NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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,
and 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 Jinhua City, Zhejiang Province, People’s Republic of China, the Company is one of the People’s Republic of China’s
(“China”) leading producers and manufacturers of electric vehicle (“EV”) products, EV parts, and off-road
vehicles for sale in China and global markets. The Company conducts its primary business operations through its wholly-owned subsidiary,
Zhejiang Kandi Vehicles Co., Ltd. (“Kandi Vehicles”), and the partially and wholly-owned subsidiaries of Kandi Vehicles.
The
Company’s organizational chart as of March 8, 2018 is as follows:
Operating
Subsidiaries:
Pursuant
to agreements executed in January 2011, Kandi Vehicles is entitled to 100% of the economic benefits, voting rights and residual
interests (100% of profits and losses) of JinhuaKandi New Energy Vehicles Co., Ltd. (“Kandi New Energy”). Kandi New
Energy currently holds battery pack production licensing rights and supplies battery packs to the JV Company (as such term is
defined below). In April 2012, pursuant to a share exchange agreement, the Company acquired 100% of YongkangScrou Electric Co,
Ltd. (“YongkangScrou”), a manufacturer of automobile and EV parts. YongkangScrou currently manufactures and sells
EV drive motors, EV controllers, air conditioners and other electric products to the JV Company.
In
March 2013, pursuant to a joint venture agreement (the “JV Agreement”) entered into by 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 EV products and related auto parts. Each of Kandi Vehicles and Shanghai Guorun has 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 and all products are manufactured by its subsidiaries. In an effort to improve the JV Company’s development, Zhejiang
Geely Holding Group, the parent company of Geely, became the JV Company’s -shareholder on October 26, 2016, through its
purchase of the 50% equity of the JV Company held by Shanghai Guorun at a premium price (a price exceeding the cash amount of
the aggregate of the original investment and the shared profits over the years). On May 19, 2017, due to business development,
Geely Holding entrusted Hu Xiaoming, Chairman of the Board of the JV Company, to hold 19% equity of the JV Company from its 50%
holding of the JV Company on behalf of Geely Holding as a nominal holder. On the same day, Geely Holding transferred its remaining
31% equity in the JV Company to Geely Group (Ningbo) Ltd., a company wholly owned by Li Shufu, Chairman of the Board of Geely
Holding. On May 25, 2017, Mr. Hu pledged his 19% equity in the JV Company held on behalf of Geely Holding to Geely Holding. On
June 30, 2017, due to the JV Company’s operational needs, Kandi Vehicles pledged its 50% equity in the JV Company to Geely
Holding as counter-guarantee, because Geely Holding provides a 100% guarantee on the JV Company’s borrowings. Notwithstanding
the pledge, guarantee and counter-guarantee arrangements stated above, there has been no change in control with respect to the
50% ownership held by each shareholder of the JV Company. In order to streamline the equity structure, on October 24, 2017, Mr.
Hu transferred the 19% equity of the JV Company to Geely Group (Ningbo) Ltd. Now, Kandi Vehicles and Geely Group (Ningbo) Ltd.
each owns 50% of equity of the JV Company.
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 EV products. In the 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. The Company, indirectly through its 50% ownership interest in the JV Company, has a 50% economic
interest in Kandi Changxing.
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, generally referred to as the Micro Public Transportation (“MPT”) program. The Company, through Kandi Vehicle,
has a 9.5% ownership interest in the Service Company.
In
November 2013, Kandi Electric Vehicles Jinhua Co., Ltd. (“Kandi Jinhua”) was formed by the JV Company. The JV
Company has a 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. JiHeKang
is engaged in the car sales business. The JV Company has a 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 a 100% ownership interest in 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, Kandi Electric Vehicles Jiangsu Co., Ltd. (“Kandi Jiangsu”) was formed by the JV Company. The JV Company
has a 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. Kandi Jiangsu is mainly engaged in EV research and development, manufacturing, and
sales.
In
November 2015, Hangzhou Puma Investment Management Co., Ltd. (“Puma Investment”) was formed by the JV Company.
Puma Investment provides investment and consulting services. The JV Company has a 50% ownership interest in Puma Investment
(the other 50% is owned by Zuozhongyou Electric Vehicles Service (Hangzhou) Co., Ltd., a subsidiary of the Service Company),
and the Company, indirectly through the JV Company, has a 25% economic interest in Puma Investment. In addition, Kandi
Vehicle has a 9.5% ownership interest in Zuozhongyou Electric Vehicles Service (Hangzhou) Co., Ltd. The Company, indirectly
through its 100% ownership interest in Kandi Vehicle, also has a 4.75% economic interest in Puma Investment. Therefore, the
Company has a total of 29.75% of economic interest in Puma Investment.
In
November 2015, Hangzhou JiHeKang Electric Vehicle Service Co., Ltd. (the “JiHeKang Service Company”) was formed by
the JV Company. The JiHeKang Service Company focuses on after-market services for EV products. The JV Company has a 100% ownership
interest in the JiHeKang Service Company, and the Company, indirectly through the JV Company, has a 50% economic interest in the
JiHeKang Service Company.
In
December 2015, Zhejiang JiHeKang Electric Vehicle Sales Co., Ltd. Tianjin Branch (“JiHeKang Tianjin”) was formed
by JiHeKang. JiHeKang Tianjin is engaged in the car sales business. Since JiHeKang Tianjin is 100% owned by the JV Company,
the JV Company has a 100% ownership interest in JiHeKang Tianjin, and the Company, indirectly through its 50% ownership
interest in the JV Company, has a 50% economic interest in JiHeKang Tianjin.
In
January 2016, Kandi Electric Vehicles (Wanning) Co., Ltd. was renamed Kandi Electric Vehicles (Hainan) Co., Ltd. (“Kandi
Hainan”). Kandi Hainan was originally formed in Wanning City in Hainan Province by Kandi Vehicles and Kandi New Energy in
April 2013, and was transferred to Haikou City in January 2016. Kandi Vehicles has a 90% ownership interest in Kandi Hainan, and
Kandi New Energy has the remaining 10% ownership interest. In fact, Kandi Vehicles is, effectively, entitled to 100% of the economic
benefits, voting rights and residual interests (100% of the profits and losses) of Kandi Hainan as Kandi Vehicles is entitled
to 100% of the economic benefits, voting rights and residual interests of Kandi New Energy.
In
August 2016, Jiangsu JiDian Electric Vehicle Sales Co., Ltd. (“Jiangsu JiDian”) was formed by JiHeKang. Jiangsu JiDian
is engaged in the car sales business. Since JiHeKang is 100% owned by the JV Company, the JV Company has a 100% ownership interest
in Jiangsu JiDian, and the Company, indirectly through its 50% ownership interest in the JV Company, has a 50% economic interest
in Jiangsu JiDian.
In
October 2016, JiHeKang acquired Tianjin BoHaiWan Vehicle Sales Co., Ltd. (“Tianjin BoHaiWan”), which is engaged in
the car sales business. Since JiHeKang is 100% owned by the JV Company, the JV Company has a 100% ownership interest in Tianjin
BoHaiWan, and the Company, indirectly through its 50% ownership interest in the JV Company, has a 50% economic interest in Tianjin
BoHaiWan.
In November 2016, Changxing Kandi Vehicle
Maintenance Co., Ltd. (“Changxing Maintenance”) was formed by Kandi Changxing. Changxing Maintenance is engaged in
the car repair and maintenance business. In December 2017, the Service Company entered an agreement with the JV Company to acquire
100% of Changxing Maintenance for RMB 1,089,887 or approximately $167,501. As of December 31, 2017, the transaction had not been
closed. Since Kandi Changxing is 100% owned by the JV Company, the JV Company has a 100% ownership interest in Changxing Maintenance,
and the Company, indirectly through its 50% ownership interest in the JV Company, has a 50% economic interest in Changxing Maintenance.
In
November 2016, Guangdong JiHeKang Electric Vehicle Sales Co., Ltd. (“Guangdong JiHeKang”) was formed by JiHeKang.
Guangdong JiHeKang is engaged in the car sales business. Since JiHeKang is 100% owned by the JV Company, the JV Company has a
100% ownership interest in Guangdong JiHeKang, and the Company, indirectly through its 50% ownership interest in the JV
Company, has a 50% economic interest in Guangdong JiHeKang.
In
March 2017, Hangzhou Liuchuang Electric Vehicle Technology Co., Ltd. (“Liuchuang”) was formed by Kandi Jiangsu.
Since Kandi Jiangsu is 100% owned by the JV Company, the JV Company has a 100% ownership interest in Liuchuang, and the
Company, indirectly through its 50% ownership interest in the JV Company, has a 50% economic interest in
Liuchuang.
In April 2017, in order to promote business
development, Kandi Jinhua, JiHeKang, and the JiHeKang Service Company were reorganized to become subsidiaries of Kandi Jiangsu.
As the JV Company has a 100% ownership interest in Kandi Jiangsu, the JV Company has 100% ownership interests in Kandi Jinhua,
JiHeKang, and the JiHeKang Service Company, and the Company, indirectly through its 50% ownership interest in the JV Company, has
a 50% economic interest in Kandi Jinhua, JiHeKang, and the JiHeKang Service Company.
The
Company’s primary business operations are designing, developing, manufacturing and commercializing EV products, EV parts
and off-road vehicles. As part of its strategic objective of becoming a leading manufacturer of EV products (through the JV Company)
and related services, the Company has increased its focus on pure EV-related products, with a particular emphasis on expanding
its market share in China.
NOTE
2 - LIQUIDITY
The
Company had a working capital surplus of $53,707,902 as of December 31, 2017, a decrease of $32,640,123 from a working capital
surplus of $86,348,025 as of December 31, 2016.
