to third parties. For the three
months ended September 30, 2014, we recorded interest income of $220,911, which
included $201,528 earned on loans made to third parties and $19,383 earned on
bank deposits. For the three months ended September 30, 2014, we recorded
interest expense of $932,030, which included bank loan interest of $558,805 and
bond interest of $373,225.
(i) Change in fair value of financial instruments
For the three months ended September 30, 2014, the gain
related to changes in the fair value of derivative liability relating to the
warrants issued to investors and placement agents was $10,187,277, compared to
a loss of $6,864,624 for the same period of last year, a change of
$17,051,901 or 248.4% . The gain on the changes in the fair value of derivative
liability is due to the decrease of the fair value price of the derivative which
was primarily attributable to two factors. Firstly, it was caused by the
decrease of the Companys stock price of the common stock underlying the
warrants issued on September 4, 2014, which decreased from $17.13 on the
issuance date to $12.99 on September 30, 2014. Secondly, it was due to the
passage of remaining life of the existing outstanding warrants (excluding the
warrants issued in September 2014), especially a significant portion of the
warrants will expire in January 2015.
(j) Share of (loss) of associated company
Investment gains were $38,702 for the three months ended
September 30, 2014, compared to a loss of $15,787 for the corresponding period
in 2013, a change of $54,489, or 345.2%, primarily due to the liquidation of our
investment in Jinhua Service as this entity was dissolved in the third quarter
of 2014. For the three months ended September 30, 2014 and 2013, these gains or
losses were attributable to our 30% equity interest investment in Jinhua
Service.
(k) Share of profit (loss) after tax of the JV Company
For the three months ended September 30, 2014, the JV Companys
net sales was $46,847,556, gross income improved to $7,025,415, and net income
increased to $4,398,828.
53
For the
three-month period ended September 30, 2014, based on equity method of
accounting we recorded equity income of
$2,199,414, or 50% of the net profit of $4,398,828 of the JV Company due to our
50% ownership interest in the JV Company. After eliminating intra-entity profits
and losses, our share of the after tax profit of the JV Company was $2,038,388
for the three months ended September 30, 2014, compared to a loss of $109,640
for the same period of last year, an increase in income of $2,148,029 or
1,959.1% .
During the three months ended September 30, 2014, a total of
1,950 units of EV products were sold by the JV Company. According to the public
Notice No. 54 issued by Chinas Ministry of Industry and Information Technology
and State Administration of Taxation, three of Kandi's pure EV models were
chosen to be on the first approved list of New Energy Vehicles to qualify for a
purchase tax exemption at the amount of 10% of the vehicles total purchase
price, effective September 1, 2014 for three years. In anticipation of such an incentive policy,
a number of customers had postponed their purchases until after September 1,
2014 to enjoy the tax exemption benefits, which
negatively impacted the JV Companys sales of EV products during this July and
August.
(l) Other income, net
Net other income was $ 21,814 for the three months ended
September 30, 2014, compared to $40,647 for the same period of last year, a
decrease of $18,833 or 46.3% .
(m) Net income from continuing operation
Net income was $ 13,533,702 for the three months ended
September 30, 2014, compared to net loss of $ 7,763,851 for the same period in
2013, a change of $21,297,553 or 274.3% . The increase in net income was
primarily attributable to increased revenue and gross profits, and the gain from
the change in the fair value of derivative securities.
Excluding (i) the effects of stock award expenses, which were
$2,024,550 and $28,000 for the three months ended September 30, 2014 and 2013,
respectively, and (ii) the change of the fair value of financial derivatives,
which was an income of $10,187,277 and a expense of $6,864,624 for the three
months ended September 30, 2014 and 2013, respectively, our net income
(non-GAAP) was $5,370,975 for the three months ended September 30, 2014 as
compared to a net loss (non-GAAP) of $871,227 (non-GAAP) for the same period of
2013, an increase of $6,242,202. This increase in net income (non-GAAP) was
primarily attributable to the increase of revenue and gross profits during the
three-month period.
We make reference to certain non-GAAP financial measure, i.e.,
the adjusted net income. Management believes that such adjusted financial result
is useful to investors in evaluating our 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.
54
|
|
Three Months Ended
|
|
|
|
September 30 |
|
|
|
2014 |
|
|
2013 |
|
GAAP net income (loss) from continuing
operations |
$ |
13,533,702
|
|
$ |
(7,763,851 |
) |
Stock award expenses |
|
2,024,550 |
|
|
28,000 |
|
Change of the fair value of financial
derivatives |
|
(10,187,277 |
) |
|
6,864,624 |
|
Non-GAAP net income (loss) from continuing operations |
|
5,370,975 |
|
|
(871,227 |
) |
Comparison of Nine Months Ended September 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 the nine months ended
September 30, 2014 and 2013.