As
of December 31, 2017, the Company had credit lines available from commercial banks of $33,042,864. Although the Company expects
that most of the Company’s outstanding trade receivables from its customers will be collected in the next twelve months,
there are uncertainties about the timing in collecting these receivables, especially the receivables due from the JV Company,
because most of them are indirectly impacted by the timely receipt of government subsidies. Since the amount due from the JV Company
accounts for the majority of the Company’s outstanding receivables, and since the Company cannot control the timing of the
receipt of government subsidies, the Company believes that its internally-generated cash flows may not be sufficient to support
the growth of future operations and to repay short-term bank loans for the next twelve months. However, the Company believes its
access to existing financing sources and its good credit will enable it to meet its obligations and fund its ongoing operations
for the next 12 months. The Company expects to approximately maintain the current debt level for the next twelve months given
the Company’s current financial position and business development needs.
The
Company’s primary need for liquidity is to fund working capital requirements of the Company’s businesses, capital
expenditures and for general operational purposes, including debt repayment. The Company has incurred losses and experienced negative
operating cash flows for the past years, and accordingly, the Company has taken a number of actions to continue to support its
operations and meet its obligations. The Company has historically financed its operations through short-term commercial bank loans
from Chinese 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 an additional one-year term, with adjustments made to
the interest rate to reflect prevailing market rates. This practice has been ongoing year after year and the Company believes
that short-term bank loans will remain available on normal trade terms if needed. As the misunderstanding surrounding the exchange
battery model of the JV Company has been gradually cleared up and the financial institutions’ confidence to Kandi has been
restored, the relevant Chinese banks are expected to further increase the credit to the company. During the second half of 2017,
the Company gradually resumed normal production and turned losses in the first six months in 2017 to profits generated in the
second six months in 2017. During the fourth quarter of 2017, the Company continued its revenue growth momentum since the third
quarter of this year and was profitable in the fourth quarter of 2017. In 2018, the management will take measures to grow the
business and further improve the Company’s liquidity. The Company acknowledges that the Company continues to face a challenging
competitive environment and expect that the actions taken will enhance the Company’s liquidity and financial flexibility
to support the Company’s operation needs.
We
finance our ongoing operating activities by using funds from our operations and external credit or financing arrangements. We
routinely monitor current and expected operational requirements and financial market conditions to evaluate the use of available
financing sources. Considering our existing working capital position and our ability to access debt funding sources, we believe
that our operations and borrowing resources are sufficient to provide for our current and foreseeable capital requirements to
support our ongoing operations for the next twelve months.
NOTE
3 - BASIS OF PRESENTATION
The
Company maintains its general ledger and journals using the accrual method of accounting for financial reporting purposes. The
Company’s financial statements and notes are the representations of the Company’s management. Accounting policies
adopted by the Company conform to generally accepted accounting principles in the United States and have been consistently applied
in the Company’s presentation of its financial statements.
NOTE
4 – PRINCIPLES OF CONSOLIDATION
The
consolidated financial statements reflect the accounts of the Company and its ownership interest in the following subsidiaries:
(1)
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Continental
Development Limited (“Continental”), a wholly-owned subsidiary of the Company incorporated under the laws of Hong
Kong;
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(2)
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Kandi
Vehicles, a wholly-owned subsidiary of Continental;
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(3)
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Kandi
New Energy, a 50%-owned subsidiary of Kandi Vehicles (Mr. Hu Xiaoming owns the other 50%). Pursuant to agreements executed
in January 2011, Mr. Hu Xiaoming contracted with Kandi Vehicles for the operation and management of Kandi New Energy and put
his shares of Kandi New Energy into escrow. As a result, Kandi Vehicles is entitled to 100% of the economic benefits, voting
rights and residual interests of Kandi New Energy;
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(4)
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YongkangScrou,
a wholly-owned subsidiary of Kandi Vehicles; and
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(5)
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Kandi
Hainan, a subsidiary, 10% owned by Kandi New Energy and 90% owned by Kandi Vehicles.
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Equity
Method Investees
The
Company’s consolidated net income also includes the Company’s proportionate share of the net income or loss of its
equity method investees as follows:
(1)
The JV Company, a 50% owned subsidiary of Kandi Vehicles;
(2)
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 in Kandi Changxing;
(3)
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 in Kandi Jinhua;
(4)
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 in JiHeKang;
(5)
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 in Kandi Shanghai;
(6)
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 in Kandi Jiangsu;
(7)
The JiHeKang Service Company, 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 in the JiHeKang Service Company.
(8)
Tianjin BoHaiWan, 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 in Tianjin BoHaiWan;
(9)
Changxing Maintenance, 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 in Changxing Maintenance;
(10)
Liuchuang, 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 in Liuchuang.
(11)
Jiangsu Jidian, 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 in Jiangsu Jidian.
(12)
JiHeKang Tianjin, 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 in JiHeKang Tianjin.
(13)
Guangdong 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 in Guangdong JiHeKang.
All
intra-entity profits and losses with regards to the Company’s equity method investees have been eliminated.
NOTE
5 – USE OF ESTIMATES
The
preparation of financial statements in conformity with generally accepted accounting principles in the United States requires
the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
the 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 China. As a result, the Company’s business, financial condition and results
of operations may be influenced by the political, economic and legal environments in China, and by the general state of the Chinese
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 China 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 China, 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 for which little or no market data exists, therefore requiring an entity to develop its
own assumptions.
The
Company’s financial instruments primarily consist of cash and cash equivalents, restricted cash, accounts receivable, notes
receivable, other receivables, accounts payable, other payables and accrued liabilities, short-term bank loans, notes payable,
and warrants.
The
carrying value of cash and cash equivalents, restricted cash, accounts receivable, notes receivable, other receivables, accounts
payable, other payables and accrued liabilities, and notes payable approximate fair value because of the short-term nature of
these items. The estimated fair values of short-term bank loans were not materially different from their carrying value as presented
due to the brief maturities and because the interest rates on these borrowings approximate those that would have been available
for loans of similar remaining maturities and risk profiles. As the carrying amounts are reasonable estimates of fair value, these
financial instruments are classified within Level 1 of the fair value hierarchy. The Company identified notes payable as Level
2 instruments due to the fact that the inputs to valuation are primarily based upon readily observable pricing information. The
balance of notes payable, which was measured and disclosed at fair value, was $28,075,945 and $14,797,325 at December 31, 2017
and December 31, 2016, respectively.
Warrants,
which are accounted for as liabilities, are treated as derivative instruments, and are measured at each reporting date for their
fair value using Level 3 inputs. The fair value of warrants was $0 at December 31, 2017 and December 31, 2016, respectively. 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 December 31, 2017, and December 31, 2016, includes time deposits on account for earning interest income. As of December
31, 2017, and December 31, 2016, the Company’s restricted cash was $11,218,688 and $12,957,377.
(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 basis of weighted average and comprises direct materials, direct
labor and an appropriate proportion of overhead.
Net
realizable value is based on estimated selling prices less selling expenses and any further costs expected to be incurred for
completion. Adjustments to reduce the cost of inventory to net realizable value are made, if required, for estimated excess, obsolescence,
or impaired balances.
(e)
Accounts Receivable and Due from the JV Company and Related Parties
Accounts
receivable are recognized and carried at net realizable value. An allowance for doubtful accounts is recorded for 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 exhaustive collection
efforts. 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 December 31, 2017 and December 31, 2016, credit terms with the Company’s customers were typically 180 to 360 days
after delivery. In 2016, the Company extended credit terms with certain customers, mainly the JV Company whose outstanding
balance has already exceeded the originally granted credit terms to a much longer period because of delayed subsidy payments
for EVs sold by the JV Company from the Chinese government. Because of the industry-wide subsidy review, the Chinese
government temporarily delayed issuance of subsidy payments for the EVs sold in 2015 and 2016, which negatively impacted the
JV Company’s cash flow position and caused its delay in repaying the Company. According to the government’s
subsidy policies, the EVs sold in 2015 and 2016 by the JV Company are eligible for receiving subsidies and the Chinese
government has a good record of paying subsidies. As of December 31, 2017, and December 31, 2016, the Company had a $133,930
and $0 allowance for doubtful accounts, as per the Company management’s judgment based on their best knowledge. The
Company conducts quarterly assessments of the state of the Company’s outstanding receivables and reserves any allowance
for doubtful accounts if it becomes necessary. As of December 31, 2017, based on the Company management’s collection
experience, approximately $15.9 million of amount due from the JV Company in the current assets was reclassified to amount
due from the JV Company in the long-term assets due to the reason mentioned above.
(f)
Notes Receivable
Notes
receivable represent short-term loans to third parties with maximum terms of six months. Interest income is recognized according
to each agreement between a borrower and the Company on an accrual basis. For notes receivable with banks, the interest rates
are determined by banks. For notes receivable with other parties, the interest rates are based on agreements between the parties.
If notes receivable are paid back, that transaction will be recognized in the relevant year. If notes receivable are not paid
back, or are written off, that transaction will be recognized in the relevant year if 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, the Company provides an accrual for the related foreclosure and litigation
expenses. The Company also receives notes receivable from the JV Company and other parties to settle accounts receivable. If the
Company decides to discount notes receivable for the purpose of receiving immediate cash, the current discount rate is approximately
in the range of 4.80% to 5.00% annually. As of December 31, 2017 and December 31, 2016, the Company had notes receivable from
the JV Company and other related parties of $1,137,289 and $400,239, respectively, which notes receivable typically mature within
six months.
(g)
Advances to Suppliers
Advances
to suppliers represent cash paid in advance to suppliers, and include advances to raw material suppliers, mold manufacturers,
and equipment suppliers.
As
of December 31, 2017, the Company had made a total advance payments of RMB744 million (approximately $114 million) to Nanjing
Shangtong Auto Technologies Co., Ltd. (“Nanjing Shangtong”) as an advance to purchase a production line and develop
a new EV model for Kandi Hainan. Nanjing Shangtong is a total solutions contractor for Kandi Hainan and provides all the equipment
and EV product design and research services used by Kandi Hainan. After such advances were transferred to construction in progress
and expensed for R&D purposes, the Company had $14,796,504 left in Advance to Suppliers in current assets and $ 12,336,973
left in Advance to Suppliers in long-term assets related to the purchases from Nanjing Shangtong as of December 31, 2017.
Advances
for raw material purchases are typically settled within two months of the Company’s receipt of the raw materials. Prepayment
is offset against the purchase price after the equipment or materials are delivered.
(h)
Property, Plants and Equipment
Property,
Plants and equipment are carried at cost less accumulated depreciation. Depreciation is calculated over the asset’s estimated
useful life, using the straight-line method. Leasehold improvements are amortized over the life of the asset or the term of the
lease, whichever is shorter. Estimated useful lives are as follows:
Buildings
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30 years
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Machinery and equipment
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10 years
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Office equipment
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5 years
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Motor vehicles
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5 years
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Molds
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5 years
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The
costs and related accumulated depreciation of assets sold or otherwise retired are eliminated from the Company’s accounts
and any gain or loss is included in the statements of income. The cost of maintenance and repairs is charged to expenses as incurred,
whereas significant renewals and betterments are capitalized.
(i)
Construction in Progress
Construction
in progress (“CIP”) represents the direct costs of construction, and the acquisition costs of buildings or
machinery. Capitalization of these costs ceases, and construction in progress is transferred to plants and equipment, when
substantially all the activities necessary to prepare the assets for their intended use are completed. No depreciation is
provided for until the assets are completed and ready for their intended use. $2,181,512 of interest expenses have been
capitalized for CIP as of December 31, 2017.
(j)
Land Use Rights
Land
in China is owned by the government and land ownership rights cannot be sold to an individual or to a private company. However,
the Chinese government grants the user a “land use right” to use the land. The land use rights granted to the Company
are amortized using the straight-line method over a 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 disposal costs.
The
Company recognized no impairment loss during the reporting period.
(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:
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|
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
Company recognized revenue when the products and the risks they carry are transferred to the other party.
(m)
Research and Development
Expenditures
relating to the development of new products and processes, including improvements to existing products, are expensed as incurred.
Research and development expenses were $27,628,085, $26,504,650 and $3,482,511 for the years ended December 31, 2017, 2016 and
2015, respectively.
(n)
Government Grants
Grants
and subsidies received from the Chinese government are recognized when the proceeds are received or collectible and related milestones
have been reached and all contingencies have been resolved.
For
the years ended December 31, 2017, 2016 and 2015, $5,913,554, $25,913,540 and $1,645,032, respectively, were received by the Company’s
subsidiaries from the Chinese 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 Company management’s best estimate of 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 will be uncertain.
(p)
Foreign Currency Translation
The
accompanying consolidated financial statements are presented in United States dollars. The functional currency of the Company
is the Renminbi (RMB). Capital accounts of the consolidated financial statements are translated into United States dollars from
RMB at their historical exchange rates when the capital transactions occurred.
Assets
and liabilities are translated at the exchange rates as of balance sheet date. Income and expenditures are translated at the average
exchange rate of the reporting period, which rates are obtained from the website: http:// www.ofx.com
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Period end RMB : USD exchange rate
|
|
|
6.5067
|
|
|
|
6.94585
|
|
|
|
6.49270
|
|
Average RMB : USD exchange rate
|
|
|
6.7568
|
|
|
|
6.64520
|
|
|
|
6.24010
|
|
(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, the Company’s chief operating decision makers rely upon the consolidated
results of operations when making decisions about allocating resources and assessing the performance of the Company. As a result
of the assessment made by the Company’s chief operating decision makers, the Company has only one operating segment. The
Company does not distinguish between markets or segments for the purpose of internal reporting.
(s)
Stock Option Expenses
The
Company’s stock option expenses are recorded in accordance with ASC 718 and ASC 505.
The
fair value of stock options 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 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.
The
recognition of stock option expenses is based on awards expected to vest. 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 expenses for the years ended December 31, 2017, 2016 and 2015 were $3,763,282, $14,867,987 and $14,255,887,
respectively. See Note 19. There were no forfeitures estimated during the reporting period.
(t)
Goodwill
The
Company allocates goodwill from business combinations to reporting units based on the expectation that the reporting unit is to
benefit from the business combination. The Company evaluates its reporting units on an annual basis and, if necessary, reassigns
goodwill using a relative fair value allocation approach. Goodwill is tested for impairment at the reporting unit level on an
annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair
value of a reporting unit below its carrying value. These events or circumstances could include a significant change in the business
climate, legal factors, operating performance indicators, competition, or sale or disposition of a significant portion of a reporting
unit.
Application
of the goodwill impairment test requires judgments, including the identification of reporting units, assignment of assets and
liabilities to reporting units, assignment of goodwill to reporting units, and the 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 December 31, 2017 and December 31, 2016, the Company determined that its goodwill was not impaired.
(u)
Intangible Assets
Intangible
assets consist of trade names and customer relations associated with the purchase price from the allocation of YongkangScrou.
Such assets are being amortized over their estimated useful lives of 9.7 years. Intangible assets were amortized as of December
31, 2017. The amortization expenses for intangible assets were $82,095 and $82,095 for the years ended December 31, 2017 and 2016,
respectively.
(v)
Accounting for Sale of Common Stock and Warrants
Gross
proceeds are first allocated according to the initial fair value of the freestanding derivative instruments (i.e. the warrants
issued to the Company’s investors in its previous offerings, or the “Investor Warrants”). The remaining proceeds
are allocated to common stock. The related issuance expenses, including the placement agent cash fees, legal fees, the initial
fair value of the warrants issued to the placement agent and others were allocated between the common stock and the Investor Warrants
based on how the proceeds are allocated to these instruments. Expenses related to the issuance of common stock were charged to
paid-in capital. Expenses related to the issuance of derivative instruments were expensed upon issuance.
(w)
Consolidation of variable interest entities
In
accordance with accounting standards regarding consolidation of variable interest entities, or VIEs, VIEs are generally entities
that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity
holders lack adequate decision making ability. All VIEs with which the Company is involved must be evaluated to determine the
primary beneficiary of the risks and rewards of the VIE. The primary beneficiary is required to consolidate the VIE for financial
reporting purposes.
The
Company has concluded, based on the contractual arrangements, that Kandi New Energy is a VIE and that the Company’s wholly-owned
subsidiary, Kandi Vehicles, absorbs a majority of the risk of loss from the activities of this company, thereby enabling the Company,
through Kandi Vehicles, to receive a majority of its respective expected residual returns.
Additionally,
because Kandi New Energy is under common control with other entities, the consolidated financial statements have been prepared
as if the transactions had occurred retroactively as to the beginning of the reporting period of these consolidated financial
statements.
Control
and common control are defined under the accounting standards as “an individual, enterprise, or immediate family members
who hold more than 50 percent of the voting ownership interest of each entity.” Because the owners collectively own 100%
of Kandi New Energy, and have agreed to vote their interests in concert since the establishment of each of these three companies
as memorialized the Voting Rights Proxy Agreement, the Company believes that the owners collectively have control and common control
of Kandi New Energy. Accordingly, the Company believes that Kandi New Energy was constructively held under common control by Kandi
Vehicles as of the time the contractual agreements were entered into, establishing Kandi Vehicles as their primary beneficiary.
Kandi Vehicles, in turn, is owned by Continental, which is owned by the Company.
NOTE
7 – NEW ACCOUNTING PRONOUNCEMENTS
Recent
accounting pronouncements that the Company has adopted or may be required to adopt in the future are summarized below:
In
August 2014, the FASB issued an accounting standards update which requires management to assess whether there are conditions or
events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern
within one year after the financial statements are issued. If substantial doubt exists, additional disclosures are required. This
update was effective for the Company’s annual period ended January 28, 2017. The Company’s assessment of our ability to continue
as a going concern is further discussed in Note 2 - Liquidity. The adoption of the new standard did not have a material impact
on the Company’s consolidated financial position, results of operations, cash flows or disclosures.
In
May 2014, the FASB issued an accounting standards update which replaces the current revenue recognition standards. Subsequently,
the FASB has also issued accounting standards updates which clarify the guidance. The new revenue recognition standard provides
a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that a company should
recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services. This standard was initially released as effective
for fiscal years beginning after December 15, 2016, however, the FASB has decided to defer the effective date of this accounting
standard update for one year. Early adoption of the update is permitted, but not before the original date for fiscal years beginning
after December 15, 2016. The update may be applied retrospectively for each period presented or as a cumulative-effect adjustment
at the date of adoption. The Company does not expect the adoption of the new standard will have a material impact on the Company’s
consolidated financial position, results of operations, cash flows or disclosures.
NOTE
8 – CONCENTRATIONS
(a)
Customers
The
Company’s major customers, who accounted for more than 10% of the Company’s consolidated revenue, were as follows:
|
|
Sales
|
|
|
Trade Receivable
|
|
|
|
Year ended
|
|
|
Year ended
|
|
|
Year ended
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31
|
|
|
December 31
|
|
Major Customers
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Kandi Electric Vehicles Group Co., Ltd.
|
|
|
89
|
%
|
|
|
59
|
%
|
|
|
34
|
%
|
|
|
71
|
%
|
|
|
53
|
%
|
|
|
55
|
%
|
Trade
receivable includes accounts receivable, amount due from the JV Company net of loans to the JV Company, and amount due from other
related parties.
(b)
Suppliers
The
Company’s material suppliers, each of whom accounted for more than 10% of the Company’s total purchases, were as follows:
|
|
Purchases
|
|
|
Accounts Payable
|
|
|
|
Year
|
|
|
Year
|
|
|
Year
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
Major Suppliers
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Dongguan Chuangming Battery Technology Co., Ltd.
|
|
|
26
|
%
|
|
|
42
|
%
|
|
|
26
|
%
|
|
|
19
|
%
|
|
|
22
|
%
|
|
|
15
|
%
|
Zhejiang Tianneng Energy Technology Co., Ltd.
|
|
|
25
|
%
|
|
|
23
|
%
|
|
|
20
|
%
|
|
|
11
|
%
|
|
|
15
|
%
|
|
|
24
|
%
|
Jinhua An Kao Power Technology Co., Ltd.
|
|
|
12
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
%
|
|
|
-
|
|
|
|
-
|
|
NOTE
9 –EARNINGS 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 years ended
December 31, 2017, 2016 and 2015, the number of potentially dilutive common shares were 0, 0 and 180,836, respectively. The potential
dilutive common shares as of December 31, 2017, 2016 and 2015 were 4,233,334, 4,566,667 and 0, respectively.