55
|
|
For Nine |
|
|
|
|
|
For Nine |
|
|
|
|
|
|
|
|
|
|
|
|
Months |
|
|
|
|
|
Months |
|
|
|
|
|
|
|
|
|
|
|
|
Ended |
|
|
% Of |
|
|
Ended |
|
|
% Of |
|
|
Change In |
|
|
Change |
|
|
|
9/30/2014 |
|
|
Revenue |
|
|
9/30/2013 |
|
|
Revenue |
|
|
Amount |
|
|
In % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES, NET |
$ |
117,338,351 |
|
|
100.0% |
|
$ |
43,975,463 |
|
|
100.0% |
|
$ |
73,362,888 |
|
|
166.8% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OF GOODS SOLD |
|
(99,748,314 |
) |
|
(85.0% |
) |
|
(33,673,048 |
) |
|
(76.6% |
) |
|
(66,075,266 |
) |
|
196.2% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT |
|
17,590,037 |
|
|
15.0% |
|
|
10,302,415 |
|
|
23.4% |
|
|
7,287,622 |
|
|
70.7% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
(2,535,027 |
) |
|
(2.2% |
) |
|
(1,863,020 |
) |
|
(4.2% |
) |
|
(672,007 |
) |
|
36.1% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing |
|
(939,516 |
) |
|
(0.8% |
) |
|
(263,414 |
) |
|
(0.6% |
) |
|
(676,102 |
) |
|
256.7% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
(11,720,693 |
) |
|
(10.0% |
) |
|
(4,826,622 |
) |
|
(11.0% |
) |
|
(6,894,071 |
) |
|
142.8% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM OPERATIONS |
|
2,394,801 |
|
|
2.0% |
|
|
3,349,359 |
|
|
7.6% |
|
|
(954,558 |
) |
|
(28.5% |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest (expense), net |
|
(1,397,294 |
) |
|
(1.2% |
) |
|
(2,472,377 |
) |
|
(5.6% |
) |
|
1,075,083 |
|
|
(43.5% |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of financial
instruments |
|
6,814,675 |
|
|
5.8% |
|
|
(6,956,963 |
) |
|
(15.8% |
) |
|
13,771,638 |
|
|
(198.0% |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government grants |
|
217,284 |
|
|
0.2% |
|
|
60,884 |
|
|
0.1% |
|
|
156,400 |
|
|
256.9% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share of (loss) in associated companies |
|
(54,290 |
) |
|
0.0% |
|
|
(45,327 |
) |
|
(0.1% |
) |
|
(8,963 |
) |
|
19.8% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share of profit after tax of JV |
|
3,757,218 |
|
|
3.2% |
|
|
(120,017 |
) |
|
(0.3% |
) |
|
3,877,235 |
|
|
(3230.6% |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income, net |
|
141,641 |
|
|
0.1% |
|
|
217,160 |
|
|
0.5% |
|
|
(75,519 |
) |
|
(34.8% |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) FROM CONTINUING
OPERATION BEFORE INCOME TAXES |
|
11,874,035 |
|
|
10.1% |
|
|
(5,967,281 |
) |
|
(13.6% |
) |
|
17,841,316 |
|
|
(299.0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAX EXPENSE |
|
(1,269,408 |
) |
|
(1.1% |
) |
|
(502,123 |
) |
|
(1.1% |
) |
|
(767,285 |
) |
|
152.8% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) FROM CONTINUING
OPERATION |
$ |
10,604,627 |
|
|
9.0% |
|
$ |
(6,469,404 |
) |
|
(14.7% |
) |
$ |
17,074,031 |
|
|
(263.9% |
)
|
(a) Revenue
For the nine months ended September 30, 2014, we had revenues
of $117,338,351 as compared to revenues of $43,975,463 for the nine months ended
September 30, 2013, an increase of $73,362,888 or 166.8% . For the nine months
ended September 30, 2014 and 2013, 95% and 88%, respectively, of our revenues were derived from
the sales of our products in the Peoples Republic of China (the PRC).
56
The following table summarizes our revenues as well as the
number of units sold by product types for the nine months ended September 30,
2014 and 2013:
|
|
Nine Months Ended September 30, |
|
|
|
2014 |
|
|
2013 |
|
|
|
Unit |
|
|
Sales |
|
|
Unit |
|
|
Sales |
|
EV parts |
|
76,626 |
|
$ |
78,044,020 |
|
|
- |
|
|
- |
|
EV products |
|
1,666 |
|
|
22,358,409 |
|
|
1,126 |
|
$ |
6,619,011 |
|
Go-Kart |
|
10,727 |
|
|
10,183,331 |
|
|
28,707 |
|
|
25,538,290 |
|
All-terrain vehicles (ATVs) |
|
10,301 |
|
|
6,266,748 |
|
|
14,304 |
|
|
7,772,598 |
|
Auto generator |
|
1,664 |
|
|
57,660 |
|
|
43,949 |
|
|
1,459,807 |
|
Three wheeled motorcycle |
|
2 |
|
|
1,018 |
|
|
237 |
|
|
380,748 |
|
OEM - EV |
|
899 |
|
|
427,165 |
|
|
- |
|
|
- |
|
Utility vehicles (UTVs) |
|
- |
|
|
- |
|
|
440 |
|
|
1,150,885 |
|
Refitted car |
|
- |
|
|
- |
|
|
39 |
|
|
1,054,124 |
|
Total |
|
101,885 |
|
$ |
117,338,351 |
|
|
8,802 |
|
$ |
43,975,463 |
|
EV Parts
During the nine months ended September 30, 2014, our revenues
from the sale of EV parts were $78,044,020. We started the EV parts business in
the first quarter of 2014, and our revenue for the nine months ended September
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 nine months ended September 30, 2014, approximately 78% 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 exclusively used in Kandi brand names EVs
manufactured by the JV Company. We are primarily responsible for supplying the
JV Company with EV parts and the JV Company is primarily responsible for
producing EV products.