The
following table sets forth the computation of basic and diluted net income per common share:
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Net (loss) income
|
|
$
|
(28,347,474
|
)
|
|
$
|
(6,510,757
|
)
|
|
$
|
14,665,495
|
|
Weighted average shares used in basic computation
|
|
|
47,943,830
|
|
|
|
47,447,665
|
|
|
|
46,744,718
|
|
Dilutive shares
|
|
|
-
|
|
|
|
-
|
|
|
|
180,836
|
|
Weighted average shares used in diluted computation
|
|
|
47,943,830
|
|
|
|
47,447,665
|
|
|
|
46,925,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.59
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
0.31
|
|
Diluted
|
|
$
|
(0.59
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
0.31
|
|
NOTE
10 - ACCOUNTS RECEIVABLE
Accounts
receivable are summarized as follows:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Accounts receivable
|
|
$
|
34,531,788
|
|
|
$
|
32,394,613
|
|
Less: allowance for doubtful accounts
|
|
|
(133,930
|
)
|
|
|
-
|
|
Accounts receivable, net
|
|
$
|
34,397,858
|
|
|
$
|
32,394,613
|
|
NOTE
11 - INVENTORIES
Inventories
are summarized as follows:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Raw material
|
|
$
|
7,256,498
|
|
|
$
|
2,529,149
|
|
Work-in-progress
|
|
|
2,831,678
|
|
|
|
1,786,087
|
|
Finished goods
|
|
|
6,512,537
|
|
|
|
8,014,671
|
|
Total inventories
|
|
|
16,600,713
|
|
|
|
12,329,907
|
|
Less: provision for slowing moving inventories
|
|
|
(620,919
|
)
|
|
|
(415,797
|
)
|
Inventories, net
|
|
$
|
15,979,794
|
|
|
$
|
11,914,110
|
|
NOTE
12 - NOTES RECEIVABLE
As
of December 31, 2017 and 2016, there are no notes receivable from unrelated party.
Notes
Receivable from JV Company and related party for the years ended December 31, 2017 and 2016 were summarized as follows:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Notes receivable as below:
|
|
|
|
|
|
|
Bank acceptance notes
|
|
|
1,137,289
|
|
|
|
400,239
|
|
Notes receivable
|
|
$
|
1,137,289
|
|
|
$
|
400,239
|
|
Details
of Notes Receivable from JV Company and related party as of December 31, 2017 were as follows:
Index
|
|
Amount ($)
|
|
|
Counter party
|
|
Relationship
|
|
Nature
|
|
Manner of settlement
|
1
|
|
|
922,126
|
|
|
Kandi Electric Vehicles Group Co., Ltd.
|
|
Joint Venture of the Company
|
|
Payments for sales
|
|
Not due
|
2
|
|
|
153,688
|
|
|
Kandi Jiangsu
|
|
Subsidiary of the JV Company
|
|
Payments for sales
|
|
Not due
|
3
|
|
|
61,475
|
|
|
Kandi Changxing
|
|
Subsidiary of the JV Company
|
|
Payments for sales
|
|
Not due
|
Details
of Notes Receivable from JV Company and related party as of December 31, 2016 were as follows:
Index
|
|
Amount ($)
|
|
|
Counter party
|
|
Relationship
|
|
Nature
|
|
Manner of settlement
|
1
|
|
|
400,239
|
|
|
Kandi Shanghai
|
|
Subsidiary of the JV Company
|
|
Payments for sales
|
|
Not due
|
NOTE
13 –PROPERTY, PLANT AND EQUIPMENT
Plant
and equipment for the years ended December 31, 2017 and 2016 consisted of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
At cost:
|
|
|
|
|
|
|
Buildings
|
|
$
|
13,853,340
|
|
|
$
|
12,977,465
|
|
Machinery and equipment
|
|
|
7,916,562
|
|
|
|
8,585,666
|
|
Office equipment
|
|
|
532,774
|
|
|
|
475,162
|
|
Motor vehicles
|
|
|
382,866
|
|
|
|
321,207
|
|
Moulds and others
|
|
|
28,659,714
|
|
|
|
26,463,472
|
|
|
|
|
51,345,256
|
|
|
|
48,822,972
|
|
Less : Accumulated depreciation
|
|
|
|
|
|
|
|
|
Buildings
|
|
$
|
(4,683,040
|
)
|
|
$
|
(3,948,909
|
)
|
Machinery and equipment
|
|
|
(7,216,464
|
)
|
|
|
(8,107,884
|
)
|
Office equipment
|
|
|
(305,367
|
)
|
|
|
(216,226
|
)
|
Motor vehicles
|
|
|
(310,631
|
)
|
|
|
(274,197
|
)
|
Moulds and others
|
|
|
(26,306,306
|
)
|
|
|
(21,031,086
|
)
|
|
|
|
(38,821,808
|
)
|
|
|
(33,578,302
|
)
|
Less: provision for impairment for fixed assets
|
|
|
(522,477
|
)
|
|
|
(50,228
|
)
|
Plant and equipment, net
|
|
$
|
12,000,971
|
|
|
$
|
15,194,442
|
|
As
of December 31, 2017 and 2016, the net book value of plant and equipment pledged as collateral for the Company’s bank loans were
$9,019,993 and $8,875,111, respectively.
Depreciation
expenses for the years ended December 31, 2017, 2016 and 2015 were $4,371,561, $4,448,010 and $5,322,613, respectively.
NOTE
14 – LAND USE RIGHTS
The
Company’s land use rights consist of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Cost of land use rights
|
|
$
|
15,676,450
|
|
|
$
|
14,280,282
|
|
Less: Accumulated amortization
|
|
|
(3,010,403
|
)
|
|
|
(2,504,562
|
)
|
Land use rights, net
|
|
$
|
12,666,047
|
|
|
$
|
11,775,720
|
|
As
of December 31, 2017 and 2016, the net book value of the land use rights pledged as collateral for the Company’s bank loans were
$8,993,913 and $8,660,097 respectively. Also see Note 16.
The
amortization expense for the years ended December 31, 2017, 2016 and 2015 were $324,336, $333,171 and $384,072, respectively.
Amortization
expense for the next five years and thereafter is as follows:
2018
|
|
$
|
324,336
|
|
2019
|
|
|
324,336
|
|
2020
|
|
|
324,336
|
|
2021
|
|
|
324,336
|
|
2022
|
|
|
324,336
|
|
Thereafter
|
|
|
11,044,367
|
|
Total
|
|
$
|
12,666,047
|
|
NOTE
15 - CONSTRUCTION -IN-PROGRESS
Hainan
Facility
In
April 2013, the Company signed an agreement with the Wanning city government in Hainan Province to invest a total of RMB 1 billion
to establish a factory in Wanning to manufacture 100,000 EVs annually. Also in 2013, the Company contracted with an unrelated
third-party supplier, Nanjing Shangtong, to purchase a production line in connection with the manufacturing facility and to help
develop a new EV model. In January 2016, the Hainan Province government implemented a development plan to centralize manufacturing
in certain designated industry parks. As a result, the Wanning facility was relocated from Wanning city to the Haikou city high-tech
zone. Based on our agreement with the government, all the expenses and lost assets resulting from the relocation were compensated
for by the local government. As a result of the relocation, the contracts to build the manufacturing facility had to be revised
in terms of total contract amount, technical requirements, completion milestones and others for the new construction site in Haikou.
Currently, the Hainan facility is progressing well and the first batch of products will be off the assembly line on March 28,
2018. The Company plans to send the qualified prototype model to the National Testing Center for inspection in the near future.
Once the prototype passes the inspection, the Company will put the products on the market.
No
depreciation is provided for CIP until such time as the facility is completed and placed into operation.
The
contractual obligation under CIP of the Company as of December 31, 2017 is as follows:
|
|
Total in CIP as of
|
|
|
|
|
|
Total
|
|
|
|
December 31,
|
|
|
Estimate to
|
|
|
contract
|
|
Project
|
|
2017
|
|
|
complete
|
|
|
amount
|
|
|
|
|
|
|
|
|
|
|
|
Kandi Hainan facility
|
|
$
|
53,083,925
|
|
|
$
|
33,229,905
|
|
|
$
|
86,313,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
53,083,925
|
|
|
$
|
33,229,905
|
|
|
$
|
86,313,830
|
|
As
of December 31, 2017 and 2016, the Company had CIP amounting to $53,083,925 and $27,054,181, respectively.
$2,181,512,
$0 and $0 of interest expense has been capitalized for CIP for the years ended December 31, 2017, 2016 and 2015, respectively.