EV Products
We continued to sell certain EV products during the first nine
months of 2014. Our revenues from the sale of EV products increased by
$15,739,398 or 237.8% from $6,619,011 for the nine months ended September 30,
2013 to $22,358,409 for the nine months ended September 30, 2014, representing a
48.0% increase in unit sales and a 128.3% increase in the average unit price. Of
the total sales of EV products for the nine months ended September 30, 2014,
approximately $21,007,072, or 94%, was sold to Shanghai Maple Auto Co., Ltd., an
unaffiliated company that holds the vehicle production rights in the PRC that
permit it to sell the products to the end customers. 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.
57
Go-Karts
During the nine months ended September 30, 2014, our revenues
from the sale of go-karts declined by $15,354,959, or 60.1%, primarily as a
result of a 62.6% decrease in unit sales as compared to the same period of last
year. However, the decline of unit sales was partially offset by a 6.7% increase
in the average unit price during the first nine 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 nine months ended September 30, 2014, our revenues
from the sale of ATVs decreased by $1,505,850, or 19.4%, as a result of a 28.0%
decrease in unit sales that was offset in part by a 12.0% 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 were sold during this
reporting period.
Auto Generators
During the nine months ended September 30, 2014, our sales of
auto generators decreased by $1,402,147, or 96.1%, as a result of a 96.2%
decrease in unit sales that was partially offset by a 4.3% 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 shift focus to the manufacturing of automobile motors,
air-conditioning systems, controllers, and accelerator pedals for EVs.
Motorcycles
During the nine months ended September 30, 2014, our revenues
from the sale of three-wheeled motorcycles declined by $379,730 or 99.7%, as a
result of a 99.2% decrease in unit sales and a 68.3% 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. We expect to continue to phase out our sales
of motorcycles in the future.
OEM EV
During the nine months ended September 30, 2014, our revenues
from our OEM business were $427,165. We started our OEM business in the second
quarter of 2014, and our sales for the nine months ended September 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.
58
UTV
During the nine months ended September 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 nine months ended September 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 nine months ended September 30, 2014 and 2013 by
geographical markets based on the location of the customer:
|
|
Nine Months Ended September 30, |
|
|
|
2014 |
|
|
2013 |
|
|
|
Sales |
|
|
Percentage |
|
|
Sales |
|
|
Percentage |
|
North America |
$ |
2,703,468 |
|
|
2% |
|
$ |
4,388,519 |
|
|
10% |
|
China |
|
111,332,763 |
|
|
95% |
|
|
38,576,289 |
|
|
88% |
|
Europe & other region |
|
3,302,120 |
|
|
3% |
|
|
1,010,655 |
|
|
2% |
|
Total |
$ |
117,338,351 |
|
|
100%
|
|
$ |
43,975,463 |
|
|
100%
|
|
(b) Cost of goods sold
Cost of goods sold during the nine months ended September 30,
2014 was $99,748,314, representing an increase of $66,075,266 or 196.2% from
$33,673,048 in the corresponding period of 2013. This increase was primarily due
to the corresponding increased sales for the nine months ended September 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 66.5% of total revenue for the nine months ended September 30,
2014. As a result, cost of goods sold for our EV parts product line comprised
the majority, or 70.9%, of the total cost of goods sold for the nine months
ended September 30, 2014. The battery sales accounted for the majority of our EV
parts sales and its corresponding cost of goods sold accounted for 56.8% of
total cost of goods sold.
59
For the nine months ended September 30, 2014, excluding the battery business mentioned above, our cost of raw materials had a percentage increase of 0.36% 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 nine months ended September 30, 2014, had an increase of 1.66% 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 nine months ended September 30, 2014 had a decrease of 2.59% compared to the sales increase in the same period of time year over year.
For the nine months ended September 30, 2014, raw material costs comprised approximately 95.0% of total cost of goods sold, labor costs comprised approximately 1.7% of total cost of goods sold, and manufacturing overhead comprised approximately 3.3%
of the total cost of goods sold. For the nine months ended September 30, 2013, raw material costs comprised approximately 87.6% of total cost of goods sold, labor costs comprised approximately 2.6% of total cost of goods sold, and manufacturing
overhead comprised approximately 9.8% of the total cost of goods sold.
(c) Gross profit
Gross profit for the first nine months of 2014 was $17,590,037 as compared to $10,302,415 for the same period last year, representing an increase of $7,287,622 or 70.7% . This increase was primarily attributable to the increase in our
revenue. However, our gross margin in the first nine months of 2014 decreased to 15.0% compared to 23.4% for the same period of 2013. The decreased gross margin was mainly because the majority of our revenue growth during the first nine months of
the year came from the relatively less profitable EV parts product lines, which had a gross margin of 9.4% compared to the average gross margin of 15.0% for the Company as a whole.
(d) Selling and distribution expenses
Selling and distribution expenses were $939,516 for the nine months ended September 30, 2014, compared to $263,414 for the same period in 2013, representing an increase of $676,102 or 256.7% . This increase was primarily attributable to
warranty expenses of $567,755 for repair and maintenance charged during the second quarter and the third quarter of 2014. We contracted a qualified third party to provide repair and maintenance services for the 1,620 Kandi 7001 series EV sedans
we have sold. The total price of this service is $3,176,080, which will be amortized over three years. Excluding this charge, our selling and distribution expenses increased $108,347, or 41.1%, 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 as well as the shipping and handling costs.
60
(e) General and administrative expenses
General and administrative expenses were $11,720,693 for the nine months ended September 30, 2014, compared to $4,826,622 for the same period in 2013, representing an increase of $6,894,071 or 142.8% . For the nine months ended September
30, 2014, general and administrative expenses included $6,453,797 in expenses for common stock awards to employees and consultants for their services, compared to $81,042 for the same period in 2013. Excluding stock award costs, our net
general and administrative expenses for the nine months ended September 30, 2014 were $5,266,896, an increase of $521,316, or 11.0%, over $4,745,580 for the same period of 2013. This increase was primarily attributable to costs related
to the capital raises consummated this January and March.
(f) Research and development
Research and development expenses were $2,535,027 for the nine months ended September 30, 2014, compared to $1,863,020 from the same period in 2013, representing an increase of $672,007 or 36.1% . 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 $217,284 for the nine months ended September 30, 2014, representing an increase of $156,400, or 256.9%, from $60,884 in the corresponding period in 2013. The increases were largely due to the subsidies we
received from the Chinese government for promoting local business.
(h) Net interest (income) expense
Net interest expense was $1,397,294 for the nine months ended September 30, 2014, compared to $2,472,377 for the same period last year, representing a decrease of $1,075,083 or 43.5% . This change was primarily attributable to an
increase in interest income earned on loans made to third parties. For the nine months ended September 30, 2014, we recorded interest income of $1,453,047, which included $1,411,815 earned on loans made to third parties and $41,232
earned on bank deposits. For the nine months ended September 30, 2014, we recorded interest expense of $2,850,341, which included bank loan interest of $1,728,432 and bond interest of $1,121,909.
(i) Change in fair value of financial instruments
For the nine months ended September 30, 2014, the gain related to changes in the fair value of the derivative liability relating to the warrants issued to investors and placement agents was $6,814,675, compared to a loss of $6,956,963 for
the same period of last year, a change of $13,771,638 or 198.0% . The gain
on the changes in the fair value of derivative liability is due to the decrease
of the fair value price of the derivative which was primarily attributable to
two factors. Firstly, it was caused by the decrease of the Companys stock price
of the common stock underlying the warrants issued on September 4, 2014, which
decreased from $17.13 on the issuance date to $12.99 on September 30, 2014.
Secondly, it was due to the passage of remaining life of the existing
outstanding warrants (excluding the warrants issued in September 2014),
especially a significant portion of the warrants will expire in January 2015.
61
(j) Share of (loss) of associated company
Investment losses were $54,290 for the first nine months ended September 30, 2014, compared to a loss of $45,327 for the corresponding period in 2013, an increase of $8,963 or 19.8% . For the nine months ended September 30, 2014 and
2013, these losses were attributable to our 30% equity ownership of Jinhua Service. In July 2014, Jinhua Service ceased its operations and was 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
For the nine months ended September 30, 2014, the JV Company’s net sales was $126,763,793, gross income was $13,944,898, and net income of $6,782,272.
The JV Company recorded net income of $6,782,272 for the nine-month period ended
September 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 $ 3,391,136
for the nine-month period ended September 30, 2014. After eliminating
intra-entity profits and losses, our share of the after tax profit of the JV
Company was $3,757,218 for the nine months ended September 30, 2014, compared to
a loss of $120,016 representing our share of the JV Companys loss for the same
period of last year, an increase in income of $3,877,235.
During the first nine months of 2014, 99.2% of the JV Company’s revenues were derived from the sales of EV products in the PRC with a total of 7,279 units sold during such period. We expect the JV Company will continue to perform well as the
demand for EV products continues to grow in China evidenced by the increased orders from the Car-Share Project
and group long-term lease project.
(l) Other income, net
Other income was $141,641 for the nine months ended September 30, 2014, compared to $217,160 for the same period of last year, a decrease of $75,519, or 34.8% . This decrease was primarily attributable to the decrease in lease income we
received during this reporting period.
(m) Net income (loss) from continuing operation
We achieved net income of $10,604,627 for the nine months ended September 30, 2014, compared to net loss of $6,469,404 for the same period in 2013, a change of $17,074,031 or 263.9% . The net income was primarily attributable to
increased revenue and gross profits, and the gain from the change in the fair value of warrant derivatives.