NOTE
16 – SHORT -TERM AND LONG-TERM BANK LOANS
Short-term
loans are summarized as follows:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Loans from China Ever-bright Bank
|
|
|
|
|
|
|
Interest rate 4.698% per annum, paid off on April 20, 2017, secured by the assets of the Company, guaranteed by Mr. Hu Xiaoming and his wife. Also see Note 13 and Note 14.
|
|
$
|
-
|
|
|
$
|
11,229,727
|
|
Interest rate 5.22% per annum, due on April 25, 2018,
secured by the assets of Kandi Vehicle, guaranteed by Mr. Hu Xiaoming and his wife, also guaranteed by company’s
subsidiaries. Also see Note 13 and Note 14.
|
|
|
10,758,141
|
|
|
|
-
|
|
Loans from Hangzhou Bank
|
|
|
|
|
|
|
|
|
Interest rate 4.35% per annum, paid off on October 16, 2017, secured by the assets of the Company. Also see Note 13 and Note 14.
|
|
|
-
|
|
|
|
7,025,778
|
|
Interest rate 4.79% per annum, due on October 16,2018, secured by the assets of Kandi Vehicle. Also see Note 13 and Note 14.
|
|
|
7,499,962
|
|
|
|
-
|
|
Interest rate 4.35% per annum, paid off July 3, 2017, secured by the assets of the Company. Also see Note 13 and Note 14.
|
|
|
-
|
|
|
|
10,394,696
|
|
Interest rate 4.79% per annum, due on July 4, 2018,
secured by the assets of Kandi Vehicle. Also see Note 13 and Note 14.
|
|
|
11,096,255
|
|
|
|
|
|
Interest rate 4.35% per annum, paid off on March 23, 2017, secured by the assets of Kandi Vehicle. Also see Note 13 and Note 14.
|
|
|
-
|
|
|
|
5,614,864
|
|
Interest rate 4.35% per annum, due March 26, 2018, secured by the assets of Kandi Vehicle. Also see Note 13 and Note 14.
|
|
|
3,688,506
|
|
|
|
-
|
|
|
|
$
|
33,042,864
|
|
|
$
|
34,265,065
|
|
Long-term
loan is summarized as follows:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Loans from Haikou Rural Credit Cooperative
|
|
|
|
|
|
|
Interest rate 7% per annum, due on December 12, 2021, guaranteed by Kandi Vehicle and Kandi New Energy.
|
|
$
|
30,737,547
|
|
|
$
|
28,794,172
|
|
|
|
$
|
30,737,547
|
|
|
$
|
28,794,172
|
|
The
interest expense of the short-term and long-term bank loans for the years ended December 31, 2017, 2016 and 2015 were $2,280,286,
$1,831,667 and $2,176,092, respectively.
As
of December 31, 2017, the aggregate amount of short-term loans that was guaranteed by various third parties was $0.
NOTE
17 – NOTES PAYABLE
By
issuing bank notes payable rather than paying cash to suppliers, the Company can defer payments until the bank notes payable are
due. Depending on bank requirements, the Company may need to deposit restricted cash in banks to back up the bank notes payable,
while the restricted cash deposited in the banks will generate interest income.
A
bank acceptance note is a promised future payment, or time draft, which is accepted and guaranteed by a bank and drawn on a deposit
at the bank. The banker’s acceptance specifies the amount of the funds, the date, and the person to which the payment is
due.
After
acceptance, the draft becomes an unconditional liability of the bank, but the holder of the draft can sell (exchange) it for cash
at a discount to a buyer who is willing to wait until the maturity date for the funds in the deposit. $11,218,688 and $3,279,656
were held as collateral for the notes payable as of December 31, 2017, and December 31, 2016, respectively.
As
is common business practice in the PRC, the Company issues notes payable to its suppliers as settlement for accounts payable.
The
Company’s notes payable also include the borrowing from the third party.
Notes
payable for December 31, 2017 and 2016 were summarized as follows:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Bank acceptance notes:
|
|
|
|
|
|
|
Due March 22, 2017
|
|
$
|
-
|
|
|
$
|
400,239
|
|
Due March 29, 2017
|
|
|
-
|
|
|
|
1,439,709
|
|
Due June 21, 2017
|
|
|
-
|
|
|
|
1,439,709
|
|
Due January 4, 2018
|
|
|
4,987,167
|
|
|
|
-
|
|
Due April 19, 2018
|
|
|
230,532
|
|
|
|
-
|
|
Due May 6, 2018
|
|
|
1,168,027
|
|
|
|
-
|
|
Due June 18, 2018
|
|
|
2,305,316
|
|
|
|
-
|
|
Due June 21, 2018
|
|
|
376,019
|
|
|
|
-
|
|
Due June 25, 2018
|
|
|
153,688
|
|
|
|
-
|
|
Due June 27, 2018
|
|
|
76,844
|
|
|
|
-
|
|
Due June 29, 2018
|
|
|
2,382,160
|
|
|
|
-
|
|
Commercial acceptance notes:
|
|
|
|
|
|
|
|
|
Due March 26, 2018
|
|
|
10,758,140
|
|
|
|
-
|
|
Other Notes Payable:
|
|
|
|
|
|
|
|
|
Due May 6, 2017
|
|
|
-
|
|
|
|
11,517,668
|
|
Due May 6, 2019
|
|
|
5,638,052
|
|
|
|
-
|
|
Total
|
|
$
|
28,075,945
|
|
|
$
|
14,797,325
|
|
NOTE
18 – TAXES
(a)
Corporation Income Tax
Pursuant
to the tax laws and regulations of the PRC, the Company’s applicable corporate income tax (“CIT”) rate is 25%.
However, Kandi Vehicles qualifies as a High and New Technology Enterprise (“HNTE”) company in the PRC, and is entitled
to pay a reduced income tax rate of 15% for the years presented. An entity may re-apply for an HNTE certificate when the prior
certificate expires. Historically, Kandi Vehicles has successfully re-applied for such certificates when the its prior certificates
expired. The applicable CIT rate of each of the Company’s three other subsidiaries, Kandi New Energy, YongkangScrou and
Kandi Hainan, the JV Company and its subsidiaries, and the Service Company is 25%.
After
combining research and development tax credits of 25% on certain qualified research and development expenses, the Company’s
final effective tax rate for December 31, 2017,2016 and 2015 was 10.32%, -11.69% and 29.47%, respectively. The effective tax rates
for each of the periods mentioned above are disclosed in the summary table of income tax expenses for December 31, 2017, 2016
and 2015.
Effective
January 1, 2007, the Company adopted the guidance in ASC 740 related to uncertain tax positions. The guidance 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
December 31, 2017, the Company did not have any liability for unrecognized tax benefits. The Company files income tax returns
with the U.S. Internal Revenue Services (“IRS”) and those states where 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 has 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 December 31, 2017, the Company was not aware of any
pending income tax examinations by U.S. or PRC tax authorities. The Company records interest and penalties on uncertain tax provisions
as income tax expense. As of December 31, 2017, the Company has no accrued interest or penalties related to uncertain tax positions.
The Company has not recorded a provision for U.S. federal income tax for year ended December 31, 2017, due to a net operating
loss in 2016 and an accumulated net operating loss carry forward from prior years in the United States.
As of December 31, 2017 and December 31,
2016, we had unrecognized tax benefits of $12.2 million and $0, respectively, for various federal, foreign, and state income tax
matters. Unrecognized tax benefits increased by $12.2 million. After considering valuation allowance, none of the unrecognized
tax benefits, if recognized, would affect our effective tax as of December 31, 2017 and December 31, 2016. These unrecognized tax
benefits are presented on the accompanying consolidated balance sheets net of the tax effects of net operating loss carry forwards,
which are offset by valuation allowance.
Our unrecognized tax benefit activity for
fiscal 2017, 2016 and 2015 was as follows:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Beginning balances
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Increases related to tax positions taken during a prior year
|
|
|
11,376,521
|
|
|
|
-
|
|
|
|
-
|
|
Decreases related to tax positions taken during a prior year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Increases related to tax positions taken during the current year
|
|
|
790,289
|
|
|
|
-
|
|
|
|
-
|
|
Ending balances
|
|
$
|
12,166,810
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Income
tax expenses for the year ended December 31, 2017, 2016 and 2015 are summarized as follows:
|
|
For the Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Current:
|
|
|
|
|
|
|
|
|
|
Provision for CIT
|
|
$
|
2,184,985
|
|
|
$
|
601,212
|
|
|
$
|
4,656,311
|
|
Provision for Federal Income Tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for CIT
|
|
|
(5,448,015
|
)
|
|
|
80,334
|
|
|
|
1,470,917
|
|
Income tax (benefit) expense
|
|
$
|
(3,263,030
|
)
|
|
$
|
681,546
|
|
|
$
|
6,127,228
|
|
The
reconciliation of taxes at the PRC statutory rate (25% in 2017 and 2016) to our provision for
income taxes for the years ended December 31, 2017 and 2016 was as follows:
|
|
For Year Ended
|
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Expected taxation at PRC statutory tax rate
|
|
$
|
(7,902,626
|
)
|
|
$
|
(1,457,303
|
)
|
Effect of differing tax rates in different jurisdictions
|
|
|
242,375
|
|
|
|
(1,403,077
|
)
|
Non-taxable income
|
|
|
-
|
|
|
|
-
|
|
Non-deductible expenses (1)
|
|
|
1,735,581
|
|
|
|
1,103,158
|
|
Research and development super-deduction
|
|
|
(105,186
|
)
|
|
|
(43,826
|
)
|
Under-accrued EIT for previous years
|
|
|
267,574
|
|
|
|
(2,727,454
|
)
|
Effect of PRC preferential tax rates
|
|
|
1,277,678
|
|
|
|
-
|
|
Addition to valuation allowance
|
|
|
1,271,728
|
|
|
|
5,301,677
|
|
Other
|
|
|
(50,154
|
)
|
|
|
(91,629
|
)
|
Income tax (benefit) expense
|
|
$
|
(3,263,030
|
)
|
|
$
|
681,546
|
|
Effective tax rate
|
|
|
10.32
|
%
|
|
|
-11.69
|
%
|
(1)
|
It’s
mainly due to share of (loss) in JV Company and its subsidiaries.
|
The
tax effects of temporary differences that give rise to the Company’s net deferred tax assets and liabilities as of December
31, 2017 and December 31, 2016 are summarized as follows:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Expense (2)
|
|
|
192,046
|
|
|
|
72,742
|
|
Depreciation
|
|
|
182,961
|
|
|
|
230,156
|
|
Loss carried forward
|
|
|
6,581,726
|
|
|
|
27,218,934
|
|
less: valuation allowance
|
|
|
(1,019,373
|
)
|
|
|
(26,820,811
|
)
|
Total deferred tax assets, net of valuation allowance
|
|
|
5,937,360
|
|
|
|
701,021
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Expense (3)
|
|
|
1,553,935
|
|
|
|
1,698,303
|
|
Total deferred tax liability
|
|
|
1,553,935
|
|
|
|
1,698,303
|
|
Net deferred tax assets (liabilities)
|
|
$
|
4,383,425
|
|
|
$
|
(997,282
|
)
|
(2)
|
It’s
provision for impairment inventory, fixed assets.
|
(3)
|
It’s
due to the difference of tax basis and GAAP basis of other long-term assets.
|
As
of December 31, 2017, the aggregate NOLs incurred in 2013 through 2017 of $4.85 million deriving from entities in the U.S. will
expire in varying amount between 2018 and 2022. The aggregate NOLs in 2016 through 2017 of $22.75 million deriving from entities
in the PRC will expire in varying amount between 2021 and 2022. As of December 31, 2016, the aggregate NOLs incurred in 2012 through
2016 of $78.88 million deriving from entities in the U.S. will expire in varying amount between 2017 and 2021. The aggregate NOLs
incurred in 2016 of $2.12 million deriving from entities in the PRC will expire in 2021. The cumulative net loss in the PRC and
U.S. can be carried forward for five years, to offset future net profits for income tax purposes. The cumulative net loss in Hong
Kong can be carried forward without an expiration date.