62
Excluding (i) the effects of stock award expenses, which were
$6,453,797 and $81,042 for the nine months ended September 30, 2014 and 2013,
respectively, and (ii) the change of the fair value of financial derivatives,
which were a gain of $6,814,675 and a loss of $6,956,963 for the nine months
ended September 30, 2014 and 2013, respectively, our net income (non-GAAP) was
$10,243,749 for the nine months ended September 30, 2014 as compared to net
income (non-GAAP) of $568,601 for the same period of 2013, an increase of
$9,675,148 or 1,701.6% . The increase in such net income was primarily
attributable to the increase of revenue and gross profits during the first nine
months of 2014.
We make reference to certain non-GAAP financial measures, i.e.,
the adjusted net income. Management believes that such adjusted financial result
is useful for investors in evaluating our 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.
|
|
Nine Months Ended September 30 |
|
|
|
2014
|
|
|
2013
|
|
GAAP net income (loss) from continuing
operations |
$ |
10,604,627 |
|
$ |
(6,469,404 |
) |
Stock award expenses |
|
6,453,797 |
|
|
81,042 |
|
Change of the fair value of financial
derivatives |
|
(6,814,675 |
) |
|
6,956,963 |
|
Non-GAAP net income from continuing operations |
|
10,243,749 |
|
|
568,601 |
|
Financial Condition Liquidity and Capital Resources
Working Capital
We had a working capital surplus of $108,121,553 as of
September 30, 2014, compared to a working capital deficit of $24,027,852 as of
September 30, 2013.
As of September 30, 2014, the amount of advances to suppliers
was $58,777,479, which included the advance of RMB353 million, or approximately
$57,342,430, for a prepayment by Kandi Wanning to an equipment supplier -
Nanjing Shangtong Auto Technologies Co., Ltd. (Nanjing Shangtong) for
equipment purchases relating to developing Kandi Wannings manufacturing factory
in Wanning city, Hainan province. 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 September 30, 2014, we had credit lines from commercial
banks of $41,910,331, of which $35,412,606 was used as of September 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, including our registered direct offering completed on
September 4, 2014 and established relationships with PRC banks will enable us to
meet our obligations and fund our ongoing operations.
63
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.
On September 4, 2014, we closed a registered direct placement
with institutional investors and raised approximately $71 million from selling
our common stock at a price of $17.20 per share. We issued a total of 4,127,908
shares to the institutional investors. As part of the transaction, we also
issued to the investors warrants for the purchase of up to 743,024 shares of
common stock at an exercise price of $21.50 per share, which have a term of 17
months from the date of issuance until February 4, 2016. In addition, any
investor that invested more than $30 million in the initial offering of shares
and warrants received an option to purchase its pro rata share of up to $30
million of additional shares, or 1,744,186 shares of common stock, and its pro
rata share of warrants to purchase an aggregate of up to 313,954 shares of
comment stock at $17.20 per share until November 17, 2014. The gross proceeds
from this offering were $71 million. After deducting offering expenses, the net
proceeds will be used for general working capital purposes.
Capital Requirements and Capital Provided
Capital requirements and capital provided for the nine months
ended September 30, 2014 were as follows:
64
|
|
Nine Months |
|
|
|
Ended |
|
|
|
September |
|
|
|
30, 2014 |
|
Capital requirements |
|
(In |
|
|
|
thousands) |
|
Purchase of plant and equipment |
$ |
813 |
|
Purchases of land use rights |
|
1,668 |
|
Purchase of construction in progress |
|
39 |
|
Issuance of notes receivable |
|
21,699 |
|
Repayments of short-term bank loans |
|
39,999 |
|
Repayments of notes payable |
|
16,585 |
|
Internal cash used in operations |
|
46,398 |
|
Total capital requirements |
$ |
127,201 |
|
Capital provided |
|
|
|
Repayments of notes receivable |
|
29,345 |
|
Increase in restricted cash |
|
(13,006 |
) |
Proceeds from short-term bank loan |
|
28,617 |
|
Proceeds from notes payable |
|
13,008 |
|
Common stock and warrants issued |
|
78,156 |
|
Warrant exercise |
|
22,448 |
|
Other financing activities |
|
6,430 |
|
Increase in cash |
|
(37,700 |
) |
Total capital provided |
$ |
127,298 |
|
The difference between capital provided and capital required is
caused by the exchange rate changes over the past nine months.
Cash Flow
For the nine months ended September 30, 2014, cash used in
operating activities was $46,397,580, as compared to cash provided by operating
activities of $20,930,272 for the nine months ended September 30, 2013. The
major operating activities that provided cash for the nine months ended
September 30, 2014 were net income of $10,604,627, an increase in accounts
payable of $32,911,627 and a decrease in accounts receivable of $17,190,113. The
major operating activities that used cash for the nine months ended September
30, 2014 were an increase in receivables from the JV Company of $49,177,160, and
an increase in prepayment and prepaid expenses of $49,927,475. Cash provided by
investing activities for the nine months ended September 30, 2014 was $
5,029,182, as compared to cash used in investing activities of $44,444,947 for
the nine months ended September 30, 2013. Cash provided by investing activities
for the nine months ended September 30, 2014 was primarily the result of the
repayment of notes receivable of $ 29,344,951. Cash used in investing activities
for the nine months ended September 30, 2014 was primarily the result of the
issuance of notes receivable of $21,698,986.