Operating loss carry forward for tax purpose
resulted in a deferred tax asset of $6.58million at December 31,2017. Tax benefit of operating loss available to offset future
tax liabilities are $5.56 million. Tax benefit of operating loss is evaluated on an ongoing basis including a review of historical
and projected future operating results, the eligible carry forward period, and available tax planning strategies.
Income (loss)
before income taxes from PRC and non-PRC sources for the year ended December 31, 2017, 2016 and 2015 are summarized as follows:
|
|
For Year Ended
|
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Income(loss) before income taxes consists of:
|
|
|
|
|
|
|
PRC
|
|
$
|
(25,471,997
|
)
|
|
$
|
6,023,694
|
|
Non-PRC
|
|
|
(6,138,507
|
)
|
|
|
(11,852,905
|
)
|
Total
|
|
$
|
(31,610,504
|
)
|
|
$
|
(5,829,211
|
)
|
Net
change in the valuation allowance of deferred tax assets are summarized as follows:
Net change of valuation allowance of Deferred tax assets
|
|
|
|
Balance at December 31,2016
|
|
|
26,820,811
|
|
Additions-change to tax expense
|
|
|
1,271,728
|
|
Deduction-expired of loss carried forward④
|
|
|
14,573,835
|
|
Deduction-changed of UTP
|
|
|
12,166,810
|
|
Deduction-changed of tax rate
|
|
|
332,521
|
|
Balance at December 31,2017
|
|
|
1,019,373
|
|
(4)
|
It’s
due to the loss carried forward deduction-expired of Kandi Technologies of 2012.
|
(b)
Tax Holiday Effect
For
the year ended December 31, 2017, 2016 and 2015, the PRC CIT rate was 25%. Certain subsidiaries of the Company are entitled to
tax exemptions (tax holidays) for the year ended December 31, 2017, 2016 and 2015.
The
combined effects of income tax expense exemptions and reductions available to the Company for the year ended December 31, 2017,
2016 and 2015 are as follows:
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Tax benefit (holiday) credit
|
|
$
|
105,186
|
|
|
$
|
36,522
|
|
|
$
|
912,548
|
|
Basic net income per share effect
|
|
$
|
0.000
|
|
|
$
|
0.001
|
|
|
$
|
0.020
|
|
(C)
The Tax Cuts and Job Act
On
December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act
(“Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code that will affect our fiscal year ended
12/31/2017 and going-forwarding, including, but not limited to, (1) reducing the U.S. federal corporate tax rate effective January
1, 2018, (2) requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries that is payable over
eight years.
The
SEC staff issued Staff Accounting Bulletin (“SAB”) No. 118, which provides guidance on accounting for the tax effects
of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for
companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects
of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting
for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record
a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the
financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately
before the enactment of the Tax Act.
For
various reasons that are discussed more fully below, we have not fully completed our accounting for the income tax effects of
certain elements of the Tax Act. If we were able to make reasonable estimates of the effects of elements for which our analysis
is not yet complete, we recorded provisional adjustments. If we were not yet able to make reasonable estimates of the impact of
certain elements, we have not recorded any adjustments related to those elements and have continued accounting for them in accordance
with ASC 740 on the basis of the tax laws in effect before the Tax Act.
Our
accounting for the following elements of the Tax Act is incomplete. However, we were able to make reasonable estimates of certain
effects and, therefore, recorded provisional adjustments as follows:
Reduction
of U.S. Federal Corporate Tax Rate: The Tax Act reduces the corporate tax rate to 21.0%, effective January 1, 2018. For certain
deferred tax assets and deferred tax liabilities, we have recorded a provisional decrease of $0.3 million, respectively, with
a corresponding net adjustment to valuation allowance of $0.3 million for the year ended December 31, 2017. While we are able
to make a reasonable estimate of the impact of the reduction in corporate rate, it may be affected by other analyses related to
the Tax Act, including, but not limited to, our calculation of deemed repatriation of deferred foreign income and the state tax
effect of adjustments made to federal temporary differences.
Deemed
Repatriation Transition Tax: The Deemed Repatriation Transition Tax (“Transition Tax”) is a tax on previously untaxed
accumulated and current earnings and profits (“E&P”) of certain foreign subsidiaries. To determine the amount
of the Transition Tax, we must determine, in addition to other factors, the amount of post-1986 E&P of the relevant subsidiaries,
as well as the amount of non-U.S. income taxes paid on such earnings. Due to the timing of the enactment and the complexity involved
in applying the provisions of the Act, we could not made reasonable estimates of the effects and did not record provisional amounts
in our financial statements as of December 31, 2017. However, we are continuing to gather information to precisely compute the
amount of the Transition Tax.
NOTE
19 - STOCK OPTIONS AND WARRANTS
(a)
Stock Options
On
May 29, 2015, the Compensation Committee of the Board of Directors of the Company approved the grant of stock options to purchase
4,900,000 shares of the Company’s common stock, at an exercise price of $9.72 per share, to the Company’s directors,
officers and senior employees. The stock options will vest ratably over three years and expire on the tenth anniversary of the
grant date. The Company valued the stock options at $39,990,540 and will amortize the stock compensation expense using the straight-line
method over the service period from May 29, 2015, through May 29, 2018. The value of the stock options was estimated using the
Black Scholes Model with an expected volatility of 90%, an expected life of 10 years, a risk-free interest rate of 2.23% and an
expected dividend yield of 0.00%. There was $3,763,282 in stock compensation expenses associated with stock options booked for
the year ended December 31, 2017.
The
following is a summary of the stock option activities of the Company:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
|
Shares
|
|
|
Price
|
|
Outstanding as of January 1, 2016
|
|
|
4,900,000
|
|
|
$
|
9.72
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(333,333
|
)
|
|
|
9.72
|
|
Outstanding as of January 1, 2017
|
|
|
4,566,667
|
|
|
|
9.72
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(333,333
|
)
|
|
|
9.72
|
|
Outstanding as of December 31, 2017
|
|
|
4,233,334
|
|
|
$
|
9.72
|
|
The
fair value of each of the options to purchase 4,900,000 shares of common stock issued to the employees and directors on May 29,
2015 is $8.1613 per share.
(b)
Warrants
As
of December 31, 2017 and December 31, 2016, all outstanding warrants had been exercised and the derivative liability relating
to the warrants issued to the investors and a placement agent was $0.
NOTE
20 – STOCK AWARD
In
connection with the appointment of Mr. Henry Yu as a member of the Board of Directors (the “Board”), and as compensation,
the Board authorized the Company to provide Mr. Henry Yu with 5,000 shares of Company’s restricted common stock every six months,
beginning in July 2011.
As
compensation having Mr. Jerry Lewin’s services as a member of the Board, the Board authorized the Company to provide Mr.
Jerry Lewin with 5,000 shares of Company’s restricted common stock every six months, beginning in August 2011.
As
compensation having Ms. Kewa Luo’s services as the Company’s investor relation officer, the Board authorized the Company
to provide Ms. Kewa Luo with 5,000 shares of Company’s common stock every six months, beginning in September 2013.
In
November 2016, the Company entered into a three-year employment agreement with Mr. Mei Bing, who is now the Company’s Chief
Financial Officer. Under the agreement, Mr. Mei Bing is entitled to receive an aggregate 10,000 shares of common stock each year,
vested in four equal quarterly installments of 2,500 shares.
The
fair value of stock awards based on service is determined based on the closing price of the common stock on the date the shares
are approved by the Board for grant. The compensation costs for awards of common stock are recognized over the requisite service
period of three or six months.
On
December 30, 2013, the Board approved a proposal (as submitted by the Compensation Committee) of an award (the “Board’s
Pre-Approved Award Grant Sub-Plan under the 2008 Plan”) for certain 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 “2008 Plan”), if the Company’s “Non-GAAP Net Income” for the current
fiscal year increased by 10% comparing to that of the prior year. 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 increased by 10% compared to the Non-GAAP Net Income
for the 2013 fiscal year, the selected executives and other key employees each would 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 would be granted.
If Non-GAAP Net Income in 2014 increased compared to Non-GAAP Net Income in 2013 but the increase is less than 10%, then the target
amount of the common stock grant would be proportionately decreased. If Non-GAAP Net Income in 2014 increased compared to Non-
GAAP Net Income in 2013 but the increase is more than 10%, then the target amount of the common stock grant would be proportionately
increased up to 200% of the target amount based on the modification to 2013’s proposal in 2014. Any such increase in the
grant would be subject to the total number of shares available under the 2008 Plan, and the Company’s Board and shareholders
will need to approve any increase in the number of shares reserved under the 2008 Plan if all the shares originally reserved are
granted. On May 20, 2015, the shareholders of the Company approved an increase of 9,000,000 shares under the 2008 Plan at its
annual meeting. On September 26, 2016, the Board approved to terminate the previous Board’s Pre-Approved Award Grant Sub-Plan
under the 2008 Plan and adopted a new plan to reduce the total number of shares of common stock of the stock award for selected
executives and key employees from 335,000 shares of common stock to 250,000 shares of common stock for each fiscal year, with
the other terms remaining the same. On February 13, 2017, the Board authorized the Company to grant 246,900 shares of common shares
to certain management members as compensation for their past services under the 2008 Plan.