Cash provided by financing activities for the nine months ended
September 30, 2014 was $ 79,068,355, as compared to cash provided by financing
activities of $25,016,660 for the nine months ended September 30, 2013. Cash
provided by financing activities for the nine months ended September 30, 2014
was primarily the result of proceeds from short-term loans of $28,616,816,
proceeds from notes payable of $13,007,644, proceeds from common stock and
warrants issued of $78,155,627, and proceeds from warrant exercises of
$22,447,914. Cash used in financing activities for the nine months ended
September 30, 2014 was primarily the result of repayment of short-term loans of
$39,998,504, repayments of notes payable of $16,584,746,and placement of
restricted cash of $13,006,018.
65
As of September 30, 2014, we had unrestricted cash of $
49,500,712. Our total current assets were $208,850,377, and our total current
liabilities were $100,728,824, which resulted in a net working capital of
$108,121,553.
Recent Development Activities:
During the quarter ended September 30, 2014 and the subsequent
period, the Car-Share Project had been through significant development in the
cities of Shanghai, Chengdu and Nanjing. Shanghai Jinshan Car-Share Project was
launched in August 2014 with the first 208 Kandi Brand EVs delivered. The
Car-Share Project is anticipated to be launched in Chengdu city by the end of
this year with 1,000 Kandi Brand EVs to be delivered. It will soon be launched
in Nanjing city. Purchasers of Kandi's SMA7000BEV and SMA7001BEV models are the
ultimate beneficiaries, on a per car basis, the national government subsidy of RMB
47,500.00 (Approximately $7,738.00) and the local government subsidy of RMB
47,500.00 (Approximately $7,738.00) from provincial government and municipal
government combined at both Chengdu (Sichuan province) and Nanjing (Jiangsu
province). Additionally, these two vehicle models also qualify for free license
plates in Shanghai. The license plates in Shanghai are auctioned to the public
at an average price between RMB70,000.00 to RMB80,000.00 ($11,410.00 to
$13,040.00) per license plate.
On September 30, 2014, the new pure electric vehicle model KD17
"Cyclone", jointly developed by us and Geely Automobile Holdings Ltd., passed
the evaluation done by the executive team of the JV Company. "Cyclone" is a
five-door, four-seat vehicle with spacious and comfortable seating area. The
vehicle utilizes newly developed triple element non-polymer battery and central
control system featuring in both touch screen and conventional buttons.
"Cyclone" achieved multiple domestic automobile golden standards and is
currently under the examination by Chinas Ministry of Industry and Information
Technology, with the expectation to release to the market at the end of 2014.
On October 29, 2014, the JV Company entered into a Strategic
Cooperation Framework Agreement with Ant Financial Services Group to launch
Alipay and Alipay Wallet services to the Car-Share Project. The
scope of the agreement includes, but is not limited to utilizing mobile
application Alipay Wallet, Chinas leading electronic and mobile payment
service for Kandis Car-Share Project, and co-developing other innovative
services, such as customer credit system, online booking, and membership
management. Alipay Wallet offers the convenience of renting Kandi's EV
through a smart phone. Additionally, it allows zero deposit and guarantee for
qualified renters with good credit records based on Alipay's proprietary
transaction data. Kandi expects to launch the first mobile application for the
Car-Share Project based on Alipay Wallet platform by the end of November.
66
On August 30, 2014, the JV Company held a meeting of the board
of directors. The board unanimously elected Mr. Hu Xiaoming as Chairman of the
JV Company to succeed Mr. Li Shufu and appointed Mr. Liu Jinliang as President
of the JV Company.
From July to the date of this report, the JV Companys
management and board members, including Mr. Hu Xiaoming and Mr. Li Shufu had
been through a variety of meetings with local government officials who supported
the Car-Share Project, including the meeting with Mr. Zhang Hongming, Mayor of
Hangzhou on July 29, 2014, the field research with Mr. Xia Baolong, Party
Secretary of Zhejiang Province on September 2, 2014; a field survey with Mr.
Gong Zheng, Party Secretary of Hangzhou on September 25, 2014. During the same
period, the JV Company management has been invited to many EV pilot cities to
introduce and negotiate the cooperation of Kandis "Car Share Project" business
model such as Zhengzhou, Beijing, Wuhan, Guangzhou, and Shenzhen.
On August 20, 2014, Messrs. Li Shufu and Hu Xiaoming called
upon the heads of the Chinese Electric Vehicle Research Institute and other
related departments to have a focused discussion on the five year strategic plan
for new products. During the meeting, Messrs. Li and Hu laid out our plans for
new products in development. We believe that the next generation of pure EVs
will be massively competitive in the market.