The
fair value of each award granted under the 2008 Plan is determined based on the closing price of the Company’s stock on
the date of grant of such award. Stock-based compensation expenses are calculated based on grant date fair value and number of
awards expected to be earned at the end of each quarter and recognized in the quarter. In subsequent periods, stock-based compensation
expenses are adjusted based on grant date fair value and the change of number of awards expected to be earned. Final stock-based
compensation expenses for the year are calculated based on grant date fair value and number of awards earned for the year and
recognized at the end of year.
For
the year ended December 31, 2017, 2016 and 2015, the Company recognized $1,428,025, $91,700 and $8,123,333 of employee stock award
expenses for stock compensation and annual incentive award under the 2008 Plan paid to Board members, management and consultants
under General and Administrative Expenses, respectively.
NOTE
21– INTANGIBLE ASSETS
The
following table provides the gross carrying value and accumulated amortization for each major class of intangible assets other
than goodwill:
|
|
Remaining
|
|
December 31,
|
|
|
December 31,
|
|
|
|
useful life
|
|
2017
|
|
|
2016
|
|
Gross carrying amount:
|
|
|
|
|
|
|
|
|
Trade name
|
|
4 years
|
|
$
|
492,235
|
|
|
$
|
492,235
|
|
Customer relations
|
|
4 years
|
|
|
304,086
|
|
|
|
304,086
|
|
|
|
|
|
|
796,321
|
|
|
|
796,321
|
|
Less : Accumulated amortization
|
|
|
|
|
|
|
|
|
|
|
Trade name
|
|
|
|
$
|
(287,561
|
)
|
|
$
|
(236,815
|
)
|
Customer relations
|
|
|
|
|
(177,644
|
)
|
|
|
(146,295
|
)
|
|
|
|
|
|
(465,205
|
)
|
|
|
(383,110
|
)
|
Intangible assets, net
|
|
|
|
$
|
331,116
|
|
|
$
|
413,211
|
|
The
aggregate amortization expenses 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 were $82,095, $82,095 and $82,095 for the year ended
December 31, 2017, 2016 and 2015, respectively.
Amortization
expenses for the next five years and thereafter are as follows:
2018
|
|
$
|
82,095
|
|
2019
|
|
|
82,095
|
|
2020
|
|
|
82,095
|
|
2021
|
|
|
82,095
|
|
2022
|
|
|
2,736
|
|
Thereafter
|
|
|
-
|
|
Total
|
|
$
|
331,116
|
|
NOTE
22 – 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 in such investees, 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 in such investees, 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.
As of December 31, 2017, the JV Company
consolidated its interests in the following entities on its financial statements: (1) its 100% interest in Kandi Changxing; (2)
its 100% interest in Kandi Jinhua; (3) its 100% interest in JiHeKang; (4) its 100% interest in Kandi Shanghai; (5) its 100% interest
in Kandi Jiangsu; (6) its 100% interest in JiHeKang Service Company; (7) its 100% interest in Jiangsu JiDian; (8) its 100% interest
in Tianjin BoHaiWan; (9) its 100% interest in Changxing Maintenance; (10) its 100% interest in Liuchuang; (11)its 100% interest
in JiHeKang Tianjin; and(12) its 100% interest in Guangdong JiHeKang. The Company accounted for its investments in the JV Company
under the equity method of accounting because the Company has a 50% ownership interest in the JV Company. As a result, the Company’s
consolidated net income for the year ended December 31, 2017, 2016 and 2015, 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:
|
|
Year ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Condensed income statement information:
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
192,748,328
|
|
|
$
|
179,328,669
|
|
|
$
|
362,715,996
|
|
Gross income
|
|
|
3,599,634
|
|
|
|
19,278,511
|
|
|
|
59,635,845
|
|
% of net sales
|
|
|
1.9
|
%
|
|
|
10.8
|
%
|
|
|
16.4
|
%
|
Net (loss) income
|
|
|
(22,699,965
|
)
|
|
|
(14,155,578
|
)
|
|
|
23,323,128
|
|
% of net sales
|
|
|
(11.8
|
)%
|
|
|
(7.9
|
)%
|
|
|
6.4
|
%
|
Company’s share in net (loss) income of JV based on 50% ownership
|
|
$
|
(11,349,983
|
)
|
|
$
|
(7,077,789
|
)
|
|
$
|
11,661,564
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Condensed balance sheet information:
|
|
|
|
|
|
|
Current assets
|
|
$
|
696,683,086
|
|
|
$
|
514,958,008
|
|
Noncurrent assets
|
|
|
179,943,752
|
|
|
|
177,563,801
|
|
Total assets
|
|
$
|
876,626,838
|
|
|
$
|
692,521,809
|
|
Current liabilities
|
|
|
703,629,444
|
|
|
|
505,356,626
|
|
Noncurrent liabilities
|
|
|
30,737,547
|
|
|
|
31,817,560
|
|
Equity
|
|
|
142,259,847
|
|
|
|
155,347,623
|
|
Total liabilities and equity
|
|
$
|
876,626,838
|
|
|
$
|
692,521,809
|
|
For
the years ended December 31,2017,2016 and 2015, the JV Company’s revenues were derived primarily from the sales of EV products
and EV parts in China. During 2017, the JV Company sold a total of 11,437 units of EV products in the PRC as compared to a total
of 10,148 units sold in 2016,an increase of 12.7%,of which the JV Company sold 7,416 units of Model K12, 3,939 units of Model
K17 and 82 units of other models in 2017.Because the Company 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 did not consolidate the JV Company’s
financial results, but rather included equity income from the JV Company during such periods.
Note:
The following table illustrates the captions used in the Company’s Income Statements for its equity based investment in
the JV Company.
The
Company’s equity method investments in the JV Company as of December 31, 2017 and 2016 are as follows:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Investment in JV Company, beginning of the period,
|
|
$
|
77,453,014
|
|
|
$
|
90,337,899
|
|
Share of loss
|
|
|
|
|
|
|
|
|
Company’s share in net loss of JV based on 50% ownership
|
|
|
(11,349,982
|
)
|
|
|
(7,077,789
|
)
|
Intercompany transaction elimination
|
|
|
(432,295
|
)
|
|
|
(230,787
|
)
|
Year 2016 unrealized profit realized
|
|
|
226,975
|
|
|
|
1,066
|
|
Subtotal
|
|
|
(11,555,302
|
)
|
|
|
(7,307,510
|
)
|
Exchange difference
|
|
|
4,783,301
|
|
|
|
(5,577,375
|
)
|
Investment in JV Company, end of the period
|
|
$
|
70,681,013
|
|
|
$
|
77,453,014
|
|
Sales
to the Company’s customers, the JV Company and its subsidiaries, for the year ended December 31, 2017 were $92,952,211 or
90.4% of the Company’s total revenue for the year, an increase of 19.6% of the sales to the JV Company from the previous
year. Sales to the JV Company and its subsidiaries were primarily battery packs, body parts, EV drive motors, EV controllers,
air conditioning units and other auto parts.
The
breakdown of the sales to the JV Company and its subsidiaries as follows:
|
|
Year ended
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
JV Company
|
|
$
|
91,500,960
|
|
|
$
|
76,331,493
|
|
|
$
|
67,729,570
|
|
Kandi Changxing
|
|
|
81,699
|
|
|
|
349,721
|
|
|
|
44,019,899
|
|
Kandi Shanghai
|
|
|
34,433
|
|
|
|
647,950
|
|
|
|
39,708,548
|
|
Kandi Jinhua
|
|
|
-
|
|
|
|
46,303
|
|
|
|
789,065
|
|
Kandi Jiangsu
|
|
|
1,335,119
|
|
|
|
332,926
|
|
|
|
-
|
|
Total sales to JV
|
|
$
|
92,952,211
|
|
|
$
|
77,708,394
|
|
|
$
|
152,247,081
|
|
As
of December 31, 2017 and December 31, 2016, the current and noncurrent amount due from the JV Company and its subsidiaries,
was $162,329,623 and $136,536,725, respectively, of which the majority were balances with the JV Company, Kandi Jinhua,
Kandi Changxing, Kandi Jiangsu and Kandi Shanghai. The breakdown is as below:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Kandi Shanghai
|
|
$
|
2,354,195
|
|
|
$
|
281,657
|
|
Kandi Changxing
|
|
|
912,760
|
|
|
|
16,359,721
|
|
Kandi Jinhua
|
|
|
15,718
|
|
|
|
5,050,525
|
|
Kandi Jiangsu
|
|
|
1,506,199
|
|
|
|
352,587
|
|
JV Company
|
|
|
157,540,751
|
|
|
|
114,492,235
|
|
Consolidated JV
|
|
$
|
162,329,623
|
|
|
$
|
136,536,725
|
|
The
current and noncurrent amounts due from the JV Company include seven short-term loans in the total amount of $60,706,656 that
Kandi Vehicles lent to the JV Company. Each such loan carries an annual interest rate of 4.35%.
As
of December 31, 2017 and December 31, 2016, the current and noncurrent amount due to the JV Company and its subsidiaries, was
$0 and $566, respectively, of which the balances were with Kandi Changxing. The breakdown is as below:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Kandi Changxing
|
|
$
|
-
|
|
|
$
|
566
|
|
Consolidated JV
|
|
$
|
-
|
|
|
$
|
566
|
|
NOTE
23 - COMMITMENTS AND CONTINGENCIES
Guarantees
and pledged collateral for bank loans to other parties
As
of December 31, 2017 and 2016, the Company provided guarantees for the following third parties:
(1)
|
Guarantees
for bank loans
|
|
|
December 31,
|
|
|
December 31,
|
|
Guarantee provided to
|
|
2017
|
|
|
2016
|
|
Zhejiang Shuguang industrial Co., Ltd.
|
|
|
-
|
|
|
|
4,175,155
|
|
Nanlong Group Co., Ltd.
|
|
|
-
|
|
|
|
2,879,417
|
|
Kandi Electric Vehicles Group Co., Ltd.
|
|
|
-
|
|
|
|
46,790,530
|
|
Total
|
|
$
|
-
|
|
|
$
|
53,845,102
|
|
On
March 15, 2013, the Company entered into a guarantee contract to serve as the guarantor of Nanlong Group Co., Ltd. (“NGCL”)
for NGCL’s loan in the amount of $3,073,755 from Shanghai Pudong Development Bank Jinhua Branch, with a related loan period
of March 15, 2013, to March 15, 2016. NGCL is not related to the Company. Under this guarantee contract, the Company agreed to
assume joint liability as the loan guarantor. In April 2017, Shanghai Pudong Development Bank filed a suit against NGCL, the Company
and ten other parties in Zhejiang Province People’s Court in Yongkang City, alleging NGCL defaulted on a bank loan borrowed
from Shanghai Pudong Development Bank for a principal amount of approximately $2.9 million and demanding the guarantor to bear
the liability for compensation. On May 27, 2017, a judicial mediation took place in Yongkang City and a mediation settlement reached
in court, which the plaintiff agreed NGCL would repay the loan principal and interest plus legal expenses in installments, and
the Company understands that Shanghai Pudong Development Bank has reached a settlement with NGCL. As of December 31, 2017, according
to the enterprise credit report issued by the Credit Center of People’s Bank of China (PBOC) or the central bank of the
People’s Republic of China, the Company’s guarantee for NGCL’s loan has been removed. The Company expects the
likelihood of incurring losses in connection with this matter to be remote.
On
September 29, 2015, the Company entered into a guarantee contract to serve as the guarantor of Zhejiang Shuguang Industrial Co.,
Ltd. (“ZSICL”) for a bank loan in the amount of $4,456,944 from Ping An Bank, with a related loan period of September
29, 2015, to September 28, 2016. ZSICL is not related to the Company. Under this guarantee contract, the Company agreed to perform
all the obligations of ZSICL under the loan contract if ZSICL fails to perform its obligations as set forth therein. In August
2016, Ping An Bank Yiwu Branch (“Ping An Bank”) filed a suit against ZSICL, the Company, and three other parties in
Zhejiang Province People’s Court in Yiwu City, alleging ZSICL defaulted on a bank loan borrowed from Pin An Bank for a principal
amount of RMB 29 million or approximately $4.2 million (the “Principal”), for which the Company is a guarantor along
with other three parties. On December 25, 2016, the court ruled that ZSICL should repay Ping An Bank the Principal and associated
interest remaining on the bank loan within 10 days once the adjudication is effective; and the Company and other three parties,
acted as guarantors, have joint liability for this bank loan. On July 31, 2017, the Company and Ping An Bank reached an agreement
to settle. According to the agreement, the Company will pay Ping An Bank RMB 20 million or approximately $3.0 million in four
installments before October 31, 2017 to release the Company from the guarantor liability for this default. As of December 31,
2017, the Company has made all four installments in the total of RMB 20 million or approximately $3.0 million to Ping An Bank
and thus the Company has been released from the guarantor liability for this default. According to the Company’s agreement
with ZSICL, ZSICL agreed to reimburse all the Company’s losses due to ZSICL’s default on the loan principal and interests,
of which RMB 9.9 million has been reimbursed to the Company as of the date of this report and the remaining RMB 10.1 million will
be reimbursed in installments within next three years. The Company expects the likelihood of incurring losses in connection with
this matter to be low.
On
December 14, 2015, the Company entered into a guarantee contract to serve as the guarantor for the JV Company for bank loans in
the aggregate amount of $38,421,934from China Import & Export Bank with a related loan period of December 14, 2015, to December
13, 2016, which was extended to October 15, 2017. Under this guarantee contract, the Company agreed to perform all the obligations
of the JV Company under the loan contract if the JV Company fails to perform its obligations as set forth therein. The loan was
paid off on October 15, 2017.
On
July 20, 2016, the Company entered into a guarantee contract to serve as the guarantor for the JV Company for bank loans in the
aggregate amount of $11,526,580 from Bank of China, with a related loan period of July 20, 2016 to July 19, 2017. Under this guarantee
contract, the Company agreed to perform all the obligations of the JV Company under the loan contract if the JV Company fails
to perform its obligations as set forth therein. The loan was paid off on July 21, 2017.
All
guarantee periods are two years from the date of expiration of the debt performance under the principal loan contracts.
(2)
Pledged collateral for bank loans to other parties
As
of December 31, 2017 and 2016, none of the Company’s land use rights or plant and equipment were pledged as collateral securing
bank loans to third parties.
Litigation
Beginning
in March 2017, putative shareholder class actions were filed against Kandi Technologies Group, Inc. and certain of its current
and former directors and officers in the United States District Court for the Central District of California and the United States
District Court for the Southern District of New York. The complaints generally allege violations of the federal securities laws
based Kandi’s disclosure in March 2017 that its financial statements for the years 2014, 2015 and the first three quarters
of 2016 would need to be restated, and seek damages on behalf of putative classes of shareholders who purchased or acquired Kandi’s
securities prior to March 13, 2017.All the remaining cases are in the New York federal court, and motions for the appointment
of lead plaintiff and lead counsel are pending.
Beginning
in May 2017, purported shareholder derivative actions based on the same underlying events described above were filed against certain
current and former directors of Kandi in the United States District Court for the Southern District of New York. A motion for
the appointment of lead plaintiff and lead counsel is pending.
In
October 2017, a purported shareholder filed a books and records action against Kandi in Delaware state court seeking the production
of certain documents generally relating to the same underlying events described above as well as attorney’s fees. The Company
was served with Plaintiff’s Verified Complaint Pursuant to 8 Del. C. Section 220 to Compel Inspection of Books and Records
(“Verified Complaint”) on October 4, 2017.On November 10, 2017, the Company filed its Answer to Plaintiff’s
Verified Complaint and currently is waiting for trial.
We
believe that although our financial statements for the years 2014, 2015 and the first three quarters of 2016 were restated, the
restatements had no effect on net income. The claims referenced above are without merit, and we intend to defend against the lawsuits
vigorously. We are unable to estimate the possible loss, if any, associated with this lawsuit. The ultimate outcome of any litigation
is uncertain and the outcome of these matters, whether favorable or unfavorable, could have a negative impact on our financial
condition or results of operations due to defense costs, diversion of management resources and other factors. Litigation can be
costly, and adverse results in the cases could result in substantial monetary judgments. No assurance can be made that litigation
will not have a material adverse effect on our future financial position.
NOTE
24 – SEGMENT REPORTING
The
Company has one operating segment. The Company’s revenue and long-lived assets are primarily derived from and located in China.
The Company does not have manufacturing operations outside of China.
The
following table sets forth revenues by geographic area:
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
Sales Revenue
|
|
|
Percentage
|
|
|
Sales Revenue
|
|
|
Percentage
|
|
|
Sales Revenue
|
|
|
Percentage
|
|
Overseas
|
|
$
|
4,817,517
|
|
|
|
5
|
%
|
|
$
|
4,919,054
|
|
|
|
4
|
%
|
|
$
|
4,713,441
|
|
|
|
2
|
%
|
China
|
|
|
97,988,104
|
|
|
|
95
|
%
|
|
|
124,572,959
|
|
|
|
96
|
%
|
|
|
196,355,732
|
|
|
|
98
|
%
|
Total
|
|
$
|
102,805,621
|
|
|
|
100
|
%
|
|
$
|
129,492,013
|
|
|
|
100
|
%
|
|
$
|
201,069,173
|
|
|
|
100
|
%
|
NOTE
25 – Related Party Transactions
The
Board must approve all related party transactions. All material related party transactions will be made or entered into on terms
that are no less favorable to the Company than can be obtained from unaffiliated third parties.
The
following table lists sales to related parties (other than the JV Company and its subsidiaries) for 2017, 2016 and
2015:
|
|
Year Ended
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Service Company
|
|
|
-
|
|
|
|
3,913,031
|
|
|
|
42,032,060
|
|
Total
|
|
$
|
-
|
|
|
$
|
3,913,031
|
|
|
$
|
42,032,060
|
|
The
details for amount due from related parties (other than the JV Company and its subsidiaries) as of the December 31, 2017 and 2016
were as below:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Service Company
|
|
|
162,048
|
|
|
|
10,484,816
|
|
Total due from related party
|
|
$
|
162,048
|
|
|
$
|
10,484,816
|
|
The
Company has a 9.5% ownership interest in the Service Company and Mr. Hu, Chairman and CEO of the Company, has a 13% ownership
interest in the Service Company. The main transactions between the Company and the Service Company are purchases by the
Service Company of batteries and EV parts.
For
transactions with the JV Company and its subsidiaries, please refer to Note 22.
NOTE
26 – Subsequent Event
On
December 18, 2017, the Company announced that its wholly-owned subsidiary, Zhejiang Kandi Vehicles Co., Ltd. (“Kandi
Vehicles”), and the sole shareholder (the “Transferor”)of Jinhua An Kao Power Technology Co., Ltd.
(“Jinhua An Kao”) entered into a Share Transfer Agreement (the “Share Transfer Agreement”) and a
Supplementary Agreement (the “Supplementary Agreement”), pursuant to which Kandi Vehicles acquired Jinhua An Kao.
The two agreements were signed on December 12, 2017 and the closing took place on January 3, 2018. Kandi Vehicles acquired
all the equity interests of Jinhua An Kao for a purchase price of approximately RMB 25.93 million (approximately $3.9
million) in cash. In addition, pursuant to the Supplementary Agreement by and between the two parties, the Company issued a
total of 2,959,837 shares of restrictive stock (the “Shares”), or 6.2% of the Company’s total outstanding
shares of the common stock to the Transferor. An additional 2,959,837 shares are placed as make good shares for the
undertaking of Jinhua An Kao to achieve no less than a total of RMB120,000,000 (approximately $18.1 million) net income over
the course of the following three years. The Supplementary Agreement sets forth the terms and conditions of the issuance of
these shares.