Item 3. Quantitative and Qualitative Disclosures About
Market Risk.
Exchange Rate Risk
Our operations are conducted mainly in 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 (CEO) and our Chief Financial Officer (CFO), the effectiveness of
disclosure controls and procedures (as such term is defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934 (the Exchange Act)) as
of September 30, 2014. Based on this evaluation, our CEO and CFO concluded that
as of the end of the period covered by this report, our disclosure controls and
procedures were effective.
67
Disclosure controls and procedures are controls and other
procedures that are designed to ensure that information required to be disclosed
in our reports filed or submitted under the Exchange Act (a) is recorded,
processed, summarized and reported within the time periods specified in the
SECs rules and forms and (b) is accumulated and communicated to management,
including our CEO and CFO, as appropriate, to allow timely decisions regarding
required disclosure. Our management recognizes that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance
of achieving their objectives and management necessarily applies its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
Our disclosure controls and procedures are designed to provide reasonable
assurance of achieving their objectives as described above.
Changes in Internal Control over Financial Reporting
During the quarter ended September 30, 2014, we continued to
implement the remediation measures according to our new Internal Audit Activity
Charter that were approved on May 30, 2014. In addition, the Audit Committee
conducted a self-assessment to assess our effectiveness in oversight of
management and updated the Audit Committee Charter.
Other than those set forth 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.
68
PART II OTHER INFORMATION
Item 1. Legal Proceedings
On November 21, 2013, the Company received a subpoena from the
SEC seeking the production of various categories of documents in an
investigation entitled In the Matter of Kandi Technologies Group, Inc.
The Company has cooperated fully with the SEC's investigation and intends to
continue doing so by providing whatever documents and other information
requested. The Company has no information at present regarding the duration or
outcome of the investigation. The November 21, 2013 subpoena stated that the
investigation is a fact-finding inquiry and its existence does not mean that any
laws have been violated.
Item 1A. Risk Factors.
Changes in the policies of the PRC government could have a
significant impact upon the business we may be able to conduct in the PRC and
the profitability of such business.
Chinese government has made significant efforts in actively
advocating the development of new energy vehicles to reach production and sales
targets of 0.5 million New Energy Vehicles (NEVs) by 2015 and 5 million NEVs by
2020. We received support from the local and central government of the PRC from
time to time. For example, purchasers of three models of Kandi brand EVs are
eligible to receive purchase tax exemption at the amount of 10% of the vehicles
total purchase price during the three-year period from September 1, 2014. Purchasers of Kandi's SMA7000BEV and SMA7001BEV models are
the ultimate beneficiaries, on a per car
basis, the national government subsidy of RMB 47,500.00 (Approximately
$7,738.00) and the local government subsidy of RMB 47,500.00 (Approximately
$7,738.00) from provincial government and municipal government combined at both
Chengdu (Sichuan province) and Nanjing (Jiangsu province). Additionally, these
two vehicle models also qualify for free license plates in Shanghai. The license
plates in Shanghai are auctioned to the public at an averaged price between
RMB70,000.00 to RMB80,000.00 ($11,410.00 to $13,040.00) per license plate. While
we believe the latest tax exemption, along with a series of government
incentives and subsidies, may have a very positive impact on the sales of Kandi
Brand EVs in China going forward, we cannot assure you it is always the case. In
the event such favored policy and treatment discontinue, our business outlook
and financial conditions could be negatively impacted.
If we fail to maintain an effective system of internal
controls, we may not be able to accurately report our financial results or
prevent fraud. As a result, current and potential shareholders could lose
confidence in our financial reporting, which would harm our business and the
trading price of our stock.
Effective internal controls are necessary for us to provide
reliable financial reports and effectively prevent fraud. As directed by Section
404 of the Sarbanes-Oxley Act of 2002, or SOX 404, the SEC adopted rules
requiring public companies to include a report of management on our internal
controls over financial reporting in their annual reports.
69
Despite of our recent efforts in improving our internal control
procedures and remediating the material weaknesses, we cannot provide assurance
that we will not fail to achieve and maintain an effective internal control
environment on an ongoing basis, which may cause investors to lose confidence in
our reported financial information and have a material adverse effect on the
price of our common stock.
Techniques employed by manipulative short sellers in Chinese
small cap stocks may drive down the market price of our common stock.
Short selling is the practice of selling securities that the
seller does not own but rather has, supposedly, borrowed from a third party with
the intention of buying identical securities back at a later date to return to
the lender. The short seller hopes to profit from a decline in the value of the
securities between the sale of the borrowed securities and the purchase of the
replacement shares, as the short seller expects to pay less in that purchase
than it received in the sale. As it is therefore in the short sellers best
interests for the price of the stock to decline, many short sellers (sometime
known as disclosed shorts) publish, or arrange for the publication of,
negative opinions or reports regarding the relevant issuer and its business
prospects in order to create negative market momentum and generate profits for
themselves after selling a stock short. These short attacks have, in the past,
led to selling of shares in the market, on occasion in large scale and broad
base.
These short seller publications are not regulated by any
governmental, self-regulatory organization or other official authority in the
U.S., are not subject to the certification requirements imposed by the
Securities and Exchange Commission in Regulation AC (Regulation Analyst
Certification) and, accordingly, the opinions they express may be based on
distortions of actual facts or, in some cases, fabrications of facts. In light
of the limited risks involved in publishing such information, and the enormous
profit that can be made from running just one successful short attack, unless
the short sellers become subject to significant penalties, it is more likely
than not that disclosed short sellers will continue to issue such reports.
While we intend to strongly defend our public filings against
any such short seller attack, often times we are constrained, either by
principles of freedom of speech, applicable state law (often called Anti-SLAPP
statutes), or issues of commercial confidentiality, in the manner in which we
can proceed against the relevant short seller. You should be aware that in light
of the relative freedom to operate that such persons enjoy oftentimes blogging
from outside the U.S. with little or no assets or identity requirements should
we be targeted for such an attack, our stock will likely suffer from a
temporary, or possibly long term, decline in market price should the rumors
created not be dismissed by market participants.
70
Item 6. Exhibits
** |
Furnished and not deemed filed or a part of a
registration statement or prospectus for purposes of Sections 11 or 12 of
the Securities Act of 1933, as amended, and deemed not filed for purposes
of Section 18 of the Securities Exchange Act of 1934, as amended, and
otherwise not subject to liability under these
sections. |
71
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, the registrant caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Date: November 10, 2014 |
By: |
/s/ Hu
Xiaoming |
|
|
Hu Xiaoming |
|
|
President and Chief Executive Officer |
|
|
(Principal Executive Officer) |
|
|
|
|
|
|
Date: November 10, 2014 |
By: |
/s/
Zhu Xiaoying |
|
|
Zhu Xiaoying |
|
|
Chief Financial Officer |
|
|
(Principal Financial Officer and Principal
|
|
|
Accounting Officer) |
72
Exhibit 31.1
OFFICERS CERTIFICATION PURSUANT TO |
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
|
I, Hu Xiaoming, certify that:
1. I have reviewed this report on Form
10-Q of Kandi Technologies Group, Inc.;
2. Based on my knowledge, this report
does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect
to the period covered by this report
3. Based on my knowledge, the financial
statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in this
report;
4. The registrants other certifying
officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls
and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this
report is being prepared;
(b) Designed such internal control
over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the
registrants disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures,
as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any
change in the registrants internal control over financial reporting that
occurred during the registrants most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the registrants
internal control over financial reporting; and
5. The registrants other certifying
officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies and
material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the
registrants ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not
material, that involves management or other employees who have a significant
role in the registrants internal control over financial reporting.
Date: November 10, 2014 |
|
|
|
/s/ Hu Xiaoming
|
|
Name: Hu Xiaoming |
|
Title: President and Chief Executive Officer |
|
(Principal Executive Officer) |
|
Exhibit 31.2
OFFICERS CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Zhu Xiaoying, certify that:
1. I have reviewed this report on Form
10-Q of Kandi Technologies Group, Inc.;
2. Based on my knowledge, this report
does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect
to the period covered by this report;
3. Based on my knowledge, the financial
statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in this
report;
4. The registrants other certifying
officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls
and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this
report is being prepared;
(b) Designed such internal control
over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the
registrants disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures,
as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any
change in the registrants internal control over financial reporting that
occurred during the registrants most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the registrants
internal control over financial reporting; and
5. The registrants other certifying
officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies and
material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the
registrants ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not
material, that involves management or other employees who have a significant
role in the registrants internal control over financial reporting.
Date: November 10, 2014
/s/ Zhu Xiaoying
|
|
Name: Zhu Xiaoying |
|
Title: Chief Financial Officer |
|
(Principal Financial Officer and Principal Accounting
Officer) |
|
Exhibit 32.1
CERTIFICATIONS OF CEO AND CFO PURSUANT TO |
18 U.S.C. § 1350, |
AS ADOPTED PURSUANT TO |
§ 906 OF THE SARBANES-OXLEY ACT OF 2002
|
In connection with the Quarterly
Report on Form 10-Q of Kandi Technologies Group, Inc. (the Company) for the
quarterly period ending September 30, 2014 as filed with the Securities and
Exchange Commission on the date hereof (the Report), Hu Xiaoming, President
and Chief Executive Officer of the Company, and Zhu Xiaoying, Chief Financial
Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. § 1350, as
adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, to the best of his
or her knowledge, that:
(1) The Report fully complies
with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act
of 1934; and
(2) The information contained in
the Report fairly presents, in all material respects, the financial condition
and results of operations of the Company.
/s/ Hu Xiaoming
|
|
Name: Hu Xiaoming |
|
Title: President and Chief Executive Officer |
|
(Principal Executive Officer) |
|
Date: November 10, 2014 |
|
|
|
/s/ Zhu Xiaoying
|
|
Name: Zhu Xiaoying |
|
Title: Chief Financial Officer |
|
(Principal Financial Officer and Principal |
|
Accounting Officer) |
|
Date: November 10, 2014 |
|
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